Allied Irish Bank
Annual Report 2002

Plain-text annual report

Annual Report & Accounts 2002 for the year ended 31 December 2002 Financial highlights for the year ended 31 December 2002 Results Total operating income Group profit before taxation Profit attributable Profit retained Per € 0.32 ordinary share Earnings – basic Earnings – adjusted (note 22) Earnings – diluted Dividend 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 2002 € m 3,930 1,375 1,037 563 119.4c 123.0c 118.2c 49.06c 2.4 494c 2001 Restated(1) € m 3,751(2) 1,366(2) 484 41 56.2c 119.4c 55.9c 43.80c 1.3 551c 2000 € m 3,397(2) 1,274(2) 784 379 91.6c 106.7c 91.0c 38.75c 2.3 566c 1.24% 22.4% 1.23%(2) (2) 19.4% 1.26%(2) 18.7%(2) 86,049 4,408 58,483 72,190 89,359 4,851 57,445 72,813 80,543 4,944 50,239 65,210 6.9% 10.1% 6.5% 10.1% 6.3% 10.8% (1)The results for the year ended 31 December 2001 have been restated to reflect the implementation of UITF Abstract 33 - Obligations in Capital Instruments. (2)Adjusted to exclude the exceptional foreign exchange dealing losses in 2001 (note 9(b)) and the impact of the deposit interest retention tax settlement in 2000 (note 6). Allied Irish Banks, p.l.c. Group Headquarters & Registered Office Bankcentre, Ballsbridge Dublin 4, Ireland Telephone +353 1 660 0311 Registered number 24173 1 Forward-Looking Statements A number of statements we make in this document will not be based on historical fact, but will be ‘forward-looking’ statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in the ‘forward-looking’ statements. Factors that could cause actual results to differ materially from those in the ‘forward-looking’ statements include, but are not limited to, global, national, regional economic conditions, levels of market interest rates, credit or other risks of lending and investment activities, competitive and regulatory factors and technology change. Contents 1 4 6 8 Financial highlights Chairman’s statement Directors Group Chief Executive’s review 35 Report of the Directors 37 Corporate Governance Statement 41 Financial contents 42 Accounting policies 47 Consolidated profit and loss account 49 Consolidated balance sheet 50 Balance sheet Allied Irish Banks, p.l.c. 51 Consolidated cash flow statement 52 Statement of total recognised gains and losses 52 Reconciliation of movements in shareholders’ funds 52 Note of historical cost profits and losses 53 Notes to the accounts 128 Statement of Directors’ responsibilities in relation to the Accounts 129 Independent auditors’ report 131 Accounts in sterling, US dollars and Polish zloty 132 Five year financial summary 134 Principal addresses 136 Additional information for Shareholders 140 Financial calendar 141 Index Chairman’s statement AIB performed well in 2002 despite the severe setback of the Allfirst fraud. Profit attributable to ordinary shareholders amounted to €1,037 million, a 4% increase over the 2001 figure when you exclude the effect of the Allfirst loss. The Board is recommending a final dividend of EUR 31.81c per share payable on 25 April 2003 to shareholders on the company's register of members at the close of business on 28 February 2003. That dividend together with the interim dividend of EUR 17.25c amounts to a total dividend of EUR 49.06c, an increase of 12% on 2001. Last year's report covered in detail our response to the Allfirst fraud.The further actions taken by the Board during the year are outlined on page 26 of this report. In September, we announced a strategic partnership with M&T Bank Corporation, which reaffirmed our commitment to the US market. This deal, which is awaiting the approval of the regulators, is of major significance to AIB. It will see Allfirst merged into one of the US's most successful regional banks. AIB will have a 22.5% shareholding in the enlarged M&T.When the deal is finalised, AIB will nominate four members to the M&T Board and Bob Wilmers, M&T's Chairman, President and CEO, will become a member of the AIB Board. In April, we put our audit out to tender, and in June shareholders approved the appointment of KPMG as AIB's Auditors. Frank Bramble retired from the AIB Board in April 2002 and two executive directors joined the board in February 2003.These are Colm Doherty, Managing Director, AIB Capital Markets, and Aidan McKeon, Managing Director, AIB Group (UK) p.l.c. My second three-year term of office ended on 31 December 2002. Last October, I was asked by the Board to remain as Chairman until the end of 2003. I will be succeeded by Dermot Gleeson, Deputy Chairman. Dermot has also been appointed the Senior Independent Non-Executive Director in line with the requirements of the corporate governance combined code.This code 4 is due to be updated later in the year.This follows the publication of the Higgs Review, commissioned by the UK Government from Derek Higgs, an AIB non-executive director. AIB will, of course, review its corporate governance practices in light of these developments. This is my last Chairman's statement. I would like to express my deep appreciation to all my Board colleagues for their support, dedication, advice and friendship since I became Chairman. I would also like to thank the management and staff who worked closely with me for their advice and guidance. AIB has strong businesses in four economies - Ireland, the UK, Poland and the US.Whilst economic growth will vary over time in these markets, we have tremendous opportunities for consistent long-term growth in profit and dividends, and I have every confidence in AIB's future. Lochlann Quinn Chairman 18 February 2003 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. Chairman of the National Gallery of Colm Doherty* B Comm Managing Director, AIB Capital Markets Division. Joined AIB in 1988 as an Associate Director, AIB International Financial Services, and became its managing director in 1991. Appointed Head of Investment Ireland. 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 61) Banking in 1994, and assumed his present position in 1999. Member of the International Financial Services Centre Clearing House Group. Co-opted to the Board on 13 February 2003. (Age 45) Dermot Gleeson BA, Ll M Deputy Chairman and Senior Independent Non-Executive Director Director of Independent News and Media PLC, and the Gate Theatre. 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.Vice Chairman of the Irish Council for Bioethics. Joined the Board in 2000. (Age 54) Michael Buckley* MA, LPh, MSI Group Chief Executive Former Managing Director, AIB Poland Division and of AIB Capital Markets Division. Former Managing Director, NCB Group and public servant in Irish Government 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 56) Don Godson BE, MIE, FIEI, C Eng Director and former Chief Executive of CRH plc. Chairman of Project Management Holdings Ltd. Board Member of the Michael Smurfit Graduate School of Business at University College and EU. Chairman of the Review Body on Higher Remuneration in the Public Sector from 1995 to 2001. Member of the Maynooth University Foundation. Joined the Board in 1995. (Age 57) Dublin. Joined the Board in 1997. (Age 63) Adrian Burke B Comm, FCA Audit Committee Chairman Derek A Higgs BA, FCA President of the Institute of Chartered Accountants in Ireland and Council Member of the Institute of European Affairs. Former Managing Partner of Arthur Andersen in Ireland 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 61) 6 Chairman of Partnerships UK plc and Business in the Environment and a Senior Adviser to UBS Warburg. Deputy Chairman of The British Land Company PLC, Director of Egg plc, Jones Lang LaSalle Inc. and London Regional Transport. Author of the UK Government commissioned Review of the Role and Effectiveness of Non-Executive Directors. Former Chairman of S.G.Warburg & Co. Ltd. and former Director of Prudential plc. Joined the Board in 2000. (Age 58) Gary Kennedy* BA, FCA Group Director, Finance & Enterprise Technology. Joined AIB and appointed to the Board 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 44) 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 Pro- Chancellor of The Queen's University, Belfast, and former Chairman of The International Carol Moffett Fellow of the Irish Management Institute. Former member of the Board of Co-operation Ireland and former Director of the Irish Trade Board. Joined the Board in 1995. (Age 50) Jim O’Leary MA Econ Lecturer in economics at the National University of Ireland, Maynooth. Former Chairman of the Public Sector Benchmarking Body. Former Chief Economist at Davy Stockbrokers and former Fund for Ireland and of the Industrial Development Board for Northern Ireland. Joined the Board in 1977. (Age 63) Director of Aer Lingus and the National Statistics Board. Joined the Board in 2001. (Age 46) Aidan McKeon* B Comm, MBS, M Sc (Mgt) Managing Director, AIB Group (UK) p.l.c.. Joined AIB in 1965 and worked in Branch Banking, Human Resources and Corporate and Commercial Banking.Was appointed General Manager Michael J Sullivan JD Served as US Ambassador to Ireland from January 1999 to June 2001 and as Governor of the State of Wyoming between 1987 and 1995. Director of Sletten Construction Inc. and of Cimarex Energy Inc., and Commercial Banking in 1989, General Manager Britain in 1996, and to his present position in 1999. Member of the CBI Financial Services Council and of the Executive Committee of Co-operation Ireland. Co-opted to the Board on 13 February 2003. (Age 55) a Trustee of the Catholic Diocese of Wyoming. Has served as a Director of Wyoming National-West Bank and on the Board of Advisors of Norwest/Wyoming Bank. Member of the Bar, State of Wyoming. Joined the Board in 2001. (Age 63) * Executive Directors Board Committees Audit Committee Adrian Burke, Chairman Dermot Gleeson Derek A Higgs Michael J Sullivan Nomination and Remuneration Committee Lochlann Quinn, Chairman Dermot Gleeson (from 1 November 2002) Derek A Higgs John B McGuckian Jim O’Leary (from 1 June 2002) Social Affairs Committee Carol Moffett, Chairman Padraic M Fallon Don Godson 7 Group Chief Executive’s review AIB faced exceptional challenges in 2002. The business environment was the most difficult for over a decade. We also had to cope with the foreign exchange fraud in Allfirst. The proof of our resilience and the quality of our franchises is the fact that we continued to grow our business. We had two key objectives after the discovery of the fraud at Allfirst.We had to be decisive and open in managing the crisis - and we had to ensure momentum was sustained in our core business. The Allfirst fraud led to a major redesign of our risk management architecture.We have made great progress in implementing the recommendations of both Deloitte Touche Tohmatsu and the First Manhattan Consulting Group. Key appointments have been made. Shom Bhattacharya joined us in December 2002 as Group Chief Risk Officer and has become a member of the AIB Group Executive team. In February 2003, Paul Shantz took up the role of Group Internal Auditor, taking responsibility for an integrated global internal audit structure. During 2002 credit quality management was a huge priority for all banks.We saw some deterioration in the grade profile of our corporate loan books, but our dynamic and conservative grading process enabled early action on deteriorating loans.The quality of the rest of our loan books was very solid. Our overall bad debt charge was 0.37% of average loans, compared with 0.36% in 2001. Non-performing loans amounted to 1.8% of total loans compared with 2.0% in 2001. But what about business momentum? As you read through the more detailed commentary in this report, you will see how AIB grew its income by 6% against a 4% growth in costs in 2002. Productivity improved across a broad range of businesses, leading to an overall reduction in our tangible cost/income ratio from 59% to 57.8%. Adjusted earnings per share of EUR 123.0c were up 3% on 2001 (adjusted earnings per share excludes goodwill amortisation in both years and the Allfirst fraud losses in 2001). Our return on equity was 22.4%. On 26 September 2002 we announced our partnership with M&T Bank Corporation. It offers exciting opportunities to AIB in the US. We will be a strategic investor in one of the largest, best-performing regional banks in the world’s leading economy. Allfirst will be merged into M&T Bank, subject to regulatory approvals, in the next few months. At this time, Eugene Sheehy will leave the AIB Group Executive, join M&T’s top management team and become a director of that bank. Donal Forde, who succeeded Eugene as Managing Director of AIB Bank (RoI), has been a member of the Group Executive since March 2002. 8 Group Executive Committee Shom Bhattacharya Group Chief Risk Officer Gerry Byrne Managing Director, AIB Poland Division Colm Doherty Managing Director, AIB Capital Markets Donal Forde Managing Director, AIB Bank (RoI) Gary Kennedy Group Director, Finance & Enterprise Technology Mike Lewis Head of Group Strategic Human Resources Aidan McKeon Managing Director, AIB Group (UK) p.l.c. Eugene Sheehy Chairman & CEO, USA Division Our priorities for 2003 include continuing to make improvements in productivity, maintaining our asset quality and relentlessly pursuing our core strategy.This strategy involves developing and delivering a distinctive customer proposition, wherever we operate.We have built our business plans consistently around this strategy. Our aim is to bring to our customers a combination of best products (using third party suppliers where appropriate to meet customer needs), best service (with dependability at its heart), best relationships (built by knowledgeable and engaging employees) and, finally, best delivery (with a wide range of channels available to our customers to access our services).We believe that this strategy will deliver superior and sustainable profit growth. By mid-2003, we will have 1,200 staff in our Republic of Ireland and Northern Ireland branch networks devoting 80% of their time exclusively to customer relationship development.We want to excel in identifying and meeting the financial services needs of our customers. In creating value for them we will create value for AIB.We are also changing the way we deliver our banking services to our business customers in Ireland. In Poland, we are putting the finishing touches to the creation of a very efficient banking platform. The Polish economy is showing early signs of recovery from a particularly slow growth phase, during which our bank, Bank Zachodni WBK, outperformed its competitors in a number of key areas.We aim to continue to grow our Polish business at a pace which allows us to continue to manage risk better than our competitors, while meeting our medium term objective of increasing the return on equity. We have developed a very strong business banking brand in Great Britain. Since 1994, we have consistently been voted the UK’s best business bank. In 2003, we will continue our measured but sustained recruitment of experienced business bankers into our British business. Our aim is to double our business development capability there over the next three years. AIB Capital Markets division continues to expand in a number of countries. Corporate Banking is extending its range as are our advisory and financial service outsourcing businesses.The principal goal is building enduring customer relationships. AIB is a more focused, more determined and more integrated bank across all its territories than it was a year ago. With our strategy intact, our priorities clear, our business performing strongly, I remain positive about AIB’s future prospects. Michael Buckley AIB Group Chief Executive 18 February 2003 9 20 years was used.The application of other accounting policies, for example, measuring shareholders’ interest in the long-term assurance fund, impairment, debt securities and equity shares, retirement benefits and derivatives, require the use of estimation techniques that involve making assumptions about future market conditions which could impact on the timing and amounts recognised in the consolidated profit and loss account and the consolidated balance sheet. Performance review Implementation of UITF Abstract 33 – Obligations in Capital Instruments (see Accounting policies on page 42) The Group has implemented UITF 33 in the accounts for the year ended 31 December 2002 and comparative periods have been restated. Implementation of the UITF results in AIB’s € 500 million of Reserve Capital Instruments (‘RCIs’) being treated as subordinated liabilities rather than shareholders’ funds.The related interest cost (2002: € 38 million; 2001: € 35 million) is now included within interest expense whereas previously the amount was included in ‘Dividends on non-equity shares’.This change in accounting treatment reduces pre-tax profit with no impact on earnings per share. Exchange rates The exchange rates used in the preparation of the accounts are set out in note 62. A significant proportion of the Group’s earnings are denominated in currencies other than the euro. As a result movements in exchange rates can impact the reported value of the foreign currency earnings.The Group may choose to hedge all or part of its projected future foreign earnings thereby fixing a translation rate for the amount hedged. Although the US dollar, sterling and Polish zloty accounting rates weakened by 5%, 1% and 5% respectively, the impact on Group profit before taxation in 2002 was not material when the outcome of hedging strategies is taken into account. Critical accounting policies AIB’s financial statements are prepared under the historical cost convention as modified by the revaluation of certain financial instruments held for dealing purposes, assets held in the long- term assurance business and certain properties.The Accounts comply with the requirements of Irish statute and with Irish Generally Accepted Accounting Principles (‘Irish GAAP’) as well as general practices followed by the financial services industry in Ireland and the UK. In the preparation of its financial statements the Group adopts the accounting policies and estimation techniques that the Directors believe are most appropriate in the circumstances for the purpose of giving a true and fair view of the Group’s state of affairs, profit and cashflows. However, different policies, estimation techniques and assumptions in critical areas could lead to materially different results. The estimation of potential bad debt losses is inherently uncertain and depends upon many factors, including loan loss trends, portfolio grade profiles, local and international economic climate, conditions in various industries to which AIB Group is exposed and other external factors such as legal and regulatory requirements. For example, should the expectation of loss within a portfolio increase, then this may result in an increase to the required general loan loss provision level. In addition, the profile of the amortisation of goodwill would be different if a useful economic life longer or shorter than the existing AIB policy of a maximum life of 10 Summary profit and loss account Net interest income Other finance income Other income Total operating income Staff costs Other costs Restructuring and integration costs in continuing businesses Depreciation and amortisation Total operating expenses Group operating profit before provisions Provisions for bad and doubtful debts Other provisions Total provisions Year 2002 € m 2,351 62 1,517 3,930 1,391 707 13 207 2,318 1,612 194 57 251 Year 2001 before exceptional € m 2,258 67 1,426 3,751 1,348 703 38 195 2,284 1,467 179 25 204 Exceptional Item(1) € m – – (789) (789) – – – – – (789) – – – Group operating profit - continuing activities 1,361 1,263 (789) Income from associated undertakings Profit on disposal of property Profit on disposal of business 9 5 – Group profit on ordinary activities before taxation 1,375 Taxation on ordinary activities 306 Group profit on ordinary activities after taxation 1,069 Minority interests and non-equity dividends 32 Group profit attributable to ordinary shareholders 1,037 Basic earnings per share Adjusted earnings per share(2) 119.4c 123.0c 4 6 93 1,366 331 1,035 38 997 – – – – (789) (276) (513) – (513) – 119.4c (59.6c) Year 2001 as restated € m 2,258 67 637 2,962 1,348 703 38 195 2,284 678 179 25 204 474 4 6 93 577 55 522 38 484 56.2c 59.8c % Change excl. exceptional 4 -7 6 5 3 – – 6 1 10 9 – 23 8 – – – 1 -8 3 -18 4 112 3 Group operating profit before provisions was up 10% to € 1,612 million for the year December 2002. Group profit attributable to ordinary shareholders amounted to € 1,037 million, up 114% or 4% excluding the exceptional item in 2001. Adjusted earnings per share(2) at EUR 123.0c per share showed an increase of 3% and basic earnings per share was up 112% to EUR 119.4c per share. (1) Exceptional foreign exchange dealing losses (see note 9(b)). (2) Adjusted earnings per share excludes goodwill amortisation in both years and the exceptional foreign exchange dealing losses in 2001 (see note 22(b)). 11 Performance review 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 acquisitions. Net interest income Net interest income at € 2,351 million increased by 7% compared with 2001 due to strong lending growth particularly in AIB Bank Republic of Ireland and AIB Bank GB & NI. Loans to customers increased by 12% and customer accounts increased by 4%. The net interest margin was 3.00%, a 1 basis point increase on 2001. A particularly strong interest rate management performance by Global Treasury was offset in margin terms by changes in product mix, the margin effect of lower interest rates on deposits and non-interest bearing funds and the impact of loans increasing at a stronger rate than deposits. All our principal markets experienced lower interest rates, the margin impact of this trend was alleviated by asset and liability and interest rate management activities. Risk weighted assets, loans to customers and customer accounts (excluding money market funds) % Change December 2002 v December 2001 AIB Bank Republic of Ireland AIB Bank GB & NI USA Capital Markets Poland AIB Group (excluding currency factors) Risk weighted assets % Change Loans to customers % Change Customer accounts % Change 18 23 2 –1 3 10 20 23 –4 1 8 12 7 13 –3(1) –2 –7(2) 4 (1) Deposits at 31 December 2001 benefited from an exceptionally high level of short-term corporate deposits. Average core deposits for the year were up 1%. (2) Combined deposits and mutual funds volumes were down 2%.The decrease mainly reflected the lower interest rate environment and the impact on the savings market of the introduction of a withholding tax on deposits, however average deposits were up 1%. The divisional commentary on pages 19 to 24 contains additional comments on key business trends in relation to loans to customers and customer accounts. Average interest earning assets Half-year Half-year Dec 2002 June 2002 € m € m % Change Year 2002 € m Year 2001 € m % Change 39,274 38,042 38,424 40,771 77,698 78,813 3 –6 –1 Domestic 38,663 35,417 Foreign 39,588 40,176 Total 78,251 75,593 9 –1 4 Net interest margin Half-year Half-year Dec 2002 June 2002 % % Basis Points Change 2.69 3.21 2.78 3.33 2.95 3.06 –9 –12 –11 Year 2002 % 2.73 3.27 Year 2001 Basis Points % Change 2.59 3.34 +14 –7 Domestic Foreign Total 3.00 2.99 +1 12 Other income Other income increased by 6% to € 1,517 million in 2002 and as a percentage of total operating income was 40.2% compared with 39.8% in 2001. Exceptional growth in banking fees and commissions resulted from increased volumes of business and significant loan growth. Corporate banking fees were buoyant with a substantial increase in income from arrangement fees and collateralised debt obligations. Retail banking fees were particularly strong in Poland with good growth in credit card revenues in the Republic of Ireland. In Allfirst, electronic banking income and deposit service charges also achieved strong increases over 2001. Asset management and investment banking revenues were lower due to a decline in asset values, reduced business volumes and the general impact of difficult equity markets.The restructuring of the AIB joint venture with Bank of New York impacted the trend as it is now reported as income from associated undertakings. Dealing profits were lower as a result of a more difficult trading environment. Ark Life profit was down 32% as difficult investment markets resulted in reduced customer demand for investment products. Declines in equity market values caused a € 32 million reduction in embedded values, which was partly offset by a benefit of € 17 million from lowering the discount Other income Dividend income Banking fees and commissions Asset management fees Investment banking fees Year 2002 € m 14 1,045 158 98 Year 2001 € m 11 962 185 111 Fees and commissions receivable Less: fees and commissions payable 1,301 1,258 (138) (128) Dealing profits Contribution of life assurance company Other Other operating income 77 57 206 263 92 84 109 193 Total other income 1,517 1,426 Underlying % Change excl. exceptional 30 15 –11 –11 4 10 –30 –32 106 43 6 rate used in the embedded value calculation from 12% to 10%. Operating profit in Ark Life was down 4%. Other operating income includes securities gains of US$ 80 million resulting from a restructuring of the securities portfolio in Allfirst and a US$ 10 million provision for residual values in the auto lease portfolio. Total operating expenses Operating expenses excluding restructuring and integration costs at € 2,305 million were higher by 4% compared with 2001. Operating expenses Staff costs Other costs Depreciation and amortisation Operating expense growth was lower than expectations with a 4% increase compared with a 10% increase in 2001.While business volumes increased substantially, tight cost management and cost saving initiatives improved productivity. In AIB Bank Republic of Ireland normal salary increases were partly offset by a cost savings programme in central supports, the cost income ratio remained at 51%.The Group continued to invest in our core businesses, major items being the opening of new offices and recruitment of experienced Year 2002 € m Year 2001 € m Underlying % Change 2002 v 2001 1,391 1,348 707 207 703 195 Operating expenses before integration costs 2,305 2,246 Restructuring and integration costs in continuing businesses 13 38 Total operating expenses 2,318 2,284 4 3 8 4 – 3 13 Performance review business and corporate bankers in Great Britain, expansion of Corporate Banking activities in New York and the implementation of a new technology platform in Poland. Realisation of integration benefits from the merger of WBK and Bank Zachodni in Poland was evident while expansion of the franchise continued.The Group’s tangible cost income ratio, excluding restructuring and integration costs was 57.8%, down 1.2% compared with 2001, with notable reductions in Capital Markets, AIB Bank GB & NI and Poland. Restructuring and integration costs in continuing businesses related to the Allfirst early retirement program in 2002 and Poland integration costs in 2001. Provisions Total provisions were € 251 million compared with € 204 million in 2001. Provisions Bad and doubtful debts Contingent liabilities and commitments Amounts written off fixed asset investments Total provisions Year 2002 € m 194 2 55 251 Year 2001 € m 179 19 6 204 The provision for bad and doubtful debts in the year to December 2002 was € 194 million compared with € 179 million in 2001. A provision of US$ 38 million was created in Allfirst in relation to one specific case and was offset by an identical release of € 40 million from the additional unallocated credit provision of € 50 million created at Group level in 2001.This € 50 million provision was created to provide an additional provision pool at Group level against the potential impact that the international macroeconomic downturn might have on asset quality. Asset quality was strong in AIB Bank Republic of Ireland with non-performing loans remaining at 0.9% of loans at 31 December 2002. Retail and commercial portfolios benefited from careful positioning in the past in relation to risk assessment and sectoral exposures.While home mortgage lending was buoyant, loan quality was very high and prudent criteria continued to be applied.The average loan to value ratio for new business was 68% in 2002. In AIB Bank GB & NI, asset quality further improved with non-performing loans reducing to 1.0% of loans, down from 1.3% in 2001.The bad debt charge reflected mainly general provisions with a small net specific charge. In Allfirst, profit and loss provisions increased by US$ 49 million reflecting the above US$ 38 million provision. Non-performing loans amounted to US$ 112 million compared with US$ 77 million at 31 December 2001 reflecting deterioration in the corporate book. Provisions as a percentage of loans in Allfirst increased from 1.4% to 1.5% with coverage for non-performing loans amounting to 140%. 2002 was a more difficult year in the international corporate market and Capital Markets experienced higher provisions and non-performing loans.The provision charge amounted to 0.37% of average loans and reflected a prudent and cautious approach with an objective of early provision recognition.The portfolio remains well diversified in terms of industry sector and geographic concentration. In Poland, the gross provision charge declined in 2002 from 1.9% of loans (before the use in 2001 of general provisions 14 of € 47 million created on the acquisition of WBK and Bank Zachodni) to 1.2%. Including the use of general provisions in 2001, headline provisions increased by € 25 million in 2002. Non-performing loans as a percentage of total loans declined to 15% from 18% at 31 December 2001 mainly due to the write off of older non-performing loans which had been fully provided for. Excluding this factor the underlying ratio would have shown a small reduction compared with 2001. The Group charge for the year represented 0.37% of average loans compared with a 0.36% charge, including the additional unallocated provision, in 2001. Group non-performing loans as a percentage of total loans amounted to 1.8% or 1.0% excluding Poland, and total provision coverage for non-performing loans was 87% (123% excluding Poland).We continued to maintain prudent provision cover.Total non-specific provisions amounted to € 427 million and specific provision cover for non-performing loans was strong at 44%. The provision for contingent liabilities and commitments in the year to December 2002 was € 2 million compared with € 19 million in 2001.The 2001 provision was mainly in relation to one specific case. The provision for amounts written off fixed asset investments in the year to December 2002 was € 55 million compared to € 6 Taxation Tax charge Irish corporation tax rate Effective tax rate - adjusted(1) Reconciliation of statutory corporation tax rate Corporation tax rate in Republic of Ireland Effective tax rate on foreign income Tax exempted income and income at a reduced rate Other items Effective tax rate - adjusted(1) Year 2002 € 306m 16.0% 22.3% % 16.0 7.9 (0.5) (1.1) 22.3 Year 2001 € 55m 20.0% 24.2% % 20.0 6.9 (2.5) (0.2) 24.2 (1) The adjusted effective tax rate has been presented to eliminate the effect of the exceptional foreign exchange losses in 2001. million in 2001.The general deterioration in equity markets led to write-downs of € 36 million for a number of equity investments including € 17 million in the technology sector, € 2 million in telecoms and venture capital write-downs of € 12 million in Allfirst.The provision charge also included provisions of € 19 million related to debt security portfolios. Taxation The taxation charge was € 306 million, compared with € 55 million (€ 331 million excluding the exceptional item) in 2001. The effective tax rate was 22.3% compared with 24.2% in 2001. Both 2002 and 2001 benefited from one-off items. On an underlying basis the effective tax rate was 24.1% in 2002 and 25.9% in 2001.This underlying decrease was primarily due to the reduction in the standard rate of Irish corporation tax and changes in the geographic and business mix of profits. The Group’s profits in its operations outside of Ireland are taxed at a range of rates up to 47%. Changes in the geographic mix of profits within the Group will therefore have an impact on future effective tax rates. In Ireland the general corporation tax rate will be 12.5% in 2003 (16% in 2002). During 2002 the Irish Government announced the introduction of a levy on financial institutions for 2003 and the following two years.The Group’s levy payment is estimated at € 30 million per annum and will increase the Group tax charge for the relevant years. Return on equity and return on assets The return on equity was 22.4% benefiting from the strong attributable profit performance and the impact of the reduced value of pension assets on the equity base in line with FRS 17. The return on assets was 1.24% and the return on risk weighted assets, a measure of the efficient use of capital, was 1.56%. 