AIB Group plc

Hello and welcome to the AIB Group PLC Q3 2023 Trading Update Call. Please note this conference is being recorded and for the duration of the call, your lines will be on decent only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your question. I will now hand you over to your host, Colin Hunt, Chief Executive Officer, to begin today's conference. Please go ahead, sir.

Good morning all and welcome. When we last spoke at the interim stage, we said that 2023 would be an exceptional year. And after a very, very strong performance by the group in the quarter to the end of September, we're upgrading our guidance for the third time this year. NII is now expected to exceed 3.75 billion. NIM is expected to exceed 3%. And ROTI is going to be above 20%. We are really pleased with how the group is performing. and we are confident in our ability to deliver robust results, not only in 2023, but also in the years ahead, with benefits flowing from a very strong customer franchise and ongoing conservatism in how we approach the management of the organization. The group is in its best position in decades, and we are excited about our prospects over the medium term, having come successfully through a period of unprecedented change in the Irish banking industry. I'm going to stop at that point and open the floor to questions. I'm joined by Donal this morning.

As a reminder, if you would like to ask a question on today's call, please press Taiwan on your telephone keypad. We will take our first questions from Raoul Sinha from JP Morgan. Your line is open. Please go ahead.

Good morning, Colin. Good morning, Donald. Thanks very much. Another very strong update. I wonder if you could help us a little bit in pinning down this NIMH trajectory, which is building very strongly you know, up another 26 basis points in Q3. And I was wondering if you might be able to comment a little bit about sort of where you think the Q4 NIM is likely to end up at. And then, you know, it looks to me like, you know, you might be ending up close to 350 or maybe slightly north of that, any color there. And then I guess related to that, the second part of the question is just around the hedging that you put in place during the year. I think in the past you've talked about the confidence in underpinning the NII trajectory in the following year as well. So, if you give us a little bit more color on, you know, what you've done with the hedges and how that gives you more confidence about the NII trajectory into next year, that would be very helpful. Thank you.

Hi, Raoul. Good morning. I think 2023, you know, we've had momentum throughout the year. which is why we were comfortable to upgrade the last number of quarters and indeed today. Obviously, underlying loans and assets are moving very much in line with plan, but the outperformance really from Q3 and into Q4, it's really liability-driven. Earlier on in the year, we had imagined a normalised liability market coming into place in our home market quicker quicker than what's actually been the reality. So, you know, if I had imagined deported visas of, you know, exit visas around less than 30, you know, that looks like that's going to be obviously less than around 10% now. And the flow over or the follow-on of that into 2024, let's say that slower shift, you know, at the term, I think we probably now see 24, 25, you know, being the time period when that more normalized beta environment comes to pass. So we obviously did in Q2 and Q3 introduce a number of deposit products. There has been a take-up. It has been a little bit slower than what we would have imagined, but that will continue throughout Q4. So I don't think that the NIM trajectory that you've seen from Q2 to Q3 will continue. But overall, very happy for the year that the net interest margin will be greater than 3% as we go into 2024. So really, I think it's a lot of the NII projects trajectory performance and outperformance is very much driven by the liability side. Following on from that, if we look at the makeup of our liabilities and the quantum, we've obviously continued to have inflows on the liability side of our balance sheet and the makeup overall of the different sectors or segments remains very much consistent with what we had at the half year, 60% retail, 40% SME in business. So very, very stable and improving liability base, which again gives us a lot of comfort going into 2024. On the structural hedge, very much in line with our plan. At the end of Q3, we had a hedge quantum of around 34, 35 billion euros and around 4 billion sterling. You probably see the exit position for our euro hedge being in and around that number, and we're going to increase our sterling hedge by around another billion euros. With respect to the exit yields, no real change there. I think for euros, around 2.3%, sterling around 2%. If we look at the average lives, I sort of wanted to try to extend the duration slightly. So our Euro hedge is just above 4% now, and our sterling hedge is above around five years. In terms of maturities, and this really is probably the most important point, as I would have mentioned before, we've had around €3.5 billion maturing in Q3, with around €2.2 billion of hedge maturing in Q4. And then throughout 2024, we have around 10 billion euros of hedge maturing. And then in 2025, there's around 6 billion euros of hedge maturing. So all the while, that kind of hedge is going to begin to perform through 2024, 2025, 2026, and really underpinning overall the trajectory for NII in the short to medium term.

