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Report: AIB bad loan sale raises questions about H1 profit

Allied Irish Banks PLC may have taken advantage of a transitional accounting arrangement to artificially boost profits in connection with its sale of a bad loan portfolio to Cerberus Capital Management LP, the Financial Times reported.

The €140 million AIB booked on disposals of bad loans for the first half came after it used transitional arrangements aimed at helping banks adjust to the IFRS 9 new accounting standard, according to the Nov. 4 report.

While AIB booked a profit on the portfolio sale, the group apparently took advantage of the arrangements to exclude a loss allowance of €271 million from its income statement, which could imply that the sale might have been a loss instead of a profit, the newspaper added.

AIB said it classifies its loans into categories — stages 1, 2 and 3, depending on their risk level — and claimed that the €271 million loss allowance was under stage 2 while the loans sold to Cerberus were under the riskiest stage 3 category.

AIB's figures have shown that after the transitional arrangements, the provisions against stage 2 loans fell by €591 million rather than increasing by €271 million, the FT noted. The group declined to confirm or deny that any of the loans benefited from the extra loan provisions.

It was hard to see how the loans sold to Cerberus, which AIB had previously disclosed were "heavily underwater" for some time, could have appreciated in value between the end of 2017 and May 17, 2018, when the loans were sold, the FT quoted financial consultant Cormac Butler as saying.