Annual Report & Accounts 2000 for the year ended 31 December 2000 A n n u a l R e p o r t & A c c o u n t s 2 0 0 0 www.aibgroup.com Financial highlights for the year ended 31 December 2000 Results Total operating income Group profit before taxation Profit attributable Profit retained Per € 0.32 ordinary share Earnings – basic Earnings – adjusted (note 20) Earnings – diluted Dividend Tax credit on dividend(2) Dividend cover – times Net assets Performance measures Return on average total assets Return on average ordinary shareholders’ equity Balance sheet Total assets Shareholders’ funds: equity interests Loans etc Deposits etc Capital ratios Tier 1 capital Total capital 2000 € m 3,326(1) 1,251(1) 762 357 89.0c 104.0c 88.1c 38.75c – 2.3 492c 1999 € m 2,822 1,132 761 428 89.5c 90.5c 88.0c 33.70c – 2.6 424c 1998 € m 2,589 1,049 633 362 74.7c 81.1c 73.7c 28.06c 3.12c 2.7 331c 1.25%(1) 21.6%(1) 1.33% 23.5% 1.39%(3) 27.3%(3) 79,688 4,296 50,239 65,210 67,070 3,651 43,127 55,241 53,720 2,829 35,496 44,840 6.3% 10.8% 6.4% 11.3% 7.5% 11.1% (1)Adjusted to exclude the impact of the deposit interest retention tax settlement. (2)For dividends payable after 5 April 1999 the tax credit is zero. (3)Adjusted to exclude the impact of the phased reduction in Irish corporation tax rates on deferred tax balances. Allied Irish Banks, p.l.c. Group Headquarters & Registered Office Bankcentre, Ballsbridge Dublin 4, Ireland Telephone (01) 660 0311 Registered number 24173 1 www.aibgroup.com Contents 1 4 6 8 Financial highlights Chairman’s statement Directors Group Chief Executive’s review 32 Report of the Directors 34 Corporate Governance statement 38 Financial contents 39 Accounting policies 42 Consolidated profit and loss account 44 Consolidated balance sheet 45 Balance sheet Allied Irish Banks, p.l.c. 46 Consolidated cash flow statement 47 Statement of total recognised gains and losses 47 Reconciliation of movements in shareholders’ funds: equity interests 47 Note of historical cost profits and losses 48 Notes to the accounts 112 Statement of Directors’ responsibilities in relation to the accounts 113 Auditors’ report 115 Accounts in sterling, US dollars and Polish zloty 116 Five year financial summary 118 Principal addresses 120 Additional information for Shareholders 124 Financial calendar 125 Index Chairman’s statement The year 2000 was an excellent year for AIB. Pre-tax profit (before an exceptional item) rose by 10.5% on the 1999 figure to € 1,251 million. Profit attributable to ordinary shareholders is € 762 million. Adjusted earnings per share increased by 15% to EUR 104.0c while basic earnings per share was EUR 89.0c. The Board is recommending a final I would like to stress that AIB continues dividend of EUR 25.25c per share. This to recognise the importance of full adherence will be payable on 26 April 2001 to with tax law and is committed to achieving shareholders on the register at the close the highest possible levels of compliance. The of business on 2 March 2001. The total Revenue Commissioners audit showed that dividend at EUR 38.75c per share is an DIRT compliance since 1992 was 99.4%. increase of 15% on 1999. There were other events in the year which An exceptional charge of € 113 million saw AIB consolidating its position in key is included in the accounts to cover AIB’s markets. The most striking example is the full and final settlement in relation to Deposit approval for the merger of Wielkopolski Bank Interest Retention Tax. The figure includes € 43 million in payment of DIRT tax with a further € 70 million in penalties and interest payments. Kredytowy and Bank Zachodni, AIB’s two subsidiaries in Poland. There were several changes in the AIB Board in 2000. Denis Murphy, non-executive director Despite the fact that AIB believes it had an of the AIB Board since 1977, retired. Denis has agreement with the Revenue Commissioners given great service to AIB for almost twenty-five in 1991, the Board decided that concluding years. His contributions to the deliberations of this settlement was in the best interests of the Board were acute and insightful. We will shareholders, customers and staff. miss his wisdom and his humour. 4 Dermot Gleeson and Derek Higgs joined experience to the job and we wish him well the Board in 2000 as non-executive directors. in his new role. Dermot brings to AIB his vast legal experience One of the most important challenges while Derek brings an unrivalled knowledge of facing the organisation in our domestic market the banking industry and financial markets. will be the changeover to euro notes and coins Looking ahead, the next few months will in January 2002. AIB’s experience of the Year see the retirement of Tom Mulcahy and Kevin 2000 issue has shown the strength of the Kelly. Kevin joined as Finance Director in organisation to deal professionally with such 1991 and became Managing Director of AIB major challenges. Bank in 1995. Since that time the profits of The business would not succeed without AIB Bank have increased by over 170%. Kevin the contribution of staff and management and has provided great service to the Bank and we I would like to thank everyone for their work wish him well in the future. during the year. Tom Mulcahy has been with the Bank I am confident about the future. We have a for 29 years, the last seven as Group Chief Bank with a well diversified geographic strategy. Executive. In that period compound growth Our people are capable and enthusiastic. And in adjusted earnings per share was 17.3% - we will continue to seek out ways to strengthen a truly outstanding achievement, and on and develop our operations wherever located. behalf of the Board I wish to record our thanks and congratulations. Michael Buckley will succeed Tom Mulcahy, having been a civil servant and stockbroker before joining the Bank in 1991. Michael brings a wide range of talents and Lochlann Quinn Chairman 21 February 2001 5 Directors Lochlann Quinn B Comm, FCA Chairman Deputy Chairman of Glen Dimplex and a Director of Glen Dimplex related companies in the UK, France, Germany, Holland and Canada. Board Member of the Michael Smurfit Graduate School of Business at University College Dublin. Joined the Board in 1995 and appointed Chairman in 1997. (Age 59) Thomas P Mulcahy* B Comm, FCA Group Chief Executive Joined the Board in 1990 and appointed Group Chief Executive in 1994. Career banker. Former Group General Manager, Capital Markets division. President of the Irish Chapter of the Ireland-United States Council for Commerce and Industry, Inc. Council Member of IBEC. (Age 59) Frank P Bramble* Chief Executive, USA division and Chairman of Allfirst Financial Inc., which he joined in 1994. Chairman of the Baltimore Center for the Performing Arts, the Baltimore Downtown Partnership, and the University of Maryland Medical Systems. Joined the Board in 1998. (Age 52) Adrian Burke B Comm, FCA Vice President of the Institute of Chartered Accountants in Ireland and Council Member of the Institute of Directors in Ireland and the Institute of European Affairs. Former Managing Partner of Arthur Andersen and former Chairman of the Joint Ethics Board of the Institutes of Chartered Accountants in Ireland, Scotland, and England and Wales. Joined the Board in 1997. (Age 59) Padraic M Fallon BBS, MA, FRSA Chairman of Euromoney Institutional Investor PLC and Director of Daily Mail & General Trust Plc in Britain. Joined the Board in 1988. (Age 54) Dermot Gleeson BA, L lM Director of Independent News and Media PLC. Served as Attorney General of Ireland and a member of the Council of State from 1994 to 1997. Chaired the Review Body on Higher Remuneration in the Public Sector from 1986 to 1992. Joined the Board in May 2000. (Age 52) Michael Buckley* MA, LPh, MSI Group Chief Executive -Designate Don Godson BE, MIE, FIEI, C Eng Former Managing Director, Poland division and of Capital Markets division. Joined the Board in 1995. Former Managing Director, NCB Group and public servant in Irish Government and EU. Chairman of the Review Body on Higher Remuneration in the Public Sector from 1995 to 2001. (Age 55) 6 Director and former Chief Executive of CRH plc. Director of Project Management Holdings Ltd. Board Member of the Michael Smurfit Graduate School of Business at University College Dublin. Joined the Board in 1997. (Age 61) Derek A Higgs FCA John B McGuckian BSc (Econ) Chairman of Ulster Television plc and a Director of a number of other companies in Ireland and the UK. Former ProChancellor of The Queen’s University, Belfast, and former Chairman of The International Fund for Ireland and of the Industrial Development Board for Northern Ireland. Joined the Board in 1977. (Age 61) Carol Moffett Joined the Board in 1995. Former member of the Board of Co-operation Ireland and former Director of the Irish Trade Board. Fellow of the Irish Management Institute. (Age 48) Director of The British Land Company PLC, Egg plc, Jones Lang LaSalle Inc. and London Regional Transport, and a member of the Financial Reporting Council. Chairman of Partnerships UK plc and Business in the Environment, and a Senior Advisor at UBS Warburg. Former Chairman of S.G. Warburg & Co., and former Director of Prudential plc. Joined the Board in November 2000. (Age 56) Kevin J Kelly* FCA Managing Director, AIB Bank. Joined the Board in 1991. Chairman of Business2Arts, the Business Council for the Arts. Former Managing Partner of Coopers & Lybrand, former Administrator of PMPA Insurance Company and former Managing Director of Agra Group. (Age 59) Gary Kennedy* BA, FCA Group Financial Director. Joined AIB in present role in 1997. Member of the Board of the Industrial Development Agency and member of the Galway University Foundation. Former Vice President Enterprise Networks Europe and Managing Director, Northern Telecom (Ireland) Ltd. (Age 42) *Executive Directors Board committees Audit Committee Don Godson, Chairman Adrian Burke Carol Moffett (to 31 May 2000) Dermot Gleeson (from 1 June 2000) Nomination and Remuneration Committee Lochlann Quinn, Chairman Adrian Burke John B McGuckian Social Affairs Committee Denis J Murphy, Chairman (to 31 December 2000) Carol Moffett, Chairman (from 1 January 2001) Michael Buckley Padraic M Fallon 7 Group Chief Executive’s review AIB’s performance in 2000 was outstanding with buoyant revenues, higher productivity and robust asset quality. It was the ninth successive year of real profit growth. During this period AIB has consistently increased shareholder value while growing the balance sheet to €80 billion. Details of AIB’s performance division by We are also seizing the opportunities division in 2000 are set out in detail over the presented by the new technologies in next few pages of this review. I would like to e-enabling our internal processes to make take this opportunity to record my thanks for them more efficient. This change is allowing the hard work of AIB staff in contributing to AIB to reduce routine processing and so enables our success over the year and during my term staff to work in roles focussed on customer as Chief Executive. service and sales. The challenge is to ensure the AIB now has more than five million correct balance is struck between cost-efficiency retail, commercial and corporate customers. and the need to invest for the future. We believe in offering extensive choice in Service differentiation is crucial. AIB knows the ways our customers can access the group's this can best be achieved through the development wide range of products and services. In of professional, expert and experienced staff 2000, technology markets were volatile yet working to a common set of values. the opportunities offered by the network This is the last time I will report as AIB economy remain. Group Chief Executive. The pace of change AIB’s integrated multi-channel distribution since I became CEO in 1994 has been strategy is proving successful - we are winning astounding, especially in terms of technological business through our on-line channels. advances and the competitiveness of our markets. 8 Group Executive Committee 2000 Frank Bramble Chief Executive USA Michael Buckley Group Chief Executive-Designate Colm Doherty Managing Director Capital Markets Kevin Kelly Managing Director AIB Bank Gary Kennedy Group Financial Director Mike Lewis Head of Strategic Human Resources Pat Ryan Group Treasurer Nevertheless, I am proud to say that return I am sure my successor Michael Buckley, on equity has averaged 22.2% over those seven working with his management team, AIB staff years (before exceptional items) while and the AIB board, will continue to deliver compound growth in adjusted earnings per quality earnings to shareholders. share was 17.3% and compound growth in AIB is in good shape and is well positioned dividend per share was 17.7%. for the future. Long-term shareholder value Teamwork has been fundamental to our remains the number one priority. success. We are the market-leading banking and financial services company in our home market. This position has been developed successfully while AIB has become a truly international organisation. We remain committed to the policy of portfolio diversification and the enrichment of our existing franchises. AIB has proven that it can innovate in the range of products and services it offers its customers and develop new revenue streams in the markets it operates in throughout the world. T P Mulcahy Group Chief Executive 21 February 2001 9 Operating review Exceptional item The exceptional item refers to a payment made on 3 October 2000 of € 113 million to the Irish Revenue Commissioners in full and final settlement of deposit interest retention tax (‘DIRT’), including interest and penalties for the period April 1986 to April 1999. Although AIB believes that it had an agreement with the Revenue Commissioners in 1991 in relation to DIRT, the Board considered that concluding this settlement was in the best interests of shareholders, customers and staff. Summary profit and loss account Net interest income Other income Total operating income Staff costs Other costs Depreciation and amortisation Total operating expenses Group operating profit before provisions Provisions for bad and doubtful debts Other provisions Total provisions Year 2000 as reported € m Exceptional item € m Year 2000 before exceptional € m 1,909 1,304 3,213 1,144 634 171 1,949 1,264 133 1 134 113 – 113 – – – – 113 – – – 2,022 1,304 3,326 1,144 634 171 1,949 1,377 133 1 134 Year 1999 € m 1,770 1,052 2,822 970 521 127 1,618 1,204 85 7 92 Group operating profit – continuing activities 1,130 113 1,243 1,112 Income from associated undertakings Profit on disposal of property Profit on disposal of business 3 5 – – – – 3 5 – 3 2 15 % Change excl. exceptional 14 24 18 18 22 35 20 14 57 – 46 12 – – – Group profit on ordinary activities before taxation 1,138 113 1,251 1,132 10.5 The current year includes Bank Zachodni (‘BZ’) in which AIB took a majority shareholding on 16 September 1999.The 1999 accounts include BZ for the period from 16 September 1999 to 31 December 1999. The following commentary on results excludes the impact of the exceptional item. Overall results Group operating profit before provisions - up 14% to € 1,377 million for the year to December 2000.The second half-year profit of € 705 million was 5% higher than the first half-year. Group operating profit – continuing activities was up 12% on 1999. Group profit on ordinary activities before tax amounted to € 1,251 million and adjusted earnings per share excluding goodwill amortisation (€ 26 million) and the exceptional item increased by 15% to EUR 104.0c per share. Basic earnings per share was EUR 89.0c per share.The second half-year profit on ordinary activities before taxation of € 642 million was up 5% on the first half-year. 10 The following commentary on the profit and loss account and balance sheet headings is based on underlying percentage growth adjusting for the impact of currency movements and excluding BZ in both years. Net interest income Net interest income at € 2,022 million increased by 4% compared with 1999. Loans to customers and customer accounts increased by 13% and 8% respectively since December 1999. The net interest margin was 3.02%, a decrease of 25 basis points on 1999.The decrease mainly occurred in AIB Bank and Allfirst, both operating in very competitive markets.The domestic margin stabilised in the second half reflecting stabilising product margins in the Republic of Ireland where strong second half growth in customer accounts outpaced the growth in loans in AIB Bank.The second half reduction in the foreign margin was due to a lower Treasury margin and a modest reduction in Allfirst and Poland margins. Net interest income of € 1,037 million for the half-year to December 2000 was up 3% on the half-year to June 2000. Loans to customers and customer accounts (excluding money market funds and currency factors) % Change December 2000 v December 1999 Loans to customers % Change Customer accounts % Change Republic of Ireland Northern Ireland Britain USA Poland AIB Group 19(1) 16 20 3 9 13 14 9 –6(2) 3 16 8 (1) The Republic of Ireland loan growth was 21% adjusting for the securitisation of certain loans. (2) The reduction of 6% in Britain customer accounts was due to the movement of some large deposits from customer accounts to money market funds. Branch customer accounts in Britain were up 23%. The divisional commentary contains additional comments on the key business trends in relation to loans to customers and customer accounts. Net interest margin (incl. BZ) Half-Year Half-Year Dec 2000 June 2000 % % Basis points change 2.76 3.08 2.73 3.40 2.94 3.10 +3 –32 –16 Domestic Foreign Total Year 2000 % 2.75 3.23 3.02 Year 1999 Basis points % change 2.97 3.54 3.27 –22 –31 –25 Average interest earning assets (incl. BZ) Half-Year Half-Year Dec 2000 June 2000 € m € m % Change Year 2000 € m Year 1999 € m % Change 31,420 28,201 38,824 35,572 70,244 63,773 11 9 10 Domestic 29,819 25,611 Foreign 37,207 28,502 Total 67,026 54,113 16 31 24 11 Year 1999 € m Underlying % Change 2000 v 1999 Other income Dividend income Banking fees and commissions Asset management fees Investment banking fees Fees and commissions receivable Less: fees and commissions payable Dealing profits Contribution of life assurance company Other Other operating income Year 2000 € m 6 807 187 107 1,101 (108) 103 95 107 202 2 643 152 114 909 (93) 74 64 96 160 Total other income 1,304 1,052 – 14 11 –8 11 –8 33 48 –2 17 14 reflecting a strong performance in all divisions with particularly strong growth in Ark Life and good growth in asset management fees and banking fees and commissions. Other income as a percentage of total operating income was 40% in the second half-year. Total operating expenses Operating expenses at € 1,949 million were up 7% compared with 1999.The Group’s tangible cost income ratio, excluding goodwill amortisation, at 58% was slightly higher than 1999.The increase in operating expenses was mainly attributable to increased business activity, Operating expenses Staff costs Other costs Depreciation and amortisation Total operating expenses technology and e-business expenditure, and branch network expansion in Poland. Arising from the implementation of a new accounting standard, the depreciation charge for freehold and long leasehold property increased by € 9 million. Higher salary costs and some once-off expenses relating to research and development work on a standalone internet bank in Ireland contributed to the cost increase. Following a review of our e-business strategy in Ireland, AIB will focus on developing and expanding 24hour-online, our existing online service, as the core internet offering for the Irish personal market and will not Year 2000 € m 1,144 634 171 1,949 Year 1999 € m 970 521 127 1,618 Underlying % Change 2000 v 1999 6 9 9 7 Other income Other income increased by 14% to € 1,304 million.This represented 39% of total income compared with 37% in 1999. • Contribution of life assurance • company up 48% Investment banking fees down 8% or up 33% excluding 1999 privatisation revenues • Banking fees and commissions up 14% • Asset management fees up 11% Banking fees and commissions increased reflecting higher business volumes with strong growth in branch banking, corporate banking, credit card and finance and leasing revenues. Asset management fees were up due to good business growth in Ireland and Britain coupled with higher trust and investment advisory fees in Allfirst. Excluding fees received in 1999 in relation to a major privatisation in the Irish market, investment banking fees were up 33% mainly due to a strong performance from stockbroking, corporate finance and international financial services activities. Dealing profits were up 33% with buoyant revenues in foreign exchange trading activities. Ark Life reported significant profit growth reflecting strong sales of investment products, substantial growth in new regular pensions and the benefit of lower corporation tax rates. Other income increased by 13% to € 693 million in the half-year to December 2000 12 proceed with the development of a standalone internet bank at this time. Investment in e-business in the US and Poland continues and the Group remains committed to an integrated multi-channel distribution strategy. Operating expenses were up 8% in the half-year to December 2000 compared with the half-year to June 2000.The increase was mainly due to wage cost pressures in Ireland, branch and ATM network expansion in Poland and technology and e-business expenditure across the Group. Asset quality The provision for bad and doubtful debts in 2000 was € 133 million compared with an adjusted € 101 million in 1999, excluding write-backs in 1999 of € 16 million relating to Latin American provisions.The charge for the year represented 0.30% of average loans compared with an adjusted 0.28% charge in 1999. In Ireland asset quality remained strong.The AIB Bank Republic of Ireland specific charge was 0.16% of average loans with the level of non-performing loans at a historically low level as a percentage of loans. Reflecting the slowdown in the economy, non-performing loans in the USA increased, however coverage is still strong at 205%.The provision for bad and doubtful debts reduced following a significant improvement in the maritime portfolio more than offsetting higher commercial loan provisions. Allfirst’s provisions as a percentage of loans amounted to 1.4% at 31 December 2000, a level of provisioning in line with its peer group banks.The vast majority of Allfirst’s provisions are in non-specific categories. Capital Markets showed a reduction particularly in non-credit related provisions with coverage remaining strong at 262%. In Poland, asset quality in WBK continued to improve with non-performing loans as a percentage of total loans amounting to 7.6%, significantly lower than the industry average. In BZ, non-performing loans increased to 30.7% as a percentage of total loans at 31 December 2000.The completion of the fair value exercise resulted in the reclassification of some loans to non-performing and also generated additional fair value provisions of € 38 million. AIB is involved in an intensive workout of this portfolio with Group resources actively participating. Group non-performing loans as a percentage of total loans amounted to 1.9% or 1.0% excluding BZ. The Group increased its level of non-specific provisions in 2000. Coverage for non-performing loans remained strong at 100% (135% excluding BZ). Taxation The taxation charge was € 318 million compared with € 327 million in 1999.The adjusted effective tax rate for the year was 26.3% down from 28.9% in 1999. The reduction was mainly due to the decrease in the standard rate of Irish corporation tax from 28% in 1999 to 24% in 2000 and a lower effective tax rate in Allfirst.The effective tax rate is also influenced by the geographic and business mix of profits. Euro AIB has made a significant investment in the preparations for the introduction of euro notes and coins in 2002. Expenditure to date on EMU preparations and the introduction of the euro has been € 16 million relating to systems development, communications and education programmes.We estimate that further expenditure of € 40 million will be required to cover a range of incremental costs and complete systems and other changes required for the introduction of euro notes and coins in 2002. Return on equity and return on assets The return on equity, excluding the exceptional item, amounted to 21.6% continuing the trend of returns in excess of 20% with an average return of 23.5% over the last five years.The return on equity was 23.5% in 1999.The return on assets was 1.25% and the return on risk weighted assets, a measure of the efficient use of capital, was 1.65%.The equity base has increased by 18% since December 1999 due principally to profit retentions and translation of foreign currency reserves. 13 million for taxation, equity dividends of € 228 million and capital expenditure of € 3,004 million, consisting mainly of net increases in debt and equity securities of € 2,830 million and expenditure on property and equipment of € 237 million. Financing, primarily the issue of subordinated debt, generated a net cash inflow of € 164 million. Outlook AIB continues to perform strongly and is confidently looking forward to meeting its objective of low double-digit earnings growth in 2001 and into the medium term. Balance sheet Total assets have increased by € 13 billion to € 80 billion at 31 December 2000, an increase of 15% on an underlying basis since December 1999 while loans to customers increased by 13% and customer accounts by 8%. The US dollar and the Polish zloty both strengthened by 8% against the euro while sterling weakened marginally resulting in reported balance sheet growth of 19%. Assets under management/ administration and custody Assets under management in the Group increased to € 40 billion at 31 December 2000 from € 39 billion at 31 December 1999 reflecting growth in new business partly offset by a decline in stock market values. Assets under administration and custody increased from € 152 billion at 31 December 1999 to € 214 billion at 31 December 2000.This strong growth of 41% reflects the success of the AIB joint venture with the Bank of New York which was established in 1997. Cash flow As reflected in the consolidated cash flow statement, there was a net decrease in cash of € 1,016 million during the year ended 31 December 2000. Net cash inflow from operating activities was € 2,433 million, of which € 1,232 million arose from trading activities.This cash inflow was offset by outflows of € 199 14 Divisional commentary On a divisional basis profit is measured in euro and consequently includes the impact of currency movements. AIB Bank Retail and commercial banking operations in Republic of Ireland, Northern Ireland, Britain, Channel Islands and Isle of Man; AIB Finance and Leasing; Card Services; and AIB’s life and pensions subsidiary Ark Life Assurance Company. AIB Bank profit increased to € 696 million - a 19% increase over the same period last year, reflecting a strong performance in all key business units. The profit increase of 19% reflects a strong performance in the Republic of Ireland, Northern Ireland and Britain, with profit growth in the high teens in all three areas. The divisional cost income ratio, despite an underlying increase of 10% in costs, further improved from 53.5% to 52.1% reflecting high levels of productivity. Banking operations in the Republic of Ireland experienced strong growth in business volumes reflecting the strength of the domestic economy, the power of the AIB franchise and favourable demographics with increasing disposable income creating higher demand for financial services. Loans increased by 22% with growth well spread across all economic sectors and customer accounts were up 17% since December 1999 with particularly strong growth in the AIB Bank profit and loss account Net interest income Other income Total operating income Total operating expenses Operating profit before provisions Provisions Operating profit - continuing activities Profit on disposal of property Year 2000 € m 1,056 508 1,564 816 748 56 692 4 Profit on ordinary activities before taxation 696 Year 1999 € m 932 422 1,354 724 630 45 585 2 587 % Change 2000 v 1999 13 20 16 13 19 25 18 – 19 second half-year. Lower margins partly offset the favourable impact of volume growth.There was good demand for Home Mortgage lending, up 26% since December 1999 despite competition from new entrants to the market. The growth in business activity levels coupled with wage cost pressures in Ireland has resulted in higher costs, however the ongoing commitment to productivity has maintained the cost income ratio at 52% in 2000. The strength of the Irish economy and the underlying demographics underpin the growth prospects going forward. Ark Life reported substantial growth in profit of 48% to € 95 million for the year to December 2000.The increased profit was driven by record new business volumes and the benefit of lower corporation tax rates. Single premium product sales were very strong at € 547 million, up 35% on 1999. New regular premium business amounted to € 103 million, an increase of 21% including particularly strong growth of 55% in new regular pensions.The new pension legislation in Ireland has greatly enhanced the attractiveness of retirement provision, especially for the self employed and proprietary directors. Annual Premium Equivalent (APE) sales were up 25% to € 158 million. First Trust Bank had a very strong performance reflecting higher volumes and strong growth in other income with foreign exchange income and branch commissions in particular, well ahead of 1999. An improved cost income ratio of 51% down from 54% in 1999 reflected improved efficiency with only a modest increase in costs since 1999. Loans increased by 16% and customer accounts were up 9% since December 1999. In Britain, business activity was buoyant in an economy where inflation was less than 3%. Business volumes increased and 15 the cost income ratio reduced to 52% from 57% in 1999 with costs remaining at the same level in 2000. Progress has been made in changing the profile of the business including a higher level of business with medium sized firms and expansion in the professional sector.There was good growth in commercial loans, home mortgages, current accounts and term deposits. Branch loan and deposit volumes increased by 15% and 23% respectively. USA includes Allfirst’s banking operations in Maryland, Pennsylvania,Virginia, Washington DC, and AIB’s own brand retail and corporate operations in New York, Philadelphia, Los Angeles, Chicago and San Francisco. USA profit was € 337 million, up 10% on the year to December 1999 profit of € 307 million. Allfirst has separately reported in US dollars growth of 7% in net income to common shareholders in 2000 on a US GAAP (United States Generally Accepted Accounting Principles) basis. On a Group basis in line with Irish GAAP, profit after tax was down 2% on 1999. Net interest income reduced due to more reliance on wholesale funding, lower treasury profit and competitive pressures on product margins. Underlying revenue highlights included strong growth of 16% in electronic banking income, 12% in corporate deposit 16 USA profit and loss account Net interest income Other income Total operating income Total operating expenses Operating profit before provisions Provisions Operating profit - continuing activities Income from associated undertakings Year 2000 € m 537 381 918 543 375 38 337 – Profit on ordinary activities before taxation 337 Year 1999 € m 506 296 802 463 339 33 306 1 307 % Change 2000 v 1999 6 29 15 17 11 18 10 – 10 Philadelphia and Los Angeles. Loans increased by 20% since December 1999 and there was a 34% increase in other income. service charges, higher joint venture and trust revenues and an 8% increase in commercial loan balances since December 1999. A decline in retail lending reduced overall growth in loans to 2%. Continued cost containment was reflected in a modest underlying increase of 1%. Provisions for bad and doubtful debts decreased due to the significant improvement in the foreign maritime portfolio. AIB’s operations produced a strong performance with a good increase in operating profit before provisions. An investment program is underway which includes plans to increase the number of representative offices and ‘e-enable’ the business to further develop the national franchise in the charity and church sectors commonly known as the not-for-profit sector.The Chicago office opened in 2000 and the San Francisco office opened in early 2001 in addition to the established offices in New York, Capital Markets Corporate Banking, Investment Banking and Treasury & International. Capital Markets profit at € 156 million was up 3%. Capital Markets had a very successful year. Excluding fees received in 1999 in relation to a major privatisation in the Irish market, profit growth was in excess of 20%.There has been substantial growth in recent years in corporate banking, asset management, IFSC services and corporate treasury activities. This has resulted in the position where the vast majority of revenues are derived from customer services and a reduced proportion obtained from proprietary activities. Corporate Banking had a record year, reporting substantial growth in profits, with other income up 52%. Loans were up 25% since December 1999 with all areas of the business performing very well.The domestic business continued to pursue its strategy of providing innovative financing solutions and consulting services to its customers.The special finance unit which focuses on project and acquisition finance had a superb year and the international business conducted from the IFSC produced a strong performance. The business in Britain produced a very strong performance in only its third year of operation and won many arranging and underwriting mandates. AIB Corporate Banking Capital Markets profit and loss account Net interest income Other income Total operating income Total operating expenses Operating profit before provisions Provisions Operating profit - continuing activities Income from associated undertakings Year 2000 € m 127 304 431 260 171 18 153 3 Profit on ordinary activities before taxation 156 Year 1999 € m 141 270 411 239 172 23 149 2 151 % Change 2000 v 1999 –10 13 5 9 –1 –20 2 – 3 Goodbody Stockbrokers, Corporate Finance and International Financial Services Centre operations performed very well. Goodbody benefited from its involvement in a number of Initial Public Offerings and private placements and was the leading equity fundraiser in Ireland for the technology sector in 2000. Treasury & International reported profits were lower than 1999 due to a lower performance from interest rate management and trading activities, particularly in the second half-year.Treasury customer business had a very good year with strong growth particularly in commercial foreign exchange in Corporate and Commercial Treasury and a strong performance in International Business Services activities. established a presence in New York during 2000 and plans to develop a lending business in structured corporate credit. AIB became one of the first European banks to enter the fund management business for corporate debt and bonds by launching a € 350 million Collateralised Debt Obligation (CDO) in January 2001. Investment Banking produced a strong performance in all major business units. Asset Management business had a good performance with strong profit growth driven by new business mandates. Higher profit was achieved in the UK, where fees were earned from new investment trusts launched in 1999 and 2000. Profit from Custodial,Trustee and Funds Administration businesses was substantially higher due to significant growth in new business volumes, underpinning our presence as a major provider of funds administration and trustee services in the IFSC. 17 Poland Wielkopolski Bank Kredytowy S.A., in which AIB has a 60.1% shareholding, together with its subsidiaries and associates, and Bank Zachodni S.A., in which AIB has an 83.0% shareholding, together with its subsidiaries and associates. Poland contributed € 88 million in 2000, a 40% increase on the profit of € 63 million in 1999. A majority shareholding in BZ was acquired in September 1999. WBK achieved record profit with growth of 15% in 2000, or 31% excluding the impact of equity investment disposals in 1999. The strong results reflect increased business volumes, wider deposit margins and good growth in fee income. Loans increased by 16% and customer accounts were up 21% since December 1999. There was significant growth of 24% in other income, excluding the impact of equity investment disposals in 1999, illustrating the growing revenue potential of our Polish franchises. Key highlights of the performance included a 128% increase in card fees, growth of 46% in foreign exchange profits and a 16% increase in current account fees and branch commissions. Costs increased as a result of expansion and development of the branch and ATM networks and technology enhancements.WBK expanded its franchise with 28 new outlets and 44 new ATMs. Poland profit and loss account Net interest income Other income Total operating income Total operating expenses Operating profit before provisions Provisions Operating profit - continuing activities Profit on disposal of property Profit on ordinary activities before taxation Year 2000 € m 252 153 405 295 110 23 87 1 88 Year 1999 € m 139 87 226 154 72 9 63 – 63 % Change 2000 v 1999 81 75 79 91 52 146 38 – 40 The above profit and loss account includes BZ for the full year in 2000 and for the period from 16 September to 31 December in 1999. BZ full year accounts were included for the first time in 2000. Significant progress is being achieved in transferring AIB’s business and lending processes to BZ.The analysis and assessment of credit quality for fair value purposes at BZ was completed in 2000 resulting in additional fair value provisions of € 38 million. Loan volumes were up 1% while deposit volumes increased by 10% since December 1999. As part of its development programme BZ opened 16 new outlets and installed 29 new ATMs since December 1999. AIB invested a further PLN 200 million in BZ during the year, increasing the Group’s shareholding to 83%. AIB, in conjunction with BZ and WBK, has initiated a change management process that includes a project to implement a new centralised branch banking system common to both Polish banks with rollout scheduled for the third quarter of 2001. On 10 October 2000 AIB announced the proposed merger of WBK and BZ.The proposal was ratified by the shareholders of both banks at an extraordinary general meeting on 20 December 2000.The merger is planned to take effect in June 2001 and it is proposed that the new entity will adopt the name Bank Zachodni WBK (‘BZWBK’).The merger will create Poland’s fifth largest bank and presents AIB Poland with the opportunity to achieve synergies while expanding and developing the branch and electronic networks. 