Aib Group PLC
ISEQ:A5G
Earnings Call Analysis
Q3-2023 Analysis
Aib Group PLC
Opening on an optimistic note, the company highlighted 2023 as an exceptional year, illustrated by a robust performance up to September. This positive trend bolstered confidence in the financial future.
A bright outlook shone through the earnings call with net interest income (NII) expected to surpass EUR 3.75 billion. Net interest margin (NIM) estimates aimed higher than 3%, setting a strong foundation for a return on tangible equity (ROTI) above 20%.
Despite solid performance projections, a hint of conservatism seemed to emerge. The expectation for the fourth quarter appeared lower, suggesting possible caution amidst volatile economic variables.
Personal lending exhibited substantial growth, and the company sustained its strong hold in first-time buyer mortgages. Success also extended to the energy and climate action sector, as well as corporate involvement in Ireland, signaling a well-rounded portfolio performance despite sluggishness in SME demand.
The deposit mix remained remarkably stable in volume and composition throughout the year, with a minor uptrend in timed deposits reflecting recent pricing strategies. The company expressed intent to incentivize long-term saving options, aligning interests both for the bank and its savers.
The Irish government's robust fiscal maneuvers, aimed at supporting income levels and boosting consumption, were perceived as underpinning the bank's business. Heightened savings ratios contributed to continued deposit inflows.
Notable is the sturdy asset quality across consumer and mortgage portfolios, despite swift rate hikes and inflation pressures. The bank flagged potential impairments in commercial real estate as interest rate and valuation changes take effect, yet the overall economic outlook remained moderately optimistic.
The bank showed satisfaction with managing the current year's cost base but noted anticipated changes to government compensation rules affecting 2024 costs, suggesting a rise from EUR 30 million to EUR 70 million. Upcoming strategies will be debated for the outer years, with more definitive updates expected in early March.
In addressing capital returns, the company reiterated its plans to focus on sustainably growing cash dividends. Holding a strong capital generation position, detailed announcements regarding capital returns are poised for release in March.
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Hello, and welcome to the AIB Group plc Q3 2023 Trading Update Call. Please note this conference is being recorded. [Operator Instructions] 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 EUR 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.
[Operator Instructions] We will take our first question from Raul Sinha from JP Morgan.
Another very strong update. I wonder, if you could help us a little bit in pinning down this NIM trajectory which is building very strongly 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.
Raul, 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. You know earlier on in the year, we had imagined a you know normalized liability market coming into place you know in our home market quicker than what's actually been the reality. So you know, if I had imagined deposit betas of exit betas around less than 30, 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 and let's say that slower shift at a term, I think we probably now see '24-'25 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 that has been take up. It has been a little bit slower than that we 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. And so really, I think it's a lot of the NII 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 it 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 EUR 34 billion, EUR 35 billion and around GBP 4 billion. 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 EUR 1 billion. With respect to the exit yields, no real change there, I think for Euro's around 2.3%, sterling around 2%. If we look at the average lives, I said, I wanted to try to extend the duration slightly so our euro hedge is just above 4% now and our sterling hedge is above around 5-years. In terms of maturities and this really is probably the most important point, as I would have mentioned before we've hedged around EUR 3.5 billion maturing in quarter 3, with around EUR 2.2 billion of hedge maturing in Q4. And then throughout 2024, we have around EUR 10 billion of hedge maturing, and then in 2025 there's around EUR 6 billion of hedge maturing. So, all the while that kind of hedge is going to begin to perform through '24-'25-'26, and really underpinning overall the trajectory for NII in the short to medium term.
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 has 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 2024?
Yes, 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. We have 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 until those assets landed, the value within that transaction was recognized just through the forward contract. Obviously, 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 '24, that forward contract will effectively mature, and what we'll just have is the balance sheet effect of EUR 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 EUR 0.95.
We will take our next questions from Diarmaid Sheridan from Davy.
