Chief executive David Duffy is convinced that earning the trust of its customers again is the first step in returning the State-controlled lender to profitability, writes SIMON CARSWELL,Finance Correspondent
DAVID DUFFY HAS been chief executive at Allied Irish Banks for only eight months but has already moved office. He has chosen to work from the fourth floor of AIB’s old blocks in Ballsbridge overlooking the RDS rather than from the fifth floor of the new wing with views of Aviva stadium.
The relocation is to bring him closer to other managers and into the thick of what AIB does. The change of office is also symbolic, moving away from what could be seen as management’s ivory tower in the new annex and closer to what he says AIB should be more focused on – serving the needs of customers.
He wants customers to be able to arrive at AIB’s head office in Ballsbridge and meet him or other senior executives within three minutes of arriving at Bankcentre. It’s all about ease of access to AIB’s most senior banker and his new leadership team.
Duffy says the rate-rigging scandal which has erupted in Britain is a symptom of banks turning their backs on the customer and becoming too inwardly focused.
“The absolute essence of culture in a bank has to be driven around how you focus on a customer. Nothing is going to cure you from human behaviour, but when you focus on yourselves, your economics and your position in the market, you get distracted.
“If we are relentless on focusing on the customer, you will at least give yourself a starting point.”
Duffy circulated a 24-page strategy document to staff last week outlining how he plans to restructure the bank and return the State-controlled lender to profitability by 2014. The aim is start paying back some of the Government’s €20.7 billion bailout by attracting outside investors.
Describing the strategy as being about “drawing a line in the sand”, Duffy says it sets out a plan to simplify the business and put the loss-making lender on a course to viability and profitability in what is the most radical restructuring of the bank in its 46-year history.
Repairing what was once the State’s largest bank will inevitably involve increasing lending rates and reducing interest paid on deposits.
Duffy says the bank’s ambition is simple – maximise the billions in capital the bank has received from the Government to support the economy and try to mitigate anything that dilutes that.
“The State has funded this bank, and the taxpayer ultimately, and without that the bank would not be viable. It would not be a good place to go to end up needing more capital and being in a position where you didn’t take the tough decisions to stabilise the basic banking model.”
One such tough choice recently was the bank’s decision not to pass on last week’s European Central Bank interest rate reduction on standard variable rate mortgages.
“In any circumstance where our funding model and our pricing on our products are inverted, we try to address that because that will only lead to a further dilution of capital,” says Duffy.
The bank is already talking to investors about the possibility of buying into the lender to allow the Government to reduce its 99.8 per cent shareholding in the bank.
The investors cover a “broad spectrum”, he says – from people willing to pay distressed prices for property to those looking for long- term investment returns. Duffy believes AIB can offer a rate of a high single digit percentage return to potential investors.
It will be up to the Government to decide when the price is right to reduce its stake to a minority position but he is hopeful that AIB can do enough to attract outside investment during 2014.
“Nobody has put a specific date or pricing model, but I am optimistic that if we deliver our controllable universe in terms of our performance and Europe is not too negative, there will be investors who are attracted to an investment in AIB,”says Duffy.
AIB is no longer a bank with a wide international reach, so it has to be reshaped and reduced, both in size and in the number of staff, to serve the economy and public that has bailed it out, says Duffy. First Trust Bank in Northern Ireland and AIB’s business bank in Britain have also been retained.
Duffy is restructuring the bank around products and services on one hand and customers on the other, eliminating the various independent units that contributed to AIB’s “siloed” set-up and the heavy losses on property loans.
“We were too complex; we had too many people with too many ambitions, hopes and dreams, or whatever it would be,” he says.
“Here, it is down to two people and myself. One decides based on the customer experience what the customer wants and the other says I will make that from the factory, so it is very basic. If two children can’t agree in any family on anything, then the parents are there.”
Independent of those businesses, new executives in charge of audit and risk can bypass Duffy, if required, and report any concerns to subcommittees of AIB’s board.
“The past sometimes had too many of those functions embedded in businesses and some of the products were the same. There were too many independent businesses with the confusion of the areas in there,” says Duffy.
