AIB Group plc

Ladies and gentlemen, welcome to AAB Group PLC Q1 Trading Update Conference Call, hosted by Colin Hunt, Chief Executive Officer, and Donald Galvin, Chief Financial Officer. Throughout today's recorded presentation, all participants will be in the listen-only mode. You may register for questions at any time by pressing star 1 on your telephone keypad. And now I'm handing over to AAB CEO, who will give some brief opening remarks, and then we will open for Q&A.

Thank you. Good morning, everybody, and welcome to our trading call for the first quarter of 2025. Thank you for your time this morning. The business has had a strong opening quarter. Our Q1 performance is ahead of plan, and we are reiterating all our guidance. We are continuing to grow our loan book prudently and to attract new customers, over 500 every single day to AIB, while making significant progress on the implementation of our strategy. Year-on-year, new lending increased by 14%, of which 38% was green. Net interest income was in line with expectations, while net fees and commissions were up 7%. Costs were 3% up, in line with guidance, delivering a cost-income ratio of 43% in the quarter. We remain exceptionally well-capitalized, with the NMARCH CE21 ratio standing at 16.8%. We are, of course, conscious that the external environment is uncertain. But that said, the domestic economy continues to perform solidly with employment growth running at 2.5% and modified domestic demand going by 3% in real terms currently. Our own PMIs remain in expansion territory and this morning we released our manufacturing PMI with a very robust result. Trade tensions externally have increased and have the potential to be dampening of global growth and put upward pressure on global prices. While growth domestically is expected to be more modest than experienced in recent years, it will still be comfortably ahead of other economies across the Eurozone and further afield. The Irish economy remains strong, characterized by high employment, 2.8 million people at work, 400,000 more, than pre-pandemic, low leverage, high savings ratios, and a robust fiscal position. This management team has been ambitious in our strategy and conservative in our execution, conservative in our underwriting, in our provisioning, and in our guidance. And that remains very much our modus operandi, and we're confident that we will meaningfully exceed our ROTI targets for 2025 and comfortably meet it in 2026. I'll stop there for the moment and hand over to you for your questions.

Thank you, sir. As a reminder, to ask a question, please signal the person to stall one. Shamsa, JP Morgan, please go ahead.

Hello, can you hear me?

Yes, we can.

Great. Thanks for the call. Can I have two, please? First, on the lending performance. It looked relatively weak compared to what we have seen in previous quarters, both on the gross loan side and on the new lending side. So it will be interesting to hear what sort of backdrop you think that the bank is operating in and what's sort of driving that number, especially with the guidance reiterated at that 5% loan growth number. And then secondly, you talked in the previous quarter around a greater than 3.6 billion number for 2026. I would be interested to hear your thoughts on that number, given where the rate outlook is at the moment, please.

Brilliant. Hi, Donald here. With respect to lending, I would say that all of the business lines are performing well. If we take out some volatile FX movements, all of the growth was actually ahead of our own expectations. Typically across our main business lines, the first quarter would be slower than the others. So we fully expect to reach our lending targets as the year progresses. So very comfortable with that. With respect to NII, obviously since results of lots of things have changed in the external environment, Most importantly, euro rate expectations have changed. So our guidance for 2025 was greater than 3.6 billion euros, and that was assuming a year-end ECB depot rate of 2%. We're comfortable to reiterate our guidance for 2025, and we've assumed in that that the ECB depot rate would be 1.75%. But even if rates were to go as low as 1.5%, given their back-enders, we're very comfortable with 2025's net interest income. Obviously, as we go into 2026, that question becomes a little bit more interesting. What I would say is, I mean, consensus income for 2026 is just over 3.6 billion euros, and we'd be comfortable with that level. if you assumed an ECB depo rate of around 1.75%. If you have a different view on rates, I think the best thing to do is just look at our sensitivity tables that we would have published. You know, a 25 basis points reduction is 90 million euros. And so like a 50 basis point reduction will be 180 million euros. Obviously the curve is pretty sensitive and volatile at the moment. But overall, 33-point guidance for 25, very firmly confirmed. And 26, I think, still a bit variable depending on the rate outturn, but that's as much color as I can give at the moment.

Thank you. We'll then now move to our next question. Please, Cand, or Thomas, please go ahead. Good morning. Thank you.

Good morning, Chris.

We're not hearing you, Chris. Sorry. The joys of too many mute buttons. Good morning. Thanks for taking my questions. I just wanted to follow up on NII and prod you a little bit on the outlook into 2026.

