AIB released FY 2013 results with underlying losses before tax decreasing to €1.5bn (2012: -€3.8bn) which was in line with our forecast. Inclusive of exceptional items, FY 2013 losses reduced to €1.7bn (2012: -€3.8bn). <p>

<b>Capital remains strong post AQR / BSA:</b><p> AIB’s CT1 ratio dropped by 90bps in 2013 to 14.3% (Merrion forecast 13.9%) or 10.5% on a fully-loaded Basel III basis (including the €3.5bn Preference Shares which AIB expects to convert to equity over coming year). The latter ratio was helped by the effective eradication of AIB’s pension deficit to €0.1bn (2012: €762m). RWAs decreased by €9bn to €62bn primarily reflecting loan reductions, off-set by €1.6bn increase relating to BSA/AQR. Elsewhere the DTA rose to €3.9bn (2012: €3.8bn). AIB notes that it is targeting a medium term fully-loaded CET1 ratio of above 10%, while it is in discussions with the Department of Finance in relation to its overall capital structure.<p>

<b>Pre-provision profits rebound:</b><p> Net Interest income rose by 22% in 2013 to €1.34bn (Merrion – €1.4bn) with margin expansion of 15bps to 1.37% (pro-forma of 1.54% or 1.67% in H2 excl NAMA bonds), offset by declines in average interest earning asset (AIEA) of 9% (y-o-y) to €111bn. Government guarantee (ELG) fees fell to €173m (2012: €388m) while other income rose by 79% to €570m (helped by trading income of €84m compared to losses of €100m in 2012). Expenses reduced by 16% to €1.5bn driven by headcount reduction of c. 2k from redundancy programme. Overall, pre-provision profits (PPP) recovered to €445m (2012: losses of €315m) implying H2 PPP of €283m versus €162m in H1.<p>

<b>Funding profile improves:<p></b> Net loans declined by 10% in 2013 to €65.7bn (in line with our forecast) while deposits increased by 3%/€2bn to €65.7bn (includes repos of €5.8bn). The year-end loan to deposit ratio fell to 100% (H1 2013: 106%) while ECB liquidity assistance declined by 43% in 2013 to €12.7bn.<p>

<b>Coverage ratio rises:<p></b> Reflecting the majority of the CBI’s €1.1bn BSA/AQR provisions, AIB recognised H2 impairment charges of €1.2bn (H1 2013: €744m) with the full-year charge decreasing by 21% to €1.9bn (slightly below our forecast of €2bn). The group’s provision stock rose to €17.1bn (H1 2012: €16.5bn) with a year-end specific coverage ratio of 55% (2012: 52%). Impaired loans increased to 35% (from 34% at June 2013), but declined by €0.5bn in nominal terms to €28.9bn. Irish mortgages impaired loans increased to 22% (Dec 2012: 19%).<p>

<B>Our view:<p></b> Ahead of the ECB stress test, we estimate that AIB‘s capital buffer now stands at c. €3.9bn above the 8% CT1 base-case minimum (BoI – €2.4bn). In common with peers, AIB faces loan growth headwinds but the majority of financial metrics are recovering. Overall AIB’s financial turnaround remains on track with a return to profitability still envisaged this year. Given recent positive macro and NAMA developments coupled with recovering fundamentals, AIB’s capacity to articulate an attractive investment case is improving, which bodes well for the bank’s planned reprivatisation.
<p><h5>Ciaran Callaghan</h5>


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.