UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
under the Securities Exchange Act of 1934
For the date of 06 December, 2007
ALLIED IRISH BANKS, public limited company
Bankcentre, Ballsbridge, Dublin 4, Republic of Ireland
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F..X... Form 40-F.....
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ..... No ..X...
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82- ________
EMBARGO 7am 6th DECEMBER 2007
Allied Irish Banks, p.l.c.
Trading Update
Allied Irish Banks, p.l.c. ("AIB") (NYSE:AIB) is issuing the following update on
trading before its year end close period. Please note that all trends in this
update are in constant currency terms.
Our performance in 2007 reflects the quality and strength of our franchises. We
expect profit growth* this year in each of our operating divisions - Republic of
Ireland, Capital Markets, United Kingdom and Poland. Customer demand for our
products and services remains good although the operating environment has
recently become more difficult. In the US, M&T has a well proven business model
which we expect will underpin its performance relative to its peers in a very
challenging environment for regional banks.
Overall, we expect productivity to further improve and to achieve a positive gap
of around 3% between the rates of income and cost growth. We are targeting
growth of around 13% in 2007 earnings per share* off a 2006 base of 182.8c, in
line with our previous guidance issued on 1st August for low teen growth in
earnings per share this year. The effects of the global market dislocation in
the second half of this year have created significant headwinds for the banking
sector. Despite AIB not being immune to some of these effects which we will
outline in this update, our earnings target underlines the resilience of our
franchises and underpins our confidence in the future.
* Excludes profit on property sales and leaseback transactions, business
disposals and interest rate hedge volatility
PRINCIPAL EFFECTS OF GLOBAL MARKET DISLOCATION
Funding
In conditions where access to term debt is severely curtailed for all banks, AIB
is in a relatively strong position. Our activities in the term senior debt and
unsecured interbank markets in the first half of 2007 and availability of
funding to us since then through a range of current programmes has positioned us
well. Our most significant source of funding at c. 47% of our total requirement,
is our solid, highly predictable retail and business customer deposit base
comprising c. 2m customers. These deposits, when combined with wholesale funding
that matures after the middle of next year provide liquidity that is c. 100% of
our total customer loans. Wholesale funding with a remaining maturity of over 1
year is c. EUR20bn, representing c. 80% of total term funding. In addition, we
currently hold c. EUR30bn in qualifying liquid assets which represents a
significant excess over both the regulatory requirement and our own higher
internal policy level. Net unsecured interbank deposits are less than 9% of our
total funding. In summary, we have solid, well diversified sources of funding
that are sufficient to support our planned business growth.
The cost of funding has increased but will not have a significant effect on our
2007 performance. Our working assumption is that current market conditions will
continue well into next year
Asset Portfolios
There are 3 distinct portfolios affected by the market dislocation. 2 are
managed by Group Treasury and 1 by Corporate Banking and we outline hereunder
the different effects which are determined by the distinctive assets in each
portfolio and accounting convention.
Group Treasury manages a trading portfolio of qualifying liquid assets (c.
EUR9bn, held for liquidity management purposes). This trading portfolio
principally comprises bank bonds (c. EUR5bn) and collateralised prime
residential mortgage obligations (c. EUR3.5bn). 76% of these securities are
rated "AA" / "AAA" with virtually 100% rated "A" or better. It is important to
note the ratings have not been achieved through synthetic structuring of the
securities. The mortgage portfolio primarily comprises prime European mortgages
which have an average loan to value of c. 65% and are owner occupied. The
average life of the assets is c. 3 years and we are entirely satisfied that they
will redeem at par value on maturity. However, asset value writedowns in current
markets have been indiscriminate and these assets currently have mark to market
values less than their par values. The accounting convention is to fair value
these assets through non interest income in the profit and loss account and it
is our intention to do this in the most clear and transparent way - by applying
quoted prices. Based on current quoted prices, the reduction in value is c.
EUR100m and is included in the earnings per share target already referred to in
this update. It should be noted that the actual reduction will be determined by
the prices quoted at our year end on 31st December.
