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View from Dublin: problem loans still weighing down AIB

The Republic’s government aims to sell a 25% share in AIB

By Dan White

The Irish government fired the starting gun on the sale of 25% of First Trust parent AIB, from which it hopes to raise up to €3bn (£2.6bn), last week.

While it is in much better shape than when it was nationalised in 2010, with lending showing the first signs of post-crash growth, AIB's stock of problem loans remains very high.

Having dwelt in the stock exchange's equivalent of the twilight zone for the past seven years, with less than 0.2% of its equity being privately owned, AIB announced its plans for an initial public offering (IPO) of shares to investors. Following the IPO, AIB's shares will be traded in Dublin and London.

Today's AIB bears very little resemblance to the bank that helped bring the country to its knees in 2008.

Its loan book has more than halved to just €65bn (£56.6bn) and it is now focused exclusively on the island of Ireland market.

The sprawling, highly-leveraged AIB of yore has given way to a much more conservative institution, with 95% of loans funded by customer deposits and a common equity tier (CET) (the ratio measure of a bank's financial strength from a regulatory point of view) of 15.3%.

Even more importantly, after years of losses AIB is now profitable once again, with pre-tax profits of almost €1.7bn (£1.5bn) in 2016. This has allowed AIB to resume dividend payments, with shareholders - effectively the State - receiving €250m (£218m) earlier this year. The resumption of dividends was a crucial step in readying AIB for a return to the stock market.

A successful IPO would go some way towards repaying the €20.8bn (£18bn) which the Exchequer has been forced to pump into AIB since 2008. AIB calculates that it had already repaid almost a third, €6.6bn (£5.7bn), of the taxpayers' cash.

As this figure also includes fees, dividends and interest payments, the actual repayment has been considerably less. Even with this proviso, it is clear that AIB is on track to repay a far greater proportion of the Exchequer's investment than would have been thought possible back in the dog days of 2010 and 2011.

While chief executive Bernard Byrne and his predecessor David Duffy have worked wonders in restoring AIB to financial health, problems still remain. The most obvious problem at AIB is its continuing very high level of problem loans. At the end of 2016 it had €9.1bn (£7.9bn) of impaired loans on its balance sheet - this had been reduced by a further €500m (£436m) to €8.6bn (£7.5bn) at the end of March.

Although this was less than a third of the peak figure of almost €29bn (£25bn) at the end of 2013, it was still the equivalent of 14% of its total loan book. The fact that, nearly a decade on from the bust and after four years of strong economic growth, almost a seventh of AIB's loan book is still iffy, must be cause for concern. At the IPO announcement, AIB promised to further reduce the volume of problem loans to more "normal" levels in line with its European peers over the next few years.

Not surprisingly, AIB's largest problem loan category, just over half, is mortgages, with €4.6bn of home loans falling into the impaired category at the end of 2016. Impaired mortgages have almost halved from €9bn at the end of 2013. However, would-be AIB investors would be well advised to examine this reduction closely.

The major contributor to the reduction in mortgage arrears at all of the banks has been mortgage restructuring, with the latest Central Bank figures showing that €23bn of mortgages, almost a fifth of the total, had been restructured by the end of 2016.

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