Backing Bernard. It could be a twist on AIB’s long-running advertising campaign to highlight how it is supporting plucky SME owners to get back on their feet after years of recession.
In a way, we're all backing Bernard Byrne in the hope that he can give us back the €20.8 billion in bailout money that taxpayers provided AIB with after the global financial crash in late 2008.
Byrne, an accountant by training rather than a career banker, was given the reins of AIB last May, succeeding the suave David Duffy, who left Ballsbridge for a better-paid role at Clydesdale Bank in Glasgow.
His mission was to continue AIB’s path to normalised and profitable lending, while also creating the conditions for a return to private ownership via a stock-market initial public offering (IPO), and a return of capital to the State, which owns 99.8 per cent of the bank.
AIB’s results for 2015 won’t be published until March 3rd but Goodbody is forecasting a pretax profit of about €2.1 billion.
This will be through a a combination of increased income, lower operating costs and provision writebacks.
Byrne has also made a start on the capital front, handing over a cheque to the Department of Finance just before Christmas for €1.62 billion relating to the preference shares held by the State.
Another €1.76 billion is promised in July when the State’s contingent capital notes are redeemed and the much-talked about IPO of shares this year could yield another €3 billion or more.
Is AIB ready to float again on the main markets in Dublin and London?
“We’re ready,” Byrne says without equivocation from his large office, which sits a few floors above the main entrance to Bankcentre in Ballsbridge and has a wonderful view of the RDS on Merrion Road.
“You can’t ever get the final piece done until you have a date but you have to remember that we have remained as a listed entity on the [junior] ESM [market in Dublin].
“One of the issues that exists for most entities when they’re trying to list or do an IPO is that their accounting is not in an appropriate position.
“They haven’t been carrying out financial reporting in accordance with financial reporting standards.
“We’ve been continuing to do that so the accounting lift [for AIB] is very small.”
Autumn IPO date
Last month the Minister for Finance,
Michael Noonan
, said he would press the button on an IPO if he were re-appointed to the role after the upcoming general election, and that he was leaning towards an autumn date for a listing.
By that stage, AIB should have published a strong set of half-year results, which would help to firm up its valuation.
What’s Byrne’s preference?
“The market isn’t always available,” he says, which is somewhat of an understatement given the global stock market rout last week.
“So when the market’s available, you shouldn’t ignore the fact that its available. That would always push me towards if you can go earlier, and the market is there, it’s not a bad time.”
Byrne says investor interest in Ireland is strong. He saw this first hand when AIB completed two capital raisings in December that were “very, very heavily oversubscribed”.
“We know from those conversations with those investors that they’re really interested in the story at this point in time,” he says.
“That’s a great environment in which to try and pitch yourself. These things don’t last forever and at some point something will happen to cause investors to look elsewhere.
“And when they do, they’ve looked elsewhere [and the moment is gone].”
One of the attractions of AIB is that it is almost a pure play on the Irish economy, having scaled back its overseas operations to just a small presence in Britain.
And the Irish economy is flying at present, with GDP growing by 7 per cent in the third quarter of last year and most commentators predicting growth in 2016 of about 5 per cent.
Positive macro position
“That’s a very positive macro position from an investor point of view and banks are a good play in that economy,” Byrne says.
Of course, all of this presupposes that the next administration will want to IPO the bank. Sinn Féin has indicated it would not sell a stake in AIB if it was part of a new Government.
So who would Byrne like to form the next Government? “I’m getting a bottle [of water] for this one,” he says, rising from his seat.
“ I have zero view on that. I have absolutely no ability to influence it and anything I say will lead to people interpreting it the wrong way.”
Sure, but wouldn’t AIB prefer continuity given how far down the track it is towards an IPO?
“We have been working with a certain administration and they have a very clear view. Obviously, we are well positioned to deliver against that view.
“Were the Minister to be re-elected, or that general environment to survive, then clearly you have a set of people you are aware of and know what’s going to happen.
“That’s good for us. If anyone else were to come into power it depends on what their disposition is.”
