20-F 1 d20f.htm FORM 20-F FORM 20-F
Table of Contents

As filed with the Securities and Exchange Commission on May 18, 2011.

 

 

 

Form 20-F

(Mark One)

 

     ¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

     x ANNUAL REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended December 31, 2010

OR

 

     ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR l5(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-10284

 

 

Allied Irish Banks,

public limited company

 

(Exact name of registrant as specified in its charter)

 

 

Ireland

 

(Jurisdiction of incorporation or organization)

Bankcentre, Ballsbridge, Dublin 4, Ireland

 

(Address of principal executive offices)

David O’Callaghan, Company Secretary

Allied Irish Banks, p.l.c.

Bankcentre, Ballsbridge

Dublin 4, Ireland

Telephone no: +353 1 6600311

 

(Name, telephone number and address of Company contact person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act

 

Title of each class

       

Name of each exchange

on which registered

Ordinary shares of EUR 0.32 each, represented by

American Depositary Shares

    

New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

Ordinary shares of EUR 0.32 each   1,791,633,262

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  x Yes  ¨ No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x Yes  ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an acceleratted filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x                Accelerated filer  ¨                Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

US GAAP  ¨                IFRS  x                 Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.  ¨ Item 17  ¨ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ¨ Yes  x No

 

 

 


Table of Contents

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Contents

 

     Page  

Business review

  

Executive Chairman’s statement

     4   

Corporate Social Responsibility

     8   

Financial review

     12   

Risk management

     73   

Governance & oversight

  

The Board & Group Executive Committee

     119   

Report of the Directors

     122   

Corporate Governance statement

     125   

Supervision & Regulation

     138   

Financial statements

  

Accounting policies

     146   

Consolidated income statement

     172   

Consolidated statement of comprehensive income

     173   

Statements of financial position

     174   

Consolidated statements of cash flows

     176   

Statements of changes in equity

     178   

Notes to the accounts

     182   

Statement of Directors’ responsibilities in relation to the Accounts

     354   

Independent auditor’s report

     355   

General information

  

Additional information

     357   

Glossary

     379   

Principal addresses

     383   

Index

     385   

 

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Forward-looking information

This document contains certain forward-looking statements within the meaning of Section 27A of the US Securities Act of 1933 and Section 21E of the US Securities Exchange Act of 1934, with respect to the financial condition, results of operations and business of the Group and certain of the plans and objectives of the Group. In particular, among other statements in this Annual Report, with regard to management objectives, trends in results of operations, margins, risk management, competition and the impact of changes in International Financial Reporting Standards are forward-looking in nature. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements sometimes use words such as ‘aim’, ‘anticipate’, ‘target’, ‘expect’, ‘estimate’, ‘intend’, ‘plan’, ‘goal’, ‘believe’, ‘may’, ‘could’, ‘will’, ‘seek’, ‘continue’, ‘should’, ‘assume’, or other words of similar meaning. Examples of forward-looking statements include among others, statements regarding the Group’s future financial position, income growth, loan losses, business strategy, projected costs, capital ratios, estimates of capital expenditures, and plans and objectives for future operations. Because such statements are inherently subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking information. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward-looking statements. These are set out in ‘Risk factors’ on pages 74 - 78. These factors include, but are not limited to the effects of the challenging economic environment, both domestically and internationally, constraints on liquidity and the challenging liquidity environment for the Group created by market reaction to factors affecting Ireland and the Irish economy, the impact of further downgrades to the Irish sovereign ratings and other country ratings, or the Group’s credit ratings, the uncertainty of further extensions of the ELG Scheme, systemic risks in the markets the Group operates in, the ability to access capital to meet targeted and minimum capital requirements for the Group, customer and counterparty credit quality, the effects of AIB’s participation in the Credit Institutions (Financial Support) Scheme, the National Pensions Reserve Fund Commission investments, the National Asset Management Agency programme and the ELG Scheme, conditions that may be imposed by the European Commission following consideration of the Group’s restructuring plan, market risk, including non-trading interest rates, operational and reputational risks, the effects of continued volatility in credit markets, the effects of changes in valuation of credit market exposures, changes in valuation of issued notes, changes in fiscal or other policies adopted by various governments and regulatory authorities, the effects of changes in taxation or accounting standards and practices, acquisitions and disposals, the risks relating to the Group’s deferred tax assets, future exchange and interest rates and the success of the Group in managing these events. Any forward-looking statements made by or on behalf of the Group speak only as of the date they are made. AIB cautions that the foregoing list of important factors is not exhaustive. Investors and others should carefully consider the foregoing factors and other uncertainties and events when making an investment decision based on any forward-looking statement. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Financial Report may not occur. The Group does not undertake to release publicly any revision to these forward-looking statements to reflect events, circumstances or unanticipated events occurring after the date hereof.

Recent developments

The information contained in this Annual Report on Form 20-F includes a discussion of AIB’s business, results of operations and financial condition for the year ended 31 December 2010. Since that date, AIB has entered into a number of important transactions, and has announced restructuring and other measures, that will be important for the future of the Group. For a description of these transactions and measures, see note 69 to the Group’s consolidated financial statements included herein.

 

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Financial highlights

 

     2010
€ m
    2009
€ m
 

Results

    

Total operating income

     (3,357     4,106   

Operating loss

     (12,124     (2,683

Loss before taxation from continuing operations

     (12,071     (2,662

Profit/(loss) after taxation from discontinued operations

     199        (45

Loss attributable to owners of the parent

     (10,232     (2,413

Per € 0.32 ordinary/CNV share

    

Loss – basic from continuing operations

     (571.1c     (203.5c

Loss – diluted from continuing operations

     (571.1c     (203.5c

Earnings/(loss) – basic from discontinued operations

     7.1c        (11.7c

Earnings/(loss) – diluted from discontinued operations

     7.1c        (11.7c

Dividend

     —          —     

Dividend payout

     —          —     

Net assets

     (€0.04   7.81   

Performance measures

    

Return on average total assets

     (6.21 %)      (1.29 %) 

Return on average ordinary shareholders’ equity

     (222.5 %)      (24.8 %) 

Statement of financial position

    

Total assets

     145,222        174,314   

Ordinary /CNV shareholders’ equity

     (80     6,970   

Shareholders’ equity

     3,659        10,709   

Loans and receivables to customers

     86,350        103,341   

Customer accounts

     52,389        83,953   

Capital ratios

    

Core tier 1 capital

     4.0     7.9

Tier 1 capital

     4.3     7.2

Total capital

     9.2 %(1)      10.2
                

 

(1)

At 31 December 2010, the Group, on a consolidated and individual basis, benefited from derogations from certain regulatory capital requirements granted on a temporary basis by the Central Bank of Ireland. The requirement for derogations arose as a result of loan impairment provisions at 31 December 2010. These derogations remained in place until the completion of the liability management exercise on 24 January 2011.

 

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LOGO    Executive Chairman’s statement

2010 was an extremely difficult 12 months for AIB and the whole of the Irish banking industry. It was a year that culminated in the announcement that the Irish Government was to take a majority stake in AIB.

This report covers our performance in 2010 and outlines what we and the Government are doing to build a stronger and more stable organisation – one that we believe will over time return to profitability, justifying and rewarding the tangible support the taxpayers of Ireland have given us.

I know that our shareholders have been deeply angered and upset by the financial losses they have suffered and the traumatic effect of this decline on themselves and their families. Over the past three years we estimate that those losses amounted to more than € 18 billion for private investors. I, along with my AIB Board colleagues, deeply regret this situation. I know there is little I can say that will alleviate the impact of these events. The road to recovery may well be a long one but we are determined to return the bank to stability and profitability as quickly as possible.

I acknowledge and reiterate our gratitude for the support of taxpayers. None of us at AIB underestimate its importance and all of us are very aware of the responsibility it places on us.

AIB’s long term future as a viable bank has been validated by the commitment of state authorities to our future as one of two Irish pillar banks, as recently announced by the Minister for Finance, Michael Noonan. This support is being given because it is accepted AIB is of systemic importance to the domestic economy and that Ireland’s future economic success requires a properly functioning banking system. We look forward to combining with the Educational Building Society (“EBS”) to fulfil our role as one of the pillar banks which will support this country’s economic recovery.

We are learning the lessons of the past and promise to show more empathy and be more in touch with our customers, staff and the general public in the future.

In the year ending this January, we approved more than 40,000 credit applications from small and medium-sized enterprises to a value of € 2.8 billion, part of an overall commitment to lend € 6 billion over two years.

We have held 116 customer information seminars for SMEs across the country in the past few months, attended by more than 6,000 business people. These events will continue this year.

We have also set up specialist units aimed at serving the needs of companies in key emerging sectors as part of our promise to work more closely with Enterprise Ireland. In addition, we are improving our credit structures, framework and processes and will involve 1,500 staff in enhanced credit skills training programmes.

We are also developing other initiatives to meet customer needs and help businesses and home owners under stress.

We recognise we have more to do to normalise the provision of credit going forward, and we know we must continue to develop new and better ways to support our customers. These ongoing actions demonstrate how AIB wants to be a business that makes a positive contribution to the economy and one which ensures Irish taxpayers see a real return on their enforced investment.

Financial performance in 2010

The financial performance of AIB in 2010 was extremely poor, though not unexpected given the events of the year and the continuing economic downturn. AIB made a loss after tax of € 10.4 billion on continuing operations, including the losses on the transfer of assets to NAMA.

Bad debts, particularly in our Irish business, were the most significant negative feature of our performance in 2010.

AIB did make an operating profit before these bad debt provisions and losses on transfer to NAMA. But our profitability is severely curtailed by what we pay to secure our funding. This funding includes our customer deposits and wholesale market borrowing and is the raw material for our business. The reality is when we lend out that money, the returns we are achieving are sometimes less than what we are paying for the raw material. AIB needs to achieve a fair but economic return on its products and services.

Capital

AIB’s capital requirements increased significantly in 2010 and 2011. A series of stress tests were carried out on AIB in 2010 and again this year. It is important to note that it is the opinion of the regulatory authorities that Irish banks, such as AIB, need to be capitalised well in excess of minimum internationally agreed regulatory levels to protect against any future shocks to the financial system and to restore confidence in Irish banks.

The original capital target of € 7.4 billion, or 8% core tier 1 capital, set in March 2010 after the European Commission stress test has been superseded by the new regulatory requirement for Irish banks to have core tier 1 capital ratio levels of at least 10.5% in a

 

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base case scenario and 6% in a stress scenario. The recent Prudential Capital Assessment Review (“PCAR”) shows that, following a series of actions already taken, AIB requires total additional capital of € 13.3 billion.

The State has confirmed its commitment to ensure AIB is recapitalised to the mandated extent. This level of recapitalisation would have seen AIB with a very strong pro-forma core tier one ratio of 22% at the end of 2010.

The PCAR, along with the Prudential Liquidity Assessment Review (“PLAR”), were the most onerous stress tests ever conducted on Irish banks and included highly adverse scenarios and assumptions designed to ensure the sector can withstand the most extreme market conditions.

AIB also raised € 8 billion through its own capital raising programme. This programme incorporated various business disposals including the sale of our Polish interests, the sale of our share in M&T Bank Corporation (“M&T”) in the United States, liability management exercises and the recent purchase of deposits from Anglo Irish Bank, which also contributed to capital.

The AIB loan book

AIB’s loan book reduced during 2010 by approximately € 34 billion reflecting loan transfers to the National Asset Management Agency, low customer demand and deleveraging actions we took in our international businesses. Our total loans at the end of the year, excluding NAMA, were € 94 billion excluding € 9 billion of loans from AIB’s recently sold Polish interests.

The quality of our loan book continues to be a key issue for the AIB Board and its management team. In the three years from 2008 to 2010, AIB’s loan losses totalled € 20 billion. An in depth review of all our lending processes has been completed and we have set clear key objectives around our credit culture policies and processes to avoid the mistakes of recent times.

In the past, AIB had too high an exposure to the construction and property sector. Loans to that sector have now reduced to € 26 billion (excluding mortgages), out of the total loan book of € 94 billion. This € 26 billion consists of € 7.4 billion in land and development loans with the remaining € 18 billion of loans in investment property, more than half of which is outside Ireland.

Land and development loans have been the biggest source of bad debts for AIB. Furthermore, in the recently completed PCAR, the capital requirement for AIB has assumed a 60 percent haircut for all residual land and development loans.

AIB’s largest loan portfolio is Irish mortgages at € 27 billion. This represents almost 29% of our total loans. Mortgage customer arrears have increased during 2010, although the pace of increase slowed in the second half of the year. We believe that arrears will continue to increase due to the high levels of unemployment in Ireland. Therefore we have increased our mortgage provision levels reflecting the additional bad debts we believe are present in our mortgage portfolios but have not been specifically recognised.

We have undertaken a comprehensive review of our loan portfolios in 2010 and set aside provisions of € 7.3 billion for our continuing operations - a very high but prudent level that reflects the deteriorating economic environment in the latter part of 2010, particularly in Ireland, and further falls in property values.

Impaired loans now have 42% specific provision coverage and an additional € 2.1 billion has been set aside for losses which we think are likely to emerge in our loan book. In addition, the capital we are required to hold by our regulator includes further material buffers for future losses. The scale of these figures is daunting but we are determined to draw a line under the past and move AIB forward.

Bad debts for all banks are closely related to the economic conditions prevailing within their markets. Therefore while future bad debt charges are subject to that important factor, we will be unstinting in endeavouring to ensure that AIB’s policies, procedures and practices control the risks we take and that we seek to manage them to the highest international standard.

Funding and liquidity

AIB, in common with other banks, continues to face funding and liquidity issues. Funding conditions in the first part of 2010 were reasonable. But as the year progressed subsequent negative international sentiment about the Irish economy and the banking sector meant AIB’s access to wholesale funding markets was much reduced.

There were also deposit outflows, most notably from our overseas institutional and corporate customers. This combination increased our reliance on funding from monetary authorities and also increased our loan to deposit ratio to 165% at the year end.

On 24 February this year more than 120,000 Anglo Irish Bank customer deposits totalling € 8.6 billion transferred to AIB. This move also saw NAMA bonds transfer to AIB along with the ownership of Anglo’s operation in the Isle of Man.

These transfers are improving our liquidity and are reducing our loan to deposit ratio as we work towards the target ratio defined by the Central Bank of Ireland of 122.5% by the end of 2013.

 

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This is welcome news but much more needs to be done to improve the funding of our business. Market access for the Irish state and the banks is an essential precondition for a return to normality.

Board changes

The AIB Board saw considerable change in 2010. Dr Michael Somers was appointed a Non-Executive Director in January. Non-Executive Directors Sean O’Driscoll and Jennifer Winter resigned in April with Kieran Crowley and Bob Wilmers leaving in October.

Executive Chairman Dan O’Connor left the board in October and Group Managing Director Colm Doherty left in November. I want to record my thanks to them for their service to AIB.

In October, I was appointed as interim Executive Chairman and Jim O’Hara and Catherine Woods joined the AIB Board as Non-Executive Directors.

New management team

It is a priority of the AIB Board to ensure people with both the right mix of skills and of internal and external experience manage the organisation in the future. Our search for a new Chief Executive Officer has started and the AIB Board is working hard to ensure we attract the right person to this crucial role.

We have also carried out a comprehensive evaluation process to select a new top management team. The members of that team who have been selected from within AIB are currently going through the necessary approval processes and we are now actively seeking candidates externally for the remaining roles. Names will be announced as appointments are made.

Corporate Governance and Risk

AIB made progress last year in the way it handles its corporate governance and risk. I want to acknowledge the work Colm Doherty and Dan O’Connor instigated in these areas.

We must continue to build strong centralised governance which includes robust control standards and functions. The necessity to move away from fragmented divisional control to a centralised approach is underpinned by findings in reports commissioned from external parties including Promontory, Mazars and Deloitte.

AIB has initiated a major risk and governance transformation programme as part of the wider review of the organisation. The programme is designed to ensure our risk and control frameworks are fit for purpose and are fully compliant with new and additional regulatory requirements. These frameworks must be resilient and responsive to potential economic and financial shocks and other risks that might emerge in the future.

Rebuilding AIB – the strategy

When I took up the role of Executive Chairman, I made a commitment to undertake a review which would develop a new strategy for AIB.

Throughout this review process it has been clear that the challenges we face are enormous but, nevertheless, surmountable. To overcome these challenges will require radical change of a magnitude never before undertaken in AIB. This will happen across the organisation and this will involve difficult decisions and strong actions in relation to our structure, size and focus.

We will establish a new core bank with a restructured balance sheet achieved through the separation and progressive disposal and winding down of non-core assets. The present divisional structures will be dismantled and replaced by business units focused on our customers’ needs. Credit, risk, control and support functions will be significantly restructured and consolidated.