15 Balance sheet Total assets amounted to € 86 billion at 31 December 2002 compared to € 89 billion at 31 December 2001.The US dollar, sterling and Polish zloty weakened against the euro by 16%, 6% and 13% respectively, resulting in a decline in the reported total balance sheet since 31 December 2001. Adjusting for the impact of currency, total assets were up 5% since 31 December 2001 while loans to customers increased by 12% and customer accounts by 4%. Risk weighted assets increased by 1% to € 69 billion, excluding currency factors there was an increase of 10%. Performance review Statement of total recognised gains and losses (‘STRGL’) When the profit attributable of € 1,037 million is adjusted for the currency translation differences on foreign currency net investments and the actuarial loss recognised in the retirement benefit schemes, the total recognised losses relating to the year amounted to € 127 million compared to a recognised gain of € 875 million in 2002. A recognised gain of € 648 million was included in 2001 relating to the first time recognition of FRS 17 in the accounts. Currency translation differences amounted to € 341 million negative compared to € 145 million positive in 2001.The currency translation difference relates to the change in value of the Group’s net investment in foreign subsidiaries arising from the weakening of the US dollar, sterling and Polish zloty against the euro. As outlined in the balance sheet discussion below, the weakening of the currencies also reduced the euro value of the assets designated in those currencies.The objective of the Group’s capital management activities is to neutralise the impact of currency movements on the capital ratios.The Group’s net investment is held in the currency of those subsidiaries to protect the Group’s capital ratios from fluctuations in exchange rates. The actuarial loss in retirement benefit schemes during 2002 charged to the STRGL, net of deferred tax, amounted to € 823 million.The decline in world-wide equity markets had a significant impact on the value of the Group’s funded retirement benefit schemes and the actuarial loss arises mainly as a result of the difference between the actual return and the expected return on the pension scheme assets. The actuarial loss is determined by valuations prepared in accordance with FRS 17 which requires retirement benefit scheme assets and liabilities to be recorded at market values at the balance sheet date.These valuations are not indicative of the long-term funding position of the schemes which are formally assessed by way of triennial actuarial valuations.The actuarial loss recognised also included € 123 million from a reduction in the discount rates together with € 18 million from experience gains and losses on scheme liabilities.The net pension liability on funded schemes recognised within shareholders’ funds was € 482 million at December 2002. This compares to a net pension asset within shareholders’ funds of € 314 million at December 2001. The decline in value of the retirement benefit scheme assets will also impact the profit and loss account - other finance income, during 2003. During 2002, the value of the assets reduced by € 733 million, including the effect of exchange rate and other movements. As it is not considered appropriate to significantly adjust the assumptions on asset returns to compensate for the decline in the market value of the assets in 2002, the reduction in asset values will have a negative impact of approximately € 47 million on other finance income in 2003. 16 Assets under management/ administration and custody Assets under management in the Group amounted to € 26 billion at 31 December 2002 and assets under administration and custody amounted to € 276 billion at 31 December 2002. Commentary on half–year December 2002 performance The second half-year profit on ordinary activities before taxation amounted to € 672 million compared with € 703 million in the first half.The second half-year was negatively impacted by the Allfirst restructuring costs and the reduction in embedded values in Ark Life. Excluding these items, profit was up 4% on a constant currency basis. Net interest income of € 1,154 million was up 1% on the half-year to June 2002. The first half benefited from a very strong performance from interest rate management activities in Global Treasury. Other income increased by 8% to € 772 million particularly due to securities gains in Allfirst which were partly offset by Ark Life’s performance. Operating expenses at € 1,173 million were broadly in line with expectations. The Group credit provision charge as a percentage of average loans was similar to the first half. Cash flow As shown in the consolidated cash flow statement, there was a net increase in cash of € 362 million during the year ended 31 December 2002. Net cash outflow from operating activities was € 121 million. Cash outflows from financing were € 129 million, primarily due to the redemption of subordinated liabilities of € 247 million offset by the issue of subordinated liabilities of € 100 million. Cash outflows from taxation were € 280 million while cash outflows in relation to equity dividends were € 345 million.These outflows were offset by a cash inflow from capital expenditure, primarily due to net cash inflows from disposals of debt and equity securities of € 1,516 million. Acquisition of a strategic stake in M&T Bank Corporation. Disposal of Allfirst Financial Inc. It was announced on 26 September 2002 that AIB is entering into a strategic relationship with M&T Bank Corporation (‘M&T’) whereby AIB’s US subsidiary, Allfirst, will be acquired by M&T. As a result of the transaction, AIB will acquire a strategic shareholding of 26.7 million M&T shares, representing a stake of approximately 22.5% in the enlarged M&T. AIB will also receive US$ 886m in cash. The transaction, which is expected to be completed by the end of the first quarter of 2003, is subject to regulatory approvals. Shareholders of both M&T and AIB approved the transaction in December 2002. The transaction has no impact on the accounts of AIB for 2002. The transaction will be accounted for in accordance with the Urgent Issue Task Force Abstract No. 31 ‘Exchanges of businesses or other non-monetary assets for an interest in a subsidiary, joint venture or an associate’ (‘UITF 31’). Under UITF 31 the transaction is accounted for as an exchange of 77.5% of Allfirst for 22.5% of the existing M&T. Under this approach, the 22.5% of Allfirst that is owned by AIB, both directly before the transaction and indirectly thereafter, is treated as being owned throughout the transaction. The transaction will give rise to a gain, which will be recognised on completion. The 2003 accounts will also reflect the income and expenses of Allfirst for the period during which it remains a 100% subsidiary of the Group. Following completion of the transaction, the Group will account for its investment in the enlarged M&T as an associated undertaking.The Group will include its share of the profits of the enlarged M&T in the Group profit and loss account within the caption ‘Income from associated undertakings’. AIB will also account for its 22.5% share of the costs associated with the merger, calculated in accordance with Irish GAAP. 17 lending growth in 2003. AIB is combining its traditional prudent and cautious approach to risk assessment with leveraging our relationship banking approach and maximising the benefits of our customer relationship management systems. In 2003 we will have a number of one off and significant items i.e. the transition of our Allfirst franchise in the USA to M&T Bank (subject to regulatory approvals), the impact of lower other finance income from our pension fund assets due to declines in stock market valuations, and the imposition of the Irish Government Bank Levy. Excluding these items, underlying adjusted earnings per share in 2003 is expected to increase in mid single-digits based on projected strong growth in business volumes. Performance review Prospective accounting developments International accounting standards The European Commission has adopted a regulation on the application of International Accounting Standards (‘IASs’). This requires that the Group accounts of all listed companies in the EU should, from January 2005, be drawn up on the basis of adopted International Accounting Standards.The ‘adoption’ of the International Accounting Standards Board (‘IASB’) standards is the responsibility of the Accounting Regulatory Committee of the European Commission. Under the terms of the EU regulation, member state governments have the option to decide whether adopted IASs should be applied more widely than in the group accounts of listed companies.The Group is currently considering the implications of the regulation and expects to prepare its first financial statements in accordance with ‘adopted’ International Accounting Standards for the year ended 31 December 2005. During 2002, the IASB proposed improvements to a number of its standards, and the Accounting Standards Board (‘ASB’) in the UK instituted a convergence programme whereby six of these standards when updated would be substituted for existing UK/Irish standards. AIB continues to monitor progress on the convergence programme. Share-based payment In November 2002, the ASB issued Financial Reporting Exposure Draft 31 – Share-based payment (‘FRED 31’) which would apply to all entities and all types of share based payment transactions including all employee share option schemes.The proposed standard would require entities to recognise an expense in the profit and loss account in respect of share based payments over the period in which the services are rendered by the employees.The expense will be measured by reference to the fair value of the equity instruments granted taking into account the terms and conditions upon which those equity instruments were granted.The comment period for the exposure draft closes in early March 2003 and the ASB expects to publish a standard during 2003 which would come into effect on 1 January 2004. AIB is currently examining the implications of the FRED, however implementation of the standard will give rise to a profit and loss account charge. Outlook The economic outlook internationally is uncertain at present, investment expenditure is sluggish and corporate customers are generally inclined to protect their balance sheets rather than expand their operations. However, AIB’s operations are positioned to generate strong revenue growth, particularly in our high growth core banking franchises and the Group is planning for double-digit 18 Divisional commentary On a divisional basis profit is measured in euro and consequently includes the impact of currency movements. AIB Bank Republic of Ireland profit was € 590 million, up 5% on the year to December 2001. AIB Bank Republic of Ireland Retail and commercial banking operations in Republic of Ireland, Channel Islands, and Isle of Man; AIB Finance and Leasing; Card Services; and AIB’s life and pensions subsidiary Ark Life Assurance Company. Banking operations in the Republic of Ireland produced a strong performance with operating profit up 11% in less buoyant economic conditions. There was strong growth in business volumes with loans up 20% since December 2001 including non-home loan lending up 16% and home loans up 31%. This reflected our capability to grow revenues and significantly increase our market penetration. Total deposits were up 7% due to a strong performance in the second half with growth of 6% following a 1% increase in the first half which was affected by an exceptional position at 31 December 2001 in the run up to euro conversion. Average deposits were up 11%. AIB Card Services reported strong profit growth benefiting from good growth in loan volumes and a lower cost income ratio. AIB AIB Bank Republic of Ireland profit and loss account Net interest income Other finance income Other income Total operating income Total operating expenses Operating profit before provisions Provisions Operating profit - continuing activities Profit on disposal of property Year 2002 € m 921 40 353 Year 2001 € m 843 43 359 1,314 1,245 677 637 55 582 8 % Change 2002 v 2001 9 –7 –2 6 6 5 23 4 – 5 641 604 44 560 2 562 Profit on ordinary activities before taxation 590 in the calculation of its embedded value profit had a favourable profit impact of € 17 million. The adoption of a 10% discount rate more closely aligns Ark Life policy with industry practice. Finance and Leasing profit also increased as a result of lower costs and strong growth in loan volumes. Costs increased by 6% due to higher business activity levels and salary increases relating to the National Programme for Prosperity and Fairness partly offset by cost saving initiatives in central supports, with the cost income ratio remaining at 51%. Ark Life profit of € 57 million for the year to December 2002 was down from € 84 million in 2001.Total Annual Premium Equivalent (APE) sales were € 179 million compared with € 200 million in 2001.The difficult investment market resulted in reduced volumes of business with customers opting for more risk averse products and the decline in world equity markets also had an adverse impact of € 32 million on embedded values.The reduction from 12% to 10% in the discount rate used 19 Divisional commentary AIB Bank GB & NI profit and loss account Net interest income Other finance income Other income Total operating income Total operating expenses Operating profit before provisions Provisions Operating profit - continuing activities Profit on disposal of property Year 2002 € m 363 (1) 166 528 266 262 22 240 – Profit on ordinary activities before taxation 240 Year 2001 € m 336 3 161 500 259 241 19 222 1 223 % Change 2002 v 2001 8 – 3 6 2 9 18 8 – 8 AIB Bank GB & NI profit was € 240 million, up 8% on the year to December 2001. AIB Bank GB & NI Retail and commercial banking operations in Great Britain and Northern Ireland. Profit in AIB Bank GB & NI increased by 9% on a constant currency basis.There was a particularly strong performance in Britain as a result of substantially increased business volumes. Average loans increased by 15% with significant growth in retail and professional sectors. In Northern Ireland, home loan activity was buoyant with an increase of 17% in total home loans. Average deposits were up 11% as a result of increased business development activity. The Division expanded its business development capability with the opening of new offices in Britain and recruitment of experienced business bankers. Notwithstanding business expansion initiatives, costs were well managed with the cost income ratio declining from 52% to 50%. Credit quality remained strong. An achievement was a reduction of 12% in non-performing loans and the bad debt charge was predominantly general with a modest net specific charge. In December, the Forum of Private Business voted AIB GB ‘Britain’s Best Business Bank’. This was the fifth consecutive time the bank was awarded this biennial title. 20 USA reported a profit of € 308 million, down 13% on the year to December 2001. USA includes Allfirst and Allied Irish America. Allfirst has banking operations in Maryland, Pennsylvania, Virginia and Washington DC. Allied Irish America includes retail and corporate operations in New York, Philadelphia, Los Angeles, Chicago, San Francisco and Atlanta; Community Counselling Services (‘CCS’) and Ketchum. Allfirst – 2002 was a difficult year for Allfirst in the aftermath of the foreign exchange trading losses. In financial terms the results benefited from securities gains of US$ 69 million (net of lost yield) arising from a restructuring of the portfolio in the fourth quarter.The purpose of the restructuring was to reduce interest rate risk exposure by replacing longer dated securities with shorter dated issues. Provisions and writedowns were substantially higher, a credit provision of US$ 38 million for one specific case, US$ 16 million writedowns of mutual fund assets held as a hedge for incentive plan liabilities and a US$ 10 million provision for residual values in the auto lease portfolio.The customer base was stable and average core deposits increased by 1% in 2002.There was little demand for borrowing by corporate customers in this subdued business climate but direct retail and SME lending increased by 3%. Employee restructuring USA profit & loss account Net interest income Other finance income Other income Total operating income Operating expenses Restructuring costs in continuing businesses Total operating expenses Operating profit before provisions Provisions Operating profit - continuing activities (Loss)/profit on disposal of property Year 2002 € m 549 (2) 528 1,075 655 13 668 407 98 309 (1) Profit on ordinary activities before taxation 308 Year 2001 € m 584 2 446 1,032 638 – 638 394 39 355 – 355 % Change 2002 v 2001 –6 – 18 4 3 – 5 4 154 –13 – –13 operates across Canada with principal offices in Toronto, Montreal, Calgary and Vancouver was acquired by the Group in May 2002. costs of US$ 13 million were incurred in relation to an early retirement program at Allfirst. On 26 September 2002, AIB announced that it was entering into a strategic relationship with M&T Bank Corporation (‘M&T’) whereby M&T would acquire AIB’s US subsidiary Allfirst with AIB obtaining a 22.5% share in the enlarged M&T and a cash payment of US$ 886 million. Allied Irish America – Profit increased significantly due to good growth in the not-for-profit business, an increased revenue contribution from CCS and the impact of reduced investment costs.There was an underlying increase of 30% in fee income with strong growth in letter of credit income and a 17% increase in risk weighted assets. Ketchum Canada, Inc., a fundraising consultancy that 21 Divisional commentary Capital Markets profit was € 209 million, up 8% on the year to December 2001. Capital Markets Global Treasury, Corporate Banking, Investment Banking and Asset Management. The 8% growth in profit reflected a strong performance in 2002 with Capital Markets activities operating in very difficult market conditions.There was good revenue growth which together with tight cost management delivered a 14% increase in operating profit before provisions. Corporate Banking achieved very substantial growth in profitability in Ireland and in its international businesses. Average loan volumes were up 13% with particularly good performances in IFSC, UK and USA businesses. Fee income was buoyant including a substantial increase in arrangement fees and fees from Collateralised Debt Obligation (‘CDO’) funds, including the launch of the Clare Island CDO. Capital Markets profit and loss account Net interest income Other finance income Other income Total operating income Total operating expenses Operating profit before provisions Provisions Operating profit - continuing activities Income from associated undertakings Year 2002 € m 271 7 282 560 300 260 60 200 9 Profit on ordinary activities before taxation 209 Year 2001 € m 210 8 305 523 296 227 38 189 5 194 % Change 2002 v 2001 29 –11 –8 7 1 14 56 6 91 8 Investment Banking revenues were lower due to a decline in asset values, reduced business volumes and the general impact of difficult equity markets. Despite difficult market conditions, strong underlying performances were achieved by Goodbody, AIB Corporate Finance and the AIB/Bank of New York Securities Services joint venture. Revenues from Asset Management declined mainly due to the impact of lower asset values on fee income. A full discussion on provisions is contained in the provisions section on page 14. Income from associated undertakings increased due to the restructuring of the AIB joint venture with the Bank of New York.The AIB share of profit from custody and trustee businesses is included in associated undertakings in 2002 whereas in 2001 the operating income and expense was included in operating profit. Profit was higher in Global Operating expenses were well Treasury due to an increased contribution from interest rate management activities which anticipated and benefited from low interest rates.Trading revenues (other income) were lower as a result of a more difficult trading environment. Global Treasury continued to maintain a strong liquidity position in euro, US dollar, sterling and Polish zloty operations. controlled. Excluding the restructuring of the AIB joint venture with Bank of New York (see comment below on associated undertakings), costs were up 3% due to normal cost inflation and expansion of the corporate business internationally partly offset by good cost management.The cost income ratio declined significantly by 3% to 54%. 22 Poland profit and loss account Net interest income Other finance income Other income Total operating income Operating expenses Integration costs in continuing businesses Total operating expenses Operating profit before provisions Provisions Operating profit - continuing activities (Loss)/profit on disposal of property Profit on ordinary activities before taxation Year 2002 € m 272 – 188 460 351 – 351 109 46 63 (2) 61 Year 2001 € m 275 – 163 438 358 38 396 42 9 33 3 36 % Change 2002 v 2001 –1 – 15 5 –2 – –11 160 417 89 – 71 Including the use of general provisions in 2001 headline provisions increased from € 9 million to € 46 million.The gross provision charge declined in 2002 from 1.9% of loans (before the use in 2001 of general provisions of € 47 million created on the acquisition of WBK and Bank Zachodni) to 1.2%. Poland profit was € 61 million for the year 2002. Poland Bank Zachodni WBK S.A. (‘BZWBK’), in which AIB has a 70.5% shareholding, together with its subsidiaries and associates. Operating profit before provisions was up 36% on the 2001 level of € 80 million, adjusting for integration costs. In local currency terms revenue was up 10% despite slower economic conditions. Net interest income increased by 4% due to growth in business volumes and a stable net interest margin. Deposit margins declined in the substantially lower interest rate environment while lower funding costs and wider loan margins were positive features. Loans increased by 8%, a level below historical trends, due to management adopting a cautious approach in the more difficult economic environment. The savings market was sluggish with combined deposits and mutual funds volumes down 2% on December 2001, however average deposits were up 1%.The market was affected by tougher business conditions and the introduction of a new withholding tax on deposits. Other income was up 21% including strong growth in card and current account fees and branch commissions. Operating expenses were up 3% reflecting implementation of a new branch technology platform offset by tight cost control and realisation of integration benefits. 23 Divisional commentary Group profit and loss account Net interest income Other finance income Other income Total operating income Total operating expenses Operating loss before provisions Provisions Operating loss – continuing activities Income from associated undertakings Profit on disposal of business Loss on ordinary activities before taxation Year 2002 € m (25) 18 – (7) 56 (63) (30) (33) – – (33) Year 2001 € m 10 11 (8) 13 54 (41) 55 (96) (1) 93 (4) Group Group includes interest income earned on capital not allocated to divisions, the funding cost of certain acquisitions, hedging costs in relation to the translation of foreign currency profits, and unallocated costs of enterprise networks and central services. Group reported a loss of € 33 million for the year to December 2002, compared with a loss of € 4 million in 2001.The increased loss arose mainly from lower capital income due to the impact on capital arising from the exceptional foreign exchange dealing losses in Allfirst in 2001 and lower investment yields.The 2001 loss included € 93 million profit from the sale of AIB’s interest in KCH and a € 50 million additional unallocated credit provision created at Group level.The 2002 result included the release of € 40 million of this € 50 million provision offset by additional provisions in relation to unquoted investments. 24 Financial review CAPITAL MANAGEMENT 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 2002 and 2001. Shareholders’ funds – equity Shareholders’ funds – non-equity Equity and non-equity minority interests Reserve capital instruments Undated capital notes Dated capital notes 2002 € m 4,408 235 274 4,917 496 389 1,287 7,089 2001 € m 4,851 279 312 5,442 496 426 1,594 7,958 Capital resources reduced by € 869 million during the year ended 31 December 2002.The decrease arose primarily as a result of the impact of the weakening of US dollar, sterling and Polish zloty exchange rates against the euro as well as the impact of weaker international equity markets on the Group’s retirement benefit scheme assets.The value of the US dollar, sterling, and Polish zloty weakened against the euro by 16%, 6% and 13% respectively, resulting in a negative foreign currency translation adjustment of € 628 million.The actuarial losses in the Group’s retirement benefit schemes, which are recognised directly in shareholders’ funds under FRS 17 - Retirement benefits, amounted to € 823 million. Shareholders’ funds benefited from net retentions of € 608 million and issues of share capital € 115 million.The redemption and maturity of dated capital notes of € 247 million were offset by the issue of € 100 million in subordinated debt due in 2013. 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 rates, foreign exchange rates and equity prices.The remaining risks, relating to the normal retail and wholesale banking activities, are regarded as banking book risks. Capital base Tier 1 Shareholders’ funds as defined for 2002 € m 2001 € m regulatory purposes Other tier 1 capital Supervisory deductions Total tier 1 capital Tier 2 Qualifying loan capital Other tier 2 capital Total tier 2 capital Gross 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 4,668 770 (632) 4,806 1,638 884 2,522 7,328 (341) 6,987 4,421 798 (740) 4,479 1,859 900 2,759 7,238 (294) 6,944 53,961 11,521 65,482 54,839 10,854 65,693 3,099 2,897 658 3,757 69,239 6.9% 10.1% 268 3,165 68,858 6.5% 10.1% 25 Financial review 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 improving to 6.9% and the total capital ratio at 10.1%.Tier 1 capital increased by € 327 million to € 4.8 billion reflecting net retentions of € 563 million, issue of shares € 115 million, and lower deduction for own shares of € 69 million.These were offset by € 420 million of currency translation and other movements. Tier 2 capital decreased by € 237 million since December 2001 reflecting redemptions of subordinated debt, lower general provisions for bad and doubtful debts, and currency factors, partly offset by the issue of € 100 million in new subordinated debt and an increase in shareholders’ funds qualifying as tier 2 capital. Supervisory deductions increased by € 47 million, primarily reflecting the increase in the long-term assurance business attributable to shareholders. Risk weighted assets increased marginally to € 69.2 billion, 10% excluding currency factors. The Basel Committee on Banking Supervision and the European Union have developed proposals to significantly revise the capital adequacy regime in operation for all ‘internationally active banks’.These proposals are designed to bring the capital adequacy regime more into line with best practice risk management in financial institutions.The regime is based on three so-called ‘Pillars’. Pillar One sets the rules for determining the capital requirements for credit risk and securitisations and introduces a new capital requirement for operational risk. Pillar Two enhances the supervisory role of the regulators. Pillar Three sets out detailed disclosure requirements designed to strengthen the role of the market in bringing discipline to risk management practices in banks and other financial institutions.While these proposals have yet to be finalised and adopted, the Group has participated actively in the consultative process surrounding them and has participated in the Quantitative Impact Studies (QIS) requested by the Basel Committee as part of its preparation for their implementation. RISK GOVERNANCE AND OVERSIGHT Arising from the findings of the Independent Report submitted by Promontory Financial Group and Wachtell, Lipton, Rosen & Katz, the Board took a number of actions to strengthen the risk management and control processes in operation at the Group.These include: • The appointment of Mr John Heimann, former Comptroller of the Currency in the US and Chairman of Merrill Lynch Global Financial Institutions, as special advisor to the Board on risk management organisation across the Group. Under his direction Deloitte Touche Tohmatsu (‘D&T’) was engaged to review the credit and operational risk management activities of the Group and advise on best practice. First Manhattan Consulting Group (‘FMCG’) performed the same role with regard to the Group’s asset and liability and liquidity management practices. It had previously been engaged to review the control environment in Global Treasury following the Board’s decision to centralise the Group’s Treasury Management activities in Dublin. The consultants’ recommendations were adopted by the Board in July 2002. Detailed implementation plans were developed and significant progress has been made in implementing these recommendations. • The appointment of Mr Shom Bhattacharya as Group Chief Risk Officer (‘CRO’).The CRO reports to the Group Chief Executive and the Audit Committee and is a member of the Group Executive Committee. • The establishment of a Group-wide internal audit function and the appointment of a new Head of Group Internal Audit – Mr Paul Shantz. • The appointment of Mr Philip Brennan as General Manager of Regulatory Compliance & Business Ethics with an independent reporting line to the Audit Committee and the Board. • Steps to strengthen the linkages between (a) the Board and the Boards of the banking subsidiaries, and (b) the Board’s Committees and those of the subsidiary Boards. 26 RISK MANAGEMENT Taking and managing risk for an appropriate return is central to creating shareholder value.The Group’s Risk-adjusted Return on Capital (‘RAROC’) programme is at an advanced stage of implementation – risk-adjusted pricing models are used in corporate portfolios and are being rolled-out to commercial lending portfolios. It is planned that risk-based measures will progressively be incorporated into the evaluation of business performance. Day-to-day risk management in AIB Group centres on three major risks – credit risk, operational risk and market risk (including liquidity). Credit risk is the exposure to loss due to counterparty default on credit obligations. It arises mainly in the Group’s retail, commercial, corporate, and interbank lending portfolios. Credit risk also arises in derivative contracts where the default of a counterparty to the transaction could expose the Group to loss. 