AIB confident of passing stress test

Allied Irish Bank is confident it will breeze through the ECB stress tests following the announcement the bank has returned to underlying profit for the first time since 2008.

The bank is now looking at unwinding its contingent capital notes before moving to convert the Government’s 98% stake into ordinary shares, possibly in the first half of 2015.

The main drivers in the bank’s return to profitability were reductions in impaired loans and an increase in profitability, as lower funding costs boosted the bank’s returns, according to its interim management statement.

Davy analyst Emer Lang said he bank had beaten analysts’ expectations.

“AIB’s interim management statement (IMS) reveals that the underlying operating performance of the bank returned to post provision profitability in Q1 2014 with performance moderately ahead of expectations both in terms of income generation and provisions,” she said.

The country’s second biggest bank said it is confident in the run-up to the stress tests that it is fully capitalised, but AIB CEO, David Duffy, said it needs to see more details of the tests.

“The devil is in the detail, but of the main parameters that have been announced, none of them are causing any issues,” he said.

Mr Duffy said even in the most stringent area of residential lending the ECB had announced banks would need to be capitalised to cover a peak-to-trough fall of between 52% and 48%, He said AIB was already capitalised to cover a fall of 55%. The bank has already seen its impairment charges fall considerably as it moves to tackle the arrears crisis.

In its statement the bank said “The reduction in impaired loans was as a result of restructuring activity, cures and write-offs offset by new impaired loans. The pace of formation of new impaired loans continued to reduce in Q1 2014.”

Mr Duffy said the write-offs AIB was offering customers was on a purely commercial basis. “The only reason we ever engaged in this process is that we are looking at it 100% commercially,” he said.

Mr Duffy said the reality is that some customers cannot repay 100% of their loans so they are trying to maximise returns to shareholders without resorting to foreclosures.

* Additional reporting by Bloomberg