He adds that a government with a different make-up to the current Fine Gael- Labour Party coalition would inevitably “take slightly longer [to press the button on an IPO] because they are either going to have to understand it and form their own view or they might have a different view.”
“I can’t influence what a particular policy or position might be. The only comment to make is that whoever is in power they will have still an objective to reduce, in a meaningful way, the national debt, and the way you can do that most readily is through the disposal of the most marketable asset that exists.”
You don’t have to be a rocket scientist to work out that AIB is a marketable asset at present. The sale of a quarter share could deliver about €3 billion to the State.
When it comes to debt reduction, Byrne argues that “this is a really quick, easy, meaningful way of doing it consistent with the overall European objective of who should own banks”.
“Or you can try and do it a harder way. People will take their time to get to those views.”
In some respects, Byrne has been down this track before. When he returned to ESB in 2004 as finance director government policy was leaning towards a privation of that company.
“I joined in anticipation of a listing. A lot of my work was around trying to position ourselves for that.
“We went through a major restructuring. We went from 13,500 down to 6,000 employees.
“That was a growth period well used because the rest of the economy was booming. Competition was starting to emerge.”
ESB remains a State-owned company; so what happened to the listing?
“Government policy changed,” he says with a smile and his trademark arched eyebrow.
Reconfigured for digital era
AIB is a different company now to the one Byrne joined six years ago.
“We’ve closed 30 per cent of the branch network, 55 per cent of branch managers have left, and our headcount went down to about 4,500 people in Ireland.”
The bank has also been reconfigured for the digital era. Just 3 per cent of its 750,000 transactions each day involve face-to-face interaction with staff in a branch.
This makes him sanguine about any competition that might emerge in the future from non-bank players offering digital products.
“If somebody comes in now with a mobile offering they are competing with our mobile offering. It’s not competing with the branch,” he says.
“The banking industry is actually in a much better place than other industries, because much of that change has taken place.
“We have been mobile-first for the past 18 months. So we design everything now from a mobile interface backwards. When we get it working [on mobile] we then transpose it back and ultimately it ends up in the branch.”
Its 200-plus branches are being transformed into “advisory centres” conducting transactions where customers perceive there to be a “high risk” but even that is changing, with 11 per cent of mortgage applications now processed online.
“For the next decade the physical branch network is going to continue to be an important part of our service offering,” Byrne says.
On the subject of mortgages, the Central Bank’s new rules have put the brakes on lending and a shortage of new housing is becoming a serious issue as the economy recovers. These are potential drags on AIB’s future growth.
On the new mortgage rules, Byrne accepts that the Central Bank is probably happy with the results to date but wants them kept under review.
“I don’t have enough information at this time to say where it’s at but I do think it needs to be kept under review.
“It’s very unlikely that when you introduce these things that you get them right the first time.
“Make the banks safer, fine, that’s a good objective but it shouldn’t be at the expense of preventing all mortgage lending that actually would be reasonable. There’s a balance between those two.”
On housing supply, he says there will be no “quick-fix” solution and it could be 2018 before housebuilding begins to match demand.
He says AIB has provided finance for 3,500 units currently under development and it agreed a €150 million senior debt facility with Irish listed housebuilder Cairn Homes just last month.
Byrne’s journey to the top of AIB has not been conventional one. His mother was a book-keeper, while his father spent his career with the long-defunct Irish Hospitals’ Sweepstake, working his way up the ladder to become its final chief executive before it was liquidated in the 1980s.
He began his working life while in secondary school, taking a summer job at House of Ireland, a giftware retailer close to Trinity College.
As he tells it, his first role was in security, “spotting shoplifters” before moving to a selling role and then to book-keeping over a three- to four-year period.
Unlike today, university fees were in place in 1980s Ireland and, with his father having lost his job, Byrne took an alternative route into accountancy.
“I didn’t go to college,” he says. “My father had lost his job at that stage. So I went straight into accountancy.
“I ended up getting a position in PwC that was a paid apprenticeship at the time and then went into ESB International [in 1994].”
