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AIB set to resolve tracker scandal, boosts lending in strong Irish economy

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AIB set to resolve tracker scandal, boosts lending in strong Irish economy

Allied Irish Banks Plc is set to fully resolve its part in Ireland's ongoing tracker mortgage scandal by June and is seeing new lending growth bolstered by improving economic growth, according to the lender's CEO.

Speaking on a March 1 conference call to discuss full-year 2017 earnings, CEO Bernard Byrne addressed the tracker scandal, which concerns mortgage holders who were prevented by banks from benefiting from cheaper "tracker" mortgages that follow the ultra-low ECB interest rate, or who should otherwise have been kept on a better rate.

By the end of March, "95%-plus" of affected customers would be addressed fully, Byrne said, indicating that the whole process would be complete by the end of the second quarter, subject to central bank agreement. He also flagged an additional €40 million in provision levels for the tracker mortgage investigation.

Meanwhile, in a 2017 that saw the bank return to the markets after a government bailout in 2010, a vibrant Irish economy flattered the bank's margins and asset quality. The European Commission estimates that Irish GDP grew by 7.3% in 2017, marking the fastest growth rate in the EU last year.

AIB's net interest margin increased to 2.58% in 2017, up from 2.23% in 2016. Impaired loans fell to €6.3 billion from €9.1 billion.

The bank's fully loaded common equity Tier 1 ratio rose to 17.5% at the end of 2017 from 15.3% a year earlier, with the bank guiding to a target of 13% in the next three-to-five year period. A cash-rich capital base, and the resulting prospects for early dividends, had been a key part of the bank's roadshow case during last year's IPO of a minority stake.

The bank proposed a €326 billion dividend payment, equaling 12 cents a share, a 30% rise from 2016.

Impaired loan reduction, new lending

Between the IPO and progress in working out impaired loans, 2017 was a "pivotal" year for Ireland's second-largest bank by assets, Byrne said.

Regarding impaired loans, now down 78%, from €23 billion, since 2013, Byrne said "we believe this journey's completed" and that asset quality is successfully reaching "more normalized European peer levels."

AIB's profit before tax fell to €1.3 billion, from €1.7 billion in 2016, although this included €268 million in exceptional items primarily related to tracker mortgage redress, Byrne said. The bank said its profit before exceptional items increased to €1.6 billion from 1.5 billion in 2016.

New lending increased to €9.4 billion from €8.4 billion, with Byrne attributing this to Ireland's current economic growth. New mortgages rose to €2.4 billion from €2 billion, and new business lending to €4.5 billion from €4.1 billion.

Meanwhile nonperforming loans fell to €10.2 billion from €14.1 billion in 2016. Byrne said AIB had completed more than 17,000 individual loan restructurings, and was continuing to process roughly 1,000 monthly.

'Vulture' funds

The bank now is in the process of selling a €3.7 billion commercial and buy-to-let loan portfolio to global funds, but Byrne insisted there were no plans to sell impaired owner-occupier loans.

Loan book sales by Irish banks to so-called "vulture" funds have been attracting sharp criticism in Ireland's Dáil, or legislature. Finance Minister Paschal Donohue said Feb. 27 that the government would support a bill by opposition finance spokesman Michael McGrath to require all funds purchasing mortgage loan books to accept regulatory supervision by the Irish central bank.

At least one large U.S. private equity firm, Oaktree Capital Management, has now removed itself from bidding on the so-called "Redwood" loan book, according to a Feb. 22 report in the Irish Independent. An Oaktree spokeswoman declined an opportunity to comment to S&P Global Market Intelligence.