Little sympathy among public for the plight bank now finds itself in

AIB chief executive David Duffy must have privately shuddered during the week when news that the semi- state transport company CIÉ had to go cap in hand to the Government for €36m caused a public and political backlash.

Mr Duffy is in charge of what was Ireland’s largest privately owned bank.

Now it is almost completely State owned. It has cost the taxpayer €14bn to cover the losses shipped by AIB since the economy collapsed in 2008. There is very little sympathy among the public for the plight the banks now find themselves in.

Mr Duffy plans to return AIB to profitability by 2014. He faces some serious headwinds to meet this target. There were some positives in the half-year 2012 results released yesterday. The deposit book has increased by €3bn. The loan-to-deposit ratio now stands at 125%, which has dropped 13% over the past year. But the bank still has huge problems. It has to provide for impairment charges relating to the billions in loans it extended during the Celtic tiger. Happily those impairment charges seem to have peaked in 2011. However, and more worryingly, the bank is still not profitable even when the cost of impairment charges are excluded.

Banks have a simple operating model. They provide an interest rate for depositors. They take this money and lend it to customers through mortgages, credit cards, car loans and loans to businesses. The difference between the two is the profit margin. But AIB pays more for its deposits and other sources of funding than it can generate on many of its mortgages and other financial products.

The problem is it still is a harsh environment for Irish banks. In view of the recent meltdown of the system and the fact they are sub-investment grade, they have to pay high interest rates on deposits. Wholesale funding costs are also prohibitive. The bank’s funding costs will not return to anything like normal until there is some sort of a resolution to the eurozone crisis, which will bring down the overall cost of funding and Ireland exits the EU/IMF bailout.

The other side of the equation will be just as tricky. AIB will have to raise the interest rate it charges on it mortgages as well as other products. Its net interest margin is roughly 1%. As Goodbody Stockbroker analyst Eamon Hughes points out, the average net interest margin in peer countries is between 2.5%-3%. AIB is State owned and will face stiff resistance as it hikes its rate in the future. But unless it does, the bank will not return to profitability and it will not be in a position to lend. Moreover, unless it becomes a viable entity, the Irish taxpayer will have slim prospects of recouping its investment.