“I feel that simplification and independent control is how you achieve some measure of protection against repeating past ills.”
One subject that is confusing Duffy is how the permanent EU bailout fund, the European Stability Mechanism, could take over part or all of the Government’s stakes in AIB, Bank of Ireland and Permanent TSB, as suggested by the EU deal agreed last month to resolve Spain’s banking troubles.
He doesn’t understand how it would work, but adds that it’s a matter for politicians, governments and parties other than AIB.
“The best thing for us, as I said to my own team, is to allow whatever discussion needs to take place to get a framework to happen before we get engaged,” he says.
“If the principles are as generally articulated – that it is of benefit to a sovereign, regardless of the bank’s mechanics and how it is structured – that is obviously a very good thing.”
Plans to move the bank’s unprofitable tracker mortgages, totalling about €18 billion at AIB and subsidiary EBS along with those of the other domestic banks, are also being considered at official level in a further restructuring of the banks, but Duffy doesn’t want this to distract his management team as it’s not within their control.
“The way we have adopted a strategy is to say – ignore any benefit from any tracker or other asset solution. It is very important that we are not deflected from a return to a sustainable and profitable bank supporting the economy by any of these discussions,” he says.
AIB supports any “workable” solution for the tracker mortgages – be they warehoused in a special-purpose vehicle, the State-owned Irish Bank Resolution Corporation or the bank’s non-core unit – as long as it doesn’t add risks to the State and can be funded efficiently, he says.
“We want to make sure it is a solution that works for the whole system. Otherwise, it’s one bank versus another, which is not a place that anyone wants to arrive at.”
Duffy says AIB’s “deleveraging” target to shed €20.5 billion of loans and other assets, and wean itself back to self-sufficiency was
€3 billion ahead of schedule with €14 billion done by March last and would be more than 90 per cent completed by the end of the year.
Given the strains in European banking and how other lenders planned to dump excess assets, he says the bank would decide towards the end of the deleveraging cycle whether to proceed with selling assets or to hold them.
AIB is also ahead of expectation on plans to reduce the bank’s headcount by at least 2,500 – about one in five of the bank’s staff – through redundancy and early retirement.
The number of staff leaving the bank will be finalised next week, he says.
Although the redundancies and retirements will “meet or exceed the targets”, AIB may not permit the departure of everyone who wants to go because it could pose risks or affect services.
AIB is reducing pay by up to 15 per cent among the bank’s most senior staff, including Duffy, and by lesser amounts further down the ranks of the company, to pay freezes at the lowest levels.
The bank was “perhaps a little late” in reducing pay, Duffy says, but it is now “time to adapt”.
Duffy’s plan to extend AIB’s existing arrangement with An Post and extend its banking services through 1,100 post offices will allow AIB to close some of its 270 branches.
No decision has been made yet on the number. The plan is not just to reduce costs but to simplify the business across AIB and EBS, which has 14 branches and 70 tied agents.
“If we were able to take a number of our branches from both brands and support each other without having both branches, that is a simplification rather than a pure cost model.”
There are no plans to close down EBS as he sees the former building society as “complementary” to AIB, not a distraction. “There are many large banks out there which have a dozen brands or more on what their offering is,” he says.
Duffy believes smartphones, tablets and apps will force banks to change the services they offer – if they don’t react, they could lose out to big, cash-rich British and US retailers which are moving into banking as a “logical extension” of their businesses.
Major internet companies such as Google and Paypal will threaten credit card business and the margins banks make on them, he says.
“We must be able to be in a position where there isn’t a motivation to leave us to go for a better service and to have someone provide that aspect of banking.”
Young people, including his children, “marvel at the concept of going into a bank branch”, he says.
While Duffy has an eye on the future, the bank is still focused on fixing the problems of the past. He is adamant that borrowers in arrears on their mortgages can be dealt with only on a case-by-case basis because of the complexity around the types of the debt that some owe.
There is “no logical debt forgiveness panacea for the country”, he stresses.