18 Group profit and loss account Net interest income Other income Total operating income Total operating expenses Operating profit before provisions Provisions Operating profit – continuing activities Profit on disposal of business Profit on ordinary activities before taxation Year 2000 € m 50 (42) 8 35 (27) (1) (26) – (26) Year 1999 € m 52 (23) 29 38 (9) (18) 9 15 24 Group includes interest income earned on capital not allocated to divisions, the funding cost of the BZ acquisition and central services costs. Group reported a loss of € 26 million in 2000, compared with a profit of € 24 million in 1999.This decrease was primarily due to provision write-backs of € 16 million in 1999 relating to Latin American provisions no longer required, hedging costs in relation to the translation of our foreign currency profits and the funding cost of the BZ acquisition.The 1999 profit included a gain of € 15 million from the sale of AIB’s private banking and treasury operations located in Singapore to Keppel TatLee Bank. 19 Financial review HOW WE MANAGE OUR CAPITAL It is the Group’s policy to maintain a strong capital base and to utilise it efficiently in the Group’s development as a diversified international banking group. The following table shows AIB Group’s capital resources at 31 December 2000 and 1999. Ordinary shareholders’ equity Preference share capital Equity and non-equity minority interests Undated capital notes Dated capital notes 2000 € m 4,296 264 272 413 1,836 7,081 1999 € m 3,651 245 227 397 1,587 6,107 Capital resources increased by € 974 million during the year ended 31 December 2000.The increase arose primarily as a result of net retentions of € 427 million and the issue of capital notes of € 149 million.The value of the US dollar and Polish zloty strengthened against the euro by 8%, resulting in a positive foreign currency translation adjustment of € 262 million. In carrying out the Group’s overall capital resources policy, a guiding factor is the supervisory requirements of the Central Bank of Ireland which applies a capital/risk assets ratio framework in measuring capital adequacy.This framework analyses a bank’s capital into two tiers. It also applies risk weightings to balance sheet and off-balance sheet exposures, reflecting the credit and other risks associated with broad categories of transactions and counterparties, to arrive at a figure for risk weighted assets. An internationally agreed minimum total capital (to risk weighted assets) ratio of 8% and a minimum tier 1 capital (to risk weighted assets) ratio of 4% are the base standards from which the Central Bank of Ireland sets individual capital ratios for credit institutions under its jurisdiction. The EU Capital Adequacy Directive (CAD) distinguishes the risks associated with a bank’s trading book from those in its banking book.Trading book risks are defined as those risks undertaken in order to benefit in the short-term from movements in market prices such as interest or exchange rates.The remaining risks, relating to the normal retail and wholesale banking activities, are regarded as banking book risks. As part of the Group’s capital management activities, the Group manages its mix of capital by currency in order to minimise the impact of exchange rate fluctuations on the Group’s key capital ratios. The Group’s capital ratios remained strong with the tier 1 ratio at 6.3% and the total capital ratio at 10.8%. Tier 1 capital increased by € 646 million to € 3.8 billion reflecting retained profit for the year of € 357 million, issues of ordinary share capital of € 105 million, and the impact of a stronger US dollar exchange rate. Capital raising by AIB of € 149 million, together with the stronger US dollar exchange rate resulted in an increase of € 375 million in tier 2 capital. In line with the growth in the balance sheet, risk weighted assets increased by 22% to € 60 billion, 18% excluding currency factors. On 5 February 2001,AIB issued € 500 million of 7.5 per cent Step-up Callable Perpetual Reserve Capital Instruments, which on a proforma basis increases the Tier 1 and total capital ratios at 31 December 2000 to 7.2% and 11.7% respectively. Capital ratios Capital base Tier 1 capital Tier 2 capital Supervisory deductions Total capital Risk weighted assets Banking book: On balance sheet Off-balance sheet Trading book: Market risks Counterparty and settlement risks Total risk weighted assets Capital ratios Tier 1 Total 2000 € m 3,814 2,926 6,740 214 6,526 1999 € m 3,168 2,551 5,719 149 5,570 49,396 8,779 58,175 40,623 7,184 47,807 1,956 1,401 91 2,047 60,222 67 1,468 49,275 6.3% 10.8% 6.4% 11.3% 20 THE RISKS WE FACE AND HOW WE MANAGE THESE RISKS Taking and managing risk for an appropriate return is central to creating shareholder value. Day to day risk management in AIB Group centres on three major risks – credit risk, market risk (including liquidity) and operational risk. Credit risk is the exposure to loss due to counterparty default on credit obligations. It arises mainly in the Group’s retail, corporate, and interbank lending portfolios. Credit risk also arises in derivative contracts to the extent that the default of a counterparty to the derivative transaction exposes the Group to the need to replace existing contracts at prices that are less favourable than when the contract was entered into. Market risk is the exposure to loss from adverse movements in market prices. Market risk arises primarily in AIB Group in the prices of interest rate instruments, which are used to manage the interest rate risk of the Group. Some exposure also arises in respect of foreign exchange and equity related positions. Liquidity risk is the exposure to loss from not having sufficient funds available at an economic price to meet actual and contingent customer commitments. Market and liquidity risks are an integral part of retail banking activities. Managing these risks also provides opportunities for Treasury to take advantage of rates and rate movements to add value through position-taking. Group-level risk management structure Board of Directors Group CEO Group Executive Committee GCC (credit risk) Group ALCO (market risk) Group ORMCO (operational risk) Operational risk, which is inherent in all business activities, is the exposure to loss from inadequate or failed internal processes, people and systems or from external events. It excludes business risk, ie the risk to income or margins from being in business, eg competitive pressure on prices/market share. Business risk is discussed on page 24. Organisational structure for managing risk AIB Group has a well-developed organisational structure for managing risk, including a comprehensive set of committees and delegated authorities.The main Group-level committees are the Group Executive Committee, the Group Credit Committee (‘GCC’), the Group Asset and Liability Committee (‘Group ALCO’), and the Group Operational Risk Management Committee (‘Group ORMCO’).The Group continues to progress towards a more integrated approach to risk management (ie credit, market, liquidity and operational risks). There is a Group-level risk management unit independent of the divisions, whose core objective is to enhance shareholder value by promoting efficient risk-taking across the Group.The unit has responsibility for formulating high-level risk policies, setting concentration limits, providing independent review, influencing effective management of the Group’s balance sheet and developing strategic risk management initiatives. The unit reports to the Group Treasurer who is a member of the Group Executive Committee.The Group Treasurer is also a member of the GCC and chairs the Group ALCO and Group ORMCO. The Group level risk management unit provides executive support to each of the above risk committees. In addition to managing credit, market and operational risks, this unit shares responsibility with Group Finance for the continued development of the Shareholder Value Based Management (‘SVBM’) framework across the Group. A key objective of this initiative is to provide decision- makers with a decision-support framework that explicitly incorporates measures of risk.This 21 will also facilitate greater efficiency in using the Group’s capital. Managing credit risk Credit risk is managed and controlled throughout the Group on the basis of established credit processes and within a framework of credit policy and delegated authorities based on skill and experience.There are credit grading and monitoring systems which accommodate the early identification and management of deterioration in loan quality. In addition, the process is underpinned by an independent system of credit review. The credit grading systems across the Group continue to be refined, expanded and calibrated to facilitate risk-based pricing, economic provisioning and the attribution of capital as part of the Groupwide SVBM initiative. It is intended to move progressively towards risk-based measures for performance evaluation. The Board, in exercising its role in relation to credit risk, has approved lending authorities for divisions and approved certain high-level credit policies. The GCC, which is chaired by a member of the Group Executive Committee, considers and approves credit exposures in excess of divisional authorities. It comprises senior management from each of the divisions as well as Group.The Committee approves key credit policies and reviews strategic portfolio management. It also reviews trends in credit quality and determines overall provision adequacy. Group and divisional credit risk management roles Within the Group-level risk management unit, there is a credit risk management unit which has functional responsibility for credit risk across the Group and provides executive support to the GCC. Its role is to influence and support the management of credit risk across the Group by promoting high standards of professionalism and best market practice. In discharging its functional role, it works closely with divisional risk and credit management. A key focus is to ensure that each division has robust credit structures, processes and policies to underpin their credit activities. The unit has specific responsibility to advise and report independently to the Group Chief Executive, the Audit Committee and the Board on credit policy, strategy, process, standards and quality, and on the adequacy of provisions.The unit presents a formal credit report to the Board on a quarterly basis. A divisional credit policy framework and credit review process supports the credit management structure in each division. Each division invests significantly in developing the professional skills of its lenders and in the continuous improvement of the credit assessment, control and monitoring processes. High priority is given to having a credit culture that is resilient through business cycles. Managing market risk Group ALCO is responsible for setting and reviewing the Group’s asset/liability strategy within the risk policies approved by the Board. It comprises senior management from each of the divisions as well as Group. It is supported by Asset and Liability committees in AIB Bank, Allfirst and Poland division. Interest rate and foreign exchange rate risks arising in the Group’s retail and commercial activities are transferred to the relevant Treasury units.Treasury takes positions in marketable securities and derivatives to mitigate these risks.The divisional Asset and Liability committees are responsible for identifying, measuring and transferring these risks to Treasury. Group ALCO policies determine the basis for managing liquidity risk and also interest rate risk arising from the structure of the balance sheet. In addition, Group ALCO sets limits on the amount of discretion available to Treasury to take positions in interest rate and foreign exchange rate instruments. The principal aims of the Group’s market risk exposure management are to limit the adverse impact of interest, exchange rate and equity price movements on profitability and shareholder value, and to enhance earnings within defined risk parameters.The Group’s policies and practices in relation to market risk management reflect the following guiding principles: 22 (a) key market risk activities are subject to a Board-approved policy framework. (b) market risk is substantially centralised in the treasury units, managed by skilled personnel, and monitored using appropriate systems and controls. (c) market risk is measured and monitored by risk management personnel operating independently of the risk-taking units. Liquidity risk The objective of liquidity management is to ensure that, at all times, the Group holds sufficient funds to meet its contracted and contingent commitments to customers and counterparties, at an economic price. The Group liquidity policy is designed to provide adequate funding to cover both normal and abnormal working conditions. It also incorporates a liquidity contingency plan for critical situations.The policy adopts a cash-flow based approach that is consistent with best practice and specifies the minimum amounts of high quality liquidity stock required for each major currency.This is calculated as a percentage of retail and wholesale resources and undrawn credit facilities in each major currency. In all cases, net outflows are monitored on a daily basis and the required minimum liquidity stock can be increased if these exceed predetermined target levels. The euro, US dollar, sterling and the Polish zloty represent the most important currencies to AIB Group from a liquidity perspective. The Group has a well-established retail deposit base in Ireland, Britain, the US and Poland to fund asset growth. Although a significant element of these deposits are contractually repayable on demand or at short notice, the Group’s substantial customer base and geographic spread generally ensures that these current and deposit accounts represent a stable and predictable source of funds. The Group is also actively involved in the interbank market and may be, at times, a net borrower from the market. Managing operational risk Operational risk management (‘ORM’) has emerged within the financial services industry as a discipline with its own management structure, tools, and processes, much like credit and market risk management. Traditionally, the approach by AIB Group and most other financial institutions has been to manage operational risk as a line management responsibility, duly supported by specialist functions that manage and advise on specific operational risks, eg fraud, money laundering, compliance, personal security, business continuity planning, information security and insurance. Evolving best practice is for structured operational risk management programmes. An element of AIB’s structured ORM programme in 2000 was the implementation of a bottom-up operational risk self-assessment process to allow businesses within the Group to assess their operational risks and the effectiveness of their controls to address these risks.This complements the risk-based audit approach now being applied by AIB Internal Audit in its role as independent assessor of management’s control and risk management processes. The role of Group ORMCO, which was established in 1999 with divisional representation, is to influence and co-ordinate divisional actions with a view to strategically managing operational risk in a pragmatic and supportive manner across the Group.There is an independent operational risk management unit within the Group-level risk management unit.This unit has functional responsibility for ORM policy on behalf of Group ORMCO. An initial objective is to support the implementation of a Group policy on ORM for identifying, assessing and reporting operational risks on a consistent basis across the Group. The role of group internal audit Group internal audit (‘GIA’) provides independent assurance to the Board Audit Committee in the form of a written opinion on the adequacy and effectiveness of the risk management and control framework in operation throughout the Group.The risk management processes for credit risk, market risk and operational 23 risk are assessed and tested. In addition to the production of audit reports, GIA provides information on the overall control environment to the management of the individual divisions. A secondary objective of GIA is to proactively influence executive management to strengthen the risk management and control framework through the implementation of best practices. In undertaking its responsibilities, GIA now adopts a risk-based approach which underpins the risk management processes in place across the Group. Businesses undertake self-assessments of operational risk and the effectiveness of their controls in managing these risks. GIA validates the information contained in these self-assessments. This is achieved through a programme of ongoing review of risk identification standards and risk measurement methodologies at business unit level and the risk mitigators adopted by management are addressed and tested. The role of group compliance Group Compliance has responsibility within its agreed function and scope for the development of policies and procedures to ensure compliance with applicable law, regulations and codes of practice with respect to the conduct of business. It has an independent reporting line to the Board Audit Committee and provides assurance to Group Management, the Board Audit Committee and regulatory bodies on the overall standard of compliance throughout the Group. Business risk Identification and management of business risks are the responsibility of line management and ultimately the Group Executive Committee. The Committee meets regularly to consider market and risk developments across the Group’s major areas of operation. Business planning occupies a central role in the management of AIB Group.The Board formally approves the overall strategy and direction of the business on an annual basis. HOW WE MEASURE MARKET RISK Value at Risk (‘VAR’) is an industry standard for market risk measurement. It provides an estimate of the potential loss of shareholder value resulting from market movements over a specified period of time within a specified probability of occurrence. AIB Group applies a VAR methodology to measure the market risk of positions held in all product groups, eg money market products, debt securities, foreign exchange products, equity products and financial derivatives. In technical terms, the AIB Group approach is termed a variance- covariance matrix approach. For internal risk measurement and management purposes, the risk is calculated as the probable maximum loss in fair value over a one month period that would arise from a ‘worst case’ movement in market rates (interest, foreign exchange, equity, as applicable). The worst case is based on an historical observation of weekly price volatility over a period of three years. AIB Group raises the measured price volatility to a high level of statistical confidence so that there is a 99% probability that this worst case price volatility would not be exceeded.VAR figures are quoted using both one-month and one day holding periods. The prices of financial instruments do not move in exact step with each other.Therefore, the total risk from holding a portfolio of different instruments is less than the sum of the individual risks. Having calculated VAR on a single instrument, the total VAR for a portfolio of market positions is adjusted to reflect the reality that the worst case scenario is unlikely to occur in all markets simultaneously. AIB Group uses an industry practice formula to take account of this portfolio diversification impact within each market risk category. As with any market risk measurement methodology the VAR system used by AIB has known limitations.These stem from the need to make assumptions about the range of likely changes in future market rates in order to determine the probable maximum loss in fair value.To deal with this, AIB supplements its VAR measure with other techniques including sensitivity analysis. 24 The following table illustrates the VAR figures for interest rate risk for the years ended 31 December 2000 and 1999. These figures represent the potential loss in shareholder value arising from a worst case change in interest rates. Interest rate risk 1 month holding period: Average High Low 31 December 1 day holding period: Average High Low 31 December Special attention is required for option portfolios because the relationship between an option’s value and the price of the underlying instrument can be quite complex. Option values are affected by several variables, including changes in market volatility. A statistical simulation methodology, consistent with the variance-covariance approach, is used to more accurately measure the market risk in selected currency option portfolios. The currency option VAR figure is included within the foreign exchange rate VAR figures. This revaluation uses the same worst case market movements used in the revaluation of non- option portfolios.The VAR on interest rate options is computed by revaluing these options under the assumption that the worst case movement in interest rates occurs.This approach relies on certain assumptions Trading 1999 € m 2000 € m Non-trading 2000 € m 1999 € m 4.1 5.3 2.8 3.2 0.9 1.2 0.6 0.7 6.0 8.0 3.6 3.6 1.3 1.8 0.8 0.8 83.5 90.5 72.6 72.6 18.7 20.2 16.2 16.2 82.6 93.8 65.1 87.3 18.5 21.0 14.6 19.5 about changes in the direction and volatility of future interest rates.The VAR on interest rate options is included in the interest rate VAR figures. AIB supplements its VAR measure with other techniques, including sensitivity analysis. Interest rate risk The Group Interest Rate Risk Policy, as approved by the Board, limits the Group’s exposure to interest rate risk.The risk to AIB Group is that changes in interest rates will have adverse effects on earnings and on the economic value of its assets and liabilities. Recognising this, the Group’s tolerance limits for interest rate risk are established from both an earnings and economic value perspective.These limits reflect the Group’s prudential philosophy as a retail/commercial bank.The Chairman of Group ALCO has discretion to allocate these limits across divisional treasury functions within the risk tolerance limits. In managing interest rate risk, a distinction is made between trading and non- trading activities.Trading activities are identified in the trading book. Interest rate risk associated with the Group’s retail and commercial activities is managed through the non-trading book. Trading book The interest rate trading book incorporates all securitites and derivatives that are held for trading purposes in the Group’s treasury units.These are revalued daily at market prices (marked to market) and any changes in value are immediately recognised in income. During the course of the year, trading book interest rate risk was predominantly concentrated in the euro, sterling and the US dollar although positions were also taken in a number of other developed country markets. Non-trading book The Group’s non-trading book consists of its retail and corporate deposit and loan books as well as the Group’s treasury interbank cash book and the Group’s investment portfolio.The interest rate risks in the retail and corporate deposit and loan books are transferred to treasury and managed using interest rate swaps and other conventional hedging instruments. AIB Group’s banking businesses have a substantial level of interest-free current accounts, equity and other interest-free 25 used in the tables it has been necessary to make certain assumptions and approximations in assigning assets and liabilities to different repricing categories. Foreign exchange rate risk Structural foreign exchange rate risk is defined as the Group’s non- trading net asset position in foreign currencies. Structural risk arises almost entirely from the Group’s net investments in its sterling, US dollar and Polish zloty based subsidiaries. The Group prepares its consolidated financial statements in euro. Accordingly, the consolidated balance sheet is affected by movements in the exchange rates between the above functional currencies and the euro. It is normal Group practice to match material individual foreign currency investments in overseas subsidiaries, associated undertakings and branches, with liabilities in the same currency. Polish investments are recorded in euro. Because of the Group’s diversified international operations, the currency profile of its capital may not necessarily match that of its assets and risk weighted assets. Under Board approved policy, a sub-committee of Group ALCO has delegated responsibility for hedging this structural mismatch against adverse exchange rate movements. At 31 December 2000 and 1999, the Group’s structural foreign exchange position was as follows: US dollar Sterling Polish zloty 2000 € m 1,380 1,016 142 1999 € m 1,192 1,060 52 2,538 2,304 This position indicates that a 10% movement in the value of the euro against these currencies at 31 December 2000 would result in an amount taken to reserves of € 254 million. Translation hedging of overseas earnings The Group may choose to hedge all or part of its overseas earnings projected over the current and next financial year, thereby fixing a translation rate for the amount hedged.The purpose of these hedges is to minimise the risk of significant fluctuations in the reported euro values of the Group’s separate US dollar, sterling and Polish zloty earnings. In the year ended 31 December 2000 certain US dollar, sterling and Polish zloty profits were hedged during the year and translated at the following exchange rates €1: US $1.0406; €1: Stg £0.6523; €1: PLN 4.6066. or fixed rate liabilities and assets. Unless carefully managed, the net income from these funds will fluctuate directly with movements in short-term interest rates. Group policy is to manage the earnings volatility arising from the impact of interest rate movements on such funds.The ‘structural’ risk position arising from these funds is hedged by maintaining a portfolio of assets with interest rates fixed for several years. In designing the hedges, care is taken to ensure that the management of the portfolio is not inflexible, as market circumstances and evolving customer requirements can change the desirable portfolio structure. The interest rate VAR figures reported represent the maximum probable loss in respect of both trading and non-trading book positions held in treasury. Interest rate sensitivity The net interest rate sensitivity of the Group at 31 December 2000 and 1999 is illustrated in the tables on pages 27 and 28.The interest sensitivity gap is split out by functional currency.The table sets out details of those assets and liabilities whose values are subject to change as interest rates change within each repricing time period. Details regarding assets and liabilities which are not sensitive to interest rate movements and any rate sensitive off-balance sheet contracts are also included. The tables shows the sensitivity of the balance sheet at one point in time and is not necessarily indicative of positions at other dates. In developing the classifications 26 Assets Central govt. bills and other eligible bills Loans and advances to banks Loans and advances to customers Debt securities Other assets Total assets Liabilities Deposits by banks Customer accounts Debt securities in issue Subordinated liabilities Other liabilities Stockholders’ equity Total liabilities Off-balance sheet items affecting interest rate 0-3 Months € m 3-6 Months € m 6-12 Months € m 1-5 Years € m 5 years + € m Non-interest bearing € m Trading € m Total € m 31 December 2000 271 3,355 30,342 4,564 – 2 80 9 61 – – – – – 15 297 697 – 4,193 2,303 710 – 1,816 1,761 – 6,850 6,336 – 4,735 3,274 – – – 10,166 – 2,341 – 46,046 18,986 10,166 38,532 3,095 3,647 13,186 8,009 10,863 2,356 79,688 10,984 33,108 3,768 1,470 106 – 571 2,478 292 107 – – 573 1,626 79 – – – 97 1,598 156 107 – – 3 451 – 513 – – 250 9,176 – 52 7,827 4,296 49,436 3,448 2,278 1,958 967 21,601 – – – – – – – – – 12,478 48,437 4,295 2,249 7,933 4,296 79,688 – 79,688 sensitivity 8,522 (1,443) (10,119) 3,802 (762) – 57,958 2,005 (7,841) 5,760 205 21,601 Interest sensitivity gap Cumulative interest sensitivity gap Interest sensitivity gap Cumulative interest sensitivity gap Interest sensitivity gap Cumulative interest sensitivity gap Interest sensitivity gap Cumulative interest sensitivity gap Interest sensitivity gap Cumulative interest sensitivity gap (19,426) 1,090 11,488 7,426 7,804 (10,738) 2,356 (19,426) (18,336) (6,848) 578 382 (2,356) – Euro m Euro m Euro m Euro m Euro m Euro m Euro m (4,456) 346 6,904 1,240 163 (5,249) 1,191 (4,456) (4,110) 2,794 4,034 4,197 (1,052) 139 US $m US $m US $m US $m US $m US $m US $m (8,504) 678 2,715 4,158 3,401 (2,866) (8,504) (7,826) (5,111) (953) 2,448 (418) 578 160 Stg m Stg m Stg m Stg m Stg m Stg m Stg m (4,550) 315 492 529 3,690 (919) 464 (4,550) (4,235) (3,743) (3,214) 476 (443) 21 PLN m PLN m PLN m PLN m PLN m PLN m PLN m (1,192) (123) 27 392 22 (52) 78 (1,192) (1,315) (1,288) (896) (874) (926) (848) 27 Assets Central govt. bills and other eligible bills Loans and advances to banks Loans and advances to customers Debt securities Other assets Total assets Liabilities Deposits by banks Customer accounts Debt securities in issue Subordinated liabilities Other liabilities Stockholders’ equity Total liabilities Off-balance sheet items affecting interest rate 0-3 Months € m 3-6 Months € m 6-12 Months € m 1-5 Years € m 5 years + € m Non-interest bearing € m Trading € m Total € m 31 December 1999 190 409 49 2,746 21 103 – 29 – – 70 718 185 747 – 3,831 25,051 2,471 – 2,351 544 – 2,090 968 – 7,442 6,604 – 2,362 2,939 – – – 8,055 – 1,582 62 39,296 15,108 8,117 30,458 3,325 3,210 14,075 5,486 8,802 1,714 67,070 6,660 29,600 3,875 1,163 – – 451 1,857 203 99 – – 903 1,275 35 – – – 320 1,576 143 99 – – 272 253 42 623 – – 2 7,774 – – 6,194 3,651 41,298 2,610 2,213 2,138 1,190 17,621 – – – – – – – – – 8,608 42,335 4,298 1,984 6,194 3,651 67,070 – 67,070 sensitivity 14,641 6,348 (2,215) (17,197) (1,577) – 55,939 8,958 (2) (15,059) (387) 17,621 Interest sensitivity gap Cumulative interest sensitivity gap Interest sensitivity gap Cumulative interest sensitivity gap Interest sensitivity gap Cumulative interest sensitivity gap Interest sensitivity gap Cumulative interest sensitivity gap Interest sensitivity gap Cumulative interest sensitivity gap (25,481) (5,633) 3,212 29,134 5,873 (8,819) 1,714 (25,481) (31,114) (27,902) 1,232 7,105 (1,714) – Euro m Euro m Euro m Euro m Euro m Euro m Euro m (6,324) (1,322) 2,229 8,096 996 (4,448) 556 (6,324) (7,646) (5,417) 2,679 3,675 (773) (217) US $m US $m US $m US $m US $m US $m US $m (11,530) (655) 1,322 9,819 3,511 (3,244) 210 (11,530) (12,185) (10,863) (1,044) 2,467 (777) (567) Stg m Stg m Stg m Stg m Stg m Stg m Stg m (3,009) (1,296) (351) 4,093 1,210 (1,224) 373 (3,009) (4,305) (4,656) (563) 647 (577) (204) PLN m PLN m PLN m PLN m PLN m PLN m PLN m (1,239) (26) 179 603 83 314 118 (1,239) (1,265) (1,086) (483) (400) (86) 32 28 Foreign exchange rate risk – trading The Group Foreign Exchange Risk Policy, as approved by the Board, limits the Group’s exposure to discretionary foreign exchange risk.The risk to AIB Group is that adverse movements in foreign exchange rates will decrease the value of the discretionary foreign exchange portfolio. Group foreign exchange rate risk is measured as the probable maximum loss in fair value (VAR) on the aggregate open foreign exchange position for the Group’s discretionary portfolio. Foreign currency exposures in the non-trading book are transferred to the trading book where the risks are managed within mandated risk limits. The following table illustrates the VAR figures for trading foreign exchange rate risk for the years ended 31 December 2000 and 1999. 