Thanks, Donald. Just to add one more question, if you don't mind, just on the NII implications from the forward contracts in 2024. So, obviously, I think there's been another upgrade to your other income guide in Q3. Could you call out for us kind of how much of that is related to the forward contracts and how that will interact with NII further in 24? Thank you.

Yeah, I mean, the bulk of the revaluation, which is going through other income, that is related, I would say, almost entirely to the Ulster tracker portfolio. You know, we have... we delayed that by a number of months just to ensure we could land it safely and soundly so really all that's happening there is you know until those assets landed you know the value within that transaction was recognized just through the forward contract you know obviously it's a It's a tracker portfolio. Rates have moved. And we were contractually agreed on these portfolios from an early stage. So I think really from the end of 2003 and going into 2024, that forward contract will effectively mature. And what we'll just have is the balance sheet effect of €4 billion of trackers on the portfolio going forward, which should be straightforward to model. recognizing the fact that we obviously bought them at a slight discount of 95 cents.

Thank you very much.

Thank you. We will take our next questions from Dermot Sheridan from Devy. Your line is now has been open. Please go ahead.

Good morning, Colin. Good morning, Donal. Thank you. Donal, maybe just returning to net interest income. And I guess if I take the 3.75 billion guidance that you've now provided, that would kind of indicate that Q4 is going to be lower. And I suppose I can understand some of the deposit piece you're expecting that to come up, but it just doesn't feel like the magnitude is going to be enough for it to be materially below. So I guess, would it be fair to assume that there's some level of conservatism in your net interest income guide and therefore... I guess, the run rate out into next year relative to where consensus looks at the moment. You know, is that, do you feel comfortable where consensus is or do you think there's potentially some upside when you're looking at 2024? And then secondly, maybe kind of unrelated, just around loan trends, I guess, what are you seeing at the moment in terms of demand across the different areas and in terms of where you're comfortable to lend? You know, obviously some still some strong performances in consumer unsecured and in the corporate Ireland book, the other areas a little bit more muted. So just interested to see what you're picking up there. Thank you.

Yeah, thanks. Look, I think for NII, what I'd say is, you know, 2023 is strong, will remain strong, massive trajectory there. And you can see that that's coming through. You know, 2024, again, it's going to just be dependent on the pace of movement, you know, from shorter-term deposit accounts to medium- to longer-term accounts. That is something that we are actively encouraging. You know, we do want to ensure that, you know, that the Irish market returns to what we would consider a more normalised type of... pricing environment. So for 2024, for now, I would just say nothing other than I'm comfortable with where consensus is. I'm imagining a normalized deposit market of betas that's, let's say, around 30% by the end of 2024. If you have a different view on that, that's obviously up to you. But that's the key ingredient, and it's just very hard to know. But obviously, when we update with our year-end results, we'll have another four or five months' worth of proof points, so it should be able to be a little bit more solid and comprehensive at that stage. But for now, I would just stay with where consensus is for 2024 and 2025.

Okay, and on the lending side, on the asset side, we're seeing ongoing strength coming through in terms of personal lending. You can see that in the numbers published this morning. First-time buyer mortgages remaining very robust very strong performances from our energy and climate action sector and also corporate Ireland SME Very much in line what we've been seeing for the past number of years remaining remaining sluggish in terms of of demand no shortage of appetite on our part to lend it to the sector, but there's limited demand coming out of that part of the economy and And on the CRE side, on the non-residential CRE, we took a very deliberate step back in terms of our own appetite in that space. And given the fact that we have had a very significant increase in interest rates, that's obviously going to have an impact on yields required and on underlying valuations. and we are, I suppose, on the sidelines there for the moment and we will remain there until we are comfortable with where valuations have settled. That said, we remain very committed to continue to support residential development and that continues to be an area of strong activity for us, but on the non-residential side, we remain quite cautious in terms of our disposition towards that part of the economy.

Very clear. Thank you.

Thank you. We will take our next questions from Grace Dragan from Barclays. Your line is open. Please go ahead.