So thanks for the sort of updated thinking given the shift in the rate environment. How should we think about deposit costs as rates come down? So when I look at system data, the pass-through to site deposits was the minimus in Ireland, the increase in average deposit costs was essentially driven by terming out. When I look at the front book and back book pricing, it feels like that's already starting to roll over in terms of the cost of term deposits. How should we be thinking about how low that might realistically go in the sort of lower rates environments you're now thinking about? So, you know, if we're at 175,000, In 2026, is it just a case of assuming that the term deposit rates come down to more or less that sort of level? Thank you.

Yeah, look, a couple of things there. First of all, we would, you know, start off with the quantum of liabilities. What we saw in the first quarter, you know, on the face of it looks flat enough. Our ROI deposit book was up slightly, UK book down slightly. So we're pretty comfortable with what we're seeing there. I think we previously said that liabilities quantum would grow by at least 2%, possibly a little bit more. So as a starting point, I would just get comfortable with that. Overall, what we're seeing on the betas is very consistent with what we had stated talked about at the year end. I think for Q1, the deposit data was 18% and the movements that we're seeing at the term have slowed down. We actually announced yesterday some rate cuts in our term deposit rate, the one and two year rate. And obviously as rates change, we keep all of our asset and liability pricing under review.

We'll now move to our next question from Alvaro Serrano from Morgan Stanley. Please go ahead.

Thanks. You've touched on the key guidance, so thanks for that. I'm just wondering on volume growth following up from the first question. Are you seeing, in terms of the new production in corporates in particular, any delayed loan growth decisions or investment decisions as a result of tariffs? And second, can you remind us where you stand in provision overlays, where they are as of Q1? Thanks.

Okay. I'll deal with your second question, but on the first one, we certainly have seen nothing to date in relation to reduce corporate demand on foot of the increased trade tensions. As Donald said earlier, the performance of the business in the first quarter was actually ahead of our expectations. We're actually ahead of plan in the first quarter and we're seeing no impact at the moment from those increased trade tensions. We continue to monitor our early warning indicators very, very closely. with a very elaborate suite of early warning indicators which are designed to highlight any signs of emerging stress in the loan book and they remain exceptionally stable in the first form of the year.

Yeah, Alvaro, hi, Donald here. Just with respect to provisioning and ECLs, I'll answer that in two ways. So at the year end, you know, we would have had a, you know, post-model adjustments in place of just over 300 million euros. But what will happen or certainly how we will approach provisioning for the half year is twofold. You know, firstly, we're kind of in the middle of rerunning our macro scenarios. And similar to everyone else, this is a, This is a challenging exercise given the range of potential outcomes. But once we settle on those, then we'll have a conversation with our board around the weightings that we would apply. So at that stage, I'd like to think that we'll be able to capture all of the range of outcomes from whatever geo-tariff effects we imagine. As a worst case downside, I'd probably just draw you to our sensitivity tables. I don't imagine that any of our severe scenarios would be any worse. And if you weighted everything in ECLs, that would be a maximum impact of €600 million. And I don't think we're anywhere near that just yet, but that's just to give you an idea of the process. But more importantly, what I would say for Q1 is that you know, business performance was strong, asset quality remains very strong because the main drivers such as employment, GDP, asset prices, you know, held up very, very well. So we are conscious to the changing external environment. We will ensure that we are pretty comprehensive and forward-looking in our approach to provisioning. But, you know, we would... I believe we are very well provided for with cover and PMAs. And more importantly, whatever the environment is, we will continue to provide business for our customers throughout the cycle.

Grace Jowigan, Barclays, please go ahead.

Hi, morning. Thank you very much for taking my questions. I just wanted to ask around your commentary on the directed buyback in today's AGM. So note the comments in the R&S. So are you saying that even if approval is given today, that firstly, you may not go ahead with the directed with the Irish government given the price? And secondly, if it does get rejected at J's AGM, what do you see as the kind of key options for you going forward in terms of the 1.2 that has effectively already got regulatory approval? Thank you.