2000 € m 1999 € m Foreign exchange rate risk-trading 1 month holding period: Average High Low 31 December 2.2 3.8 0.9 1.9 1 day holding period: Average High Low 31 December 0.5 0.9 0.2 0.4 2.4 5.0 1.2 1.9 0.5 1.1 0.3 0.4 Equity risk As part of its normal activities, the Group’s subsidiary, Goodbody Stockbrokers, carries positions in equities to provide liquidity for clients. Equity risk also arises from the management of the Group’s convertible bond portfolio and the hedging of stock market linked investment products (tracker bonds). Equity risk is subject to Board approved policy and trading activity is restricted to companies that are listed on recognised Stock Exchanges.The following table illustrates the VAR figures for equity risk for the year ended 31 December 2000. Equity risk 1 month holding period: Average High Low 31 December 2000 1 day holding period: Average High Low 31 December 2000 Trading € m Non-trading € m 10.7 13.2 8.4 13.2 2.4 2.9 1.9 2.9 0.4 0.6 0.3 0.5 0.1 0.1 0.1 0.1 The use of off-balance sheet financial instruments by the Group The Group uses off-balance sheet financial instruments, including derivatives, to service customer requirements, to manage the Group’s interest and foreign exchange rate exposures and for trading purposes.The table on page 30 shows the notional amount and gross replacement cost for trading and non-trading interest rate, exchange rate and equity contracts at 31 December 2000 and 1999. Derivative instruments are contractual agreements between parties whose value reflects movements in an underlying interest rate, foreign exchange rate or share price index.While notional principal amounts are used to express the volume of these transactions, the amounts subject to credit risk are much lower.This is because most derivatives involve payments based on the net differences between the rates expressed in the contracts or other market rates. A new methodology has been introduced in Capital Markets Divison to improve the measurement of credit risk on derivative instruments.The Group’s exposure to credit risk is now measured using a simulation methodology that models the dynamic process by which 29 portfolios and prices change over time.This measure also recognises the benefits of netting and margining agreements where relevant. Where the operations of the Group are exposed to interest rate risk arising from the fact that assets and liabilities mature or reprice at different times or in differing amounts, derivatives are used to modify the repricing or maturity characteristics of assets and liabilities in a cost efficient manner.This flexibility helps the Group to achieve liquidity and risk management objectives. Similarly foreign exchange and equity derivatives are used to change the nature of the Group’s exposure to foreign exchange and equity risk as required. The values of derivative instruments can rise and fall as interest rates change.Where they are used to hedge on balance sheet assets or liabilities the changes in value are generally offset by the value changes in the hedged items. Derivative transactions entered into for hedging purposes are accounted for in accordance with the accounting treatment for the item or items being hedged. Futures contracts are designated as hedges when they reduce risk and there is high correlation between the futures contract and the item being hedged, both at inception and throughout the hedge period. Interest rate swaps, forward rate agreements and option contracts are generally used to modify the Interest rate contracts Trading Non-trading Exchange rate contracts Trading Non-trading Equity contracts Trading Non-trading 2000 Notional Gross amount replacement cost € m € m 1999 Gross replacement cost € m Notional amount € m 37,271 93,674 130,945 21,080 5,797 26,877 40 2,898 2,938 199 676 875 770 131 901 – 297 297 56,844 72,727 129,571 7,070 17,407 24,477 48 1,874 1,922 190 649 839 151 618 769 – 313 313 interest rate characteristics of balance sheet instruments and are linked to specific assets or groups of similar assets or specific liabilities or groups of similar liabilities. Where a transaction originally entered into for hedging purposes no longer represents a hedge, its value is restated at fair value and any subsequent change in value is taken to the profit and loss account immediately. The following is a brief description of the derivative instruments that account for the major part of the Group’s derivative activities: Interest rate swaps are agreements between two parties to exchange fixed and floating rate interest by means of periodic payments based upon notional principal amounts and interest rates defined in the contract. Currency swaps are interest rate swaps where one or both of the legs of the swap is payable in a different currency.They are used by both customers and Treasury to convert fixed rate assets or liabilities to floating rate or vice versa or to change the maturity or currency profile of underlying assets and liabilities as required. The Group uses interest rate swaps to manage the impact on income and shareholder value, of interest rate changes on variable and fixed rate assets, including debt securities, and fixed rate mortgage lending. In addition, swaps are used to hedge the Group’s funding costs. Forward rate agreements are individually negotiated contracts under which an interest rate is agreed for a notional principal amount covering a specified period 30 represented by the contractual amounts of these contracts. Risk weighted amounts are calculated according to rules specified by the Central Bank of Ireland, taking into account the nature of the instrument and the risk classification of the counterparty. The Group uses the same credit control and risk management policies in undertaking all off-balance sheet commitments as it does for on balance sheet lending, including counterparty credit approval, limit setting and monitoring procedures. In addition, in relation to derivative instruments, the Group’s exposure to market risk is controlled within the risk limits in the Group’s interest rate, foreign exchange and equity risk policies and is further constrained by the risk parameters incorporated in the Group’s Derivatives Policy, as approved by the Board. The Group recognises that certain types of derivatives can give rise to risks that are difficult to measure and control. In order to avoid these risks the Group places clear restrictions on taking positions in such complex derivative instruments. in the future. At the settlement date, if interest rates for the future period are higher than the agreed rate, the seller pays the buyer the difference between the contract rate and the rate prevailing. If interest rates are lower, the buyer pays the seller.These contracts are used by customers to fix the rates for future short-term borrowing or deposits. Financial futures are exchange traded contracts to buy or sell a standardised amount of the underlying item at an agreed price on a set date. Interest rate futures contracts are available in all of the major currencies. Foreign currency and equity index futures are also available. Financial futures are used to hedge the Group’s exposures arising from the sale of forward rate agreements or guaranteed equity products.They are also used to manage the interest rate risks arising in the Group’s debt securities portfolio. Options are contracts that give the purchaser the right, but not the obligation to buy or sell an underlying asset eg bond, foreign currency or equity index, at a certain price on or before an agreed date.These provide more flexible means of managing exposure to changes in interest rates, exchange rates and equity index levels. Interest rate caps/floors are portfolios of options that give the buyer the ability to fix the maximum or minimum rate of interest.There is no facility to deposit or draw down funds, instead the seller pays to the buyer the amount by which the market rate exceeds or is less than the cap rate or floor rate respectively. A combination of an interest rate cap and floor is known as an interest rate collar. The Group uses interest rate caps in conjunction with swaps in managing the interest rate risks arising in its fixed rate mortgage lending activities. Interest rate options are also used to manage the risk in the Group’s debt securities portfolio. Foreign exchange rate options are used to hedge income and expenses arising from non-euro denominated assets and liabilities and also exposures arising from customer transactions. Forward foreign exchange contracts are agreements to buy or sell a specified quantity of foreign currency, usually on a specified date, at an agreed exchange rate. These contracts are used by customers to fix the exchange rates for future foreign exchange transactions.They are also used by the Group to hedge non-euro income and expenses and to manage the impact of exchange rates on the reported value of foreign earnings. In respect of contingent liabilities and commitments to extend credit, the Group’s maximum exposure to credit loss in the event of non-performance by the other party where all counterclaims, collateral or security prove valueless, is 31 Report of the Directors for the year ended 31 December 2000 The Directors of Allied Irish Banks, p.l.c. present their report and the audited accounts for the year ended 31 December 2000. A Statement of the Directors’ responsibilities in relation to the Accounts appears on page 112. Results The Group profit attributable to the ordinary shareholders amounted to € 762 million and was arrived at as shown in the Consolidated Profit and Loss Account on pages 42 and 43. Dividend An interim dividend of EUR 13.50c per ordinary share, amounting to € 117 million, was paid on 27 September 2000. It is recommended that a final dividend of EUR 25.25c per ordinary share, amounting to € 221 million, be paid on 26 April 2001, making a total distribution of EUR 38.75c per ordinary share for the year.The balance of profit to be transferred to the Profit and Loss Account amounts to € 357 million. Capital Information concerning allotments of shares under the Dividend Reinvestment Plan, the Approved Employees’ Profit Sharing Schemes, the Allfirst Stock Option Plan and the Executive Share Option Scheme is shown in Note 44 on pages 82 and 83. At the 2000 Annual General Meeting, shareholders renewed authority for the Company, or any subsidiary, to make market purchases of up to 50 million ordinary shares of the Company, subject to the terms and conditions set out in the relevant resolution. Accounting policies There have been no changes in accounting policies. Review of activities The Statement by the Chairman on pages 4 and 5 and the Review by the Group Chief Executive on pages 8 to 31 contain a review of the development of the business of the Group during the year, of recent events, and of likely future developments. Directors The following Board changes occurred with effect from the dates shown: – Mr Dermot Gleeson was appointed a Non-Executive Director on 16 May 2000; – Mr Derek A Higgs was appointed a Non-Executive Director on 14 November 2000; – Mr Denis J Murphy retired as a Non-Executive Director on 31 December 2000. In accordance with the Articles of Association, Mr Gleeson and Mr Higgs retire at the 2001 Annual General Meeting and, being eligible, offer themselves for re-appointment. Mr Adrian Burke, Mr Don Godson and Mr Gary Kennedy retire by rotation at the 2001 Annual General Meeting and, being eligible, offer themselves for re-appointment. The names of the Directors appear on pages 6 and 7, together with a short biographical note on each Director. Directors’ and Secretary’s Interests in the Share Capital The interests of the Directors and Secretary in the share capital of the Company are shown in Note 53 on page 100. Substantial Interests in Share Capital The following substantial interests in the Ordinary Share Capital had been notified to the Company at 20 February 2001: Bank of Ireland Asset Management Limited 3.3% The Capital Group Companies, Inc. 7.5% At the same date, subsidiaries of the Company had aggregate interests in 4.7% of the Ordinary Share Capital.With the exception of 5.6 million shares (0.6%) held by a subsidiary (see Note 48), these shares represented non-beneficial interests; none of the clients for whom these shares, the shares of Bank of Ireland Asset Management Limited, and the shares of The Capital Group Companies, Inc., are held had a beneficial interest in 3% or more of the Ordinary Share Capital. An analysis of shareholdings is shown on page 124. 32 Auditors The auditors, PricewaterhouseCoopers, have signified their willingness to continue in office under Section 160 of the Companies Act, 1963. Lochlann Quinn Chairman Thomas P Mulcahy Group Chief Executive 20 February 2001 Corporate Governance The Directors’ Corporate Governance statement appears on pages 34 to 37. Safety, Health and Welfare of Employees It is the Company’s policy to ensure the safety, health and welfare of its employees while at work, and of visitors to its premises, by maintaining safe places and systems of work.The Company is committed to facilitating this policy by an open, consultative process with its employees. Monitoring procedures ensure the maintenance of standards and compliance with legislative requirements. A Safety Statement, prepared in accordance with the requirements of the Safety, Health and Welfare at Work Act, 1989, has been circulated to all premises; the Statement was revised during the year and will be circulated to all premises in 2001. During 2000, particular emphasis was focused on accident reporting and accident prevention in the workplace. Branches outside the State The Company has established branches, within the meaning of EU Council Directive 89/666/EEC, in the United Kingdom and the United States of America. 33 Corporate Governance Statement The Board is committed to the highest standards of corporate governance.This Statement explains how the Company has applied the Principles set out in ‘The Combined Code: Principles of Good Governance and Code of Best Practice’ (the ‘Code’), adopted by the Irish Stock Exchange and the London Stock Exchange, and reports on compliance with its Provisions. Directors The Board The importance of the Company being headed by an effective Board to lead and control the Company and the Group is fully recognised.To that end, there is a comprehensive range of matters specifically reserved for decision by the Board; at a high level this includes: – determining the Company’s strategic objectives and policies; – appointing the Chairman and Group Chief Executive; – monitoring progress towards achievement of the Company’s objectives and compliance with its policies; – approving annual operating and capital budgets, major acquisitions and disposals, and risk management policies. A scheduled Board meeting is held each month, except August. Additional meetings are held as required.The Directors are provided in advance of each Board meeting with relevant documentation and information to enable them to discharge their duties. Any additional information requested by Directors is readily provided. The Directors have access to the advice and services of the Company Secretary, who is responsible for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. There is a procedure in place to enable Directors to take independent professional advice, at the Company’s expense. At 31 December 2000, the Board comprised 9 Non-Executive Directors and 5 Executive Directors. All Directors bring independent judgement to bear on issues of strategy, performance, resources, and standards of conduct. All Non-Executive Directors are considered to be independent of Management and free from any business or other relationship that could materially interfere with the exercise of their independent judgement. In these circumstances, it is not considered necessary to identify one senior Non-Executive Director to whom concerns can be conveyed, as suggested by the Code. Shareholders who wish to raise issues are free to contact any of the Non-Executive Directors. The role of the Chairman is separate from the role of the Group Chief Executive, with clearly defined responsibilities attaching to each. It is the policy of the Board that a significant majority of the Directors (ie up to two-thirds) should be Non-Executive. Accordingly, Non-Executive Directors are appointed so as to maintain an appropriate balance and to ensure a sufficiently wide and relevant mix of backgrounds, skills and experience to provide strong and effective leadership and control for the Group. The names of the Directors, and their biographical notes, appear on pages 6 and 7. Non-Executive Directors appointed since 1990 are appointed for an initial period of six years, which may be extended for a further period of three years. Following co-option, Directors must retire at the next Annual General Meeting and may go before the shareholders for re-election. Not more than one-third of the Directors are required by the Articles of Association to retire from office at each Annual General Meeting.This means that, in effect, Directors are re-elected every three years. The Code recommends that all Directors should submit themselves for re-election at regular intervals and at least every three years. As the Articles’ provision in this regard could lead, in certain circumstances, to an interval of four years between a Director’s appointment and re-appointment, it is intended, at the next general revision of the Articles, to propose an amendment to bring the relevant provision fully into line with the Code’s recommendation. There is an induction process for new Directors. Its content varies as between Executive and Non-Executive Directors; in respect of the latter, the induction 34 is designed to familiarise Non- Executive Directors with the Group and its operations, and comprises principally a programme of meetings with the Heads of Divisions and the senior management of businesses and support functions, and briefings on the Company’s strategic and operational plans. All Directors on appointment are furnished with a booklet entitled ‘Responsibilities, Functions and Operations of the Board and Code of Conduct for Directors’. Board Committees The Board is assisted in the discharge of its duties by Board Committees, whose purpose is to consider, in greater depth than is practicable at Board Meetings, matters for which the full Board retains responsibility.The composition of Board Committees is reviewed annually by the Board. A description of these Committees, each of which operates under terms of reference or guidelines approved by the Board, and their membership, is given below.The minutes of all meetings of Board Committees are circulated to all Directors, for information, with their Board papers, and are formally noted by the Board.This provides an opportunity for Directors to seek additional information or to comment and express views on issues being addressed at Committee level. Audit Committee Members: Mr Don Godson, Chairman, Mr Adrian Burke, Ms Carol Moffett (to 31 May, 2000), Mr Dermot Gleeson (from 1 June, 2000). The Audit Committee meets five/six times each year.The auditors are invited to attend all meetings, along with the Group Chief Executive, the Group Financial Director, the Group Treasurer and the Group Internal Auditor.The Audit Committee reviews the Group’s annual and interim accounts; the scope of the audit and the findings, conclusions and recommendations of the auditors; the nature and extent of non-audit services provided by the auditors; and the effectiveness of internal controls.The Committee is responsible for ensuring the cost-effectiveness of the audit and for confirming the independence of the auditors and the Group Internal Auditor, each of whom it meets separately once each year, in confidential session, in the absence of Management. Both the auditors and the Group Internal Auditor have unrestricted access to the Chairman of the Audit Committee. A written report is submitted annually to the Board showing the issues considered by the Committee. Nomination and Remuneration Committee Members: Mr Lochlann Quinn, Chairman, Mr Adrian Burke, Mr John B McGuckian. The Nomination and Remuneration Committee meets five/six times each year.The Committee is responsible for recommending candidates to the Board for appointment as Directors. Its remit also includes, inter alia, recommending to the Board appropriate remuneration policies, and determining, under advice to the Board, the specific remuneration packages of the Executive Directors. Social Affairs Committee Members: Mr Denis J Murphy, Chairman (to 31 December, 2000), Ms Carol Moffett, Chairman (from 1 January, 2001), Mr Michael Buckley, Mr Padraic M Fallon. The Social Affairs Committee meets quarterly. Its role, as defined in guidelines approved by the Board, is to assist the Company in discharging its social responsibilities.This includes developing corporate-giving and sponsorship policies and reviewing responses to a range of social responsibility issues. Directors’ Remuneration The Report on Directors’ Remuneration and Interests appears on pages 96 to 101. Relations with Shareholders The Company recognises the importance of communicating with its shareholders.To that end, the Company circulates each year, along with the statutory Report and Accounts, a short-form, user- friendly booklet explaining features of the Company’s performance in the previous year. This focuses on how the profit was utilised; profit and dividend growth over the previous five 35 Corporate Governance Statement (continued) years; the need for strong capital resources; running costs; risk management; and other issues. As a further step in enhancing the communication process, interim trading statements are issued to the Stock Exchanges twice-yearly. The Company also uses its internet website (www.aibgroup.com) to communicate with investors.The Investor Relations home page is updated with the Company’s Stock Exchange releases and formal presentations to analysts and investors, as they are made. The site also contains the Company’s most recent Annual and Interim Reports, together with the Annual Report on Form 20-F when filed with the US Securities and Exchange Commission. All ordinary shareholders are encouraged to attend the Annual General Meeting (‘AGM’) and to participate in the proceedings. It is practice to give shareholders an update on the Group’s performance, and developments of interest, by way of video presentation. Separate resolutions are proposed on each substantially separate issue.The Chairman of the Audit Committee is available to answer questions at the AGM. The proportion of proxy votes lodged for and against each resolution is indicated; this demonstrates what the voting position would be if the votes of shareholders not in attendance at the AGM were taken into account. It is usual for all Directors to attend the AGM and to be available to meet shareholders, both before and after the Meeting. A Shareholders’ Help Desk facility is available to shareholders attending. In accordance with company law, the Notice of the AGM and related papers are required to be sent to shareholders not less than 21 days before the Meeting.The Code suggests that these papers should be sent to shareholders ‘at least 20 working days before the meeting’. In respect of the 2001 AGM, the Notice was despatched 30 calendar days (20 working days) before the Meeting. The Company holds regular meetings with its principal institutional shareholders and with financial analysts and brokers.These meetings involve the Group Chief Executive, the Group Financial Director, the Chief Financial Officer and the Head of Investor Relations, and are governed by prescribed procedures to ensure that price-sensitive information is not divulged. Accountability and Audit Accounts and Directors’ Responsibilities The accounts and other information presented in this Report and Accounts are consistent with the Code Principle requiring the presentation of ‘a balanced and understandable assessment of the Company’s position and prospects’.The Statement concerning the responsibilities of the Directors in relation to the accounts appears on page 112. 36 Going Concern The accounts continue to be prepared on a going concern basis, as the Directors are satisfied that the Company and the Group as a whole have the resources to continue in business for the foreseeable future. In forming this view, the Directors have reviewed the Group’s budget for 2001. Internal Control The Directors acknowledge that the Board is responsible for the Group’s system of internal control and for reviewing its effectiveness. Guidance (‘Internal Control: Guidance for Directors on the Combined Code’) has been issued by the Irish Stock Exchange and the London Stock Exchange to assist Directors in complying with the Code’s requirements in respect of internal control.That Guidance states that systems of internal control are designed to manage rather than eliminate the risk of failure to achieve business objectives, and can provide only reasonable and not absolute assurance against material misstatement or loss. The Group’s system of internal control includes: – a clearly defined management structure, with defined lines of authority and accountability; a comprehensive annual budgeting and financial reporting system, which incorporates clearly defined and communicated common accounting policies and financial control procedures, including those relating to authorisation limits; capital – Board, have been in place for the year under review and up to the date of the approval of the Annual Report and Accounts.Those processes are regularly reviewed by the Board, and accord with the above-mentioned Guidance. The settlement with the Irish Revenue Commissioners in relation to Deposit Interest Retention Tax (‘DIRT’), referred to in Note 5 on page 51, related to the period April 1986 to April 1999, and principally to the period prior to April 1992. As the Company is satisfied that it had already taken all reasonable steps to ensure compliance with the requirements in relation to the administration of DIRT, no material internal control aspects required to be dealt with in that regard in the year ended 31 December 2000. The Directors confirm that, with the assistance of reports from the Audit Committee and Management, they have reviewed the effectiveness of the Group’s system of internal control for the year ended 31 December 2000. Compliance Statement The Company has complied throughout the year ended 31 December 2000 with the Provisions of the Code, except where otherwise indicated. expenditure and investment procedures; physical and computer security; and business continuity planning; the Audit Committee, which receives reports on various aspects of control, reviews the Group’s statutory accounts and other published financial statements and information, and ensures that no restrictions are placed on the scope of the statutory audit or on the independence of the internal audit function. The Audit Committee reports to the Board on these matters, compliance with relevant laws and regulations, and related matters; appropriate policies and procedures relating to capital management, asset and liability management (including interest rate, exchange rate risk and liquidity management), credit risk management, and operational risk management; regular review by the Board of overall strategy, business plans, variances against operating and capital budgets and other performance data; an internal audit function. – – – – In addition, the Group has a well-developed structure and comprehensive on-going processes for identifying, evaluating and managing the significant credit, market and operational risks faced by the Group, as described in pages 20 to 31.That structure and those processes, which include comprehensive half-yearly reports to the Audit Committee and 37 Financial contents 39 42 44 45 46 47 47 47 48 Accounting policies Consolidated profit and loss account Consolidated balance sheet Balance sheet Allied Irish Banks, p.l.c. Consolidated cash flow statement Statement of total recognised gains and losses Reconciliation of movements in shareholders’ funds: equity interests Note of historical cost profits and losses Notes to the accounts 112 Statement of Directors’ responsibilities in relation to the Accounts 113 Auditors’ report 115 Accounts in sterling, US dollars and Polish zloty 116 Five year financial summary 38 Accounting policies The accounts on pages 42 to 111 have been prepared under the historical cost convention, as modified by the revaluation of certain properties and investments, and comply with the requirements of Irish statute comprising the Companies Acts 1963 to 1999 and the European Communities (Credit Institutions: Accounts) Regulations, 1992, and with accounting standards generally accepted in Ireland.The preparation of accounts requires management to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Since management’s judgement involves making estimates concerning the likelihood of future events, the actual results could differ from those estimates. The effect on the Group’s consolidated net income and ordinary shareholders’ equity had US Generally Accepted Accounting Principles (‘US GAAP’) been applied in the preparation of these accounts is set out in note 62. The principal accounting policies adopted by the Group are as follows: Basis of consolidation The Group accounts include the accounts of Allied Irish Banks, p.l.c. (the parent company) and its subsidiary undertakings made up to the end of the financial year. Details of principal subsidiaries are given in note 30. In order to reflect the different nature of the shareholders’ and policyholders’ interests in the long-term assurance business, the value of long-term assurance business attributable to shareholders and the long-term assurance assets and liabilities attributable to policyholders are classified under separate headings in the consolidated balance sheet. Interests in associated undertakings The attributable share of income of associated undertakings, based on accounts made up to the end of the financial year, is included in the consolidated profit and loss account using the equity method of accounting. Interests in associated undertakings are included in the consolidated balance sheet at the Group’s share of the book value of the net assets of the undertakings concerned less provisions for any permanent diminution in value. Income and expense recognition Interest income and expense is recognised on an accruals basis. Fees which, in effect, increase the yield on transactions are spread over the lives of the underlying transactions on a level yield basis. Fees and commissions received for services provided are recognised when earned. Expenses are, in general, charged to profit and loss account as accrued. However, in some cases, expenses incurred in the setting up of transactions are deferred and are charged to profit and loss account over the lives of the transactions. Provisions for bad and doubtful debts Specific provisions are made as a result of a detailed appraisal of risk assets. In addition general provisions are carried to cover risks which, although not specifically identified, are present in any portfolio of bank advances.The total provisions for bad and doubtful debts (note 25) is deducted in arriving at the balance sheet figures of loans and advances to banks and to customers, as appropriate. Provisions made during the year, less existing provisions no longer required and recoveries of bad debts previously written off, are charged against profits. Interest is not taken to profit where recovery is doubtful. Debt securities Premiums and discounts on Government and other debt securities having a fixed redemption date, which are not held for trading purposes, are amortised over the period from date of purchase to redemption and an appropriate proportion is taken to profit and loss account each year and included in interest income. Securities held for investment purposes are stated in the balance sheet at amortised cost, less provision for any permanent diminution in value. Securities held for hedging purposes are included in the balance sheet at a valuation, the basis of which is consistent with that being applied to the underlying transactions. Securities held for both investment and hedging purposes are classified as financial fixed assets in the balance sheet. Securities held for trading purposes are included in the balance sheet at market value. Profits and losses on disposal of securities held for trading and investment purposes are recognised immediately in the profit and loss account.The realised and unrealised profits and losses on trading securities are included with dealing profits, while the profits and losses on disposal of securities held for investment purposes are included with other operating income. Profits and losses on disposal of securities held for hedging purposes are amortised over the lives of the underlying transactions, and included in net interest income. Finance leases Income from leasing transactions is apportioned over the primary leasing period in proportion to the monthly balance of finance outstanding using the investment period method. Government grants in respect of these assets are credited to profit and loss account on the same basis. 39 Accounting policies (continued) Hire purchase and instalment finance Interest and charges on hire purchase and on instalment credit agreements are taken to profit and loss account by the sum of the digits method over the period of the agreements after deducting the costs of setting up the transactions. Securitised assets Securitised assets are included in the balance sheet at their gross amount less non-returnable proceeds received on securitisation, where the Group has retained significant rights to benefits and exposure to risks, but where the Group’s maximum loss is limited to a fixed monetary amount.The contribution from the securitised assets is included in other operating income. Operating leases Rentals are charged to profit and loss account in equal instalments over the terms of the leases. Depreciation Up to 31 December 1999, freehold and long leasehold properties were not depreciated. Since 1 January 2000, with the introduction of Financial Reporting Standard 15 ‘Tangible Fixed Assets’, freehold and long leasehold properties are written off over their estimated useful lives of 50 years.The impact of this change on the current years depreciation charge was € 9 million. Leasehold properties with less than 50 years unexpired are written off by equal annual instalments over the remaining terms of the leases. Depreciation on equipment is provided on a straight line basis at rates which will write off these assets over their expected useful lives, which for furnishings are 10 years and for computers, motor vehicles and other equipment are 3 to 10 years. Expenditure incurred to date amounting to € 29 million on the development of computer systems has been capitalised and included under equipment.This expenditure is written off over a maximum period of 5 years and to date € 18 million has been charged to the profit and loss account. actuaries (note 12). The costs of the Group’s defined contribution schemes are charged to the profit and loss account for the period in which they are incurred. Discounting of future commitments The Group provided in the year ended 31 December 1993, on a present value basis, for the cost of its future commitments arising under the agreements reached in 1985 and 1992 in relation to the funding of Icarom plc (under Administration), formerly The Insurance Corporation of Ireland plc. The future commitments under the 1985 and 1992 agreements were each discounted to their present value by applying an interest rate derived from the weighted average of the yield to maturity of Irish Government securities maturing on the same dates as the future commitments.The Group’s policy is not to revise these discount rates for future changes in interest rates.The commitments are deducted from the present value provisions as they mature and interest at the relevant discount rates is charged annually to interest expense and added to the present value provisions. The present value provisions are included in other liabilities (note 38). Equity shares Equity shares held as financial fixed assets are included in the balance sheet at cost, less provision for any permanent diminution in value. Profits and losses on disposal of equity shares held as financial fixed assets are recognised immediately in the profit and loss account. Equity shares held for trading purposes are marked to market with full recognition in the profit and loss account of changes in market value. Pensions and other post-retirement benefits It is the Group’s policy to provide for defined benefit pension schemes and other post-retirement benefits at rates recommended by independent qualified Deferred taxation Deferred taxation is accounted for in respect of timing differences between the profits as stated in the accounts and as computed for taxation purposes using the liability method where, in the opinion of the directors, there is a reasonable probability that a tax liability or asset will arise in the foreseeable future.The calculation of the deferred taxation asset or liability is based on the taxation rates expected to be applicable when the liabilities or assets are anticipated to crystallise. Foreign currencies Assets and liabilities denominated in foreign currencies and commitments for the purchase and sale of foreign currencies are translated at appropriate spot or forward rates of exchange ruling on the balance sheet date. Profits and losses arising from these translations and from trading activities are included as appropriate, having regard to the nature of the transactions, in other operating income or dealing profits. In the case of net investments in foreign subsidiaries, associated undertakings and branches, exchange adjustments arising from the retranslation of these investments, net of hedging profits and losses, are included as appropriate in the exchange translation adjustments on reserves (note 46) and the profit and loss account (note 47). Profits and losses arising in foreign currencies have been translated at average rates for the year.The adjustment arising on the retranslation of profits and losses to balance sheet rates is included in the exchange translation adjustments on the profit and loss account (note 47). 