The bank is offering a range of products to keep borrowers in their homes and will only consider mortgage debt to be written down to a level a borrower can afford after “real and constructive engagement” by customers.
“Any other approach risks creating some sort of a perception that we can all erase the sins of the past in one go and I am not sure that is viable,” he says.
The bank’s own products – designed under the Government’s mortgage arrears resolution strategy or Mars – are designed to prevent borrowers turning to the personal insolvency arrangements (PIA) under the new legislation.
“By another definition it [the PIA] is bankruptcy and it is not an attractive place,” says Duffy.
He would have preferred the Government to set the amount of mortgage debt that can be written down through PIAs at a level lower than the €3 million set in last month’s legislation, a figure that can also rise under certain circumstances.
He has concerns that this would “start bringing in all classes of debt in an uncontrolled way”.
“I would rather the levels were lower initially to start out with, so you can understand what the volume should be. Any escalation of the level should be very thoughtfully considered.”
Duffy still believes mortgage arrears will flatten out this year and he doesn’t expect any nasty surprises on loan impairments when AIB reports its half-year results at the end of this month.
The computer crash at Ulster Bank has been “a wake-up call” for everyone in banking to check their own computer systems, he adds.
AIB has come to Ulster Bank’s rescue by processing transactions for its big corporate customers over the past three weeks since the IT problem crashed the UK-owned bank’s processing system.
Duffy says that AIB’s distressed position meant its own technology systems had been checked independently by outside consultants at the end of last year.
“The real issue is not what can go wrong; it’s what can you fix when it goes wrong. As management, your most responsible answer is that you can answer that question because the other question is an imponderable.”
He has ordered that under no circumstances should AIB staff solicit Ulster Bank customers who may be keen to move banks as a result of the technical crash.
“I have been in many crashes and the rule of thumb is that you never take advantage of somebody else’s distress because you are only inviting the same thing at some date in the future.”
As for AIB’s role in the wider banking crash, Duffy says it was in no way unique, although its culture meant it was “a little slow to recognise that it needed to adapt” and to move to start helping customers.
As for resolving the general crisis of confidence in banking, Duffy says his staff have regularly asked him how they can earn the trust of their customers again.
“I have said that we build trust with both solutions for negative and positive situations. If you focus on that and the customer, you will get the trust back. Banking is simple and it ought to be done well.”
Duffy says the rate-rigging scandal in Britain is a symptom of banks turning their backs on the customer and becoming too inwardly focused
Position:Chief executive, Allied Irish Banks.
Age: 50.
Home:Living in Skibbereen, Co Cork, but originally from Leinster.
Family: Married to Renee, he has three children.
Hobbies: Travel, particularly in Asia and especially China; reading political and economic books.
Education:Terenure College in Dublin (where he was in the same class as former Ulster Bank chief executive Cormac McCarthy) and Trinity College Dublin.
Career:He worked at Goldman Sachs from 1987 to 1997 where he was business manager in the area of information technology. He was later head of general services and then head of human resources of the investment bank in Europe.
He joined Dutch-owned ING Barings in 1998 as head of human resources and was later appointed global chief operating officer, taking charge of the bank's US and Latin American franchises.
He worked for the bank in New York and Amsterdam where he was head of global wholesale banking network, managing a team covering global operations.
Moving to South Africa's Standard Bank in 2006, he ran the bank's international operations in London and later took charge of all its international businesses.
Duffy joined the bank's executive committee in 2008 and moved to Asia in 2010, becoming head of strategic projects later that year.
He left Standard Bank in June 2011 and set up his consultancy, Celtic Advisory International, advising companies on raising capital and corporate development.
AIB appointed Duffy chief executive in November 2011 on €500,000 a year, the Government's salary cap for top bankers.
Something you might expect:Duffy says that he is a "gadget nut" – he has insisted that from next week, all AIB's senior management meetings will be paperless and conducted through the use of iPads.
Something that might surprise:He commuted from his home in west Cork, an old church house which he says he renovated "from rubble", for seven of the past 10 years while working overseas.
Duffy says that AIB's distressed position meant its own technology systems had been checked independently by outside consultants