The core business will concentrate on the Irish market including Northern Ireland. It will focus on the personal, small business, commercial and corporate sectors and also include a selective overseas presence, supporting expatriate Irish business as well as cross-border trade and investment flows.

Non-core will comprise assets that no longer fit with our new strategic direction and some businesses or portfolios which represent excessive risk or offer a poor return profile. These businesses will be wound down and reduced in size over time. Hasty disposals – or fire sales – of assets will be avoided.

To ensure AIB is best placed to serve our business and personal customers, our product ranges will be simplified and re-positioned to give value at an acceptable return.

We will invest in new technologies to increase our speed, reach and efficiency. All of this will be achieved without losing sight of the key objective of supporting our customers through this challenging period and helping to revitalise the national economy.

AIB will become a smaller organisation with a fresh leadership team, a restructured balance sheet, a redefined customer strategy and a new operating model.

 

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This new AIB will form a strong foundation from which a profitable business can be rebuilt. This business will be well positioned to gain a significant share of the stronger national banking market which, we believe, will emerge in time. The combination with EBS will further strengthen this proposition.

People

The transformation to a more focused, more cost effective organisation will inevitably entail job losses. AIB is negotiating with state authorities to progress a programme of job cuts this year and into 2012.

In the meantime, there is much work to be done to address both AIB’s problem loans and issues with our legacy processing and operating systems. This is a priority for 2011.

AIB will need also to attract and retain individuals with the specific skills needed for the future. Our competitive edge in this area must not be blunted. There is no reason that, in time, AIB cannot become, once again, a preferred employer with staff proud to work for the organisation.

Economic outlook

The speed at which AIB recovers and returns to profit is heavily influenced by Ireland’s economic prospects, which remain challenging.

Throughout 2010 and into this year, demand for new loans from small firms and personal customers has been subdued. This together with a weak capital and funding position has reduced the ability of AIB to lend to these sectors. We are also seeing existing customers paying down existing debts rather than increase borrowing. However AIB accepts it needs to do more to resume normal lending.

Latest official figures show that the economy contracted again last year. Real GDP declined by 1% in 2010 but there are hopeful signs that a positive rate of growth will be achieved in 2011.

Our exports are performing very strongly, increasing by almost 10% in real terms last year. Inward foreign direct investment is also very buoyant and global growth prospects remain favourable. These are good omens for the future as exports now form a very large part of the economy.

However, on the domestic side of the economy, demand continues to fall and may not stabilise until 2012 or later. The latest unemployment statistics were disappointing. Employment continues to fall (down almost 3.5% in the last quarter of 2010 in annual terms) and the unemployment rate is now well over 14%. Job losses, higher inflation and tighter budgetary measures will depress consumer spending in 2011. Investment spending will also fall again this year.

On a more positive note, the rate of decline in domestic demand is slowing and consumers are becoming slightly more optimistic. The underlying budget deficit has also been stabilised.

A resolution of the Irish banking crisis should also have a more profound positive influence on domestic and international confidence in Ireland’s ability to recover from the deep economic and financial crisis of the past three years.

The future

In 2010, we have endured the heavy consequences of our problems. I want to thank customers for the tremendous support we have received from so many of them.

With the completion of our plan, the support of taxpayers, customers and shareholders, AIB has taken the first steps on the road to recovery to a future as a standalone, independent bank.

The energy, resilience and dedication shown by AIB staff in the last few months has been deeply impressive to me. I want to take this opportunity to pay tribute to the way they have faced the challenges of recent times with great patience, commitment and capacity for hard work.

Ireland needs healthy and vibrant financial services able to support economic recovery and growth. The Government proposals announced on 31 March 2011 give us a firm foundation to rebuild our business and return it to profitability.

I believe this bank will remain at the heart of the Irish financial sector. My colleagues and I are wholly committed to ensure this is the case.

AIB continues to face serious challenges and problems. The hard days are not over yet but I promise to do everything in my power to make sure that next year we have a more positive story to tell.

David Hodgkinson

Executive Chairman

11 April 2011

 

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LOGO    Corporate Social Responsibility

AIB has worked with all stakeholders to provide Corporate Social Responsibility (“CSR”) support and the focus has been to adjust to the rapidly changing market environment. AIB is committed to further embedding CSR policies and practices across the Group in order to restore its credibility and reputation.

Marketplace

AIB recognises its role in supporting its customers and in contributing to the general economic recovery. To support this objective, a number of initiatives were introduced.

Small and Medium Enterprises (“SMEs”)

A new ‘AIB Small Business Recovery Scheme’ was launched in 2010 specifically targeted at small business customers in Ireland. The aim of the scheme, is to support viable small businesses through the current economic conditions. The scheme, with a fund of € 500 million, will achieve this by restructuring existing borrowings and providing additional working capital to meet businesses’ needs.

Seminars were held throughout Ireland, entitled ‘AIB Open for Business’. These were attended by SME owners and professional and business support groups. In addition, a key business influencers’ communication programme for professional advisers to SMEs was launched, together with sponsorship and awards schemes to support and promote business confidence.

In 2010, at the request of the Irish Government, a Credit Review Office was established to provide a process to review decisions made by the bank to refuse, reduce or withdraw credit facilities to SMEs, sole traders or farm enterprises. The third quarterly report from the Credit Review Office, issued in February 2011, acknowledged the progress that AIB has made on its commitments to support these customers both in terms of meeting the € 6 billion lending target set by the Government by the end of March 2012 and the range of initiatives AIB has undertaken to promote demand for credit.

Personal Customers

During 2010, an online campaign ‘Reviewing your Finances’ was launched which helps personal customers review the current shape of their finances and provides them with suggestions as to what should be considered.

A brochure entitled ‘Managing your personal borrowings’ was also launched, which focuses on customers in difficulty and in need of debt consolidation. This document encourages customers to contact AIB as soon as possible to review their current situation and requires them to provide background information before meeting on a one-to-one basis with a staff member to find a viable solution. To support these initiatives, a specific debt management staff engagement training programme has been implemented.

Mortgages

AIB supported mortgage customers by putting in place a range of measures including interest only or deferred repayments. Under the Central Bank of Ireland’s Code of Conduct on Mortgage Arrears, AIB introduced the five step Mortgage Arrears Resolution Process to help mortgage customers in arrears, or at risk of going into arrears. This also applies to customers where an alternative repayment arrangement already in place breaks down or expires.

General

Since 2006, AIB has been contributing to the Social Finance Foundation, an organisation which makes loan finance available at affordable interest rates to community based projects and micro enterprises, which yield a social and financial return. At the end of 2010, € 15 million of these approved loans have been drawn down. AIB initially provided € 6.27 million to the Foundation and since 2009 has also provided an annual payment of € 1.5 million, which will continue to 2021.

In addition, AIB continued to report quarterly to the Department of Finance and the Central Bank of Ireland on its customer support obligations under the terms of the Government recapitalisation package.

 

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People

2010 was another year of significant change for the staff in AIB. Various assets and businesses were put up for sale and there were a number of changes in top management and at Board level. Following the appointment of the Executive Chairman in October 2010 a review of the organisation commenced with a view to defining the future shape of AIB in terms of its business focus, its strategy, its structure and its staff. The Chairman has communicated regularly to staff on the progress of the review.

The bank continued to engage with the Irish Bank Officials’ Association, the recognised trade union for bank officials in the Republic of Ireland, Northern Ireland and Great Britain, on a range of issues including job security during 2010 under the partnership arrangement.

Training and development continued during 2010 in a number of areas. An enhanced Credit Professionalism programme was introduced which builds on existing skills and introduces a focus on financial literacy and the professional requirements of AIB and the financial services industry. Capital Markets ran tailored leadership and development and customer relationship programmes. Mandatory health and safety training was rolled out through an e-learning based course outlining responsibilities under the AIB Group Safety Statement. Other mandatory courses, under AIB’s Group Compliance and Ethics training programme, covered topics on anti-money laundering, data protection, ethics, treating customers fairly, fraud prevention and policies.

In Ireland, 4,584 staff achieved the Minimum Competency Requirements accreditation required for their roles, since the introduction in 2006 of the Central Bank of Ireland’s Minimum Competency Requirements. Ongoing continuing professional development is required by these staff to maintain this accreditation.

AIB’s head office at Bankcentre was recognised for its accessibility during 2010 and was awarded an Able Business Excellence Award, granted by leading disability charity Rehab and the quality experts Excellence Ireland Quality Association. In addition, AIB Group was recognised at the 02 Ability 2010 Awards achieving ability company status in the retention and wellbeing category. Both of these awards are welcome reflections of AIB’s commitment to AIB staff and customers who have disabilities.

 

Employee information AIB Group*

      

Total staff **

     23,208   

Voluntary attrition

     4.2

Permanent/temporary staff

     93 %(P) 
     7 %(T) 

Part-time/Full time staff

     6 %(PT) 
     94 %(FT) 

Average age of employees (years)

     40   

Average length of service (years)

     14   

Male/Female staff

     35 %(M) 
     65 %(F) 

 

* Information as at December 2010, including BZWBK, excludes Polish subsidiaries.
** Reflects the Full Time Equivalent (“FTE”) of staff in payment, includes staff on paid leave arrangements

 

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LOGO    Corporate Social Responsibility

Community

Charitable groups and programmes are seeking support now more than ever. In 2010, AIB continued to support community projects through the Better Ireland programme. € 1.82 million was donated to 546 children’s projects throughout the country making a total of € 17.85 million donated to deserving projects in Ireland since 2001.

Staff across AIB Group donated more than € 182,000 to charities during 2010. These funds are just part of the effort across the network which saw AIB staff donating both money and time to Irish and international charities.

AIB is in its third decade of sponsorship with the Gaelic Athletic Association (“GAA”) and in particular, the AIB All Ireland Club Championships which focus on club and games development. AIB also sponsored the AIB Ladies Irish Open which attracted the strongest field of women professional golfers in its history, profiling Ireland and generating local economic benefit. In Ireland, AIB has given the use of its corporate hospitality boxes in Croke Park and the Aviva Stadium to registered charities in the Republic of Ireland, to entertain their donors and patrons for the 2010/2011 GAA and rugby seasons.

Allied Irish Bank (GB) as part of its five year Founding Partnership sponsorship with Ascot Racecourse hosted a charity day with 240 guests attending. The organisations involved included Christian Vision, The Eden Project, and The National Association for the Care and Resettlement of Offenders, Muscular Dystrophy Campaign, Nordoff Robbins Music Therapy, Rainbow Family Trust and St Giles Hospice, all of whom hosted a table of guests and supporters at the event.

A number of financial education programmes continued during the year. AIB had the highest number of corporate volunteers deliver Junior Achievement’s curriculum in schools in Ireland, preparing young people for the world of work and teaching financial literacy; AIB Kids website www.aib.ie/kids, which teaches children about finances in an easy, informative and fun way; and AIB Build a Bank Challenge, a programme aimed at senior students introducing the concept of banking and finance in an interactive manner. In addition, AIB is a lead member of the Business in the Community network and supports the BITC Schools Business Partnership, a programme which aims to address educational disadvantage in Ireland.

AIB worked with the National Consumer Agency (“NCA”) in the development of a pilot programme called ‘Money skills for life…’. This programme involves a one-hour presentation to employees in their workplace covering topics including managing your money, saving and investing, planning for retirement and dealing with debt, among others. The programme is available to all workplaces in Ireland, run by the NCA with presenters from the financial services industry, including volunteers from AIB.

AIB continued to support the arts and sponsored the Irish Photojournalism Awards for the eighth year. These annual awards, which are run in conjunction with the Press Photographers Association of Ireland recognise, reward and showcase excellence in press photography. The AIB Photojournalism exhibition travelled to AIB branches around the country in order to give access to the exhibition to as wide an audience as possible.

Loans of key artworks from the AIB Art Collection to municipal, regional and national galleries continued during 2010. For example, one exhibition at Draíocht in Blanchardstown, Co Dublin in partnership with Fingal County Council’s Arts Office entitled, “In Colour”, contained a selection of 20th century works by Irish artists which were on loan from both AIB Group and other collections. This exhibition was accompanied by an extensive education programme including mediated tours, resource packs and talks by featured artists.

Environment

AIB is fully committed to sustainability with a commitment to live up to its responsibilities and continuously seek to improve efforts in this area.

In 2010, the results of the measurement of AIB’s carbon footprint calculation in the Republic of Ireland were assessed using data collected in late 2009. The calculation shows that AIB’s total carbon footprint has reduced by 16% since the 2006 assessment period. For the same period, the reported carbon footprint for energy has reduced by 9%. Although this falls short of AIB’s stated target of 10%, it is attributable to a more thorough methodology for acquiring the 2009 data, thus accounting for greater emissions.

 

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Energy is a key area where AIB has concentrated efforts resulting in our levels of electrical energy consumption in 2010 remaining approximately 15% below corresponding periods in 2009. These results were achieved through a Bankcentre, Dublin energy reduction project which is ongoing.

A bin-less office initiative was introduced in AIB’s head office at Bankcentre. This has produced very positive results with the volume of general waste reducing by 11.78 tons per month, from 29.4 tons in January 2010, to 17.62 tons in June 2010. The effect of this is a significant reduction in waste being diverted from landfill to be recycled and also a reduction in costs.

In Northern Ireland, the 12th Business in the Community Environmental benchmarking ARENA Survey reported First Trust Bank (“FTB”) achieving a top 20% position for the second year in a row, in what is widely recognised as the principal measure of environmental engagement in Northern Ireland. FTB achieved an overall score of 89% which compared very favourably with the average score of 72% and the financial sector average of 69%. FTB also launched a unique community ‘shredding’ event. Shred-It Ireland located one of its mobile shredding units at an FTB branch for the day and provided a document destruction service to the general public. This initiative helped to prevent fraud through identity theft and also supported the environment by diverting documents away from landfill and into recycled household paper products.

AIB in the Republic of Ireland launched the ‘Cycle to Work’ scheme – a Government introduced tax advantaged initiative – which supports a greener environment. Take-up represented 7.5% of all AIB staff in the Republic of Ireland area, almost double the national average take-up of 4%.

The AIB ‘Add more green’ e-statement initiative continued to be popular with over 268,000 customers opting for online rather than paper statements. AIB donates € 2 for every customer who takes this option and this has generated over € 1,000,000 for the ‘Add more green’ fund. This fund is used to support environmental projects both in Ireland and internationally. One such project, launched this year in conjunction with Coillte, was the development of a native woodland area with both recreational and educational facilities at Carrigeenroe, Co Roscommon. As well as supporting biodiversity objectives, the addition of an amenity trail for visitors brings the site to life as a living educational resource for the community.

Benchmarking

AIB participated in the development of ISO 26000: Guidance for social responsibility (a new ISO guidance standard), through the National Standards Authority of Ireland. AIB will continue to review its CSR practices using this guidance.

During 2010, AIB also contributed to the Ethical Investment Research Services annual survey, the results of which qualified AIB for inclusion in the FTSE4Good Index, the leading global responsible investment index. In addition, AIB also participated in the Carbon Disclosure Project Ireland report and the Dow Jones Sustainability Index. All of these allow AIB benchmark corporate responsibility policies and practices in a number of areas including labour standards, environmental sustainability and supply chain management among others and identify gaps where action can be taken.

AIB participated in the pilot programme supporting the development of ‘Business in the Community’ Ireland’s Business Working Responsibly mark during the year. This again provided key feedback in terms of AIB’s current policies and practices and is an excellent tool to use to improve in the area of CSR.

More information www.aibgroup.com/csr

 

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             Page  

1.

    

Business description

  
    

1.1        History

     13   
    

1.2        Relationship with the Irish Government

     13   
    

1.3        The businesses of AIB Group

     15   
    

1.4        Organisational structure

     17   
    

1.5        Competition

     18   
    

1.6        Economic conditions affecting the Group

     19   

2.

    

Financial data

     21   

3.

    

Management report

     24   

4.

    

Capital management

     58   

5.

    

Critical accounting policies & estimates

     61   

6.

    

Deposits and short term borrowings

     65   

7.

    

Financial investments available for sale

     68   

8.

    

Financial investments held to maturity

     71   

9.

    

Contractual obligations

     72   

 

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1.1 History

AIB Group, originally named Allied Irish Banks Limited, was incorporated in Ireland in September 1966 as a result of the amalgamation of three long established banks: the Munster and Leinster Bank Limited (established 1885), the Provincial Bank of Ireland Limited (established 1825) and the Royal Bank of Ireland Limited (established 1836).

AIB Group conducts retail and commercial banking business in Ireland. It has an extensive branch network across the country, a head office in Dublin and a capital markets operation based in the International Financial Services Centre in Dublin. AIB also has retail and corporate businesses in the UK, offices in Europe and a subsidiary company in the Isle of Man and Jersey (Channel Islands).