40 valuation of the investment in business on policies in force together with the net tangible assets of the business.The value is determined on the advice of a qualified actuary on an after tax basis using a discount rate of 12% and is included separately in the consolidated balance sheet. Movements in the value placed on the Group’s long-term assurance business attributable to shareholders, grossed up for taxation, are included in other operating income. Fiduciary and trust activities Allied Irish Banks, p.l.c. and some subsidiary undertakings act as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, investment trusts, pension schemes and unit trusts.These assets are not consolidated in the accounts as they are not assets of Allied Irish Banks, p.l.c. or its subsidiary undertakings. Fees and commissions earned in respect of these activities are included in the profit and loss account. Capital instruments Issue expenses of capital instruments are deducted from the proceeds of issue and, where appropriate, are amortised to profit and loss account so that the finance costs are allocated to accounting periods at a constant rate based on the carrying amount of the instruments.The issue expenses amortised to profit and loss account are subsequently transferred to the share premium account. Intangible assets and goodwill Purchased goodwill is the excess of cost over the fair value of the Group’s share of net assets acquired. In accordance with Financial Reporting Standard 10 ‘Goodwill and Intangible Assets’, purchased goodwill and intangible assets arising on acquisition of subsidiary and associated undertakings, occurring after 1 January 1998, are capitalised as assets on the balance sheet and amortised to profit and loss account over their estimated useful economic lives subject to a maxiumum period of 20 years. Goodwill arising on acquisitions of subsidiary and associated undertakings prior to 31 December 1997 has been written off to the profit and loss account in the year of acquisition. Purchased goodwill, previously written off, is charged in the profit and loss account on subsequent disposal of the business to which it relates. Derivatives The Group uses derivatives, such as currency and interest rate swaps, options, forward rate agreements and financial futures, for both trading and hedging purposes (note 50).The accounting treatment for these derivative instruments is dependent on whether they are entered into for trading or hedging purposes. AIB Group maintains trading positions in a variety of financial instruments including derivatives. Most of these positions are a result of activity generated by corporate customers while others represent trading decisions of the Group’s derivative and foreign exchange traders with a view to generating incremental income.Trading instruments are recognised in the accounts at fair value with the adjustment arising included in other assets and other liabilities, as appropriate, in the consolidated balance sheet. Gains and losses arising from trading activities are included in dealing profits in the profit and loss account using the mark to market method of accounting. Derivative transactions entered into for hedging purposes are recognised in the accounts in accordance with the accounting treatment of the underlying transaction or transactions being hedged. To qualify for hedge accounting the derivative must be designated as a hedge at its inception and must remain effective as a hedge throughout the hedge period. Derivatives that are not designated as hedges are classified as held for trading purposes. Gains and losses arising from hedging activities are amortised to net interest income over the lives of the underlying transactions. Futures contracts are designated as hedges when they reduce risk and there is high correlation between the futures contract and the item being hedged, both at inception and throughout the hedge period. Interest rate swaps, forward rate agreements and option contracts are generally used to modify the interest rate characteristics of balance sheet instruments and are linked to specific assets or groups of similar assets or specific liabilities or groups of similar liabilities. Upon early termination of these derivative financial instruments, any realised gain or loss is deferred and amortised over the life of the original hedge, as long as the designated assets or liabilities remain.Where a transaction originally entered into for hedging purposes no longer represents a hedge, its value is restated at fair value and any change in value is taken to the profit and loss account immediately. Long-term assurance business The value placed on the Group’s long-term assurance business attributable to shareholders represents a prudent 41 Consolidated profit and loss account for the year ended 31 December 2000 Interest receivable: Interest receivable and similar income arising from debt securities and other fixed income securities Other interest receivable and similar income Less: interest payable Deposit interest retention tax Net interest income Dividend income Fees and commissions receivable Less: fees and commissions payable Dealing profits Other operating income Other income Total operating income Before exceptional item Deposit interest retention tax Administrative expenses: Staff and other administrative expenses Integration costs in continuing businesses Depreciation and amortisation Total operating expenses Group operating profit before provisions Before exceptional item Deposit interest retention tax Provisions for bad and doubtful debts Provisions for contingent liabilities and commitments Amounts (written back)/written off fixed asset investments Group operating profit – continuing activities Before exceptional item Deposit interest retention tax Income from associated undertakings Profit on disposal of property Profit on disposal of business Group profit on ordinary activities before taxation (carried forward) Before exceptional item Deposit interest retention tax Notes 2000 € m 1999 € m 1998 € m 3 4 5 6 7 8 5 9(a) 9(b) 10 5 25 11 5 13 5 1,140 3,987 (3,105) (113) 1,909 6 1,101 (108) 103 202 1,304 3,213 3,326 (113) 1,778 – 1,778 171 1,949 1,264 1,377 (113) 133 2 (1) 1,130 1,243 (113) 3 5 – 1,138 1,251 (113) 833 3,009 (2,072) – 1,770 2 909 (93) 74 160 1,052 2,822 2,822 – 1,491 – 1,491 127 1,618 1,204 1,204 – 85 2 5 1,112 1,112 – 3 2 15 1,132 1,132 – 772 3,194 (2,357) – 1,609 1 777 (84) 69 217 980 2,589 2,589 – 1,313 20 1,333 109 1,442 1,147 1,147 – 126 1 7 1,013 1,013 – 4 32 – 1,049 1,049 – 42 Group profit on ordinary activities before taxation (brought forward) Taxation on ordinary activities Impact of phased reduction in Irish corporation tax rates on deferred tax balances Group profit on ordinary activities after taxation Equity and non-equity minority interests in subsidiaries Dividends on non-equity shares Group profit attributable to the ordinary shareholders of Allied Irish Banks, p.l.c. Dividends on equity shares Transfer to reserves Profit retained Earnings per € 0.32 ordinary share – basic Earnings per € 0.32 ordinary share – adjusted Earnings per € 0.32 ordinary share – diluted Notes 15 16 17 18 46 19&47 20(a) 20(b) 20(c) 2000 € m 1,138 318 – 318 820 38 20 58 762 335 70 405 357 89.0c 104.0c 88.1c 1999 € m 1,132 327 – 327 805 28 16 44 761 288 45 333 428 89.5c 90.5c 88.0c 1998 € m 1,049 315 55 370 679 29 17 46 633 239 32 271 362 74.7c 81.1c 73.7c L Quinn, Chairman.T P Mulcahy, Group Chief Executive. G Kennedy, Group Financial Director.W M Kinsella, Secretary. The movements in the Group profit and loss account are shown in note 47. 43 Consolidated balance sheet 31 December 2000 Assets Cash and balances at central banks Items in course of collection Central government bills and other eligible bills Loans and advances to banks Loans and advances to customers Securitised assets Less: non-returnable proceeds Debt securities Equity shares Interests in associated undertakings Intangible fixed assets Tangible fixed assets Own shares Other assets Prepayments and accrued income Long-term assurance business attributable to shareholders Long-term assurance assets attributable to policyholders Liabilities Deposits by banks Customer accounts Debt securities in issue Other liabilities Accruals and deferred income Provisions for liabilities and charges Deferred taxation Subordinated liabilities Equity and non-equity minority interests in subsidiaries Shareholders’ funds: non-equity interests Called up ordinary share capital Share premium account Reserves Profit and loss account Shareholders’ funds: equity interests Long-term assurance liabilities to policyholders Memorandum items Contingent liabilities: Acceptances and endorsements Guarantees and assets pledged as collateral security Other contingent liabilities Commitments: Commitments arising out of sale and option to resell transactions Other commitments Notes 2000 € m 1999 € m 938 1,116 297 4,193 45,880 933 (767) 166 18,986 412 8 466 1,127 177 1,708 1,835 238 77,547 2,141 79,688 12,478 48,437 4,295 3,079 1,665 155 357 2,249 272 264 281 1,620 401 1,994 4,296 77,547 2,141 79,688 147 4,027 1,089 5,263 257 15,855 16,112 1,119 916 718 3,831 39,171 598 (473) 125 15,108 297 22 468 1,039 123 1,071 1,195 166 65,369 1,701 67,070 8,608 42,335 4,298 2,360 1,294 125 242 1,984 227 245 277 1,594 330 1,450 3,651 65,369 1,701 67,070 143 2,835 933 3,911 188 14,118 14,306 21 22 23 26 27 28 29 31 32 33 34 34 35 36 37 38 39 40 41 42 43 44 45 46 47 34 49 49 L Quinn, Chairman.T P Mulcahy, Group Chief Executive. G Kennedy, Group Financial Director.W M Kinsella, Secretary. 44 Balance sheet Allied Irish Banks, p.l.c. 31 December 2000 Assets Cash and balances at central banks Items in course of collection Central government bills and other eligible bills Loans and advances to banks Loans and advances to customers Debt securities Equity shares Shares in Group undertakings Tangible fixed assets Other assets Deferred taxation Prepayments and accrued income Liabilities Deposits by banks Customer accounts Debt securities in issue Other liabilities Accruals and deferred income Provisions for liabilities and charges Subordinated liabilities Shareholders’ funds: non-equity interests Called up ordinary share capital Share premium account Reserves Profit and loss account Shareholders’ funds: equity interests Memorandum items Contingent liabilities: Acceptances and endorsements Guarantees and assets pledged as collateral security Other contingent liabilities Commitments: Other commitments Notes 2000 € m 1999 € m 412 177 85 10,042 22,207 12,193 28 1,457 531 225 51 1,507 48,915 20,391 21,299 392 843 1,296 17 1,501 264 281 1,620 132 879 2,912 48,915 130 2,428 515 3,073 379 207 464 7,815 18,674 9,124 36 1,368 507 293 56 922 39,845 15,235 18,000 704 877 943 16 1,294 245 277 1,594 131 529 2,531 39,845 113 1,633 515 2,261 6,881 5,907 21 22 23 27 28 30 32 40 35 36 37 38 39 41 43 44 45 46 47 49 49 L Quinn, Chairman.T P Mulcahy, Group Chief Executive. G Kennedy, Group Financial Director.W M Kinsella, Secretary. 45 Consolidated cash flow statement for the year ended 31 December 2000 Net cash inflow from operating activities Dividends received from associated undertakings Returns on investments and servicing of finance Equity dividends paid Taxation Capital expenditure Acquisitions and disposals Financing (Decrease)/increase in cash Reconciliation of Group operating profit to net cash inflow from operating activities Group operating profit Increase in prepayments and accrued income Increase in accruals and deferred income Provisions for bad and doubtful debts Provisions for contingent liabilities and commitments Amounts (written back)/written off fixed asset investments Increase in other provisions Depreciation and amortisation Amortisation of own shares Profit on disposal of business Interest on subordinated liabilities Profit on disposal of debt securities and equity shares Averaged gains on debt securities held for hedging purposes Profit on disposal of associated undertakings Amortisation of (discounts)/premiums on debt securities held as financial fixed assets Increase in long-term assurance business Net cash inflow from trading activities Net increase in deposits by banks Net increase in customer accounts Net increase in loans and advances to customers Net (increase)/decrease in loans and advances to banks Decrease/(increase) in central government bills Net (increase)/decrease in debt securities and equity shares held for trading purposes Net (increase)/decrease in items in course of collection Net (decrease)/increase in debt securities in issue Net increase in notes in circulation (Increase)/decrease in other assets Increase in other liabilities Effect of exchange translation and other adjustments Net cash inflow from operating activities 46 Notes 52(a) 52(b) 52(c) 52(d) 52(e) 52(f) 2000 € m 2,433 – (184) (228) (199) (3,004) 2 164 (1,016) 2000 € m 1,130 (607) 355 133 2 (1) 11 171 1 – 155 (23) (16) (5) (2) (72) 1,232 3,621 4,854 (5,812) (1,015) 445 (710) (160) (266) 23 (595) 674 142 1,201 2,433 1999 € m 3,191 2 (108) (215) (237) (1,405) (391) 640 1,477 1999 € m 1,112 (20) 351 85 2 5 1 127 – 15 95 (31) (18) (3) 13 (47) 1,687 479 2,545 (5,398) 2,748 (414) (542) 192 1,912 16 (289) 126 129 1,504 3,191 1998 € m 3,721 3 (110) (176) (204) (2,774) 22 67 549 1998 € m 1,013 (279) 41 126 1 7 – 109 – – 82 (79) (15) (14) (15) (33) 944 2,602 2,977 (4,111) 698 (44) 379 (175) 37 4 333 127 (50) 2,777 3,721 Statement of total recognised gains and losses Group profit attributable to the ordinary shareholders Unrealised surplus on revaluation of property (note 32) Currency translation differences on foreign currency net investments Total recognised gains relating to the year 2000 € m 762 – 113 875 1999 € m 761 – 281 1,042 Reconciliation of movements in shareholders’ funds: equity interests Group profit attributable to the ordinary shareholders Dividends on equity shares Unrealised surplus on revaluation of property (note 32) Other recognised gains/(losses) relating to the year New ordinary share capital subscribed Goodwill written back Ordinary shares issued in lieu of cash dividend Net addition to shareholders’ funds: equity interests Opening shareholders’ funds: equity interests Closing shareholders’ funds: equity interests 2000 € m 762 335 427 – 113 27 – 78 645 3,651 4,296 1999 € m 761 288 473 – 281 28 1 39 822 2,829 3,651 Note of historical cost profits and losses Reported profits on ordinary activities before taxation would not be materially different if presented on an unmodified historical cost basis. 1998 € m 633 141 (60) 714 1998 € m 633 239 394 141 (60) 26 – 29 530 2,299 2,829 47 Notes to the accounts 1 Turnover Turnover is not shown as it resulted in the main from the business of banking. 2 Segmental information AIB Bank division € m USA division € m Capital Markets division € m Poland division € m Group € m Operations by business segments(1) Net interest income before exceptional item Other income 1,056 508 Total operating income before exceptional item 1,564 816 Total operating expenses 56 Provisions Group operating profit before exceptional item Income from associated undertakings Profit on disposals Group profit on ordinary activities before exceptional item Deposit interest retention tax Group profit on ordinary activities before taxation Balance sheet Total loans Total deposits Total assets Total risk weighted assets Net assets Operations by business segments(1) Net interest income Other income Total operating income Total operating expenses Provisions Group operating profit Income from associated undertakings Profit on disposals Group profit on ordinary activities before taxation Balance sheet Total loans Total deposits Total assets Total risk weighted assets Net assets 48 692 – 4 696 23,112 25,019 29,607 21,133 1,508 AIB Bank division € m 932 422 1,354 724 45 585 – 2 587 19,306 21,956 25,008 17,919 1,328 537 381 918 543 38 337 – – 337 12,995 15,941 20,458 20,318 1,449 USA division € m 506 296 802 463 33 306 1 – 307 127 304 431 260 18 153 3 – 156 10,386 19,271 23,218 14,837 1,058 Capital Markets division € m 141 270 411 239 23 149 2 – 151 11,769 14,357 17,834 16,898 1,252 9,013 14,758 18,675 11,375 843 252 153 405 295 23 87 – 1 88 3,645 4,897 6,054 3,655 261 Poland division € m 139 87 226 154 9 63 – – 63 2,754 3,993 4,990 2,838 210 50 (42) 8 35 (1) (26) – – (26) 101 82 351 279 20 Group € m 52 (23) 29 38 (18) 9 – 15 24 285 177 563 245 18 2000 Total € m 2,022 1,304 3,326 1,949 134 1,243 3 5 1,251 (113) 1,138 50,239 65,210 79,688 60,222 4,296 1999 Total € m 1,770 1,052 2,822 1,618 92 1,112 3 17 1,132 43,127 55,241 67,070 49,275 3,651 2 Segmental information (continued) Operations by business segments(1) Net interest income Other income Total operating income Total operating expenses Provisions Group operating profit Income from associated undertakings Profit on disposals Group profit on ordinary activities before taxation Balance sheet Total loans Total deposits Total assets Total risk weighted assets Net assets AIB Bank division € m USA division € m Capital Markets division € m Poland division € m Group € m 844 385 1,229 656 68 505 – 32 537 15,132 19,091 19,417 14,005 1,013 490 334 824 492 32 300 2 – 302 116 213 329 186 27 116 2 – 118 9,928 13,296 15,596 13,940 1,008 9,262 10,748 16,496 9,961 721 95 62 157 95 13 49 – – 49 1,069 1,750 2,068 1,188 86 64 (14) 50 13 (6) 43 – – 43 105 (45) 143 19 1 1998 Total € m 1,609 980 2,589 1,442 134 1,013 4 32 1,049 35,496 44,840 53,720 39,113 2,829 (1) The business segment information is based on management accounts information. Income on capital is allocated to the divisions on the basis of the capital required to support the level of risk weighted assets. Interest income earned on capital not allocated to divisions, the funding cost of the Bank Zachodni acquisition and central services costs are reported in Group. Republic of Ireland Operations by geographical segments (2) Net interest income before exceptional item Other income € m 791 570 Total operating income before exceptional item 1,361 770 Total operating expenses 51 Provisions Group operating profit before exceptional item Income from associated undertakings Profit on disposals Group profit on ordinary activities before exceptional item Deposit interest retention tax Group profit on ordinary activities before taxation 540 3 3 546 United States of America € m United Kingdom Poland Rest of the world € m € m € m 568 336 904 557 38 309 – – 309 392 243 635 327 23 285 – 1 286 269 151 420 292 23 105 – 1 106 2 4 6 3 (1) 4 – – 4 Balance sheet Total loans Total deposits Total assets Net assets 24,027 29,055 37,502 1,746 13,018 17,585 19,716 1,477 9,545 13,672 16,162 794 3,645 4,897 6,060 261 4 1 248 18 2000 Total € m 2,022 1,304 3,326 1,949 134 1,243 3 5 1,251 (113) 1,138 50,239 65,210 79,688 4,296 49 Notes to the accounts 2 Segmental information (continued) Operations by geographical segments (2) Net interest income Other income Total operating income Total operating expenses Provisions Group operating profit Income from associated undertakings Profit on disposals Group profit on ordinary activities before taxation Balance sheet Total loans Total deposits Total assets Net assets Operations by geographical segments (2) Net interest income Other income Total operating income Total operating expenses Provisions Group operating profit Income from associated undertakings Profit on disposals Group profit on ordinary activities before taxation Balance sheet Total loans Total deposits Total assets Net assets Republic of Ireland € m 754 483 1,237 690 48 499 2 16 517 20,511 25,056 30,970 1,491 Republic of Ireland € m 684 404 1,088 581 53 454 2 30 486 18,044 20,620 25,872 1,242 United States of America € m United Kingdom € m 514 299 813 473 22 318 1 – 319 350 182 532 291 10 231 – 1 232 11,797 15,410 18,137 1,264 8,061 10,787 12,721 668 United States of America € m United Kingdom € m 507 331 838 502 33 303 2 – 305 10,020 13,833 15,928 1,015 311 166 477 255 20 202 – 2 204 6,186 8,562 9,663 471 Poland € m 149 86 235 154 9 72 – – 72 2,751 3,988 5,000 210 Poland € m 107 63 170 94 13 63 – – 63 1,070 1,750 2,069 87 Rest of the world € m 3 2 5 10 3 (8) – – (8) 7 – 242 18 Rest of the world € m – 16 16 10 15 (9) – – (9) 176 75 188 14 1999 Total € m 1,770 1,052 2,822 1,618 92 1,112 3 17 1,132 43,127 55,241 67,070 3,651 1998 Total € m 1,609 980 2,589 1,442 134 1,013 4 32 1,049 35,496 44,840 53,720 2,829 (2)The geographical distribution of profit before taxation is based primarily on the location of the office recording the transaction. Assets by segment The fungible nature of liabilities within the banking industry inevitably leads to allocations of liabilities to segments, some of which are necessarily subjective. Accordingly, the directors believe that the analysis of total assets is more meaningful than the analysis of net assets. 50 3 Other interest receivable and similar income Interest on loans and advances to banks Interest on loans and advances to customers Income from leasing and hire purchase contracts Income from leasing and hire purchase contracts has been accounted for as follows: Investment period method Sum of the digits method 4 Interest payable Interest on deposits by banks and customer accounts Interest on debt securities in issue Interest on subordinated liabilities 2000 € m 238 3,544 205 3,987 135 70 205 2000 € m 2,701 249 155 3,105 1999 € m 157 2,683 169 3,009 113 56 169 1999 € m 1,818 159 95 2,072 1998 € m 487 2,559 148 3,194 106 42 148 1998 € m 2,159 116 82 2,357 5 Deposit interest retention tax (‘DIRT’) On 3 October 2000, AIB announced that it had reached a full and final settlement with the Irish Revenue Commissioners of IR£90.04m (€ 114.33m) in relation to DIRT, interest and penalties in Ireland for the period April 1986 to April 1999.The settlement included IR£1.08m (€ 1.37m) paid in prior years. Although AIB believe that it had an agreement with the Revenue Commisioners in 1991 in relation to DIRT, the Board considered that concluding this settlement was in the best interests of shareholders, customers and staff. As a result an exceptional charge of IR£88.96m (€ 112.96m) has been reflected in the accounts for the year ended 31 December 2000. 6 Dividend income The dividend income relates to income from equity shares. 7 Dealing profits Foreign exchange contracts Profits less losses from securities held for trading purposes Interest rate contracts 2000 € m 69 42 (8) 103 1999 € m 30 28 16 74 1998 € m 52 8 9 69 Dealing profits is a term prescribed by the European Communities (Credit Institutions: Accounts) Regulations, 1992. Dealing profits reflects trading income and excludes interest payable and receivable arising from these activities. Staff and other administrative expenses arising from trading activities are not included here but are included under the appropriate heading within administrative expenses (note 9(a)). 8 Other operating income (Loss)/profit on disposal of debt securities held for investment purposes Profit on disposal of investments in associated undertakings Profit on disposal of equity shares Contribution of life assurance company Contribution from securitised assets (note 26) Mortgage origination and servicing income Miscellaneous operating income 2000 € m 1999 € m 1998 € m (1) 5 24 95 4 3 72 16 3 15 64 3 3 56 73 14 6 49 5 16 54 202 160 217 51 Notes to the accounts 9 Administrative expenses (a) Staff and other administrative expenses Staff costs: Wages and salaries Social security costs Pension costs and other costs in respect of post-retirement benefits (note 12) Other staff costs Other administrative expenses 2000 € m 934 85 70 55 1,144 634 1,778 1999 € m 785 68 69 48 970 521 1998 € m 697 69 66 35 867 446 1,491 1,313 (b) Integration costs in continuing businesses These costs relate to the integration of the business of Dauphin Deposit Corporation and First Maryland Bancorp. 10 Depreciation and amortisation Depreciation of tangible fixed assets: Property depreciation Equipment depreciation Amortisation of goodwill (note 31) 11 Amounts (written back)/written off fixed asset investments Debt securities Equity shares Interests in associated undertakings 2000 € m 32 113 145 26 171 2000 € m (1) – – (1) 1999 € m 20 99 119 8 127 1999 € m 2 3 – 5 1998 € m 19 90 109 – 109 1998 € m (4) 5 6 7 52 12 Pensions and other post-retirement benefits The majority of the pension schemes operated by the Group are of the defined benefit type. However, the pension entitlements of staff joining the Group in the Republic of Ireland and the United Kingdom after January 1998 are determined on a defined contribution basis. The total cost for the Group for 2000 was € 64m (1999: € 64m; 1998: € 61m).The costs relating to all schemes have been assessed in accordance with the advice of independent qualified actuaries.The majority of the schemes are funded. Independent actuarial valuations, for the main Irish and UK schemes, are carried out on a triennial basis by Mercer Ltd., Actuaries and Consultants.The last such valuation was carried out at 1 January 1998 using the Projected Unit Method.The principal actuarial assumptions used in the valuation were that the investment return would be 2.5% higher than the annual salary increases, before any scale increments, and 2.5% higher than the annual increase in present and future pensions where salary related, and 4% higher where inflation linked. At the date of the most recent actuarial valuations, the market value of the assets of the main Irish and UK schemes was € 2,709m and the actuarial value of the assets was sufficient to cover the benefits that had accrued to the members.The funding level allowing for future earnings increases was 117%.The employers’ contribution rate over the average remaining service life of the members of the schemes takes account of this funding level.The actuarial valuations are available for inspection only to the members of the schemes. The main US defined benefit scheme is valued annually and is fully funded.The obligation for pension benefits in respect of unfunded plans was € 18m. For defined contribution schemes the charge against profits was the amount of contributions payable to these schemes during the year ended 31 December 2000. The Group provides certain post-retirement benefits for retired employees, primarily health care and life insurance benefits in the US.The cost of these benefits, including the amortisation of the accrued obligation at transition of € 24m, is being charged to the profit and loss account over the average remaining service life of the employees eligible for the benefits.The total cost for the Group in respect of post-retirement benefits for 2000 was € 6m (1999: € 5m; 1998: € 5m). 13 Profit on disposal of business In October 1999, AIB’s private banking and treasury operations in Singapore were sold to Keppel TatLee Bank Limited, giving rise to a profit before taxation on disposal of € 15m (tax charge € 4m). 14 Group profit on ordinary activities before taxation Is stated after: (i) Income: (ii) Expenses: Listed investments Unlisted investments Operating lease rentals Property Equipment Auditors’ remuneration (including VAT): Audit services: Statutory audit Audit related services Non-audit services: IT consultancy Taxation services Other consultancy 2000 € m 651 495 46 4 1.7 0.8 2.5 4.0 1.0 0.8 5.8 1999 € m 443 392 40 3 1.3 0.6 1.9 – 1.0 0.4 1.4 1998 € m 375 398 36 3 1.8 0.1 1.9 – 0.4 – 0.4 Audit services include fees for the statutory audits of the Group and fees for assignments which are of an audit nature.These fees include assignments where the auditors provide assurance to third parties. In the year ended 31 December 2000, 70% of the total audit services fees (1999: 67%; 1998: 64%) and 56% of the non-audit services fees (1999 and 1998: 100%) were paid to overseas offices of the auditors. The increase in non-audit services fees is primarily due to fees for a number of significant IT assignments.The Audit Committee has reviewed the level of non-audit services fees and is satisfied that it has not affected the independence of the Auditors. It is Group policy to subject all large consultancy assignments to competitive tender. 53 Notes to the accounts 15 Taxation Allied Irish Banks, p.l.c. and subsidiaries Corporation tax in Republic of Ireland Current tax on income for the period Adjustments in respect of prior periods Double taxation relief Foreign tax Current tax on income for the period Adjustments in respect of prior periods Stamp duty on section 84 interest Deferred taxation: On ordinary activities Impact of phased reduction in Irish corporation tax rates on deferred tax balances(1) 2000 € m 1999 € m 1998 € m 69 (1) 68 (15) 53 146 (5) 141 – 194 124 – 124 318 107 – 107 (14) 93 120 1 121 1 215 112 – 112 327 110 – 110 (10) 100 117 11 128 2 230 85 55 140 370 Effective tax rate – adjusted 26.3%(2) 28.9% 30.1%(3) (1)In December 1998, the Minister for Finance announced a phased reduction in the Irish corporation tax rate, commencing 1 January 1999, to achieve a 121⁄2% corporation tax rate for all trading income with effect from 1 January 2003.The Irish Finance Act 1999 provided for the reduction in the standard rate of corporation tax to 28% with effect from 1 January 1999, and to 24% with effect from 1 January 2000, with further reductions to 20% and 16% on 1 January 2001 and 2002 respectively. From 1 January 2000 the rate of corporation tax applying to non-trading income is 25%. Arising from the phased reduction in corporation tax rates, timing differences will reverse at rates of corporation tax lower than those provided for on origination. As a result, a charge of € 55m was made in the year ended 31 December 1998. (2)The adjusted effective tax rate has been presented to eliminate the effect of the deposit interest retention tax settlement (note 5). (3)The adjusted effective tax rate has been presented to eliminate the effect of the deferred tax charge arising from the phased reduction in Irish corporation rates. 16 Equity and non-equity minority interests in subsidiaries The profit attributable to minority interests is analysed as follows: Equity interest in subsidiaries Non-equity interest in subsidiaries 17 Dividends on non-equity shares Non-cumulative preference shares of US $25 each Dividends paid and accrued* Amortisation of issue costs *Includes an amount of € 4m which has been accrued (1999: € 4m; 1998: € 3m). 54 2000 € m 28 10 38 2000 € m 20 – 20 1999 € m 18 10 28 1999 € m 16 – 16 1998 € m 16 13 29 1998 € m 17 – 17 18 Dividends on equity shares Ordinary shares of € 0.32 each Interim dividend Second interim dividend Final dividend Employee share trusts(1) 2000 1999 cent per € 0.32 share 1998 2000 € m 1999 € m 1998 € m 13.50 – 25.25 38.75 11.85 – 21.85 33.70 10.28 17.78 – 28.06 117 – 221 338 (3) 335 102 – 188 290 (2) 288 88 152 – 240 (1) 239 (1)In accordance with Financial Reporting Standard No. 14 ‘Earnings per share’ (FRS 14), dividends of € 3.4m (1999: € 2.0m; 1998: € 0.9m) arising on the shares held by certain employee share trusts (note 33) are excluded in arriving at profit before taxation and deducted from the aggregate of dividends paid and proposed. 19 Profit retained The transfer to the profit and loss account is dealt with in the Group accounts as follows: Allied Irish Banks, p.l.c. Subsidiary undertakings Associated undertakings 2000 € m 1999 € m 1998 € m 174 180 3 357 80 348 – 428 (30) 391 1 362 As permitted by Regulation 5, paragraph 2 of the European Communities (Credit Institutions: Accounts) Regulations, 1992, the profit and loss account of Allied Irish Banks, p.l.c. has not been presented separately. 20 Earnings per € 0.32 ordinary share 2000 1999 1998 (a) Basic Group profit attributable to the ordinary shareholders(1) Weighted average number of shares in issue during the year(1) Earnings per share € 762m 856.1m € 633m 847.2m EUR 89.0c EUR 89.5c EUR 74.7c € 761m 850.6m (1)In accordance with FRS 14 - ‘Earnings per share’, dividends arising on the shares held by the employee share trusts (note 33) are excluded in arriving at profit before taxation and deducted from the aggregate of dividends paid and proposed.The shares held by the trusts are excluded from the calculation of weighted average number of shares in issue. (b) Adjusted As reported Adjustments Deposit interest retention tax Goodwill amortisation (note 31) Impact of phased reduction in Irish corporation tax rates on deferred tax balances (note 15) Earnings per € 0.32 ordinary share 2000 89.0 12.0 3.0 – 1999 cent per € 0.32 share 89.5 – 1.0 – 104.0 90.5 1998 74.7 – – 6.4 81.1 The adjusted earnings per share figure has been presented to eliminate the effect of the deposit interest retention tax settlement in 2000, the goodwill amortisation in 2000 and 1999 and the deferred tax charge arising from the phased reduction in Irish corporation tax rates in 1998 (note 15). 55 Notes to the accounts 20 Earnings per € 0.32 ordinary share (continued) (c) Diluted Weighted average number of shares in issue during the period Dilutive effect of options outstanding Diluted 2000 1999 1998 Number of shares (millions) 856.1 8.8 864.9 850.6 15.1 865.7 847.2 11.0 858.2 The weighted average number of ordinary shares reflects the dilutive effect of options outstanding under the employee share trusts (note 33), the Executive Share Option Scheme (note 44) and the Allfirst Stock Option Plan (note 44). 21 Central government bills and other eligible bills Group Held as financial fixed assets Treasury bills and similar securities Held for trading purposes Treasury bills Allied Irish Banks, p.l.c. Held as financial fixed assets Treasury bills and similar securities Held for trading purposes Treasury bills Analysis of movements in central government bills and other eligible bills held as financial fixed assets At 1 January 2000 Exchange translation adjustments Purchases Disposals/maturities Amortisation of discounts At 31 December 2000 2000 Market value € m 284 86 Book amount € m 282 15 297 84 1 85 Book amount € m 648 70 718 464 – 464 1999 Market value € m 647 464 Group € m Allied Irish Banks, p.l.c. € m 648 18 6,740 (7,173) 49 282 464 3 436 (820) 1 84 56 22 Loans and advances to banks Funds placed with the Central Bank of Ireland Funds placed with other central banks Funds placed with other banks Analysed by remaining maturity: Repayable on demand Other loans and advances by remaining maturity: Over 5 years 5 years or less but over 1 year 1 year or less but over 3 months 3 months or less General and specific bad and doubtful debt provisions (note 25) Due from subsidiary undertakings: Subordinated Unsubordinated 2000 € m 304 385 3,504 4,193 Group Allied Irish Banks, p.l.c. 1999 € m 425 383 3,023 3,831 2000 € m 244 4 9,794 10,042 1999 € m 358 5 7,452 7,815 1,284 2,011 786 1,451 206 25 183 2,498 4,196 3 4,193 185 78 211 1,349 3,834 3 3,831 8 19 87 1,023 1,923 – 1,923 123 7,996 8,119 10,042 18 35 135 732 2,371 – 2,371 123 5,321 5,444 7,815 57 Notes to the accounts 23 Loans and advances to customers Loans and advances to customers Amounts receivable under finance leases Amounts receivable under hire purchase contracts Money market funds Analysed by remaining maturity: Over 5 years 5 years or less but over 1 year 1 year or less but over 3 months 3 months or less General and specific bad and doubtful debt provisions (note 25) Due from subsidiary undertakings: Subordinated Unsubordinated 2000 € m 42,159 2,446 846 429 Group Allied Irish Banks, p.l.c. 1999 € m 36,028 2,226 704 213 2000 € m 21,963 4 – 240 1999 € m 18,466 4 – 204 45,880 39,171 22,207 18,674 15,577 15,902 6,629 8,641 46,749 869 12,370 13,204 5,686 8,679 39,939 768 6,619 5,116 2,564 4,989 19,288 215 4,299 4,009 2,574 5,489 16,371 203 45,880 39,171 19,073 16,168 83 3,051 3,134 83 2,423 2,506 22,207 18,674 Of which repayable on demand or at short notice 9,108 8,105 7,273 6,216 Amounts include: Due from associated undertakings – – – – The cost of assets acquired for letting under finance leases and hire purchase contracts amounted to € 1,703m (1999: € 1,882m). Non-performing loans – Loans accounted for on a non-accrual basis AIB Bank division USA division Capital Markets division Poland division 2000 € m 232 87 29 523 871 Group 1999 € m 234 53 30 436 753 58 24 Concentrations of credit risk Construction and property Republic of Ireland(2) United States of America United Kingdom Poland 2000 % of total loans(1) 7.4 6.1 4.0 0.4 17.9 € m 3,455 2,862 1,850 187 8,354 1999 % of total loans(1) 6.6 6.4 3.7 0.3 17.0 € m 2,665 2,556 1,473 125 6,819 The construction and property portfolio is well diversified across the Group’s principal markets by spread of location and individual customer. In addition, the Group’s outstandings are dispersed across the segments within the construction and property portfolio to ensure that the credit risk is widely spread. Residential mortgages Republic of Ireland(2) United States of America United Kingdom Poland 2000 % of total loans(1) 10.5 1.5 3.8 0.2 16.0 € m 4,922 705 1,775 78 7,480 1999 % of total loans(1) 9.8 1.7 3.8 – 15.3 € m 3,915 691 1,523 – 6,129 The residential mortgage portfolio contains high quality lendings which are well diversified by borrower and are represented across the Group’s principal markets. (1)Total loans are gross of provisions and unearned income and exclude money market funds. (2)During 2000 a review of sector classifications in the Republic of Ireland was undertaken.The 1999 concentrations have been restated to reflect the impact of reclassifications in the Republic of Ireland following this review. 