Allied Irish Banks – Phoenix rising from the ashes

Further progress in the bank’s rehabilitation: Post the release of Allied Irish Banks (AIB) results last week, we update our forecast but just make modest changes to our projections. With AIB expected to be back generating capital internally this year and a buffer of c. €4bn above the 8% CT1 level at Dec 2013, we see little risk arising from the ECB stress tests. While the closure of the defined benefit pension scheme helped increase the fully-loaded CT1 ratio to 10.5% in 2013, we believe AIB has several other self-help options to boost solvency levels further in coming years (revaluation of NAMA subordinated bonds / optimisation of RWA models). Critically management does not anticipate any adverse commitments arising from the approval of its EC Restructuring Plan. Based on our numbers AIB is on track to achieve the majority of its financial targets in 2017 (NIM: +2%, C/I ratio: <50%, IC: < 65bps, FL B3 CT1: +10%).      

 

Accelerated State CoCo redemption to enhance viability and capital profile: We estimate that an early retirement of AIB’s €1.6bn CoCo notes post the ECB stress tests would boost profits by up to €240m in 2015 and the NIM by 25bps (€160m annual coupon & FV amortization savings of c. €80m). While an accelerated redemption is likely to crystalize a loss (liabilities marked at 82c of nominal at Dec 2013), a disposal of Irish government bonds in the bank’s AFS book that are used to hedge the capital investment would mitigate the P&L/capital impact (unrealised gains in the Irish bond portfolio increased by €300m in 2013 to €910m).

 

We believe that a partial refinancing of the €1.6bn CoCos with new AT1 issuance (supplemented with vanilla LT2 debt) would optimise AIB’s capital structure. In this scenario, dated CoCo notes which have mandatory must-pay coupon are replaced with more subordinated perpetual discretionary AT1 coupons. While clarification is still required on the likely regulatory trigger level and tax treatment of Irish AT1 instruments, we think that the market and credit agencies would view an overall capital restructuring of this nature positively.

 

Balance sheet transformation leaves group well placed for Basel III liquidity compliance: AIB’s funding and liquidity profile has materially improved in recent periods with the 2013 loan to deposit ratio (LTD) falling to 100% (2010: 169%). Significantly the group’s Net Stable Funding Ratio (NSFR) and Liquidity Coverage Ratio (LCR) increased to 95% and 105% respectively in 2013, with further improvements anticipated as NAMA fast-tracks its senior bond repayments. This leaves AIB strongly positioned to comply with the new Basel III liquidity requirements.

 

Underlying margin dynamics bode well for re-privatisation: Neutralising for the adverse NAMA senior bond impact and CoCo P&L amortization drag, we estimate that AIB’s structural underlying NIM is just c. 15bps below BoI’s run rate, which bodes well for the bank’s investment case. Furthermore we think that AIB still has scope to follow competitors and implement asset re-pricing across SME & corporate portfolios, potentially adopting a “cost of liquidity” pricing model similar to peers. Given AIB’s improved LTD ratio we also see potential for the group to assume a leading position in the Irish deposit market over the coming year, driving further pricing reductions. 

 

Ciaran Callaghan  |  Merrion Stockbrokers

Senior Credit Analyst

 

Direct: +353 1 240 4128 | Mob: +353 87 284 5056

Desk: +353 1 240 4200

Block C, The Sweepstakes Centre, Ballsbridge, Dublin 4

www.merrion-capital.com

 

Disclaimer: www.merrion-capital.com/disclaimer

Merrion Stockbrokers Limited (registration no. 307878)
is a limited liability company whose registered office is at
Block C, The Sweepstakes Centre, Ballsbridge, Dublin 4, Ireland

 

 

Ciaran Callaghan  |  Merrion Stockbrokers

Senior Credit Analyst

 

Direct: +353 1 240 4128 | Mob: +353 87 284 5056

Desk: +353 1 240 4200

Block C, The Sweepstakes Centre, Ballsbridge, Dublin 4

www.merrion-capital.com

 

Disclaimer: www.merrion-capital.com/disclaimer

Merrion Stockbrokers Limited (registration no. 307878)
is a limited liability company whose registered office is at
Block C, The Sweepstakes Centre, Ballsbridge, Dublin 4, Ireland

 

 

Allied-Irish-Banks-Phoneix-rising-from-the-ashes.pdf