Hi, good morning. Thank you very much for having the call. Maybe just touching again on the deposits, maybe you could give us a little bit more detail on the split of your deposits across the different retail products you have. And I guess it'd be really interesting to hear what you've seen quarter to date on Mix. Have you seen any reaction from the September price changes that you made? So any color on that would be helpful. And then secondly, Maybe just looking a bit further out, you're obviously talking about the deposit mix and the headwinds playing through next year and beyond. How do you see that interplaying with the structural hedge? And are you factoring in and thinking about a reduction in the notional of your hedge as that mix shift plays through? Thank you.

Hi, Grace. Thanks very much for that. If I look at the way in which we categorize our liabilities, it's been amazingly consistent in terms of volumes and mix throughout the year. We had €102 billion of deposits at year-end. We currently have around €104 billion. At the start of this year, we had around €64 billion of current accounts. We currently have around €64 billion of current accounts. Our demand deposits at the start of the year were around €33 billion, and they are still at €33 billion. And where we are seeing small changes would be in the more term type of products. So we have time deposits, which at the start of the year were €2.5 billion. That's moved up to €4.5 billion, and that's very much been in the last couple of months post some of the price moves. And then we have notice accounts as well, where at the start of the year we had 2.8 billion euros and now we have 3 billion euros. So really overall, slight increase in overall liabilities, very little change or movement between the segments. And obviously the only area where we are beginning to see a pickup is in those time deposits, which is really six-month, one-year, two-year type products. You know, if I gave a percentage, I could call it 50%. But it's, you know, quantum-wise, the move has been quite small. But we are seeing a slow and steady shift. And like I said before, it is something that we want to encourage as well to make sure that savers with long-term saving aspirations have reasonable products to be able to get a reasonable return. Then overall on the structural hedge, you're right. If the mix of... liabilities does not pan out in the way which we project, then one might look at adjusting the hedge. But overall, that's just kind of a statement of fact, which is methodologies. But overall, where we see the Euro curve now, five-year rates in around three and a quarter percent, locking in fixed rate exposures you know, for four or five years, you know, makes sense to us in any case, really underpinning that net interest income trajectory in the coming years. So certainly wouldn't be flagging that I would be looking to adjust the structural hedge. But, you know, we always look at the shape of our balance sheet, the shape of the euro yield curve, et cetera, et cetera.

Perfect. Thank you.

Thank you. We will take our next questions from Alistair Ryan from Bank of America. Please go ahead.

Yeah, thanks very much. Good morning. Pleasure not to be looking at the UK banks for once. The context for that is in the UK, there's no real income growth for people, no economic growth going on. And so the obsession we've had with banks current accounts is whether they will leave for other accounts. And the question really then is, obviously the Irish context is very different. There's record employment, there's real wage growth ongoing. So could you just talk about the dynamics of sort of what people are doing? Is money coming into current accounts yet? Are people spending down savings because real wages were negative when inflation was high? Are you seeing any shift in behaviours? So does the deposit pot grow? as well as move forward-looking next six to 12 months. So should we be thinking about margin compression on one side, but also possibly just people having more in their current account because there's more employment and higher wages? Thank you.

Thanks very much indeed, Alistair. Yeah, I think you've covered most of the salient features in terms of the Irish economic backdrop. Another consideration worth bearing in mind is that, thanks to a very strong fiscal position, the Irish government continues to be supportive of income levels and consumption. In the most recent budget, you would have seen a number of initiatives which will see real disposable income increasing next year, and that is obviously something that is supportive of our business. Notwithstanding the fact that we have seen a sort of a normalization of spending patterns post-COVID, savings ratios are still very high in this economy and still in double digits. And we continue to see an inflow of deposits as a consequence. So we're just not facing the same sort of headwinds, particularly in terms of the underpinning of domestic demand that you might be facing in Britain at this juncture. and we're very big comfortable with where the economy is positioned. We're not seeing signs of distress in the book at all, quite the contrary, and the backdrop remains very supportive of a business like ours.

Thanks very much.

Thank you. We will take our next questions from Christopher Kent from Autonomous. Please go ahead.

