In an interview with a legal firm (McCann Fitzgerald) the CEO of AIB (David Duffy) provides his view on the outlook for the Irish banking sector and economy. According to Mr. Duffy, the pillar banks (AIB and BoI) are expected to return to profitability during 2014-15, and should be adequately capitalised “to meet ECB and other criteria unless there are changes to the rules at a European level”. The CEO believes that “the issues of arrears, capital adequacy and profitability will all effectively be resolved for Ireland’s banking sector in the next two years”. <p>

Mr. Duffy notes that Irish household deleveraging still has some way to go, with net loan book reductions expected as debt repayments exceed new lending. However the CEO is of the view that we are reaching a tipping point, with stabilising house prices and job numbers helping confidence. Mr. Duffy believes that a normalised Irish mortgage market should be in the range of €8bn to €10bn (compared to c. €40bn at the peak) with demographics supporting 12,000 to 18,000 new housing completions each year. As the banking sector returns to health, Mr. Duffy sees the amount of cash buyers in the housing market declining (currently estimated to account for half of all transactions), as first time buyers are able to obtain sufficient access to credit. <p>

In relation to asset quality, the CEO believes that 2014 will finally see a decline in arrears as progress is achieved on resolutions for personal and business borrowers. In order to support employment, “the key is to restructure legacy property debts” relating to SMEs in a manner that helps growth and employment. According to Mr Duffy, the ending of farming quotas also represents an opportunity for indigenous suppliers to grow and to secure higher levels of productivity. <p>

The latest comments from the AIB CEO on the Irish banking sector are broadly consistent with other recent updates from peers, with arrears soon expected to peak, profitability being restored and capital levels appearing to remain robust. We share the CEO’s view that loan contraction is a particular issue facing the sector due to private sector leverage (we expect AIB’s net loan book to decline to €60bn in 2015, from €84bn in 2011). We note that the non-life insurer FBD Holdings particularly stands to benefit from any uplift in the agricultural sector, given its exposure to the Irish farming community (c. 80% market share).
<p><h5>Ciaran Callaghan</h5>


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