Four years later, at the age of 29, he joined Joe Moran’s IWP International as finance director.
It was a listed household products group and Byrne describes its as an “interesting job” although his timing was unfortunate.
Byrne agreed to take the job in June 1998 but IWP’s share price had halved by the time he arrived in September that year, and had halved again by December.
“IWP had made 30 acquisitions in the previous decade and they had an awful lot of debt in 30 different countries all with different financial institutions and a business that was really tricky.”
Massive restructuring job
“Effectively, IWP became for four years a massive restructuring job because it had made acquisitions all over the place.
“We had to sell a whole pile of them, restructure and close down a whole other pile of them and do debt deals,” he says.
Moran was a leading business figure of his day and Byrne says he was “great to work with”.
“I would have great time for Joe. He is the typical cute Kerryman. He had his fingers in a number of pies at the time, including Manor Park Homes and IFG [another listed business].”
Byrne later tried to engineer a buyout of IWP without success, “which is how I exited”.
He then returned to ESB before joining AIB in 2010 as group chief financial officer.
AIB was in the horrors at the time and he admits to hesitating about throwing his hat in the ring.
“When it first came up, I thought: ‘Why would I want to do that?’ but within 24 hours I’d gone: ‘Well, why wouldn’t you?’”
Some friends and family thought it was a “really interesting opportunity” while others thought he was off his rocker.
In his first year as chief financial officer, Byrne announced a loss of €10 billion, “which wasn’t particularly what I wanted”.
From 2011 he moved to other roles, successfully leading the retail, business and corporate segments of AIB, which would have helped his application last year to be the next chief executive.
“It was an opportunity that I felt I had to go for because it was a continuation of that development.
“In large measure we have achieved a lot but clearly there’s more to do. We haven’t solved all the problems but it’s getting a lot better.”
Byrne has said publicly that it could take up to 10 years for AIB to return to full private ownership. Is this a goal for his time as chief executive?
“My goal absolutely is to ensure that AIB can be returned to private ownership. It’s important for AIB to be seen as a private institution because I think, ultimately, that is where banks should be.
“The time period over which that happens is clearly for the minister.
“It’s a nice [time] target because it means that the job of fixing the bank and bringing it back and repaying the debt to the nation will have been achieved. You couldn’t ask for a lot more than that. That would be my goal.”
CV
Name: Bernard Byrne
Job: AIB chief executive
Family: Married with three children
Lives: Rathfarnham
Hobbies: Golf and tennis. “It might be a bit brave to say tennis but I’ll put it down.”
Something that we might expect: He is president of Banking & Payments Federation Ireland.
Something that might surprise: He didn’t go to college.
Bernard Byrne on . . .
Michael Noonan as Minister for Finance: "He has been very resolute, very clear and very deliberate in what he has done and that has been really important for the banking sector and for the broader economy to get back on its feet.
“That doesn’t mean that I’ve agreed with every single thing he’s done, or always thought that he was doing the best thing from an AIB point of view, but if you take it in the round you would have to say that his resolute, clear, rational perspective has been invaluable.”
Working with David Duffy:"David was a really interesting character. He was very good at delegating and letting you get on and do things.
“Very supportive of what you were trying to achieve. Big personality. He did a great job at taking the pressure off the organisation at a time when it was really at the forefront of political and public ire.”
Whether Ireland's economic recovery is sustainable: "I think so, yeah. We're getting a big bounce after a big down. The economy did become more efficient, more cost-effective. Foreign direct investment continued, which was important.
“We executed the changes more quickly than a lot of other countries and so you get the improvement much more quickly. The challenge then becomes: how can that be shared back across the board?”
The Government's €500,000 cap for bank executives (his salary increased to this level on becoming chief executive):"The pay cap is clearly relevant because it's part of Government policy.
“Time moves on but I’m not in any way naive to think that we’re the ones who will determine that time has moved on enough on that one.
“At the moment, I’m very clear that the pay cap exists. Whether the IPO is the event that causes people to think about that differently or not, I don’t know. I don’t think it’s top of the political agenda to move on this issue.”