Thanks for taking my questions. Two, please. One on levies and one around asset quality. On levies, I think between yourselves and Bank of Ireland, you're now expecting to pick up 190 million of the 200 million total levy target. So is there a bit of conservatism being baked into your expectation there? I'm not quite sure how you... calibrated at this point, how much of that 200 million total you're expecting to take. And could you just give us an update on how you're thinking about the other components of the 165 million developing into next year? I think you previously indicated the DGS would probably be about a 40 million drop into 2024. And then on asset quality, could I just ask for an update around the the PMA as of 3Q. And how are you thinking about that in the context of your full year guidance? You've booked a small write back in the third quarter. I presume sticking to the low end of the 30 to 40 range, you must be assuming that the macro updates are a bit negative in the fourth quarter. Surely that should be coming off the PMA. Isn't the PMA there to absorb future deterioration in macro models? So we shouldn't see that in the cost of risk. So I'm just curious to understand how you're thinking about using that PMA over time. It is very outsized in a sector context versus your domestic peers. It's a huge balance that you've got against future economic deterioration. So I'm curious to understand that. what it is in the fourth quarter that's bringing back into a net charge. Thank you.

No problem. Thanks very much, Chris, and good morning to you. Look, on the levy, we were pretty happy with the clarity provided at the last budget. I think the calculations are still being finalized. The methodology changed slightly to be basically derived from liability quantums, so we're pretty confident that it's going to be around 90, 95 million euros. With respect to the other levies, to the best of our knowledge, they will reduce in line with what I would have said previously. Obviously, a greater cause of concern is around treatment of reserve balances, etc. No update on that from the from the ECB at the last meeting. Perhaps in the new year we will get further updates on that, and your guess is as good as mine. Asset quality overall is, I'll give the high-level view and then try to answer your questions more specifically. Notwithstanding the fact that rates have moved quickly and that inflation has shot up pretty quickly, You know, the areas of our portfolio where you would expect to see weaknesses, you know, we haven't seen any, that being in, let's say, consumer space, personal, and in mortgage world. So that's a really positive sign. If we look at SME business areas, to date, really very little stress in the portfolios, which is a positive sign. The only area, and I would have called this out at the first half of the year, where we inevitably are going to see some form of impairment, it's going to be in commercial real estate. Nothing out of the ordinary. I think it's a rate yield valuation effect, which has still not played through in our view. And this is all going to, I would say, crystallize throughout the rest of 23, 24 as kind of refis take place. So we were cautionary in this area at the half of the year. I've moved a lot of our office exposures into stage two. As we work through those transactions, it's more likely they'll move back to stage one or if you are going to move into stage three, Indeed, we have PMAs in place to capture what we believe to be the effect of that. That's something that we'll look to consider towards the end of the year. Overall, macro-wise, I would say things are looking reasonably okay. I think coming towards the end of the year, there's nothing really that would be of great cause for concern. And then specifically to your questions, I mean, 30 to 40 basis points is typically where we guide. I mean, it's certainly at the very lower end of that. Don't see it, certainly wouldn't see it being any higher. And we will look to actually towards the end of this year begin to provide better colour and clarity on the unwind of some of those PMAs. Look, we're overall on a very strong financial position. We don't need to be writing back ECLs for any particular other reason other than ensuring that we're adequately provided for whatever comes our way. So I think that I'm pretty comfortable overall with the asset quality and ECL strategy. Thank you.

Thank you. We will take our next questions from Rob Noble from Doshvang. Please go ahead.

Morning, thanks for taking my questions. On costs, please, is a flat cost base out to 2024 realistic? Do we have any visibilities at the moment on what next year's efficiency savings will be? And is a ramp up in investment spending under consideration, or are you committed to keeping the absolute cost base contained as much as possible? Thanks.

I think on costs, a couple of moving parts. Very focused on 2023. You know, I'm very happy to reiterate our guidance for this year of 1.8 billion euros. I mean, 23, busy year, landing all of the inorganics, ensuring we made all of the right calls around balance sheet management, and the outturn is going to be pretty strong. You know, as we go into 24 and 25, yes, you know, we're currently kind of working through all of our strategies and options for the outer years. And those are the kind of things that we'll be debating. So it's a little bit too early to land on those. But what I would say is, I mean, in earlier this year, or maybe towards the back end of last year, the government's rules around compensation changed in Republic of Ireland. We did reference that we would take a charge around 30 million euros in 2023. And that will be to allow for variable pay for staff, which we will look to pay in 2024. And if I look forward into 2024, if I was just to pick one line item, that cost for 2024 is likely to be around 70 million euros. So moving from 30 to 70. And that's the one new item, I would say, on our cost line. And then the question over investment spend over the coming years is something that we're going to consider. And we'll be able to update the market on the 6th of March with a new cost target. Great. Thank you.