In December 1983, AIB acquired 43 per cent. of the outstanding shares of First Maryland Bankcorp (“FMB”). In 1989, AIB completed the acquisition of 100 per cent. of the outstanding shares of common stock of FMB. During the 1990s, there were a number of ‘bolt-on’ acquisitions, the most notable being Dauphin Deposit Bank and Trust Company, a Pennsylvania chartered commercial bank which was acquired in 1997. Subsequently, all banking operations were merged into Allfirst Bank. In 2003, Allfirst was integrated with M&T Bank Corporation (“M&T”). Under the terms of the agreement AIB received 26.7 million shares in M&T, representing a stake of approximately 22.5 per cent. in the enlarged M&T, together with US$ 886.1 million cash, of which US$ 865 million was received by way of a pre-sale dividend from Allfirst Bank.

The Group entered the Polish market in February 1995, when it acquired a non-controlling interest in Wielkopolski Bank Kredytowy S.A. (“WBK”). The Group subsequently increased its shareholding in WBK to 60.14 per cent. through a number of additional transactions. In September 1999, AIB completed the acquisition of an 80 per cent. shareholding in Bank Zachodni S.A. (‘Bank Zachodni’) from the State Treasury, and through a number of subsequent transactions increased its shareholding in Bank Zachodni to 83 per cent. In June 2001, WBK merged with Bank Zachodni to form BZWBK, following which the Group held a 70.5 per cent. interest in the newly-merged entity. The Group’s interest in BZWBK decreased to approximately 70.36 per cent. when BZWBK’s share capital was increased in 2009.

In October 1996, AIB’s retail operations in the United Kingdom were integrated and the enlarged entity was renamed AIB Group (UK) p.l.c. with two distinct trading names, First Trust Bank in Northern Ireland and Allied Irish Bank (GB) in Great Britain.

In January 2006, Aviva Life & Pensions Ireland Limited and AIB’s life assurance subsidiary, Ark Life were brought together under a holding company Aviva Life Holdings Ireland Limited (“ALH”), formerly Hibernian Life Holdings Limited. This resulted in AIB owning an interest of 24.99% in ALH. Following this, AIB entered into an exclusive agreement to distribute the life and pensions products of the venture.

Since mid 2008, AIB Group has experienced many significant challenges as a result of issues arising from the financial crisis. The Group had expanded significantly outside Ireland in the past, as outlined above, as well as having smaller operations and interests in other markets. However, resulting from the provision of support to AIB as part of a broader arrangement with the Irish Government and the European Commission, the Group agreed in 2010 to replenish capital levels by way of disposals, namely its BZWBK and M&T shareholdings (and selected other businesses). AIB disposed of M&T on 4 November 2010 and agreed the sale of BZWBK on 10 September 2010. The sale of BZWBK was completed on 1 April 2011.

AIB ceased trading on the main markets of the Irish and London stock exchanges on 25 January 2011. Its ordinary shares are now listed on the Enterprise Securities Market of the Irish Stock Exchange and its ADRs continue to be listed on the New York Stock Exchange.

1.2 Relationship with the Irish Government

Since the onset of the global and Irish financial crisis, AIB’s relationship with the Irish Government has changed significantly.

As at 31 December 2010, the Government, through the National Pension Reserve Fund Commission (“NPRFC”), held 49.9 per cent. of the ordinary shares of the company (the share of the voting rights at shareholders’ general meetings), 10,489,899,564 convertible non-voting (“CNV”) shares and 3.5 billion 2009 Preference Shares. On 8 April 2011, the NPRFC converted the total outstanding amount of CNV shares into 10,489,899,564 ordinary shares of AIB, thereby increasing its holding to 92.8% of the ordinary share capital.

In addition to its shareholders’ interests, the Government’s relationship with AIB is reflected through formal and informal oversight by the Minister and the Department of Finance and the Central Bank of Ireland, representation on the Board of Directors (three non-executive directors are Government nominees), participation in NAMA (defined below), and otherwise.

 

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Participation in the National Asset Management Agency (“NAMA”) has had a particularly significant impact on the size, quality, sectoral and geographical spread of AIB’s loan portfolio. Between early April 2010 and 31 December 2010, AIB transferred to NAMA, financial assets with a gross carrying value of € 18.6 billion in exchange for NAMA senior and subordinated bonds of € 8.5 billion of nominal value. Furthermore, financial assets with a gross carrying value of € 2.3 billion were, at 31 December, due to transfer in early 2011. In March 2011, € 1.1 billion of this remaining amount transferred.

An element of the joint EU/IMF programme, outlined below, requires that the NAMA scheme be extended and in this regard, a bill was introduced in the Dail (lower house of the Irish parliament) in early 2011, however, no legislation has been enacted to date.

In addition to its ownership interest in AIB, the Government’s relationship with AIB has included the guarantee of a wide range of AIB’s obligations, including deposits and specified senior debt obligations, as set forth in AIB’s consolidated financial statements, the notes thereto and the ELG and other schemes described therein. The provision of this support helped to allay the concerns of depositors and other creditors in 2009 and 2010. However, the worsening financial condition of the Irish sovereign in late 2010 had a corresponding adverse impact on customer deposit levels in AIB and other Irish banks with the result that the need for further Government and international support became evident.

On 28 November 2010, the Irish Government agreed in principle to the provision of € 85 billion of financial support through the European Union (“EU”) and International Monetary Fund (“IMF”) Joint Programme for Ireland. The Irish Government’s contribution to the € 85 billion facility will be € 17.5 billion. One part of this programme deals with the restructuring and reorganisation of the Irish banks for which € 35 billion of the financial support is earmarked. It is too early to predict what final benefits AIB will ultimately derive from this Joint Programme.

On 31 March 2011, following PCAR and PLAR assessments which took place in February/March 2011, the Central Bank announced the following:

 

 

a minimum capital target for AIB of 10.5% core tier 1 in a base scenario and 6% core tier 1 in a stressed scenario;

 

 

a target loan to deposit ratio of 122.5% by 2013, through a combination of run-off and deleveraging; and

 

 

a requirement to raise € 13.3 billion (€ 10.5 billion plus a € 2.8 billion capital buffer).

Following on the results of these assessments, the Minister for Finance announced on 31 March 2011 a restructuring of the Irish banking system. This restructuring revolves around two pillar banks, with AIB and EBS, a mutual society, merging in the coming months (subject to State aid and regulatory approvals) to form one of these pillar banks. The non-core division of the combined entity will be required to deleverage assets to achieve the target loan to deposit ratio. The Government signalled its support for the recapitalisation of the Irish banks, which amounts to € 24 billion, to ensure that the Irish banking system is returned to health. It has also signalled that it will seek direct contributions to solving the capital issues of the banking system by requiring further significant contributions from other sources, including from subordinated debt holders, by the sale of assets to generate capital and where possible, by seeking private sector investors.

The Irish Government’s support of AIB reflects the important role it plays in the Irish economy. However, it has required AIB to seek Irish Government and European Commission approval of comprehensive restructuring plans in accordance with EU state aid and other requirements and to otherwise undertake business and other initiatives that support Governmental priorities. In addition to participation in NAMA, AIB restructuring approvals have so far been conditioned on capital raising initiatives such as the M&T and BZWBK disposals referred to above, lending initiatives to support SMEs, first time buyers of residential premises in Ireland and other customers, an agreement to purchase certain deposits from Anglo Irish Bank in early 2011, and other initiatives.

Irish Government, EU and related initiatives will have a material impact on the future financial condition and prospects of AIB.

 

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1.3 The businesses of AIB Group

The business of AIB Group is now conducted through three major operating divisions namely: AIB Bank ROI, Capital Markets and AIB Bank UK. A decision was made in March 2010, to hold certain investments for sale which included principally AIB Group (UK) (which formed AIB Bank UK division); M&T Bank Corporation; and BZWBK and Bulgarian American Credit Bank AD (“BACB”) which were the predominant elements of Central and Eastern Europe division. The sale of M&T Bank Corporation was completed in November 2010. A sale was agreed for BZWBK on 10 September 2010 and was completed on 1 April 2011. In relation to AIB Group (UK), AIB decided to halt the sales process in November 2010 in the light of continuing challenging market conditions in the United Kingdom.At 31 December 2010, AIB Group (UK) business is shown as part of continuing operations.

The current divisional structure is under review as part of the restructuring plan for the organisation. The businesses of AIB Group are described below.

AIB Bank Republic of Ireland division

AIB Bank Republic of Ireland (“ROI”) Division, with total assets of € 57.9 billion at 31 December 2010, covers retail and business banking operations in the Republic of Ireland, Channel Islands and Isle of Man, in addition to asset finance, wealth management and credit card services. ROI Division supports both business and personal customers and commands a strong presence in all key sectors including SME, mortgages and personal. It provides customers with choice and convenience through:

 

 

A range of delivery channels consisting of over 182 branches, 86 outlets and 14 Business Centres, 783 ATMs and AIB Phone and Internet Banking as well as an alliance with An Post which gives our customers banking access at over 1,000 Post Offices nationwide;

 

 

A wide range of banking products and services; and

 

 

A choice of payment methods including cheques, debit and credit cards, self service and automated domestic and international payments.

AIB is the principal banker to many leading public and private companies and government bodies, and plays an important role in Ireland’s economic and social development. AIB is a founding member of the Irish Payment Services Organisation (“IPSO”) and is a member of the Irish Clearing Systems for paper, electronic and realtime gross settlement (“RTGS”). The main distribution channel for the division is an extensive branch network structured around retail banking and business banking. Retail Banking concentrates on the personal market and smaller businesses. Business Banking, through a network of business centres, focuses on medium to larger SMEs.

Complementing the AIB branch network services is our AIB Direct Channels operation (leading Irish on-line banking service), offering self service capability through online, telephone, ATM, self service kiosks and automated payments.

AIB Finance & Leasing is the asset financing arm in the Republic of Ireland. Its services include leasing, hire purchase and other asset backed finance delivered via the branch network, a direct sales force, broker intermediaries and also via internet.

The Wealth Management unit delivers wealth propositions to AIB customers, tailored to the needs of specific customer segments and also encompasses AIB’s share of ALH, AIB’s venture with Aviva Group Ireland plc.

AIB Card Services provides credit and debit card products to the ROI personal and corporate customer base, supporting their payment and consumer credit requirements.The products are delivered across all channels. AIB has a joint venture with First Data International, trading as AIB Merchant Services. This provides access to leading edge technology, enhanced risk management, operational capability and best in class functionality for merchants and partners in the merchant acquiring business.

Capital Markets division

AIB Capital Markets activities, with total assets of € 40.1 billion at 31 December 2010, comprises corporate banking, treasury and investment banking. These activities are delivered through the following business units: AIB Corporate Banking, Global Treasury and Investment Banking.

AIB Corporate Banking provides a fully integrated, relationship-based banking service to top-tier companies, both domestic and international, including financial institutions and Irish commercial state companies. AIB Corporate Banking’s activities also include participating in, developing and arranging acquisition, project, property and structured finance in Ireland, the UK, North America and Continental Europe. Corporate Banking’s not-for-profit activities are provided through Allied Irish America(1). Corporate Banking has also originated and manages four Collateralised Debt Obligation (“CDO”) funds(2). The assets under management of the CDO funds at 31 December 2010 were € 1.6 billion.

Global Treasury, through its treasury operations, manages on a global basis the liquidity and funding requirements and the interest and exchange rate exposure of the Group. In addition, it undertakes proprietary trading activities, and provides a wide range of treasury and risk management services to corporate, commercial and retail customers of the Group. It also provides import and export related financial services through its international activities.

 

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Investment Banking provides a range of services including corporate finance through AIB Corporate Finance Limited; outsourced financial services through AIB International Financial Services Limited; and asset management through AIB Investment Managers Ltd (“AIBIM”). During 2010, Investment Banking provided corporate finance and stockbroking services through Goodbody Stockbrokers(3). AIBIM manages assets principally for institutional and retail clients in the Republic of Ireland. Investment Banking also includes the management of property fund activities (principally in Polish properties).

AIB Capital Markets is headquartered at Dublin’s International Financial Services Centre and has operations in a number of principal UK, US and Polish cities; and in Frankfurt, Paris, Luxembourg, Budapest, Zurich and Toronto.

AIB Bank UK division

The AIB Bank UK division, with total assets of € 20.9 billion at 31 December 2010, operates in two distinct markets, Great Britain and Northern Ireland, with different economies and operating environments. The division’s activities are carried out primarily through AIB Group (UK) p.l.c., a bank registered in the UK and regulated by the Financial Services Authority (“FSA”).

Great Britain

In this market, the division operates under the trading name Allied Irish Bank (GB) from 31 full service branches and 1 business development office. The divisional head office is located in Mayfair, London with a significant back office operation in Uxbridge, West London and a divisional processing centre in Belfast. A full service is offered to business customers, professionals, and high net worth individuals.

Allied Irish Bank (GB) is positioned as a specialist business bank, providing a relationship focused alternative to UK high street banks. The bank offers a full range of banking services, including daily banking, deposits solutions, corporate banking and international trade expertise to SMEs, mid-size corporates and professionals in the UK. Its services to businesses are complimented by its wealth management and personal banking offerings, delivered through the traditional branch network and online banking systems. Allied Irish Bank (GB)’s relationship approach has been validated externally on a number of occasions over the past decade by Business Superbrands and Forum of Private Business and the bank’s commitment to staff development has consistently achieved the recognition of the Investors in People (“IiP”) standard since 1995.

Northern Ireland

In this market, the division operates under the trading name First Trust Bank from 48 branches and outlets throughout Northern Ireland. The First Trust Bank head office is located in Belfast, together with the divisional processing centre.

A full service, including internet and telephone banking is offered to business and personal customers across the range of customer segments, including professionals and high net worth individuals, small and medium enterprises, as well as the public and corporate sectors.

Specialist services, including mortgages, credit cards, invoice discounting and asset finance are based in Belfast and delivered throughout the division.

First Trust Independent Financial advisers provides sales and advice on regulated products and services, including protection, investment and pension requirements.

First Trust Bank is strongly rooted in the communities which it serves and supports a wide range of business, community and charitable initiatives, with strong links to the education sector in Northern Ireland.

Discontinued operations

BZWBK was held as a discontinued operation at 31 December 2010, with the sale completed on 1 April 2011. BACB was held as a discontinued operation at 31 December 2010.

 

(1)

The process of winding down the activities of Allied Irish America began during 2010.

(2)

On 18 February 2011, AIB Capital Markets plc entered into an agreement to sell their collateral management business with the intention of being replaced as investment manager to the CDO funds.

(3)

The sale of Goodbody Holdings Limited and associated companies was completed subsequent to Central Bank approval received on 24 December 2010.

 

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1.4 Organisational structure

AIB Group consists of a number of legal entities, the parent company being Allied Irish Banks, p.l.c., which has investments in a number of subsidiaries and associated companies. The business of the Group is conducted through its divisional structure which can span a number of legal entities. Following the requirement to raise additional equity capital by 31 December 2010, certain businesses were classified as discontinued operations/disposal groups during the year. These businesses are shown under the headings ‘Discontinued operations/disposal groups’. The principal legal entities within the divisional structures as well as the more significant business activities are shown below:

 

AIB BANK ROI DIVISION

Allied Irish Banks, p.l.c.

General retail and business banking through some 268 branches and outlets and 14 business centres in the Republic of Ireland.

 

AIB Mortgage Bank

The Company’s principal activity is the issue of Mortgage Covered Securities for the purpose of financing loans secured on residential property or commercial property, in accordance with the Asset Covered Securities Act, 2001.

 

AIB Leasing Limited

Asset financing company providing leasing products.

 

AIB Insurance Services Limited

Provision of general insurance services. Acts as an insurance intermediary.

 

AIB Bank (CI) Limited

Jersey (Channel Islands) based company providing a full range of offshore banking services including lending and internet banking facilities and also offering offshore trust and corporate services through a subsidiary company. It also maintains a branch in the Isle of Man.

 

CAPITAL MARKETS DIVISION

Allied Irish Banks, p.l.c.

Management of liquidity and funding needs; interest and exchange rate exposures; financial market trading activities; provision of lending; trade finance and commercial treasury services; provision of corporate banking and not-for-profit activities(1).

 

AIB Capital Markets plc

Provision of asset management, fund management and corporate advisory services, including equity investment.

 

AIB Corporate Finance Limited

Provision of corporate advisory services to companies including merger, acquisition, capital raising and strategic financial advice.

 

AIB International Financial Services Limited

Provider of outsourced financial services to international banks and corporations.

 

AIB Asset Management Holdings (Ireland) Limited

Provides asset management and funds services management for institutional and retail clients through its subsidiary companies AIB Investment Managers Ltd. and AIB Fund Management Ltd.