59 Notes to the accounts 25 Provisions for bad and doubtful debts Specific € m General € m Group At 1 January Exchange translation adjustments Acquisition of Group undertakings Charge against profit and loss account Transfer to specific Amounts written off Recoveries of amounts written off in previous years At 31 December Amounts include: Loans and advances to banks (note 22) Loans and advances to customers (note 23) Allied Irish Banks, p.l.c. At 1 January Exchange translation adjustments Charge against profit and loss account Transfer to specific Amounts written off Recoveries of amounts written off in previous years At 31 December (note 23) 401 17 28 – 106 (132) 32 452 3 449 452 75 1 – 23 (47) 13 65 370 16 7 133 (106) – – 420 – 420 420 128 1 44 (23) – – 150 2000 Total € m 771 33 35 133 – (132) 32 872 3 869 872 203 2 44 – (47) 13 215 Specific € m General € m 258 17 139 – 66 (107) 28 401 3 398 401 75 2 – 24 (40) 14 75 280 26 45 85 (66) – – 370 – 370 370 106 4 42 (24) – – 128 1999 Total € m 538 43 184 85 – (107) 28 771 3 768 771 181 6 42 – (40) 14 203 The provisions for bad and doubtful debts in Allied Irish Banks, p.l.c. at 31 December 2000 and 1999 relate to loans and advances to customers only. 60 26 Securitised assets Securitised assets Less: non-returnable proceeds Mortgages Asset backed securities € m € m 16 – 16 917 (767) 150 2000 Total € m 933 (767) 166 Mortgages € m 21 – 21 Asset backed securities € m 577 (473) 104 1999 Total € m 598 (473) 125 In September 1991 and July 1992, First Manufactured Housing Credit Corporation, a subsidiary of Allfirst, securitised and sold manufactured housing receivables amounting to US $133m. At 31 December 2000, the manufactured housing receivables were serviced by outside parties for a fixed fee under subservicing arrangements. Credit recourse is generally limited to future servicing income and certain balances maintained in trust for the benefit of the investors. In July 1999 and December 2000 a subsidiary company securitised and sold part of its Asset Backed Securities portfolio to a third party. Under the terms of the agreement AIB has the option to transfer additional assets to the third party. AIB is not obliged, nor does it intend, to support any losses in this portfolio in excess of the net amount recognised as an asset on the balance sheet. The contribution from these securitised assets, included in other operating income, is analysed below. Net interest income Other income Total operating income Total operating expenses Provisions for bad and doubtful debts Contribution from securitised assets (note 8) 2000 € m 1999 € m 1998 € m 5 – 5 1 4 – 4 4 1 5 1 4 1 3 10 2 12 1 11 6 5 61 Notes to the accounts 27 Debt securities Group Held as financial fixed assets Issued by public bodies: Government securities Other public sector securities Issued by other issuers: Bank and building society certificates of deposit Other debt securities Held for trading purposes Issued by public bodies: Government securities Other public sector securities Issued by other issuers: Bank and building society certificates of deposit Other debt securities Group Held as financial fixed assets Issued by public bodies: Government securities Other public sector securities Issued by other issuers: Bank and building society certificates of deposit Other debt securities Held for trading purposes Issued by public bodies: Government securities Other public sector securities Issued by other issuers: Bank and building society certificates of deposit Other debt securities Book amount € m Gross unrealised gains € m Gross unrealised losses € m 40 18 1 46 105 (51) (24) – (14) (89) 6,113 4,001 395 6,136 16,645 431 904 46 960 2,341 2000 Market value € m 6,102 3,995 396 6,168 16,661 431 904 46 960 2,341 18,986 105 (89) 19,002 Book amount € m Gross unrealised gains € m Gross unrealised losses € m 34 3 – 8 45 (119) (115) – (19) (253) 6,674 3,833 192 2,827 13,526 210 571 80 721 1,582 1999 Market value € m 6,589 3,721 192 2,816 13,318 210 571 80 721 1,582 Market value is market price for quoted securities and directors’ estimate for unquoted securities. 15,108 45 (253) 14,900 62 27 Debt securities (continued) Allied Irish Banks, p.l.c. Held as financial fixed assets Issued by public bodies: Government securities Other public sector securities Issued by other issuers: Bank and building society certificates of deposit Other debt securities Held for trading purposes Issued by public bodies: Government securities Other public sector securities Issued by other issuers: Bank and building society certificates of deposit Other debt securities Allied Irish Banks, p.l.c. Held as financial fixed assets Issued by public bodies: Government securities Other public sector securities Issued by other issuers: Bank and building society certificates of deposit Other debt securities Held for trading purposes Issued by public bodies: Government securities Other public sector securities Issued by other issuers: Bank and building society certificates of deposit Other debt securities Book amount € m Gross unrealised gains € m Gross unrealised losses € m 37 – – 42 79 (37) (1) – (11) (49) 4,395 645 278 4,948 10,266 97 901 – 929 1,927 2000 Market value € m 4,395 644 278 4,979 10,296 97 901 – 929 1,927 12,193 79 (49) 12,223 Book amount € m Gross unrealised gains € m Gross unrealised losses € m 4,878 720 128 1,955 7,681 119 569 34 721 1,443 9,124 32 1 – 8 41 (88) (3) – (12) (103) 41 (103) 1999 Market value € m 4,822 718 128 1,951 7,619 119 569 34 721 1,443 9,062 63 Market value is market price for quoted securities and directors’ estimate for unquoted securities. Notes to the accounts 27 Debt securities (continued) Analysed by remaining maturity Due within one year Due one year and over Analysed by listing status Group Held as financial fixed assets Listed on a recognised stock exchange Quoted elsewhere Unquoted Held for trading purposes Listed on a recognised stock exchange Quoted elsewhere Unquoted Group Allied Irish Banks, p.l.c. 1999 € m 1,162 7,962 9,124 1999 Market value € m 8,317 4,166 835 13,318 1999 € m 2,377 12,731 15,108 2000 Market value € m 10,876 4,785 1,000 16,661 2000 € m 3,874 15,112 18,986 Book amount € m 10,848 4,797 1,000 16,645 2,251 7 83 2,341 18,986 2000 € m 2,198 9,995 12,193 Book amount € m 8,383 4,308 835 13,526 1,457 26 99 1,582 15,108 Debt securities with a book value of € 1,106m (1999: € 1,690m) were pledged to secure public funds, trust deposits, funds transactions and other purposes required by law. Debt securities subject to repurchase agreements amounted to € 1,761m (1999: € 1,461m). Subordinated debt securities included as financial fixed assets amounted to € 5m at 31 December 2000 (1999: € 6m). The amount of unamortised discounts net of premiums on debt securities held as financial fixed assets amounted to € 86m (1999: € 21m). The cost of debt securities held for trading purposes amounted to € 2,346m (1999: € 1,580m). 64 27 Debt securities (continued) Analysed by listing status Allied Irish Banks, p.l.c. Held as financial fixed assets Listed on a recognised stock exchange Quoted elsewhere Unquoted Held for trading purposes Listed on a recognised stock exchange Quoted elsewhere Unquoted 1999 Market value € m 7,351 140 128 7,619 2000 Market value € m 9,585 443 268 10,296 Book amount € m 9,550 448 268 10,266 1,927 – – 1,927 12,193 Book amount € m 7,412 141 128 7,681 1,384 25 34 1,443 9,124 Debt securities subject to repurchase agreements amounted to € 928m (1999: € 832m). The amount of unamortised premiums net of discounts on debt securities held as financial fixed assets was € 24m (1999: € 78m). The cost of debt securities held for trading purposes was € 1,921m (1999: € 1,440m). Analysis of movements in debt securities held as financial fixed assets Group At 1 January 2000 Exchange translation adjustments Purchases Realisations/maturities Transfers Credit against profit and loss account (note 11) Amortisation of discounts net of (premiums) At 31 December 2000 Allied Irish Banks, p.l.c. At 1 January 2000 Exchange translation adjustments Purchases Realisations/maturities Amortisation of (premiums) net of discounts At 31 December 2000 Cost € m Discounts and premiums € m Amounts written off € m Book amount € m 13,536 362 10,889 (8,355) 213 – – 16,645 7,715 (53) 6,398 (3,746) – 10,314 (8) 1 – 4 – – 2 (1) (34) – – 18 (32) (48) (2) – – 2 – 1 – 1 – – – – – – 13,526 363 10,889 (8,349) 213 1 2 16,645 7,681 (53) 6,398 (3,728) (32) 10,266 65 Notes to the accounts 28 Equity shares Group Held as financial fixed assets Listed on a recognised stock exchange Unquoted Held for trading purposes Listed on a recognised stock exchange Allied Irish Banks, p.l.c. Held as financial fixed assets Unquoted Held for trading purposes Listed on a recognised stock exchange Analysis of movements in equity shares held as financial fixed assets Group At 1 January 2000 Exchange translation adjustments Transfer from associated undertakings (note 29) Purchases Disposals At 31 December 2000 Book amount € m 2000 Market value € m Book amount € m 1999 Market value € m 165 193 358 1 175 189 364 48 412 1 27 28 149 86 235 62 297 1 35 36 151 94 245 1 Cost € m Amounts written off € m Book amount € m 256 16 23 162 (71) 386 (21) (1) – – – (22) 235 15 23 162 (71) 364 66 29 Interests in associated undertakings At 1 January Exchange translation adjustments Transfer to equity shares (note 28) Purchases Disposals Profit retained At 31 December 2000 € m 22 2 (23) 4 – 3 8 At 31 December 2000 and 1999 there were no provisions carried in respect of the Group’s interests in associated undertakings. The movements in the provisions are as follows: At 1 January Disposals At 31 December 2000 € m – – – The Group’s interests in associated undertakings, all of which are non-credit institutions, are unlisted and are held by subsidiary undertakings. The exemption permitted by the European Communities (Credit Institutions: Accounts) Regulations, 1992, has been availed of and, in accordance with the regulations, Allied Irish Banks, p.l.c. will annex a full listing of associated undertakings to its annual return to the companies registration office. 1999 € m 23 3 – 1 (5) – 22 1999 € m 7 (7) – 67 Notes to the accounts 30 Shares in Group undertakings Allied Irish Banks, p.l.c. At 1 January Exchange translation adjustments Additions At 31 December At 31 December Credit institutions Other Total – all unquoted 2000 € m 1,368 89 – 1,457 1,255 202 1,457 1999 € m 1,152 168 48 1,368 1,170 198 1,368 The shares in Group undertakings are included in the accounts on a historical cost basis. Principal subsidiary undertakings incorporated in the Republic of Ireland Nature of business AIB Capital Markets plc* AIB Corporate Finance Limited AIB Finance Limited* AIB Leasing Limited AIB Fund Management Limited(a) AIB Investment Managers Limited(a) AIB International Financial Services Limited Ark Life Assurance Company Limited* Goodbody Holdings Limited *Group interest is held directly by Allied Irish Banks, p.l.c. Banking and financial services Corporate finance Industrial banking Leasing Unit trust management Investment management International financial services Life assurance and pensions business Stockbroking and corporate finance (a)The Group’s interests in AIB Fund Management Limited and AIB Investment Managers Limited are held through the Group’s equity interest of 85.86% in AIB Asset Management Holdings Limited. The above subsidiary undertakings are incorporated in the Republic of Ireland and are wholly-owned unless otherwise stated. The issued share capital of each undertaking is denominated in ordinary shares. 68 30 Shares in Group undertakings (continued) Principal subsidiary undertakings incorporated outside the Republic of Ireland Allfirst Bank Registered office: 25 South Charles Street, Baltimore, Maryland 21201, USA (Common stock shares of US $10 each – Group interest 100%) Nature of business Banking and financial services AIB Group (UK) p.l.c. Banking and financial services trading as First Trust Bank in Northern Ireland trading as Allied Irish Bank (GB) in Great Britain Registered office: 4 Queen’s Square, Belfast, BT1 3DJ AIB Bank (CI) Limited* Banking services Registered office: AIB House, Grenville Street, St. Helier, Jersey AIB Bank (Isle of Man) Limited* Banking services Registered office: 10 Finch Road, Douglas, Isle of Man AIB Asset Management Holdings Limited Funds management Registered office: Shackleton House, 4 Battle Bridge Lane, London SE1 2HR (Ordinary shares of Stg £0.01 each – Group interest 85.86%) (Cumulative redeemable preference shares of Stg £0.01 each – Group interest 100%) Wielkopolski Bank Kredytowy S.A. Banking and financial services Registered office: Plac Wolno´sci 16, 60-967 Pozna´n, Poland (Ordinary shares of PLN 1.25 each – Group interest 60.14%) Bank Zachodni S.A. Banking and financial services Registered office: Rynek 9/11, 50-950 Wroclaw, Poland (Ordinary shares of PLN 10 each - Group interest 83.01%) *Group interest is held directly by Allied Irish Banks, p.l.c. The above subsidiary undertakings are wholly-owned unless otherwise stated.The registered office of each is located in the principal country of operation.The issued share capital of each undertaking is denominated in ordinary shares unless otherwise indicated. In presenting details of the principal subsidiary undertakings the exemption permitted by the European Communities (Credit Institutions: Accounts) Regulations, 1992, has been availed of and, in accordance with the regulations, Allied Irish Banks, p.l.c. will annex a full listing of subsidiary undertakings to its annual return to the companies registration office. 69 Notes to the accounts 31 Intangible fixed assets Goodwill Cost at 1 January Arising on acquisitions during the year Exchange translation adjustments At 31 December Accumulated amortisation at 1 January Charge for the year (note 10) At 31 December Net book value At 31 December 2000 € m 1999 € m 476 24 – 500 8 26 34 466 – 475 1 476 – 8 8 468 Intangible fixed assets comprise purchased goodwill arising on acquisition of subsidiary and associated undertakings. Prior to 1 January 1998 goodwill arising on acquisition of subsidiary and associated undertakings was taken directly to profit and loss account reserves.The goodwill arising on acquisitions during 2000 and 1999 is set out in the following table: Bank Zachodni S.A. Other 2000 € m 24 – 24 1999 € m 465 10 475 70 31 Intangible fixed assets (continued) Acquisition of majority interest in Bank Zachodni S.A. (‘BZ’) On 16 September 1999, the Group acquired an 80% shareholding in Bank Zachodni S.A. (‘BZ’), from the Polish State Treasury through the purchase of 22.4 million shares at a price of PLN 102 per share.The total acquisition cost of PLN 2.285 billion was payable in cash. Under its agreement with the Polish State Treasury, AIB agreed to invest a further PLN 250 million by 16 April 2000 of which PLN 150 million was invested on 15 October 1999 and PLN 100 million was invested on 12 April 2000. A further PLN 100 million was invested on 22 November 2000 increasing the Group’s shareholding in BZ to 83%. The assets and liabilities of BZ have been recorded at fair value in accordance with the accounting policies of the Group. In completing the accounts for the year ended 31 December 1999 the fair values of the assets and liabilities of BZ were recorded on a provisional basis.The fair values have now been finalised and these are reflected in the table below.The fair value of the consideration has been revised to reflect the capital injections during 2000.The adjustments to the fair value of the net assets acquired together with the investment of additional capital during 2000 give rise to a revised goodwill amount of € 489m, of which € 24m and € 465m arose during 2000 and 1999 respectively. Adjustments Book value € m Revaluation € m Other € m Fair value € m Cash and balances at central banks Central government bills & other eligible bills Loans and advances to banks Loans and advances to customers Debt securities Equity shares Tangible fixed assets Other assets Deposits by banks Customers accounts Deferred taxation Other liabilities Net assets Investment of additional capital Minority interest in net assets Group share of net assets acquired Costs incurred in the acquisition Fair value of consideration Goodwill arising on the acquisition of BZ 205 225 117 1,071 100 10 87 51 (94) (1,472) (3) (116) 181 – – – – (1) 4 20 – 2 1 (2) – 24 – – – (115) – – – (9) – – 54 (18) (88) 205 225 117 956 99 14 107 42 (92) (1,471) 49 (134) 117 81 198 34 164 6 647 489 Acquisition accounting has been adopted in respect of the acquisition of BZ.The above figures have been translated at an exchange rate of € 1 = PLN 4.2995, the exchange rate prevailing at 16 September 1999. Goodwill arising has been capitalised on the balance sheet and will be written off over 20 years. The fair value adjustments made on the acquisition of the majority interest in BZ arise as follows: Revaluation adjustments Debt securities were reduced by € 1m and equity shares were increased by € 4m to reflect their market value. Revaluation of tangible fixed assets gave rise to a surplus of € 20m. Deposits by banks and customer accounts were reduced by € 2m and € 1m respectively to reflect their fair value.The increase in the deferred taxation liability relates to the deferred taxation impact of the above adjustments. 71 Notes to the accounts 31 Intangible fixed assets (continued) Other adjustments Loans and advances to customers were decreased by € 115m to bring the provisioning policy of BZ into line with that of the Group. The reduction in other assets reflects the elimination of intangible assets in the accounts of BZ.The adjustment to deferred taxation relates primarily to the tax effect of the adjustment to loans and advances to customers as well as bringing BZ’s accounting policy for deferred taxation into line with that of the Group.The adjustment to other liabilities includes an accrual of € 12m in respect of employee past service benefits which have been accumulated by BZ employees, and a provision of € 5m in respect of contingent liabilities. Revaluation and other adjustments arising during 2000 The following are the significant adjustments to the book values arising during 2000. Loans and advances to customers were decreased by € 38m following a detailed review of the loan portfolio.The freehold and long leasehold property of BZ was revalued by external valuers, DTZ Sherry FitzGerald international property advisers, as at September 1999. Properties held as investment, for development, and surplus to requirements were valued on the basis of Open Market Value. Owner occupied properties were valued on the basis of Existing Use Value, with a Depreciated Replacement Cost valuation of adaptation works not reflected in the Existing Use Value. Both bases are in accordance with the Appraisal and Valuation Manual issued by the Society of Chartered Surveyors (SCS). Other liabilities were increased by € 3m in respect of employee benefits and € 3m in respect of contingent liabilities.The increase in the deferred tax asset reflects the deferred tax impact of the above adjustments. The impact of the acquisition of BZ on the Group profit and loss account from the date of acquisition to 31 December 1999, including funding costs and amortisation of intangible assets, was as follows: Total operating income Group operating profit before provisions Group profit before taxation 32 Tangible fixed assets Group Cost or valuation at 1 January 2000 Additions Acquisition of Group undertaking Disposals Exchange translation adjustments At 31 December 2000 Accumulated depreciation at 1 January 2000 Depreciation charge for the year Disposals Exchange translation adjustments At 31 December 2000 Net book value At 31 December 2000 At 31 December 1999 72 1999 € m 39 1 (1) Property Equipment Total Freehold Long leasehold € m € m Leasehold under 50 years € m € m € m 589 45 20 (19) 22 657 46 18 (2) 4 66 591 543 122 6 – (1) – 127 2 4 – – 6 121 120 134 24 – (6) 5 157 71 10 (3) 2 80 77 63 980 162 – (89) 31 1,084 667 113 (51) 17 746 338 313 1,825 237 20 (115) 58 2,025 786 145 (56) 23 898 1,127 1,039 32 Tangible fixed assets (continued) Allied Irish Banks, p.l.c. Cost or valuation at 1 January 2000 Additions Disposals Exchange translation adjustments At 31 December 2000 Accumulated depreciation at 1 January 2000 Depreciation charge for the year Disposals Exchange translation adjustments At 31 December 2000 Net book value At 31 December 2000 At 31 December 1999 Property Equipment Total Freehold Long leasehold € m € m Leasehold under 50 years € m € m € m 279 8 (1) – 286 4 7 – – 11 275 275 111 6 (1) – 116 2 3 – – 5 111 109 36 9 – – 45 19 3 – – 22 23 17 459 62 (4) 1 518 353 45 (3) 1 396 122 106 885 85 (6) 1 965 378 58 (3) 1 434 531 507 The net book value of property occupied by the Group for its own activities was € 751m (1999: € 692m). The Group’s freehold and long leasehold property was valued by external valuers, DTZ Sherry FitzGerald international property advisers, as at 31 December 1998. Properties held as investment, for development, and surplus to requirements were valued on the basis of Open Market Value. Owner occupied properties were valued on the basis of Existing Use Value, with a Depreciated Replacement Cost valuation of adaptation works not reflected in the Existing Use Value. Both bases are in accordance with the Appraisal and Valuation Manual issued by the Society of Chartered Surveyors (SCS).The external valuers have provided an additional valuation for a number of Group properties on the basis of Open Market Value for an alternative use, which, if recorded, would have resulted in a valuation of € 27m greater than the Existing Use Value provided.The Directors have adopted the transitional provisions of FRS 15 and therefore the valuation has not been updated. The valuation exercise gave rise to a property revaluation surplus of € 141m of which € 128m arose in the parent company. 33 Own shares Allfirst Financial, Inc. sponsors the Allfirst Stock Option Plans, for the benefit of key employees of Allfirst. Allfirst has lent US $151m (1999: US $106m) to a trust to enable it to purchase AIB ordinary shares in the form of American Depositary Shares in the open market.The shares purchased are used to satisfy options which have been granted to Allfirst employees. Proceeds of option exercises are used to repay the loan to the trust. Under the terms of the trust, the trustees receive dividends on the shares which are used to meet the expenses of the trust. Allfirst will provide funds as necessary to cover expenses net of dividend revenue. At 31 December 2000, 13.5 million ordinary shares (1999: 8.6 million) were held by the trust with a cost of € 162m (1999: € 108m) and a market value of € 170m (1999: € 90m). In 1999, the Group sponsored a Save As You Earn Share Option Scheme, the AIB Group 1999 Sharesave Scheme for eligible employees in the UK.The trustees of the scheme have borrowed funds from Group companies, interest free, to enable them to purchase Allied Irish Banks, p.l.c. ordinary shares in the open market.These shares are used to satisfy commitments arising under the scheme.The trustees receive dividends on the shares which are used to meet the expenses of the scheme.The cost of providing these shares is charged to the profit and loss account on a systematic basis over the period that the employees are expected to benefit. At 31 December 2000, 1.4 million shares (1999: 1.4 million) were held by the trustees with a book value of € 15m (1999: € 17m) and a market value of € 17m (1999: € 16m). In accordance with the requirements of UITF Abstract 13 the shares held by the above employee share schemes have been recognised on the balance sheet of the Group and the dividend income received by the schemes of € 3.4m (1999: € 2.0m) has been excluded in arriving at profit before taxation. 73 Notes to the accounts 33 Own shares (continued) In accordance with FRS 14 - Earnings per Share, the shares held by the Trusts are excluded from the earnings per share calculation.The accounting treatment is not intended to affect the legal characterisation of the transaction or to change the situation at law achieved by the parties to it.Thus, the inclusion of the shares on the Group balance sheet does not imply that they have been purchased by the company as a matter of law. 34 Long-term assurance business The assets and liabilities of Ark Life Assurance Company Limited (‘Ark Life’) representing the value of the assurance business together with the policyholders’ funds are: Investments: Cash and short-term placings with banks Debt securities Equity shares Property Value of investment in business Other assets – net Long-term assurance liabilities to policyholders Long-term assurance business attributable to shareholders Represented by: Shares at cost Reserves Profit and loss account 2000 € m 954 179 974 43 2,150 138 91 2,379 (2,141) 238 19 218 1 238 1999 € m 779 153 709 30 1,671 75 121 1,867 (1,701) 166 19 149 (2) 166 The increase in the value to the Group of Ark Life’s long-term assurance and pensions business in force credited to the profit and loss account and included in other operating income amounted to € 95m after grossing-up for taxation (1999: € 64m; 1998: € 49m). 74 35 Deposits by banks Federal funds purchased Securities sold under agreements to repurchase Other borrowings from banks Of which: Domestic offices Foreign offices With agreed maturity dates or periods of notice, by remaining maturity: Over 5 years 5 years or less but over 1 year 1 year or less but over 3 months 3 months or less but not repayable on demand Repayable on demand Due to subsidiary undertakings Group Allied Irish Banks, p.l.c. 2000 € m 544 1,484 10,450 12,478 7,396 5,082 12,478 429 260 792 6,837 8,318 4,160 12,478 1999 € m 291 514 7,803 8,608 5,893 2,715 8,608 260 385 1,195 5,691 7,531 1,077 8,608 2000 € m – 1,165 19,226 20,391 299 65 694 6,341 7,399 3,485 10,884 9,507 1999 € m – 509 14,726 15,235 143 99 986 5,459 6,687 778 7,465 7,770 20,391 15,235 Federal funds generally represent one-day transactions, a large portion of which arise because of Allfirst’s market activity in federal funds for correspondent banks and other customers. 75 Notes to the accounts 36 Customer accounts Current accounts Demand deposits Time deposits Securities sold under agreements to repurchase Other short-term borrowings Of which: Non-interest bearing current accounts Domestic offices Foreign offices Interest bearing deposits, current accounts and short-term borrowings Domestic offices Foreign offices Analysed by remaining maturity: Over 5 years 5 years or less but over 1 year 1 year or less but over 3 months 3 months or less but not repayable on demand 2000 € m 12,701 10,297 21,094 44,092 889 3,456 4,345 Group Allied Irish Banks, p.l.c. 1999 € m 9,609 10,360 19,718 39,687 1,090 1,558 2,648 2000 € m 6,008 4,141 7,886 18,035 62 3,202 3,264 1999 € m 4,398 4,154 7,723 16,275 447 1,278 1,725 48,437 42,335 21,299 18,000 4,655 4,515 3,987 3,787 16,552 22,715 14,657 19,904 48,437 42,335 601 2,005 3,679 19,161 25,446 640 1,557 2,701 17,701 22,599 170 439 872 9,238 10,719 136 526 419 7,775 8,856 8,553 Repayable on demand 22,991 19,736 10,206 Due to subsidiary undertakings Amounts include: Due to associated undertakings 48,437 42,335 20,925 17,409 374 591 21,299 18,000 2 2 2 2 Securities sold under agreements to repurchase are secured by Irish Government stock, US Treasury and US Government agency securities and mature within three months. The aggregate market value of all securities sold under agreements to repurchase did not exceed 10% of total assets and the amount at risk with any individual counterparty or group of related counterparties did not exceed 10% of total stockholders’ equity. 76 37 Debt securities in issue Bonds and medium term notes: European medium term note programme Allfirst adjustable rate federal home loan bank advances: due 4 December, 2000 due 20 August, 2001 Other debt securities in issue: Master demand notes of Allfirst Commercial paper Commercial certificates of deposit Analysed by remaining maturity Bonds and medium term notes: Over 5 years 5 years or less but over 1 year 1 year or less but over 3 months 3 months or less Other debt securities in issue: Over 5 years 5 years or less but over 1 year 1 year or less but over 3 months 3 months or less 38 Other liabilities Notes in circulation Taxation Dividend (note 18) Provisions for future commitments in relation to the funding of Icarom(1) Short positions in securities Other 2000 € m 114 – 215 329 323 338 3,305 3,966 4,295 – 114 215 – 329 – 200 2,136 1,630 3,966 4,295 2000 € m 386 121 221 94 379 1,878 3,079 Group Allied Irish Banks, p.l.c. 1999 € m 221 199 199 619 330 298 3,051 3,679 4,298 42 333 237 7 619 – 9 1,533 2,137 3,679 4,298 2000 € m 1999 € m 114 – – 114 – – 278 278 392 – 114 – – 114 – 44 234 – 278 392 221 – – 221 – – 483 483 704 42 134 38 7 221 – 3 82 398 483 704 Group Allied Irish Banks, p.l.c. 1999 € m 365 166 188 104 65 1,472 2,360 2000 € m – 69 221 94 53 406 843 1999 € m – 114 188 104 37 434 877 (1)The provisions represent the present value of the cost of the future commitments arising under the 1985 and 1992 agreements in relation to the funding of Icarom. Discount rates of 5.95% and 6.35% were applied in the year ended 31 December 1993, in discounting the cost of the future commitments arising under the 1985 and 1992 agreements respectively.The undiscounted amount of the cost of the future commitments relating to these two agreements amounted to € 134m (1999: € 150m). 77 Notes to the accounts 39 Provisions for liabilities and charges Group At 1 January 2000 Exchange translation adjustments Acquisition of Group undertakings Profit and loss account charge Provisions utilised At 31 December 2000 Allied Irish Banks, p.l.c. At 1 January 2000 Profit and loss account charge/(credit) Provisions utilised At 31 December 2000 Pension and similar obligations € m Contingent liabilities and commitments € m Other Total € m € m 91 5 – 70 (54) 112(1) 6 34 (33) 7(1) 13 1 3 2 (3) 16 5 (1) – 4 21 2 – 11 (7) 27 5 2 (1) 6 125 8 3 83 (64) 155 16 35 (34) 17 (1)Included in this figure is a provision in respect of commitments to pay annual pensions amounting to € 97,543 in aggregate to a number of former directors. 40 Deferred taxation Deferred taxation liabilities and (assets) in the accounts amount to: Short-term timing differences Capital allowances on: Assets leased to customers Assets used in the business Timing differences on provisions for future commitments in relation to the funding of Icarom plc (under Administration) Group Allied Irish Banks, p.l.c. 2000 € m 1999 € m 2000 € m 1999 € m (116) (159) 465 19 (11) 357 397 18 (14) 242 (37) – (3) (11) (51) (38) 1 (5) (14) (56) Due to the availability of roll-over relief and the expectation that the greater portion of land and buildings will be retained by the Group, no provision is made for taxation which might arise on disposal of properties at their revalued amounts. Analysis of movements in deferred taxation At 1 January Exchange translation and other adjustments Acquisition of Group undertakings Profit and loss account taxation charge/(credit) At 31 December Group Allied Irish Banks, p.l.c. 2000 € m 242 (1) (8) 124 357 1999 € m 164 7 (41) 112 242 2000 € m (56) – – 5 (51) 1999 € m (43) (2) – (11) (56) 78 41 Subordinated liabilities Allied Irish Banks, p.l.c. Undated loan capital Dated loan capital Allfirst Financial Inc. Dated loan capital Wielkopolski Bank Kredytowy S.A. Dated loan capital Undated loan capital US $100m Floating Rate Notes, Undated US $100m Floating Rate Primary Capital Perpetual Notes, Undated € 200m Fixed Rate Perpetual Subordinated Notes Dated loan capital Allied Irish Banks, p.l.c. European Medium Term Note Programme: US $130m Floating Rate Notes due September 2006 US $150m Floating Rate Notes due October 2006 US $250m Floating Rate Notes due January 2010 IR £35.5m Floating Rate Notes due February 2007 IR £29.6m 7.25% Fixed Rate Notes due October 2007 Stg £35m 8% Fixed Rate Notes due October 2007 NLG 71m 6.7% Fixed Rate Notes due August 2009 € 250m Floating Rate Notes due January 2010 € 100m Floating Rate Notes due August 2010 Allfirst Financial Inc. US $100m 8.375% Fixed Rate Subordinated Notes due May 2002 US $200m 7.2% Fixed Rate Subordinated Notes due July 2007 US $100m 6.875% Fixed Rate Subordinated Notes due June 2009 US $150m Floating Rate Subordinated Capital Income Securities due January 2027 US $150m Floating Rate Subordinated Capital Income Securities due February 2027 Wielkopolski Bank Kredytowy S.A. PLN 10m Fixed Rate Loan due July 2002 The dated loan capital outstanding is repayable as follows: In one year or less, or on demand Between 1 and 2 years Between 2 and 5 years In 5 years or more 2000 € m 413 1,088 1,501 745 3 1999 € m 397 897 1,294 688 2 2,249 1,984 107 108 198 413 140 161 268 45 38 56 32 248 100 1,088 107 214 106 159 159 745 3 99 100 198 397 129 149 248 45 38 57 32 199 – 897 99 198 98 147 146 688 2 1,836 1,587 – 110 – 1,726 1,836 – – 101 1,486 1,587 The loan capital of the Bank is unsecured and is subordinated in right of payment to the ordinary creditors, including depositors, of the Bank. 79 Notes to the accounts 41 Subordinated liabilities (continued) The US $ Undated Floating Rate Loan capital notes have no final maturity but may be redeemed at par at the option of the Bank in or after November 1990 and July 1998 respectively. Interest is payable semi-annually on the US $100m Undated Floating Rate Notes and quarterly on the US $100m Floating Rate Primary Capital Perpetual Notes.The € 200m Fixed Rate Perpetual Subordinated Notes, with interest payable annually, have no final maturity but may be redeemed at the option of the Bank on each coupon payment date on or after 3 August 2009. The European Medium Term Note Programme is subordinated in right of payment to the ordinary creditors, including depositors, of the Bank.The US $130m Floating Rate Notes, the US $150m Floating Rate Notes and the US $250m Floating Rate Notes, with interest payable quarterly, may be redeemed, in whole but not in part, on any interest payment date falling in or after September 2001, October 2001 and January 2005, respectively.The IR £35.5m Floating Rate Notes, with interest payable quarterly, may be redeemed, in whole but not in part, on any interest payment date falling in February 2002 or any interest payment date thereafter subject to giving no less than fourteen business days notice to noteholders.The IR £29.6m Fixed Rate Notes and the Stg £35m Fixed Rate Notes, with interest payable semi-annually, are redeemable, in whole but not in part, on 1 October 2002 and 31 October 2002, respectively.The NLG 71m Fixed Rate Notes, with interest payable annually, may be redeemed, in whole but not in part, on 20 August 2004.The € 250m Floating Rate Notes, with interest payable quarterly, may be redeemed, in whole but not in part, in or after January 2005.The € 100m Floating Rate Notes, with interest payable quarterly, may be redeemed, in whole but not in part, on the interest payment date falling in August 2005. The 8.375% and 7.2% Fixed Rate Subordinated Notes and the Floating Rate Subordinated Capital Income Securities of Allfirst are subordinated in right of payment to the ordinary creditors of Allfirst.The 8.375% Fixed Rate Subordinated Notes, with interest payable semi-annually, are not redeemable prior to maturity.The 7.2% Fixed Rate Subordinated Notes, with interest payable semi- annually, may not be redeemed prior to maturity and are not subject to any sinking fund.The 6.875% Fixed Rate Subordinated Notes mature on 1 June 2009, with interest payable semi-annually and are not redeemable prior to maturity.The US $150m Floating Rate Subordinated Capital Income Securities due January 2027, with interest payable quarterly, are redeemable in whole or in part on or after 15 January 2007, or at any time, in whole but not in part, upon the occurrence of a special event.The US $150m Floating Rate Subordinated Capital Income Securities due February 2027, with interest payable quarterly, are redeemable in whole or in part on or after 1 February 2007, or at any time, in whole but not in part, upon the occurrence of a special event. In either case such redemption is subject to the necessary prior approval of the Federal Reserve and the Central Bank of Ireland. There is no exchange exposure as the proceeds of these notes are retained in their respective currencies. 80 42 Equity and non-equity minority interests in subsidiaries Equity interest in subsidiaries Non-equity interest in subsidiaries: Allfirst Financial, Inc.: Cumulative preferred stock(1) Floating rate non-cumulative subordinated capital trust enhanced securities(2) 2000 € m 158 9 105 114 272 1999 € m 122 8 97 105 227 (1)Allfirst issued 90,000 cumulative preference shares of US $5 par value each on 28 June 1997.These shares have a liquidation preference of US $100 each and the holders are subject to dividend entitlements at a rate of 4.5% per annum on the liquidation preference amount.The preference shares are redeemable at the option of the issuer and the holder during the period commencing 1 July 2002 and ending on 30 June 2003 and are subordinated in right of payment to the ordinary creditors of Allfirst. (2) Allfirst issued 100,000 floating rate non-cumulative subordinated capital trust enhanced securities through a subsidiary on 13 July 1999.The distribution rate on the securities is three month LIBOR plus 1.5% of the stated liquidation amount of US $1,000 per security, reset quarterly. 43 Shareholders’ funds: non-equity interests Called up preference share capital Non-cumulative preference shares of US $25 each Authorised: Issued: 20.0 million shares (1999: 20.0 million) 0.25 million shares (1999: 0.25 million) Non-cumulative preference shares of € 1.27 each Authorised: Issued: 200.0 million shares (1999: 200.0 million) Nil Non-cumulative preference shares of Stg £1 each Authorised: Issued: 200.0 million shares (1999: 200.0 million) Nil Non-cumulative preference shares of Yen 175 each Authorised: Issued: 200.0 million shares (1999: 200.0 million) Nil 2000 € m 1999 € m 264 245 – – – – – – 264 245 On 5 May 1998, 250,000 non-cumulative preference shares of US $25 each were issued at a price of US $995.16 per share raising US $248.8m before expenses.The holders of the non-cumulative preference shares are entitled to a non-cumulative preferential dividend, payable quarterly in arrears, at a floating rate equal to 3 month dollar LIBOR plus 0.875% on the liquidation preference amount of US $1,000.The preference shares are redeemable at the option of the Bank, and with the agreement of the Central Bank of Ireland on or after 15 July 2008 (i) in whole or in part or (ii) prior to that date in certain circumstances in whole, but not in part. In each case, the preference shares will be redeemed at a price equal to US $1,000 per share (consisting of a redemption price of US $995.16 plus a special dividend of US $4.84 per share), plus accrued dividends. 