Donal, maybe just returning to net interest income, and I guess, if I take the EUR 3.75 billion guidance that you have 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 are expecting that to come up, but it just does not 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 is some level of conservatism in your net interest income guide and therefore I guess to run rate out into next year relative to where consensus looks at the moment? Do you feel comfortable where consensus is or do you think there is potentially some upside when you are 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? 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.
Yes, look, I think for NII, what I'd say is 2023 is strong, will remain strong, massive trajectory there and you can see that that's coming through. 2024, again, it's going to just be dependent on the pace of movement from shorter term deposit accounts to medium to longer-term accounts. That is something that we are actively encouraging. We do want to ensure that the Irish market returns to what we would consider a more normalized 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 at, 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 4 or 5 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 personnel 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 sluggish in terms of demand. No shortage of appetite on our part to lend into the sector, but there's limited demand coming out of that part of the economy. 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.
We will take our next questions from Grace Dargan from Barclays.
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 notion of your hedge as that makes shift plays through?
If I look at the make, let's say the way in which we categorize our liabilities, it's been amazingly consistent in terms of volumes and mix throughout the year. We had EUR 102 billion of deposits at year-end. We currently have around EUR 104 billion. At the start of this year, we had around EUR 64 billion of current accounts. We currently have around EUR 64 billion of current accounts. Our demand deposits at the start of the year were around EUR 33 billion and they are still at EUR 33 billion. 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 EUR 2.5 billion, that's moved up to EUR 4.5 billion and that's very much being in the last couple of months post some of the price moves and that we have noticed accounts as well, where at the start of the year we have EUR 2.8 billion, and now we have EUR 3 billion. So really overall, a 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 timed deposits, which is really 6 month, 1-year, 2-year type products. If I gave a percentage, I could call it 50%, but 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 are 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 with your methodologies. But overall, where we see the euro curve now, 5-year rates in around 3.25%, locking in fixed-rate exposures for 4- or 5-years 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 we always look at the shape of our balance sheet, the shape of the Euro yield curve, et cetera, et cetera.
We will take our next questions from Alastair Ryan from Bank of America.
Pleasure not to be looking at the U.K. banks for once. The context for that is in the U.K., there's no real income growth for people, no economic growth going on. And so the obsession we've had with current accounts is whether they all 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 behaviors? So does the deposit pot grow as well as move forward-looking next 6 months to 12 months? So should we be thinking about margin compression on one side, but also possibly just people having more in the current account because they've got more, there's more employment and higher wages?
Indeed, Alastair, yes, there's -- 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, very 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.
We will take our next questions from Christopher Cant from Autonomous.
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 EUR 190 million of the EUR 200 million total levy targets. So is there a bit of conservatism being baked into your expectation there? I'm not quite sure how you calibrate it at this point, how much of that EUR 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 EUR 165 million developing into next year? I think you previously indicated the DGS would probably be about a EUR 40 million drop into 2024? And then on asset quality, could I just ask for an update around 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. But 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 what it is in the fourth quarter that's getting you back into a net charge. Thank you.
No problem. 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 methodologies changed slightly to be basically derived from liability quantums. So we're pretty confident that it's going to be around EUR 90 million, EUR 95 million. With respect to the other levies, to the best of our knowledge, they will reduce in line with what I would have said previously. And obviously, greater cause of concern is around treatment of reserve balances, et cetera. No update on that 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. The areas of our portfolio where you would expect to see weaknesses, 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, today's really very little stress in the portfolios, which is a positive. Like 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 impairments, 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 2. As we work through those transactions, it's more likely they'll move back to Stage 1 or a few are going to move into Stage 3. And 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. And 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 basis points 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 color and clarity on the online to some of those PMAs. Look, we're overall in 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 they're pretty comfortable overall with the asset quality and ECL strategy.
We will take our next questions from Rob Noble from Deutsche Bank.
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 would 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?