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. Market risk is the exposure to loss arising from adverse movements in interest rates, foreign exchange rates and equity prices. 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 add value through position-taking. Organisational structure for managing risk AIB manages risk through a set of committees and dedicated risk officers and functions with delegated authorities spread throughout the Group.The committee structure is outlined below.The Board of Directors formally approves the overall strategy and the direction of the business on an annual basis. It regularly monitors the Group’s financial performance, reviews risk management activities and controls and has responsibility for approving the Group’s risk appetite.The Group Executive Committee manages the strategic business risks of the Group. It sets the business strategy within which the risk management function operates and oversees its activities. On Mr Heimann’s recommendation the Group Risk Management Committee (‘RMC’) was established to direct and co-ordinate risk management activities across the Group.The Group CRO chairs this committee.The role of the Group Asset and Liability Committee (‘Group ALCO’) was revised following the establishment of the RMC.This committee is chaired by the Group Director, Finance & Enterprise Technology and has responsibility for co-ordinating the Group’s capital management Group-level risk management structure Board of Directors Group Executive Committee Board Audit Committee Group RMC (credit, market, and operational risk) Group ALCO (market risk) GCC (credit risk) Group ORMCO (operational risk) 27 Financial review activities and for funding and liquidity management.The Group Credit Committee (‘GCC’) and the Group Operational Risk Management Committee (‘Group ORMCO’) are subcommittees of the RMC. The risk management function in the Group was reorganised following Mr Heimann’s recommendations.The Group CRO has responsibility for risk management and control activities across the Group. Divisional CROs were appointed to head up the risk management functions in each of the Divisions. These report directly to the Group CRO who shares responsibility with the Head of each Division for setting risk management objectives and ensuring the availability of adequate risk management skills and expertise. Each Division has its own Credit Committee and Operational Risk Management Committee, which report to the equivalent Group-level committees.The Group CRO is supported at the centre by specialist officers with functional responsibility for credit and operational risk.The CRO at Capital Markets Division carries the functional responsibility for market risk.This structure is designed to develop a more cohesive risk management organisation that serves the dual needs of supporting the business through sharing of expertise and best practice while at the same time ensuring that appropriate controls are in place at all times. Two other functions play very important roles in overseeing the risk control environment.These are Group Internal Audit and Regulatory Compliance & Business Ethics. Group internal audit 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 risk are assessed and tested. In addition to audit reports, internal audit provides information on the overall control environment to the management of the individual divisions. A secondary objective of internal audit is to proactively influence executive management to strengthen the risk management and control framework through the implementation of best practices. In undertaking its responsibilities, internal audit 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.The information contained in these self-assessments is subject to review by internal audit.There is a programme of ongoing review of risk identification standards and risk measurement methodologies at business unit level, which includes testing of the risk mitigators adopted by management. Regulatory Compliance & Business Ethics (‘RC & BE’) has responsibility for co-ordinating the compliance functions across all Divisions and for the development of Group policy on ethical matters. Divisional compliance departments together with management, develop policies and procedures to ensure compliance with applicable law, regulation and codes of practice with respect to the conduct of business. RC & BE reports independently to the Audit Committee on the compliance framework in operation across the Group and on management attention to compliance matters. 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. Credit grading and monitoring systems accommodate the early identification and management of deterioration in loan quality. In addition, the credit management process is underpinned by an independent system of credit review.The credit grading systems across the Group continue to be refined to facilitate risk-based pricing, economic provisioning, attribution of capital and performance evaluation. The Board, in exercising its role in relation to credit risk, determines the credit authority of the GCC, approves certain high-level credit policies and reviews credit performance. 28 The GCC considers and approves credit exposures in excess of divisional authorities. It comprises senior divisional and Group management.The Committee approves key credit policies and reviews strategic portfolio management. It also reviews trends in credit quality and determines overall provision adequacy. The Group CRO has functional responsibility for ensuring that groupwide credit risk activities are governed by appropriate and robust policies and best practices.The Group CRO also has responsibility to report independently to the Group Chief Executive, Audit Committee and the Board on credit performance, credit quality and the adequacy of provisions. 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 operational risk The management of operational risk is a line management responsibility. It is supported by small operational risk management teams at Group and in each of the Divisions as well as specialist functions in areas such as money laundering prevention, business continuity planning, information security and insurance.These operational risk management teams are responsible for the development and implementation of a structured operational risk management (‘ORM’) programme, which is being strengthened on the recommendations of D&T. to centralise market risk in Global Treasury and the establishment of the RMC. Asset and liability management (‘ALM’) units operate in each of the retail divisions.These have responsibility for identifying interest rate and foreign exchange risks and transferring these to Global Treasury. An element of AIB’s structured Global Treasury is responsible ORM programme is an operational risk self-assessment process.This process requires each business within the Group to assess its operational risks and the effectiveness of the related controls to address these risks.This raises awareness of control weaknesses and allows management to target specific actions to strengthen the control processes. It complements the risk-based audit approach used by Group Internal Audit in its role as independent assessor of management’s control and risk management processes. The role of Group ORMCO is to co-ordinate operational risk management activities across the Group through setting policy, monitoring compliance and promoting best practice disciplines. Managing market risk The principal aims of the Group’s market risk management activities are to limit the adverse impact of interest rate, exchange rate and equity price movements on profitability and shareholder value, and to enhance earnings within defined risk parameters. The processes for managing market risk have changed to take account of the Board’s decision for managing these risks. It also manages the Group’s liquidity and funding activities.The process of risk transfer to Global Treasury and the Group’s funding and liquidity activities are overseen by Group ALCO, which is supported by ALCOs in each Division. Group ALCO also carries responsibility for capital and balance sheet management. In addition to interest rate and foreign exchange rate risk, equity risk arises in Global Treasury from the management of the Group’s convertible bond portfolio and the hedging of stock market linked investment products (tracker bonds) sold to customers. Equity risk also arises in the Group’s stockbroking business. These risks are managed by setting limits on the amount of the Group’s capital and forecast earnings that can be put at risk. These limits are based on the risk measurement methodologies set out below.The Board delegates authority to the Group CRO to allocate these limits on its behalf and charges him with ensuring that the risk measurement methodologies used to determine these limits are appropriate for the risks being taken and that 29 Financial review appropriate monitoring and control procedures are in place. The RMC reviews market risk strategy, appetite and policies and promotes best practice for measurement, monitoring and control. 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 achieves this through the maintenance of a stock of high quality liquid assets and active involvement in the interbank market.The liquid asset stock is maintained at a level considered sufficient to meet the withdrawal of deposits or calls on commitments in both normal and abnormal trading conditions. In all cases, net outflows are monitored on a daily basis and the required minimum liquidity stock can be increased if these outflows 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 an established retail deposit base in Ireland, Britain, the US and Poland to fund asset growth. Although a significant element of these deposits is 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 also operates a liquidity contingency plan for critical situations. For a period following the announcement of the fraudulent foreign exchange trading activities in Allfirst Bank on 6 February 2002, Group liquidity was managed in accordance with this plan. Allfirst Bank became a net seller of federal funds as a result of actions taken under the liquidity contingency plan, which included the sale of investment securities and receipt of funding from AIB. Allfirst Bank initially experienced a small decrease in core deposits and it was required, in the interest of maintaining good customer relations, to purchase approximately US$ 300 million in variable rate demand bonds (‘VRDBs’), which were backed by a standby letter of credit.These were later successfully reissued to the market. MARKET RISK MEASUREMENT Value at Risk (‘VaR’) is an industry practice for market risk measurement. It provides an estimate of the potential loss resulting from market movements over a given period of time within a specified probability of occurrence. For internal risk measurement and management purposes, AIB Group uses a VaR methodology. Risk is calculated as the probable maximum loss in fair value that could arise in one month from a ‘worst case’ movement in market rates (interest, foreign exchange, equity, as applicable) with a 99% degree of probability.This means that there is a one in one hundred chance that potential loss could be greater than that estimated using historical observations of weekly price volatility in interest and foreign exchange rates and equity prices over the previous period of three years.VaR figures are quoted using both one- month and one-day holding periods. Recognising that the prices of similar financial instruments do not move in exact step with each other, the total risk for a portfolio of different instruments is not the same as the sum of the individual risks. Having calculated the 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 risk category. In technical terms, this approach is termed a variance- covariance approach. 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. Special attention is required for measuring the market risk of 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- 30 covariance approach, is used to more accurately measure the market risk in currency option portfolios.The currency option VaR figure is included in the foreign exchange rate VaR figures.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 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. Interest rate risk Global Treasury manages the Group’s exposure to interest rate risk.The risk is that changes in interest rates will have adverse effects on earnings and on the value of the Group’s assets and liabilities.This risk is managed by setting limits on the probable maximum loss in fair value (VaR) on the aggregate open interest rate positions of the Group. Stop-loss limits are also used to close out loss making positions. In managing interest rate risk, a distinction is made between trading and non-trading activities.Trading activities are recorded in the trading book. Interest rate risk associated with the Group’s retail and commercial activities is managed through the non-trading book.The reported interest rate VaR figures represent the average, high, low and year-end probable maximum loss in respect of both trading and non-trading book positions held in Global Treasury. The following table illustrates the VaR figures for interest rate risk for the years ended 31 December 2002 and 2001. Interest rate risk 1 month holding period: Average High Low 31 December 1 day holding period: Average High Low 31 December Trading 2001 € m 2002 € m Non-trading 2002 € m 2001 € m 6.8 9.3 4.7 6.4 1.5 2.1 1.0 1.4 9.5 12.0 7.3 9.6 2.1 2.7 1.6 2.2 48.7 87.4 23.0 48.5 10.9 19.5 5.1 10.8 73.4 88.8 58.4 69.9 16.4 19.9 13.1 15.6 Trading book The interest rate trading book incorporates all securities and interest rate derivatives that are held for trading purposes in the Group’s Global Treasury units.These are revalued daily at market prices (marked to market) and any changes in value are immediately recognised in income. During 2002, trading book interest rate risk was predominantly concentrated in the euro, sterling and the US dollar although positions were also taken in Polish zloty and 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 Global Treasury interbank cash books, and the Group’s investment portfolios.The interest rate risks in the retail and corporate deposit and loan books are transferred to Global 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 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.This is achieved by maintaining a portfolio of assets with interest rates fixed for several years. In designing this strategy, 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 investment life and composition of this portfolio. Group ALCO reviews the management of these activities. 31 Financial review Interest rate sensitivity The net interest rate sensitivity of the Group at 31 December 2002 and 2001 is illustrated in note 53. Foreign exchange rate risk - structural Structural foreign exchange rate risk arises from the Group’s non-trading net asset position in foreign currencies. Structural risk exposure 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 these 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. However, 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. The Group does not maintain material non-trading open currency positions other than the structural risk exposure discussed above. At 31 December 2002 and 2001, the Group’s structural foreign exchange position was as follows: US dollar Sterling Polish zloty 2002 € m 1,071 1,210 187 2001 € m 1,096 1,185 209 2,468 2,490 This position indicates that a 10% movement in the value of the euro against these currencies at 31 December 2002 would result in an amount to be taken to reserves of € 247 million. The Group may choose to hedge all or part of its projected future foreign currency earnings, 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 2002, certain US dollar, sterling and Polish zloty profits were hedged during the year and translated at the following exchange rates € 1: US $0.9062; € 1: Stg £0.6273; € 1: PLN 4.0076. Foreign exchange rate risk – trading Global Treasury manages the Group’s exposure to foreign exchange risk arising from unhedged customer transactions and discretionary trading.The risk is that adverse movements in foreign exchange rates will result in losses.This risk is managed by setting limits on the probable maximum loss in fair value (VaR) on the aggregate open foreign exchange position for the Group’s discretionary portfolio. Stop-loss limits are also used to close out loss-making positions. The following table illustrates the VaR figures for trading foreign exchange rate risk for the years ended 31 December 2002 and 2001. 2002 € m 2001 € m Foreign exchange rate risk-trading 1 month holding period: Average High Low 31 December 0.9 1.9 0.3 0.8 1 day holding period: Average High Low 31 December 0.2 0.4 0.1 0.2 2.1 4.4 0.5 4.4 0.5 1.0 0.1 1.0 Equity risk Global Treasury manages the equity risk arising in its convertible bond portfolio and from hedging stock market linked investment products (tracker bonds) sold to customers. Goodbody stockbrokers manage the equity risk arising in its Principal Trading Account.The risk is that adverse movements in share, share index, or share option prices would result in loss to the Group.This risk is managed by setting limits on the probable maximum loss in fair value (VaR) on open equity positions. Stop-loss limits are also used to close out 32 Equity risk 1 month holding period: Average High Low 31 December 1 day holding period: Average High Low 31 December loss-making positions.The table above illustrates the VaR figures for equity risk for the years ended 31 December 2002 and 2001. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS The Group uses off-balance sheet financial instruments, including derivatives, to service customer requirements, to manage market and credit risk exposures and for trading purposes. Credit commitments Contingent liabilities and commitments to extend credit are outlined in note 50.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 represented by the contractual amounts of these contracts. Derivative instruments Derivative instruments are contractual agreements between parties whose value reflects movements in some underlying Trading 2001 € m Non-trading 2002 € m 2001 € m 13.0 20.0 10.3 12.1 2.9 4.5 2.3 2.7 0.3 0.7 0.1 – 0.1 0.2 – – 0.5 0.8 0.1 0.1 0.1 0.2 – – 2002 € m 10.2 16.5 6.2 9.9 2.3 3.7 1.4 2.2 interest rate, foreign exchange rate, share price or index level. The table on page 34 shows the notional amount and gross replacement cost for trading and non-trading interest rate, exchange rate and equity contracts at 31 December 2002 and 2001.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 and other market rates. The Group uses derivatives to hedge interest rate, foreign exchange rate and equity risk. The Group also makes controlled use of derivatives for discretionary trading purposes. The values of derivative instruments can rise and fall as market rates change.Where they are used to hedge other assets and liabilities, the changes in value are generally offset by the value changes in the hedged items. As long as the derivative instrument is effective in offsetting the risk of the associated asset or liability, both at the time it is entered into and throughout the hedge period, it is accounted for in accordance with the accounting treatment for the item or items being hedged. Swaps, forward rate agreements, futures and option contracts are used to hedge 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 interest payments based on variable or fixed interest rates.They are used to convert variable rate assets or liabilities into fixed rate assets or liabilities or vice versa or to change the maturity profile of the underlying assets or liabilities. Currency swaps are interest rate swaps where one or both sides of the swap is payable in a different currency.These allow Global Treasury to change the currency profile of an interest rate risk position. Forward rate agreements are individually negotiated contracts that allow customers to fix the rates at which they will borrow or lend in the future. 33 Financial review Financial futures are exchange-traded contracts that allow investors to speculate on the future direction of interest rates, stock indices, commodities etc. They are also an effective and cheap way to hedge against movement in certain market rates. They are used in the Group to hedge exposures arising from the sale of forward rate agreements or guaranteed equity products.They are also used to manage the interest rate risk 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 e.g. 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. Foreign exchange rate options are used to hedge income and expenses arising from non-euro denominated assets and liabilities and to manage the impact of exchange rates on the reported euro value of non-euro earnings. Foreign exchange rate options are also used to hedge exposures arising from customer transactions. Interest rate caps/floors are series of options that give the buyer the ability to fix the maximum or minimum rate of interest. A combination of an interest rate cap and floor is known as an interest rate collar.These are used to limit the variability in the rate payable on future loans and deposits. Forward foreign exchange contracts are agreements to buy or sell a specified quantity of foreign currency, usually on a specified Notional amount € m 2002 Gross replacement cost € m 2001 Gross replacement cost € m Notional amount € m 75,558 34,971 1,223 690 46,015 70,136 586 846 110,529 1,913 116,151 1,432 18,468 2,578 21,046 2,037 – 2,037 457 89 546 27 – 27 18,766 7,739 26,505 23 2,870 2,893 217 63 280 1 194 195 Interest rate contracts Trading Non-trading Exchange rate contracts Trading Non-trading Equity contracts Trading Non-trading date, at an agreed exchange rate. These contracts are used 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 euro value of non-euro earnings. Measurement and control of off-balance sheet financial instruments The market risk exposure arising from derivative transactions is controlled within the risk limits set for the management of interest rate, foreign exchange and equity risk. In addition, the Group sets limits on the counterparty credit risk it is prepared to take on derivatives. Unlike loans or investments, credit risk on derivatives change over the life of the derivative contract with the movement in the underlying market rate. For example, in a pay-fixed, receive floating interest rate swap, the Group is exposed to credit risk when variable interest rates rise above the agreed fixed rate, as under such circumstances, it is due to receive payment from the counterparty.Where variable interest rates fall below the agreed fixed rate, the counterparty is exposed to the credit risk of the Group. Credit risk on derivatives is measured using a simulation methodology that models the potential movement in value of the portfolio over the remaining period to maturity and assumes counterparty default in adverse circumstances for the Group. Counterparty netting and credit support agreements are used to mitigate the credit risk. 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, including counterparty credit approval, limit setting and monitoring procedures. 34 Report of the Directors for the year ended 31 December 2002 The Directors of Allied Irish Banks, p.l.c. present their report and the audited accounts for the year ended 31 December 2002. A Statement of the Directors’ responsibilities in relation to the Accounts appears on page 128. Results The Group profit attributable to the ordinary shareholders amounted to € 1,037 million and was arrived at as shown in the Consolidated Profit and Loss Account on pages 47 and 48. Dividend An interim dividend of EUR 17.25c per ordinary share, amounting to € 154 million, was paid on 27 September 2002. It is recommended that a final dividend of EUR 31.81c per ordinary share, amounting to € 283 million (see Note 20), be paid on 25 April 2003, making a total distribution of EUR 49.06c per ordinary share for the year.The balance of profit to be transferred to the Profit and Loss Account amounts to € 563 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 Share Option Scheme is shown in Note 45 on pages 91 and 92. At the 2002 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 The principal accounting policies adopted by the Group, together with information on changes therein, are set out on pages 42 to 46. Review of activities The Statement by the Chairman on pages 4 and 5 and the Review by the Group Chief Executive on pages 8 and 9 contain a review of the development of the business of the Group during the year, of recent events, and of likely future developments. Directors Mr Frank P Bramble retired as an Executive Director on 19 April 2002. Mr Dermot Gleeson was appointed Deputy Chairman with effect from 8 October 2002. Mr Colm Doherty and Mr Aidan McKeon were appointed Executive Directors with effect from 13 February 2003. In accordance with the Articles of Association, Mr Doherty and Mr McKeon retire at the 2003 Annual General Meeting and, being eligible, offer themselves for re-appointment. Mr Adrian Burke, Mr Padraic M Fallon, Mr Don Godson and Mr Lochlann Quinn retire by rotation at the 2003 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 55 on pages 112 to 114. Substantial Interests in the Share Capital The following substantial interest in the Ordinary Share Capital had been notified to the Company at 18 February 2003: The Capital Group Companies, Inc. 4.84% At the same date, subsidiaries of the Company had aggregate interests in 3.52% of the Ordinary Share Capital.With the exception of 5.6 million shares (0.6%) held by a subsidiary (see Note 49), these shares represented non- beneficial interests. None of the clients for whom these shares 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 140. 35 Report of the Directors and safety issues arising from the handling and distribution of the new euro notes and coins, while later in the year the Company participated in European Safety Week, an EU initiative supported by the Health and Safety Authority. Branches Outside the State The Company has established branches, within the meaning of EU Council Directive 89/666/EEC, in Germany, the United Kingdom and the United States of America. Auditors KPMG, Chartered Accountants, were appointed Auditors during the year and have signified their willingness to continue in office under Section 160(2) of the Companies Act, 1963. Lochlann Quinn Chairman Michael Buckley Group Chief Executive 18 February 2003 for the year ended 31 December 2002 Corporate Governance The Directors’ Corporate Governance Statement appears on pages 37 to 40. Books of Account To secure compliance with the Company’s obligation to keep proper books of account, the measures taken by the Directors are the use of appropriate systems and procedures, including those set out in the Internal Control section of the Corporate Governance Statement on pages 37 to 40, and the employment of competent persons.The books of account are kept at the Company’s Registered Office, Bankcentre, Ballsbridge, Dublin 4, Ireland; at the principal offices of the Company’s main subsidiary companies, as shown on pages 77/78 and 134/135; and at the Company’s other principal offices, as shown on those pages. 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. During 2002, particular emphasis was focused at the beginning of the year on health 36 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 UK Listing Authority, 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, 2002, the Board comprised 10 Non-Executive Directors and 2 Executive Directors. On 13 February 2003 two additional Executive Directors were co-opted to the Board (see ‘Report of the Directors’ on page 35), bringing Board strength to 14, comprising 10 Non-Executive Directors and 4 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. Nevertheless, in compliance with a Code provision that there should be a designated senior independent Non-Executive director, other than the Chairman, to whom concerns can be conveyed, Mr Dermot Gleeson, Deputy Chairman, was so designated by the Board, with effect from 8 October, 2002.This designation does not preclude shareholders from conveying concerns to any of the other Non-Executive Directors, as was previously the position. 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 (i.e., at least two-thirds) should be Non-Executive. 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. Directors are required to submit themselves for re-election every three years. 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 is designed to familiarise Non-Executive Directors with the Group and its operations, and comprises principally a 37 Corporate Governance Statement 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 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 Adrian Burke, Chairman, Mr Dermot Gleeson, Mr Derek A Higgs and Mr Michael J Sullivan. The Audit Committee met on twelve occasions during 2002. The Auditors are invited to attend meetings of the Audit Committee, along with the Group Chief Executive, the Group Director, Finance & Enterprise Technology, the Deputy Head of Finance & Enterprise Technology, the Group Chief Risk Officer, the General Manager, Regulatory Compliance & Business Ethics, 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 internal and external Auditors; reports on compliance, 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, the Group Internal Auditor, and the General Manager, Regulatory Compliance & Business Ethics, each of whom it meets separately at least once each year, in confidential session, in the absence of Management. Each of these parties has 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 Dermot Gleeson (from 1 November 2002), Mr Derek A Higgs, Mr John B McGuckian, and Mr Jim O’Leary (from 1 June 2002). The Nomination and Remuneration Committee met on five occasions during 2002. 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: Ms Carol Moffett, Chairman, Mr Padraic M Fallon, and Mr Don Godson. The Social Affairs Committee met on five occasions during 2002. 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 109 to 114. 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, 38 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 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 its shareholders. The Investor Relations section of the website is updated with the Company’s Stock Exchange releases and formal presentations to analysts and investors, as they are made, so that such documents are available for review by shareholders.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. Since August 2001, shareholders have been offered the facility of accessing the Annual Report and Accounts on AIB’s internet website, instead of receiving them by post. All 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 all the votes cast, including votes cast by 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 2003 AGM, it is intended that the Notice and related papers will be despatched 28 calendar days and 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 Director, Finance & Enterprise Technology, 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 128. 