 

AIB BANK UK DIVISION

AIB Group (UK) p.l.c.

31 branches and 1 business development office in Britain, trading as Allied Irish Bank (GB), focused primarily on the mid-corporate business sector. 48 branches and outlets in Northern Ireland, trading as First Trust Bank, focused on general retail and commercial banking and also asset finance and leasing.

 

Discontinued operations/ disposal groups

 

Bank Zachodni WBK S.A.

A commercial and retail bank which operates through 527 branches and 100 agency outlets in Poland. On 10 September 2010, AIB announced its agreement to sell its interest in Poland. The sale completed on 1 April 2011. This interest was held as a discontinued operation until completion of sale.

 

AmCredit

A mortgage lender which operates through three branches in Lithuania, Latvia and Estonia. This investment is held as a disposal group within continuing operations.

   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   
   

 

(1)

The process of winding down the activities of the not-for-profit activities in the US began during 2010.

The above subsidiary undertakings are wholly-owned with the exception of Bank Zachodni WBK S.A. (31 December 2010: 70.36%). The registered office of each is located in the principal country of operations for divisional reporting purposes.

 

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1.5 Competition

The competition among providers of banking services in the areas in which the Group operates has been significantly affected by the challenging economic environment as well as the crisis in the banking sector. The global banking crisis has reduced the capacity of many institutions to lend and has resulted in the withdrawal of a number of market participants and the consolidation of a significant number of competitors. There has also been substantial government intervention in the banking sector in the form of guarantees, recapitalisation and full nationalisation, particularly in the Republic of Ireland and the United Kingdom (“UK”).

Republic of Ireland Competition in retail banking in the Republic of Ireland has undergone a significant transformation in light of the recent economic crisis with a resultant change in both operating models and behaviours. The economic crisis and resultant banking crisis has lead to both Government and European intervention through Government sponsored bank guarantee schemes, the recapitalisation of many banks operating in Ireland (both domestic and foreign), the nationalisation or substantial Government financial support across the majority of domestic institutions as well as transfer of property related assets to the National Asset Management Agency.

The focus of competitive activity in retail banking continues to be to provide enhanced credit support to existing customers in particular SMEs as well as to retain and gather deposits. Deposit pricing continues to be extremely competitive and unsustainable in the medium term. Foreign owned institutions have either withdrawn completely, are in the process of withdrawing through asset holding companies and are no longer providing credit or are scaling back substantially.

The economic downturn has resulted in a fall off in demand for banking products and services in both the personal and business markets. In the personal market, consumers are paying down debt and saving more, reflected in a reduction in national personal credit levels and an increase in the national personal savings ratio. Activity in the mortgage market continues to be limited.

Through 2010 both domestic and foreign institutions have been realigning their business models in response to the reduced demand for banking services.

UK Competition in the UK banking market has been changed dramatically by the global economic crisis, and specific issues with Ireland and Irish banks have had an adverse impact on Irish banks operating in the UK market.

Public concern in the UK regarding the stability of the Irish banking system heightened significantly in the second half of 2010 as a result of the downgrading of both Irish sovereign debt and the debt of Irish banks. Although Ireland’s state authorities extended the Eligible Liabilities Guarantee Scheme, which was put in place to safeguard all deposits with Ireland’s main banks (including their UK operations), Irish banks operating in the UK market experienced significant deposit withdrawals during the year.

The focus of activity in the UK retail deposit market has therefore been on maintaining close relationships with customers in order to retain existing deposits, and attracting new deposits where possible in a very competitive market.

On the credit side, demand for new lending was subdued given the economic climate. Although improving credit conditions were reported during 2010, the increased availability of bank credit appeared to benefit only larger businesses, while many smaller businesses and households continued to experience difficulties in accessing affordable credit, despite the UK Banks’ requirement to provide credit through their Small Business Funds.

United States Since the disposal of M&T Bank Corporation in November 2010, AIB’s presence in the United States has been substantially reduced and is focussed on a specific range of banking activity.

 

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1.6 Economic conditions affecting the Group

AIB’s activities in Ireland accounted for the majority of the Group’s business in 2010. As a result, the performance of the Irish economy is extremely important to the Group. However, the Group also continued to operate businesses during 2010 in the United Kingdom, the Eurozone, Poland and the United States, which means that it is also influenced directly by political, economic and financial developments in those economies.

Since August 2007, global financial markets have experienced significant volatility and turmoil which have caused a breakdown of wholesale banking markets, large write-downs among financial institutions, a major change in the banking landscape and a credit crisis that has extended into some sovereign debt markets. The impact of the financial crisis has been very damaging. According to the IMF, world GDP fell by 0.6% in 2009, with the advanced economies suffering a decline in real GDP of 3.4%.

The world economy has been recovering since around the middle of 2009 and world GDP is forecast by the International Monetary Fund in its World Economic Outlook Update (25 January 2011) to expand by 4.4% in 2011 and 4.5% in 2012, following growth of 5% in 2010. The recovery, though, has been sluggish and uneven in developed economies, where GDP growth is forecast by the IMF at 2.5% for both 2011 and 2012, compared with 3.0% in 2010.

According to Ireland’s Central Statistics Office’s (“CSO”) National Income and Expenditure (“NIE”) 2009 publication, real GDP in Ireland fell by 3.5% in 2008 and a further 7.6% in 2009. The severity of the 2008/2009 Irish recession was primarily due to the particularly sharp decline in residential property investment. Based on CSO NIE estimates, new housing output fell by almost 30% in 2008, resulting in a negative contribution of 2.5 percentage points to the change in real GDP in that year. A further fall in residential investment of close to 50% in 2009 accounted for another 3.5 percentage points decline in real GDP.

National Accounts data published by the CSO for 2010 show that GDP contracted by 1% last year. Housing remained a significant drag on the economy, knocking a further 2.0 percentage points off GDP last year. Consumer and government spending are estimated to have declined by 1.2% and 2.2%, respectively, in 2010. Exports, though, recovered strongly last year as the world economy regained momentum, rising by 9.4% following a decline of 4.1% in 2009.

Due to the very large role played by exports of foreign-owned multinationals in the Irish economy, there is a significant amount of annual profit repatriations which often results in differences in the annual growth in GDP and GNP, since the profits of multinationals are not included in GNP. The latter was smaller in absolute terms in 2010, by the equivalent of 19% of nominal GDP. According to the CSO NIE, real GNP fell by 10.7% in 2009 compared to the 7.6% decline in GDP, while in 2010, real GDP fell by 1% and real GNP contracted by 2.1%

Economic conditions in the United States, the United Kingdom and the Eurozone, Ireland’s three most important trading partners, deteriorated sharply in 2008 and the first half of 2009, with all three economies enduring a deep recession. A moderate recovery in activity has been underway in all three economies since around the middle of 2009.

US GDP is estimated to have grown by 2.9% in 2010 following a decline of 2.6% in 2009; GDP growth in the United Kingdom is put at 1.3% last year after it fell by 4.9% in 2009, while in the Eurozone, GDP growth is put at 1.7% last year after it fell by over 4% in 2009. (Source: IMF World Economic Outlook Update, 25 January 2011).

Meanwhile, the Polish economy actually avoided recession but GDP growth did slow to 1.7% in 2009 before recovering to a growth rate of 3.8% last year (Source: Eurostat 3 March 2011). The economic performance of Poland has been very impressive. It has been helped by its sound financial system, a sharp weakening of the zloty in the second half of 2008, strong FDI flows and the supportive stance of fiscal and monetary policy.

Not surprisingly, given the deep recession, labour market conditions have weakened significantly in Ireland since 2007. Employment fell by 1.1% in 2008 and 8.2% in 2009 according to CSO data, and fell by a further 4.2% in 2010. Over half the job losses are in construction. While the labour force also contracted, CSO data show that the unemployment rate had risen to over 14% by the final quarter of 2010.

Ireland retains many of the fundamental factors that supported strong rates of economic growth in the past two decades (such as a young, highly educated labour force, a relatively competitive corporate tax regime, labour market flexibility, access to European and global markets and continued inward Foreign Direct Investment (“FDI”)). These factors, as well as gains in competitiveness, will be crucial in restoring the economy to a solid growth path over the next number of years. A modest rise in GDP is expected in 2011, helped by a continuing strong performance from exports, with growth picking up thereafter.

The forecasts do not take account of the economic and financial market fallout of recent political risks in the Middle East or North Africa and the earthquake in Japan. However, the impact is expected to be limited as most of Ireland’s current economic difficulties are domestically generated.

Much progress is being made in terms of improving competitiveness. According to the CSO data, the average rate of inflation in 2010, as measured by the CPI, was -1.0% following the rate of -4.5% recorded in 2009. The annual rate of inflation as measured by

 

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the harmonised index of consumer prices, which excludes mortgages, was -1.6% in 2010 and -1.7% in 2009. Weak economic activity, a strong exchange rate against Sterling and the US dollar, increased competitive pressures and declining wages have all contributed to the decline in prices. The fall in Irish prices has been much more pronounced than in other countries, most notably the UK. The official figures from Eurostat for December 2010 show annual harmonised index of consumer prices inflation at -0.2% in Ireland compared to +2.2% in the Eurozone and +3.7% in the UK. Higher commodity prices have put upward pressure on inflation everywhere in the opening months of 2011.

Meanwhile, the European Commission has estimated that unit wage costs will decline by close to 9% in Ireland in the period 2009-2012, while it forecasts that they will rise by 5.0% and 9.5% over the same timeframe in the Eurozone and UK, respectively.

The European Central Bank (“ECB”), which regulates monetary policy for the Euro area as a whole, cut the official refinancing rate to 1% in May 2009 from a peak of 4.25% in July 2008. Rates have been kept on hold at this historically low level since then. However, given the rise in eurozone inflation in early 2011, the ECB has hinted that it may soon increase interest rates.

The Irish public finances have deteriorated sharply in recent years, moving from an estimated surplus of 2.9% of GDP in 2006 in terms of the General Government balance to underlying deficits of 7.3% in 2008, 11.9% in 2009 and 11.6% in 2010. The shift to large deficits is due to the sharp fall in tax revenues largely associated with the downturn in the Irish housing market. The Irish budget for 2010 stabilised the underlying deficit at below 12% of GDP and the 2011 budget aims to cut the deficit to around 9.5% of GDP. Further corrective action will be necessary and the current government has committed to reduce the deficit to below 3% of GDP by 2015.

It should be noted that the actual budget deficit was boosted in both 2009 and 2010 by measures taken by the Irish State to recapitalise the Irish banking system. This boosted the General Government budget deficit to 14.4% of GDP for 2009 and 32% of GDP in 2010 according to the Department of Finance.

The Irish General Government debt/GDP ratio had fallen steadily from over 95% in 1991 to 25% by 2007 (Source: Ireland Information Memorandum published by the NTMA in March 2008). However, as a result of higher budget deficits and falling levels of GDP, Ireland’s General Government debt/GDP ratio is estimated by the Department of Finance to have climbed to 94% of GDP at end 2010, up from 66% in 2009 and 44% in 2008.

Yields on Irish Government bonds rose sharply to prohibitive levels in the closing months of 2010 - there was a sharp rise in yields on bonds in other peripheral Eurozone countries as well. The Irish banking system also became highly dependent on ECB funding. This triggered concerns within the EU about the financing needs of the Irish economy and led to the provision of an IMF/EU loan package for Ireland amounting to € 85 billion over three years. However, € 17.5 billion of this is coming from Irish resources.

Some € 50 billion of the package is to meet the Exchequer’s financing needs, while € 35 billion is being made available to boost the capital levels in Irish banks, although this may not all need to be drawn down. Thus, the Irish State has secured its funding via the EU/IMF facility until 2013. The interest rate on the loans from the IMF/EU averages out at 5.8%. This is about 1% higher than the average cost of funding for the Irish sovereign over the past two years. However, it is well below the market interest rates on Irish Government debt prevailing at the end of 2010 and early 2011.

 

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Financial review - 2. Financial data   LOGO

The financial information in the tables below for the years ended 31 December 2010, 2009, 2008, 2007 and 2006 has been derived from the audited consolidated financial statements of AIB Group for those periods. AIB Group’s consolidated financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). This information should be read in conjunction with, and is qualified by reference to, the accounting policies adopted, the consolidated financial statements of AIB Group and notes therein for the years ended 31 December 2010, 2009 and 2008 included in this Annual Financial Report. The summary of consolidated income statement re-presents the results of continuing operations, where the results of Bank Zachodni WBK S.A. (“BZWBK”), M&T Bank Corporation and Bulgarian American Credit Bank AD as applicable, are accounted for as discontinued operations net of taxation for all years presented.

Summary of consolidated income statement

 

     Years ended 31 December  
     2010
€ m
         2009
€ m
         2008
€ m
         2007
€ m
         2006
€ m
 

Net interest income

     1,844           2,872           3,392           3,075           2,735   

Other (loss)/income

     (5,201        1,234           749           1,005           980   
                                                    

Total operating income

     (3,357        4,106           4,141           4,080           3,715   

Total operating expenses

     1,649           1,522           1,885           2,107           1,981   
                                                    

Operating (loss)/profit before provisions

     (5,006        2,584           2,256           1,973           1,734   

Provisions

     7,118           5,267           1,749           98           97   
                                                    

Operating (loss)/profit

     (12,124        (2,683        507           1,875           1,637   

Associated undertakings

     18           (3        2           10           20   

Profit on disposal of property

     46           23           10           76           365   

Construction contract income

     —             1           12           55           96   

(Loss)/profit on disposal of businesses(1)

     (11        —             106           1           79   
                                                    

(Loss)/profit before taxation from continuing operations

     (12,071        (2,662        637           2,017           2,197   

Income tax (income)/expense from continuing operations

     (1,710        (373        69           368           401   
                                                    

(Loss)/profit after taxation from continuing operations

     (10,361        (2,289        568           1,649           1,796   

Discontinued operations, net of taxation

     199           (45        322           420           502   
                                                    

(Loss)/profit for the period

     (10,162        (2,334        890           2,069           2,298   

Non-controlling interests from discontinued operations

     (70        (79        (118        (117        (113

Distributions to RCI holders(2)

     —             (44        (38        (38        (38
                                                    

(Loss)/profit for the period attributable to owners of the parent

     (10,232        (2,457        734           1,914           2,147   
                                                    

Basic (loss)/earnings per ordinary/CNV share(5)

                      

Continuing operations

     (571.1c        (203.5c        54.8c           178.3c           196.6c   

Discontinued operations

     7.1c           (11.7c        28.6c           40.0c           50.2c   
     (564.0c        (215.2c        83.4c           218.3c           246.8c   

Diluted (loss)/earnings per ordinary/CNV share(5)

                      

Continuing operations

     (571.1c        (203.5c        54.7c           177.3c           195.0c   

Discontinued operations

     7.1c           (11.7c        28.6c           39.5c           49.6c   
     (564.0c        (215.2c        83.3c           216.8c           244.6c   

Dividends

     —             —             81.8c           74.3c           67.6c   
                                                    

 

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Selected consolidated statement of financial position data

 

     31 December  
     2010
€ m
     2009
€ m
     2008
€ m
     2007
€ m
     2006
€ m
 

Total assets

     145,222         174,314         182,174         177,888         158,526   
                                            

Loans and receivables to banks and customers(3)

     91,212         131,464         135,755         137,068         120,015   

Deposits by central banks and banks, customer accounts and debt securities in issue

     117,922         147,940         155,996         153,563         136,839   
                                            

Dated loan capital

     3,996         4,261         2,970         2,651         2,668   

Undated loan capital

     197         189         692         813         871   

Other capital instruments

     138         136         864         1,141         1,205   

Non-controlling interests in subsidiaries

     690         626         1,344         1,351         1,307   

Shareholders’ funds: other equity interests

     239         389         497         497         497   

Shareholders’ equity(4)

     3,420         10,320         8,472         9,356         8,108   
                                            

Total capital resources

     8,680         15,921         14,839         15,809         14,656   
                                            

 

    31 December  
    2010
m
     2009
m
     2008
m
     2007
m
     2006
m
 

Share capital - ordinary shares

             

Number of shares outstanding

    1,791.6         918.4         918.4         918.4         918.4   

Nominal value of € 0.32 per share

  573       294       294       294       294   

Share capital - convertible non-voting shares(5)

             

Number of shares outstanding

    10,489.9         —           —           —           —     

Nominal value of € 0.32 per share

  3,357         —           —           —           —     

Share capital - preference shares

             

US$ non-cumulative preference shares

             

Number of shares outstanding

    —           —           —           0.25         0.25   

Nominal value of US$ 25 each

    —           —           —         $ 6.25       $ 6.25   

2009 Preference shares(6)

             

Number of shares outstanding

    3,500         3,500         —           —           —     

Nominal value of € 0.01 per share

  35       35         —           —           —     
                                           

 

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LOGO

 

Selected consolidated statement of financial position data (continued)

Other financial data(7)

 

     Years ended 31 December  
     2010
%
    2009
%
    2008
%
    2007
%
     2006
%
 

Return on average total assets

     (6.21     (1.29     0.47        1.22         1.63   

Return on average ordinary shareholders’ equity

     (222.5     (24.8     8.2        21.8         29.0   

Dividend payout ratio

     —          —          36.8        36.3         29.3   

Average ordinary shareholders’ equity as a percentage of average total assets

     2.8        4.3        4.8        5.2         5.2   

Year end impairment provisions as a percentage of total loans to customers:(3)

           

Total Group

     7.1        5.5        1.7        0.6         0.7   

Continuing operations

     7.4        5.5        1.7        0.6         0.7   

Net interest margin(8)

     1.49        1.92        2.21        2.14         2.26   

Tier 1 capital ratio(9)

     4.3 (10)      7.2 (10)      7.4 (10)      7.5         8.2   

Total capital ratio(9)(11)

     9.2 (10)      10.2 (10)      10.5 (10)      10.1         11.1   
                                         

 

(1) 

The loss on disposal of businesses in 2010 of € 11 million relates to the sale of AIB’s investment in Goodbody Holdings Limited and related companies (note 15). The profit on disposal of businesses in 2008 of € 106 million relates to a joint venture with First Data Corporation (note 15). The profit on disposal of businesses in 2006 of € 79 million includes profit relating to (a) the transfer by Ark Life of investment management contracts pertaining to the sale of Ark Life of € 26 million (tax charge Nil); (b) the sale of AIB’s 50% stake in AIB/BNY Securities Services (Ireland) Ltd of € 51 million (tax charge Nil); and (c) the sale of Ketchum Canada Inc. of € 1 million (tax charge Nil) and (d) the accrual of € 1 million (tax charge € 0.3 million) arising from the sale of the Govett business in 2003.

