It's 10am on the morning after Dublin Chamber of Commerce's annual dinner in the Convention Centre Dublin, and AIB chief executive Bernard Byrne looks remarkably fresh.
AIB is the main sponsor of this annual knees-up, which usually lasts into the small hours and results in a few sore heads the following day. But Byrne is in chipper form, helped no doubt by a buoyant economy that is underpinning strong business activity at the State’s biggest mortgage lender.
"The economy is looking pretty good at this stage," he says, before adding that issues around the housing market and the Central Bank of Ireland's macroprudential rules are causing issues.
Last year, the value of new residential home loans was about €7.3 billion. The expectation was that it would hit €9 billion this year, a growth rate of 23 per cent.
“I think that [€9 billion figure] will be slightly under threat,” Byrne says. “The supply is probably a little bit slower coming on and, secondly, the macroprudential rules from the Central Bank are working.
“It’s a sensible strategy to reduce the number of mortgage-ready customers when there aren’t properties available, because it drives up prices.”
Byrne would like to see one tweak to the Central Bank’s rules: the exemptions to the 3.5 times loan-to-income ratio operating as a “rolling average” rather than on the current calendar year basis. “People have 12-month approvals now, but if they can’t close out the property, the exemptions run out pretty quickly.”
Byrne bristles slightly at talk of Irish banks charging rip-off mortgage rates when compared with the rest of the EU, arguing it is “factually not true”. Latest figures from the Central Bank show that the average mortgage rate here was 3.15 per cent in August compared with an EU average of 1.77 per cent. On a positive note, that Irish rate was down from 3.21 per cent in July.
Byrne says the discrepancy occurs in terms of the “front book”, or new loans issued in the market, but not across the total loan books, which can stretch back more than two decades in duration.
He argues that many lenders across the EU offer “teaser” short-term rates before migrating customers on to higher interest rates. This distorts comparisons, particularly for his bank, where the focus is on variable rather than fixed-term loans. He also says AIB’s 3.15 per cent variable rate applies both to new and legacy home loans.
“That [promoting variable rates] is the way you can maintain what we think is a fair mortgage,” he says. “We think that front book and back book pricing being the same is a good strategy.”
Fixed rates
AIB’s focus on variable rates is interesting given that about two-thirds of new home loans drawn down over the summer were on fixed rates.
And what about the 2 per cent cashback offer promoted by AIB’s subsidiary EBS (worth €5,000 on a €250,000 loan)? Isn’t cashback a “teaser” offer?
“We are in a competitive marketplace and others are offering other opportunities in terms of cashback and fixed-term pricing. People have to defend their market share.”
Earlier this year Fianna Fáil’s finance spokesman Michael McGrath called for cashback offers to be banned by regulators, arguing that borrowers could “end up paying far more over the long term in terms of higher interest rates”.
Byrne is non-committal on this proposal. “It’s not my job to eliminate choice in the marketplace, but it’s important that people really understand what they’re getting into. Sometimes, the allure of these products can be quite strong because it looks good in the short term, but it doesn’t necessarily work in the long term.”
Byrne also argues that pricing for new loans is higher here because of the difficulties in repossessing a house in the Republic compared with other EU countries, where it can be a “30 to 60-day process”.
Consumer protection measures in Ireland are also more rigorous than in other European countries, “which costs”, Byrne says. And, since the crash a decade ago, Irish banks have been required by regulators to keep a sizeable capital buffer to protect against another crash.
In the medium term (three to four years), Byrne thinks the mortgage market could hit the €15 billion mark in terms of “new business”, rather than the €10 billion to €12 billion level currently predicted. That would still be a long way off the €40 billion a year that lenders were issuing at the peak of the boom more than a decade ago.
“That was unnatural. I think €15 billion is possible, given where we are.”
In round terms, AIB (including EBS) writes one-in-three new mortgages in the Republic.
Wobbles
AIB hasn’t been immune to recent stock market wobbles. Its share price is down about 17 per cent in the year to date, trading marginally above the €4.40 price of its initial public offering from May 2017, when the Government reduced its stake to 71 per cent through a flotation of shares in Dublin and London.
“There’s been a very significant sell-off in equities over the last while,” Byrne says by way of explanation. “The European banking sector in particular has come off its highs of six or nine months ago quite significantly. On a relative valuation basis, if you look at AIB across our peer set, we’re actually performing reasonably well, and we’re in the upper tier in terms of book value or on an eps [earnings per share] basis.
"On a macro level, investors are nervous about a number of things. The Italian banking position is not helpful. Brexit is not helpful. Over the last 12 months, the relative positioning of US banking and European banking has changed," he says, noting that US banks are trading on average at about 1.5 times book value while European banks are trading at, or just below, their book value.
“The second thing that’s playing out in the Irish situation is Brexit – that’s a particular issue around the Irish banks.”
