Latest set of results show bank is moving in the right direction

AIB faces a number of challenges over the next few years if it is to once again become a normal functioning bank that is able to transmit credit to the wider economy. It is by no means certain that this is possible, but the latest set of results show it is moving in the right direction.

The bank, which is 99.8% owned by the taxpayer, has to work through €8.5bn in impaired mortgages over the next few years. Getting a handle on the size of the losses will determine whether the bank needs more capital and what its prospects are of returning to the private fold.

Like all banks in this country it is paying for past sins. None more so than its tracker mortgage book which is over €17bn. These type of mortgages are mostly loss making because the interest rate is very often less than the cost of funding.

A drag on growth of this magnitude has a huge bearing if and when the bank returns to profitability. This is not just a problem for AIB. Bank of Ireland and Permanent TSB are also carrying massive tracker mortgage books.

The troika had been looking at ways of hiving off the tracker mortgages from the three covered banks. During the last review of the economy, a commission source said he was hopeful a solution would be in place before the EU-wide stress tests of the banks next March.

Potential solutions are believed to have included putting these tracker books into a special asset management unit, which would be funded by the ESM with the banks guaranteeing future losses. However, last week the head of the ESM, Klaus Regling, said this was not possible.

Worryingly, in a results briefing, AIB chief David Duffy said he was unaware of any potential solutions and had not been in contact with the troika or Department of Finance about this.

AIB has made a tentative return to the markets through a $500m covered bond in January. If it needs more capital following the stress tests it is still unclear where this capital will come from. If the markets are unwilling to invest, then it will fall back on the Government.

AIB will consider debt writedowns when all other possibilities have been exhausted. Ulster Bank and Bank of Ireland are still implacable in their position that there will be no debt writedowns under any circumstances.

Mr Duffy declined to comment on whether these two banks are being realistic. But it does seem that given the level of debt in the system, there is going to have to be debt writeoffs. How much will be the biggest concerns for potential investors over the short term. Over the medium to longer term, Mr Duffy will have to prove that AIB can get a proper funding and lending model in place.