Yeah, thank you very much indeed, Grace. We have regulatory approval for that. We got it back in before we released our full year numbers for 2024. That regulatory approval has a validity of a year. Now, today we're going to AGM. As you know, we have that motion before our shareholders for their approval. Subsequent, assuming we get that approval, we don't know yet, we'll know later on this afternoon, but assuming we get that approval, it'll then be up to the board to decide if proceeding with the transaction is in the best interests of the company. I think it is fair to say that we are eager to transact, the government is eager to transact, and it will be up to the board to make that decision on the basis of the best interests of the company. In the event we get that approval at AGM today, it has a validity and a lifespan that extends to the close of business on Thursday of next week, so on the 8th of May. And so we've got a bit of time on our hands, and let's wait and see what happens over the course of the next number of days. But as of today, first order of business is getting that approval through the AGM, and then we will be having, hopefully, a discussion at board in relation to proceeding or not in the best interest of the company.

We have our chair, Dan Davie. Please go ahead.

Good morning. Can you hear me okay? Yes. Good morning. Two, if I can, please, maybe just tangentially related to the last question on capital returns. Obviously, you've got a very high level of capital sitting on your balance sheet now. I mean, is it reasonable to expect that you might start to move to interim kind of distributions and kind of, you know, kind of normalize that piece and look to manage your capital on kind of a more frequent basis, just given the level of capital you have and the capital you're generating, first question. And then just secondly on costs, obviously up in line with expectations. I'm just wondering if you have any kind of more detail that you could provide to us around how you get back down to kind of guidance for 2026 of around that 2 billion mark. That would be great. Thank you.

Okay. So, Dermot, thanks for your questions. Just in relation to dividends and interim distributions, you are quite correct. We are in an exceptionally strong capital position. And I've said on a number of occasions that we have a strong preference to see a normalized pattern of distributions in a normalized bank. That's a discussion we haven't had at board as of yet and I'm not going to pre-empt that discussion. But it is a discussion that will be taking place in the context of the first half results. So I'm not going to pre-announce anything today. It would be entirely inappropriate of me to do it and I would be running ahead of a discussion that we'd be having with the board. But I want to make it clear that we want to see a normalised pattern of distributions in a normalised financial institution.

Yeah, hi, Dermot. With respect to the costs, obviously we've, you know, a number of medium-term targets. ROTI of 15% really is the main one, and we'll meaningfully exceed that in 2025, and certainly look to do the same in 2026. Our CET1 ratio of 14%, or greater than 14%, is obviously a... equally a north star for us and helps define our return ambitions. And then lastly, obviously, underpinned by our costs and our cost target of less than €2 billion in 2026. So, organizationally, we're very focused on this. You see year on year that the overall headcount has flatlined and is beginning to come down, and we have a number of different initiatives that we are executing, not just to reach a 2026 target, but more around, I would say, ongoing perpetual operational efficiency management. So we're very focused on reaching and exceeding all of our targets, one of which is the 2 billion euro cost target in 2026.

The next question is from Chris Hallam from Goldman Sachs. Please go ahead.

Yeah, morning, everybody, and thanks for taking my questions. Two, please. Again, on capital, you previously flagged 120 basis point tailwind from Basel IV, capital generation continues to be strong. But in addition to that, is there anything else to call out just in terms of capital? The CET1 ratio you've given today looks particularly strong. My second question then is a little bit sort of post quarter end, but on deposit trends, are you seeing anything changing in terms of deposit trends by customer type? Obviously, you've given some color on the mix shift, but post-quarter end, have you seen any sort of like, let's say, liquidity build from customers, for example? And then obviously, customer deposit growth is about 5% in the first quarter. I think earlier in the call, you mentioned 2% liability growth for the full year. Does that feel increasingly cautious as an assumption? And what sort of NII sensitivity should we expect to build in from higher deposit balances? Thank you.

Yeah, but the savings backdrop is very strong in Ireland. We have traditionally had a very, very high savings ratio. I think the pre-pandemic was only about 10%. It's currently running at about 15% in terms of the savings ratio. So you're seeing, but that's obviously an important ballast for our business. We have seen a significant moderation of pace in terms of the migration rate from demand deposits into term deposits. That's been a continuing feature through the opening months of 2025, and that continues to be the case through the months of April. So the flow is probably running at the moment at something of the order of a third of what it was if you go back 12 months ago. Yeah, and I mean the flow from demand into term.