(2) 

The distributions in 2009, 2008, 2007 and 2006 relate to the Reserve Capital Instruments (note 21).

(3) 

Loans and receivables to customers includes loans and receivables held for sale to NAMA (note 23).

(4) 

Includes both ordinary shareholders’ equity, the 3,500 million 2009 Preference Shares issued to the NPRFC in May 2009 (note 48) and the convertible non-voting shares issued to the NPRFC on the 23 December 2010 (note 55).

(5) 

Convertible non-voting shares issued to the NPRFC on 23 December 2010, rank equally with ordinary shares and are convertible into ordinary shares on a one to one basis (note 48).

(6) 

2009 Preference Shares issued to the NPRFC on 13 May 2009.

(7) 

The calculation of the average balances includes daily and monthly averages and are considered to be representative of the operations of the Group.

(8) 

Net interest margin represents net interest income as a percentage of average interest earning assets. The net interest margin for the year ended 31 December 2008 reflects a net interest income figure that was adjusted to reflect a 365 day year for comparative purposes. The net interest margin is presented on a total Group basis.

(9) 

The minimum total capital ratio set by the EU Capital Requirements Directive is 8% of which the tier 1 element must be at least 4%. The Central Bank of Ireland (the ‘Central Bank’) has issued guidelines for implementation of the requirements of the EC Council Directives on own funds, solvency ratios and capital adequacy in Ireland. The Board of Governors of the Federal Reserve System in the US the (‘Federal Reserve Board’) guidelines for risk-based capital requirements, applicable to all bank holding companies, require the minimum ratios of tier 1 capital and total capital to risk adjusted assets to be 4% and 8% respectively. Furthermore, the Federal Reserve Board has adopted leverage capital guidelines requiring bank holding companies to maintain a minimum ratio of tier 1 capital to total quarterly average assets (‘tier 1 leverage ratio’) of at least 3%, in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth. All other bank holding companies are expected to maintain a tier 1 leverage ratio at least 1% to 2% above the stated minimum.

(10) 

Calculated under Pillar 1 (‘minimum capital requirements’) under the Capital Requirements Directive (Financial review - 4. Capital management).

(11) 

The Group’s regulatory capital position at 31 December 2010 benefited from the following derogations from certain regulatory capital requirements granted by the Central Bank, on a temporary basis, following requests from the Group:

 

 

that tier 2 capital cannot exceed tier 1 capital (Regulation 11 (1)(a) of the European Communities (Capital Adequacy of Credit Institutions) Regulation 2006 (SI No. 661 of 2006)); and

 

that lower tier 2 capital cannot exceed 50% of tier 1 capital (Regulation 11(1)(b) of SI No. 661 of 2006).

The requirement for this derogation is as a result of loan impairment provisions at 31 December 2010.

 

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Basis of presentation

The commentary in this management report is on a continuing operations basis unless otherwise stated. For the reporting of the results, the Group’s continuing operations constitute the businesses AIB operates: AIB Bank ROI division, Capital Markets division, AIB Bank UK division and Group division, (which includes AmCredit, previously reported within the Central and Eastern Europe division). Capital Markets division previously included the results of BZWBK wholesale treasury and certain BZWBK investment banking subsidiaries. This business segmentation has been reviewed as part of the restructuring plan of the organisation and the new structure will be reflected in future business segment reporting.

A summary commentary on discontinued operations is included on page 43.

 

     2010      2009            2008  
     Total          NAMA(1)            Total
excluding
NAMA
           Total            Total  

Summary income statement

   € m          € m            € m            € m            € m  

Net interest income

     1,844           —             1,844           2,872           3,392   

Other income

     (5,201        (5,969        768           1,234           749   
                                                    

Total operating income

     (3,357        (5,969        2,612           4,106           4,141   

Personnel expenses

     921           —             921           909           1,161   

General and administrative expenses

     548           —             548           486           586   

Depreciation(2), impairment and amortisation(3)

     180           —             180           127           138   

Total operating expenses

     1,649           —             1,649           1,522           1,885   
                                                    

Operating (loss)/profit before provisions

     (5,006        (5,969        963           2,584           2,256   

Provisions for impairment of loans and receivables

     6,015           —             6,015           5,242           1,724   

Provisions for liabilities and commitments

     1,029           1,029           —             1           (4

Provisions for impairment of financial investments available for sale

     74           —             74           24           29   

Total provisions

     7,118           1,029           6,089           5,267           1,749   
                                                    

Operating (loss)/profit

     (12,124        (6,998        (5,126        (2,683        507   

Associated undertakings

     18           —             18           (3        2   

Profit on disposal of property

     46           —             46           23           10   

Construction contract income

     —             —             —             1           12   

(Loss)/profit on disposal of businesses

     (11        —             (11        —             106   
                                                    

(Loss)/profit before taxation - continuing operations

     (12,071        (6,998        (5,073        (2,662        637   
                                  

Income tax/(income) - continuing operations

     (1,710                  (373        69   
                                        

(Loss)/profit after taxation - continuing operations

     (10,361                  (2,289        568   
                                        

 

(1) 

NAMA transfer related losses (see note 7 for further details).

(2) 

Depreciation of property, plant and equipment.

(3) 

Impairment and amortisation of intangible assets.

Overview of results

2010 was an extremely difficult period for AIB and all its stakeholders. It was a year that culminated in the announcement that the Irish Government was to take a majority stake in AIB. There were significant levels of credit losses, as we matched the continued downturn in the economy, in addition to the loss on transfer of loans to NAMA.

On a continuing operations basis, the Group incurred a loss after taxation of € 10.4 billion in 2010, compared with a loss after taxation of € 2.3 billion in 2009. Operating profit before provisions was € 963 million excluding the loss on transfer of assets to NAMA, or a loss of € 5.0 billion including the loss on transfer of assets to NAMA, compared to an operating profit before provisions of € 2.6 billion in 2009. Provisions for impairment of loans and receivables were € 6.0 billion in 2010 and included € 1.5 billion related to loans held for sale to NAMA and € 4.5 billion for non NAMA loans. There were also provisions for liabilities and commitments of € 1.0 billion in relation to loans at 31 December 2010 which had yet to transfer to NAMA. In total, provisions for credit deterioration coupled with the NAMA impact amounted to € 13 billion in 2010. Higher funding costs were an ongoing issue throughout 2010. These higher funding costs reflect the increased cost of customer deposits, higher wholesale funding costs and the cost of the ELG Scheme which in total contributed to a reduction in net interest income.

 

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Total operating income was negative € 3.4 billion in 2010. Excluding the loss on transfer of assets to NAMA, total operating income was € 2.6 billion. This compares to € 4.1 billion in the year to December 2009, a decrease of € 1.5 billion or 36%. Net interest income was € 1.8 billion in 2010 compared to € 2.9 billion in 2009, a decrease of € 1.1 billion or 36%. The net interest margin was 1.31%. Excluding the cost of the ELG Scheme, the net interest margin for 2010 was 1.52%. Operating expenses were € 1,649 million in 2010 compared with € 1,522 million in 2009, an increase of € 127 million. 2009 included a gain of € 159 million from the retirement benefits amendment. Excluding the impact of this amendment from the cost base in 2009, costs reduced by € 32 million or 2%, notwithstanding significant external engagement, expenditure to address NAMA transition requirements (€ 44 million in 2010; € 29 million in 2009) and a € 59 million writedown of intangible assets in relation to projects that were discontinued in 2010.

AIB Group total customer accounts as a percentage of funding requirement was 45% at 31 December 2010 compared to 51% at 31 December 2009.

The loan to deposit ratio at 31 December 2010 was 165% compared to 123% at 31 December 2009. Customer accounts decreased by € 22 billion or 29% during 2010 to € 52 billion.

At 31 December 2010, AIB Group’s core tier 1 ratio was 4.0%, tier 1 ratio was 4.3% and total capital ratio was 9.2%. During 2010 there were a number of reviews by the Central Bank of Ireland which resulted in a requirement to raise new core tier 1 capital. This requirement was partly achieved (in 2010 and 2011 to date) by generating benefits equivalent to core tier one capital from the disposals of BZWBK (€ 2.5 billion) and M&T (€ 0.9 billion). On 23 December 2010, AIB received the net proceeds of the Irish Government capital injection of € 3.7 billion.

The following events took place post 31 December 2010 and so had no impact on capital ratios at 31 December 2010, however they have contributed to the capital position since 31 December 2010. A liability management exercise was announced on 24 January 2011 which raised € 1.5 billion of capital. The immediate transfer of certain deposits and senior NAMA bonds from Anglo Irish Bank and Anglo Irish Bank Corporation (International) p.l.c. in the Isle of Man to AIB by way of a share sale was announced on 24 February 2011. There was a capital contribution of c. € 1.5 billion arising from this transaction. On 31 March 2011, the Central Bank of Ireland announced the results of the Prudential Capital Assessment Review (“PCAR”). The Central Bank of Ireland requires AIB to raise capital of € 13.3 billion of which an amount of € 1.4 billion may be in the form of contingent capital. The Minister for Finance announced, also on 31 March 2011, that it is intended that AIB will be combined with the Educational Building Society (“EBS”), subject to State aid and regulatory approvals required.

Outlook statement

AIB’s long term future as a viable bank has been validated by the commitment of state authorities to support the bank. This commitment is being given because it is accepted that AIB is of systemic importance to the domestic economy and Ireland’s future economic success requires a properly functioning banking system. The very strong capital base that will result from the generation of € 13.3 billion of capital will enable AIB to provide long term support to its customers and play an active role in the recovery of the Irish economy. It is intended to combine AIB and EBS (subject to State aid and regulatory approvals) to form one of two new strong universal pillar banks in Ireland. Business and market conditions remain challenging and the environment for operating income generation remains difficult. This requires costs to be lowered. It is expected that a reduction of over 2,000 staff will take place on a phased basis over 2011 and 2012. A core bank, in line with AIB’s new strategic direction will be established with a restructured balance sheet achieved through the disposal and winding down of non-core assets. This new AIB will form a strong foundation from which a profitable business can be rebuilt. The speed at which AIB recovers and returns to a position of profitability and self-capitalisation is heavily influenced by Ireland’s economic prospects.

Net interest income

 

     2010      2009      2008  

Net interest income

   € m      € m      € m(1)  

Net interest income

     1,844         2,872         3,392   
                          
     2010      2009         
Average interest earning assets - continuing operations    € m      € m         

Average interest earning assets

     141,093         156,439      
                    
     2010      2009         

Net interest margin

   %      %         

Group net interest margin

     1.31         1.84      

Group interest margin excluding ELG

     1.52         1.84      
                    

 

(1) 

Although, the statement of financial position for prior periods has not been represented for continuing and discontinued operations, a continuing average interest earning assets figure and Net interest margin for 2009 only have been presented for comparative purposes (see note 68 Average Balance Sheet on a group basis).

 

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2010 v 2009

Net interest income was € 1,844 million in 2010 compared with € 2,872 million in 2009, a decrease of € 1,028 million or 36%. Net interest income for 2010 included a charge for the ELG Scheme of € 306 million(1) excluding which net interest income reduced by € 722 million or 25%.

The net interest income decrease excluding the ELG cost mainly reflected the significantly increased cost of customer deposits in a marketplace with elevated deposit pricing, higher wholesale funding costs and lower income on capital. There was also lower income from loans reflecting the transfer of loans to NAMA and lower earning loan balances partly offset by higher loan margins on new lending.

The net interest margin was 1.31%. Excluding the cost of the ELG Scheme, the net interest margin for 2010 was 1.52%. This was a reduction of 53 basis points or excluding the ELG Scheme 32 basis points compared with 1.84% in 2009. The estimated(2) factors contributing to the movement in the margin of -32 basis points were: -20 basis points due to lower deposit income, -19 basis points due to lower capital income, -14 basis points due to higher wholesale funding costs partly offset by +10 basis points due to improved lending margins and +11 basis points impact from treasury/other net interest income.

2009 v 2008

Net interest income was € 2,872 million in 2009 compared to € 3,392 million in 2008, a reduction of € 520 million or 15%.

Weak demand for credit resulted in loans being lower than 2008. Gross loans to customers reduced by € 3 billion (including NAMA loans) and customer accounts decreased by € 9 billion since 31 December 2008 (details of loan and deposit growth by division are contained on page 44).

The decrease in net interest income mainly reflected the significantly increased cost of customer deposits in a highly competitive marketplace, higher wholesale funding costs and a lower return on invested capital partly offset by higher loan margins and a higher treasury margin.

 

(1) 

The aggregate charge for CIFS Scheme and the ELG Schemes was € 357 million (ELG € 306 million and CIFS Scheme € 51 million) compared to a CIFS Scheme charge of € 147 million for 2009.The CIFS Scheme charge is reflected in other income, while the ELG Scheme charge is in net interest income.

(2)

Management estimate.

Other income

The following table shows other income for the years ended 31 December 2010, 2009 and 2008.

 

     2010      2009            2008  
     Total            NAMA(1)            Total
excluding
NAMA
           Total            Total  

Other income

   € m            € m            € m            € m            € m  

Dividend income

     1           —             1           4           7   

Banking fees and commissions

     486           —             486           526           608   

Investment banking and asset management fees

     99           —             99           110           120   

Fee and commission income

     585           —             585           636           728   

Irish Government guarantee scheme expense (“CIFS”)

     (51        —             (51        (147        (29

Other fee and commission expense

     (37        —             (37        (37        (47

Less: Fee and commission expense

     (88        —             (88        (184        (76

Trading loss

     (188        —             (188        (12        (113

Interest rate hedge volatility

     (13        —             (13        (28        27   

Net trading loss(2)

     (201        —             (201        (40        (86

Gain on redemption of subordinated liabilities

     372           —             372           623           —     

Loss on disposal of loans

     (54        —             (54        —             —     

Other operating income

     153           —             153           195           176   

Other operating income

     99           —             99           195           176   
                                                    

Other income excluding NAMA loss

     768           —             768           1,234           749   

Loss on transfer of financial instruments to NAMA

     (5,969        (5,969        —             —             —     
                                                    

Other (loss)/income

     (5,201        (5,969        768           1,234           749   
                                                    

 

(1) 

Loss on transfer of financial instruments held for sale to NAMA.

(2) 

Trading loss includes foreign exchange contracts, debt securities and interest rate contracts, credit derivative contracts, equity securities and index contracts (see note 5).

 

 

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2010 v 2009

Other income was a negative € 5.2 billion in 2010, which included a loss of € 6.0 billion on the transfer of assets to NAMA and a € 372 million gain on redemption of subordinated liabilities from the capital exchange offering in 2010. Excluding these items other income was € 396 million, compared with € 611 million in 2009 (excluding the € 623 million gain on redemption of subordinated liabilities from the capital exchange offering in 2009), a decrease of € 215 million or 35%.

