ALLIED IRISH Bank’s net interest margin must double if it is to return to full financial health and attract investors, the bank has told the Oireachtas finance committee.
A senior AIB executive told the committee that the bank had to wean itself off the Government bank guarantee, raise loan interest rates and reduce deposits if it is to return to profitability by 2014.
Fergus Murphy, AIB’s director of products, said the State-owned bank’s net interest margin was in the “mid-80s” basis points currently and had to increase to more than 150 basis points over time.
He told the Oireachtas Committee on Finance, Public Expenditure and Reform that the bank was still losing money on its standard variable rate mortgages despite increasing the rate to 4 per cent.
The bank’s cost of funding was about 3 per cent and additional costs meant AIB was paying out a rate of 4.1 per cent.
AIB chief executive David Duffy said the bank’s mortgage rates could increase to between 5 per cent and 6 per cent over time.
The bank hoped to attract investors by offering a return on their equity of 8 to 12 per cent, he said.
Talks had been held with potential investors but it would be two years before AIB could convince them to invest, he said.
They had not discussed what value investors would put on the bank; this was a matter for the Government to decide.
AIB disclosed that just €600 million of lending to SMEs of its €3.5 billion target for the year was new money; the remainder was the restructuring of existing debt.
The bank said that it was ahead of its year-to-date target to reach the €3.5 billion target but it denied that it was “playing around with numbers”, in response to questions by Sinn Féin TD Pearse Doherty about the Government’s definition of what constituted SME lending.
Paul Stanley, AIB’s chief financial officer, said he expects bad loan losses to be within the stress test levels and that the bank should not need to use State contingent capital injected last year.
AIB is 99.8 per cent owned by the State following a €21 billion bailout by the Government.
Mr Murphy said that the possible mis-selling of payment protection insurance policies to customers was “of a different scale” in Ireland compared with Britain, where banks had paid out about £10 billion in compensation.
About 25 per cent of customers took out insurance on loans in Ireland compared with 90 per cent in Britain, he said, and that one in five Irish customers made claims.