Thank you. We will take our next questions from Guy Stebbings from BNB Paribas. Please go ahead. Mr. Guy Stebbings, your line is open. Please go ahead.

Hi there. Apologies for that. Hopefully you can hear me now. Hi there. Thanks. I have one question on capital return and one on other harvesting performance. So at 16.2% and presumably you'd expect to be capital-generative in the fourth quarter, obviously very strongly placed. I appreciate your want to wait for the four-year to set out exactly how you're thinking about capital return. But are there any guardrails you could talk to now, perhaps a sort of broad buffer over the capital target you might look to manage during the short term and whether you'd look at 100% payout ratio as a ceiling in a given year or perhaps be comfortable around those sorts of levels? And just given how much excess capital you have, should we be thinking about excess capital return announcements being a sort of multiple decision during the year? Any colour there would be helpful given it's increasingly a focus for investors. And then other obviously income and the guidance is very encouraging. Could you give a sense as to how much of that 850 million guidance is flattered at all by what you might consider more lumpy items and how much is sort of the clean base you would look to grow off into 2024? Thank you.

Thanks very much, Guy. Look, capital return, a couple of things on that. Always said 23, land all of our inorganics, drive the business hard, get all of the performance out of all of our business units. That's going to mean that we're in a really strong position as we come to the end of 2023. And not just 23, the outlook for 24, 25, probably never look better. So we feel like the overall AIB picture, financial trajectory is really, really strong. We obviously are you know, strongly capital generative and have to ensure that we give good color to investors and indeed analysts on what our plans are going to be on when and how we will look to return that capital. That really is a question that I want to answer comprehensively for the 6th of March. you know, other than to reiterate what we would have said before. Our preference will be to, you know, grow a cash dividend sustainably and transact with the government on a directed basis where we possibly can. That makes good sense for us as we reduce a large shareholding overhang from the government and obviously from the government's perspective, We have €20.7 billion that was invested in AIB and we're very focused on returning that over a number of years. I don't want to get caught up in guardrails, etc. That's something that we'll be able to describe a lot more later. fully, should I say, on the 6th of March. But, you know, I think the facts are that we're feeling very comfortable with our performance for 23 and the trajectory over to 26. And that is a view that would be shared with the board of AIB as well.

Yeah. And of course, we do have existing guardrails in place there in terms of that the special distribution has been dependent upon a support of economic backdrop board approval and regulatory approval as well. But we do look forward to outlining in some detail our plans in this space when we speak to you in the spring.

The second question there was on other income. Yes, definitely flattered in 2023 by evaluation adjustment for the forward contract But even stripping that out, I think the underlying fees and commissions continue to be very strong, up 10% year-on-year, really driven by the fact that we would have onboarded so many new customers given the change in market environment. Again, we're working through all of these different plans at the moment. I would just stick with where consensus is for other income, 24-25, and we'll be able to update you on that one at the year-end results. Okay, that's helpful.

Thank you very much.

Thank you. We will take our next questions from Ali Woods from Morgan Stanley. Please go ahead.

Hi. Just to get back to NIM for a second, it looks like Q3 was really strong above 3.3%, though with your guidance at greater than 3%, do you think that Q3 NIM could be peak NIM? And obviously, it's a much smaller part of your business, but Given the tight lending spreads in the UK and what's been going on in the deposit market, how is that impacting AIB UK this year and looking ahead? Thanks.

Thanks very much. I think looking at 2023, probably fair to assume the Q3 would be the peak quarter in terms of net interest margin. And I would only say that because You know, I don't see the balance sheet changing materially, you know, in terms of asset liability mix. And I do expect to see, you know, further movement on the liability side, albeit not huge. And I just wouldn't want you to project, you know, that kind of NIM trajectory into Q4 because it's just probably not the way we see 2025 playing out. You know, there's always going to be timing effects around these things, but, you know, overall, happy with that guidance at greater than 3% for 2024.