I think on cost, a couple of moving parts, very focused on 2023. I'm very happy to reiterate our guidance for this year of EUR 1.8 billion. 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. As we go into '24 and '25, yes, 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 EUR 30 million in 2023, and that will be to allow for variable pay for staff, which we've -- 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 EUR 70 million, so moving from EUR 30 million to EUR 70 million. And that's really -- 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 the new cost target.
We will take our next questions from Guy Stebbings from BNP Paribas.
I had one question. I have one question on capital return and one on underlying performance. So, at 16.2% and presumably expect to be capital generated in the fourth quarter, obviously very strongly placed. I appreciate you want to wait for the full 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 color there would be helpful given it's increasingly a focus for investors. And then other obviously income and guidance is very encouraging. Could you give a sense as to how much of that EUR 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 '24?
Look, capital return, a couple of things on that. We always said '23, land all of our inorganics, drive the business hard, get all of the performance out of all of our -- out 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 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. Other than to reiterate what we would have said before, our preference will be to 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 EUR 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 kind of guardrails, et cetera. That's something that we'll be able to describe a lot more fully, should I say, on the 6th of March. But, I think the facts are that we're feeling very comfortable with our performance for '23 and the trajectory over to '26. That is a view that would be shared with the Board of AIB as well.
Yes. And of course, we do have existing guardrails in place there in terms of the special distributions being dependent upon a supportive 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.
And the second question there was on other income. Yes, definitely flattered in 2023 by a valuation 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 changing 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.
We will take our next questions from Ali Woods from Morgan Stanley.
Just to get back to NIM for a second. It looks like Q3 was really strong above 3.3%. So with your guidance at greater than 3%, do you think that Q3 NIM could be peak NIM? And obviously, it's much smaller part of your business. But given sort of the tight lending spreads in the U.K., and what's been going on in the deposit market, how is that impacting AIB U.K. this year and looking ahead?
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 I don't see the balance sheet changing materially in terms of asset liability mix. And I do expect to see further movement on the liability side, albeit not huge. And I just wouldn't want you to project that kind of NIM trajectory into Q4, because it's just probably not the way we see '24, '25 playing out. There's always going to be timing effects around these things. But overall, happy with that guidance at greater than 3% for 2024.
Yes. And in the U.K., 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 U.K. year-to-date is a reflection of 2 things. One is strong performance in the first 9 months of '22, but also a very deliberate pullback in terms of commercial real estate activity that, of course, has emerged here in the Republic of Ireland as well.
We will take our next questions from Andrew Stimpson from KBW.
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 there was 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 NII sensitivity, then I'll happily take that as well.
Yes. Overall, I would say 2 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 changing on the liability base. But we do think that that is just a more of 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 our balance sheet. And I think we divulged just loads of tables for Q3, but overall, NII sensitivity would have reduced for Euros and Sterling, albeit not dramatically. But overall, we're feeling comfortable with the shape of the balance sheet at the moment.
We will take our next question from Borja Ramirez from Citi.
I have 2 questions. Firstly, a follow-up on NII 2024. If I understood correctly, the deposit beta guided 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 how -- or is this for the full deposit base? And then my second question is related to the cost growth at this aspect. So the variable costs that are guided to be EUR 70 million in 2024 compared to EUR 30 million 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?
Yes. Overall, the way we see '24 is, I have always considered a normalized liability market to be 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. 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 sense it's less than 30%. Data 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 healthcare to all staff north and south of the border. So we hadn't adjusted for that in '23. 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.
We will take our next question from Stephane Suchet from Point72.
Could you please tell us what your issuance plan for 2024 is across senior debt and capital securities, please?
Well, we were pretty active this year. I feel like we pre-hedged a little bit of MREL requirements for the latest Euro trades. 2024 is going to be very focused on hybrid securities, and also looking to execute our first SRT transaction, but 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 around hybrid securities.
Okay. Well, we're now heading towards 9:15, 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 '23. We'll outline our strategic ambition to 2026 and our refreshed medium-term targets. Have a good day.
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