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 2003. 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. 39 Corporate Governance Statement 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 2002. Compliance Statement The Company was in full compliance at 31 December 2002 with the Provisions of the Code, having designated a Senior Independent Non-Executive Director in October 2002, as indicated above. The Group’s system of internal - appropriate policies and 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 expenditure and investment procedures; physical and computer security; and business continuity planning; the accuracy and integrity of the Group’s financial information is confirmed through Divisional and Group level reports to the Chief Financial Officer; - the General Manager, Regulatory Compliance & Business Ethics reports independently to the Audit Committee on the compliance framework across the Group and on Management’s attention to compliance matters; - 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; procedures relating to capital management, asset and liability management (including interest rate risk, exchange rate risk and liquidity management), credit risk management, and operational risk management; independent testing of the risk management and control framework is undertaken by the Internal Audit function; - the Group Risk function is responsible for ensuring that risks are identified, assessed and managed throughout the Group; - regular review by the Board of overall strategy, business plans, variances against operating and capital budgets and other performance data. The above-mentioned Guidance provides that the Board should summarise the process it (either directly or, where applicable, through its committees) has applied in reviewing the effectiveness of the system of internal control.The Group’s structure and on-going processes for identifying, evaluating and managing the significant credit, market and operational risks faced by the Group are described in pages 28 to 34.Those processes are regularly reviewed by the Board, and accord with the above-mentioned Guidance. The Code provides that the Directors should, at least annually, conduct a review of the effectiveness of the Group’s system of internal control and should report to the shareholders that they have done so.The Directors confirm that, with the assistance 40 Financial contents 42 47 49 50 51 52 52 52 53 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 Note of historical cost profits and losses Notes to the accounts 128 Statement of Directors’ responsibilities in relation to the Accounts 129 Independent auditors’ report 131 Accounts in sterling, US dollars and Polish zloty 132 Five year financial summary 41 Accounting policies Accounting convention The accounts on pages 47 to 127 have been prepared under the historical cost convention, as modified by the revaluation of certain financial instruments held for dealing purposes, assets held in the long-term assurance business and certain properties.The accounts comply with the requirements of Irish statute comprising the Companies Acts 1963 to 2001 and the European Communities (Credit Institutions: Accounts) Regulations, 1992, and with applicable accounting standards issued by the Accounting Standards Board, pronouncements of the Urgent Issues Task Force, and with the Statements of Recommended Practice issued by the British Bankers’ Association and the Irish Bankers’ Federation.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 64. Change in accounting policy and presentation of financial information (a) Deferred taxation The Group has adopted Financial Reporting Standard (‘FRS’) 19 ‘Deferred Tax’ in the preparation of its accounts for the year ended 31 December 2002. Previously it was Group policy to provide deferred tax where there was a reasonable probability that the deferred tax asset or liability would crystallise in the foreseeable future. Under FRS 19, deferred tax is recognised on all timing differences. The change in policy did not have a material impact on the results for each of the years ended 31 December 2002, 2001 and 2000. Under FRS 19, deferred tax 4242 assets and liabilities are required to be disclosed separately on the face of the balance sheet. Comparative figures have been restated. (b) Change in presentation of financial information The Group has implemented UITF 33 - ‘Obligations in Capital Instruments’ in the preparation of its accounts for the year ended 31 December 2002 and comparative figures have been restated. Under UITF 33 the € 500m 7.5% Step-Up Callable Perpetual Reserve Capital Instruments (RCIs), which were issued during 2001, are treated as a subordinated liability rather than shareholders’ funds.The related interest cost is included within interest expense whereas previously the amount was included in ‘Dividends on non-equity shares’.The effect on 2001 is to reduce net interest income and Group profit before taxation and exceptional items by € 35 million. Dividends on non-equity shares reduced by € 35 million and the impact on profit attributable was neutral. Funded retirement benefit schemes in surplus are now shown as assets on the balance sheet while funded retirement benefit schemes in deficit together with unfunded schemes are shown on the balance sheet as liabilities. Previously these would have been presented as a net figure. (c) Comparative amounts Comparative amounts have been reclassified to accord with the presentation of information in the accounts for 2002. 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 32. 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 An associated undertaking generally is one in which the Group’s interest is greater than 20% and less than 50% and where the Group exercises significant influence over the entity’s operating and financial policies. 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 impairment in value. Goodwill arising on the acquisitions of associates occuring after 1 January 1998 is included within the carrying amount of the associate less amortisation to date. 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. 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 It is Group policy to make provisions for bad and doubtful debts to reflect the losses inherent in the loan portfolio at the balance sheet date.The charge to the profit and loss account reflects new provisions made during the year, plus write-offs not previously provided for, less existing provisions no longer required and recoveries of bad debts already written off. Specific provisions are made when, in the judgement of management, the recovery of the outstanding balance is in serious doubt.The amount of the specific provision is intended to cover the difference between the balance outstanding on the loan or advance and the estimated recoverable amount. In certain portfolios, provisions are applied to pools of loans on a formula driven basis depending on levels of delinquency. When a loan has been subjected to a specific provision, and the prospects for recovery do not improve, a point will come when it may be concluded that there is no realistic prospect of recovery.When this point is reached, the amount of the loan which is considered to be beyond the prospect of recovery is written off. General provisions are also made to cover loans which are impaired at balance sheet date, and while not specifically identified, are known from experience to be present in any portfolio of bank advances.The Group holds general provisions at a level deemed appropriate by management taking into account a number of factors including:- the credit grading profiles and movements within credit grades; historic loan loss rates; local and international economic climates and portfolio sector profiles/industry conditions.The level of general provisions is reviewed quarterly to ensure that it remains appropriate. Loans and advances to banks and customers are reported in the balance sheet having deducted the total provisions for bad and doubtful debts (note 27). Loans are deemed non-performing where interest is 90 days overdue and not taken to profit (i.e. non-accrual) or where a provision exists in anticipation of a loss. Interest is not taken to profit when recovery is doubtful. Debt securities Debt securities held as financial fixed assets are those held on a continuing use basis by the Group and those held to hedge positions which are accounted for on a historic cost basis.These debt securities are stated in the balance sheet at cost, adjusted for the amortisation of any premiums or discounts arising on acquisition or provisions for impairment. The amortisation of premiums and discounts is included in net interest income. Profits and losses on disposal of securities held for investment purposes are recognised immediately in 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. Debt securities held for trading purposes are stated in the balance sheet at market value. Both realised and unrealised profits on trading securities are taken directly to the profit and loss account and included within dealing profits. Investment or other securities may be lent or sold subject to a commitment to repurchase them. Securities sold are retained on the balance sheet where substantially all the risks and rewards of ownership remain with the Group. Similarly, securities purchased subject to a commitment to resell are treated as collateralised lending transactions where the Group does not acquire the risks or rewards of ownership. Finance leases Assets leased to customers are classified as finance leases if the lease agreements transfer substantially all the risks and rewards of ownership. Finance lease receivables are stated in the balance sheet at the cost of asset, including gross earnings to date, less rentals earned to date and provisions for impairment. In addition rentals received in advance but not yet amortised to profit and loss account are included in other liabilities. Income from finance leasing transactions is apportioned over the primary leasing period on an after tax basis in proportion to the net cash investment using the investment period method. Government grants in respect of these assets are credited to profit and loss account on the same basis. Hire purchase and instalment finance Amounts receivable under hire purchase contracts are stated in the balance sheet at the cost of the asset, including gross earnings to date less rentals received to date and provisions for impairment. 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. Tangible fixed assets It is Group policy not to revalue its tangible fixed assets.The Group adopted the transitional arrangements of FRS 15 ‘Tangible Fixed Assets’ and chose to retain the book amounts of previously revalued assets in its accounting records. Tangible fixed assets are depreciated on a straight line basis over their estimated useful economic lives. No depreciation is provided on freehold land. Freehold and long leasehold properties are written off over their estimated useful lives of 50 years. Leasehold properties with less than 50 years unexpired are written off by equal annual instalments over the remaining terms of the leases. The estimated useful life for costs of adaptation of freehold and leasehold property are 10 years for branch properties and 15 years for office properties, in all cases subject to the maximum remaining life of a lease. Such costs are included within property in the balance sheet total of tangible fixed assets. Computer hardware, operating software and application software are 4343 Accounting policies (continued) written off over their estimated useful lives of 3 to 5 years, while other equipment and furnishings are written off over 3 to 10 years.The estimated useful life of motor vehicles is 5 years. The Group reviews its depreciation rates regularly. Expenditure incurred to date amounting to € 83 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 € 24 million has been charged to the profit and loss account. Equity shares Equity shares intended to be held on a continuing basis are classified as financial fixed assets and included in the balance sheet at cost less provision for any impairment. 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. Impairment Tangible fixed assets and goodwill are subject to impairment review in accordance with FRS 11 ‘Impairment of Fixed Assets and Goodwill’ if there is evidence of changes in circumstances that the carrying amount of the fixed asset or goodwill may not be recoverable. For the purpose of conducting impairment reviews, income generating units are identified as groups of assets, liabilities and associated goodwill that generate income that is largely independent of other income streams. The impairment review comprises a comparison of the carrying amount of the fixed asset or goodwill with its recoverable amount, which is the higher of net realisable value and value in use. Net realisable value is calculated by reference to the amount at which the asset could be disposed of.Value in use is calculated by discounting the expected future cash flows obtainable as a result of the assets continued use, including that resulting from its ultimate disposal, at a market based discount rate on a pre-tax basis. Any loss is recognised in the profit and loss account in the year in which impairment occurs through the writing down of the asset. If the occurrence of an external event gives rise to the reversal of an impairment loss, the reversal is recognised in the profit and loss account, by increasing the carrying amount of the fixed asset or goodwill in the period in which it occurs. Non-credit risk provisions Provisions are recognised for present obligations arising as a consequence of past events where it is probable that a transfer of economic benefits will be necessary to settle the obligation and it can be reliably estimated. 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 relation to the funding of Icarom plc (under Administration), formerly The Insurance Corporation of Ireland plc.The future commitments under the 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 41). Where a leasehold property ceases to be used in the business, provision is made where the unavoidable cost of the future obligations relating to the lease are expected to exceed anticipated income. The provision is discounted using market rates to reflect the long term nature of the cash flows. Where the Group has a detailed formal plan for restructuring a business and has raised valid expectations in the areas affected by the restructuring, by starting to implement the plan or announcing its main features, provision is made for the anticipated cost of the restructuring including redundancy costs. The provision raised is normally utilised within twelve months. Contingent liabilities are possible obligations whose existence will be confirmed only by uncertain future events giving rise to present obligations where the transfer of economic benefit is uncertain or cannot be reliably measured. Contingent liabilities are not recognised but are disclosed unless they are remote. Credit related instruments The Group treats credit related instruments (other than credit derivatives) as contingent liabilities and these are not recognised on the balance sheet unless and until the Group is called upon to make a payment under the instrument. Assets arising from payments to a third party where the Group is awaiting reimbursement from a customer are shown on the balance sheet where reimbursement is considered to be virtually certain. Fees for providing these instruments are taken to profit and loss account over the life of the instrument and reflected in fees and commissions receivable. Retirement benefits AIB Group provides a number of defined benefit and defined contribution retirement benefit schemes in various geographic locations, the majority of which are funded. In relation to the defined benefit schemes, a full actuarial valuation is undertaken every three years and is updated to reflect current conditions in the intervening periods. Scheme assets are valued at market value. Scheme liabilities are measured on an actuarial basis, using the projected unit method and discounted at the current rate of return on a high quality corporate bond of equivalent term and currency to the liability. Schemes in surplus are shown as assets on the balance sheet net of the deferred tax impact. Schemes in deficit together with unfunded schemes are shown on the balance sheet as liabilities net of the deferred tax impact. Actuarial gains and losses are recognised immediately in the statement of total recognised gains and losses. 4444 The current service cost and past service cost of the defined benefit schemes is charged to operating profit and the expected return on assets net of the change in the present value of the scheme liabilities arising from the passage of time, is credited to other finance income. The costs of the Group’s defined contribution schemes are charged to the profit and loss account in the period in which they are incurred. Deferred taxation Except as outlined below deferred taxation is recognised in full in respect of timing differences that have originated but not reversed at the balance sheet date. Deferred tax is not provided on timing differences arising:- on the revaluation of property when no commitment has been made to sell the asset; when a taxable gain on the sale of an asset is rolled over into replacement assets; or on the potential additional tax that may be payable on the payment of a dividend by a subsidiary where no commitment has been made to pay a dividend. Deferred tax assets are recognised to the extent that, on the basis of the available evidence, it is regarded as more likely than not that there will be suitable taxable profits from which the future reversal of the underlying timing differences can be deducted.The calculation of the deferred taxation asset or liability is based on the taxation rates that are expected to apply in the periods in which the timing differences are expected to reverse based on tax rates and laws that have been enacted or substantively enacted at the balance sheet date. 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 recognised in the statement of total recognised gains and losses. 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 recognised in the statement of total recognised gains and losses. 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 Goodwill may arise on the acquisition of subsidiary and associated undertakings. Purchased goodwill is the excess of cost over the fair value of the Group’s share of net assets acquired. In accordance with FRS 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.The useful economic life of goodwill is determined at the time of acquisition, taking into consideration factors such as the nature of the business acquired, the market in which it operates and its position in that market. In all cases goodwill is subject to a maximum life of 20 years and is subject to review in accordance with FRS 11, ‘Impairment of Fixed Assets and Goodwill’. Goodwill arising on acquisitions of subsidiary and associated undertakings prior to 31 December 1997 has been written off to the profit and loss account (note 48) in the year of acquisition. In accordance with the transitional arrangements of FRS 10 this goodwill was not reinstated when FRS 10 was implemented. At the date of disposal of subsidiary or associated undertakings, any unamortised goodwill, or goodwill written off directly to profit and loss account on acquisitions prior to 1 January 1998, is included with the Group’s share of net assets of the undertaking disposed in the calculation of the profit or loss on disposal. Own shares Shares held within certain Employee Share Trusts are recognised as assets on the balance sheet of the Group in accordance with UITF Abstract 13 ‘Accounting for ESOP trusts’. Where shares have been granted to employees at a discount to market price the cost of providing these shares is charged to the profit and loss on a systematic basis over the period to date of vesting. In accordance with UITF Abstract 13, dividend income received by the schemes is excluded in arriving at profit before taxation, and dividends on equity shares is reduced accordingly. In addition, shares held by the trusts are excluded from the earnings per share calculation. Derivatives The Group uses derivatives, such as interest rate swaps, options, forward rate agreements and financial futures for trading and non-trading purposes (note 51).The accounting treatment of these derivative instruments is dependent on the purpose for which they are entered into. The Group maintains trading positions in a variety of financial instruments including derivatives.Trading transactions arise as a result of activity generated by customers while others represent proprietary trading with a view to generating incremental income.Trading instruments and hedges thereof are recognised in the accounts at fair value with the adjustment arising included in other assets and other liabilities as appropriate. Assets and liabilities arising are reported gross in other assets or liabilities reduced by the effects of qualifying netting agreements where the Group has the right 4545 the purpose of giving a true and fair view of the Group’s state of affairs, profit and cashflows. However, different policies, estimation techniques and assumptions in critical areas could lead to materially different results. The estimation of potential bad debt losses is inherently uncertain and depends upon many factors, including loan loss trends, portfolio grade profiles, local and international economic climate, conditions in various industries to which AIB Group is exposed and other external factors such as legal and regulatory requirements. For example, should the expectation of loss within a portfolio increase, then this may result in an increase to the required general loan loss provision level. In addition, the profile of the amortisation of goodwill would be different if a useful economic life longer or shorter than the existing AIB policy of a maximum life of 20 years was used. The application of other accounting policies, including measuring the shareholders’ interest in the Long-term assurance fund, impairment, debt securities and equity shares, retirement benefits and derivatives, require the use of estimation techniques that involve making assumptions about future market conditions which could impact on the timing and amounts recognised in the consolidated profit and loss account and the consolidated balance sheet. Accounting policies (continued) to insist on net settlement that would survive the insolvency of the counterparty. 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. Interest and dividend income arising together with the funding costs relating to trading activities are included in net interest income. Non-trading derivative transactions, comprise transactions held for hedging purposes as part of the Group’s risk management strategy, against assets, liabilities, positions or cash flows, themselves accounted for on an accruals basis.The gains and losses on these instruments (arising from changes in fair value) are not recognised in the profit and loss account immediately as they arise. Derivative transactions entered into for hedging purposes are recognised in the accounts on an accruals basis consistent with the accounting treatment of the underlying transaction or transactions being hedged. Upon early termination of derivative financial instruments, classified as hedges, any realised gain or loss is deferred and amortised to net interest income over the life of the original hedge as long as the designated assets or liabilities remain. A derivative will only be classified as a hedge where it is designated as a hedge at its inception and where it is reasonably expected that the derivative substantially matches or eliminates the exposure being hedged.Transactions designated as hedges are reviewed and 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 profit and loss account immediately. 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. Futures contracts are designated as hedges when they reduce risk and there is high correlation between the futures contracts and the item being hedged, both at inception and throughout the hedge period. Amounts paid or received over the life of a futures contract are deferred and amortised over the life of the contract. Long-term assurance business The value placed on the Group’s long-term assurance business attributable to shareholders represents a valuation of the policies in force together with the net tangible assets of the business including any surplus retained in the long-term business funds which could be transferred to shareholders.The value is determined on the advice of a qualified actuary on an after tax basis 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. Critical accounting policies AIB’s financial statements are prepared under the historical cost convention as modified by the revaluation of certain properties and investments and comply with Irish statute and with Irish Generally Accepted Accounting Principles as well as general practices followed by the financial services industry in Ireland and the UK. In the preparation of its financial statements the Group adopts the accounting policies and estimation techniques that the Directors believe are most appropriate in the circumstances for 4646 Consolidated profit and loss account for the year ended 31 December 2002 Notes 2002 € m 2001 Restated(1) € m 2000 € m 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 Other finance income Dividend income Fees and commissions receivable Less: fees and commissions payable Dealing profits Exceptional foreign exchange dealing losses Other operating income Other income Total operating income Before exceptional items Exceptional foreign exchange dealing losses Deposit interest retention tax Administrative expenses: Staff and other administrative expenses Restructuring and integration costs in continuing businesses Depreciation and amortisation Total operating expenses Group operating profit before provisions Before exceptional items Exceptional foreign exchange dealing losses Deposit interest retention tax Provisions for bad and doubtful debts Provisions for contingent liabilities and commitments Amounts written off/(written back) fixed asset investments Group operating profit – continuing activities Before exceptional items Exceptional foreign exchange dealing losses 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 items Exceptional foreign exchange dealing losses Deposit interest retention tax 4 5 6 7 8 9(a) 9(b) 10 9(b) 6 11(a) 11(b) 12 9(b) 6 27 13 9(b) 6 15 9(b) 6 946 3,807 (2,402) – 2,351 62 14 1,301 (138) 77 – 263 1,517 3,930 3,930 – – 2,098 13 2,111 207 2,318 1,612 1,612 – – 194 2 55 1,361 1,361 – – 9 5 – 1,375 1,375 – – 1,198 4,148 (3,088) – 1,140 3,987 (3,105) (113) 2,258 67 11 1,258 (128) 92 (789) 193 637 2,962 3,751 (789) – 2,051 38 2,089 195 2,284 678 1,467 (789) – 179 19 6 474 1,263 (789) – 4 6 93 577 1,366 (789) – 1,909 71 6 1,101 (108) 103 – 202 1,304 3,284 3,397 – (113) 1,826 – 1,826 171 1,997 1,287 1,400 – (113) 133 2 (1) 1,153 1,266 – (113) 3 5 – 1,161 1,274 – (113) 4747 Consolidated profit and loss account (continued) for the year ended 31 December 2002 Group profit on ordinary activities before taxation (brought forward) Taxation on ordinary activities 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 17 18 19 20 47 21&48 22(a) 22(b) 22(c) 2002 € m 1,375 306 1,069 24 8 32 1,037 429 45 474 563 119.4c 123.0c 118.2c 2001 Restated(1) € m 577 55 522 23 15 38 484 380 63 443 41 56.2c 119.4c 55.9c 2000 € m 1,161 319 842 38 20 58 784 335 70 405 379 91.6c 106.7c 91.0c (1)The figures for 2001 have been restated to reflect the interest cost of the Reserve Capital Instruments as interest expense rather than ‘Dividends on non-equity shares’ in accordance with UITF 33. L Quinn, Chairman. M Buckley, Group Chief Executive. G Kennedy, Group Director, Finance & Enterprise Technology.W M Kinsella, Secretary. The movements in the Group profit and loss account are shown in note 48. 4848 Consolidated balance sheet 31 December 2002 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 Deferred taxation Prepayments and accrued income Pension assets 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 Pension liabilities Provisions for liabilities and charges Deferred taxation Subordinated liabilities Equity and non-equity minority interests in subsidiaries Share capital Share premium account Reserves Profit and loss account Shareholders’ funds including non-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 2002 € m 2001 € m 1,176 1,171 24 4,788 53,447 1,002 (754) 248 18,204 246 31 457 1,178 176 1,153 245 927 – 352 83,823 2,226 86,049 16,137 52,976 3,077 2,591 829 537 60 527 2,172 274 293 1,918 490 1,942 4,643 83,823 2,226 86,049 72 5,292 1,027 6,391 2,062 17,890 19,952 1,175 1,536 49 6,047 51,216 1,099 (917) 182 20,082 332 10 495 1,305 245 1,260 417 2,080 372 304 87,107 2,252 89,359 13,223 54,557 5,033 3,272 2,159 117 71 717 2,516 312 291 1,926 463 2,450 5,130 87,107 2,252 89,359 142 5,245 1,125 6,512 402 18,597 18,999 23 24 25 28 29 30 31 33 34 35 36 14 37 37 38 39 40 41 14 42 36 43 44 45 46 47 48 37 50 50 L Quinn, Chairman. M Buckley, Group Chief Executive. G Kennedy, Group Director, Finance & Enterprise Technology.W M Kinsella, Secretary. 4949 Balance sheet Allied Irish Banks, p.l.c. 31 December 2002 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 Pension assets Liabilities Deposits by banks Customer accounts Debt securities in issue Other liabilities Accruals and deferred income Pension liabilities Provisions for liabilities and charges Deferred taxation Subordinated liabilities Share capital Share premium account Reserves Profit and loss account Shareholders’ funds including non-equity interests Memorandum items Contingent liabilities: Acceptances and endorsements Guarantees and assets pledged as collateral security Other contingent liabilities Commitments: Other commitments Notes 2002 € m 2001 € m 571 144 4 13,520 28,904 13,371 16 1,327 526 350 40 867 – 455 227 7 11,586 25,496 13,625 18 1,534 562 361 57 1,805 358 59,640 56,091 25,163 26,080 1,935 897 758 258 22 4 1,604 293 1,918 116 592 2,919 21,858 24,335 1,893 800 1,781 14 28 2 1,726 291 1,926 132 1,305 3,654 59,640 56,091 54 3,455 558 4,067 96 3,266 549 3,911 8,624 7,734 23 24 25 29 30 32 34 36 38 39 40 41 42 36 43 45 46 47 48 50 50 L Quinn, Chairman. M Buckley, Group Chief Executive. G Kennedy, Group Director, Finance & Enterprise Technology.W M Kinsella, Secretary. 