AIB upgrades forecasts after ‘very strong’ first quarter

AIB raised its full-year forecasts on Thursday after posting “a very strong first-quarter performance”, even as parts of the wider banking sector overseas succumbed to volatility not seen since the financial crisis 15 years ago.

The bank said it now expects its net interest income to exceed €3.3 billion in 2023, compared to its previous forecast for a figure above €3 billion and last year’s out-turn of €2.16 billion, as it continues to benefit from rising central bank rates.

Full-year net interest margin – the difference between the average rates at which it funds itself and lends to customers – is now projected to top 2.7 per cent, more than 0.4 of a percentage point better than its previous guidance.

AIB sees its profit returns on tangible shareholders equity – its key measure of profitability – rising to the “high teens” this year, compared to a medium-term target of a figure greater than 13 per cent. Analysts and investors view a ratio of between 8 per cent and 10 per cent as a sign of a healthy bank.

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“The group had a very strong first-quarter performance and, with continued momentum across our business, we are very confident in our outlook for 2023,” said chief executive Colin Hunt. “Notwithstanding the overseas financial market volatility, AIB remains in a position of strength with a robust balance sheet, stable deposit base and growing loan book enabling us to support our customers and the wider economy.”

While Irish banking shares have hit pockets of turbulence in recent months amid the implosion of a string of US regional banks and rescue of Credit Suisse, AIB’s shares had recovered sufficiently by early last week for it to agree to buy back about 2 per cent of its stock from the Government.

That reduced taxpayers’ holding in the company to 53.4 per cent. The State had a 71 per cent stake in AIB at the beginning of January 2022, when it started a programme of selling down stock through a combination of drip-feeding shares on to the market, the placing of large blocks of stock and participating in share buy-backs.

AIB’s total income increased by 70 per cent during the first quarter, driven by higher European Central Bank (ECB) rates on its surplus deposits and the bank passing on some of recent ECB rate increases to borrowers.

The ECB has raised its deposit rate from minus 0.5 per cent to 3.25 per cent since last July, including a quarter of a percentage point increase announced on Thursday. The ECB’s president, Christine Lagarde, said that that the bank is “not pausing” its current cycle of rate increases as the outlook for price inflation across the 20-country single-currency area remains “too high for too long”.

AIB’s non-performing loan ratio fell to 3.4 per cent of gross loans at the end of March from to 3.5 per cent in December.

Gross loans rose by €600 million to €61.8 billion, primarily driven by strong new lending exceeding redemptions and further migration of €160 million of Ulster Bank corporate and commercial loans during the period.

AIB agreed to buy about €9.5 billion of corporate, commercial and tracker mortgage loans from Ulster Bank, as the latter exits the market. Some €2.1 billion of corporate and commercial loans had already transferred by the end of December.

The bank said that its asset quality remains resilient. “However, we are ever vigilant with careful management of the loan book as we monitor the impact of inflation and rising interest rates,” it said, adding that 75 per cent of its €7.7 billion commercial property investment book is in the Republic, with the remainder in the UK.

“The portfolio is well-diversified, with no individual sector concentration and characterised by conservative underwriting standards with an average loan-to-value of circa 50 per cent,” it said. “Land and development is a relatively small part of the overall property portfolio at €1.4 billion, dominated by residential development including social housing.”

AIB’s customer deposit accounts remained stable at €102.2 billion during the first quarter, it added.