Our "financial investments available for sale" portfolio managed by Group
Treasury is c. EUR19bn and contains assets of equally high quality (also held
for liquidity management purposes) that have not suffered any permanent
diminution. The accounting convention is to fair value these assets through the
equity account and not the profit and loss. We will apply the same approach to
valuation as outlined for our trading portfolio financial assets and the current
write down is c. EUR170m which does not affect our regulatory capital position.
Our total credit exposure to US sub prime mortgages is low. We have 2 portfolios
- a "whole loan" i.e. not tranched portfolio of c.$200m and an asset backed
securities (ABS) portfolio of around $300m. The whole loans were purchased in
2007 from a top US originator and comprise collateral selected by AIB and
purchased after extensive due diligence and the onset of the sub prime crisis.
These loans offer strong risk adjusted returns and are performing well within
our expectations. Within the ABS portfolio, c. 80% of the collateral was
originated prior to 2006. All payments are current and the portfolio is held to
maturity. This portfolio is marked to model, regular reviews are undertaken and
following a recent examination we have taken a charge to our income of c. $35m
which we consider adequate to cover all likely losses. We have no exposure to
conduits or SIVs, either directly or through backstop facilities. Other CDO/CLO
exposures total c. EUR550m and are all performing well. This is greater than the
figure disclosed at the interim stage primarily due to the reclassification of
securities already held together with the addition of 1 new security.
REPUBLIC OF IRELAND DIVISION
The Irish economy is performing well and growth remains ahead of the eurozone
average. The pace of growth is slowing as the housing market undergoes a rapid
and significant period of transition in which developers are materially cutting
the supply of new houses. The speed and extent of this transition and the price
correction taking place will restore the housing sector to a more stable and
sustainable part of the economy. The housing market has materially changed and,
as activity slows, so too will our income from residential development and
mortgages. However, our lending to residential developers is heavily weighted to
borrowers with extensive experience, assets and cashflows derived from diverse
segments of the property market. Asset quality in this sector remains solid,
although it is inevitable that impaired loans and credit provisions will
increase in the future from current unsustainably low levels. Key lead
indicators and the comprehensive reviews we have undertaken point to the future
increase being moderate in all likely scenarios. Quality of the residential
mortgage book remains very strong.
Activity remains strong in other key sectors of the economy, including
non-residential property. Overall employment continues to grow and any increase
in unemployment is expected to be moderate. In 2007 we expect GDP growth of
close to 5% and around 3% in 2008.
In the still relatively benign although less buoyant environment outlined above,
we expect loan growth in 2007 of close to 20%. Demand from our business
customers is strong and we continue to increase market share, further extending
our no. 1 position. We are maintaining our share of the slower growing mortgage
market, despite our continued underweight position in the first time buyer
segment. In deposits we are also increasing our share. We expect a volume
increase of around 3% for the full year due to better momentum in the second
half following a flat performance in the first half when significant SSIA funds
matured.
Our wealth management business is performing strongly. This business includes
our joint venture with Aviva which is continuing to outperform in the investment
and protection market.
CAPITAL MARKETS DIVISION
Our expectation for profit growth in this division this year, despite highly
unfavourable market conditions, underlines the quality, nature and
sustainability of income in this franchise.
Corporate banking continues to generate a high percentage of the division's
profit and is performing strongly again this year. Customer demand for loans has
remained strong and we continue to achieve superior returns. The profile and
quality of the loan book remains robust. We expect loan growth of close to 20%
this year and importantly, do not hold any material underwritings in our book.
Customer demand is very good in Global Treasury particularly in recent months
when heightened market volatility has increased sales of protection products.
Our wholesale activities are being well managed in the difficult market
conditions already outlined in this update.
Investment Banking is on track to deliver significant operating profit growth
this year. Key contributions are being made by our asset management,
stockbroking and corporate finance businesses and by the disposal of some trade
investments.
UK DIVISION
Customer demand is driving good volume growth on both sides of the balance
sheet. Both loans and deposits are expected to increase by around 20% this year.