81 Notes to the accounts 44 Called up ordinary share capital Authorised: Ordinary shares of € 0.32 each Issued and fully paid: Ordinary shares of € 0.32 each At 1 January Capitalisation of reserves on renominalisation of share capital Other – see below At 31 December 2000 € m 371 277 – 4 281 1999 € m 371 273 2 2 277 At the 1999 Annual General Meeting, shareholders resolved to redenominate the Company’s Ordinary Shares of IR 25p each into euro units, and to renominalise those shares as shares of € 0.32 each, resulting in the capitalisation, from reserves, of € 2.2 million. During the year ended 31 December 2000 the issued ordinary share capital was increased from 865,997,596 to 879,207,610 ordinary shares as follows: (a) under the dividend reinvestment plan 6,163,129 shares were allotted to shareholders, at € 8.60 per share, in respect of the final dividend for the year ended 31 December 1999 and 2,625,046 shares were allotted to shareholders at € 9.40 per share, in respect of the interim dividend for the year ended 31 December 2000. These allotments were made in lieu of dividends amounting to € 77.7m; (b) by the issue of 2,266,171 shares to the trustees of the employees’ profit sharing schemes at € 7.85 per share; the consideration received for these shares was € 17.8m; (c) by the issue of 1,951,248 shares to participants in the executive share option scheme at prices of € 2.64, € 3.36, € 3.38, € 3.68, € 4.19, € 5.80 and € 6.25 per share; the consideration received for these shares was € 7.7m; (d) by the issue of 204,420 shares to holders of Dauphin Deposit Corporation (now ‘Allfirst’) stock options, which were converted, on the acquisition of Dauphin, into options to purchase AIB American Depositary Shares.The consideration received for these shares was € 1.7m. Dividend reinvestment plan At the 1999 Annual General Meeting, the directors were given authority for a five year period to offer shareholders the right to elect to receive additional ordinary shares in lieu of cash dividends.The price at which such shares are offered is the average of the middle market quotations of the Bank’s shares on the Irish Stock Exchange for the five business days commencing on the first date on which the shares are quoted ‘ex-dividend’. Employee share schemes The Company operates employee profit sharing schemes on terms approved by the shareholders. All employees, including executive directors, of the company and certain subsidiaries are eligible to participate, subject to a minimum of one year’s continuous service at the end of the relevant financial period and subject also to their being in employment on the date on which the invitation to participate is issued. Under the schemes, the directors at their discretion may set aside each year, for allocation to the trustees of the schemes, a sum not exceeding 5% of eligible profits of participating companies in the Republic of Ireland and 4% of such profits in the UK. Employees may elect to receive their profit sharing allocations either in shares or in cash.The maximum market value of shares that may be appropriated to any employee in a year may not exceed € 12,697 (IR £10,000) in the Republic of Ireland or Stg £8,000 in the UK. Such shares are held by the trustees for a minimum period of two years and are required to be held for a total period of three years for the employee to obtain the maximum tax benefit. Employees in the Republic of Ireland may elect to forego an amount of salary, subject to certain limitations, towards the acquisition of additional shares.The maximum market value of shares that may be appropriated to an employee in a year, in respect of profit sharing and the salary foregone option, may not exceed € 12,697 (IR £10,000). In 1999 the Company introduced a Save As You Earn Share Option Scheme for eligible employees in the UK. Under that Scheme employees may opt to save fixed amounts on a regular basis, over a three-year period, subject to a maximum monthly saving of Stg £250 per employee, and to utilise amounts so saved in the acquisition of market-purchased shares in the Company. 82 44 Called up ordinary share capital (continued) Executive share option scheme The Company operates a share option scheme on terms approved by the shareholders. Officials may participate in the scheme at the discretion of the directors. Options are granted at the market price, being the middle market quotation of the Bank’s shares on the Irish Stock Exchange on the day preceding the date on which the option is offered.The exercise of options granted since 1 January 1996 is conditional upon earnings per share showing growth of at least 2% per annum compound above the increase in the Consumer Price Index over a period of not less than three and not more than five years. Options may not be transferred or assigned and may be exercised only between the third and seventh anniversaries of their grant. At 31 December 2000, options were held by some 2,550 participants over 29,379,228 ordinary shares in aggregate (3.3% of the issued ordinary share capital) at prices ranging from € 3.32 to € 15.46 per share; these options may be exercised at various dates up to 5 May 2007. Allfirst Financial, Inc. stock option plan Under the terms of the Agreement and Plan of Merger between the Company, First Maryland Bancorp (now ‘Allfirst’) and Dauphin Deposit Corporation (‘Dauphin’, now ‘Allfirst’), approved by shareholders at the 1997 Annual General Meeting, options to purchase Dauphin shares which were outstanding immediately prior to the merger were converted, at the holders’ elections, into either cash or options to purchase a similar number of AIB American Depositary Shares. At 31 December 2000, options so converted were outstanding over 1,268,174 ordinary shares. Limitations on profit sharing and executive share option schemes Under the terms of the employees’ profit sharing schemes, the aggregate number of shares which may be purchased/held by the trustees may not exceed 10% of the issued ordinary share capital.The aggregate number of shares issued under the Executive Share Option Scheme may not exceed 5% of the issued ordinary share capital.The company complies with guidelines issued by the Irish Association of Investment Managers in relation to those schemes. 45 Share premium account At 1 January 2000 Premium arising on shares issued under: Employees’ profit sharing schemes Executive share option scheme Allfirst Financial, Inc. stock option plan At 31 December 2000 46 Reserves At 1 January 2000 Capital reserves Revaluation reserves Transfer from profit and loss account: Non-distributable reserves of Ark Life Exchange translation and other adjustments At 31 December 2000 At 31 December 2000 Capital reserves Revaluation reserves Group € m 1,594 17 7 2 Allied Irish Banks, p.l.c. € m 1,594 17 7 2 1,620 1,620 Group € m Allied Irish Banks, p.l.c. € m 182 148 330 70 1 401 253 148 401 – 131 131 – 1 132 – 132 132 83 Notes to the accounts 47 Profit and loss account At 1 January 2000 Allied Irish Banks, p.l.c. and subsidiaries Associated undertakings Profit retained for the year Dividend reinvestment plan Exchange translation adjustments At 31 December 2000 At 31 December 2000 Allied Irish Banks, p.l.c. and subsidiaries Associated undertakings Group € m Allied Irish Banks, p.l.c. € m 529 – 529 174 75 101 879 1,447 3 1,450 357 75 112 1,994 1,990 4 1,994 The cumulative goodwill arising on acquisitions of subsidiary and associated undertakings which are still part of the Group, and charged against profit and loss account reserves of the Group, amounted to € 1,670m at 31 December 2000 (1999: € 1,570m). 48 Repurchase of ordinary shares In September 1997, a subsidiary undertaking purchased 5.6 million ordinary shares of € 0.32 each of Allied Irish Banks, p.l.c. on the open market at a price of € 7.30 per share.The purchase was undertaken at foot of a resolution approved by shareholders at the Annual General Meeting held on 21 May 1997. In accordance with the Companies Act, 1990 the cost of the purchase of these shares, € 42m including related expenses of € 0.8m, has been deducted from distributable reserves.The issued ordinary share capital of Allied Irish Banks, p.l.c. continues to include these shares (nominal value € 1.8m) as they have not been cancelled. The shares do not rank for dividend as the related dividend entitlements have been waived.The weighted average number of shares in the earnings per share calculation has been reduced to reflect the purchase of these shares. 49 Memorandum items: contingent liabilities and commitments In the normal course of business the Group is a party to financial instruments with off-balance sheet risk to meet the financing needs of customers. These instruments involve, to varying degrees, elements of credit risk which are not reflected in the consolidated balance sheet. Credit risk is defined as the possibility of sustaining a loss because the other party to a financial instrument fails to perform in accordance with the terms of the contract. The Group’s maximum exposure to credit loss under contingent liabilities and commitments to extend credit, in the event of non-performance by the other party where all counterclaims, collateral or security prove valueless, is represented by the contractual amounts of those instruments. The risk weighted amount is obtained by applying credit conversion factors and counterparty risk weightings in accordance with the Central Bank of Ireland’s guidelines implementing the EC Own Funds and Solvency Ratio Directives. The Group uses the same credit control and risk management policies in undertaking off-balance sheet commitments as it does for on balance sheet lending. The following tables on pages 85 and 86 give, for the Group and Allied Irish Banks, p.l.c., the nominal or contract amounts and the risk weighted credit equivalent of contingent liabilities and commitments. 84 49 Memorandum items: contingent liabilities and commitments (continued) Group Contingent liabilities Acceptances and endorsements Guarantees and assets pledged as collateral security: Guarantees and irrevocable letters of credit Assets pledged as collateral security Other contingent liabilities Commitments Sale and option to resell transactions Other commitments: Documentary credits and short-term trade-related transactions Forward asset purchases and forward deposits placed Undrawn note issuance and revolving underwriting facilities Undrawn formal standby facilities, credit lines and other commitments to lend: 1 year and over Less than 1 year (1) Contract amount € m 2000 Risk weighted amount € m Contract amount € m 1999 Risk weighted amount € m 147 137 143 132 3,995 32 4,027 1,089 5,263 257 179 83 36 7,532 8,025 15,855 16,112 21,375 3,554 3 3,557 546 4,240 257 42 82 9 3,615 – 3,748 4,005 8,245 2,798 37 2,835 933 3,911 188 169 – 116 6,639 7,194 14,118 14,306 18,217 2,566 4 2,570 476 3,178 188 29 – 25 3,172 – 3,226 3,414 6,592 (1)Undrawn loan commitments which are unconditionally cancellable at any time or which have a maturity of less than one year have a risk weighting of zero. 85 Notes to the accounts 49 Memorandum items: contingent liabilities and commitments (continued) Allied Irish Banks, p.l.c. Contingent liabilities Acceptances and endorsements Guarantees and irrevocable letters of credit Other contingent liabilities Commitments Other commitments: Documentary credits and short-term trade-related transactions Undrawn note issuance and revolving underwriting facilities Undrawn formal standby facilities, credit lines and other commitments to lend: 1 year and over Less than 1 year(1) Contract amount € m 2000 Risk weighted amount € m Contract amount € m 1999 Risk weighted amount € m 130 2,428 515 3,073 88 20 3,527 3,246 6,881 9,954 130 2,359 257 2,746 18 1 1,673 – 1,692 4,438 113 1,633 515 2,261 107 72 2,558 3,170 5,907 8,168 113 1,576 257 1,946 21 4 1,185 – 1,210 3,156 (1)Undrawn loan commitments which are unconditionally cancellable at any time or which have a maturity of less than one year have a risk weighting of zero. There exists a contingent liability to repay in whole or in part grants received on equipment leased to customers if certain events set out in the agreements occur. Allied Irish Banks, p.l.c. has given guarantees in respect of the liabilities of certain of its subsidiaries and has also given guarantees for the satisfaction of the relevant regulatory authorities for the protection of the depositors of certain of its banking subsidiaries in the various jurisdictions in which such subsidiaries operate. Charges in respect of the exchange of euro-zone currencies On 28 June 2000 the Commission of the European Communities served a Statement of Objections and initiated proceedings under Article 81 of the Treaty establishing the European Community against AIB (together with Bank of Ireland,TSB Bank, Irish Life and Permanent plc, Ulster Bank Limited, National Irish Bank Limited, ACC Bank plc, the Irish Bankers’ Federation and the Irish Mortgage and Savings Association (together with AIB the ‘Addressees’)). It is understood that similar cases have been initiated against banks in Belgium, Portugal, Finland, the Netherlands, Germany and Austria. In its Statement of Objections the Commission alleges that the Addressees agreed to fix prices in Ireland for the exchange of banknotes of euro-zone currencies following the introduction of the euro as the single currency of the eleven participating Member States of the European Union. Defences have been filed by all the Addressees denying the alleged breach and contesting the Commission’s allegations. In accordance with the Commission’s procedure in cases of this nature an oral hearing at which the Addressees reiterated and elaborated upon their defences was held in Brussels on 13 and 14 November 2000.The Commission will now consider the defences of the Addressees. Having done so the Commission may decide to close its file without further action or may issue a decision that, either intentionally or negligently, there has been an infringement of Article 81. It may reach such a decision and impose no fine or it may impose fines of up to a maximum of € 1 million or a greater sum not exceeding 10% of the turnover in the preceeding business year of the enterprises in question. An appeal would lie against any such decision by the Commission to the Court of First Instance of the European Communities. 86 50 Derivatives The Group’s objectives, policies and strategies in managing the risks that arise in connection with the use of financial instruments, including derivative financial instruments, are set out on pages 20 to 31 of the Financial Review. The Group uses derivatives to service customer requirements, to manage the Group’s interest, exchange rate and equity exposures and for trading purposes. Derivative instruments are contractual agreements whose value is derived from price movements in underlying assets, interest rates, foreign exchange rates or indices. These instruments involve, to varying degrees, elements of market risk and credit risk which are not reflected in the consolidated balance sheet. Market risk is the exposure to potential loss through holding interest rate, exchange rate and equity positions in the face of absolute and relative price movements, interest rate volatility, movements in exchange rates and shifts in liquidity. Credit risk is the exposure to loss should the counterparty to a financial instrument fail to perform in accordance with the terms of the contract. While notional principal amounts are used to express the volume of derivative transactions, the amounts subject to credit risk are much lower because derivative contracts typically involve payments based on the net differences between specified prices or rates. Credit risk arises to the extent that the default of a counterparty to the derivative transaction exposes the Group to the need to replace existing contracts at prices that are less favourable than when the contract was entered into.The potential loss to the Group is known as gross replacement cost. For risk management purposes, consideration is taken of the fact that not all counterparties to derivative positions are expected to default at the point where the Group is most exposed to them. For derivatives, credit risk is calculated as the positive mark to market value for each contract plus an estimate of the additional credit risk that may arise over the contract’s remaining life from an adverse movement in the value of the underlying asset or index. Any breach of credit risk limits on derivative contracts is reported to line management and reviewed by the appropriate credit authority.The counterparty credit exposure on derivatives is amalgamated with all other exposures to the counterparty to provide a comprehensive statement of individual counterparty risk. The following tables present the notional principal amount and the gross replacement cost of interest rate, exchange rate and equity contracts at 31 December 2000 and 1999. Interest rate contracts(1) Notional principal amount Gross replacement cost Exchange rate contracts(1) Notional principal amount Gross replacement cost Equity contracts(1) Notional principal amount Gross replacement cost 2000 € m Group Allied Irish Banks, p.l.c. 1999 € m 2000 € m 1999 € m 130,945 129,571 126,502 123,416 875 € m 839 € m 836 € m 792 € m 26,877 24,477 20,528 20,767 901 769 499 656 € m 2,938 297 € m 1,922 313 € m 2,938 297 € m 1,922 313 (1) Interest rate, exchange rate and equity contracts have been entered into for both hedging and trading purposes. The Group uses the same credit control and risk management policies in undertaking all off-balance sheet commitments as it does for on balance sheet lending including counterparty credit approval, limit setting and monitoring procedures. In addition, in relation to derivative instruments, the Group’s exposure to market risk is controlled within the risk limits in the Group’s Interest Rate Risk and Foreign Exchange Risk Policies and is further constrained by the risk parameters incorporated in the Group’s Derivatives Policy as approved by the Board. 87 Notes to the accounts 50 Derivatives (continued) Trading activities AIB Group maintains trading positions in a variety of financial instruments including derivatives.These financial instruments include foreign exchange, interest rate and equity futures, interest rate swaps, interest rate caps and floors, forward rate agreements, and interest rate, foreign exchange and equity index options. Most of these positions arise as a result of activity generated by corporate customers while others represent trading decisions of the Group’s derivative and foreign exchange traders with a view to generating incremental income.The managers and traders involved in financial derivatives have the technical expertise to trade these products and the active involvement of the traders in these markets allows the Group to offer competitive pricing to customers. All trading activity is conducted within risk limits approved by the Board. Systems are in place which measure risks and profitability associated with derivative trading positions as market movements occur. Independent risk control units monitor these risks. Nature and terms of trading instruments The following table presents the notional amounts and fair values of the classes of derivative trading instruments at 31 December 2000 and 1999. Interest rate contracts: Interest rate swaps In a receivable position In a payable position Interest rate caps, floors and options Held Written Forward rate agreements In a favourable position In an unfavourable position Financial futures In a favourable position In an unfavourable position Other interest rate derivatives Exchange rate contracts: Currency options Forward FX contracts Currency swaps Equity derivatives Notional amounts(1) € m 21,525 5,364 8,449 1,880 53 4,714 16,300 66 40 2000 Fair values € m Notional amounts(1) € m 195 (180) 6 (6) 10 (10) 1 (2) – 259 (38) – – 18,042 5,420 29,932 3,406 44 4,430 2,640 – 48 1999 Fair values € m 159 (220) 10 (15) 27 (35) 5 (3) – (18) 3 – (2) (1)The notional amounts shown for the contracts represent the underlying amounts that the instruments are based upon and do not represent the amounts exchanged by the parties to the instruments. In addition, these amounts do not measure the Group’s exposure to credit or market risks. 88 50 Derivatives (continued) Details of debt securities held for trading purposes are outlined in note 27 to the financial statements. The Group's credit exposure at 31 December 2000 and 1999 from derivatives held for trading purposes is represented by the fair value of instruments with a positive fair value.The risk that counterparties to derivative contracts might default on their obligations is monitored on an ongoing basis and the level of credit risk is minimised by dealing with counterparties of good credit standing. All trading instruments are subject to market risk. As the traded instruments are recognised at market value, these changes directly affect reported income for the period. Exposure to market risk is managed in accordance with risk limits approved by the Board through buying or selling instruments or entering into offsetting positions. The Group undertakes trading activities in interest rate contracts with the Group being a party to interest rate swap, forward, futures, option, cap and floor contracts.The Group's largest activity is in interest rate swaps.The two parties to an interest rate swap agree to exchange, at agreed intervals, payment streams calculated on a specified notional principal amount. Forward rate agreements are also used by the Group in its trading activities. Forward rate agreements settle in cash at a specified future date based on the difference between agreed market rates applied to a notional principal amount. Most of these contracts have maturity terms up to one year. Dealing profits The following table summarises the Group’s dealing profits by category of instrument. Foreign exchange contracts Profits less losses from securities held for trading purposes Interest rate contracts Total Risk management activities 2000 € m 69 42 (8) 103 1999 € m 30 28 16 74 1998 € m 52 8 9 69 In addition to meeting customer needs, the Group’s principal objective in holding or issuing derivatives for purposes other than trading is the management of interest rate and foreign exchange rate and equity risks. The operations of the Group are exposed to interest rate risk arising from the fact that assets and liabilities mature or reprice at different times or in differing amounts. Derivatives are used to modify the repricing or maturity characteristics of assets and liabilities in a cost-efficient manner.This flexibility helps the Group to achieve liquidity and risk management objectives. Similarly, foreign exchange and equity derivatives are used to hedge the nature of the Group’s exposure to foreign exchange and equity risk, as required. Derivatives fluctuate in value as interest rates rise or fall just as on balance sheet assets and liabilities fluctuate in value. If the derivatives are purchased or sold as hedges of balance sheet items, the appreciation or depreciation of the derivatives, as interest rates change, will generally be offset by the unrealised depreciation or appreciation of the hedged items.This means that separate disclosure of market risk on derivatives used for hedging purposes is not meaningful. To achieve its risk management objective, the Group uses a combination of derivative financial instruments, particularly interest rate swaps, futures and options, as well as other contracts.The tables on pages 90 and 91 present the notional and fair value amounts weighted average maturity and weighted average receive and pay rates for instruments held for risk management purposes entered into by the Group at 31 December 2000 and 1999. 89 Notes to the accounts 50 Derivatives (continued) Interest rate swaps: Receive fixed 1 year or less 1 - 5 years 5 - 10 years Pay fixed 1 year or less 1 - 5 years 5 - 10 years Pay/receive floating 1 year or less 1 - 5 years Forward rate agreements: Loans 1 year or less 1 - 5 years Deposits 1 year or less 1 - 5 years Interest rate options: Purchased 1 year or less 1 - 5 years 5 - 10 years Written 1 year or less 1 - 5 years 5 - 10 years Notional amount 2000 € m 1999 € m 14,692 12,263 1,647 8,535 12,833 1,705 28,602 23,073 7,458 12,115 2,432 5,824 11,661 1,828 22,005 19,313 11 13 24 25 23 48 1,763 424 3,663 900 2,187 4,563 2,385 140 3,655 255 2,525 3,910 9,012 2,660 25 11,697 2,399 1,022 56 1,685 2,009 20 3,714 2,619 943 97 3,477 3,659 90 Weighted average maturity in years Weighted average rate Pay Receive Estimated fair value 2000 1999 2000 % 1999 % 2000 % 1999 % 2000 € m 1999 € m 0.42 2.37 7.30 1.65 0.39 2.45 8.36 2.40 0.26 2.18 1.33 0.72 1.32 0.84 0.70 1.40 0.74 0.40 2.06 9.10 0.80 0.24 2.35 5.16 0.94 0.50 2.63 7.59 2.21 0.53 2.63 9.39 2.64 0.50 2.81 1.61 0.67 1.67 0.87 0.67 1.50 0.72 0.33 2.54 5.33 1.55 0.25 3.76 6.17 1.31 5.31 5.51 4.95 5.16 5.02 6.02 5.37 5.15 5.39 4.66 5.49 5.66 6.12 5.16 5.01 6.24 5.61 5.33 5.66 5.17 7.77 6.56 5.53 6.10 7.09 5.80 6.72 5.79 5.64 6.96 4.76 5.76 5.72 4.82 6.12 7.01 4.49 6.06 6.29 4.80 6.32 5.11 6.53 6.04 5.35 5.38 5.99 5.91 5.10 6.75 5.48 5.64 4.79 4.36 5.37 5.39 207 155 35 397 (48) (144) (39) (231) – – – 3 2 5 (4) (2) (6) 1 5 1 7 – (2) – (2) 88 (71) (38) (21) (70) 20 3 (47) – – – (7) (2) (9) 5 – 5 1 3 1 5 – (2) – (2) 50 Derivatives (continued) Notional amount 2000 € m 1999 € m Weighted average maturity in years Weighted average rate Pay Receive Estimated fair value 2000 1999 2000 % 1999 % 2000 % 1999 % 2000 € m 1999 € m Financial futures: 1 year or less 1 - 5 years 18,845 3,107 7,165 5,298 0.47 1.54 0.58 1.88 5.59 5.75 5.39 6.32 21,952 12,463 0.62 1.13 5.62 5.79 Other interest rate derivatives: 1 year or less 1 - 5 years 5 - 10 years 519 686 – 903 982 99 Equity derivatives: 1 year or less 1 - 5 years 5 - 10 years 1,205 1,984 1,174 1,655 69 156 1,594 124 0.46 1.60 – 1.11 0.46 2.58 5.22 0.42 2.47 5.75 1.70 0.42 2.21 5.33 2,898 1,874 1.78 2.27 9.36 8.51 – 10.12 10.82 6.06 8.88 10.26 9.63 11.30 (17) 2 (15) 4 5 – 9 – (1) – (1) 1 1 2 (10) (11) (1) (22) (1) 2 (1) – The carrying value of the interest rate derivative financial instruments held for risk management purposes was € 162 million (1999: € 57 million). Reconciliation of movements in notional amounts of interest rate instruments held for risk management purposes At 31 December 1998 Additions Maturities/amortisations Cancellations Exchange adjustments At 31 December 1999 Additions Maturities/amortisations Cancellations Exchange adjustments At 31 December 2000 Interest rate swaps € m FRA Deposits € m 32,402 26,195 (15,380) (1,176) 393 42,434 22,740 (14,068) (815) 340 7,054 14,623 (18,043) – 276 3,910 2,555 (3,933) – (7) FRA Loans € m 5,921 14,408 (16,166) – 400 4,563 2,028 (4,415) – 11 50,631 2,525 2,187 91 Notes to the accounts 50 Derivatives (continued) Non-trading derivative deferred balances Set out hereunder are deferred balances relating to settled transactions.These balances will be released to the profit and loss account in the same periods as the income and expense flows from the underlying transactions. At 31 December 2000 the Group had deferred income of € 73m (1999: € 84m) and deferred expense of € 88m (1999: € 80m) relating to non-trading derivatives. € 38m (1999: € 41m) of deferred income and € 41m (1999: € 40m) of deferred expense is expected to be released to the profit and loss account in 2001. During the year ended 31 December 2000, net deferred income in relation to previous years of € 1m was released to the profit and loss account. 2001 € 000 2002 € 000 2003 € 000 2004 € 000 2005 € 000 Interest rate swaps Deferred income Deferred expense Forward rate agreements Deferred income Deferred expense Interest rate options Deferred income Deferred expense Financial futures Deferred income Deferred expense 8,767 (2,276) 1,961 (4,256) 4,204 (4,515) 4,192 (1,498) – (1,532) 3,488 (4,171) 23,629 (30,071) 10,077 (17,057) 2,742 (717) 2,762 (4,563) – – 2,386 (2,972) 4,009 (6,032) – – 413 (578) 1,303 (2,003) After 2005 € 000 513 (38) – – 66 (306) 163 (131) – – 252 (226) 980 (1,856) 960 (3,578) Total € 000 19,139 (9,223) 1,961 (5,788) 10,809 (12,768) 40,958 (60,597) (2,557) (6,501) (584) (2,666) (818) (2,383) (15,509) The above deferred balances have related unrealised gains or losses on transactions which are on balance sheet.The matching of the income and expense flows from the related transactions will be effected through the deferral process. At 31 December 2000 the Group had deferred income of € 26m (1999: € 50m) relating to debt securities held for hedging purposes of which € 15m (1999: € 12m) is expected to be released to the profit and loss account in 2001. During the year ended 31 December 2000, deferred income in relation to previous years of € 12m was released to the profit and loss account. Unrecognised gains and losses on derivatives hedges Gains and losses on instruments used for hedging are recognised in line with the underlying items which are being hedged. The unrecognised net gain on instruments used for hedging as at 31 December 2000 was € 138m (1999: net loss of € 2m). The net gain expected to be recognised in 2001 is € 52m (1999: net loss of € 6m) and thereafter a net gain of € 86m (1999: € 4m) is expected. The net loss recognised in 2000 in respect of previous years was € 6m (1999: € 32m) and the net gain arising in 2000 which was not recognised in 2000 was € 134m (1999: € 61m). 51 Fair value of financial instruments The term ‘financial instruments’ includes both financial assets and liabilities and also derivatives.The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value is based upon quoted market prices where available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities and adjusted for differences between the quoted instrument and the instrument being valued. In certain cases, including some lendings to customers, where there are no ready markets, various techniques have been used to estimate the fair value of the instruments.These estimates are subjective in nature and involve uncertainties and matters of significant judgement and therefore cannot be determined with precision. Readers of these financial statements are advised to use caution when using this data to evaluate the Group’s financial position or to make comparisons with other institutions. 92 51 Fair value of financial instruments (continued) Fair value information is not provided for certain financial instruments or for items that do not meet the definition of a financial instrument.These items include short-term debtors and creditors, intangible assets such as the value of the branch network and the long-term relationships with depositors, premises and equipment and shareholders’ equity.These items are material and accordingly the fair value information presented does not purport to represent, nor should it be construed to represent, the underlying value of the Group as a going concern at 31 December 2000. The following table gives details of the carrying amounts and fair values of financial instruments at 31 December 2000 and 1999. 31 December 2000 31 December 1999 Trading financial instruments Debt securities(1) Equity shares(1) Central government and other eligible bills(1) Off-balance sheet assets/(liabilities): Interest rate contracts(1) Exchange rate contracts(1) Equity contracts(1) Non-trading financial instruments Assets: Cash and balances at central banks(1) Items in course of collection(1) Central government bills and other eligible bills Loans and advances to banks Loans and advances to customers(2) Securitised assets(1) Debt securities Equity shares Liabilities: Deposits by banks Customer accounts Debt securities in issue Subordinated liabilities Shareholders’ funds: non-equity interests Off-balance sheet assets/(liabilities): Interest rate contracts Exchange rate contracts Equity contracts Carrying amount € m 2,341 48 15 14 221 – 938 1,116 282 4,193 45,880 166 16,645 364 12,478 48,437 4,295 2,249 264 162 21 – Fair value € m 2,341 48 15 14 221 – 938 1,116 284 4,197 46,267 166 16,661 358 12,507 48,527 4,310 2,235 267 164 158 (1) Carrying amount € m 1,582 62 70 (72) (15) (2) 1,119 916 648 3,831 39,171 125 13,526 235 8,608 42,335 4,298 1,984 245 57 16 – Fair value € m 1,582 62 70 (72) (15) (2) 1,119 916 647 3,805 39,325 125 13,318 245 8,638 42,330 4,312 1,975 248 (89) 160 – (1)The fair value of these financial instruments is considered equal to the carrying value.These instruments are either carried at market value or have minimal credit losses. (2)The carrying values are net of the provisions for bad and doubtful debts and related unearned income. 93 Notes to the accounts 51 Fair value of financial instruments (continued) The following methods and assumptions were used in estimating the fair value of financial instruments. Central government bills and other eligible bills The fair value of central government bills and other eligible bills is based on quoted market prices. Loans and advances to banks and loans and advances to customers The Group provides lending facilities of varying rates and maturities to corporate and personal customers. Several different techniques are employed, as considered appropriate, in estimating the fair value of loans.Where secondary market prices were available, these were used.The carrying amount of variable rate loans was considered to be at market value if there was no significant change in the credit risk of the borrower.The fair value of fixed rate loans was calculated by discounting expected cash flows using discount rates that reflected the credit and interest rate risk in the portfolio. The fair value of money market funds and loans and advances to banks was estimated using discounted cash flows applying either market rates, where practicable, or rates currently offered by other financial institutions for placings with similar characteristics. Debt securities and equity shares The fair value of listed debt securities and equity shares is based on market prices received from external pricing services or bid quotations received from external securities dealers.The estimated value of unlisted debt securities and equity shares is based on the anticipated future cashflows arising from these items. Deposits by banks, customer accounts and debt securities in issue The fair value of current accounts and deposit liabilities payable on demand is equal to their book value.The fair value of all other deposits and other borrowings is estimated using discounted cash flows applying either market rates, where applicable, or interest rates currently offered by the Group. Subordinated liabilities The estimated fair value of subordinated liabilities is based upon quoted market rates. Commitments pertaining to credit-related instruments Details of the various credit-related commitments entered into by the Group and other off-balance sheet financial guarantees are included in note 49. Fees for these instruments may be billed in advance or in arrears on an annual, quarterly or monthly basis. In addition, the fees charged vary on the basis of instrument type and associated credit risk. As a result it is not considered practicable to estimate the fair value of these instruments because each customer relationship would have to be separately evaluated. Derivatives The Group uses various derivatives, designated as hedges, to manage its exposure to fluctuations in interest and exchange rates. The fair value of these instruments is estimated using market prices or pricing models consistent with the methods used for valuing similar instruments used for trading purposes. Derivatives used for trading purposes are marked to market using independent prices and are included in other assets/other liabilities on the consolidated balance sheet at 31 December 2000 and 1999. Details of derivatives in place, including fair values, are included in note 50. Shareholders’ funds: non-equity interests The fair value of these instruments is based on quoted market prices. 