This decrease reflected weaker economic conditions, challenging trading markets in which AIB operates, lower business volumes and lower revenues from investment banking activities. The decline of these other income elements was partly offset by lower deposit guarantee costs for the CIFS Scheme booked through other income.

Banking fees and commissions decreased by 8% reflecting lower business volumes and activity.

Investment banking and asset management fees were down 10% in 2010 mainly reflecting lower brokerage income in the Republic of Ireland.

Fee and commission expense includes the cost of the CIFS Scheme of € 51 million in 2010. The cost of the ELG Scheme of € 306 million in 2010 is included in net interest income.

Trading losses were € 201 million in 2010 compared to € 40 million in 2009. Trading loss excludes interest payable and receivable arising from hedging and the funding of trading activities, which are included in interest income and by reclassification of income between other income and net interest income. During 2010 there was an increase in the trading loss recorded in other income with a related increase in net interest income. On a total income basis (net interest income and other income), income from trading activities was broadly in line with 2009.

Other operating income in 2010 was € 99 million compared with € 195 million in 2009. Other operating income in 2010 included € 75 million from the disposal of available for sale debt securities compared with € 167 million in 2009, a reduction of € 92 million. In 2010 there was a loss of € 54 million on the disposal of loans as part of asset deleveraging measures. Partly offsetting these reductions was an increase in foreign exchange gains of € 21 million.

2009 v 2008

Other income was € 1,234 million in 2009 which included a € 623 million gain on redemption of subordinated liabilities from the capital exchange offering. Excluding this gain other income was € 611 million, compared with € 749 million in 2008, a decrease of € 138 million or 18%.

This reflected weaker economic conditions in the markets in which AIB operated, lower revenues from investment banking and wealth management activities, the € 147 million cost of the CIFS Scheme in 2009 (€ 29 million in 2008) and the negative impact of interest rate hedge volatility between 2008 and 2009 of € 55 million. The decline of these other income elements were partly offset by higher trading income and profit on disposal of available for sale debt securities.

Banking fees and commissions of € 526 million decreased by € 82 million or 13% reflecting lower business volumes and activity. Investment banking and asset management fees were down € 10 million or 8% in 2009.

The increase in fee and commission expense was due to the cost of the Irish Government guarantee scheme where 2009 has the full year costs of the scheme compared with a one quarter charge in 2008.

Trading losses were negative € 12 million in 2009. Trading losses excludes interest payable and receivable arising from hedging and the funding of trading activities, which are included in net interest income. Trading losses in 2009 reflected a more positive fair value impact on bond assets than 2008 which experienced more difficult trading conditions and the reclassification of assets as available for sale in 2008. In 2009 there was a fair value charge of € 73 million to trading income in relation to the structured securities portfolio, while the charge was € 53 million in 2008.

Other operating income in 2009 was € 195 million compared with € 176 million in 2008. Profit from the disposal of available for sale debt securities of € 167 million was recorded in 2009. 2008 included € 74 million profit on disposal of available for sale debt securities and profit on disposal of available for sale equity shares of € 56 million, including the sale of Visa and MasterCard shares.

 

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Total operating expenses         

Operating expenses

   2010
€ m
     2009
€ m
     2008
€ m
 

Personnel expenses

     921         909         1,161   

General and administrative expenses

     548         486         586   

Depreciation,(1) impairment and amortisation(2)

     180         127         138   
                          

Total operating expenses

     1,649         1,522         1,885   
                          

 

(1) 

Depreciation of property, plant and equipment.

(2) 

Impairment and amortisation of intangible assets.

2010 v 2009

Total operating expenses were € 1,649 million in 2010, an increase of € 127 million or 8% when compared to € 1,522 million in 2009. In 2009 there was a gain of € 159 million from an amendment to retirement benefits, excluding which costs decreased by € 32 million or 2%. Total operating expenses in 2010 included costs of € 44 million relating to NAMA compared with € 29 million in 2009. When these costs are excluded the cost base decreased by € 47 million or 3%. This decrease reflected cost management in a period of slower economic conditions, lower staff numbers and reduced business activity. These costs reductions were in addition to reductions of 11% in 2009.

The following comment on personnel expenses excludes the retirement benefits amendment in 2009 mentioned above. Personnel expenses in 2010 were € 921 million, a decrease of € 147 million or 14% compared with € 1,068 million in 2009 reflecting a reduction of more than 400 in staff numbers during 2010 and a reduction in other staff costs. This was in addition to a reduction of almost 900 in staff numbers during 2009.

General and administrative expenses of € 548 million in 2010 were € 62 million or 13% higher than € 486 million in 2009. The increase was mainly related to significant external engagement including professional fees and consultancy costs connected with the sale of businesses, business restructuring and preparation for transfer of loans to NAMA, incremental occupancy costs following continued rollout of the branch sale and leaseback programme and other one-off costs. Excluding these items, general and administrative expenses were in line with 2009 which reflected ongoing management of all discretionary spend.

Depreciation, impairment and amortisation of € 180 million in 2010 was € 53 million or 42% higher than 2009. This increase was due to a writedown in the value of intangible assets of € 59 million in relation to projects discontinued during 2010. Depreciation and amortisation costs decreased by 5% excluding this writedown.

2009 v 2008

Operating expenses were € 1,522 million in 2009, a decrease of € 363 million or 19% when compared to € 1,885 million in 2008. There was a gain of € 159 million from an amendment to retirement benefits excluding which costs decreased by 11%. This reflected a strong focus on cost management as a key priority in a period of slower economic conditions and a difficult revenue generation environment. The decrease in costs was achieved notwithstanding costs in 2009 associated with the preparation for participation in NAMA (€ 29 million).

Personnel expenses in 2009 were € 909 million, a decrease of € 252 million or 22% compared with € 1,161 million in 2008. This reflected the aforementioned gain of € 159 million from the retirement benefits amendment, a reduction in staff numbers during 2009 of almost 900, lower variable staff compensation costs and tight management of all expense categories. General and administrative expenses of € 486 million in 2009 were € 100 million or 17% lower than € 586 million in 2008 due to cost saving initiatives and the ongoing monitoring of costs throughout the Group. Depreciation, impairment and amortisation of € 127 million in 2009 was 8% lower than € 138 million in 2008. Amortisation in 2008 included an impairment charge of € 15 million in relation to the investment in AmCredit.

Cost income ratio

 

      2010
%
     2009
%
     2008
%
 

Cost income ratio(3)

     73.6         43.7         45.5   
                          

 

(3) 

The cost income ratio is total operating expenses as a percentage of total operating income.

2010 v 2009

The cost income ratio for 2010, excluding the loss on the transfer of assets to NAMA and the gain on the capital exchange offering was 73.6% compared to 43.7% for 2009 excluding the gain on the capital exchange offering. Lower total income contributed to an increase in the cost income ratio.

2009 v 2008

Excluding the gain on the capital exchange offering, the cost income ratio in 2009 was 43.7%. A vigilant focus on cost management was maintained which resulted in the underlying cost income ratio reducing by 1.8%, notwithstanding the weaker economic environment.

 

 

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Asset quality

An analysis of loans by division is shown in the statement of financial position section on page 44.

The Group’s total criticised loans and receivables for continuing operations including loans held for sale to NAMA amounted to € 29.0 billion (30.2% of total gross loans of € 96 billion) at 31 December 2010, comprising € 1.6 billion related to loans and receivables held for sale to NAMA and € 27.4 billion for loans and receivables to customers. This compared to € 16.4 billion and € 20.1 billion respectively at 31 December 2009. The reduction in criticised loans held for sale to NAMA mainly reflected the transfer of loans to NAMA during 2010. Allowing for the change in the definition of NAMA eligible loans(1) during 2010, the increase in non NAMA criticised loans and receivables to customers was € 4.3 billion(2). While the quantum of criticised loans and receivables to customers is considerable the migration into criticised grades slowed significantly in the latter part of 2010. The following tables show criticised loans for the total loan book and then split into non NAMA and held for sale to NAMA. Criticised loans include watch, vulnerable and impaired loans and are defined as follows:

Watch: credit exhibiting weakness but with the expectation that existing debt can be fully repaid from normal cashflow.

Vulnerable: credit where repayment is in jeopardy from normal cashflow and may be dependent on other sources.

Impaired: a loan is impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the assets (a ‘loss event’) and that loss event (or events) has an impact such that the present value of future cashflows is less than the current carrying value of the financial asset or group of assets i.e. requires a provision to be raised through the income statement.

 

     2010  

Criticised loans by division

(including NAMA)

   Watch loans
€ m
     Vulnerable loans
€ m
     Impaired loans
€ m
    Criticised loans
€ m
     % of
total
gross  loans
 

AIB Bank ROI

     5,501         5,114         9,749        20,364         34.3   

Capital Markets

     356         220         748        1,324         7.1   

AIB Bank UK

     2,244         2,648         2,358        7,250         40.5   

Group (AmCredit)

     —           3         27        30         40.0   
                                           

Continuing operations

     8,101         7,985         12,882        28,968         30.2   
                                           
     2009  

Criticised loans by division

(including NAMA)

   Watch loans
€ m
     Vulnerable loans
€ m
     Impaired loans
€ m
    Criticised loans
€ m
     % of
total
gross loans
 

AIB Bank ROI

     8,528         5,540         14,620        28,688         36.9   

Capital Markets

     241         447         559        1,247         5.5   

AIB Bank UK

     2,349         2,376         1,755        6,480         31.8   

Group (AmCredit)

     12         4         42        58         64.2   
                                           

Continuing operations

     11,130         8,367         16,976        36,473         30.1   

BZWBK

     990         237         477        1,704         19.7   
                                           

AIB Group

     12,120         8,604         17,453        38,177         29.4   
                                           
     2010  

Criticised loans by division

(non NAMA)

   Watch loans
€ m
     Vulnerable loans
€ m
     Impaired loans
€ m
    Criticised loans
€ m
     % of total
non-NAMA
gross loans
 

AIB Bank ROI

     5,323         5,032         9,489        19,844         33.9   

Capital Markets

     324         220         748        1,292         6.9   

AIB Bank UK

     1,998         2,305         1,877        6,180         37.5   

Group (AmCredit)

     —           3         27        30         40.0   
                                           

Continuing operations

     7,645         7,560         12,141 (3)      27,346         29.2   
                                           

 

(1) 

There was a change in the threshold for NAMA eligible loans during 2010 from greater than € 5 million to greater than € 20 million as well as movements in the number of loans and balances within the NAMA eligible pool.

(2) 

Management estimate.

(3) 

Includes €12,114 million impaired loans (note 28) and AmCredit (€ 27 million).

 

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     2009  

Criticised loans by division

(non NAMA)

   Watch loans
€ m
     Vulnerable loans
€ m
     Impaired loans
€ m
     Criticised
loans

€ m
     % of total
non NAMA
gross loans
 

AIB Bank ROI

     6,230         3,418         4,506         14,154         24.2   

Capital Markets

     241         411         559         1,211         5.4   

AIB Bank UK

     1,892         1,878         912         4,682         27.3   

Group (AmCredit)

     12         4         42         58         64.2   
                                            

Continuing operations

     8,375         5,711         6,019         20,105         20.5   

BZWBK

     990         237         477         1,704         19.7   
                                            

AIB Group

     9,365         5,948         6,496         21,809         20.4   
                                            

The Group’s non NAMA criticised loans and receivables to customers in continuing operations amounted to € 27.3 billion or 29.2% of non NAMA customer loans, up from € 20.1 billion or 20.5% at 31 December 2009, an increase of € 7.2 billion. However, allowing for changes in the definition of NAMA eligible loans(1) during the year, the increase was € 4.3 billion(2).

In AIB Bank ROI non NAMA criticised loans increased from € 14.2 billion to € 19.8 billion but adjusting for changes in the definition of NAMA eligible loans(1) during the year, the increase was € 3.7 billion(2). There have been increases in the vulnerable and impaired categories in the property, distribution, retail, agriculture, other services and personal sectors. Property sector loans account for 46% of the division’s non NAMA criticised loans up from 42% at 31 December 2009.

Non NAMA criticised loans in Capital Markets increased from € 1.2 billion to € 1.3 billion during 2010 and are spread across a range of geographies and sectors and now represent 6.9% of loans in Capital Markets compared with 5.4% at 31 December 2009.

In AIB Bank UK non NAMA criticised loans increased from € 4.7 billion to € 6.2 billion. Adjusting for changes in the definition of eligible loans(1), the increase was € 0.5 billion(2), with increases in watch loans in the leisure and other business sectors and in the vulnerable and impaired categories in the property and residential mortgage sectors.

In AmCredit, criticised loans decreased by € 28 million to € 30 million in the period reflecting the sale/restructure of impaired loans.

 

     2010  

Criticised loans by division

(held for sale to NAMA)

   Watch loans
€ m
     Vulnerable loans
€ m
     Impaired loans
€ m
     Criticised
loans

€ m
     % of
total NAMA
gross loans
 

AIB Bank ROI

     178         82         260         520         71.0   

Capital Markets

     32         —           —           32         55.0   

AIB Bank UK

     246         343         481         1,070         73.4   

Group (AmCredit)

     —           —           —           —           —     
                                            

Continuing operations

     456         425         741         1,622         72.2   
                                            
     2009  

Criticised loans by division

(held for sale to NAMA)

   Watch loans
€ m
     Vulnerable loans
€ m
     Impaired loans
€ m
     Total
criticised loans

€ m
     % of
total NAMA
gross loans
 

AIB Bank ROI

     2,298         2,122         10,114         14,534         75.0   

Capital Markets

     —           36         —           36         6.6   

AIB Bank UK

     457         498         843         1,798         55.1   

Group (AmCredit)

     —           —           —           —           —     
                                            

Continuing operations

     2,755         2,656         10,957         16,368         70.6   

BZWBK

     —           —           —           —           —     
                                            

AIB Group

     2,755         2,656         10,957         16,368         70.6   
                                            

At 31 December 2010, NAMA criticised loans amounted to € 1.6 billion or 72.2% of the remaining € 2.2 billion of loans held for sale to NAMA. This compared with € 16.4 billion at 31 December 2009. The movement was due to the transfer of € 18.2 billion of loans to NAMA during the year of which € 16.1 billion were criticised and a net € 1.3 billion increase in criticised loans due to the revised NAMA criteria(1) and movement in eligible loan balances during the year.

 

(1) 

There was a change in the threshold for NAMA eligible loans during 2010 from greater than € 5 million to greater than € 20 million as well as movements in the number of loans and balances within the NAMA eligible pool.

(2) 

Management estimate.

 

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     2010      2009  

Impaired loans by division

   NAMA
€ m
     Non NAMA
€ m
    Total
€ m
     NAMA
€ m
     Non NAMA
€ m
     Total
€ m
 

AIB Bank ROI

     260         9,489        9,749         10,114         4,506         14,620   

Capital Markets

     —           748        748         —           559         559   

AIB Bank UK

     481         1,877        2,358         843         912         1,755   

Group (AmCredit)

     —           27        27         —           42         42   
                                                    

Continuing operations

     741         12,141 (1)      12,882         10,957         6,019         16,976   
                                  

BZWBK

             —           477         477   
                                  

AIB Group

             10,957         6,496         17,453   
                                  
     2010      2009  

% of total gross loans

   NAMA
%
     Non NAMA
%
    Total
%
     NAMA
%
     Non NAMA
%
     Total
%
 

AIB Bank ROI

     35.5         16.2        16.4         52.2         7.7         18.9   

Capital Markets

     —           4.0        4.0         —           2.5         2.5   

AIB Bank UK

     33.0         11.4        13.2         25.8         5.3         8.6   

Group (AmCredit)

     —           36.0        36.0         —           46.7         46.7   
                                                    

Continuing operations

     33.0         12.9        13.4         47.2         6.1         14.0   
                                  

BZWBK

             —           5.5         5.5   
                                  

AIB Group

             47.2         6.1         13.5   
                                  

Group impaired loans as a percentage of gross customer loans decreased to 13.4%, down from 14.0% at 31 December 2009 due to the transfer of loans to NAMA and deleveraging in Capital Markets and AIB Bank UK.

Total non NAMA impaired loans increased to € 12.1 billion or 12.9% of gross loans up from € 6.0 billion or 6.1% at 31 December 2009. Allowing for the change in definition of NAMA eligible loans(2), the underlying increase was € 4.1 billion(3), € 3.5 billion in AIB Bank ROI, € 0.2 billion in Capital Markets, and € 0.4 billion in AIB Bank UK. Property loans represented € 7.0 billion or 58% of the Group's total non NAMA impaired loans of € 12.1 billion at 31 December 2010, 38% in property investment, 59% in land and development and 3% in contractors.