Significant benefits are now being derived from the reconfiguration of our
networks. In Great Britain, we have centralised all SME business in one location
to enable our branch and specialist teams focus on selected mid corporate
sectors. Cross sales to customers in these sectors are increasing, notably in
private banking, interest rate hedging and foreign exchange services. We are
consistently adding new customers in our chosen sectors; two out of three new
customers tell us their decision to bank with us was prompted by a
recommendation from an existing customer. This advocacy by customers of our
relationship management model is a very powerful catalyst for new business
development, underpinning momentum and the growth potential in our franchise.
In Great Britain, our property book is robust and we have minimal exposure to
the consumer sector. The other key sectors in which we operate - professional
services, private education, healthcare, waste management and leisure - are
likely to prove resilient in an economic downturn.
In Northern Ireland good progress has been made in centralising administration
activities and processing. We have carefully segmented the market and created a
mix of full service branches and sales outlets. This approach has sharpened our
focus on opportunities in the market; product sales are increasing and
productivity is improving.
POLAND DIVISION
Our premium quality franchise is growing very strongly in a positive environment
- Polish economic growth is expected to be around 6% in 2007.
Our loan book is on track to increase by over 30% and deposit percentage growth
is expected to be in the mid teens, stronger than the 10% previously guided.
Outperformance in our corporate and business banking portfolios continues to be
a feature and is driven by dedicated, experienced teams operating from a growing
number of well located business centres. Personal lending and zloty mortgages
are also increasing strongly and we are distributing our suite of competitive
products through an expanding number and range of channels. This channel
development includes internet, call centres, mobile sales teams and agency sales
to complement over 380 branches - a number we are now increasing at a rate of
more than 1 per week. A key part of this major ongoing investment programme is
people and we expect the number of employees to rise by almost 1,000 in 2007; we
now have more people in Poland than any other division of the bank.
Non interest income growth is also very strong. We hold a clear no. 2 position
in the mutual funds market and this business is also benefiting from our channel
development and additions to the product suite. Our fast growing brokerage
business now holds a leading market position while foreign exchange, insurance,
banking fees and commissions are also important sources of growth.
The investment we will continue to make in Poland is being done in a measured
way, drawing on the experience we have in the market over many years. There is a
clear focus on quality and returns from the business and 2007 will reflect
further gains in our already high productivity.
M&T BANK CORPORATION
In common with their US regional banking peers, slower revenue growth and higher
credit costs are creating difficult conditions for M&T in 2007. Management is
responding by managing costs very effectively, evidenced by an improvement in
the Q3 efficiency ratio compared to the same period last year. The profit
contribution we expect this year will continue to deliver a good return on the
capital supporting our c. 25% shareholding.
In its investment securities, M&T has a mezzanine CDO portfolio of $132m,
comprising 3 securities. In Q3 this portfolio was deemed to be temporarily
impaired and in accordance with US GAAP was partly written down in the M&T
balance sheet with a charge to stockholders' equity. Management is currently
reviewing the securities to determine whether any are other than temporarily
impaired. In the event that they consider impairment other than temporary, a
writedown would be taken as a charge to the profit & loss account this year.
While this determination is pending, we have reduced the projected M&T
contribution to us by cautiously assuming that M&T management decide to write
down the portfolio of $132m to $31m and that this writedown is charged to the
profit & loss account. We have made this assumption for the purpose of our 2007
earnings per share guidance contained in this update. The impact on AIB would be
to reduce the profit contribution from M&T by c.$25m pre-tax, $17m after tax.
MARGINS
The rate of net interest margin attrition due to business factors (excludes
volume effect / reclassification of income on treasury assets) is expected to
reduce from 16 basis points last year to around 10 basis points in 2007. Loans
growing faster than deposits are the main cause of attrition with the
reinvestment of customer account funds likely to have a close to neutral effect
on the net interest margin this year. Both loan and deposit product margins are
broadly stable while we estimate that c. 1 basis point of the attrition is due
to higher funding costs.