Yeah, and in the UK, we are not the full-service institution that we are in Ireland, and far from it. We are a niche player in Britain in the corporate sector. We choose our sectors very carefully. The Reduction you've seen in terms of new lending in the UK year to date is a reflection of two things. One is strong performance in the first nine months of 2022, but also a very deliberate pullback in terms of commercial real estate activity that, of course, has been mirrored here in the Republic of Ireland as well.

Thank you very much.

Thank you. We will take our next questions from Andrew Simpson from KBW. Your line is open. Please go ahead.

Good morning, everyone. Thanks for taking my questions. First one on the hedge, I'm afraid. So I remember at the first half numbers, you were speaking about the NII sensitivity that you published and how it hadn't reduced that much despite adding the greater hedge at the time. And part of the answer was that it was there's more work to do on the assumptions around the sensitivity to a 100 basis points cut in rates. Given you've increased the size and the length of the hedges again in the third quarter, are there any qualitative comments you can make on that work and how it's progressed and how the increased size and duration of the hedge that you comment on today fits into that? And then if you want to give an update on the quantitative update on the NAIA sensitivity, then I'll happily take that as well.

Thank you. Overall, I would say two things. We would have increased the hedge size, so our sensitivities would naturally have reduced. Probably not as much as we thought they would have because we had expected to see more more uh more changing on the liability base but we do think that that is just a uh more of a a timing effect than anything and so we would have just pushed ahead and hedged the balance sheet out in any case to get more fixed rate exposures on a balance sheet and i think we divulged uh disclosure tables for q3 um but overall you know nii sensitivity would have reduced for euros and sterling, albeit not dramatically. But overall, we're feeling very comfortable with the shape of the balance sheet at the moment.

Thank you. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad now. We will take our next questions from Borja Ramirez from CTE Please go ahead.

Good morning. I have two questions. Firstly, a follow-up on NII 2024. If I understood correctly, the deposit data is 30%. Could you please clarify this is the average for the year and also is this calculated as the deposit rate divided by the interest rate or is this for the full deposit base? And then my second question is related to the cost growth that is expected. So the variable costs that are guided to be 70 million euros in 2024 compared to 30 million euros in 2023. Does this mean that overall revenues, given this variable remuneration, which I guess is linked to the profitability of the group, does this mean that revenues may grow next year and the overall profitability? Thank you.

Yeah, overall, the way we see 24 is, you know, I have always considered, you know, a normalized liability market to be you know, less than or at 30%. Currently, that's where the thinking is for 24. That kind of reconciles with where consensus is, in my view. And I'm happy just to leave that assumption there for the time being. You know, and obviously, when we come back on the 1st of March, I'll have a few more months' worth of data and proof points. For now, I would just... less than 30, and beta for us is across the full liability base. In terms of cost growth overall, the factors that go into the variable remuneration are very broad. There's some quantitative metrics, there's some qualitative metrics, but it also incorporates something which AIB announced very recently, which is effectively giving health care to all staff north and south of the border. So we hadn't adjusted for that in 2023. We'll pay for the total cost of that in 2024. And that, for us, in our mind, is a very standard and normalized human resources adjustment from the bank to make. It's just it is a new line item for us, and I feel it was important to specifically call that out.

Thank you. We will take our next question from Stefan Sachet from Point72. Your line is open. Please go ahead.

Good morning. Thank you for holding the call and for taking my question. Could you please tell us what your issuance plan for 2024 is across senior debt and capital securities, please?

Hi. Well, we were pretty active this year. I feel like we pre-hedged a little bit of MRL requirements for the latest euro trades 2024, going to be very focused on hybrid securities and also looking to execute our first SRT transaction. But, you know, depending on what markets are like, we may look to issue some senior non-preferred as well. But big focus in 2024 on our capital stack, making that really efficient and around hybrid securities. Thank you.

Okay, well, we're now heading towards quarter past nine and we're going to leave you at that point. As ever, thank you very much indeed for your time this morning. We look forward to speaking to you all again on the 6th of March when we will publish our full year results for 2023. We'll outline our strategic ambition to 2026 and our refreshed medium-term targets. Have a good day.

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