5050 2001 Restated € m 2000 € m 231 2,433 Consolidated cash flow statement for the year ended 31 December 2002 Net cash (outflow)/inflow from operating activities Dividends received from associated undertakings Returns on investments and servicing of finance Equity dividends paid Taxation Capital expenditure and financial investment Acquisitions and disposals Financing Increase/(decrease) in cash Reconciliation of Group operating profit to net cash (outflow)/inflow from operating activities Group operating profit Decrease/(increase) in prepayments and accrued income (Decrease)/increase in accruals and deferred income Provisions for bad and doubtful debts Provisions for contingent liabilities and commitments Amounts written off/(written back) fixed asset investments Increase in other provisions Depreciation and amortisation Amortisation of own shares Profit on disposal of business Interest on subordinated liabilities Interest on reserve capital instruments 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 on debt securities held as financial fixed assets Increase in long-term assurance business Notes 54(a) 54(b) 54(c) 54(d) 54(e) 54(f) 2002 € m (121) 1 (138) (345) (280) 1,379 (5) (129) 362 2002 € m 1,361 1,162 (1,191) 194 2 55 16 207 – – 83 38 (117) (4) (1) (15) (48) 4 (131) (334) (242) 700 (59) 208 377 2001 Restated € m 474 (199) 429 179 19 6 19 202 2 93 133 35 (21) (24) (1) (7) (66) Net cash inflow from trading activities 1,742 1,273 Net increase in deposits by banks Net increase in customer accounts Net increase in loans and advances to customers Net decrease/(increase) in loans and advances to banks Decrease in central government bills Net increase in debt securities and equity shares held for trading purposes Net decrease/(increase) in items in course of collection Net (decrease)/increase in debt securities in issue Net (decrease)/increase in notes in circulation (Increase)/decrease in other assets (Decrease)/increase in other liabilities Effect of exchange translation and other adjustments Net cash (outflow)/inflow from operating activities 3,975 2,299 (6,129) 982 18 (1,180) 174 (1,425) (3) (28) (521) (25) 452 4,647 (4,281) (1,588) 274 (1,394) (374) 533 44 460 279 (94) (1,863) (1,042) (121) 231 – (184) (228) (199) (3,004) 2 164 (1,016) 2000 € m 1,153 (607) 355 133 2 (1) 11 171 1 – 155 – (23) (16) (5) (2) (72) 1,255 3,621 4,854 (5,812) (1,015) 445 (710) (160) (266) 23 (595) 674 119 1,178 2,433 5151 Statement of total recognised gains and losses Group profit attributable to the ordinary shareholders Currency translation differences on foreign currency net investments Actuarial loss recognised in retirement benefit schemes (note 14) Prior year adjustment (note 14(b)) Total recognised (losses)/gains relating to the year 2002 € m 1,037 (341) (823) – (127) Reconciliation of movements in shareholders’ funds Group profit attributable to the ordinary shareholders Dividends on equity shares Other recognised (losses)/gains relating to the year Actuarial loss recognised in retirement benefit schemes (note 14) New ordinary share capital subscribed Ordinary shares issued in lieu of cash dividend Net (deduction from)/addition to shareholders’ funds Opening shareholders’ funds Closing shareholders’ funds Shareholders’ funds: Equity interests Non-equity interests 2002 € m 1,037 429 608 (387) (823) 39 76 (487) 5,130 4,643 4,408 235 4,643 2001 € m 484 145 (402) 648 875 2001 € m 484 380 104 160 (402) 37 23 (78) 5,208 5,130 4,851 279 5,130 2000 € m 784 130 (201) – 713 2000 € m 784 335 449 150 (201) 27 78 503 4,705 5,208 4,944 264 5,208 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. 5252 Notes to the accounts 1 Acquisition of a strategic stake in M&T Bank Corporation. Disposal of Allfirst Financial Inc. It was announced on 26 September 2002 that AIB is entering into a strategic relationship with M&T Bank Corporation (‘M&T’) whereby AIB’s US subsidiary, Allfirst, will be acquired by M&T. As a result of the transaction, AIB will acquire a strategic shareholding of 26.7 million M&T shares, representing a stake of approximately 22.5% in the enlarged M&T. AIB will also receive US$ 886m in cash. The transaction, which is expected to be completed by the end of the first quarter of 2003, is subject to regulatory approvals. Shareholders of both M&T and AIB approved the transaction in December 2002. The transaction has no impact on the accounts of AIB for 2002.The transaction will be accounted for in accordance with the Urgent Issue Task Force Abstract No. 31 ‘Exchanges of businesses or other non-monetary assets for an interest in a subsidiary, joint venture or an associate’ (‘UITF 31’). Under UITF 31 the transaction is accounted for as an exchange of 77.5% of Allfirst for 22.5% of the existing M&T. Under this approach, the 22.5% of Allfirst that is owned by AIB, both directly before the transaction and indirectly thereafter, is treated as being owned throughout the transaction.The transaction will give rise to a gain, which will be recognised on completion. The 2003 accounts will also reflect the income and expenses of Allfirst for the period during which it remains a 100% subsidiary of the Group. Following completion of the transaction, the Group will account for its investment in the enlarged M&T as an associated undertaking.The Group will include its share of the profits of the enlarged M&T in the Group profit and loss account within the caption ‘Income from associated undertakings’. AIB will also account for its 22.5% share of the costs associated with the merger, calculated in accordance with Irish GAAP. 2 Turnover Turnover is not shown as it resulted in the main from the business of banking. 3 Segmental information Operations by business segments(1) Net interest income(2) AIB Bank ROI AIB Bank GB & NI USA Capital Markets Poland Group Deposit interest retention tax Other finance income AIB Bank ROI AIB Bank GB & NI USA Capital Markets Poland Group Other income AIB Bank ROI AIB Bank GB & NI USA Capital Markets Poland Group Exceptional foreign exchange dealing losses 2002 € m 2001 € m 921 363 549 271 272 (25) 2,351 – 2,351 40 (1) (2) 7 – 18 62 353 166 528 282 188 – 1,517 – 1,517 843 336 584 210 275 10 2,258 – 2,258 43 3 2 8 – 11 67 359 161 446 305 163 (8) 1,426 (789) 637 2000 € m 738 318 537 127 252 50 2,022 (113) 1,909 46 4 4 8 1 8 71 357 151 381 304 153 (42) 1,304 – 1,304 5353 Notes to the accounts 3 Segmental information (continued) Operations by business segments(1) Total operating income AIB Bank ROI AIB Bank GB & NI USA Capital Markets Poland Group Exceptional foreign exchange dealing losses Deposit interest retention tax Total operating expenses AIB Bank ROI AIB Bank GB & NI USA Capital Markets Poland Group Provisions AIB Bank ROI AIB Bank GB & NI USA Capital Markets Poland Group Group profit on ordinary activities before taxation(2) AIB Bank ROI AIB Bank GB & NI USA Capital Markets Poland Group Exceptional foreign exchange dealing losses Deposit interest retention tax 5454 2002 € m 2001 € m 2000 € m 1,314 528 1,075 560 460 (7) 3,930 – – 3,930 677 266 668 300 351 56 1,245 500 1,032 523 438 13 3,751 (789) – 2,962 641 259 638 296 396 54 1,141 473 922 439 406 16 3,397 – (113) 3,284 593 248 554 265 296 41 2,318 2,284 1,997 55 22 98 60 46 (30) 251 590 240 308 209 61 (33) 1,375 – – 1,375 44 19 39 38 9 55 36 20 38 18 23 (1) 204 134 562 223 355 194 36 (4) 1,366 (789) – 577 516 205 330 159 88 (24) 1,274 – (113) 1,161 3 Segmental information (continued) Operations by business segments(1) Total loans AIB Bank ROI AIB Bank GB & NI USA Capital Markets Poland Group Total deposits AIB Bank ROI AIB Bank GB & NI USA Capital Markets Poland Group Total assets AIB Bank ROI AIB Bank GB & NI USA Capital Markets Poland Group Total risk weighted assets AIB Bank ROI AIB Bank GB & NI USA Capital Markets Poland Group Net assets AIB Bank ROI AIB Bank GB & NI USA Capital Markets Poland Group 2002 € m 2001 € m 2000 € m 21,367 8,967 12,286 12,247 3,473 143 58,483 22,522 7,449 12,823 24,250 5,014 132 72,190 27,239 10,161 17,234 25,026 6,261 128 86,049 18,821 8,666 19,234 18,599 3,662 257 69,239 1,198 552 1,225 1,184 233 16 4,408 17,797 7,784 14,586 12,535 4,646 97 57,445 21,016 7,015 17,226 21,472 5,968 116 72,813 23,512 8,993 22,427 26,881 7,340 206 89,359 15,987 7,542 22,403 18,821 4,105 – 68,858 1,126 532 1,578 1,326 289 – 4,851 15,669 7,443 12,995 10,386 3,645 101 50,239 18,609 6,410 15,941 19,271 4,897 82 65,210 21,333 8,507 20,538 23,635 6,129 401 80,543 14,302 6,789 20,318 14,879 3,655 279 60,222 1,174 557 1,668 1,222 300 23 4,944 (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 is reported in Group. 5555 Notes to the accounts 3 Segmental information (continued) Operations by geographical segments(3) Interest income Republic of Ireland United States of America United Kingdom Poland Rest of the world Other finance income Republic of Ireland United States of America United Kingdom Poland Rest of the world Dividend income Republic of Ireland United States of America United Kingdom Poland Rest of the world Fees and commissions receivable Republic of Ireland United States of America United Kingdom Poland Rest of the world Dealing profits/(losses) Republic of Ireland United States of America United Kingdom Poland Rest of the world Exceptional foreign exchange dealing losses Other operating income Republic of Ireland United States of America United Kingdom Poland Rest of the world 5656 2002 € m 2001 € m 2000 € m 2,020 984 1,002 747 – 4,753 62 (2) 2 – – 62 4 4 1 5 – 14 446 462 236 155 2 2,089 1,254 1,000 1,001 2 5,346 60 2 5 – – 67 4 5 – 1 1 11 457 433 225 142 1 1,951 1,359 1,059 756 2 5,127 62 4 5 – – 71 1 – – 4 1 6 428 355 207 109 2 1,301 1,258 1,101 63 (11) 24 1 – 77 – 77 79 120 11 53 – 263 62 16 12 2 – 92 (789) (697) 110 13 30 44 (4) 193 25 2 44 32 – 103 – 103 121 37 20 24 – 202 3 Segmental information (continued) Operations by geographical segments(3) Gross income Republic of Ireland United States of America United Kingdom Poland Rest of the world Exceptional foreign exchange dealing losses Total operating expenses Republic of Ireland United States of America United Kingdom Poland Rest of the world Provisions Republic of Ireland United States of America United Kingdom Poland Rest of the world Group profit on ordinary activities before taxation(2) Republic of Ireland United States of America United Kingdom Poland Rest of the world Exceptional foreign exchange dealing losses Deposit interest retention tax Total loans Republic of Ireland United States of America United Kingdom Poland Rest of the world 2002 € m 2001 € m 2000 € m 2,674 1,557 1,276 961 2 6,470 – 6,470 924 676 363 351 4 2,782 1,723 1,272 1,190 – 6,967 (789) 6,178 885 653 350 393 3 2,588 1,757 1,335 925 5 6,610 – 6,610 801 569 332 292 3 2,318 2,284 1,997 71 109 25 47 (1) 251 675 330 303 67 – 1,375 – – 1,375 29,899 12,594 12,516 3,473 1 58,483 132 44 19 9 – 204 527 358 333 55 93 1,366 (789) – 577 27,224 14,665 10,899 4,646 11 57,445 51 38 23 23 (1) 134 577 301 286 106 4 1,274 – (113) 1,161 24,027 13,018 9,545 3,645 4 50,239 5757 Notes to the accounts 3 Segmental information (continued) Operations by geographical segments(3) Total deposits Republic of Ireland United States of America United Kingdom Poland Rest of the world Total assets Republic of Ireland United States of America United Kingdom Poland Rest of the world Net assets Republic of Ireland United States of America United Kingdom Poland Rest of the world 2002 € m 2001 € m 2000 € m 37,944 14,453 14,779 5,014 – 72,190 45,205 17,798 16,774 6,271 1 86,049 1,975 1,243 944 246 – 4,408 33,062 19,078 14,705 5,968 – 72,813 42,148 22,672 17,184 7,343 12 89,359 2,245 1,257 1,029 320 – 4,851 29,055 17,585 13,672 4,897 1 65,210 36,956 21,020 16,191 6,128 248 80,543 2,009 1,700 914 300 21 4,944 (2)The figures for 2001 have been restated to reflect the interest cost of the Reserve Capital Instruments as interest expense rather than ‘Dividends on non-equity shares’. (3)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. 4 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 The aggregate rentals receivable from leasing contracts was € 505m (2001: € 501m). 2002 € m 196 3,423 188 3,807 119 69 188 2001 € m 255 3,684 209 4,148 134 75 209 2000 € m 238 3,544 205 3,987 135 70 205 5858 5 Interest payable Interest on deposits by banks and customer accounts Interest on debt securities in issue Interest on subordinated liabilities Interest on reserve capital instruments 2002 € m 2,178 103 83 38 2,402 2001 Restated € m 2,744 176 133 35 3,088 2000 € m 2,701 249 155 – 3,105 6 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 € 114.33m in relation to DIRT, interest and penalties in Ireland for the period April 1986 to April 1999.The settlement included € 1.37m paid in prior years. Although AIB believe 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. As a result an exceptional charge of € 112.96m was reflected in the accounts for the year ended 31 December 2000. 7 Other finance income Under FRS 17 ‘Retirement benefits’, the net of the interest cost on liabilities and the expected return on assets is to be recorded as other finance income adjacent to interest.The interest cost represents the unwinding of the discount on the scheme liabilities. The expected return on assets is based on long-term expectations at the beginning of the period. A description of the retirement benefit schemes operated by the Group is provided in note 14. 8 Dividend income The dividend income relates to income from equity shares. 9 Dealing profits (a) Dealing profits (before exceptional losses) Foreign exchange contracts Profits less losses from securities held for trading purposes Interest rate contracts 2002 € m 78 10 (11) 77 2001 € m 75 2 15 92 2000 € m 69 42 (8) 103 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 11(a)). (b) Exceptional foreign exchange dealing losses AIB accounted for the losses arising from the fraudulent foreign exchange trading activities at Allfirst Bank (‘Fraud Losses’) by way of an exceptional pre-tax charge of € 789m (of which € 341m related to prior periods) in its accounts for the year ended 31 December 2001.The losses occurred over a number of years as follows:- 2002: US$ 17.2m; 2001: US$ 373.3m; 2000: US$ 211.0m; 1999: US$ 48.2m; 1998: US$ 12.4m; and 1997: US$ 29.1m. The Group profit attributable to the ordinary shareholders of € 1,037m, for the year ended 31 December 2002, would reduce to € 1,019m if the Fraud Losses and associated costs which were charged in 2001 as part of the exceptional item, were taken into account. Treatment of exceptional foreign exchange dealing losses for US reporting purposes For US reporting purposes, the Fraud Losses are required to be charged in the years in which they occurred. Accordingly in Note 64 - Supplementary Group financial information for US reporting purposes, the Group profit attributable to stockholders of AIB is restated to reflect the Fraud Losses and associated costs in the periods in which they occurred. 5959 Notes to the accounts 10 Other operating income Profit/(loss) on disposal of debt securities held for investment purposes Profit on disposal of investments in associated undertakings Profit/(loss) on disposal of equity shares Contribution of life assurance company (note 37) Contribution from securitised assets (note 28) Mortgage origination and servicing income Miscellaneous operating income 11 Administrative expenses (a) Staff and other administrative expenses Staff costs: Wages and salaries Social security costs Retirement benefits service costs (note 14) Other staff costs Other administrative expenses 2002 € m 106 1 11 57 4 7 77 263 2002 € m 1,097 105 122 67 1,391 707 2,098 2001 € m 2000 € m 24 1 (3) 84 5 10 72 (1) 5 24 95 4 3 72 193 202 2001 € m 1,066 104 106 72 1,348 703 2,051 2000 € m 934 85 113 60 1,192 634 1,826 (b) Restructuring and integration costs in continuing businesses Allfirst Financial Inc. Allfirst introduced an early retirement program in August 2002 for certain qualifying employees which provided additional service credits for those employees who retired on 1 December 2002.The charge of € 13m in 2002 relates to the cost of the enhanced benefits that were provided to the employees who retired.This also forms part of the retirement benefit past service cost in note 14. Bank Zachodni WBK S.A. On 13 June 2001, Bank Zachodni S.A. (Group interest 83.01%) merged with Wielkopolski Bank Kredytowy S.A. (Group interest 60.14%) through a share for share offering.The enlarged company, now called Bank Zachodni WBK S.A. (Group interest 70.47%), is listed on the Warsaw stock exchange.The charge of € 38m in 2001 relates to the costs of integration of the two businesses. 12 Depreciation and amortisation Depreciation of tangible fixed assets: Property depreciation Equipment depreciation Amortisation of goodwill (note 33) 13 Amounts written off/(written back) fixed asset investments Debt securities Equity shares Interests in associated undertakings 6060 2002 € m 37 138 175 32 207 2002 € m 19 36 – 55 2001 € m 37 127 164 31 195 2001 € m 6 (1) 1 6 2000 € m 32 113 145 26 171 2000 € m (1) – – (1) 14 Retirement benefits (a) Description of retirement benefit schemes The Group provides pension benefits for employees in Ireland, the UK, and the US, the majority of which are funded. Certain post-retirement benefits are also provided for retired employees, primarily healthcare and life insurance benefits in the US. The Group operates a number of defined benefit schemes.The majority of staff in the Republic of Ireland are members of the AIB Group Irish Pension Scheme (the Irish scheme) while the majority of staff in the UK are members of the AIB Group UK Pension Scheme (the UK scheme). Allfirst sponsors a number of defined benefit schemes, the largest of which (the US scheme) covers substantially all employees of Allfirst and its subsidiaries. Retirement benefits for the defined benefit schemes are calculated by reference to service and pensionable salary at normal retirement date. Independent actuarial valuations, for the main Irish and UK schemes, are carried out on a triennial basis.The last such valuation was carried out on 1 January 2001 using the Projected Unit Method.The schemes are funded and contribution rates of 10.0% and 22.6% have been set for the Irish and UK schemes respectively. As both these schemes are closed to new entrants, under the Projected Unit Method, the current service cost and the standard contribution rates will increase as members of the schemes approach retirement. Independent actuarial valuations of the US schemes are carried out annually.The last such valuation was carried out on 31 December 2002 using the Projected Unit Method.The actuarial valuations are available for inspection only to the members of the schemes. The following table summarises the financial assumptions adopted in respect of the main schemes.The assumptions, including the expected long-term rate of return on assets, have been set upon advice of the Group’s actuary. Financial assumptions Irish scheme Rate of increase in salaries Rate of increase of pensions in payment Discount rate Inflation assumptions UK scheme Rate of increase in salaries Rate of increase of pensions in payment Discount rate Inflation assumptions US scheme Rate of increase in salaries Rate of increase of pensions in payment Discount rate Inflation assumptions as at 31 December 2002 % 4.0 2.5 5.60 2.5 4.0 2.5 5.75 2.5 4.5 – 6.51 3.0 2001 % 4.0 2.5 5.75 2.5 4.0 2.5 6.00 2.5 4.5 – 6.94 3.0 2000 % 4.0 2.5 5.75 2.5 4.0 2.5 6.00 2.5 4.0 – 7.47 3.0 The following table sets out on a combined basis for all schemes the fair value of the assets held by the schemes together with the long term rate of return expected for each class of assets. Equities Bonds Other Total market value of assets Actuarial value of liabilities (Deficit)/surplus in the schemes Related deferred tax asset/(liability) Net pension (liability)/asset as at 31 December 2002 Long term rate of return expected % 9.0 5.2 6.3 8.0 Value € m 1,490 333 346 2,169 (2,879) (710) 173 (537) as at 31 December 2001 Long term rate of return expected % Value € m as at 31 December 2000 Long term rate of return expected % Value € m 8.6 5.6 4.9 7.7 2,138 391 373 2,902 (2,645) 257 (2) 255 7.4 5.9 5.1 6.9 2,280 443 407 3,130 (2,403) 727 (102) 625 6161 Notes to the accounts 14 Retirement benefits (continued) The net pension (liability)/asset is recognised on the balance sheet as follows:- as at 31 December Funded pension schemes in surplus Funded pension schemes in deficit Unfunded schemes 2002 € m – (482) (55) (537) 2001 € m 372 (58) (59) 255 Included in the actuarial value of the liabilities is an amount in respect of commitments to pay annual pensions amounting to € 105,992 in aggregate to a number of former directors. The following table sets out the components of the defined benefit cost for each of the three years ended 31 December 2002, 2001 and 2000. Other finance income Expected return on pension scheme assets Interest on pension scheme liabilities Included within administrative expenses Current service cost Past service cost Cost of providing defined retirement benefits Analysis of the amount recognised in STRGL Actual return less expected return on pension scheme assets Experience gains and losses on scheme liabilities Changes in demographic and financial assumptions Actuarial loss recognised under FRS 17 Deferred tax Recognised in STRGL Movement in (deficit)/surplus during the year Surplus in scheme at beginning of year Movement in year: Current service cost Past service cost Contributions Other finance income Actuarial loss recognised under FRS 17 Translation adjustment (Deficit)/surplus in scheme at end of year 6262 2002 € m 220 (158) 62 86 22 108 46 2002 € m (862) (18) (123) (1,003) 180 (823) 2002 € m 257 (86) (22) 50 62 (1,003) 32 (710) 2001 € m 213 (146) 67 79 5 84 17 2001 € m (438) (32) (32) (502) 100 (402) 2001 € m 727 (79) (5) 50 67 (502) (1) 257 2000 € m 671 – (46) 625 2000 € m 203 (132) 71 75 21 96 25 2000 € m (158) (72) (18) (248) 47 (201) 2000 € m 946 (75) (21) 47 71 (248) 7 727 14 Retirement benefits (continued) History of experience gains and losses Difference between expected and actual return on scheme assets: Amount Percentage of scheme assets Experience gains and losses on scheme liabilities: Amount Percentage of scheme liabilities Total amount recognised in STRGL: Amount Percentage of scheme liabilities 2002 € m (862) 40% (18) 1% (1,003) 35% 2001 € m (438) 15% (32) 1% (502) 19% 2000 € m (158) 5% (72) 3% (248) 10% 1999 € m 324 10% (16) 1% 662 31% The Group operates a number of defined contribution schemes.The defined benefit schemes in Ireland and the UK were closed to new members from December 1997. Employees joining after December 1997 join on a defined contribution basis.The standard contribution rate in Ireland is 10%.The standard contribution rate in the UK is 5% and these members are also accruing benefits under SERPS (the State Earnings Related Pension Scheme). Allfirst provides a defined contribution plan whereby eligible employees can contribute, subject to certain limitations, varying percentages of their annual compensation. Allfirst matches 100% of the first 3% and 50% of the next 3% of an employee’s contribution.The total cost in respect of defined contribution schemes for 2002 was € 27m (2001: € 22m; 2000: € 17m). (b) Implementation of FRS 17 ‘Retirement benefits’ The Group adopted FRS 17 in the preparation of its accounts for the year ended 31 December 2001 and comparative figures were restated.The change in accounting policy arising from the adoption of FRS 17 gave rise to a net credit to shareholders funds of € 648m at 1 January 2001. 15 Profit on disposal of business In August 2001, AIB’s interests in Keppel Capital Holdings Ltd. were sold to Oversea-Chinese Banking Corporation Limited, giving rise to a profit before taxation on disposal of € 93m (tax charge € nil). 16 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 2002 € m 681 279 50 4 2.1 0.4 2.5 – 0.1 0.8 0.9 2001 € m 778 431 47 4 1.8 0.9 2.7 0.4 0.6 1.2 2.2 2000 € m 651 495 46 4 1.7 0.8 2.5 4.0 1.0 0.8 5.8 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. KPMG were appointed Auditors at the reconvened Annual General Meeting on 26 June 2002.The Auditors’ remuneration (including VAT) set out above for 2002 relates to KPMG only since date of appointment. In the year ended 31 December 2002, 70% of the total audit services fees and 84% of the non-audit services fees were paid to overseas offices of the Auditors. 6363 Notes to the accounts 16 Group profit on ordinary activities before taxation (continued) The Auditors’ remuneration for 2001 and 2000 relates to PricewaterhouseCoopers. During 2002 € 1.2m was paid to PricewaterhouseCoopers in respect of audit related services. In the year ended 31 December 2001, 73% of the total audit services fees (2000: 70%) and 64% of the non audit services fees (2000: 56%) were paid to overseas offices of the Auditors. Included in non- audit services for 2001 are fees for work associated with the merger of Bank Zachodni and Wielkopolski Bank Kredytowy.The level of non-audit services fees for 2000 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. 17 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 Total current tax Deferred tax Origination and reversal of timing differences Other Total deferred tax Associated undertakings Taxation on ordinary activities Effective tax rate - adjusted 2002 € m 2001 € m 2000 € m 81 (7) 74 (4) 70 212 (4) 208 278 21 6 27 1 306 22.3% 88 (6) 82 (17) 65 64 (8) 56 121 (66) – (66) – 55 69 (1) 68 (15) 53 146 (5) 141 194 125 – 125 – 319 24.2%(1) 25.8%(1) (1) The adjusted effective tax rate has been presented to eliminate the effect of the exceptional foreign exchange dealing losses in 2001 (note 9(b)) and the deposit interest retention tax settlement in 2000 (note 6). Factors affecting current tax charge for period The current tax charge for the period is lower than the weighted average of the Group’s statutory corporation tax rates across its geographic locations.The differences are explained below. Weighted average corporation tax rate Effects of: Expenses not deductible for tax purposes Exempted income, income at reduced rates and tax credits Capital allowances in excess of depreciation Other deferred tax timing differences Exceptional item Adjustments to tax charge in respect of previous periods Effective current tax charge 6464 2002 % 23.8 1.5 (1.9) (1.0) (1.4) – (0.8) 20.2 2001 % 25.0 1.5 (3.9) (0.2) (1.4) (11.1) (1.0) 8.9 2000 % 28.3 1.7 (3.1) (0.3) (9.4) – (0.5) 16.7 18 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 19 Dividends on non-equity shares Non-cumulative preference shares of US $25 each Dividends paid and accrued* Amortisation of issue costs 2002 € m 20 4 24 2002 € m 8 – 8 *Includes an amount of € 2m which has been accrued (2001: € 2m; 2000: € 4m). 20 Dividends on equity shares Ordinary shares of € 0.32 each Interim dividend Second interim dividend Final dividend Employee share trusts(1) 2002 2001 cent per € 0.32 share 2000 2002 € m 17.25 – 31.81 49.06 15.40 28.40 – 43.80 13.50 – 25.25 38.75 154 – 283 437 (8) 429 2001 € m 15 8 23 2001 € m 15 – 15 2001 € m 136 250 – 386 (6) 380 2000 € m 28 10 38 2000 € m 20 – 20 2000 € m 117 – 221 338 (3) 335 (1)In accordance with FRS 14 ‘Earnings per share’, dividends of € 7.9m (2001: € 5.8m; 2000: € 3.4m) arising on the shares held by certain employee share trusts (note 35) are excluded in arriving at profit before taxation and deducted from the aggregate of dividends paid and proposed. 21 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 2002 € m 2001 € m 2000 € m 76 480 7 563 3 39 (1) 41 202 174 3 379 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. 6565 Notes to the accounts 22 Earnings per € 0.32 ordinary share 2002 2001 2000 (a) Basic Group profit attributable to the ordinary shareholders(1) Weighted average number of shares in issue during the year(1) Earnings per share € 1,037m 868.7m EUR 119.4c € 484m 861.4m EUR 56.2c € 784m 856.1m EUR 91.6c (1)In accordance with FRS 14 - ‘Earnings per share’, dividends arising on the shares held by the employee share trusts (note 35) 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 Exceptional foreign exchange dealing losses (note 9(b)) Deposit interest retention tax (note 6) Goodwill amortisation Earnings per € 0.32 ordinary share 2002 2001 2000 cent per € 0.32 share 119.4 – – 3.6 56.2 59.6 – 3.6 91.6 – 12.0 3.1 123.0 119.4 106.7 The adjusted earnings per share figure has been presented to eliminate the effect of the goodwill amortisation in all years, the exceptional foreign exchange dealing losses in 2001 and the deposit interest retention tax settlement in 2000. (c) Diluted Weighted average number of shares in issue during the period Dilutive effect of options outstanding Diluted 2002 2001 2000 Number of shares (millions) 861.4 5.7 867.1 856.1 5.8 861.9 868.7 8.4 877.1 The weighted average number of ordinary shares reflects the dilutive effect of options outstanding under the employee share trusts (note 35), the Share option scheme (note 45) and the Allfirst Financial Inc. stock option plan (note 45). 23 Central government bills and other eligible bills Book amount € m 2002 Market value € m Book amount € m 2001 Market value € m 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 6666 23 3 23 1 24 3 1 4 45 4 49 4 3 7 45 4 23 Central government bills and other eligible bills (continued) Analysis of movements in central government bills and other eligible bills held as financial fixed assets At 1 January 2002 Exchange translation adjustments Purchases Disposals/maturities Amortisation of discounts At 31 December 2002 24 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 27) Due from subsidiary undertakings: Subordinated Unsubordinated Concentrations of credit risk by geographical area Republic of Ireland United States of America United Kingdom Poland Rest of the world Group € m Allied Irish Banks, p.l.c. € m 45 (6) 1,020 (1,041) 5 23 4 (1) 11 (11) – 3 2002 € m 1,039 53 3,696 4,788 Group 2001 € m 399 34 5,614 6,047 Allied Irish Banks, p.l.c. 2001 € m 2002 € m 988 17 12,515 13,520 344 5 11,237 11,586 1,555 1,477 91 234 160 77 457 2,541 4,790 2 4,788 230 219 722 3,401 6,049 2 6,047 – 32 415 2,111 2,649 – 2,649 122 10,749 10,871 13,520 2002 € m 2,463 1,459 451 414 1 4,788 8 61 462 2,132 2,897 – 2,897 125 8,564 8,689 11,586 Group 2001 € m 2,894 1,219 423 1,500 11 6,047 6767 Notes to the accounts 25 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 27) Due from subsidiary undertakings: Subordinated Unsubordinated Allied Irish Banks, p.l.c. 2001 € m 2002 € m 2002 € m 50,244 2,143 834 226 Group 2001 € m 47,674 2,447 863 232 28,788 3 – 113 53,447 51,216 28,904 18,099 14,206 7,158 14,844 54,307 860 17,502 17,032 8,247 9,442 52,223 1,007 9,405 7,462 3,324 5,729 25,920 271 53,447 51,216 25,649 83 3,172 3,255 25,311 4 – 181 25,496 8,005 6,026 3,654 4,990 22,675 292 22,383 83 3,030 3,113 Of which repayable on demand or at short notice 12,008 10,889 9,239 8,073 Amounts include: Due from associated undertakings – – – – € 979m and € 630m (2001: € 958m and € 923m) of loans and advances were pledged as collateral with the Central Bank of Ireland and The Federal Reserve Bank, respectively. The cost of assets acquired for letting under finance leases and hire purchase contracts amounted to € 1,367m (2001: € 1,406m). 28,904 25,496 Non-performing loans – Loans accounted for on a non-accrual basis AIB Bank ROI division AIB Bank GB & NI division USA division Capital Markets division Poland division 2002 € m 194 88 107 115 486 990 Group 2001 € m 162 107 87 34 643 1,033 6868 26 Loans and advances to customers - concentrations of credit risk Construction and property Republic of Ireland United States of America United Kingdom Poland 2002 % of total loans(1) 8.8 4.8 5.3 0.4 € m 4,796 2,582 2,860 221 10,459 19.3 2001 % of total loans(1) 7.8 5.7 4.1 0.4 18.0 € m 4,062 2,988 2,156 230 9,436 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 United States of America United Kingdom Poland 2002 % of total loans(1) 14.2 0.7 4.0 0.6 19.5 € m 7,725 374 2,151 319 10,569 2001 % of total loans(1) 11.3 1.1 3.8 0.3 16.5 € m 5,930 550 1,965 181 8,626 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 relate to loans and advances to customers and are gross of provisions and unearned income and exclude money market funds. Loans and advances to customers by geographical area Republic of Ireland United States of America United Kingdom Poland Rest of the world 2002 € m 27,188 11,135 12,064 3,060 – 53,447 Group 2001 € m 24,147 13,446 10,477 3,146 – 51,216 6969 Notes to the accounts 27 Provisions for bad and doubtful debts Specific € m General € m Group At 1 January Exchange translation adjustments Disposed loans 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 24) Loans and advances to customers (note 25) 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 25) 539 (51) (2) – 202 (279) 26 435 2 433 435 78 (1) – 62 (54) 11 96 470 (35) – 194 (202) – – 427 – 427 427 214 (4) 27 (62) – – 175 2002 Total € m 1,009 (86) (2) 194 – (279) 26 862 2 860 862 292 (5) 27 – (54) 11 271 Specific € m General € m 436 32 – – 159 (113) 25 539 2 537 539 65 – – 29 (28) 12 78 436 14 – 179 (159) – – 470 – 470 470 150 2 91 (29) – – 214 2001 Total € m 872 46 – 179 – (113) 25 1,009 2 1,007 1,009 215 2 91 – (28) 12 292 The provisions for bad and doubtful debts in Allied Irish Banks, p.l.c. at 31 December 2002 and 2001 relate to loans and advances to customers only. 28 Securitised assets Securitised assets Less: non-returnable proceeds 2002 € m 1,002 (754) 248 2001 € m 1,099 (917) 182 In July 1999 a subsidiary company entered into an agreement whereby it securitised and sold part of its Asset Backed Securities portfolio to a third party. Subsequent to the initial securitisaton, additional assets have been transferred to the third party as provided for under the terms of the agreement. 