Non NAMA impaired loans in AIB Bank ROI increased by € 5.0 billion in the period, allowing for the change in definition of NAMA eligible loans(2) the increase was € 3.5 billion(3) and now represents 16% of divisional customer loans. The main sectors impacted were the property, distribution and residential mortgages portfolios.

Non NAMA impaired loans in Capital Markets increased by € 0.2 billion spread across sectors and geographies.

In AIB Bank UK, non NAMA impaired loans increased by € 1.0 billion but allowing for the change in definition of NAMA eligible loans(2), the increase was € 0.4 billion(3), mainly in the property, residential mortgage, personal and retail sectors.

AmCredit impaired loans decreased by € 15 million in the year to 31 December 2010 reflecting the sale/restructure of impaired loans.

Impaired loans held for sale to NAMA amounted to € 0.7 billion down from € 11 billion at 31 December 2009. The reduction reflects the transfer of € 18.2 billion in loans to NAMA during 2010 of which € 11.9 billion were impaired. The remaining € 0.7 billion represents 33% of NAMA loans to be transferred in 2011, the vast majority of which relate to loans in the property sector.

 

(1) 

Includes € 12,114 million of impaired loans (note 28) and AmCredit (€ 27 million).

(2) 

There was a change in the threshold for NAMA eligible loans during 2010 from greater than € 5 million to greater than € 20 million as well as movements in the number of loans and balances within the NAMA eligible pool.

(3) 

Management estimate.

 

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Provisions (income statement)

   2010
€m
            2009
€m
            2008
€m
 
              

Provisions for impairment of loans and receivables to customers

     6,015            5,237            1,724   

Provisions for impairment of loans and receivables to banks

     —              5            —     

Provisions for impairment of loans and receivables

     6,015            5,242            1,724   

Provisions for liabilities and commitments

     1,029            1            (4

Provisions for impairment of financial investments available for sale

     74            24            29   
                                

Total provisions

     7,118            5,267            1,749   
                                

2010 v 2009

Economic conditions continued to be extremely challenging throughout 2010 and deteriorated further in Ireland in particular in the last quarter of the year. The provision charge for loans and receivables was € 6,015 million or 5.25% of average customer loans and compares with € 5,237 million or 4.23% of customer loans in 2009. The charge comprised € 4,639 million of specific provisions and € 1,376 million of IBNR provisions (€ 5,060 million and € 177 million in 2009). The charge included € 1,497 million for loans held for sale to NAMA and € 4,518 million for non NAMA loans (€ 3,373 million and € 1,864 million respectively in 2009).

A provision for liabilities and commitments of € 1.0 billion was made in 2010 for the remaining NAMA gross loans of € 2.2 billion. This represented the excess amount over existing provisions to apply a 60% discount on these assets.

The provision for impairment of financial investments available for sale of € 74 million included € 59 million for bonds held in other financial institutions and € 15 million for other investments.

2009 v 2008

The crisis in the global financial markets and the severe downturn in the economies in which the Group operated continued to significantly impact on our businesses throughout 2009 and resulted in a further substantial increase in the provision charge for loans and receivables to customers which was € 5,237 million or 4.23% of average customer loans in 2009 compared with € 1,724 million or 1.38% in 2008.

The provision charge for loans and receivables to customers included specific provisions of € 5,060 million (4.09% of average loans) and IBNR provisions of € 177 million (0.14% of average loans) compared with € 797 million or 0.64% and € 927 million or 0.74% respectively in 2008. The increased specific charge resulted largely from the significant level of impairment and associated provisions in our property portfolios in AIB Bank ROI. The IBNR charge at € 177 million was low relative to 2008 reflecting the substantial recognition of impairment in the year which was covered by specific provisions and management's view at balance sheet date of the incurred but not reported loss in the remaining performing book. The Group held a stock of IBNR provisions of € 1.4 billion as at 31 December 2009 (€ 1.15 billion as at 31 December 2008).

The property and construction sector accounted for 74% or € 3.9 billion of the Group's total provision charge for the year of € 5.2 billion for loans and receivables to customers compared to 77% or € 1.3 billion of the total charge of € 1.7 billion in 2008. Other sectors were also impacted during the year as the non-property related provision charge was € 1.4 billion compared with € 0.4 billion in 2008.

Of the € 5,237 million of provisions for impairment for loans and receivables to customers, € 3,373 million or 64% relates to loans and receivables held for sale to NAMA. At 31 December 2009 the statement of financial position included € 4.2 billion of provisions for loans held for sale to NAMA.

 

     2010  

Divisional impairment charges

   NAMA
€ m
     Non
NAMA(1)
€ m
     Non NAMA
residential mortgages
€ m
     Total
€ m
 

AIB Bank ROI

     1,335         3,301         448         5,084   

Capital Markets

     10         319         13         342   

AIB Bank UK

     152         385         51         588   

Group (AmCredit)

     —           —           1         1   
                                   

Continuing operations

     1,497         4,005         513         6,015   
                                   

 

(1) 

Non NAMA loans excluding residential mortgages.

 

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     2010  

Divisional impairment charges

   NAMA
bps
    Non
NAMA(1)
bps
     Non NAMA
residential
mortgages
bps
     Total
bps
 

AIB Bank ROI

     916        1,048         168         698   

Capital Markets

     342        151         262         156   

AIB Bank UK

     572        279         156         298   

Group (AmCredit)

     —          —           122         122   
                                  

Continuing operations

     854        603         168         525   
                                  
     2009  

Divisional impairment charges

   NAMA
€ m
    Non
NAMA(1)
€ m
     Non NAMA
residential
mortgages

€ m
     Total €
m
 

AIB Bank ROI

     3,215        1,172         86         4,473   

Capital Markets

     (8     351         13         356   

AIB Bank UK

     166        217         12         395   

Group (AmCredit)

     —          —           13         13   
                                  

Continuing operations

     3,373        1,740         124         5,237   
                                  
     2009  

Divisional impairment charges

   NAMA
bps
    Non
NAMA(1)
bps
     Non NAMA
residential
mortgages
bps
     Total
bps
 

AIB Bank ROI

     1,659        363         33         576   

Capital Markets

     (145     148         145         141   

AIB Bank UK

     509        157         33         191   

Group (AmCredit)

     —          —           1,175         1,175   
                                  

Continuing operations

     1,454        249         40         423   
                                  

 

(1)             Non NAMA loans excluding residential mortgages.

 

          
                  2008  

Divisional impairment charges

                Income
statement
charge

€ m
     As a %
average
customer
loans
bps
 

AIB Bank ROI

          1,298         174   

Capital Markets

          160         60   

AIB Bank UK

          257         111   

Group (AmCredit)

          9         1,148   
                      

Continuing operations

          1,724         138   
                      

The provision charge included € 1,497 million for loans held for sale to NAMA.

In AIB Bank ROI the provision charge for NAMA loans was € 1,335 million or 9.16% of average NAMA loans, the vast majority of which related to property loans, with € 320 million relating to other sectors such as distribution and personal.

There was a charge of € 10 million for NAMA loans in Capital Markets in 2010 relating to a small number of impaired cases.

There was a charge of € 152 million in AIB Bank UK for NAMA loans, again largely for loans in the property sector.

The Group provision charge for non NAMA loans for continuing operations was € 4,518 million (4.66% of average customer loans) comprising € 3,204 million in specific provisions (3.30% of average customer loans) and € 1,314 million or 1.35% of average customer loans in IBNR provisions. This was up from € 1,712 million specific provisions and € 152 million IBNR provisions in 2009. The increase in IBNR provisions largely occurred in AIB Bank ROI where the IBNR charge was € 1,205 million, with increases in Capital Markets and AIB Bank UK also in 2010. This was due to management’s view of the heightened level of incurred loss (not yet identified) in the book and the impact of more negative economic circumstances, particularly in Ireland.

 

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In AIB Bank ROI the charge for non NAMA loans was € 3,749 million or 6.44% of average customer loans, of which € 2,544 million was in specific provisions and € 1,205 million in IBNR provisions compared with € 1,131 million and € 127 million respectively in 2009. 57% or € 2.1 billion of the total provision charge related to borrowers in the property sector, who continue to be impacted by depressed construction/housing activity. A further € 448 million of the total provision charge related to the residential mortgage portfolio and represented 1.68% of average residential mortgages compared with 0.33% in 2009. The provision charge in the other commercial sector of the division’s book increased significantly to € 872 million or 7.38% of average commercial loans compared with 3.32% in 2009, mostly in the distribution sector. This sector includes the hotels (portfolio size € 1.6 billion), licensed premises (€ 1.0 billion) and retail/wholesale (€ 2.8 billion) sub-sectors which have been heavily impacted by the economic environment and decline in consumer spending during the year.

The charge of € 1,205 million in IBNR income statement provisions in AIB Bank ROI had the impact of increasing its statement of financial position IBNR provisions to € 1,842 million at 31 December 2010. In considering the appropriate level of IBNR provisions, the Bank has taken into account the credit risk profile of the portfolio, particularly the level of arrears and >90 days past due but not impaired loans. Specific provision experience, particularly the most recent experience, is taken into consideration as historic average loss rates are deemed to be unrepresentative of the incurred loss in the non impaired book. The income statement IBNR provision charge was allocated to the following portfolios; € 312 million to residential mortgages (statement of financial position provision of € 368 million), which reflected recent provision experience, the level of arrears, the level of requests for restructure and uncertainty over underlying peak to trough asset price declines. The Bank also took into consideration the levels of interest only mortgages in the portfolio and their maturity profile. € 666 million was allocated to the property portfolio (statement of financial position provision of € 1,063 million), which reflected the impact of further pressure on asset prices and rental cash flow and uncertainty over the timing of a general recovery in demand for commercial property assets including land. € 172 million was allocated to the SME/commercial portfolio (statement of financial position of € 311 million) which again is influenced by recent provision experience, declining consumer demand and capital spending. € 55 million was allocated to other personal debt (statement of financial position provision of € 99 million) which was influenced by provision experience, arrears profiles and concern over unemployment and income levels. These factors have been considered together, rather than in isolation, and with an overlay of management judgement have resulted in the overall IBNR charge mentioned above.

The charge for non NAMA loans in Capital Markets was € 332 million or 1.54% of average customer loans. € 282 million related to specific provisions after provision recovery of € 38 million. The charge included € 106 million relating to provisions on five large cases, spread across sectors and € 50 million in IBNR provisions bringing their statement of financial position IBNR provisions to € 100 million, influenced by the increased specific provisioning experience in the latter half of 2010.

In AIB Bank UK, the income statement provision charge for non NAMA loans was € 436 million or 2.55% of average loans. The income statement IBNR provision charge was € 59 million resulting in statement of financial position IBNR provisions of € 197 million. Influencing the view of appropriate levels of IBNR provisions were a combination of several key factors, which included the most recent specific provision experience, property asset prices and the expected time it will take for normal markets for those assets to resume and the repayment profile of residential mortgages. € 258 million or 59% of the total provision charge related to loans in the property and construction sector. There was an increased charge in the residential mortgage portfolio of 1.56% of average mortgage loans up from 0.33% in 2009 particularly in First Trust.

There was a charge on income statement of € 1 million in AmCredit in 2010 representing 1.22% of average loans.

2009 v 2008

The AIB Group provision charge of 4.23% of average total customer loans comprised of 14.54% relating to NAMA and 1.86% relating to the non NAMA portfolio (including 0.40% for residential mortgages and 2.49% for other non NAMA loans).

In AIB Bank ROI the provision charge increased to 5.76% of average customer loans compared with 1.74% at December 2008. The charge included specific provisions of € 4,323 million and IBNR provisions of € 150 million. Provisions for loans in the property portfolio accounted for approximately 80% of the charge primarily in the land and development element of the property portfolio (€ 17.1 billion) where the illiquid property market and reduced asset values continued to impact our borrowers. There was an addition to IBNR provisions of € 150 million in the year and the factors influencing this were the introduction of enhanced credit management processes and the significant level of impaired loans and their related specific provisions which were recognised in the period, and by the reduction in performing advances at € 63.2 billion compared with € 74.9 billion at 31 December 2008. The residential mortgage portfolio excluding NAMA in AIB Bank ROI amounted to € 27.3 billion at 31 December 2009, split 64% owner occupier, 29% buy-to-let with staff and other accounting for the remaining 7%. The provision charge for this book was € 85 million or 0.33% of total average residential mortgages compared with € 35 million or 0.16% in December 2008 impacted by increasing unemployment.

The provision charge in the finance & leasing operation in AIB Bank ROI (excluding residential mortgages) increased significantly to € 166 million compared with € 80 million for December 2008 with the main contributors to this position being the plant, equipment and transport financing sub-sectors (portfolio size of € 2.1 billion) which are continuing to be impacted by the low levels of activity in the property and construction sector.

 

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€ 3,215 million or 72% of the charge of € 4,473 million related to loans and receivables held for sale to NAMA. The charge represented 16.6% of the € 19.4 billion of loans and receivables held for sale to NAMA in AIB Bank ROI and these primarily relate to loans in the land and development sub-sector but also include associated loans in the property investment, distribution, other services and personal sectors.

In Capital Markets the provision charge was € 356 million or 1.41% of average customer loans compared with € 160 million or 0.60% in 2008. The charge included a specific provision of € 326 million and an IBNR provision of € 30 million to recognise the deteriorating grade profile within the performing book. While the provision charge was spread across a number of geographies, the principal sectors impacted were financial, manufacturing, distribution and property sectors. Included in the above charge is a credit of € 8 million for provisions in relation to loans and receivables held for sale to NAMA. The positive position was largely as a result of the write-back of a provision which was no longer required due to improved performance relating to an associated loan in the property sector.

In AIB Bank UK, the provision charge increased to € 395 million or 1.91% of average loans compared with € 257 million or 1.11% in 2008. While the increase was heavily influenced by property sector cases which accounted for 66% of the charge, there was also evidence of increased provisioning relating to other sectors, particularly the leisure sector where a number of customers in the licensed trade sub-sector have been experiencing problems. 42% (€ 166 million) of the charge of € 395 million related to loans and receivables of € 3.3 billion which are held for sale to NAMA. 90% of the charge related to land and development advances with the remainder largely held for associated property investment assets.

The provision charge for AmCredit was € 13 million or 11.75% of gross customer loans, reflecting the continuing weak mortgage market in the Baltics.

Credit profile

 

Loans and receivables to customers

   2010
€ bn
         2009
€ bn
 

Retail(1)

       

Residential mortgages

     31           31   

Other personal lending

     6           7   

Total retail

     37           38   

Commercial(1)

       

Property

     26           24   

SME/commercial

     18           19   

Total commercial

     44           43   

Corporate(1)

     13           16   
                   

Total

     94           97   
                   

 

      € bn      2010
%
     € bn      2009
%
 

Credit Profile

           

Satisfactory

     66.6         71         77.8         79   

Watch

     7.6         8         8.4         9   

Vulnerable

     7.6         8         5.7         6   

Impaired

     12.1         13         6.0         6   

Statement of financial position provisions

     7.3            2.7      

Statement of financial position provisions/loans

        7.8            2.8   

Specific provisions/impaired loans cover

        42            34   

Total provisions/impaired loans

        60            45   

Impairment charge/average advances

        4.66            1.86   
                                   

Gross loans and receivables to customers amounted to € 93.9 billion at 31 December 2010. € 27.4 billion or 29.2% of the portfolio is criticised of which € 12.1 billion is impaired. Statement of financial position specific provisions of € 5.2 billion providing cover of 42% are held at 31 December 2010 for this portfolio with total provisions to total loans of 7. 8%. The income statement specific provision charge in 2010 was € 4,518 million or 4.66% of average advances up from € 1,864 million or 1.86% in 2009. The key portfolios and credit quality are profiled in the following pages.

 

(1) 

The segmentation of the loan book is based on the historical composition of the statement of financial position but may not be reflective of business segmentation under the new structure. The new business segments will be reported in future reporting periods.

 

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Residential mortgages

Non NAMA residential mortgages for continuing operations amounted to € 31 billion at 31 December 2010. The provision charge for non NAMA residential mortgages was € 513 million or 1.68% of average mortgage loans. Residential mortgages in AIB Bank ROI amounted to € 27.2 billion (including owner occupier of € 19.4 billion and buy to let € 7.8 billion) and account for 88% of the residential mortgages for continuing operations of € 31 billion (29.1% of the continuing operations non NAMA loans) and are profiled below. The portfolio is split as follows: 54% tracker, 32% standard variable rate and 14% fixed rate.