Yeah, and I would just add, with respect to our core franchise in Ireland, it's mainly within the SME kind of mid-sized corporate sector. We don't bank the big U.S. or international FDI firms. and we don't compete for liabilities in that NBFI space, so we wouldn't expect to see any volatility from that perspective. You asked a question there on capital generation. Q1, very strong performance-wise. Overall, obviously, we had a benefit from Basel IV. I talked about it previously over on 120 basis points. We had profitability over on 80 basis points. We made a dividend deduction of around 50 basis points, and we had some other items which had a benefit of around 20 basis points, which is mainly the deferred tax asset. At the year end, I would kind of talk about some potential headwinds coming from modeling and model outputs and IRB outputs and stuff like that. We don't have any line of sight on any changes there. We do have a... We do have a model which is up for approval at the moment, which is for our climate capital project finance portfolio. We're awaiting the outcome of that from the regulator. I wouldn't have anything to say on that side, positively or negatively. Hopefully for the half year we'll be able to have a little bit more colour there. But obviously overall capital position, capital outturn for Q1, exceptionally strong.

The next question is from Dennis McGoldrick with GoodBuddy. Please go ahead.

Good morning, Colin and Donal, and thank you for taking my questions. Just two, please, if I may. So one is just on deposits again. Maybe if you could just elaborate a little bit more on your expectations for deposit growth for the full year in the context of them being obviously in line quarter on quarter. And then again, think to that, maybe how that informs your thinking on the structural hedge and the quantum of that, or if your thinking has changed in any way on how the structural hedge goes from here. Thank you.

Yeah, good question overall. I mean, just to reiterate around deposit flow is very much in line with expectations. Let's be honest, some of this is going to depend on the you know, on the environment that we're coming into in the second half of the year. If there is any nervousness on individual or business side, we're inevitably going to see an increase, you know, thought and liabilities. But to date for Q1, haven't seen anything that we weren't expecting. With respect to the structural hedge overall, obviously, you know, I would have thought previously about the additional quantum we executed in January. It's very comfortable with the overall size. But we keep this under review. I mean, if the liability mix and the balance sheet mix changes, then we react to that. And if we do see any changes, we certainly would have the capacity to increase that hedge. But that's something that's just currently under review at the moment. I wouldn't take it for granted that we will necessarily do anything. But as you can imagine, we keep a watch and brief at all times.

Thank you. We will now take our next question from Borja Ramirez from Citigroup. Please go ahead.

Hello. Good morning. Thank you very much for taking my question. Good morning. Thank you very much for taking my questions. I have two. Firstly, if you could kindly remind me what was mentioned on, there was a question on NIA 2026. Sorry, I didn't fully understand it. I think linked to this, I would like to ask what is your benefit from the yield curve steepening? Because not only do you have the structural hedge, you also are possibly the European bank with the highest amount of cash in the balance sheet. I think it was 27% by your end. So that can be reinvested into fixed income portfolio. And then lastly, you also have a sizable fixed rate mortgage loan book that can be repriced at higher rates. So I'd like to ask, what could be the NIA benefit in the future years from the stippling of the yield curve?

Thank you. Hi, Borka. Donald here. Yeah, so what I said for 2026 is... You know, if we look at consensus NII, which is just over 3.6 billion euros, you know, if the ECB depot rate was 1.75%, well, then we'd be comfortable enough with that. If you imagine that interest rates are going to be any different than the sensitivities, you know, that we would have disclosed at year end, which I would say still holds, would indicate a 25 basis points reduction would have an impact of 90 million euros. So I'd say for now, that's as clear as I can be. The yield curve steepening debate is unfortunately one which seems to be flattening away in front of our very eyes. But look, rates are volatile overall at the moment. A couple of weeks ago, obviously, rates were or four or five-year rates were 60 basis points higher. So, you know, you could see a real effect there where they are today. I don't see too much benefit, to be perfectly frank. Overall, as you correctly say, you know, we have a lot of excess cash sitting with the central bank. What we have witnessed is a widening of spreads in credit markets, particularly sovereigns, particularly SSAs. And we do see on a go-forward basis that we will see those widened level remains, especially with the expanded plans coming out of Germany. So we will be looking to increase our fixed income portfolio. It's not a momentary opportunity. We think that spreads are structurally going to remain wider in the Eurozone. So we look to add between 3 and 5 billion euros in the coming 12 to 18 months, really in the SSA space, maybe in the sovereign space, and then we will keep that position under review. But look, rates remain volatile, and we keep all options on the table, but would be able to take advantage of either steeper curves or wider rates.

So I think that's it for the moment. Donal and I have an AGM to attend now. We've got some very important proposals before the AGM. We look forward to engaging with our shareholders later this morning and to catching up with you all over the coming weeks. Thank you very much indeed. Good morning.

Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.