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 10) 7070 2002 € m 2001 € m 2000 € m 4 – 4 – 4 – 4 5 – 5 – 5 – 5 5 – 5 1 4 – 4 29 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 170 31 – 87 288 – (1) – (43) (44) 4,931 2,503 124 5,888 13,446 833 73 45 3,807 4,758 2002 Market value € m 5,101 2,533 124 5,932 13,690 833 73 45 3,807 4,758 18,204 288 (44) 18,448 Book amount € m Gross unrealised gains € m Gross unrealised losses € m 87 48 1 87 223 (19) (7) – (28) (54) 5,014 4,012 518 6,755 16,299 511 47 48 3,177 3,783 2001 Market value € m 5,082 4,053 519 6,814 16,468 511 47 48 3,177 3,783 Market value is market price for quoted securities and directors’ estimate for unquoted securities. 20,082 223 (54) 20,251 7171 Notes to the accounts 29 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 111 4 – 82 197 – – – (37) (37) 3,581 356 124 5,262 9,323 170 73 – 3,805 4,048 2002 Market value € m 3,692 360 124 5,307 9,483 170 73 – 3,805 4,048 13,371 197 (37) 13,531 Book amount € m Gross unrealised gains € m Gross unrealised losses € m 53 – 1 73 127 (19) – – (25) (44) 3,624 400 518 5,749 10,291 177 1,354 – 1,803 3,334 2001 Market value € m 3,658 400 519 5,797 10,374 177 1,354 – 1,803 3,334 Market value is market price for quoted securities and directors’ estimate for unquoted securities. 13,625 127 (44) 13,708 7272 29 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 2002 € m 3,921 14,283 18,204 Book amount € m 9,867 2,749 830 13,446 4,355 355 48 4,758 18,204 Group 2001 € m 4,596 15,486 20,082 2002 Market value € m 10,118 2,743 829 13,690 Allied Irish Banks, p.l.c. 2001 € m 2002 € m 2,875 10,750 13,625 2001 Market value € m 10,255 4,877 1,336 16,468 2,518 10,853 13,371 Book amount € m 10,133 4,826 1,340 16,299 3,525 170 88 3,783 20,082 Debt securities with a book value of € 1,492m (2001: € 1,033m) were pledged to secure public funds, trust deposits, funds transactions and other purposes required by law. Debt securities subject to repurchase agreements amounted to € 3,021m (2001: € 2,192m). Subordinated debt securities included as financial fixed assets amounted to € 5m at 31 December 2002 (2001: € 5m). There were no unamortised discounts net of premiums on debt securities held as financial fixed assets in 2002 (2001: € 98m). The cost of debt securities held for trading purposes amounted to € 4,738m (2001: € 3,801m). 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 2001 Market value € m 8,914 613 847 10,374 2002 Market value € m 8,660 373 450 9,483 Book amount € m 8,464 409 450 9,323 4,048 – – 4,048 13,371 Book amount € m 8,819 621 851 10,291 3,294 40 – 3,334 13,625 Debt securities subject to repurchase agreements amounted to € 2,291m (2001: € 1,415m). The amount of unamortised premiums net of discounts on debt securities held as financial fixed assets was € 41m (2001: € 17m). The cost of debt securities held for trading purposes was € 4,039m (2000: € 3,347m). 7373 Notes to the accounts 29 Debt securities (continued) Analysis of movements in debt securities held as financial fixed assets Group At 1 January 2002 Exchange translation adjustments Purchases Realisations/maturities Charge to profit and loss account (note 13) Amortisation of discounts net of (premiums) At 31 December 2002 Allied Irish Banks, p.l.c. At 1 January 2002 Exchange translation adjustments Purchases Realisations/maturities Charge to profit and loss account Amortisation of (premiums) net of discounts At 31 December 2002 30 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 Group Held as financial fixed assets Listed on a recognised stock exchange Unquoted Held for trading purposes Listed on a recognised stock exchange 7474 Cost € m Discounts and premiums € m Amounts written off € m 16,251 (1,445) 9,765 (11,171) – – 13,400 10,317 (763) 4,246 (4,448) – – 9,352 53 (6) – 1 – 15 63 (20) 1 – 16 – (13) (16) (5) 2 – 5 (19) – (17) (6) 1 – 5 (13) – (13) Book amount € m Gross unrealised gains € m Gross unrealised losses € m 52 136 188 58 246 10 8 18 18 (2) (1) (3) (3) Book amount € m Gross unrealised gains € m Gross unrealised losses € m 127 156 283 49 332 20 15 35 35 (23) (12) (35) (35) Book amount € m 16,299 (1,449) 9,765 (11,165) (19) 15 13,446 10,291 (761) 4,246 (4,427) (13) (13) 9,323 2002 Market value € m 60 143 203 58 261 2001 Market value € m 124 159 283 49 332 30 Equity shares (continued) Allied Irish Banks, p.l.c. 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 Listed on a recognised stock exchange 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 2002 Charge to profit and loss account (note 13) Exchange translation adjustments Transfer to associated undertakings (note 31) Transfer to trading equity securities Purchases Disposals At 31 December 2002 Book amount € m Gross unrealised gains € m Gross unrealised losses € m – 3 3 13 16 – – – – – – – – Book amount € m Gross unrealised gains € m Gross unrealised losses € m – 3 3 15 18 – – – – – – – – 2002 Market value € m – 3 3 13 16 2001 Market value € m – 3 3 15 18 Cost € m Amounts written off € m Book amount € m 300 – (29) (10) (22) 69 (77) 231 (17) (36) 2 – – – 8 (43) 283 (36) (27) (10) (22) 69 (69) 188 The cost of equity shares held for trading purposes amounted to € 78m (2001: € 53m). 7575 Notes to the accounts 31 Interests in associated undertakings At 1 January Exchange translation adjustments Transfer from equity shares (note 30) Charge to profit and loss account (note 13) Purchases Profit retained At 31 December 2002 € m 2001 € m 10 (1) 10 – 5 7 31 8 – 3 (1) 1 (1) 10 2001 € m 2 1 3 The Group’s interests in associated undertakings are shown after accumulated provisions for write-downs of € 3m (2001: € 3m). The movements in the provisions are as follows: At 1 January Charge to profit and loss account At 31 December 2002 € m 3 – 3 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. 7676 32 Shares in Group undertakings Allied Irish Banks, p.l.c. At 1 January Additions Exchange translation adjustments At 31 December At 31 December Credit institutions Other Total – all unquoted 2002 € m 1,534 10 (217) 1,327 1,123 204 1,327 2001 € m 1,457 – 77 1,534 1,328 206 1,534 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. 7777 Notes to the accounts 32 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%) AIB Group (UK) p.l.c. 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 Nature of business Banking and financial services Banking and financial services 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%) Bank Zachodni WBK S.A. Banking and financial services Registered office: Rynek 9/11, 50-950 Wroclaw, Poland (Ordinary shares of PLN 10 each - Group interest 70.47%) *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. 7878 33 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 12) Exchange translation adjustments At 31 December Net book value At 31 December 2002 € m 2001 € m 560 1 (8) 553 65 32 (1) 96 500 59 1 560 34 31 – 65 457 495 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 2002 and 2001 is set out in the following table: Community Counselling Service Co., Inc. Bank Zachodni WBK S.A. Other 34 Tangible fixed assets Group Cost at 1 January 2002 Additions Disposals Exchange translation adjustments At 31 December 2002 Accumulated depreciation at 1 January 2002 Depreciation charge for the year Disposals Exchange translation adjustments At 31 December 2002 Net book value At 31 December 2002 At 31 December 2001 2002 € m – – 1 1 2001 € m 51 4 4 59 Freehold Long leasehold € m € m Property Leasehold under 50 years € m Equipment Total € m € m 725 25 (33) (56) 661 96 22 (5) (9) 104 557 629 130 2 (1) (1) 130 9 3 – – 12 118 121 168 16 (4) (15) 165 90 12 (2) (9) 91 74 78 1,349 136 (265) (95) 1,125 872 138 (259) (55) 696 429 477 2,372 179 (303) (167) 2,081 1,067 175 (266) (73) 903 1,178 1,305 7979 Notes to the accounts 34 Tangible fixed assets (continued) Allied Irish Banks, p.l.c. Cost at 1 January 2002 Additions Disposals Exchange translation adjustments At 31 December 2002 Accumulated depreciation at 1 January 2002 Depreciation charge for the year Disposals Exchange translation adjustments At 31 December 2002 Net book value At 31 December 2002 At 31 December 2001 Freehold Long leasehold € m € m Property Leasehold under 50 years € m Equipment Total € m € m 296 10 (23) – 283 18 8 – – 26 257 278 119 2 (1) – 120 8 3 – – 11 109 111 53 8 (2) (2) 57 25 5 – (2) 28 29 28 589 44 (155) (4) 474 444 54 (153) (2) 343 131 145 1,057 64 (181) (6) 934 495 70 (153) (4) 408 526 562 The net book value of property occupied by the Group for its own activities was € 730m (2001: € 799m). 35 Own shares Allfirst Financial, Inc. sponsors the Allfirst Stock Option Plans, for the benefit of key employees of Allfirst. Allfirst has lent US$ 178m (2001: US$ 201m) 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 2002, 15.9 million ordinary shares (2001: 18.1 million) were held by the trust with a cost of € 169m (2001: € 228m) and a market value of € 204m (2001: € 238m). 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. In 2001 a similar scheme was set up for employees in the Isle of Man and Channel Islands.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 2002, 0.4 million shares (2001: 1.5 million) were held by the trustees with a book value of € 4m (2001: € 15m) and a market value of € 5m (2001: € 19m). In 2001, the AIB Group Employee Share Trust was established to satisfy commitments arising under the AIB Group Long-Term Incentive Plan (LTIP). Funds are provided to the trustees to enable them to purchase Allied Irish Bank p.l.c. ordinary shares in the open market.The cost of meeting the commitments under the LTIP are charged to the profit and loss account over the period that the employees are expected to benefit.The trustees have waived their entitlement to dividends.At 31 December 2002, 0.2m shares (2001: 0.2m) were held by the trustees with a book value of € 2.1m (2001: € 1.5m) and a market value of € 2.6m (2001: € 2.6m). 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 € 7.9m (2001: € 5.8m; 2000: € 3.4m) has been excluded in arriving at profit before taxation. 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. 8080 36 Deferred taxation Deferred tax assets: Provision for bad and doubtful debts Amortised income Debt securities Deferred compensation Timing difference on provisions for future commitments in relation to the funding of Icarom plc (under Administration) Exceptional foreign exchange dealing losses Other Total gross deferred tax assets Deferred tax liabilities: Assets leased to customers Assets used in the business Debt securities Other Total gross deferred tax liabilities Net deferred tax liabilities/(assets) 2002 € m (161) (36) (12) (10) (10) – (16) (245) 443 24 53 7 527 282 Group 2001 € m Allied Irish Banks, p.l.c. 2001 € m 2002 € m (183) (47) (14) (12) (11) (125) (25) (417) 543 23 68 83 717 300 (23) (4) – – (10) – (3) (40) 1 – 3 – 4 (28) (3) – – (11) – (15) (57) 1 – – 1 2 (36) (55) For the year ended December 31, 2002, 2001 and 2000 full provision has been made for capital allowances and other timing differences except as described below. No provision is made for tax that could be payable on any future remittance of the past earnings of certain subsidiary undertakings. No provision is made for tax on capital gains which might arise on the disposal of properties at their balance sheet amounts due to the expectation that the greater portion of land and buildings will be retained by the Group. Accordingly deferred tax has not been recognised on the revaluation gains and losses that have arisen on the Group’s property portfolio. If deferred tax had been recognised it would have amounted to € 28m approximately. Furthermore certain taxable gains in the Republic of Ireland have been rolled over into replacement assets. In February 2003, the Minister for Finance published the Finance Bill which, if passed, will change the legislation in the Republic of Ireland in respect of roll over relief. As a result, a disposal of certain properties would give rise to the crystalisation of a tax liability of € 8m approximately. In view of the substantial number of properties involved and the likelihood of a material tax liability arising being remote no provision is made in the accounts in respect of a tax liability arising until a decision is made to sell the properties involved. Analysis of movements in deferred taxation At 1 January Exchange translation and other adjustments Profit and loss account taxation charge/(credit) At 31 December 2002 € m 300 (45) 27 282 Group 2001 € m Allied Irish Banks, p.l.c. 2001 € m 2002 € m 364 2 (66) 300 (55) – 19 (36) (50) (5) – (55) 8181 Notes to the accounts 37 Long-term assurance business Methodology The value of the shareholder’s interest in the long-term assurance business (‘the embedded value’) is comprised of the net tangible assets of Ark Life Assurance Company Limited (‘Ark Life’), including any surplus retained in the long-term business funds, which could be transferred to shareholders, and the present value of the in-force business.The value of the in-force business is calculated by projecting future surpluses and other net cash flows attributable to the shareholder arising from business written by the balance sheet date and discounting the result at a rate which reflects the shareholder’s overall risk premium. Surpluses arise following annual actuarial valuations of the long-term business funds, which are carried out in accordance with the statutory requirements designed to ensure and demonstrate the solvency of the funds. Future surpluses will depend on experience in a number of areas such as investment returns, lapse rates, mortality and administrative expenses. Surpluses can be projected by making realistic assumptions about future experience, having regard to both actual experience and forecast long-term economic trends. Other net cash flows principally comprise annual management charges and other fees levied upon the policyholders by Ark Life. Changes in the embedded value, which are determined on a post-tax basis, are included in the profit and loss account and described as contribution from life assurance company. For the purpose of presentation, the change in this value is grossed up at the underlying rate of corporation tax. Analysis of income from long-term assurance business Income from long-term assurance business included in the profit and loss account can be divided into those items comprising the operating profit of the business and other items. Included within operating profit are the following items: New business contribution: this represents the value from new business written during the year after taking into account the cost of establishing technical provisions and reserves. Contribution from existing business: this comprises the following elements: - - The expected return arising from the unwinding of the discount rate; and Experience variances caused by the differences between the actual experience during the year and the expected experience. Investment returns: this represents the investment return on both the net tangible assets and the value of the shareholder’s interest in the long-term business account. Distribution costs: this represents the actual cost of acquiring new business during the year and includes bonuses paid to sales consultants and other direct sales costs but does not include any allowance for the cost of referral generation from the branch network. Included within other items are: Change in value of future unit linked fees: this represents the unsmoothed impact of the discounted value of future unit linked fees at the end of the year as a result of investment returns being different from those assumed at the start of the year. Changes in economic assumptions: this represents the effect of changes in the economic assumptions referred to below. Exceptional items: this includes any other items which by virtue of their size or incidence, are considered not to form part of the ongoing operating profit. 8282 37 Long-term assurance business (continued) Income from Ark Life’s long-term assurance business is set out below: New business contribution Contribution from existing business - - expected return experience variances Investment returns Distribution costs Operating profit Other items: Change in value of future unit linked fees Changes in economic assumptions Exceptional items Income from long-term assurance business before tax Attributable tax Income from long-term assurance business after tax 2002 € m 60 25 2 2 (20) 69 (32) 17 3 57 9 48 Assumptions The economic assumptions are based on a long-term view of economic activity and are therefore not adjusted for market movements which are considered to be short-term.This approach is considered to be the most appropriate given the long-term nature of the portfolio of products.The principal economic assumptions used are as follows: Risk adjusted discount rate Weighted average investment return Future expense inflation 2002 % 10.0 7.625 3.5 2001 € m 65 18 3 3 (17) 72 (3) – 15 84 17 67 2001 % 12.0 9.0 5.0 8383 Notes to the accounts 37 Long-term assurance business (continued) Balance sheet The assets and liabilities of 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 Embedded value adjustment 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 2002 € m 1,250 223 849 42 2,364 153 61 2001 € m 1,019 256 1,034 43 2,352 142 62 2,578 (2,226) 2,556 (2,252) 352 19 326 7 352 304 19 281 4 304 Modified statutory solvency basis Ark Life’s profit before tax on a modified statutory solvency basis was € 44m (2001: € 35m) and its profit after tax was € 37m (2001: € 28m). Ark Life’s total assets on a modified statutory solvency basis were € 2,482m at 31 December 2002 (31 December 2001: € 2,482m) and its shareholders’ funds at 31 December 2002 were € 199m (31 December 2001: € 162m).The following table provides a reconciliation of embedded value to the modified statutory solvency basis. Reconciliation of embedded value to modified statutory solvency basis Long-term assurance business attributable to the shareholder - embedded value basis Value of in-force business Other differences: Deferred acquisitions costs Other adjustments Shareholders’ funds of life operations - modified statutory solvency basis 2002 € m 352 (251) 89 9 199 2001 € m 304 (228) 76 10 162 8484 38 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 Allied Irish Banks, p.l.c. 2001 € m 2002 € m – 2,457 22,706 25,163 – 1,631 20,227 21,858 2002 € m 491 2,478 13,168 16,137 10,869 5,268 16,137 405 236 3,554 11,357 15,552 585 Group 2001 € m 546 1,742 10,935 13,223 7,899 5,324 13,223 428 289 2,781 8,871 12,369 854 350 46 3,407 10,909 14,712 58 302 33 2,696 8,456 11,487 264 11,751 10,107 21,858 16,137 13,223 14,770 10,393 25,163 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. 8585 Notes to the accounts 39 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 Repayable on demand Due to subsidiary undertakings Amounts include: Due to associated undertakings 2002 € m 16,428 10,333 21,855 48,616 703 3,657 4,360 Group 2001 € m 16,300 11,165 22,896 50,361 726 3,470 4,196 Allied Irish Banks, p.l.c. 2001 € m 2002 € m 8,106 4,484 10,320 22,910 – 3,170 3,170 7,603 4,330 9,321 21,254 – 3,081 3,081 52,976 54,557 26,080 24,335 6,020 5,004 5,857 6,140 19,950 22,002 52,976 232 3,134 2,730 19,434 25,530 27,446 18,074 24,486 54,557 654 2,688 3,150 19,743 26,235 28,322 136 1,553 526 10,568 12,783 12,789 52,976 54,557 25,572 508 110 921 707 10,275 12,013 11,933 23,946 389 26,080 24,335 28 2 1 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. 8686 40 Debt securities in issue Bonds and medium term notes: European medium term note programme Allfirst adjustable rate federal home loan bank advances: due 23 August, 2011 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: 5 years or less but over 1 year 1 year or less but over 3 months 3 months or less 41 Other liabilities Notes in circulation Taxation Dividend (note 20) Provision for future commitments in relation to the funding of Icarom(1) Short positions in securities(2) Other 2002 € m 121 191 312 250 224 2,291 2,765 3,077 197 – – 115 312 8 685 2,072 2,765 3,077 2002 € m 410 91 283 85 266 1,456 2,591 Group 2001 € m Allied Irish Banks, p.l.c. 2001 € m 2002 € m 84 227 311 301 133 4,288 4,722 5,033 233 – 72 6 311 89 2,176 2,457 4,722 5,033 Group 2001 € m 441 – 250 91 205 2,285 3,272 121 – 121 – – 1,814 1,814 1,935 6 – – 115 121 8 463 1,343 1,814 1,935 84 – 84 – – 1,809 1,809 1,893 6 – 72 6 84 15 421 1,373 1,809 1,893 Allied Irish Banks, p.l.c. 2001 € m 2002 € m – 59 283 85 97 373 897 – 65 250 91 31 363 800 (1)The provision represents the present value of the cost of the future commitments arising under the 1992 agreement in relation to the funding of Icarom. A discount rate of 6.35% was applied in the year ended 31 December 1993, in discounting the cost of the future commitments arising under this agreement.The undiscounted amount was € 112m (2001: € 123m).The unwinding of the discount on the provision amounted to € 5.4m (2001: € 5.8m). (2)Short positions in debt securities and equity securities in 2002 were € 250m and € 16m, respectively. 8787 Notes to the accounts 42 Provisions for liabilities and charges Group At 1 January 2002 Exchange translation adjustments Profit and loss account charge Provisions utilised At 31 December 2002 Allied Irish Banks, p.l.c. At 1 January 2002 Profit and loss account charge Provisions utilised At 31 December 2002 Contingent liabilities and commitments € m Other Total € m € m 32 (2) 2 (14) 18 22 – (13) 9 39 (4) 16 (9) 42 6 7 – 13 71 (6) 18 (23) 60 28 7 (13) 22 8888 43 Subordinated liabilities Allied Irish Banks, p.l.c. Undated loan capital Dated loan capital Reserve capital instruments Allfirst Financial Inc. Dated loan capital Bank Zachodni WBK 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 $250m Floating Rate Notes due January 2010 € 45.1m Floating Rate Notes due February 2007 € 37.6m 7.25% Fixed Rate Notes due October 2007 € 32.2m 6.7% Fixed Rate Notes due August 2009 Stg £35m 8% Fixed Rate Notes due October 2007 € 250m Floating Rate Notes due January 2010 € 100m Floating Rate Notes due August 2010 € 100m Floating Rate Notes due June 2013 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 $150m Floating Rate Subordinated Capital Income Securities due February 2027 Bank Zachodni WBK S.A. PLN 10m Fixed Rate Loan due July 2002 The dated loan capital outstanding is repayable as follows: In one year or less, or on demand Between 1 and 2 years Between 2 and 5 years In 5 years or more 2002 € m 389 719 1,108 496 2001 € m 426 804 1,230 496 568 787 – 3 2,172 2,516 95 95 199 389 238 – – 32 – 249 100 100 719 – 190 95 141 142 568 – 113 114 199 426 283 45 38 32 57 249 100 – 804 113 226 113 167 168 787 3 1,287 1,594 – – 190 1,097 1,287 161 – – 1,433 1,594 The loan capital of the Bank is unsecured and is subordinated in right of payment to the ordinary creditors, including depositors, of the Bank. 8989 Notes to the accounts 43 Subordinated liabilities (continued) Reserve capital instruments In February 2001, Reserve capital instruments (RCIs) of € 500m were issued by Allied Irish Banks, p.l.c. at an issue price of 100.069%.The RCIs are perpetual securities and have no maturity date.The RCIs are redeemable in whole but not in part at the option of the Bank and with the agreement of the Central Bank of Ireland (i) upon the occurence of certain events, or (ii) on or after 28 February 2011, an authorised officer having reported to the Trustees within the previous six months that a solvency condition is met. The RCIs bear interest at a rate of 7.50% per annum from (and including) 5 February 2001 to (but excluding) 28 February 2011 and thereafter at 3.33% per annum above three month EURIBOR, reset quarterly. The rights and claims of the RCI holders and the coupon holders are subordinated to the claims of the senior creditors and the senior subordinated creditors of the issuer. In the event of a winding up of the issuer, the RCI holders will rank pari passu with the holders of the classes of preference shares (if any) from time to time issued by the issuer and in priority to all other shareholders. Undated loan capital The US$ Undated Floating Rate Loan capital notes have no final maturity but may be redeemed at par at the option of the Bank, with the prior approval of the Central Bank of Ireland. 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, with the prior approval of the Central Bank of Ireland, on each coupon payment date on or after 3 August 2009. Dated loan capital The European Medium Term Note Programme is subordinated in right of payment to the ordinary creditors, including depositors, of the Bank.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 January 2005.The € 45.1m Floating Rate Notes were redeemed in February 2002.The € 37.6m Fixed Rate Notes and the Stg £ 35m Fixed Rate Notes were redeemed on 1 October 2002 and 31 October 2002, respectively.The € 32.2m 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. In December 2001, € 100m Floating Rate Notes due in June 2013 were issued. The € 100m Floating Rate Notes, with interest payable quarterly, may be redeemed, in whole but not in part, on the 12 June 2008 and on each interest payment date thereafter. In all cases, redemption prior to maturity is subject to the necessary prior approval of the Central Bank of Ireland. The 8.375% Fixed Rate Subordinated Notes were repaid in May 2002.The 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 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. 44 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) 9090 2002 € m 181 – 93 93 274 2001 € m 191 10 111 121 312 44 Equity and non-equity minority interests in subsidiaries (continued) (1)This preferred stock was redeemed on 15 July 2002. (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. 45 Share capital Ordinary share capital Ordinary shares of € 0.32 each Authorised: 1,160 million shares (2001: 1,160 million) Issued: 897 million shares (2001: 887 million) Preference share capital Non-cumulative preference shares of US$ 25 each Authorised: 20.0 million shares (2001: 20.0 million) Issued: 0.25 million shares (2001: 0.25 million) Non-cumulative preference shares of € 1.27 each Authorised: 200.0 million shares (2001: 200.0 million) Issued: Nil Non-cumulative preference shares of Stg £ 1 each Authorised: 200.0 million shares (2001: 200.0 million) Issued: Nil Non-cumulative preference shares of Yen 175 each Authorised: 200.0 million shares (2001: 200.0 million) Issued: Nil Movements in ordinary share capital At 1 January New shares issued during year - see below At 31 December 2002 € m 2001 € m 287 284 6 – – – 293 2002 € m 284 3 287 7 – – – 291 2001 € m 281 3 284 During the year ended 31 December 2002 the issued ordinary share capital was increased from 886,690,015 to 897,446,519 ordinary shares as follows: (a) under the dividend reinvestment plan, 4,552,960 shares were allotted to shareholders, at € 12.99 per share, in respect of the second interim dividend for the year ended 31 December 2001, and 1,293,867 shares were allotted to shareholders, at € 13.12 per share, in respect of the interim dividend for the year ended 31 December 2002.These allotments were made in lieu of dividends amounting to € 76.12m; (b) by the issue of 1,358,433 shares to the trustees of the employees’ profit sharing schemes at € 12.41 per share; the consideration received for these shares was € 16.86m; (c) by the issue of 3,156,500 shares to participants in the executive share option scheme at prices of € 3.38, € 4.19, € 5.80, € 6.25, € 7.61 and € 11.90 per share; the consideration received for these shares was € 18.6m; (d) by the issue of 394,744 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 € 3.34m. 9191 Notes to the accounts 45 Share capital (continued) 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 minimum service periods.The directors at their discretion may set aside each year a sum not exceeding 5% of eligible profits of participating companies in the Republic of Ireland and the UK. Eligible employees in the Republic of Ireland may elect to receive their profit sharing allocations either in shares or in cash. Such shares are held by Trustees for a minimum period of two years and are required to be held for a total period of three years for the employees to obtain the maximum tax benefit. Such employees may also 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 any employee in a year may not exceed € 12,700. In December 2002 the Company launched a Share Ownership Plan in the UK to replace the profit sharing scheme that previously operated for UK-based employees.The Plan, which was approved by shareholders at the 2002 Annual General Meeting, provides for the receipt by eligible employees of shares in a number of categories: Partnership Shares, in which employees may invest up to £ 1,500 per annum from salary; Free Shares, involving the award by the Company of shares up to the value of £ 3,000 per annum per employee; and Dividend Shares, which may be acquired by employees by re-investing dividends of up to £ 1,500 per annum. 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 granted.The exercise of options granted between 1 January 1996 and 31 December 2000 is conditional on the achievement of earnings per share (‘EPS’) growth of at least 2% per annum, compound, above the increase in the Consumer Price Index (‘CPI’) over a period of not less than three and not more than five years from date of grant.The exercise of options granted since 1 January 2001 is conditional on the achievement of EPS growth of at least 5% per annum, compound, above the increase in the CPI over a period of not less than three and not more than five years from date of grant. Options may not be transferred or assigned and may be exercised only between the third and seventh anniversaries of their grant in the case of the options granted up to 31 December 2000, and between the third and tenth anniversaries of their grant in the case of options granted subsequent to that date. At 31 December 2002, options were held by some 3,555 participants over 29,518,229 ordinary shares in aggregate (3.3% of the issued ordinary share capital), at prices ranging from € 4.19 to € 15.46 per share; these options may be exercised at various dates up to 4 December, 2012. 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 2002, options so converted were outstanding over 418,598 ordinary shares. AIB Long Term Incentive Plan Under the terms of the AIB Long Term Incentive Plan, approved by shareholders at the 2000 Annual General Meeting, conditional grants of awards of ordinary shares have been made in respect of 1,305,200 ordinary shares, in aggregate, to 234 employees.These awards will not vest in the award holders unless (a) the growth in the Company’s EPS, as defined in the Rules of the Plan, in any three consecutive years within the five years following the grant is not less than the growth in the CPI plus 5% per annum, compound, over the same three year period; and (b) the growth in the Company’s core EPS, as defined in the Rules of the Plan, over the three year period during which the criterion at (a) is satisfied, is such as to position the Company in the top 20% of the FTSE Eurotop Banks Retail Index. Partial vesting, on a reducing scale, will occur if the growth in the Company’s core EPS positions the Company outside the top 20% of that Index but still within its top 45%, subject to the criterion at (a) being satisfied.Vested shares must be held until normal retirement date, except that award holders may dispose of shares sufficient to meet the income tax liability arising on vesting. 