 

     2010  
     Owner
occupier
     Buy to
Let
     Total  

AIB Bank ROI residential mortgages

   € m      € m      € m  

Total residential mortgages

     19,382         7,783         27,165   

In arrears (>30 days past due)

     749         924         1,673   

In arrears (>90 days past due)

     557         747         1,304   

Of which impaired

     422         561         983   

Statement of financial position specific provisions

     73         125         198   

Statement of financial position IBNR provisions

     138         230         368   

Income statement specific provisions 2010

     56         80         136   

Income statement IBNR provisions 2010

     107         205         312   
     %         %         %   

Specific provisions/impaired loans cover

     17.3         22.3         20.1   
                          
     2009  
     Owner
occupier
     Buy to
Let
     Total  

AIB Bank ROI residential mortgages

   € m      € m      € m  

Total residential mortgages

     19,152         8,177         27,329   

In arrears (>30 days past due)

     398         362         760   

In arrears (>90 days past due)

     289         263         552   

Of which impaired

     252         207         459   

Statement of financial position specific provisions

     44         31         75   

Statement of financial position IBNR provisions

     29         24         53   

Income statement specific provisions 2009

     28         23         51   

Income statement IBNR provisions 2009

     18         16         34   
     %         %         %   

Specific provisions/impaired loans cover

     17.5         15.0         16.3   
                          

The portfolio has experienced an increase in arrears reflecting the impact of a harsher economic climate on borrowers’ repayment affordability. The pace of increase in total arrears eased somewhat in the second half of 2010. The level of >90 days in arrears was 4.80% at 31 December 2010 compared with 2.02% at 31 December 2009.

The level of total arrears (>90 days) in the owner occupier book has increased significantly since 31 December 2009 from € 289 million (1.51% of mortgages) to € 557 million or 2.87% at 31 December 2010. Unemployment, wage cuts and high levels of personal debt continued to be the principal drivers of increased arrears.

The level of total arrears (>90 days) in the Buy to Let (“BTL”) portfolio has increased significantly from € 263 million or 3.22% at 31 December 2009 to € 747 million or 9.60% at 31 December 2010 and was influenced by falling rents.

Total owner occupier and BTL impaired loans were € 983 million at 31 December 2010. Statement of financial position specific provisions of € 198 million provided cover of 20% and have been raised having assessed the peak to trough fall in house prices in Ireland (55%). IBNR statement of financial position provisions of € 368 million are held for the performing book (96% of residential mortgage book) based on management’s view of incurred loss in this book. The total income statement charge for 2010 was € 448 million (specific € 136 million and IBNR € 312 million). The IBNR charge was influenced by the increase in the level of arrears, requests for loan restructures and the level of interest only mortgages (€ 4.9 billion) in the portfolio.

AIB has received a number of requests for forbearance from customers who are experiencing cash flow difficulties. AIB considers these against the borrowers’ current and likely future financial circumstances, their willingness to resolve these issues, as well as the legal and regulatory obligations. As part of that process loans are tested for impairment and where appropriate, the loans are downgraded to impaired status and provisions raised.

AIB Bank UK residential mortgages

Non NAMA residential mortgages in AIB Bank UK were € 3.4 billion at 31 December 2010. The level of >90 days in arrears was 4.1% compared with 2.5% at 31 December 2009 driven by an increase in Northern Ireland in particular.

 

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Other personal lending

   € m      2010
%
     € m      2009
%
 

Total personal lending portfolio

     6,021            7,103      

Credit profile

           

Satisfactory

     3,916         65         5,290         74   

Watch

     634         11         711         10   

Vulnerable

     632         10         489         7   

Impaired

     839         14         613         9   

Statement of financial position provisions

     619            375      

Statement of financial position provisions/loans

        10.3            5.3   

Specific provisions/impaired loans cover

        61            53   

Total provisions/impaired loans

        74            61   

Impairment charge/average advances

        5.27            3.51   
                                   

The non NAMA other personal portfolio amounted to € 6.0 billion at 31 December 2010 and includes € 1.1 billion in credit card loans with the remaining € 4.9 billion relating to loans/overdrafts. The portfolio decreased by € 1.1 billion in the period, largely in AIB Bank ROI. € 2.1 billion (35%) of the portfolio was criticised at 31 December 2010 (up from 25% at 31 December 2009) of which € 0.8 billion were impaired. The increased level of criticised loans was largely due to high levels of unemployment which is impacting borrowers. Statement of financial position specific provisions of € 515 million provided cover of 61% and the ratio of total provisions to total loans was 10. 3%. The income statement provision charge for this portfolio in 2010 was € 336 million or 5.27% of average advances up from € 268 million or 3.51% at 31 December 2009.

 

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Property(1)

   2010
€ m
           2009
€ m
 

Investment

       

Commercial investment

     13,679           14,478   

Residential investment

     3,497           3,348   
     17,176           17,826   

Land and development

       

Commercial development

     1,847           1,499   

Residential development

     5,543           3,524   
     7,390           5,023   

Contractors

     807           917   
                   

Total

     25,373 (2)         23,766 (2) 
                   

 

      € m     2010
%
     € m      2009
%
 

Credit profile (excluding housing associations)

          

Satisfactory

     12,362        49         15,363         65   

Watch

     2,789        11         3,330         14   

Vulnerable

     3,215        13         2,338         10   

Impaired

     7,007 (3)      27         2,735         11   

Statement of financial position provisions

     4,047           1,091      

Statement of financial position provisions/loans

       16            5   

Specific provisions/impaired loans cover

       41            27   

Total provisions/impaired loans

       58            40   

Impairment charge/average advances

       9.00            2.61   
                                  

At 31 December 2010, excluding exposures to housing associations in AIB Bank UK of € 529 million (€ 577 million at 31 December 2009), the non NAMA property and construction portfolio was € 25.4 billion. Excluding exposure to housing associations, impaired loans for this portfolio amounted to € 7.0 billion which represented 58% of the total non NAMA impaired loans for continuing business of € 12.1 billion. Statement of financial position specific provisions of € 2.9 billion provided cover of 41% for this portfolio with total provisions to total loans of 16%. The income statement provision charge in 2010 was € 2,402 million or 9.00% of average property loans up from € 629 million or 2.61% of average property loans in 2009.

At 31 December 2010, investment property amounted to € 17.2 billion (€ 17.8 billion at 31 December 2009) of which € 13.7 billion related to commercial investment. € 7.8 billion of this related to loans for the purchase of property in the Republic of Ireland, € 7.1 billion in the UK, € 1.2 billion in the US and € 1.1 billion in other geographical locations. € 6.3 billion of investment property loans were criticised at 31 December 2010 of which € 2.6 billion were impaired. AIB had statement of financial position specific provisions of € 819 million at 31 December 2010 for these impaired loans which provide impaired loan cover of 31% and total provisions to total loans of 8.3%.

At 31 December 2010, land and development loans amounted to € 7.4 billion and related to loans of less than € 20 million. The portfolio is split by location as follows: € 5.2 billion in ROI, € 2.0 billion in UK and € 0.2 billion in other geographies. Criticised loans amounted to € 6.2 billion of which € 4.2 billion were impaired. The Group had statement of financial position specific provisions of € 2.0 billion providing cover of 47% on these impaired loans and total provisions to total loans of 34%.

 

(1)

The segmentation of the loan book is based on the historical composition of the statement of financial position but may not be reflective of business segmentation under the new structure. The business segment reporting will reflect the new structure in future reporting periods.

(2)

Excludes exposures to housing associations of € 529 million at 31 December 2010 and € 577 million at 31 December 2009.

(3) 

Includes € 37 million of impaired loans for lease financing that is property related.

 

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Non NAMA SME/commercial

Not included in this analysis is the Corporate loan book of € 13 billion at 31 December 2010, which is detailed in the following section.

 

Non NAMA SME/commercial

   2010
€ m
     2009
€ m
 

Hotels

     2,827         2,907   

Licensed premises

     1,181         1,212   

Retail/wholesale

     3,150         3,355   

Other services

     6,886         7,912   

Agriculture

     1,838         1,897   

Other

     1,764         1,946   
                 

Total SME/commercial

     17,646         19,229   
                 

 

      € m      2010
%
     € m      2009
%
 

Credit profile

           

Satisfactory

     10,444         59         13,046         68   

Watch

     2,405         14         2,543         13   

Vulnerable

     2,121         12         1,897         10   

Impaired

     2,676         15         1,743         9   

Statement of financial position provisions

     1,700            861      

Statement of financial position provisions/loans

        9.6            4.5   

Specific provisions/impaired loans cover

        50            39   

Total provisions/impaired loans

        64            49   

Impairment charge/average advances

        5.44            2.65   
                                   

The main sub-sectors included in the SME/commercial category of € 17.6 billion were: hotels and licensed premises € 4.0 billion; retail/wholesale € 3.1 billion; other services € 6.9 billion and agriculture € 1.8 billion. € 7.2 billion or 41% were in criticised grades (up from 32% at 31 December 2009) and include € 2.7 billion in impaired loans. € 5.2 billion or 45% of AIB Bank ROI’s loans and loans to customers in this sector are criticised. The increase in criticised loans reflects the impact the continuing difficult economic conditions and high levels of unemployment, particularly in Ireland, are having on borrowers. Statement of financial position specific provisions of € 1.3 billion provide cover of 50% for the impaired element of this portfolio with total provisions to total loans (€ 17.6 billion) coverage of 9.6%. The income statement provision charge for this portfolio in 2010 was € 985 million or 5.44% of average loans up from € 541 million or 2.65% in 2009.

 

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Corporate loans

   € m      2010
%
     € m      2009
%
 

Total corporate portfolio

     13,412            15,661      

Credit profile

           

Satisfactory

     12,679         95         14,985         96   

Watch

     176         1         138         1   

Vulnerable

     90         1         169         1   

Impaired

     467         3         369         2   

Statement of financial position provisions

     285            208      

Statement of financial position provisions/loans

        2.1            1.3   

Specific provisions/impaired loans

        45            46   

Total provisions/impaired loans

        61            56   

Impairment charge/average advances

        1.86            0.29   
                                   

The corporate book which relates to large corporate borrowers in Capital Markets division amounted to € 13.4 billion spread on a business unit basis as follows: Ireland € 3.0 billion, UK € 1.7 billion, US € 3.3 billion, International € 4.8 billion and Other € 0.6 billion. Included in this portfolio is a leveraged finance book of € 3.3 billion, down from € 4.3 billion at 31 December 2009 and € 1.7 billion of project finance (€ 1.5 billion at 31 December 2009). € 0.8 billion of corporate loans are in criticised grades of which € 0.5 billion are impaired. Statement of financial position specific provisions of € 211 million provided cover of 45% with total provisions to total loans of 2.12%. The income statement provision charge in 2010 for this portfolio was € 282 million or 1.86% of average loans. Further detail of the leveraged book by geographic location and industry sector is available in note 28.

Note: Further information relating to asset quality on continuing operations (on a geographic location and industry sector basis) is available in notes 28, 29 and 73 of this report.

 

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Available for sale (“AFS”) financial investments

 

     € bn      2010
%
     € bn      2009
%
 

Government securities - Ireland

     4.3         20.7         3.9         15.4   

Government securities - Eurozone

     3.5         16.8         2.1         8.3   

Government securities - non Euro

     1.7         8.2         2.6         10.3   

Supranational banks and Government agencies

     1.3         6.3         0.6         2.4   

Senior bank and financial institution debt

     3.0         14.4         6.5         25.7   

Residential mortgage backed securities

     2.9         13.9         3.7         14.6   

Government guaranteed senior bank debt

     1.1         5.3         1.5         5.9   

Covered bonds (originated externally)

     0.9         4.3         1.0         3.9   

Corporate debt

     0.6         2.9         0.8         3.1   

Other asset backed securities

     0.6         2.9         1.0         4.0   

Subordinated bank debt

     0.5         2.4         0.6         2.4   

Other assets

     0.1         0.5         0.3         1.2   

Certificates of deposit

     —           —           0.2         0.8   

Equity investments (including subordinated NAMA bonds)

     0.3         1.4         0.3         1.2   

Other investments

     —           —           0.2         0.8   
                                   
     20.8         100.0         25.3         100.0   
                                   

At 31 December 2010, 96% of the AFS securities of € 20.8 billion held by the Group were externally rated as investment grade and 69% were rated A- or stronger. Sovereign issued or guaranteed securities accounted for 58% of the holdings. Other asset classes included senior bank debt and covered bonds (19%), senior tranches of residential mortgage backed securities (14%). Smaller holdings included senior tranches of other asset backed securities (3%), as well as corporate debt (3%) and bank subordinated debt (2.4%). The makeup of the portfolio is more heavily weighted towards sovereign and sovereign guaranteed securities than at 31 December 2009. This is mainly due to sales and paydowns/maturities of bank and asset backed securities during the year of approximately € 8.3 billion with most new purchases concentrated in sovereign or sovereign guaranteed securities.

There were no specific impairments recognised during the year. Screen prices have been used to value the majority of the assets and the weighted average price for the overall portfolio is 94.8% of par value. The portfolio contains positions which have unrealised losses of € 709 million for more than one year. This relates to increased charges in the market for liquidity and credit risk since 2008 which the Group is satisfied does not constitute impairment. This is borne out of ongoing credit assessment and experience of continuing performance and full repayment at maturity of similar assets which were also subject to weak market pricing in the last two years.

An IBNR provision of € 59 million was made in 2010 against the subordinated bank debt holdings within the portfolio. Total nominal value of these holdings gains at 31 December 2010 was € 590 million with a fair value of € 450 million.

Movement in net unrealised gains/losses on the financial investments available for sale securities portfolio

In 2010 there was a negative pre-tax movement of € 1 billion in the net unrealised gains/losses of the financial investments available for sale portfolio.

The principal contributor to the movement in net unrealised losses has been the impact of widening credit spreads for Irish sovereign debt in 2010 e.g. the cost of 5 year Irish sovereign credit default swaps moved from 156 basis points at 31 December 2009 to 615 basis points at 31 December 2010. The unrealised loss on Irish sovereign securities held at 31 December 2010 was € 632 million in comparison to a net unrealised gain of € 115 million at 31 December 2009. There were also negative movements of € 72 million on Eurozone government securities which related to widening credit spreads on smaller positions in Spanish, Portuguese and Greek sovereign debt and € 51 million on subordinated NAMA bonds, impacted by increased negative perception of Irish sovereign debt in 2010.

 

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Associated undertakings

   2010
€ m
     2009
€ m
    2008
€ m
 

AIB Bank ROI

     16         (4     —     

AIB Bank UK

     2         1        2   
                         

AIB Group

     18         (3     2   
                         

2010 v 2009

Income from associated undertakings in 2010 was € 18 million compared with a loss of € 3 million in the comparative period. Associated undertakings includes AIB’s share of Aviva Life Holdings Ireland Limited, Aviva Health Insurance Ireland Limited and AIB’s share in the joint venture with First Data International trading as AIB Merchant Services. The improved financial out-turn reflected increased contributions from each of these businesses.

2009 v 2008

Losses from associated undertakings in 2009 were € 3 million compared with income from associated undertakings of € 2 million in 2008.

Income tax (income)/expense

2010 v 2009

The taxation credit for 2010 was € 1,710 million (including a € 1,714 million credit relating to deferred taxation), compared with a taxation credit of € 373 million in 2009 (including a credit of € 374 million relating to deferred taxation). The taxation credits exclude taxation on share of results of associated undertakings. Associated undertakings are reported net of taxation in the Group (loss)/profit before taxation. The credit is influenced by the geographic mix of profits and losses, which are taxed at the rates applicable in the jurisdictions where the Group operates.

2009 v 2008

The taxation credit for 2009 was € 373 million, compared with a tax charge of € 69 million in 2008. The taxation charge/credit excludes taxation on share of results of associated undertakings. Share of results of associated undertakings is reported net of taxation in the Group (loss)/profit before taxation. The charge/credit is influenced by the geographic mix of profits and losses, which are taxed at the rates applicable in the jurisdictions where the Group operates.

NAMA

During 2010, loans of € 18.2 billion transferred to NAMA. Of the consideration received, 95% comprised Government guaranteed floating rate notes, with the remaining 5% comprising floating rate perpetual subordinated bonds. The aggregate discount on assets transferred in 2010 was 54%. The NAMA senior bonds have been classified as loans and receivables in the statement of financial position under the caption ‘NAMA senior bonds’ (the NAMA senior bonds were disclosed within financial investments available for sale in the half-yearly financial report 2010). The bonds were measured at initial recognition at fair value and subsequently measured as for loans and receivables, that is, at amortised cost using the effective interest method less any impaired losses.

At 31 December 2010, € 2.2 billion of gross loans were held for sale to NAMA. A provision of € 1.0 billion was made in relation to these remaining NAMA loans and was recorded as a provision for liabilities and commitments. This represented the excess amount required over existing provisions in order to apply a 60% discount on these loans. The total NAMA transfer related losses of € 7.0 billion are highlighted separately in this commentary on results.

Retirement benefits