NON INTEREST INCOME
We are targeting an increase of around 6% this year. Banking fees and
commissions remain an important component of non interest income while Polish
asset management and brokerage, investment and protection, cards and customer
treasury services are all growing strongly in 2007. Growth in our non interest
income this year will be affected by global market dislocation effects already
referred to in this update.
COSTS
Growth of around 10% is expected this year. Key drivers include business growth,
investment in our single enterprise agenda, performance remuneration and Polish
business expansion costs. As already stated, we expect income growth to exceed
cost growth by around 3% in 2007. Significant progress has been made in our
single enterprise agenda and we have reached a point at which the level of
further investment spending will moderate. We have also largely completed major
regulatory programmes and these factors will slow the rate of future cost
growth.
ASSET QUALITY
Credit quality remains good and there has been no material increase in impaired
loans in any of our loan portfolios. We expect a bad debt charge of around 10
basis points of average loans in 2007. As indicated at our interim results
presentation, the charge is higher in the second half of the year reflecting the
non recurrence of the high level of provision recoveries and writebacks in the
first half. This expected variation in the half year charges was also evident in
2006.
CAPITAL
We target a minimum tier 1 capital ratio of c.7% and a core tier 1 ratio (before
the addition of preference shares) of c. 5%. We expect these targets to be
exceeded at 2007 year end and they are also achieved in our 2008 plan. Our plan
incorporates continuation of our progressive dividend policy. In regard to Basel
II we continue to expect the effect on our capital ratios to be broadly neutral.
2008 OUTLOOK
Activity levels and business pipelines are good across all our franchises. Our
business is well diversified by carefully chosen geographies and sectors and
relies on recurring, sustainable, customer activity driven revenues. In 2008 we
currently expect to achieve profit growth in each operating division and at
overall group level.
We have previously and consistently said that we expect a through the credit
cycle charge to be in a range of 30 - 35 basis points of average loans. Our
close monitoring of all key lead indicators of credit quality do not justify
incorporating an increased charge to within this range in 2008. However, the
operating environment is becoming more challenging. We anticipate the bad debt
charge in 2008 to rise compared to the very low level expected in 2007 as we do
not expect the strong level of recoveries and writebacks this year to recur.
As already noted, we assume that current market conditions and their effect on
our cost of funding will continue well into next year and this assumption is
incorporated in our 2008 financial plan.
We intend to provide specific guidance for 2008 on presentation of our 2007 year
end results which will be announced on 20th February 2008.
-ENDS-
For further information please contact:
Alan Kelly Catherine Burke
General Manager, Group Finance Head of Corporate Relations
AIB Group AIB Group
Dublin 4 Dublin 4
Tel: +353-1-6412162 Tel: +353-1-6413894
John O'Donnell, Group Finance Director and Alan Kelly, General Manager Group
Finance, will host a conference call for analysts and investors today at 09.00
GMT
Conference call dial-in details:
Title AIB Trading Update - code 4481008
Republic of Ireland (01) 655 8886
UK +44 20 7806 1955
USA 1888 935 4577
Replay facility available until close of business 20th December 2007 - access
code 4481008#
Republic of Ireland (01) 659 8321
UK +44 20 7806 1970
USA 1866 239 0765
Forward-looking statements
A number of statements we make in this document will not be based on historical
fact, but will be 'forward-looking' statements within the meaning of the United
States Private Securities Litigation Reform Act of 1995. Actual results may
differ materially from those projected in the 'forward-looking' statements.
Factors that could cause actual results to differ materially from those in the '
forward-looking' statements include, but are not limited to, global, national,
regional economic conditions, levels of market interest rates, credit and other
risks of lending and investment activities, competitive and regulatory factors
and technology change. Any 'forward-looking' statements made by or on behalf of
the Group speak only as of the date they are made.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorised.
ALLIED IRISH BANKS, p.l.c.
(Registrant)
Date 06 December, 2007 By: ___________________
John O'Donnell
Group Director, Finance,
Risk and Enterprise
Technology
Allied Irish Banks, p.l.c.