9292 45 Share capital (continued) Limitations on profit sharing and share option schemes Under the terms of the employees’ profit sharing schemes, the aggregate number of shares that may be purchased/held by the Trustees in any 10 year period may not exceed 10% of the issued ordinary share capital.The aggregate number of shares issued under the share option scheme in any ten year period 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. Preference share capital In 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. 46 Share premium account At 1 January 2002 Premium arising on shares issued under: Employees’ profit sharing schemes Executive share option scheme Allfirst Financial, Inc. stock option plan Profit and loss account Exchange translation adjustments At 31 December 2002 47 Reserves At 1 January 2002 Capital reserves Revaluation reserves Transfer from/(to) profit and loss account: Non-distributable reserves of Ark Life Property revaluation reserves Exchange translation and other adjustments At 31 December 2002 At 31 December 2002 Capital reserves Revaluation reserves Group € m 1,926 Allied Irish Banks, p.l.c. € m 1,926 17 17 3 (1) (44) 17 17 3 (1) (44) 1,918 1,918 Group € m Restated Allied Irish Banks, p.l.c. € m Restated 315 148 463 45 (15) (3) 490 359 131 490 – 132 132 – (15) (1) 116 – 116 116 9393 Notes to the accounts 48 Profit and loss account At 1 January 2002 Profit retained for the year Dividend reinvestment plan Actuarial loss recognised in retirement benefit schemes (note 14) Share premium account Transfer from property revaluation reserves Exchange translation adjustments At 31 December 2002 At 31 December 2002 Allied Irish Banks, p.l.c. and subsidiaries Associated undertakings Group € m Allied Irish Banks, p.l.c. € m 1,305 76 74 (625) 1 15 (254) 592 2,450 563 74 (823) 1 15 (338) 1,942 1,931 11 1,942 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 € 1,507m at 31 December 2002 (2001: € 1,754m). Included within the profit and loss account reserve for the Group at 31 December 2002 is € 482m (Allied Irish Banks, p.l.c.: € 245m) relating to the net pension liability in funded retirement benefit schemes (note 14). 49 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. 9494 50 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 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. 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 2002 Risk weighted amount € m Contract amount € m 2001 Risk weighted amount € m 72 61 5,278 14 5,292 1,027 6,391 4,957 1 4,958 520 5,539 2,062 1,230 314 24 33 9,073 8,446 17,890 19,952 26,343 97 5 10 4,387 – 4,499 5,729 11,268 142 5,222 23 5,245 1,125 6,512 402 235 5 100 8,905 9,352 18,597 18,999 25,511 109 4,852 2 4,854 570 5,533 402 76 2 12 4,308 – 4,398 4,800 10,333 (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. Concentration of exposure Republic of Ireland Unites States of America United Kingdom Poland Contingent liabilities 2002 2001 € m € m Commitments 2001 € m 2002 € m 1,544 4,316 483 48 6,391 1,451 4,504 469 88 6,512 6,556 8,743 3,768 885 6,119 9,022 3,055 803 19,952 18,999 9595 Notes to the accounts 50 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 2002 Risk weighted amount € m Contract amount € m 2001 Risk weighted amount € m 54 3,455 558 4,067 106 13 4,904 3,601 8,624 12,691 54 3,334 279 3,667 21 – 2,394 – 2,415 6,082 96 3,266 549 3,911 68 76 4,245 3,345 7,734 11,645 96 3,151 275 3,522 14 – 2,082 – 2,096 5,618 (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. Except as set out below, AIB Group is not, nor has been, involved in, nor are there, so far as the Company is aware, pending or threatened by or against AIB Group any legal or arbitration proceedings which may have, or have had during the previous twelve months, a significant effect on the financial position of AIB Group. Class actions On 5 March 2002 and on 24 April 2002, separate class action lawsuits under the Securities Exchange Act, 1934 of the United States were filed in the United States District Court for the Southern District of New York against AIB, Allfirst and certain serving and past officers and directors of Allfirst and its subsidiaries, seeking compensatory damages, legal fees and other costs and expenses relating to alleged misrepresentations in filings of AIB and Allfirst. On 3 May 2002, a motion to consolidate both cases and to appoint a lead plaintiff was filed with the court. It is not practicable to predict the outcome of the action against AIB and Allfirst and any financial impact on AIB, but on the basis of current information, the Directors do not believe that the action is likely to have a materially adverse effect on AIB. On 13 May 2002, a purported shareholder derivative action was filed in the Circuit Court for Baltimore City, Maryland. An alleged holder of AIB American Depositary Shares purports to sue certain present and former directors and officers of Allfirst Bank on behalf of AIB, alleging those persons are liable for the foreign exchange trading losses. No relief is sought in the purported derivative action against AIB, Allfirst or Allfirst Bank. On 30 December 2002, the Court dismissed the action. On 10 January 2003, the plaintiffs have filed a motion seeking to have the Court amend or revise the judgement, or to be granted leave to file an amended complaint. Certain of the individual defendants in these actions have asserted or may possibly assert claims for indemnification against AIB and/or Allfirst, which, if made against Allfirst following completion of the M&T transaction, might be subject to the indemnification obligations of AIB as part of the agreement with M&T. In the nature of any such claims, it is not possible to quantify the amount which might be asserted in any such claim. 9696 51 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 in 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 the 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 2002 and 2001. 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 2002 € m Group 2001 € m Allied Irish Banks, p.l.c. 2001 € m 2002 € m 110,529 116,151 105,623 111,135 1,913 1,432 1,756 1,335 € m € m € m € m 21,046 26,505 16,567 18,988 546 280 540 272 € m 2,037 27 € m 2,893 195 € m 2,037 27 € m 2,893 195 (1)Interest rate, exchange rate and equity contracts are 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. 9797 Notes to the accounts 51 Derivatives (continued) The following table analyses the notional amount and gross replacement cost of interest rate, exchange rate and equity contracts by maturity. 2002 Notional amount Gross replacement cost 2001 Notional amount Gross replacement cost Residual maturity < 1 year € m 1 < 5 years € m 5 years + € m Total € m 78,231 990 46,663 1,094 8,718 402 133,612 2,486 72,545 617 63,912 1,045 9,092 245 145,549 1,907 Of the gross replacement cost € 2,208m (2001: € 1,596m) related to financial institutions and € 278m (2001:€ 311m) related to non-financial institutions. AIB Group has the following concentration of exposures in respect of notional amount and gross replacement cost of all interest rate, exchange rate and equity contracts.The concentrations are based primarily on the location of the office recording the transaction. Republic of Ireland Unites States of America United Kingdom Poland Trading activities Notional amount 2001 € m 2002 € m Gross replacement cost 2001 € m 2002 € m 63,723 8,470 56,541 4,878 60,029 12,309 66,831 6,380 133,612 145,549 1,315 232 922 17 2,486 964 155 772 16 1,907 AIB Group maintains trading positions in a variety of financial instruments including derivatives.These financial instruments include interest rate, foreign exchange 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. 9898 51 Derivatives (continued) 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 2002 and 2001. 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 2002 Fair values € m Notional amounts(1) € m 2001 Fair values € m 65,613 34,817 1,199 (1,065) 15 (12) 7 (6) 1 (4) – 7 55 – – 5,293 5,092 776 37 2,391 16,375 – 23 4,187 3,805 1,926 27 1,231 17,237 – 2,037 538 (444) 20 (21) 5 (6) 22 (19) – (460) 4 – 1 (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. Details of debt securities held for trading purposes are outlined in note 29 to the financial statements. The Group’s credit exposure at 31 December 2002 and 2001 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. 9999 Notes to the accounts 51 Derivatives (continued) Dealing profits The following table summarises the Group’s dealing profits (before the exceptional losses in 2001) by category of instrument. Foreign exchange contracts Profits less losses from securities held for trading purposes Interest rate contracts Total Risk management activities 2002 € m 78 10 (11) 77 2001 € m 75 2 15 92 2000 € m 69 42 (8) 103 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 can be used to hedge the Group’s exposure to foreign exchange and equity risk, as required. Derivative prices fluctuate in value as the underlying interest rate, foreign exchange rate, or equity prices change. If the derivatives are purchased or sold as hedges of balance sheet items, the appreciation or depreciation of the derivatives, 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 the following pages 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 2002 and 2001. 100100 51 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 5 - 10 years Forward rate agreements: Loans 1 year or less 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 Notional amount 2002 2001 € m € m Weighted average maturity in years Weighted average rate Pay Receive 2002 2001 2002 % 2001 % 2002 % 2001 % Estimated fair value 2001 € m 2002 € m 7,414 4,919 1,861 9,216 18,023 2,574 14,194 29,813 0.42 2.75 7.27 2.12 4,821 5,412 1,603 7,991 15,784 1,823 0.43 2.97 10.01 11,836 25,598 2.89 132 10 15 157 239 239 950 – 950 934 117 25 1,076 405 114 519 – 99 15 114 1,582 1,582 2,807 740 3,547 1,491 818 27 2,336 303 756 1,059 0.76 3.75 8.33 1.67 0.38 0.38 0.40 – 0.40 0.58 2.78 7.12 0.97 0.67 2.11 0.98 0.48 2.25 7.43 2.15 0.58 2.22 9.27 2.21 – 2.00 9.33 2.96 0.44 0.44 0.52 1.33 0.69 0.67 2.02 8.00 1.23 0.66 1.90 1.54 4.10 5.11 6.04 4.78 5.14 6.05 4.70 5.11 2.73 3.95 4.39 4.84 5.53 4.82 5.16 5.78 2.58 3.54 4.75 5.10 1.93 3.68 4.43 – 2.46 4.43 2.28 2.72 2.03 3.26 5.11 – 4.50 5.46 5.11 4.70 3.92 3.92 4.57 4.57 4.25 3.93 3.40 4.19 2.72 4.09 3.02 4.19 3.56 4.45 3.97 4.75 3.52 3.87 95 279 174 548 (81) (306) (168) (555) – – – – 2 2 (8) – (8) 10 1 2 13 (10) (1) (11) 205 373 84 662 (134) (385) (50) (569) – – – – 5 5 (2) 1 (1) 1 23 – 24 (1) (20) (21) 101101 Notes to the accounts 51 Derivatives (continued) Notional amount 2002 2001 € m € m Weighted average maturity in years Weighted average rate Pay Receive 2002 2001 2002 % 2001 % 2002 % 2001 % Estimated fair value 2001 € m 2002 € m Financial futures: 1 year or less 1 - 5 years 4,552 970 4,303 994 0.49 1.52 0.58 1.49 2.08 3.31 2.85 5.02 5,522 5,297 0.67 0.74 2.29 3.26 Other interest rate derivatives: 1 year or less 1 - 5 years 5 - 10 years Equity derivatives: 1 year or less 1 - 5 years 5 - 10 years 109 291 78 478 – – – – 294 380 116 790 849 1,941 80 2,870 0.40 2.22 6.27 2.47 – – – – 0.73 2.53 6.92 2.51 0.50 2.70 5.25 2.12 5.11 4.29 7.48 5.00 5.76 4.54 7.38 5.42 5.35 5.61 (7) – (7) 2 (5) (3) (6) – – – – 1 (1) - 1 12 (10) 3 (1) (2) – (3) The carrying value of the interest rate derivative financial instruments held for risk management purposes was € 15m (2001: € 94m). Reconciliation of movements in notional amounts of interest rate instruments held for risk management purposes Interest rate swaps € m FRA Deposits € m FRA Loans € m 2,187 4,498 (5,095) (51) 43 1,582 3,574 (4,816) – (52) (49) 50,631 40,361 (34,315) (1,767) 615 55,525 28,962 (31,720) (1,243) (23,411) (1,926) 2,525 7,849 (6,851) (50) 74 3,547 2,012 (4,391) – (94) (124) 26,187 950 239 At 31 December 2000 Additions Maturities/amortisations Cancellations Exchange adjustments At 31 December 2001 Additions Maturities/amortisations Cancellations Transfer to trading derivatives Exchange adjustments At 31 December 2002 102102 51 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 2002 the Group had deferred income of € 35m (2001: € 65m) and deferred expense of € 62m (2001: € 89m) relating to non-trading derivatives. € 18m (2001: € 38m) of deferred income and € 41m (2001: € 52m) of deferred expense is expected to be released to the profit and loss account in 2003. During the year ended 31 December 2002, net deferred expense in relation to previous years of € 13m was released to the profit and loss account. 2003 € 000 2004 € 000 2005 € 000 2006 € 000 2007 € 000 After 2007 € 000 Total € 000 14,586 (9,384) 2,910 (5,384) 4,374 (5,296) 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 4,397 (2,688) 2,910 (5,384) 3,685 (3,339) 7,493 (30,163) 3,263 (2,358) 2,428 (818) 2,356 (672) 1,909 (569) 233 (2,279) – – 380 (956) 2,400 (5,474) – – 241 (681) 868 (2,173) – – 68 (186) 501 (1,643) – – – (43) – – – (91) 488 (1,038) 1,080 (1,730) 12,830 (42,221) (23,089) (2,745) (135) 424 747 (2,787) (27,585) 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 2002 the Group had deferred expense of € 4m (2001: € 1m) relating to debt securities held for hedging purposes. Deferred expense of € 1m (2001: deferred income € 3m) relating to these debt securities is expected to be released to the profit and loss account in 2003. During the year ended 31 December 2002, deferred income in relation to previous years of € 3m 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 loss on instruments used for hedging as at 31 December 2002 was € 22m (2001: net gain of € 25m). The net gain expected to be recognised in 2003 is € 16m (2001: € 20m) and thereafter a net loss of € 38m (2001: net gain of € 5m) is expected. The net gain recognised in 2002 in respect of previous years was € 20m (2001: net gain of € 52m) and the net loss arising in 2002 which was not recognised in 2002 was € 27m (2001: € 61m). 52 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 these data to evaluate the Group’s financial position or to make comparisons with other institutions. 103103 Notes to the accounts 52 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 2002. The following table gives details of the carrying amounts and fair values of financial instruments at 31 December 2002 and 2001. Assets Trading financial instruments(1) Debt securities Equity shares Central government and other eligible bills Non-trading financial instruments 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(2) Loans and advances to customers(2) Securitised assets Debt securities Equity shares Liabilities Trading financial instruments Short positions in securities(1) Non-trading financial instruments Deposits by banks Customer accounts Debt securities in issue Subordinated liabilities Shareholders’ funds: non-equity interests Off-balance sheet assets/(liabilities) Trading financial instruments(1) Interest rate contracts Exchange rate contracts Equity contracts Non-trading financial instruments Interest rate contracts Exchange rate contracts Equity contracts 31 December 2002 Fair value € m Carrying amount € m 31 December 2001 Fair value € m Carrying amount € m 4,758 58 1 1,176 1,171 23 4,788 53,447 248 13,446 188 4,758 58 1 1,176 1,171 23 4,826 54,075 220 13,690 203 3,783 49 4 1,175 1,536 45 6,047 51,216 182 16,299 283 3,783 49 4 1,175 1,536 45 6,060 51,498 160 16,468 283 266 266 205 205 16,137 52,976 3,077 2,172 235 16,162 53,091 3,106 2,362 227 13,223 54,557 5,033 2,516 279 13,261 54,615 5,041 2,539 267 135 62 – 15 20 – 135 62 – (24) 37 – 95 (456) 1 94 9 – 95 (456) 1 103 28 (3) (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. 104104 52 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. Securitised assets The fair value of securitised assets is based on market prices received from external pricing services. 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 50. 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 2002 and 2001. Details of derivatives in place, including fair values, are included in note 51. Shareholders’ funds: non-equity interests The fair value of these instruments is based on quoted market prices. 105105 Notes to the accounts 53 Interest rate sensitivity The net interest rate sensitivity of the Group at 31 December 2002 and 2001 is illustrated in the tables below.The interest sensitivity gap is split by functional currency.The tables set 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 show the sensitivity of the balance sheet at one point in time and are not necessarily indicative of positions at other dates. In developing the classifications used in the tables it has been necessary to make certain assumptions and approximations in assigning assets and liabilities to different repricing categories. The tables do not take into account the effect of interest rate options used by the Group to hedge its exposure. Details of options are given in note 51. 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 Shareholders’ funds Total liabilities Off-balance sheet items affecting interest rate sensitivity 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 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 2002 23 3,999 41,838 4,485 – 50,345 12,159 36,071 2,269 1,066 95 – – 300 1,995 781 – 3,076 1,819 1,145 330 95 – – – 25 1,587 1,054 – – 18 5,095 5,284 – 2,666 10,397 1,641 1,868 258 – – – 59 2,472 214 223 – – – – 3,180 1,842 – 5,022 167 62 6 788 – – – 446 - – 8,997 9,443 292 11,358 – – 6,403 4,643 51,660 3,389 3,767 2,968 1,023 22,696 1 – – 4,758 341 24 4,788 53,695 18,204 9,338 5,100 86,049 – – – – 546 – 546 16,137 52,976 3,077 2,172 7,044 4,643 86,049 2,882 (843) (1,961) 214 (292) – – – 54,542 2,546 1,806 (4,197) 530 860 3,182 7,215 731 22,696 546 86,049 4,291 (13,253) 4,554 (4,197) (3,667) (2,807) 4,408 8,699 (4,554) – Euro m Euro m Euro m Euro m Euro m Euro m Euro m (89) (89) 342 253 626 879 1,947 1,855 (6,873) 1,803 2,826 4,681 (2,192) (389) US $m US $m US $m US $m US $m US $m US $m (1,761) 446 (120) 2,890 1,328 (3,237) (1,761) (1,315) (1,435) 1,455 2,783 (454) 869 415 Stg m Stg m Stg m Stg m Stg m Stg m Stg m (993) (398) 177 2,150 1,039 (3,251) 991 (993) (1,391) (1,214) 936 1,975 (1,276) (285) PLN m PLN m PLN m PLN m PLN m PLN m PLN m (1,201) (197) 40 213 54 225 502 (1,201) (1,398) (1,358) (1,145) (1,091) (866) (364) 106106 53 Interest rate sensitivity (continued) 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 Shareholders’ funds Total liabilities Off-balance sheet items affecting interest rate sensitivity 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 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 2001 16 4,764 35,669 5,126 – 45,575 9,862 36,666 3,813 496 112 – 29 537 2,365 1,469 – 4,400 2,151 1,792 601 113 – – – 143 2,034 2,195 – – 33 6,242 4,400 – – – 5,088 3,109 – – 570 – – 11,404 4 – – 3,783 379 49 6,047 51,398 20,082 11,783 4,372 10,675 8,197 11,974 4,166 89,359 713 1,470 298 209 – – 47 2,302 89 664 – – 110 582 232 1,034 – – 340 11,745 – – 7,791 5,130 – – – – 997 – 997 13,223 54,557 5,033 2,516 8,900 5,130 89,359 50,949 4,657 2,690 3,102 1,958 25,006 2,801 117 (311) (968) (1,639) – – – 53,750 4,774 2,379 (8,175) (374) 1,993 2,134 8,541 319 25,006 997 89,359 7,878 (13,032) 3,169 (8,175) (8,549) (6,556) 1,985 9,863 (3,169) – Euro m Euro m Euro m Euro m Euro m Euro m Euro m (1,045) (598) 724 3,997 2,136 (6,431) 1,835 (1,045) (1,643) (919) 3,078 5,214 (1,217) 618 US $m US $m US $m US $m US $m US $m US $m (1,998) (179) 317 3,184 2,889 (3,857) (1,998) (2,177) (1,860) 1,324 4,213 356 116 472 Stg m Stg m Stg m Stg m Stg m Stg m Stg m (2,955) (196) 139 1,555 2,963 (2,812) 819 (2,955) (3,151) (3,012) (1,457) 1,506 (1,306) (487) PLN m PLN m PLN m PLN m PLN m PLN m PLN m (1,382) (196) 744 (173) (86) (113) 248 (1,382) (1,578) (834) (1,007) (1,093) (1,206) (958) 107107 Notes to the accounts 54 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 outflow 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 and financial investment Net decrease/(increase) in debt securities Net decrease/(increase) in equity shares Additions to tangible fixed assets Disposals of tangible fixed assets Net cash inflow/(outflow) from capital expenditure (d) Acquisitions and disposals Acquisition of Group undertakings Investments in associated undertakings Disposals of investments in associated undertakings Net cash (outflow)/inflow from acquisitions and disposals (e) Financing Issue of ordinary share capital Redemption of subordinated liabilities Issue of subordinated liabilities Issue of reserve capital instrument Redemption of preference shares Net cash (outflow)/inflow from financing 54(h) (f ) Analysis of changes in cash At 1 January Net cash inflow/(outflow) before the effect of exchange translation adjustments Effect of exchange translation adjustments At 31 December 54(g) 2002 € m (126) (8) (4) (138) (85) (195) (280) 1,506 10 (179) 42 1,379 (1) (5) 1 (5) 27 (247) 100 – (9) (129) 2,652 362 (283) 2,731 2001 € m (108) (17) (6) (131) (72) (170) (242) 904 94 (328) 30 700 (59) (1) 1 (59) 23 (311) – 496 – 208 2000 € m (150) (20) (14) (184) (82) (117) (199) (2,763) (67) (237) 63 (3,004) – (4) 6 2 15 – 149 – – 164 2,222 377 53 2,652 3,130 (1,016) 108 2,222 108108 54 Consolidated cash flow statement (continued) (g) Analysis of cash Cash and balances at central banks Loans and advances to banks (repayable on demand) 2002 € m 1,176 1,555 2,731 2001 € m 1,175 1,477 2,652 Change in year € m 1 78 79 The Group is required to maintain balances with the Central Bank of Ireland which amounted to € 1,039m (2001: € 399m). 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 € 53m (2001: € 34m). Share capital(1) 2002 € m 2001 Restated € m Subordinated liabilities 2001 Restated € m 2002 € m Non-equity minority interests 2001 2002 € m € m 2,217 (45) 27 13 (1) 2,211 2,165 15 23 14 – 2,217 2,516 (199) (147) – 2 2,172 2,249 80 185 – 2 2,516 121 (19) (9) – – 93 114 7 – – – 121 (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 (1)Includes share capital and share premium. 55 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 that 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 2002 its members were: Mr. Lochlann Quinn (Chairman), Mr. Dermot Gleeson (from 1 November), Mr. Derek A Higgs, Mr. John B McGuckian and Mr. Jim O’Leary (from 1 June).The Committee has a wide remit which includes, inter alia, determining, under advice to the Board, the specific remuneration packages of the executive directors. 109109 Notes to the accounts 55 Report on directors’ remuneration and interests (continued) Remuneration Executive directors Frank P Bramble Michael Buckley Gary Kennedy Non-executive directors Adrian Burke Padraic M Fallon Dermot Gleeson Don Godson Derek A Higgs John B McGuckian Carol Moffett Jim O’Leary Lochlann Quinn Michael J Sullivan Former directors Pensions(6) Other payments(7) Total Fees(1) Salary Bonus(2) € 000 € 000 € 000 Profit share(3) € 000 Taxable benefits(4) € 000 Pension contributions(5) € 000 236 539 296 1,071 – 250 125 375 – 13 10 23 4 52 45 101 9 29 29 67 80 31 88 41 69 83 41 37 216 57 743 666 57 30 753 – – – – – – – – – – – 2002 Total € 000 915 940 535 2,390 80 31 88 41 69 83 41 37 216 57 743 106 487 593 3,726 110110 55 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 29 29 24 29 43 811 502 144 282 380 154 2,119 – – – – – – – 9 9 9 9 21 65 18 37 16 36 157 65 31 45 46 43 75 43 1 207 16 572 619 80 23 42 59 823 – – – – – – – – – – – 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 Jim O’Leary Lochlann Quinn Michael J Sullivan Former directors Pensions(6) Other payments(7) Total 2001 Total € 000 1,480 685 218 399 507 3,289 65 31 45 46 43 75 43 1 207 16 572 103 364 467 4,328 (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 or Deputy 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 60% of annual salary, except that the bonus for Mr. Frank P Bramble, former Chief Executive, USA Division, ranged from 0% to 160% of annual salary. (3) Information on the employees’ profit sharing schemes, which are operated on terms approved by the shareholders, is given in note 45. (4) Taxable benefits include the use of a company car or the payment of a car allowance, and benefit arising from loans made at preferential interest rates.Taxable benefits also include 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.The pension benefits earned during the year, and accrued at year-end (or date of retirement, if earlier), are as follows: 111111 Notes to the accounts 55 Report on directors’ remuneration and interests (continued) Remuneration (continued) Increase in accrued benefits during 2002(a) € 000 Accrued benefit at year-end(b) € 000 Executive directors Frank P Bramble Michael Buckley Gary Kennedy Non-executive directors Padraic M Fallon John B McGuckian 9 1 10 0.4 0.06 375 285 57 11 17 Transfer values(c) € 000 85 15 84 4 0.7 (a)Increases are after adjustment for inflation, and reflect additional pensionable service and earnings. (b)Figures represent the accumulated total amounts of accrued benefits payable at normal retirement dates, as at 31 December 2002 and as at actual retirement date in respect of Mr. Bramble. (c)Figures show the transfer values of the increases in accrued benefits during 2002. 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 2002, 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 (a) payments by Allfirst Financial Inc. (‘Allfirst’) of € 169,060 to Mr Frank P Bramble following his retirement from the Board; these payments comprised (i) salary of € 98,096 for the period from his retirement from the Board on 19 April 2002 up to 31 May 2002, and (ii) pension funding costs of € 70,396 and taxable benefits of € 568 for that period; (b) remuneration of € 280,474 paid to Mr Jeremiah E Casey under the terms of a post-retirement consultancy contract approved by shareholders at the 1999 Annual General Meeting (2001: € 296,634), and (c) payments of € 37,950, in aggregate, to two former directors who served on the boards of subsidiary companies (2001: € 67,760 to one such director). Interests in shares The beneficial interests of the directors and secretary in office at 31 December 2002, and of their spouses and minor children, are as follows: Ordinary Shares Directors: Michael Buckley Adrian Burke Padraic M Fallon Dermot Gleeson Don Godson Derek A Higgs Gary Kennedy John B McGuckian Carol Moffett Jim O’Leary Lochlann Quinn Michael J Sullivan Secretary: W M Kinsella 112112 31 December 2002 1 January 2002 177,610 10,642 8,377 12,056 25,099 5,000 26,776 67,557 13,125 – 420,055 700 176,605 10,642 8,148 2,000 25,099 5,000 25,355 66,113 15,675 – 314,588 700 14,674 13,897 55 Report on directors’ remuneration and interests (continued) 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.The exercise of options granted between 1 January 1996 and 31 December 2000 is conditional on the achievement of earnings per share (‘EPS’) growth of at least 2% per annum, compound, above the increase in the Consumer Price Index (‘CPI’) over a period of not less than three and not more than five years from date of grant.The exercise of options granted since 1 January 2001 is conditional on the achievement of EPS growth of at least 5% per annum, compound, above the increase in the CPI over a period of not less than three and not more than five years from date of grant.The percentage of share capital that 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 below; additional information in relation to the Share Option Scheme, in which non-executive directors do not participate, is given in note 45. 31 December 2002 1 January 2002 Since 1 January 2002 Exercised Granted Price of options exercised Market price at date of exercise Weighted average subscription price of options outstanding at 31 December 2002 Directors: Michael Buckley Gary Kennedy Secretary: W M Kinsella 281,500 155,000 216,500 105,000 65,000 50,000 65,000 60,000 5,000 – – – € – – – € – – – € 10.77 9.71 9.26 The options outstanding at 31 December 2002 are exercisable at various dates between 2003 and 2012. Details are shown in the Register of Directors’ and Secretary’s Interests, which may be inspected by shareholders at the Company’s Registered Office. Long Term Incentive Plan Under the terms of the Long Term Incentive Plan approved by shareholders at the 2000 Annual General Meeting, awards of shares may be granted to key executives and other employees (see note 45). These awards will not vest in the award holders unless (a) the growth in the Company’s EPS, as defined in the Rules of the Plan, in any three consecutive years within the five years following the grant is not less than the growth in the CPI plus 5% per annum, compound, over the same three year period; and (b) the growth in the Company’s core EPS, as defined in the Rules of the Plan, over the three year period during which the criterion at (a) is satisfied, is such as to position the Company in the top 20% of the FTSE Eurotop Banks Retail Index. Partial vesting, on a reducing scale, will occur if the growth in the Company’s core EPS positions the Company outside the top 20% of that Index but still within its top 45%, subject to the criterion at (a) being satisfied.Vested shares must be held until normal retirement date, except that award holders may dispose of shares sufficient to meet the income tax liability arising on vesting. 113113 Notes to the accounts 55 Report on directors’ remuneration and interests (continued) Long Term Incentive Plan (continued) The following conditional grants of awards of ordinary shares have been made under the terms of the Plan: Directors: Michael Buckley Gary Kennedy Secretary: W M Kinsella Total as at 31 December 2002 Granted during 2002 Total as at 1 January 2002 38,000 20,000 20,000 10,000 18,000 10,000 4,500 4,500 – Apart from the interests set out above, the directors and secretary and their spouses and minor children have no interests in the shares of the Company. The year-end market price, on the Irish Stock Exchange, of the Company’s ordinary shares was € 12.86 per share; during the year the price ranged from € 10.92 to € 15.70 per share. There were no changes in the above interests between 31 December, 2002 and 18 February, 2003. Service contracts There are no service contracts in force for any director with the Company or any of its subsidiaries. 56 Transactions with directors Loans to non-executive directors are made in the ordinary course of business on normal commercial terms, while loans to executive directors are made on terms applicable to other employees in the Group, in accordance with established policy. At 31 December 2002 the aggregate amount outstanding in loans to persons who at any time during the year were directors was € 42.8m in respect of 6 persons; the amount outstanding in respect of quasi-loans (effectively, credit card facilities), to 6 persons, was € 0.03m (2001: € 42.8m in respect of loans to 7 persons and € 0.07m in respect of quasi-loans to 7 persons). 114114 57 Commitments Capital expenditure Estimated outstanding commitments for capital expenditure not provided for in the accounts amounted to € 49m (2001: € 69m). Capital expenditure authorised, but not yet contracted for, amounted to € 90m (2001: € 152m). 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. 