94 52 Consolidated cash flow statement Notes (a) Returns on investments and servicing of finance Interest paid on subordinated liabilities Dividends paid on non-equity shares Dividends paid to non-equity minority interests in subsidiaries Net cash outflows from returns on investments and servicing of finance (b) Taxation Tax paid, Republic of Ireland Foreign tax paid Net cash outflow from taxation (c) Capital expenditure Net increase in debt securities Net increase in equity shares Additions to tangible fixed assets Disposals of tangible fixed assets Net cash outflow from capital expenditure (d) Acquisitions and disposals Acquisition of Group undertakings Net cash acquired with Group undertakings Investments in associated undertakings Disposals of investments in associated undertakings Net cash inflow/(outflow) from acquisitions and disposals (e) Financing Issue of ordinary share capital Redemption of subordinated liabilities Issue of subordinated liabilities Issue proceeds net of redemption of non-equity minority interests in subsidiaries Net cash inflow from financing 52(h) (f ) Analysis of changes in cash At 1 January Net cash (outflow)/inflow before the effect of exchange translation adjustments Effect of exchange translation adjustments At 31 December 52(g) 2,222 2000 € m (150) (20) (14) (184) (82) (117) (199) 1999 € m (84) (14) (10) (108) (101) (136) (237) (2,763) (67) (237) 63 (1,231) (17) (177) 20 (3,004) (1,405) – – (4) 6 2 15 – 149 – 164 3,130 (1,016) 108 (602) 205 (2) 8 (391) 14 (57) 733 (50) 640 1,523 1,477 130 3,130 95 Notes to the accounts 52 Consolidated cash flow statement (continued) (g) Analysis of cash Cash and balances at central banks Loans and advances to banks (repayable on demand) 2000 € m 938 1,284 2,222 1999 € m 1,119 2,011 3,130 Change in year € m (181) (727) (908) The Group is required to maintain balances with the Central Bank of Ireland which amounted to € 304m (1999: € 336m). The Group is also required by law to maintain reserve balances with the Federal Reserve Bank in the United States of America, the Bank of England and with the National Bank of Poland. Such reserve balances amounted to € 385m (1999: € 383m). (h) Analysis of changes in financing At 1 January Effect of exchange translation adjustments Cash inflow/(outflow) from financing Other movements Amortisation of issue costs At 31 December Share capital (including premium) Subordinated liabilities Non-equity minority interests 2000 € m 2,116 19 15 15 – 2,165 1999 € m 2,050 35 14 17 – 2,116 2000 € m 1,984 115 149 – 1 2,249 1999 € m 1,140 168 676 – – 1,984 2000 € m 105 8 – 1 – 114 1999 € m 137 18 (50) – – 105 53 Report on directors’ remuneration and interests Remuneration policy The Company’s policy in respect of the remuneration of the executive directors is to provide remuneration packages which attract, retain, motivate and reward the executives concerned and, by ensuring strong links between performance and reward, encourage them to enhance the Company’s performance. In considering such packages, cognisance is taken of : the levels of remuneration for comparable positions, as advised by external consultants; the responsibilities of the individuals concerned; their individual performances measured against specific and challenging objectives; and overall Group performance. Nomination and Remuneration Committee The Nomination and Remuneration Committee comprises only non-executive directors; during 2000 its members were: Mr Lochlann Quinn (Chairman), Mr Adrian Burke and Mr John B McGuckian.The Committee has a wide remit which includes, inter alia, determining, under advice to the Board, the specific remuneration packages of the executive directors. 96 53 Report on directors’ remuneration and interests (continued) Fees(1) Salary Bonus(2) € 000 € 000 € 000 Profit share(3) € 000 Taxable benefits(4) € 000 Pension contributions(5) € 000 29 29 29 29 29 783 307 309 252 698 470 157 159 129 349 145 2,349 1,264 – 13 13 11 13 50 15 149 38 42 40 284 65 36 24 42 4 86 41 38 198 534 424 50 50 38 109 671 – – – – – – – – – – Remuneration Executive directors Frank P Bramble Michael Buckley Kevin J Kelly Gary Kennedy Thomas P Mulcahy Non-executive directors Adrian Burke Padraic M Fallon Dermot Gleeson Don Godson Derek A Higgs John B McGuckian Carol Moffett Denis J Murphy Lochlann Quinn Former directors Pensions(6) Other payments(7) Total 2000 Total € 000 1,721 705 598 501 1,238 4,763 65 36 24 42 4 86 41 38 198 534 98 327 425 5,722 97 Notes to the accounts 53 Report on directors’ remuneration and interests (continued) Remuneration (continued) Fees(1) Salary Bonus(2) € 000 € 000 € 000 Profit share(3) € 000 Taxable benefits(4) € 000 Pension contributions(5) € 000 28 28 28 28 28 609 272 278 228 603 487 143 143 117 301 140 1,990 1,191 – 12 12 11 13 48 13 87 33 46 39 218 43 35 41 66 16 40 43 45 189 518 444 45 46 34 94 663 – 6 – 6 – – 10 16 – 38 Executive directors Frank P Bramble Michael Buckley Kevin J Kelly Gary Kennedy Thomas P Mulcahy Non-executive directors Adrian Burke Padraic M Fallon Don Godson John B McGuckian Raymond J McLoughlin Carol Moffett Denis J Murphy Miriam Hederman O’Brien Lochlann Quinn Former directors Pensions(6) Other payments(7) Total 1999 Total € 000 1,581 587 540 464 1,078 4,250 43 41 41 72 16 40 53 61 189 556 175 1,474 1,649 6,455 (1) Fees comprise a fee paid in respect of service as a director, and additional remuneration paid to any non-executive director who holds the office of Chairman, serves on the board of a subsidiary company, or performs services outside the ordinary duties of a director, such as through membership of Board Committees. (2) The executive directors participate in a discretionary, performance-related, incentive scheme for senior executives under which bonuses may be earned on the achievement of specific, performance-related objectives, reviewed annually. The bonus may range from 0% to 50% of annual salary, except that the bonus for Mr Frank P Bramble, Chief Executive, USA division, may range from 0% to 120% of annual salary. (3) Information on the employees’ profit sharing schemes, which are operated on terms approved by the shareholders, is given in note 44. (4) Taxable benefits include the use of a company car or an allowance in lieu thereof, benefit arising from loans made at preferential rates, and any allowances related to the undertaking of international assignments within the Group. (5) Pension contributions represent payments to defined benefit pension plans, in accordance with actuarial advice, to provide post-retirement pensions.The fees of the non-executive directors who joined the Board since 1990 are not pensionable. In respect of the US-based executive director, pension benefits are computed on the basis of salary and annual bonus in accordance with US practice.The pension benefits earned during the year, and accrued at year end, are as follows: 98 53 Report on directors’ remuneration and interests (continued) Remuneration (continued) Executive directors Frank P Bramble Michael Buckley Kevin J Kelly Gary Kennedy Thomas P Mulcahy Non-executive directors Padraic M Fallon John B McGuckian Denis J Murphy Increase in accrued benefits during 2000(a) € 000 Accrued benefit at year-end(b) € 000 Transfer values(c) € 000 68 20 29 9 54 0.7 0.5 0.6 300 162 222 29 481 10 16 19 534 243 428 57 804 5 5 8 (a) Increases are after adjustment for inflation, and reflect additional pensionable service and earnings. (b) Figures represent the accumulated total amounts at 31 December 2000 of accrued benefits payable at normal retirement dates. (c) Figures show the transfer values of the increases in accrued benefits during 2000. These transfer values do not represent sums paid or due, but the amounts that the pension plan would transfer to another pension plan, in relation to the benefits accrued in 2000, in the event of the member leaving service. (6) Pensions represent the payment of pensions to former directors or their dependants, granted on an ex-gratia basis and fully provided for in the balance sheet. (7) Other payments comprise fees of € 42,228 paid to a former non-executive director serving on the board of a subsidiary company (1999: € 65,911, in respect of two such directors), and remuneration of € 285,049 paid to Mr Jeremiah E Casey under the terms of a post-retirement consultancy contract approved by shareholders at the 1999 Annual General Meeting (1999: € 648,450 in respect of consultancy, and € 759,610 in respect of the salary, bonus, pension contributions and taxable benefits of Mr Casey prior to his retirement as Chief Executive, USA division on 30 April 1999). Share options To encourage focus on long-term shareholder value, executive directors are eligible for grants of share options. Options are usually granted on a phased basis and the exercise of options granted since 1 January 1996 is conditional on the achievement of earnings per share growth of at least 2% per annum compound above the increase in the Consumer Price Index over a period of not less than three and not more than five years from date of grant.The percentage of share capital which may be issued under the share option scheme, and individual grant limits, comply with the requirements of the Irish Association of Investment Managers. Details of the executive directors’ share options are given on page 100, and additional information in relation to the Executive Share Option Scheme is given in note 44. Non-executive directors do not participate in that scheme. Service contracts There are no service contracts in force for any director with the Company or any of its subsidiaries. 99 Notes to the accounts 53 Report on directors’ remuneration and interests (continued) Interests in shares The beneficial interests of the directors and the secretary and of their spouses and minor children are as follows: (a) Ordinary shares Directors: Frank P Bramble# Michael Buckley Adrian Burke Padraic M Fallon Dermot Gleeson Don Godson Derek A Higgs Kevin J Kelly Gary Kennedy John B McGuckian Carol Moffett Thomas P Mulcahy Denis J Murphy Lochlann Quinn Secretary: W M Kinsella * or later date of appointment 31 December 2000 1 January 2000* 133,548 128,690 10,642 8,011 2,000 25,099 – 107,578 9,191 66,113 15,675 365,929 3,039 309,309 136,416 85,589 6,611 7,768 2,000 15,000 – 68,653 7,568 64,475 15,350 255,441 2,947 300,000 13,005 11,732 # Mr Bramble’s interests on 31 December 1998 and 1 January 1999 related to 140,016 ordinary shares, and on 31 December 1999 to 136,416 ordinary shares.These restated interests, which reflect transfers of shares to irrevocable trusts established for the benefit of his children and grandchildren, were advised to the Company and announced to the Stock Exchanges in January 2001. (b) Options to subscribe for shares 31 December 2000 1 January 2000 Since 1 January 2000 Exercised Granted Price of options exercised Market price at date of exercise Weighted average subscription price of options outstanding at 31 December 2000 Directors: Michael Buckley Kevin J Kelly Gary Kennedy 181,500 157,500 235,000 Thomas P Mulcahy 336,728 Secretary: 246,500 257,500 220,000 536,728 35,000 – 15,000 100,000 100,000 – – 200,000 € 3.36 3.36 – 3.68 € 10.80 10.83 – 10.97 W M Kinsella 65,000 50,000 15,000 – – – € 7.41 6.18 6.49 6.10 7.15 The options outstanding at 31 December, 2000 are exercisable at various dates between 2001 and 2007. Details of these are shown in the Register of Directors’ and Secretary’s Interests, which may be inspected at the Company’s Registered Office. 100 53 Report on directors’ remuneration and interests (continued) Interests in shares (continued) (c) Other options On 1 January 2000, Mr Frank P Bramble held options over 440,000 AIB American Depositary Receipts (‘ADRs’) (equivalent to 880,000 ordinary shares) at a weighted average price of US $23.66 per ADR, under the terms of the Allfirst Financial, Inc. 1997 Stock Option Plan (note 33) and the Allfirst Financial, Inc. 1999 Stock Option Plan. During the year, Mr Bramble was granted options over 210,000 ADRs (equivalent to 420,000 ordinary shares) at a weighted average price of US $19.92 per ADR. At 31 December 2000, Mr Bramble held options over 650,000 ADRs (1,300,000 ordinary shares) at a weighted average price of US $22.45 per ADR. Under the terms of the aforementioned Plans, ADRs are purchased in the market by a trust which holds the ADRs, and Plan participants are granted options over ADRs so held.The options granted to Mr Bramble in 2000 will vest and become exercisable not earlier than 1 January 2003 and not later than 23 November 2010 subject to the following criteria, set by the Management and Compensation Committee of Allfirst Financial, Inc. and approved by the Nomination and Remuneration Committee, being satisfied: – 35% of the grant on the achievement, by Allfirst, of tangible net income growth of 7.5% per annum, compound, over the two year period following the date of grant; – 35% of the grant on the achievement, by Allfirst, of a tangible cost/income ratio of less than 55.0% for the two year period following the date of grant; – 30% of the grant on the achievement of growth in AIB tangible earnings per share over the three year period following the date of grant at least equal to the growth in the Consumer Price Index plus 5% per annum, compound, over that period. The year-end market price, on the Irish Stock Exchange, of the Company’s ordinary shares was € 12.35 per share; during the year the price ranged from € 7.89 to € 13.10 per share. There were no changes in the above interests between 31 December 2000 and 20 February 2001. 54 Transactions with directors Loans to non-executive directors are made in the ordinary course of business on commercial terms. Loans to executive directors are made on the terms applicable to other employees within the Group, in accordance with established policy. At 31 December 2000, the aggregate amount outstanding in loans to persons who at any time during the year were directors was € 44.4m in respect of 8 persons; the amount outstanding in respect of quasi-loans, to 6 persons, was € 0.03m (1999: € 37.2m in respect of loans to 9 persons and € 0.05m in respect of quasi-loans to 9 persons). Under the terms of a ‘Change of Control Agreement’ between Mr Frank P Bramble and Allfirst Financial, Inc., which agreement existed at the time of his co-option to the Board of Allied Irish Banks, p.l.c., Mr Bramble would be entitled to a severance package in the event of his discharge or constructive discharge within two years following a change of control. Essentially, a change of control would be deemed to have occurred if a third party became the beneficial owner of 50% or more of the equity of AIB, or 25% or more of the equity of Allfirst Financial, Inc. or its subsidiary Allfirst Bank or if, arising from any merger, consolidation, sale of assets or contested election, the persons who were directors of AIB, Allfirst Financial, Inc. or Allfirst Bank immediately before that transaction should cease to constitute a majority of the Board of such entity, or the persons who were shareholders of AIB or Allfirst Financial, Inc., as applicable, immediately before the transaction should cease to own at least 50% of the equity of the applicable entity.The severance package provides for the payment, within US Internal Revenue limits, of: three times annual salary; short-term bonus; target payments under long-term incentive awards; vesting of all stock awards; contribution of fringe benefits for up to two years; and out-placement. 101 Notes to the accounts 55 Commitments Capital expenditure Estimated outstanding commitments for capital expenditure not provided for in the accounts amounted to € 69m (1999: € 46m). Capital expenditure authorised, but not yet contracted for, amounted to € 190m (1999: € 27m). Operating lease rentals The Group had annual commitments under non-cancellable operating leases as set out below. Operating leases which expire: Within one year In the second to fifth year Over five years The operating lease rentals in respect of property are subject to rent reviews. 56 Employees The average full-time equivalent employee numbers by division were as follows: AIB Bank USA Capital Markets Poland Group support functions 2000 € m 3 9 35 47 Property 1999 € m Equipment 1999 € m 2000 € m 2 10 30 42 – 1 – 1 – 1 – 1 2000 1999 11,663 5,658 2,175 11,926 226 11,183 5,523 2,023 7,322 213 31,648 26,264 57 Companies (Amendment) Act, 1983 The Companies (Amendment) Act, 1983, requires that, when the net assets of a company are half or less than half of its called up share capital, an extraordinary general meeting be convened.The Act further requires an expression of opinion by the auditors as to whether the financial situation of the company at the balance sheet date is such as would require the convening of such a meeting. 58 Form 20-F An annual report on Form 20-F will be filed with the Securities and Exchange Commission,Washington D.C. and, when filed, will be available to shareholders on application to the Company Secretary. 59 Reporting currency The currency used in these accounts is the euro which is denoted by ‘EUR’ or the symbol €. The euro was introduced on 1 January 1999.The countries participating in the European Single Currency are: Austria, Belgium, Finland, France, Germany, Greece, Italy, Luxembourg, the Netherlands, Portugal, Spain and Ireland.The national currency units of these participating currencies will co-exist with the euro, as denominations of the new single currency until 31 December 2001. Ireland joined the European Single Currency at the fixed translation rate of EUR 1=IR £0.787564. Each euro is made up of one hundred cents, denoted by the symbol ‘c’ in these accounts. 102 60 Financial and other information Operating ratios Operating expenses/operating income Tangible operating expenses(2)/operating income Other income/operating income Net interest margin: Group Domestic Foreign Rates of exchange € /US $ Closing Average € /Stg £ Closing Average € /PLN Closing Average 2000 1999 (1) 58.6% 57.8%(1) (1) 39.2% 3.02%(3) 2.75%(3) 3.23% 0.9305 0.9259 0.6241 0.6091 3.8498 4.0121 57.3% 57.1% 37.3% 3.27% 2.97% 3.54% 1.0046 1.0671 0.6217 0.6596 4.1587 4.2231 (1)Adjusted to exclude the impact of the deposit interest retention tax settlement (‘DIRT’). Including DIRT, operating expenses/ operating income was 60.7%, tangible operating expenses/operating income was 59.8% and other income/operating income was 40.6%. (2)Excludes amortisation of goodwill of € 26.3m (1999: € 8.0m). (3)The Group and domestic net interest margins have been adjusted to exclude the impact of the deposit interest retention tax settlement. Capital adequacy information Risk weighted assets Banking book: On balance sheet Off-balance sheet Trading book: Market risks Counterparty and settlement risks 2000 € m 1999 € m 49,396 8,779 58,175 1,956 91 2,047 40,623 7,184 47,807 1,401 67 1,468 Total risk weighted assets 60,222 49,275 Capital Tier 1 Tier 2 Supervisory deductions Total Currency information Euro Other 3,814 2,926 6,740 214 6,526 2000 € m 32,297 47,391 3,168 2,551 5,719 149 5,570 Liabilities 1999 € m 25,911 41,159 2000 € m 32,398 47,290 Assets 1999 € m 25,415 41,655 79,688 67,070 79,688 67,070 103 Notes to the accounts 61 Average balance sheets and interest rates The following tables show the average balances and interest rates of interest earning assets and interest bearing liabilities for the years ended 31 December 2000 and 1999.The calculation of average balances include daily and monthly averages for reporting units. The average balances used are considered to be representative of the operations of the Group. Year ended 31 December 2000 Year ended 31 December 1999 Assets Placings with banks Domestic offices Foreign offices Loans to customers(1) Domestic offices Foreign offices Placings with banks and loans to customers(1) Domestic offices Foreign offices Funds sold Domestic offices Foreign offices Debt securities and government bills Domestic offices Foreign offices Instalment credit and finance lease receivables Domestic offices Foreign offices Total interest earning assets Domestic offices Foreign offices Allowance for loan losses Non-interest earning assets Average balance € m Interest € m Average rate % 114 123 1,239 2,056 1,353 2,179 – 5 398 775 109 96 1,860 3,055 4,915 2,410 1,897 18,570 22,772 20,980 24,669 – 75 7,100 11,014 1,739 1,449 29,819 37,207 67,026 (828) 7,392 4.7 6.5 6.7 9.0 6.4 8.8 – 6.4 5.6 7.0 6.3 6.6 6.2 8.2 7.3 Interest € m Average rate % 81 76 974 1,430 1,055 1,506 – 2 299 551 89 80 1,443 2,139 3,582 3.2 5.7 6.3 8.2 5.9 8.0 – 5.1 4.8 6.5 6.5 7.0 5.6 7.5 6.6 Average balance € m 2,572 1,342 15,416 17,476 17,988 18,818 – 36 6,263 8,495 1,360 1,153 25,611 28,502 54,113 (656) 7,018 Total assets 73,590 4,915 6.7 60,475 3,582 5.9 Percentage of assets applicable to foreign activities 56.0 52.9 (1)Loans to customers include money market funds. Non-accrual loans and loans classified as problem loans are also included within this caption. 104 61 Average balance sheets and interest rates (continued) Liabilities and stockholders’ equity Interest bearing deposits and other short-term borrowings Domestic offices Foreign offices Funds purchased Domestic offices Foreign offices Subordinated liabilities Domestic offices Foreign offices Total interest bearing liabilities Domestic offices Foreign offices Interest-free liabilities Current accounts Other liabilities Minority equity and non-equity interests Preference share capital Ordinary stockholders’ equity Year ended 31 December 2000 Year ended 31 December 1999 Average balance € m Interest € m Average rate % Average balance € m Interest € m Average rate % 22,797 30,058 – 1,522 1,478 750 24,275 32,330 56,605 8,503 3,941 246 266 4,029 944(1) 1,701 4.1(1) 5.7 19,886 23,157 633 1,012 – 93 97 58 1,041(1) 1,852 2,893(1) – 6.1 6.6 7.7 4.3(1) 5.7 5.1(1) – 72 49 46 682 1,130 1,812 – 1,498 835 678 20,721 25,333 46,054 6,712 4,025 214 230 3,240 3.2 4.4 – 4.8 5.8 6.8 3.3 4.5 3.9 Total liabilities and stockholders’ equity 73,590 2,893(1) 3.9(1) 60,475 1,812 3.0 Percentage of liabilities applicable to foreign activities 55.7 51.6 (1)The interest amount and the average rate have been presented to eliminate the effect of the deposit interest retention tax settlement (note 5). 62 Group financial information for US investors Summary of significant differences between Irish and United States accounting principles The following is a description of the significant differences between Irish generally accepted accounting principles (IR GAAP) and those applicable in the United States of America (US GAAP). Debt securities and equity securities In preparing its US GAAP information, the Group has applied SFAS No. 115 ‘Accounting for Certain Investments in Debt and Equity Securities’. Because AIB periodically sells and buys long-term debt securities in response to identified market conditions, including fluctuations in interest rates, debt securities classified as financial fixed assets in the Group balance sheet in the amount of € 16,645 million at December 31, 2000 would be classified for US GAAP purposes as ‘available-for-sale’.The purpose of these securities transactions is to minimise the risk associated with the AIB investment portfolio. At December 31, 2000 the market value of such securities was € 16,661 million. At December 31, 2000 the book amount of derivative financial instruments held to hedge the debt securities within the ‘available-for-sale’ portfolio exceeded the fair value of these instruments by € 63 million.The excess of market value over amortised cost of the debt securities of € 16 million, offset by the excess of the book amount over fair value of the derivative financial instruments of € 63 million, gave rise to an after tax reconciling item of € 37 million negative in the consolidated ordinary stockholders’ equity for US GAAP purposes. 105 Notes to the accounts 62 Group financial information for US investors (continued) Summary of significant differences between Irish and United States accounting principles (continued) Debt securities and equity securities (continued) At December 31, 1999 debt securities in the amount of € 13,526 million would be classified for US GAAP purposes as ‘available-for-sale’.The purpose of these securities transactions is to minimise the risk associated with the AIB investment portfolio. At December 31, 1999 the market value of such securities was € 13,318 million. At December 31, 1999 the book amount of derivative financial instruments held to hedge the debt securities within the ‘available-for-sale’ portfolio exceeded the fair value of these instruments by € 17 million.The excess of amortised cost over market value of the debt securities of € 208 million, along with the excess of the book amount over fair value of the derivative financial instruments of € 17 million, gave rise to an after tax reconciling item of € 148 million negative in the consolidated ordinary stockholders’ equity for US GAAP purposes. At December 31, 2000 equity securities classified as financial fixed assets in the Group balance sheet in the amount of € 364 million would be classified as ‘available-for-sale’. At December 31, 2000 the market value of such securities was € 358 million. The excess of book amount of such securities over market value was € 6 million giving rise to an after tax reconciling item of € 4 million negative in the consolidated ordinary stockholders’ equity for US GAAP purposes. At December 31, 1999 equity securities classified as financial fixed assets in the Group balance sheet in the amount of € 235 million would be classified as ‘available-for-sale’. At December 31, 1999 the market value of such securities was € 245 million. The excess of market value of such securities over book amount was € 10 million giving rise to an after tax reconciling item of € 7 million positive in the consolidated ordinary stockholders’ equity for US GAAP purposes. Debt securities held for hedging purposes Certain debt securities held as financial fixed assets are held to hedge the Group’s sensitivity to movements in market interest rates. Profits and losses on disposal of these debt securities are deferred and amortised to the profit and loss account over the lives of the underlying transactions. Under US GAAP, profits and losses on disposal of debt securities are recognised immediately in the profit and loss account. Internal derivative trades Under IR GAAP, where underlying Group subsidiaries and business units undertake internal derivative trades with the Group central treasury to transfer risk from the banking book to the trading book, the Group central treasury is allowed to aggregate and/or offset trades with similar characteristics for the purposes of establishing an effective hedge position against the underlying risk. Under IR GAAP, where positions established with external counterparties offset the net risk, hedge accounting is to be applied to internal derivative trades.The accounting policy for derivatives under IR GAAP is described more fully on page 41. Under US GAAP, contemporaneous offset with external counterparties is required if hedge accounting is to be applied to internal derivative trades. As a consequence, trades not satisfying this requirement have been accounted for at fair value for US GAAP purposes. Revaluation of property In Ireland, property may be carried at either original cost or subsequent valuation less related depreciation, calculated where applicable on the revalued amount. In the US, revaluations are not permitted to be reflected in the financial statements. Deferred taxation Deferred taxation is accounted for under IR GAAP using the liability method in respect of timing differences between the income as stated in the accounts and as computed for taxation purposes where, in the opinion of the directors, there is a reasonable probability that a tax liability or asset will arise in the foreseeable future. Under SFAS No. 109 ‘Accounting for Income Taxes’ the liability method is also used but deferred tax assets and liabilities are calculated for all temporary differences. A valuation allowance is raised against a deferred tax asset where it is more likely than not that some portion of the deferred tax asset will not be realised. Arising from the phased reduction in Irish corporation tax rates announced in 1998 (note 15) deferred taxation of € 55m was charged to the profit and loss account under IR GAAP at December 31, 1998. In the US, the impact of the phased reduction in tax rates is not recognised until the enactment of the appropriate legislation. 106 62 Group financial information for US investors (continued) Summary of significant differences between Irish and United States accounting principles (continued) Depreciation Up to December 31, 1999 depreciation was generally not charged by AIB Group on freehold and long leasehold properties as their estimated useful economic lives and residual values made it insignificant. Since January 1, 2000 AIB has adopted a policy of depreciating its freehold and long leasehold property over a period not exceeding 50 years, in accordance with US GAAP. In the US, freehold and long leasehold property must be depreciated. In AIB’s case, a period of 50 years has been used in preparing its US GAAP information. Goodwill Goodwill arising on acquisition of subsidiary and associated undertakings prior to December 31, 1997 has been written off to reserves in the year of acquisition and is written back in the year of disposal. In the US, goodwill is capitalised and amortised through income over the estimated useful life. In AIB’s case, a period of 20 years has been used in preparing its US GAAP information. Core deposit intangibles In the US, a component of goodwill arising on acquisition of bank subsidiary undertakings which relates to retail depositors is termed core deposit intangibles. Under IR GAAP, core deposit intangibles arising prior to December 31, 1997 have been written off to reserves in the year of acquisition, as a component of goodwill. In the US, capitalized core deposit intangibles are amortised through income over the estimated average life of the retail depositor relationship. In AIB’s case a period of 10 years has been used in preparing its US GAAP information. Profit on disposal of US credit card business Under IR GAAP, the profit on disposal of the US credit card business was reflected in the profit and loss account for the year ended December 31, 1997 as regulatory approval for the transaction had been received prior to the announcement of the Group’s results. As the transaction did not close until the first quarter of 1998, the profit was not recognized under US GAAP in the profit and loss account for the year ended December 31, 1997. Under US GAAP the profit was recognised in 1998 when the transaction was completed. Long-term assurance policies The shareholders’ interest in the long-term assurance fund is valued as the discounted value of the cash flows expected to be generated from in-force policies together with the net assets in excess of the statutory liabilities. Under US GAAP, premiums are recognized as revenue when due from policyholders.The costs of claims are recognized when insured events occur. For traditional business, the present value of estimated future policy benefits is accrued when premium revenue is recognized. Acquisition costs are capitalized and charged to expense in proportion to premium revenue recognized. For unit-linked business, acquisition costs are amortised over the life of the contracts at a constant rate based on the present value of estimated gross profits. Initial income in respect of future services is not earned in the period assessed but recognized as income over the same amortization period and using the same amortization schedule as for acquisition costs. Dividends payable on ordinary shares In accordance with Irish accounting principles, AIB records proposed dividends on ordinary shares, which are declared after period end, in the period to which they relate. Under accounting principles generally accepted in the US, dividends are recorded in the period in which they are declared. 107 Notes to the accounts 62 Group financial information for US investors (continued) Summary of significant differences between Irish and United States accounting principles (continued) Dividends on preference shares In accordance with Irish accounting principles, AIB records dividends on preference shares in the profit and loss account on an accruals basis. Under accounting principles generally accepted in the US, dividends are recorded as a charge against ordinary stockholders’ equity in the period in which they are declared. Acceptances The Group presents acceptances as a contingent liability in a footnote. In the US, acceptances outstanding are presented as a liability, with an equal amount presented as an asset, ‘customers’ acceptance liability’. Pensions Pension contributions are charged against income at rates determined on the projected unit valuation method to provide retirement benefits based on projected final salaries and length of service.The most recent actuarial valuations confirmed that, based on current salaries, accrued pension liabilities were fully funded. Pension accounting in the US has to apply the provisions of SFAS No. 87 ‘Employers’ Accounting for Pensions’.This differs from IR GAAP with regard to certain assumptions primarily in relation to asset valuation and amortization methods. The Group has applied SFAS No. 87 ‘Employers’ Accounting for Pensions’ in preparing its US GAAP information. Post-retirement benefits Post-retirement benefit liabilities are assessed actuarially on a similar basis to pension liabilities and are discounted at a long-term interest cost.Variations from regular cost are expressed as a percentage of payroll and are spread over the average remaining service lives of current eligible employees. Under SFAS No. 106 ‘Employers’ Accounting for Post-retirement Benefits other than Pensions’ there are certain differences in the actuarial method used and variations in the computation of regular cost as compared with IR GAAP. Own shares In accordance with Irish accounting principles, own shares are recorded at cost and reflected as fixed asset investments in the consolidated balance sheet. Under US GAAP, own shares are recorded at cost and reflected as a reduction to the consolidated ordinary stockholders’ equity. Internal use computer software In accordance with Irish accounting principles, certain specific costs incurred in respect of software for internal use can be capitalised and amortised. All other costs are expensed. Under US GAAP, the same treatment applies, however there are additional specific costs that are capitalised which would be expensed under Irish GAAP.These costs are being depreciated on a straight line basis over five years. 108 62 Group financial information for US investors (continued) Summary of significant differences between Irish and United States accounting principles (continued) Adjustments to financial statements The Group financial statements conform with accounting principles generally accepted in Ireland. The following tables provide the significant adjustments to the consolidated net income (Group profit attributable to the stockholders of AIB) and consolidated ordinary stockholders’ equity, total assets and total liabilities, which would be required if accounting principles generally accepted in the United States (US GAAP) had been applied instead of those generally accepted in Ireland (IR GAAP). Consolidated net income Net income (Group profit attributable to the stockholders of AIB) as in the consolidated profit and loss account Adjustments in respect of: Depreciation of freehold and long leasehold property Long-term assurance policies Goodwill Premium on core deposit intangibles Profit on disposal of US credit card business Pension cost Preference dividends Securities held for hedging purposes Derivatives hedging available-for-sale securities Internal derivative trades Post-retirement benefits Internal use computer software Deferred tax effect of the above adjustments Impact of phased reduction in Irish corporation tax rates Net income in accordance with US GAAP Net income applicable to ordinary stockholders of AIB in accordance with US GAAP Equivalent to Year ended December 31 2000 1999 1998 (millions except per share amounts) € 762 € 761 € 633 – (70) (78) (9) – 122 20 (25) (9) (6) (1) 11 (5) – (5) (43) (73) (11) – 97 16 34 – (3) (1) – (22) (55) (4) (50) (61) (14) 53 47 17 (5) – – (1) – (13) 55 € 712 € 692 US $ 644 € 695 € 680 € 657 € 640 Income per American Depositary Share (ADS*) in accordance with US GAAP € 1.62 € 1.60 € 1.51 Equivalent to Year end exchange rate €/US $ *An American Depositary Share represents two ordinary shares of € 0.32 each. US $ 1.50 0.9305 Comprehensive income Net income in accordance with US GAAP Net movement in unrealized holding gains/(losses) on debt and equity securities arising during the period Exchange translation adjustments Comprehensive income Year ended December 31 2000 1999 1998 € 712 110 220 (millions) € 695 (237) 489 € 657 39 (121) € 1,042 € 947 € 575 109 Notes to the accounts 62 Group financial information for US investors (continued) Adjustments to financial statements (continued) Consolidated ordinary stockholders’ equity Ordinary stockholders’ equity as in the consolidated balance sheet Revaluation of property Depreciation of freehold and long leasehold property Goodwill Core deposit intangibles Dividends payable on ordinary shares Preference dividend declared Long-term assurance policies Unrealized (losses)/gains not yet recognised on: Available-for-sale debt securities Available-for-sale equity securities Derivatives hedging available-for-sale securities Securities held for hedging purposes Internal derivative trades Pension cost Post-retirement benefits Internal use computer software Own shares Deferred tax effect of the above adjustments Ordinary stockholders’ equity in accordance with US GAAP Equivalent to Ordinary stockholders’ equity per ADS in accordance with US GAAP Equivalent to Ordinary stockholders’ equity per ADS in accordance with IR GAAP Equivalent to Consolidated total assets Total assets as in the consolidated balance sheet Revaluation of property Depreciation of freehold and long leasehold property Goodwill Core deposit intangibles Available-for-sale debt securities Available-for-sale equity securities Derivatives hedging available-for-sale securities Internal derivative trades Internal use computer software Own shares Long-term assurance policies Long-term assurance assets attributable to policyholders Securitized assets Acceptances Total assets in accordance with US GAAP Equivalent to 110 2000 1999 (millions except per share amounts) € 3,651 (211) (27) 1,074 33 188 (1) (97) € 4,296 (210) (27) 1,097 26 221 – (150) 16 (6) (63) 26 (10) 256 (5) 11 (177) (64) (208) 10 (17) 51 (3) 138 (4) – (123) 11 € 5,237 € 4,465 US $ 4,873 € 11.99 € 10.38 US $ 11.16 € 9.84 US $ 9.15 € 8.49 2000 1999 (millions) € 79,688 (210) (27) 1,097 26 16 (6) (63) (10) 11 (177) (150) (2,141) (3) 147 € 78,198 US $ 72,763 € 67,070 (211) (27) 1,074 33 (208) 10 (17) (3) – (123) (97) (1,701) (1) 143 € 65,942 62 Group financial information for US investors (continued) Adjustments to financial statements (continued) Consolidated total liabilities and ordinary stockholders’ equity Total liabilities and ordinary stockholders’ equity as in the consolidated balance sheet Ordinary stockholders’ equity Dividends payable on ordinary shares Preference dividend declared Acceptances Securities held for hedging purposes Pension cost Securitized assets Deferred taxation Post-retirement benefits Long-term assurance liabilities to policyholders Total liabilities and stockholders’ equity in accordance with US GAAP Equivalent to Statement of changes in stockholders’ equity Opening balance Net income Dividends payable on ordinary shares Preference dividend Issue of shares Unrealized gains/(losses) on debt securities and equity shares held as available-for-sale and derivatives hedging available-for-sale securities Own shares Exchange translation adjustments Other movements 63 Approval of accounts The accounts were approved by the board of directors on 20 February 2001. 