About 10 per cent of AIB’s balance sheet is exposed to the British market, and the bank is taking a “conservative position on lending to the UK economy right now”.
But there is also the impact on AIB’s customers, which Byrne describes as a more “material” concern for the bank. It has 25 Brexit advisers around the State trying to help customers navigate this complex issue.
“The core issue is around trade restrictions. So long as there is a managed Brexit, I think it will be okay, but that’s not to say some sectors won’t be challenged.” The issue he fears is that it becomes an unmanaged, or disorderly Brexit, which is “hard to call”.
AIB’s initial public offering (IPO) of shares of last year reduced the State’s shareholding in the bank. Byrne estimates that some €11 billion of the €21 billion bailout it received has been repaid to the State. When might the State sell more shares in the bank?
“Ultimately, the Government needs to decide on a strategy around the sell-down piece,” he says, adding that in the long term, the State shouldn’t be the owner of banks. “I think everyone wants that separation to exist between banking and the Government. It’s just a timing issue.”
Window of opportunity
The next window of opportunity for the State to sell a stake would be after AIB’s third-quarter update in the “next number of weeks”, Byrne says.
“Given the volatility in the market, that may be unlikely,” he says, adding that it would then be post the publication of its full-year results next February or March.
How long before AIB is back in majority private ownership?
“There are two parts to that question. Is there the capacity for AIB to be in private ownership quite quickly? Actually, I think the capacity is there and there’s plenty of investor interest, so that could happen reasonably quickly. It could be a few years.
“The key issue is a policy issue by the Government on how long they want to take. That is obviously beyond my remit in terms of whether that’s a short, medium or long-term play.”
When will taxpayers get their €21 billion in bailout funds back?
With AIB back in profit, paying a dividend, and once again listed on the main stock markets in Dublin and London, Byrne says the State now has the ability to “receive the full cash over time”.
“The question for the State is how quickly does it want to get the cash back. That isn’t a question I can answer at this stage.”
Earlier this year, AIB's board sought approval from shareholders to put in place a long-term incentive plan for executives. The timing was poor, coinciding with a ramping-up of pressure on the banks over the €1 billion tracker mortgage scandal, and Minister for Finance Paschal Donohoe voted down the proposal.
“The job isn’t always to do what’s popular . . . it’s trying to position for what the right answer is,” says Byrne. He adds that as part of its IPO last year the board identified a number of “key risk factors”, including the fact that there weren’t “retention mechanisms” in place for senior management.
“As part of the next annual result . . . they brought forward a plan to try and create a lock-in mechanism based on aligning the interests of the new shareholders and the management, which is a fairly typical arrangement,” he explains.
While the Government voted against the motion at AIB’s agm, Byrne notes that 99 per cent of all the other shareholders approved the bonus scheme.
“That’s a sign that the new investor set finds this something that they want because they want to lock management in. I totally get that bankers aren’t popular and that there’s a desire to inflict pain on the system. The question is, what is the best approach to address an issue that is a challenge, because we have higher turnover rates [at executive level] and that causes a drag in terms of investor interest.”
Novo Banco
AIB's chief financial officer Mark Bourke recently left to take up a position with Novo Banco in Portugal. Was his decision related to pay?
“I don’t think anyone ever leaves for one individual issue. However, if you have no . . . defined benefit pension, no variable pay, no shares, it’s very easy to leave. If those things are in place to create a lock-in mechanism then it’s harder to leave.”
Is he resigned to the fact that he might never be paid a bonus as CEO of AIB?
“I’m always the optimist. The Government, as a result of the issue going to them, did commit to a review of [bankers’] pay to take a long-term perspective on what happens next. The Minister has put in place a mechanism to get some objective thinking on what could be done and that should deliver by the end of the year.
“What happens after that is a political issue rather than anything I could influence, so we’ll see how that goes. There is a consequence to the fact that . . . it’s getting towards full employment here, with lots of interesting financial services businesses coming to Ireland as a result of Brexit. It’s a very competitive market and there is a consequence to not being normal.”
In terms of finding a replacement for Bourke, “if we can look at an internal option, that would be a good thing to do”, particularly given the long lead-in times that can be involved to recruit an external candidate.
Byrne joined AIB in 2010 from State-owned ESB and has spent the past 3½ years as CEO. Might he follow Bourke's lead and depart for new pastures?
“I’m 50 and average tenure of CEOs tends not to bring you to 65. But I think there’s certainly more left. Banking has its challenges. I’m probably the longest-serving executive in Irish banking at this point in time. The attrition rate is pretty high. The good news from AIB’s point of view is that we’re in a good place at this stage, and I think we can do a lot of interesting things in the next while. But I’ll wait and see.”
- This is an edited version of an interview with Inside Business, an Irish Times podcast. The full interview can be downloaded from irishtimes.com/podcasts
