Mortgage rates help make AIB ‘most profitable’ euro zone bank

German analysis finds that Ireland is a ‘very attractive banking market’

AIB "is the most profitable bank in the euro zone", flattered by Ireland's high mortgage rates and the lender's ability in recent years to free up provisions previously set aside for bad loans, according to an influential German brokerage.

Analysts at Hamburg-based Berenberg initiated their coverage of AIB’s shares with a “buy” recommendation this week, saying the bank’s profitability, based on its return on assets, tops the league of euro zone lenders.

However, its return on equity is “depressed” by the high levels of capital the bank holds on its balance sheet, according to the analysts.

"Ireland is a very attractive banking market, having seen a number of competitors leave following the losses they incurred after the large price correction in the Irish property market," said Berenberg analyst Eoin Mullany.


“This has allowed incumbent banks to reassert their dominant position in the market. AIB, in particular, has consolidated its position in the Irish market and now has number one market share in household mortgages and SME [small and medium-sized enterprise] loans.”

The average rate on new Irish variable mortgages stood at 3.38 per cent in July, compared with 1.84 per cent across the broader euro zone, according to Central Bank data published last month.

While AIB has introduced lower variable rates in Ireland in recent years, further reductions to take effect next month will still leave the rate on loans worth more than 80 per cent of a property’s value at 3.15 per cent.

Return to profit

Investment banks, including Morgan Stanley and Goldman Sachs, estimate that AIB will have more than €3 billion of excess capital by the end of 2019, which could be returned to shareholders over time, assuming the bank makes decent continued progress on lowering its level of bad loans.

AIB’s return to profitability since 2014 has been helped as it freed up more than €1.1 billion of provisions previously set aside for bad loans.

“AIB has made good progress reducing non-performing exposures (NPE) from €30.7 billion in 2013 to €12.1 billion in the first half of 2017,” said Mr Mullany.

“However, there is still a lot more to do. Its NPE ratio is currently 19 per cent, versus a European average of circa 5 per cent.”

The bank plans to largely resolve its non-performing loans problem by the end of 2019 by continuing to restructure problem borrowings, selling portfolios and seeking to move distressed mortgage holders into mortgage-to-rent solutions. It may also result in a greater level of repossessions against borrowers who refuse to engage with the bank.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times