2000 1999 (millions) € 79,688 941 (221) – 147 (26) (256) (3) 64 5 (2,141) € 67,070 814 (188) 1 143 (51) (138) (1) (11) 4 (1,701) € 78,198 € 65,942 US $ 72,763 2000 1999 (millions) € 4,465 712 (302) (20) 105 110 (55) 220 2 € 5,237 € 3,784 695 (252) (14) 67 (237) (66) 489 (1) € 4,465 111 Statement of Directors’ responsibilities in relation to the Accounts The following statement, which should be read in conjunction with the statement of auditors' responsibilities set out within their audit report, is made with a view to distinguishing for shareholders the respective responsibilities of the directors and of the auditors in relation to the accounts. The directors are required by the Companies Acts to prepare accounts for each financial year which give a true and fair view of the state of affairs of the Company and the Group as at the end of the financial year and of the profit or loss for the financial year. Following discussions with the auditors, the directors consider that in preparing the accounts on pages 39 to 111, which have been prepared on a going concern basis, the Company and the Group have used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, and that all accounting standards which they consider applicable have been followed (subject to any explanations and any material departures disclosed in the notes to the accounts). The directors have responsibility for taking all reasonable steps to secure that the Company causes to be kept proper books of account, whether in the form of documents or otherwise, that correctly record and explain the transactions of the Company, that will at any time enable the financial position of the Company to be readily and properly audited, and that will enable the directors to ensure that the accounts comply with the requirements of the Companies Acts. The directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and the Group and to prevent and detect fraud and other irregularities. The directors, having prepared the accounts, have requested the auditors to take whatever steps and undertake whatever inspections they consider to be appropriate for the purpose of enabling them to give their audit report. 112 Auditors’ report To the Members of Allied Irish Banks, p.l.c. We have audited the accounts on pages 39 to 111 which have been prepared under the historical cost convention, as modified by the revaluation of certain properties and investments, and the accounting policies set out on pages 39 to 41. Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual Report. As described on page 112, this includes responsibility for preparing the accounts in accordance with Accounting Standards generally accepted in Ireland. Our responsibilities, as independent auditors, are established in Ireland by statute, the Auditing Practices Board, the Listing Rules of the Irish Stock Exchange and our profession’s ethical guidance. We report to you our opinion as to whether the accounts give a true and fair view and are properly prepared in accordance with Irish statute comprising the Companies Acts, 1963 to 1999, and the European Communities (Credit Institutions: Accounts) Regulations, 1992.We state whether we have obtained all the information and explanations we consider necessary for the purposes of our audit and whether the Company balance sheet is in agreement with the books of account.We also report to you our opinion as to: – whether the Company has kept proper books of account; – whether the directors’ report is consistent with the accounts; and – whether at the balance sheet date there existed a financial situation which may require the Company to convene an extraordinary general meeting; such a financial situation may exist if the net assets of the Company, as stated in the Company balance sheet, are not more than half of its called-up share capital. We also report to you if, in our opinion, information specified by law or the Listing Rules regarding directors’ remuneration and transactions is not disclosed. We read the other information contained in the Annual Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the accounts. We review whether the statement on page 37 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Irish Stock Exchange, and we report if it does not.We are not required to consider whether the board’s statements on internal control cover all risks and controls or to form an opinion on the effectiveness of the Company’s or Group’s corporate governance procedures or its risk and control procedures. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the Company’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the accounts are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the accounts. 113 Auditors’ report (continued) Opinion In our opinion, the accounts give a true and fair view of the state of affairs of the Company and the Group at 31 December 2000 and of the profit and cash flows of the Group for the year then ended and have been properly prepared in accordance with the Companies Acts 1963 to 1999 and the European Communities (Credit Institutions: Accounts) Regulations, 1992. We have obtained all the information and explanations we consider necessary for the purposes of our audit. In our opinion, proper books of account have been kept by the Company.The Company balance sheet is in agreement with the books of account. In our opinion, the information given in the Report of the Directors on pages 32 and 33 is consistent with the accounts. The net assets of the Company, as stated in the balance sheet on page 45, are more than half the amount of its called up share capital and, in our opinion, on that basis there did not exist at 31 December 2000 a financial situation which, under Section 40(1) of the Companies (Amendment) Act, 1983, would require the convening of an extraordinary general meeting of the Company. PricewaterhouseCoopers Chartered Accountants and Registered Auditors Dublin 20 February 2001 114 Accounts in sterling, US dollars and Polish zloty Summary of consolidated profit and loss account for the year ended 31 December 2000 Group operating profit before provisions and exceptional item Deposit interest retention tax Group operating profit before provisions Provisions Group operating profit Income from associated undertakings Profit on disposal of property Group profit on ordinary activities before taxation Taxation Group profit on ordinary activities after taxation Group profit attributable to the ordinary shareholders of Allied Irish Banks, p.l.c. Dividends on equity shares Earnings per € 0.32 share – basic Earnings per € 0.32 share – adjusted Earnings per € 0.32 share – diluted Summary of consolidated balance sheet 31 December 2000 Assets Loans and advances to banks Loans and advances to customers Debt securities and equity shares Intangible fixed assets Tangible fixed assets Other assets Long-term assurance assets attributable to policyholders Liabilities Deposits by banks Customer accounts Debt securities in issue Other liabilities Subordinated liabilities Equity and non-equity minority interests in subsidiaries Shareholders’ funds: non-equity interests Shareholders’ funds: equity interests Long-term assurance liabilities to policyholders € m 1,377 (113) 1,264 134 1,130 3 5 1,138 318 820 762 335 89.0c 104.0c 88.1c STG £m STG £0.6241 = € 1 US $m US $0.9305 = € 1 PLN m PLN 3.8498 = € 1 859 (70) 1,281 (105) 5,302 (435) 789 84 705 2 3 710 198 512 475 209 55.5p 64.9p 55.0p 1,176 125 1,051 3 5 1,059 296 763 709 311 82.8¢ 96.8¢ 81.9¢ 4,867 517 4,350 13 18 4,381 1,225 3,156 2,932 1,288 342.5 PLN 400.5 PLN 339.0 PLN € m Stg £m US $m PLN m 4,193 45,880 19,398 466 1,127 6,483 2,617 28,634 12,106 291 704 4,045 3,902 42,691 18,050 433 1,049 6,032 16,142 176,629 74,680 1,793 4,340 24,955 2,141 1,336 1,992 8,242 79,688 49,733 74,149 306,781 12,478 48,437 4,295 5,256 2,249 272 264 4,296 2,141 7,787 30,230 2,680 3,281 1,403 170 165 2,681 1,336 11,611 45,071 3,996 4,891 2,092 253 246 3,997 1,992 48,038 186,473 16,533 20,236 8,656 1,046 1,018 16,539 8,242 79,688 49,733 74,149 306,781 115 Five year financial summary 2000 Summary of consolidated US $m profit and loss account 1,882 Net interest income before exceptional item (105) Deposit interest retention tax 1,777 Net interest income after exceptional item 1,213 Other income 2,990 Total operating income 1,814 Total operating expenses 1,176 Group operating profit before provisions 125 Provisions 1,051 Group operating profit 3 5 – Income from associated undertakings Profit/(loss) on disposal of property Profit on disposal of business 1,059 Group profit before taxation 296 Taxation on ordinary activities Impact of phased reduction in Irish corporation tax rates on deferred tax balances – 296 35 19 Dividends on non-equity shares Equity and non-equity minority interests Group profit attributable to the ordinary shareholders of 709 Allied Irish Banks, p.l.c. 311 Dividends on equity shares 2.3 Dividend cover – times 82.8¢ 96.8¢ 81.9¢ Earnings per € 0.32 share – basic Earnings per € 0.32 share – adjusted Earnings per € 0.32 share – diluted 2000 Summary of consolidated US $m balance sheet 74,149 Total assets 46,747 60,678 Deposits etc Loans etc 1,708 Dated capital notes 384 Undated capital notes Equity and non-equity minority interests in subsidiaries Shareholders’ funds: non-equity interests Shareholders’ funds: equity interests 253 246 3,997 6,588 Total capital resources 116 2000 € m 2,022 (113) 1,909 1,304 3,213 1,949 1,264 134 1,130 3 5 – 1,138 318 – 318 38 20 762 335 2.3 89.0c 104.0c 88.1c 2000 € m 79,688 50,239 65,210 1,836 413 272 264 4,296 7,081 1999 € m 1,770 – 1,770 1,052 2,822 1,618 1,204 92 1,112 3 2 15 1,132 327 – 327 28 16 761 288 2.6 89.5c 90.5c 88.0c 1999 € m 67,070 43,127 55,241 1,587 397 227 245 3,651 6,107 Year ended 31 December 1997 € m 1,374 – 1,374 757 2,131 1,384 747 94 653 9 (2) 76 736 230 – 230 23 18 465 177 2.6 60.9c – 60.6c 1996 € m 1,063 – 1,063 591 1,654 1,067 587 67 520 13 2 – 535 179 – 179 12 14 330 129 2.5 48.8c – 48.8c Year ended 31 December 1997 € m 47,777 32,390 40,063 1,002 178 219 160 2,299 3,858 1996 € m 33,137 22,354 27,660 600 250 141 132 1,626 2,749 1998 € m 1,609 – 1,609 980 2,589 1,442 1,147 134 1,013 4 32 – 1,049 315 55 370 29 17 633 239 2.7 74.7c 81.1c 73.7c 1998 € m 53,720 35,496 44,840 970 170 213 210 2,829 4,392 Other financial data Return on average total assets Return on average ordinary shareholders’ equity Dividend payout ratio Average ordinary shareholders’ equity as a percentage of average total assets Allowance for loan losses as a percentage of total loans to customers at year end Net interest margin Tier 1 capital ratio Total capital ratio 2000 % 1.11(1) 18.9(1) 43.9 5.5 1.9 3.02 6.3 10.8 1999 % 1.33 23.5 37.8 5.4 1.9 3.27 6.4 11.3 Year ended 31 December 1998 % 1.29(2) 25.4(2) 37.9 4.7 1.8 3.33 7.5 11.1 1997 % 1.23 23.6 38.0 4.8 1.9 3.67 7.4 11.1 1996 % 1.09 21.3 39.3 4.8 1.9 3.54 7.8 11.6 (1)Excluding the impact of the deposit interest retention tax settlement, the return on average total assets was 1.25% and the return on average ordinary shareholders’ equity was 21.6%. (2)Excluding the impact of the phased reduction in Irish corporation tax rates on deferred tax balances the return on average total assets was 1.39% and the return on average ordinary shareholders’ equity was 27.3%. Supplementary information for US investors US $ Per American Depositary Share (ADS):(1) 1.66(2) Net income 0.74 Dividend(3) – Tax credit on dividend(4) 9.15 Net assets Amounts in accordance with US GAAP: 663m(5) Net income 644m(6) Net income attributable to ordinary stockholders 1.50(7) Net income per ADS 11.16 Net assets per ADS 72,763m Total assets 4,873m Ordinary stockholders’ equity 2000 € 1.78(2) 0.79 – 9.84 1999 € 1.79 0.68 – 8.49 Year ended 31 December 1998 € 1.49 0.56 0.07 6.62 1997 € 1.22 0.46 0.10 4.27 1996 € 0.97 0.38 0.15 3.80 712m(5) 695m 657m 457m 323m 692m(6) 1.62(7) 680m 1.60 10.38 78,198m 65,942m 5,237m 4,465m 11.99 640m 1.51 8.86 53,483m 3,784m 442m 1.15 6.38 48,124m 3,433m 309m 0.91 4.60 32,972m 1,969m (1)With effect from close of business on 13 May 1999 the number of ordinary shares represented by one American Depositary Share was amended from six to two. Prior year data has been restated to reflect this change. (2)€ 2.02 (US $ 1.88) when adjusted to exclude the impact of the deposit interest retention tax settlement. (3)The actual dividend payable to US stockholders will depend on the €/US $ exchange rate prevailing. (4)For dividends payable after 5 April 1999 the tax credit is zero. (5)€ 815m (US $ 759m) when adjusted to exclude the impact of the deposit interest retention tax settlement. (6)€ 795m (US $ 740m) when adjusted to exclude the impact of the deposit interest retention tax settlement. (7)€ 1.86 (US $ 1.73) when adjusted to exclude the impact of the deposit interest retention tax settlement. Other financial data in accordance with US GAAP: Return on average total assets Return on average ordinary stockholders’ equity Dividend payout ratio Average ordinary stockholders’ equity as a percentage of average total assets 2000 % 1.04(1) 14.1(1) 48.4 6.8 1999 % 1.21 16.5 42.3 6.9 Year ended 31 December 1998 % 1.30 18.0 37.3 6.8 1997 % 1.17 16.3 39.9 6.6 1996 % 1.02 16.5 41.8 5.7 (1)Excluding the impact of the deposit interest retention tax settlement, the return on average total assets was 1.18% and the return on average ordinary shareholders’ equity was 16.3%. 117 Principal addresses Ireland & Britain Group Headquarters Bankcentre, PO Box 452, Ballsbridge, Dublin 4, Ireland. Telephone + 353 1 660 0311 http://www.aibgroup.com Ark Life Assurance Company Limited 8 Burlington Road, Dublin 4. Telephone + 353 1 668 1199 Facsimile + 353 1 637 5737 info@arklife.ie Goodbody Stockbrokers Ballsbridge Park, Ballsbridge, Dublin 4. Telephone + 353 1 667 0400 Facsimile + 353 1 667 0422 AIB Securities Services AIB Trade Centre, IFSC, Dublin 1. Telephone + 353 1 874 0222 Facsimile + 353 1 670 0710 AIB Corporate Finance Limited 85 Pembroke Road, Dublin 4. Telephone + 353 1 667 0233 Facsimile + 353 1 667 0250 Allied Irish Capital Management Limited 85 Pembroke Road, Dublin 4. Telephone + 353 1 668 8860 Facsimile + 353 1 668 8831 AIB Corporate Banking Bankcentre, Ballsbridge, Dublin 4. Telephone + 353 1 660 0311 Facsimile + 353 1 668 2508 corporatebanking@aib.ie Corporate Business Britain 12 Old Jewry, London EC2R 8DP. Telephone + 44 207 606 3070 Facsimile + 44 207 606 5698 AIB Bank Bankcentre, Ballsbridge, Dublin 4. Telephone + 353 1 660 0311 Facsimile + 353 1 660 9137 Office of General Manager – Area Dublin Bankcentre, Ballsbridge, Dublin 4. Telephone + 353 1 660 0311 Facsimile + 353 1 660 1974 Office of General Manager – Area East/West Bankcentre, Ballsbridge, Dublin 4. Telephone + 353 1 660 0311 Facsimile + 353 1 660 2487 Office of General Manager – Area South 66 South Mall, Cork. Telephone + 353 21 427 6811 Facsimile + 353 21 427 0061 First Trust Bank First Trust Centre, PO Box 123, 92 Ann Street, Belfast, BT1 3AY. Telephone + 44 28 9032 5599 From ROI 048 9032 5599 Facsimile + 44 28 9032 1754 From ROI 048 9032 1754 ftonline@aib.ie Allied Irish Bank (GB) Bankcentre – Britain, Belmont Road, Uxbridge, Middlesex, UB8 1SA. Telephone + 44 1895 272222 Facsimile + 44 1895 239774 Credit Card Centre Donnybrook House, Donnybrook, Dublin 4. Telephone + 353 1 668 5500 Facsimile + 353 1 668 5901 credcard@aib.ie AIB Capital Markets AIB International Centre, IFSC, Dublin 1. Telephone + 353 1 874 0222 Facsimile + 353 1 679 5933 Treasury & International AIB International Centre, IFSC, Dublin 1. Telephone + 353 1 874 0222 Facsimile + 353 1 679 5933 12 Old Jewry, London EC2R 8DP. Telephone + 44 207 606 3070 Facsimile + 44 207 606 5698 AIB Asset Management Holdings Limited/AIB Govett Asset Management Limited Shackleton House, 4 Battle Bridge Lane, London SE1 2HR. Telephone + 44 207 378 7979 Facsimile + 44 207 638 3468 email@aibgovett.co.uk AIB Investment Managers Limited AIB Investment House, Percy Place, Dublin 4. Telephone + 353 1 661 7077 Facsimile + 353 1 661 7038 aibim@iol.ie AIB Finance & Leasing Sandyford Business Centre, Blackthorn Road, Sandyford, Dublin 18. Telephone + 353 1 660 3011 Facsimile + 353 1 295 9898 aibfinl@aib.ie AIB International Financial Services Limited AIB International Centre, IFSC, Dublin 1. Telephone + 353 1 874 0777 Facsimile + 353 1 874 3050 118 USA Poland Rest of the World Allfirst Bank 25 South Charles St. Baltimore, Maryland 21201. Telephone + 1 410 244 4000 Facsimile + 1 410 244 4026 1-800-842-BANK (2265) (USA only) Allied Irish Bank 405 Park Avenue, New York NY10022. Telephone + 1 212 339 8000 Facsimile + 1 212 339 8008 (includes AIB Group Treasury Facsimile + 1 212 339 8006) AIB Bank (CI) Limited AIB House, PO Box 468, Grenville Street, St Helier, Jersey, JE4 8WT, Channel Islands. Telephone + 44 1534 883 000 Facsimile + 44 1534 726 225 AIB Frankfurt Oberlindau 5, D-60323, Frankfurt-Main, Germany. Telephone + 49 69 971 4210 Facsimile + 49 69 971 42116 AIB Bank (Isle of Man) Limited PO Box 186, 10 Finch Road, Douglas, Isle of Man, IM99 1QE. Telephone + 44 1624 639639 Facsimile + 44 1624 639636 Wielkopolski Bank Kredytowy SA Pl.Wolnosci 16, 60-967 Poznan. Telephone + 48 61 856 4900/01 Facsimile + 48 61 852 1113 WBK AIB Asset Management ul. 27 Grudnia 13, 61-737 Poznan. Telephone + 48 61 851 9268 Facsimile + 48 61 852 3037 Bank Zachodni SA Rynek 9/11, 50-950 Wroclaw. Telephone + 48 71 370 2617 Facsimile + 48 71 370 2677 AIB European Investments (Warsaw) Sp. z O.O. Atrium Tower, Al. Jana Pawla II 25, 00-854 Warsaw. Telephone + 48 22 653 4700 Facsimile + 48 22 653 4701 All numbers are listed with international codes.To dial a location from within the same jurisdiction, drop the country code after the + sign and place a 0 before the area code.This does not apply to calls to First Trust from Ireland (Republic). 119 Additional information for shareholders 1. Stock Exchange Listings Allied Irish Banks, p.l.c. is an Irish registered company. Its ordinary shares are traded on the Irish Stock Exchange, the London Stock Exchange and, in the form of American Depositary Shares (ADS), on the New York Stock Exchange (symbol AIB). Each ADS represents two ordinary shares and is evidenced by an American Depositary Receipt (ADR).The Company’s non-cumulative preference shares are listed on the Irish Stock Exchange, and are eligible for trading in the USA, in the form of American Depositary Shares, in the National Association of Securities Dealers, Inc.’s PORTAL system under rule 144A. 2. Registrar The Company’s Registrar is: Computershare Investor Services (Ireland) Ltd., Heron House, Corrig Road, Sandyford Industrial Estate, Dublin 18. Telephone: +353-1-216 3100. Facsimile: +353-1-216 3151. Website: http:// www.computershare.com e-mail: web.queries@computershare.ie Ordinary Shareholders with access to the internet may check their accounts on the Company’s Share Register by accessing AIB’s website at www.aibgroup.com and clicking on the ‘Check Shareholding’ option or by accessing the Registrar’s website at www.computershare.com.This facility allows shareholders to check their shareholdings and recent dividend payment details, and to download standard forms required to initiate changes in details held by the Registrar. 3. Payment of Dividends direct to a bank account Ordinary Shareholders resident in Ireland or the UK may have their dividends paid by electronic transfer direct to a designated bank account, under advice from the Company of full details of the amounts so credited. Shareholders who wish to avail of this facility should contact the Registrar (see 2 above). 4. Payment of Dividends in euros Ordinary Shareholders resident in Ireland may elect to have their dividends paid in euros. Shareholders who wish to avail of this facility should contact the Registrar (see 2 above). 5. Dividend Reinvestment Plan - Ordinary Shareholders In accordance with the terms of the Dividend Reinvestment Plan, Ordinary Shareholders were offered the right to elect to receive new shares in lieu of cash in respect of the proposed final dividend, announced on 21 February 2001. 6. American Depositary Shares American Depositary Shares provide US residents wishing to invest in overseas securities with a share certificate and dividend payment in a form familiar and convenient to them. The Company’s ordinary share and non-cumulative preference share ADR programmes are administered by The Bank of New York (see address on page 124). 7. Dividend Reinvestment Plan - US ADR Holders AIB’s ordinary share ADR holders who wish to re-invest their dividends may participate in The Bank of New York’s Global Buy Direct program, details of which may be obtained from The Bank of New York at 1-800-943-9715. 8. Direct Deposit of Dividend Payments - US ADR Holders Ordinary share ADR holders may elect to have their dividends deposited direct into a bank account through electronic funds transfer. Information concerning this service may be obtained from The Bank of New York at 1-888-269-2377. 120 9. Dividend Withholding Tax (‘DWT’) Note: The following information, which is given for the general guidance of shareholders, does not purport to be a definitive guide to relevant taxation provisions. It is based on the law and practice as provided for under the (Irish) Finance Acts 1999 and 2000. Shareholders should take professional advice if they are in any doubt about their individual tax positions. Further information concerning DWT may be obtained from: DWT Section, Office of the Revenue Commissioners, St. Conlon’s Road, Nenagh, Co.Tipperary, Ireland. Telephone: +353-67-33533. Facsimile: +353-67-33822. E-mail: infodwt@revenue.ie. General With certain exceptions, dividends paid by Irish resident companies on or after 6 April 1999 are subject to DWT at the standard rate of income tax, to apply at the reduced rate of 20% from 6 April 2001. DWT, where applicable, is deducted by the Bank from dividends paid in cash or as new shares issued under the Dividend Reinvestment Plan (see 5 above); participants in the Plan thus receive shares to the value of the dividend after deduction of DWT.The following summarises the position in respect of different categories of shareholder: A. Irish Resident Shareholders – Individuals DWT is deducted from dividends received, whether in the form of cash or as new shares, by individuals resident in the Republic of Ireland for tax purposes. Individual shareholders are liable to Irish income tax on the amount of the dividend before deduction of DWT, and the DWT is available for offset against their income tax liability; where the DWT exceeds such liability, the shareholder may apply to the Revenue Commissioners, at the address shown above, for a refund of the excess. – Shareholders not liable to DWT The following classes of shareholder who receive the dividend in a beneficial capacity are exempt from DWT, provided the shareholder furnishes a properly completed declaration, on a standard form (available from the Irish Revenue Commissioners and from the Company’s Registrar), to the Registrar not less than three working days prior to the relevant dividend payment record date: – Companies resident in the Republic of Ireland for tax purposes; – Qualifying Employee Share Ownership Trusts; – Exempt Approved Pension Schemes; – Collective Investment Undertakings; – Charities exempt from income tax on their income; – Athletic/amateur sports bodies whose income is exempt from income tax; – Designated stockbrokers receiving a dividend for the benefit of the holder of a Special Portfolio Investment Account (‘SPIA’). Copies of the relevant declaration form may be obtained from the Company’s Registrar at the address shown at 2 above, or from the Revenue Commissioners at the above address. Once lodged with the Company’s Registrar, the declaration form remains current from its date of issue until 31 December in the fifth year following the year of issue, or, within such period, until the exempt shareholder notifies the Registrar that entitlement to exemption is no longer applicable.Where DWT is deducted from dividends paid to shareholders not liable to DWT, the shareholder may apply to the Revenue Commissioners, at the address shown above, for a refund of the DWT so deducted. – Qualifying Intermediaries (other than American Depositary Banks – see D below) Dividends received by a shareholder who is a qualifying intermediary on behalf of a shareholder not liable to DWT may be received without deduction of DWT. A ‘qualifying intermediary’ is a person who receives dividends on behalf of a third party, is resident for tax purposes in the Republic of Ireland or in a relevant territory*, and: *A ‘relevant territory’ means a member state of the European Communities, other than the Republic of Ireland, or a country with which the Republic of Ireland has entered into a double taxation agreement. 121 Additional information for shareholders (continued) 9. Dividend Withholding Tax (‘DWT’) (continued) – holds a licence under the Central Bank Act, 1971, or a similar authorisation under the law of a relevant territory, or is owned by a company which holds such a licence; – is a member firm of the Irish Stock Exchange or of a recognised stock exchange in a relevant territory; or – otherwise is, in the opinion of the Irish Revenue Commissioners, a person suitable to be a qualifying intermediary; and who (a) enters into a qualifying intermediary agreement with the Irish Revenue Commissioners and (b) is authorised by them as a qualifying intermediary. Information concerning the conditions to be satisfied by intending qualifying intermediaries may be obtained from the Irish Revenue Commissioners at the address shown above. A qualifying intermediary should ensure that it receives completed declarations from underlying shareholders eligible for DWT exemption, so as to be in a position to notify the Company’s Registrar, in advance of each dividend record payment date, of the extent to which the dividend payable to the qualifying intermediary is to be paid without deduction of DWT. A shareholder wishing to ascertain whether an entity is a qualifying intermediary should contact the Irish Revenue Commissioners at the address shown above. B. Shareholders not resident for tax purposes in the Republic of Ireland The following categories of shareholder not resident for tax purposes in the Republic of Ireland may claim exemption from DWT, as outlined below: (a) an individual who is neither resident nor ordinarily resident in the Republic of Ireland and who is resident for tax purposes in a relevant territory (as defined at * above); (b) an unincorporated entity resident for tax purposes in a relevant territory; (c) a company not resident in the Republic of Ireland and which is controlled by a person or persons resident for tax purposes in a relevant territory; or a company resident in a relevant territory controlled by a non-Irish resident/residents; or (d) a company not resident in the Republic of Ireland, the principal class of whose shares are traded on a recognised stock exchange in a relevant territory or on such other stock exchange as may be approved by the Minister for Finance, including a company which is a 75% subsidiary of such a company; or a company not resident in the Republic of Ireland that is wholly-owned by two or more companies, each of whose principal class of shares is so traded. To claim exemption, any such shareholder must furnish a valid declaration, on a standard form (available from the Irish Revenue Commissioners and from the Company’s Registrar), to the Registrar not less than three working days in advance of the relevant dividend payment record date, accompanied by: – Categories (a) and (b) above: The declaration must be certified by the tax authority of the country in which the shareholder is resident for tax purposes.Where the shareholder is a trust, the declaration must be accompanied by a certificate signed by the trustee(s) showing the name and address of each settlor and beneficiary. Such trustee(s) certificate must be noted by the Irish Revenue Commissioners. – Categories (c) and (d) above: The company’s auditor must certify the declaration. Dividends received by a shareholder who is a qualifying intermediary on behalf of a qualifying non-resident person may be received without deduction of DWT – see ‘Qualifying Intermediaries’ under ‘Irish Resident Shareholders’ at A above. C. Dividend Statements Each shareholder, including those receiving shares under the Dividend Reinvestment Plan, receives a statement showing the shareholder’s name and address, the dividend payment date, the amount of the dividend, and the amount of DWT, if any, deducted therefrom. In accordance with the requirements of legislation, this information is also furnished to the Irish Revenue Commissioners. 122 9. Dividend Withholding Tax (‘DWT’) (continued) D. American Depositary Receipt (‘ADR’) Holders An ADR holder whose address: – on the register of ADRs maintained by AIB’s ADR programme administrator,The Bank of New York, or – in the records of a further intermediary through which the dividend is paid, is located in the United States of America is exempt from DWT, provided the intermediary concerned satisfies certain conditions. In such circumstances, there is no requirement for the holder to make a declaration in order to obtain exemption from Irish DWT. US Withholding Tax Notwithstanding entitlement to exemption from Irish DWT, referred to above, ADR holders should note that, under provisions introduced by the US Internal Revenue authorities, effective from 1 January, 2001, US-resident holders of ADRs may, in certain circumstances, be liable to a US witholding tax on dividends received on such ADRs.This would arise, for example, where a US resident, being the beneficial owner of ADRs issued by an overseas company, fails to provide the depositary bank - or, where applicable, the Registered Broker - with a Form W-9 (tax certified document), showing, inter alia, the holder’s Social Security Number or Taxpayer Identification Number. Non-US residents holding ADRs are required to submit a Form W-8BEN to the depositary bank / Registered Broker, as appropriate, to become tax certified and to avoid US witholding tax. ADR holders with queries in this regard should contact either (i) The Bank of New York, in the case of holders registered direct with that institution – see address on page 124; (ii) the holder’s Registered Broker, where applicable; or (iii) the holder’s financial/ taxation adviser. 123 Additional information for shareholders (continued) Shareholding analysis as at 31 December 2000 Size of shareholding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – over Total Geographical division Republic of Ireland Overseas Total Financial calendar Annual General Meeting Wednesday, 25 April 2001 Shareholder Accounts % Number Number 14,615,000 106,633,272 106,881,489 111,185,071 539,892,778 Shares % 2 12 12 13 61 38 42 15 5 – 100 879,207,610 100 61 39 359,005,290 520,202,320 100 879,207,610 41 59 100 37,703 41,116 14,874 4,592 348 98,633 59,783 38,850 98,633 Dividend payment dates – Ordinary Shares Final Dividend 2000 - 26 April 2001 Interim Dividend 2001 - 28 September 2001 Interim results Unaudited interim results for the half-year ending 30 June 2001 will be announced on 1 August 2001. Shareholder enquiries should be addressed to: For holders of Ordinary Shares: Computershare Investor Services (Ireland) Ltd. Heron House Corrig Road Sandyford Industrial Estate Dublin 18 Ireland Telephone +353 1 216 3100 Facsimile +353 1 216 3151 Website (for on-line shareholder enquiries): www.aibgroup.com – click on the ‘Check Shareholding’ option or www.computershare.com For holders of ADRs in the United States: The Bank of New York Shareholder Relations PO Box 11258 Church Street Station New York, NY 10286-1258 USA Telephone 1-888-BNY-ADRS 1-888-269-2377 Website:http://www.bankofny.com or Allfirst Shareholder Relations 213 Market Street, PO Box 2961 Harrisburg, PA 17105-2961 Telephone 1-800-458 0348 Email: ann.l.kerman@allfirst.com 124 Index A Accounting policies Accounts D 39 39 Dealing profits Debt securities Accounts in Sterling, US Dollars, etc. 115 Debt securities in issue Administrative expenses 52 Deferred taxation Amounts (written back)/written off Deposit interest retention tax fixed asset investments Approval of accounts Associated undertakings 52 111 67 Deposits by banks Derivatives Directors I 51 & 89 Intangible fixed assets 62 77 78 51 75 87 6 Interest payable Interest rate sensitivity Internal control L Liquidity risk Audit Committee 7 & 35 Directors’ interests 100 Loans and advances to banks Auditors Auditors’ remuneration Auditors’ report 33 53 Directors’ remuneration Dividend income 113 Dividends Average balance sheets and Divisional commentary interest rates 104 96 51 55 15 Loans and advances to customers Long-term assurance business 70 51 26 36 23 57 58 74 B Balance sheet C Called up ordinary share capital Capital management Cash flow statement Central government bills Chairman’s statement Commitments Contingent liabilities and commitments Corporate Governance statement Credit risk Customer accounts E Earnings per share 44 Employees Equity shares Euro Exchange rates 82 20 46 & 95 F 56 4 Fair value Financial and other information 102 Financial calendar Financial highlights Financial review Five year financial summary Form 20-F 84 34 21 76 M Market risk Minority interests 22 & 24 54 & 81 55 102 66 N 13 & 102 Nomination and Remuneration 103 Committee 7, 35 & 96 O Operating review Operational risk Other interest receivable Other liabilities Other operating income Outlook Own shares 92 103 124 1 20 116 102 10 21 & 23 51 77 51 14 73 G Group Chief Executive’s Review Group Executive Committee 8 9 125 Index (continued) P Pension costs Principal addresses Profit and loss account Profit and loss account reserves Profit retained Provisions for bad and doubtful debts Provisions for liabilities and charges 53 118 42 84 55 S Securitised assets Segmental information Share premium account Shareholder information Shareholders’ funds: non-equity interests 60 Shares in Group undertakings 61 48 83 120 81 68 Social Affairs Committee 7 & 35 78 Statement of Directors’ Responsibilities Statement of total recognised gains R and losses Reconciliation of movements Subordinated liabilities in shareholders’ funds: equity interests Report of the Directors Reporting currency Repurchase of ordinary shares Reserves 47 32 T 102 Tangible fixed assets 84 83 Taxation Transactions with directors Turnover 112 47 79 72 54 101 48 U US Investors – Financial Information 105 126