58 Employees The average full-time equivalent employee numbers by division were as follows: AIB Bank ROI AIB Bank GB & NI USA Capital Markets Poland Group 2002 € m 3 14 35 52 Property 2001 € m Equipment 2001 € m 2002 € m 3 18 33 54 – 2 – 2 – 1 – 1 2002 2001 9,935 3,050 5,885 2,492 9,946 735 32,043 9,548 2,909 5,912 2,213 11,100 715 32,397 59 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. 60 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. 61 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 co-existed with the euro, as denominations of the new single currency until 31 December 2001. Euro notes and coin were introduced on 1 January 2002. 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 cent, denoted by the symbol ‘c’ in these accounts. 115115 Notes to the accounts 62 Financial and other information Operating ratios Operating expenses(1)/operating income Tangible operating expenses(3)/operating income Other income(4)/operating income Net interest margin: Group Domestic Foreign Rates of exchange € /US $ Closing Average € /Stg £ Closing Average € /PLN Closing Average 2002 2001 Restated 58.6% 57.8% 40.2% 3.00% 2.73% 3.27% 1.0487 0.9458 0.6505 0.6282 4.0210 3.8473 (2) (2) (2) 59.9% 59.0% 39.8% 2.99% 2.59% 3.34% 0.8813 0.8947 0.6085 0.6198 3.4953 3.6573 (1)Excludes restructuring costs of € 13.3m in 2002 and integration costs of € 38.2m in 2001. (2)Adjusted to exclude the impact of the exceptional foreign exchange dealing losses in 2001. Including the exceptional foreign exchange dealing losses, operating expenses/operating income was 77.1%, tangible operating expenses/operating income was 74.8% and other income/operating income was 23.8%. (3)Excludes amortisation of goodwill of € 31.7m (2001: € 30.9m) and restructuring/integration costs of € 13.3m (2001: € 38.2m). (4)Other income includes other finance income. Capital adequacy information Risk weighted assets Banking book: On balance sheet Off-balance sheet Trading book: Market risks Counterparty and settlement risks Total risk weighted assets Capital Tier 1 Tier 2 Supervisory deductions Total 116116 2002 € m 2001 € m 53,961 11,521 65,482 3,099 658 3,757 54,839 10,854 65,693 2,897 268 3,165 69,239 68,858 4,806 2,522 7,328 341 6,987 4,479 2,759 7,238 294 6,944 62 Financial and other information (continued) Currency information Euro Other 2002 € m 38,307 47,742 Assets 2001 € m 35,966 53,393 2002 € m 38,697 47,352 86,049 89,359 86,049 Liabilities 2001 € m 35,356 54,003 89,359 63 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 2002 and 2001.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. 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 3,388 1,884 23,530 26,369 26,918 28,253 – 744 9,850 9,311 1,895 1,280 38,663 39,588 78,251 (956) 8,962 Year ended 31 December 2002 Average rate % Interest € m 103 81 1,360 1,573 1,463 1,654 – 12 401 550 115 73 1,979 2,289 4,268 3.0 4.3 5.8 6.0 5.4 5.9 – 1.6 4.1 5.9 6.1 5.7 5.1 5.8 5.5 Average balance € m 3,441 2,041 21,210 25,026 24,651 27,067 – 93 8,886 11,558 1,880 1,458 35,417 40,176 75,593 (939) 9,560 Year ended 31 December 2001 Average rate % Interest € m 138 117 1,390 2,051 1,528 2,168 – 2 432 784 119 90 2,079 3,044 5,123 4.0 5.7 6.6 8.2 6.2 7.9 – 2.7 4.9 6.8 6.3 6.2 5.9 7.6 6.8 Total assets 86,257 4,268 4.9 84,214 5,123 6.1 Percentage of assets applicable to foreign activities 51.6 53.3 (1)Loans to customers include money market funds. Non-accrual loans and loans classified as problem loans are also included within this caption. 117117 Notes to the accounts 63 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 2002 Year ended 31 December 2001 Average balance € m Interest € m Average rate % Average balance € m Interest € m Average rate % 1,044 1,588 – 65 116 52 1,160 1,705 2,865 3.8 4.9 – 3.8 6.1 6.6 4.0 4.9 4.5 31,005 30,326 – 1,489 1,642 682 32,647 32,497 65,144 10,764 5,182 285 253 4,629 837 935 – 24 85 36 922 995 1,917 2.7 3.1 – 1.6 5.2 5.3 2.8 3.1 2.9 27,285 32,519 – 1,694 1,906 788 29,191 35,001 64,192 9,578 4,996 298 253 4,897 Total liabilities and stockholders’ equity 86,257 1,917 2.2 84,214 2,865 3.4 Percentage of liabilities applicable to foreign activities 50.0 53.7 64 Supplementary Group financial information for US reporting purposes Exceptional foreign exchange dealing losses As set out in note 9(b), in accordance with Irish Generally Accepted Accounting Principles (IR GAAP) the total costs arising from the fraud in Allfirst Treasury have been reflected by way of an exceptional charge of € 789 million (after tax € 513 million) in the accounts for the year ended December 31, 2001. Under US reporting requirements, the filing of AIB’s 2001 financial statements by way of Annual Report on Form 20-F constituted a reissue of the financial statements for prior years.The US Securities and Exchange Commission requires all material errors in respect of prior years to be accounted for and reported as prior year adjustments, in the years in which they occurred. Accordingly, in AIB’s Annual Report on Form 20-F for December 2001, the Fraud Losses were charged in the years in which they occurred and this approach has been reflected in the financial information provided in this note. 118118 64 Supplementary Group financial information for US reporting purposes (continued) Exceptional foreign exchange dealing losses (continued) The losses arising from the fraud occurred over a number of years. Reflecting the losses in the periods in which they arose would have the following impact on reported amounts for 2002 and prior periods. (Decrease)/increase in income before taxes (Decrease)/increase in income tax expense (Decrease)/increase in reported net income 2002 € m (28) (10) (18) 2001 € m 378 132 246 2000 € m (228) (80) (148) 1999 € m (45) (16) (29) 1998 € m (11) (4) (7) 1997 € m (24) (8) (16) Alternative presentation of consolidated statements of income As outlined above, under US reporting requirements the losses arising from the fraud would be reflected in the Group figures in the years in which the losses arose.The following alternative presentation of consolidated statements of income reflects this approach. Net interest income(2) Deposit interest retention tax Net interest income Other income, including other finance income(3) Exceptional foreign exchange dealing losses Total operating income Total operating expenses Group operating income before provisions Provisions Group operating income Income from associated undertakings Income on disposal of property Income on disposal of business Income before taxes, preference dividends and minority interests Applicable taxes Equity and non-equity minority interests in subsidiaries Dividends on non-equity shares Consolidated net income under alternative presentation 2002 € m 2,351 – 2,351 1,579 (18) 3,912 2,328 1,584 251 1,333 9 5 – 1,347 296 1,051 24 8 32 1,019 2001 Restated(1) € m 2,258 – 2,258 1,493 (417) 3,334 2,278 1,056 204 852 4 6 93 955 187 768 23 15 38 730 2000 € m 2,022 (113) 1,909 1,375 (228) 3,056 1,997 1,059 134 925 3 5 – 933 239 694 38 20 58 636 (1)The figures for 2001 have been restated to reflect the interest cost of the Reserve Capital Instruments as interest expense rather than ‘Dividends on non-equity shares’ in accordance with UITF 33. (2)Excluding charge in respect of DIRT in 2000 (note 6). (3)Excluding exceptional foreign exchange dealing losses in all years (note 9(b)). 119119 Notes to the accounts 64 Supplementary Group financial information for US reporting purposes (continued) Alternative presentation of consolidated balance sheet Reflecting the losses in the period in which they arose would have had the following impact on consolidated ordinary stockholders’ equity, consolidated total assets and consolidated total liabilities.The losses had no impact on consolidated ordinary stockholders’ equity, consolidated total assets and consolidated total liabilities for the year ended 31 December 2002. Consolidated ordinary stockholders’ equity 2001 € m 2000 € m 1999 € m 1998 € m 1997 € m Ordinary stockholders’ equity as in the consolidated balance sheet Adjustments: Cumulative impact of recognition of losses in year they occurred Consolidated ordinary stockholders’ equity under 4,851 4,944 4,460 2,829 2,299 20 (210) (58) (23) (17) alternative presentation 4,871 4,734 4,402 2,806 2,282 Consolidated total assets Total assets as in the consolidated balance sheet Adjustments: Other assets 89,359 80,543 67,959 53,875 48,004 – (323) (89) (36) (26) Consolidated total assets under alternative presentation 89,359 80,220 67,870 53,839 47,978 Consolidated total liabilities and ordinary stockholders’ equity Total liabilities and ordinary stockholders’ equity as in the consolidated balance sheet 89,359 80,543 67,959 53,875 48,004 Adjustments: Expense accruals Other liabilities Ordinary stockholders’ equity (11) (9) 20 – (113) (210) – (31) (58) – (13) (23) – (9) (17) Consolidated total liabilities and ordinary stockholders’ equity under alternative presentation 89,359 80,220 67,870 53,839 47,978 120120 64 Supplementary Group financial information for US reporting purposes (continued) Alternative presentation of consolidated balance sheet (continued) The following consolidated balance sheet illustrates this presentation. 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 less allowance for loan losses Securitized assets Debt securities Equity shares Interests in associated undertakings Intangible assets Property and equipment Own shares Other assets Deferred taxation Prepayments and accrued income Pension assets Long-term assurance business attributable to stockholders Long-term assurance assets attributable to policyholders Total assets Liabilities and stockholders’ equity Deposits by banks Customer accounts Debt securities in issue Other liabilities Accruals and deferred income Pension liabilities Provisions for liabilities and charges Deferred taxation Subordinated liabilities Minority equity and non-equity interests in consolidated subsidiaries Non-equity stockholders interests Ordinary stockholders’ equity Long-term assurance liabilities to policyholders Total liabilities and stockholders’ equity 2001 € m 1,175 1,536 49 6,047 51,216 182 20,082 332 10 495 1,305 245 1,260 417 2,080 372 304 87,107 2,252 89,359 13,223 54,557 5,033 3,263 2,148 117 71 717 2,516 312 279 4,871 87,107 2,252 89,359 2000 € m 938 1,116 297 4,193 45,880 166 18,986 412 8 466 1,127 177 1,322 247 1,835 671 238 78,079 2,141 80,220 12,478 48,437 4,295 2,966 1,684 46 43 611 2,249 272 264 4,734 78,079 2,141 80,220 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 Under IR GAAP, debt and equity securities held for investment purposes are stated in the balance sheet at amortized cost less provision for any impairment 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.These are classified as financial fixed assets. In preparing its US GAAP information, the Group has applied SFAS No. 115 ‘Accounting for Certain Investments in Debt and Equity Securities’. 121121 Notes to the accounts 64 Supplementary Group financial information for US reporting purposes (continued) Summary of significant differences between Irish and United States accounting principles (continued) Under US GAAP, debt securities held to maturity are recorded at amortized cost. 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 € 13,446 million at December 31, 2002 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, 2002 the market value of such securities was € 13,690 million.The excess of market value over amortized cost of the debt securities of € 244 million gave rise to an after tax reconciling item of € 199 million positive in the consolidated ordinary stockholders’ equity for US GAAP purposes. Under US GAAP, at December 31, 2001 debt securities in the amount of € 16,299 million would be classified as ‘available-for-sale’. The Group uses these securities to minimise the risk associated with the AIB investment portfolio. At December 31, 2001 the market value of such securities was € 16,468 million.The excess of market value over amortized cost of the debt securities of € 169 million, gave rise to an after tax reconciling item of € 125 million positive in the consolidated ordinary stockholders’ equity for US GAAP purposes. Under US GAAP, at December 31, 2000 debt securities in the amount of € 16,645 million would be classified as ‘available-for-sale’. The Group uses these securities 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 amortized 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. Under US GAAP, at December 31, 2002 equity securities classified as financial fixed assets in the Group balance sheet in the amount of € 188 million would be classified as ‘available-for-sale’. At December 31, 2002 the market value of these securities was € 203 million. The excess of book amount of these securities over market value was € 15 million giving rise to an after tax reconciling item of € 13 million positive in the consolidated ordinary stockholders’ equity for US GAAP purposes. Under US GAAP, at December 31, 2001 equity securities classified as financial fixed assets in the Group balance sheet in the amount of € 283 million would be classified as ‘available-for-sale’. At December 31, 2001 the market value of these securities was € 283 million. There was no adjustment to the consolidated ordinary stockholders’ equity for US GAAP purposes as the book amount equaled the market value of these securities. Under US GAAP, 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 these securities was € 358 million. The excess of book amount of these securities over market value was € 6 million gave rise to an after tax reconciling item of € 4 million negative 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. Under IR GAAP, profits and losses on disposal of these debt securities are deferred and amortized 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 pages 45 and 46. 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 with gains or losses being recognized in the consolidated net income statement. From January 1, 2001 the adjustment for internal derivative trades is included with the Derivatives FAS 133 adjustment. 122122 64 Supplementary Group financial information for US reporting purposes (continued) Summary of significant differences between Irish and United States accounting principles (continued) FAS 133 - Derivatives and hedging activities Under IR GAAP, the Group uses derivatives for both trading and hedging purposes.The accounting treatment for these derivative instruments is dependent on whether they are entered into for trading or hedging purposes. Trading instruments are recognized 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 recognized in the accounts in accordance with the accounting treatment of the underlying transactions being hedged. Gains and losses arising from hedging activities are amortized to net interest income over the lives of the underlying transactions. Under US GAAP, all derivatives are recognized as either assets or liabilities in the statement of financial position and measured at fair value.The recognition of the changes in the fair value of a derivative depends upon its intended use. Derivatives that do not qualify for hedging treatment must be adjusted to fair value through earnings. If certain conditions are met, a derivative may be specifically designated as (a) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows of a forecasted transaction, or (c) a hedge of the foreign currency exposure of a net investment in a foreign operation, an unrecognized firm commitment, an available-for-sale security, or a foreign currency denominated forecasted transaction.The accounting for changes in the fair value of a derivative depends on the intended use of the derivatives and the resulting designations. In adopting Statement of Financial Accounting Standard No. 133,“Accounting for Derivative Instruments and Hedging Activities” (‘FAS 133’) in its US GAAP reconciliation from January 1, 2001, AIB Group designated its derivative instruments anew for US reporting purposes on that date.The transition adjustment arising from this action was reflected in net income and other comprehensive income. Revaluation of property Under IR GAAP, property may be carried at either original cost or subsequent valuation less related depreciation, calculated where applicable on the revalued amount. Under US GAAP, revaluations are not permitted to be reflected in the financial statements. Deferred taxation Under IR GAAP, deferred taxation is recognized in full in respect of timing differences that have originated but not reversed at the balance sheet date. Under US GAAP, 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. Goodwill Under IR GAAP, 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. Goodwill arising after January 1, 1998 is capitalized and written off over its useful life, up to a maximum of 20 years. Under US GAAP, with effect from January 1, 2002, due to the introduction of FAS 142 “Goodwill and Other Intangible Assets”, goodwill is not amortized but retained at its value and reviewed for impairment. Core deposit intangibles Under US GAAP, the 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. Core deposits arising after January 1, 1998, are subsumed within goodwill and amortized over its useful life up to a maximum of 20 years. Under US GAAP, capitalized core deposit intangibles are amortized 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. Long-term assurance policies Under IR GAAP, the shareholders’ interest in the long-term assurance business represents a valuation of the investment in policies in force together with the net tangible assets of the business. 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 123123 Notes to the accounts 64 Supplementary Group financial information for US reporting purposes (continued) Summary of significant differences between Irish and United States accounting principles (continued) Long-term assurance policies (continued) business, acquisition costs are amortized 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 Under IR GAAP, AIB records proposed dividends on ordinary shares, which are declared after period end, in the period to which they relate. Under US GAAP, dividends are recorded in the period in which they are declared. Dividends on non-equity shares Under IR GAAP, AIB records dividends on non-equity shares in the profit and loss account on an accruals basis. Under US GAAP, dividends are recorded as a charge against ordinary stockholders’ equity in the period in which they are declared. Acceptances Under IR GAAP, the Group presents acceptances as a contingent liability in a footnote to the financial statements. In the US, acceptances outstanding are presented as a liability, with an equal amount presented as an asset, ‘customers’ acceptance liability’. Retirement benefits Under IR GAAP, the expected return on pension assets, net of the interest cost on pension liabilities, is credited to other finance income while the service cost is charged to other administrative expenses. Actuarial gains and losses are recognized through the statement of total recognized gains and losses. Scheme assets are valued at fair value and scheme liabilities are measured using the projected unit method.The net scheme assets and liabilities, reduced by deferred tax amounts are shown on the face of the balance sheet. Under US GAAP, certain assumptions primarily in relation to the recognition of actuarial gains and losses and amortization methods are used that are different when compared with IR GAAP. Own shares purchased Under IR GAAP, own shares purchased are recorded at cost and reflected as fixed asset investments in the consolidated balance sheet. Under US GAAP, own shares purchased are recorded at cost and reflected as a reduction to the consolidated ordinary stockholders’ equity. Internal use computer software Under IR GAAP, certain specific costs incurred in respect of software for internal use can be capitalised and amortized. 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 IR GAAP.These costs are being depreciated on a straight line basis over five years. Transfer and servicing of financial assets Under IR GAAP, where a transaction involving a previously recognized asset transfers to others (a) all significant rights or other access to benefits relating to that asset and (b) all significant exposure to the risks inherent in those benefits, the entire asset should cease to be recognized. Under US GAAP, an entity de-recognizes financial assets where control has been surrendered and de-recognizes liabilities where they are extinguished. Control passes where the following criteria have been met: (a) the assets are isolated from the transferor (the seller) i.e. the assets are beyond the reach of the transferor, even in bankruptcy or other receivership, (b) the transferee (the buyer) has the right - free of any conditions that constrain it from taking advantage of the right - to pledge or exchange the assets, and (c) the transferor does not maintain effective control over the transferred assets. Special purpose vehicles Under IR GAAP, special purpose vehicles are consolidated as quasi-subsidiaries where risks and rewards from operations are similar to those which would be obtained for subsidiaries. Under US GAAP, consolidation of an entity by its sponsor, the party at whose initiative the entity is activated, is required if the entity’s powers and activities are not strictly limited, and the entity does not have sufficient legal equity in form held by parties other than the sponsor or its affiliates. Interest earned on the assets held in the special purpose vehicles has been entirely offset by the interest expense and management fees of the special purpose vehicles. 124124 64 Supplementary Group financial information for US reporting purposes (continued) Summary of significant differences between Irish and United States accounting principles (continued) Reconciliation of alternative presentation to US GAAP The Group financial statements conform with accounting principles generally accepted in Ireland.The following tables provide the significant adjustments to the alternative presentation of 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 under alternative presentation (page 119) Adjustments in respect of: Depreciation of freehold and long leasehold property Long-term assurance policies Goodwill Premium on core deposit intangibles Retirement benefits Dividends on non-equity shares Securities held for hedging purposes Derivatives hedging available-for-sale securities Internal derivative trades Internal use computer software Derivatives FAS 133 transition adjustment(1) Derivatives FAS 133 adjustment Deferred tax effect of the above adjustments Year ended December 31 2002 2001 Restated 2000 (millions except per share amounts) € 1,019 € 730 € 636 2 (27) 4 (5) (5) 8 (3) – – 1 – (82) 17 5 (48) (110) (7) 53 15 (24) – – 6 122 (107) (5) – (70) (78) (9) 94 20 (25) (9) (6) 11 – – 7 Net income in accordance with US GAAP Net income applicable to ordinary stockholders of AIB in accordance with US GAAP Equivalent to € 929 € 921 US $ 966 € 630 € 615 € 571 € 551 Income per American Depositary Share (ADS*) in accordance with US GAAP € 2.12 € 1.43 € 1.29 Equivalent to Year end exchange rate €/US $ US $ 2.22 1.0487 *An American Depositary Share represents two ordinary shares of € 0.32 each. Comprehensive income Net income in accordance with US GAAP Net movement in unrealized holding gains on investment securities arising during the period Derivatives FAS 133 transition adjustment(1) Exchange translation adjustments Comprehensive income 2002 € 929 84 – (480) Year ended December 31 2001 Restated (millions) € 630 120 41 214 2000 € 571 110 – 233 € 533 € 1,005 € 914 (1)Cumulative effect of the change in accounting principle for derivatives and hedging activities. 125125 Notes to the accounts 64 Supplementary Group financial information for US reporting purposes (continued) Consolidated ordinary stockholders’ equity Ordinary stockholders’ equity as in the consolidated balance sheet 2002 2001 2000 (millions except per share amounts) under alternative presentation (page 120) Revaluation of property Depreciation of freehold and long leasehold property Goodwill Core deposit intangibles Dividends payable on ordinary shares Dividends on non-equity shares Long-term assurance policies Unrealized gains/(losses) 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 Derivatives FAS 133 adjustment 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 Total assets as in the consolidated balance sheet under alternative presentation (page 120) 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 Derivatives FAS 133 adjustment Retirement benefits Internal use computer software Own shares Special purpose vehicles Long-term assurance policies Long-term assurance assets attributable to policyholders Securitized assets Acceptances Total assets in accordance with US GAAP Equivalent to 126126 € 4,408 (201) (27) 925 12 284 1 (263) 244 15 – (4) – (79) 1,012 18 (176) (206) € 5,963 US $ 6,254 € 13.37 US $ 14.02 € 9.88 US $ 10.37 € 4,871 (204) (27) 1,070 19 250 1 (236) 169 – – (1) – 5 77 17 (245) (50) € 5,716 € 4,734 (210) (27) 1,097 26 221 – (188) 16 (6) (63) 26 (10) – (476) 11 (177) 76 € 5,050 € 12.98 € 11.56 € 11.06 € 10.84 2002 2001 2000 € 86,049 (201) (27) 925 12 244 15 – – (79) 1,012 18 (176) 1,057 (263) (2,226) – 72 € 86,432 US $ 90,642 (millions) € 89,359 (204) (27) 1,070 19 169 – – – 5 77 17 (245) 667 (236) (2,252) – 142 € 88,561 € 80,220 (210) (27) 1,097 26 16 (6) (63) (10) – (476) 11 (177) – (188) (2,141) (3) 147 € 78,216 64 Supplementary Group financial information for US reporting purposes (continued) Consolidated total liabilities and ordinary stockholders’ equity 2002 2001 2000 Total liabilities and ordinary stockholders’ equity as in the consolidated balance sheet under alternative presentation (page 120) Ordinary stockholders’ equity Dividends payable on ordinary shares Dividends on non-equity shares Acceptances Securities held for hedging purposes Securitized assets Debt securities in issue re special purpose vehicles Deferred taxation Long-term assurance liabilities to policyholders (millions) € 89,359 845 (250) (1) 142 1 – 667 50 (2,252) € 80,220 316 (221) – 147 (26) (3) – (76) (2,141) € 86,049 1,555 (284) (1) 72 4 – 1,057 206 (2,226) Total liabilities and stockholders’ equity in accordance with US GAAP € 86,432 € 88,561 € 78,216 Equivalent to US $ 90,642 Statement of changes in ordinary stockholders’ equity 2002 2001 2000 Opening balance Net income Dividends payable on ordinary shares Dividends on non-equity shares Issue of shares Unrealized gains on debt securities and equity shares held as available-for-sale FAS 133 transition adjustment Own shares Exchange translation adjustments Other movements Closing balance 65 Approval of accounts The accounts were approved by the board of directors on 18 February 2003. € 5,716 929 (396) (8) 115 84 – 69 (480) (66) € 5,963 (millions) € 5,050 630 (351) (15) 60 120 41 (68) 214 35 € 5,716 € 4,420 571 (302) (20) 105 110 – (55) 233 (12) € 5,050 127127 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. The directors consider that, in preparing the accounts on pages 42 to 127, which have been prepared on a going concern basis, the Company and the Group have, following discussions with the auditors, used appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates, and that all accounting standards which, following discussions with the auditors, 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. * Note: KPMG have signalled that they will be raising with us the need for this paragraph, which they believe is not part of the ‘standard’ wording used by other plcs and is, in their view, unique to AIB 128128 Independent auditors’ report Independent Auditors’ Report to the Members of Allied Irish Banks, p.l.c. We have audited the financial statements on pages 42 to 127. This report is made solely to the Company’s members, as a body, in accordance with section 193 of the Companies Act, 1990. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose.To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of directors and auditors The directors are responsible for preparing the Annual Report. As described on page 128, this includes responsibility for preparing the financial statements in accordance with applicable Irish law and accounting standards. Our responsibilities, as independent auditors, are established in Ireland by statute, the Auditing Practices Board, the Listing Rules of the Irish Stock Exchange, and by our profession’s ethical guidance. We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Acts. As also required by the Acts, we state whether we have obtained all the information and explanations we require for our audit, whether the Company’s balance sheet is in agreement with the books of account and report to you our opinion as to whether: – the Company has kept proper books of account; – the Report of the Directors is consistent with the financial statements; – at the balance sheet date a financial situation existed that may require the company to hold an extraordinary general meeting, on the grounds that the net assets of the Company, as shown in the financial statements, are less than half of its share capital. We also report to you if, in our opinion, information specified by law regarding directors’ remuneration and transactions is not disclosed. We review whether the statement on pages 37 to 40 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, 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 form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures. We read the other information contained in the Annual Report, including the Corporate Governance Statement, and consider whether it is consistent with the audited financial statements.We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. 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 financial statements. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group’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 financial statements 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 financial statements. 129129 Independent auditors’ report (continued) Opinion In our opinion, the financial statements give a true and fair view of the state of affairs of the Group and the Company as at 31 December 2002 and of the profit of the Group for the year then ended and have been properly prepared in accordance with the Companies Acts, 1963 to 2001 and all Regulations to be construed as one with those Acts. We have obtained all the information and explanations we considered necessary for the purposes of our audit. In our opinion, proper books of account have been kept by the Company and proper returns, adequate for the purposes of our audit, have been received from branches not visited by us.The balance sheet of the Company is in agreement with the books of account. In our opinion, the information given in the Report of the Directors on pages 35 to 36 is consistent with the financial statements. The net assets of the Company, as stated in the balance sheet on page 50, are more than half of the amount of its called up share capital and, in our opinion, on that basis there did not exist at 31 December 2002 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. Chartered Accountants Registered Auditors Dublin 18 February 2003 Notes: a.The maintenance and integrity of the Allied Irish Banks, p.l.c. website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements or audit report since they were initially presented on the website. b.Legislation in the Republic of Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. 130130 Accounts in sterling, US dollars and Polish zloty Summary of consolidated profit and loss account for the year ended 31 December 2002 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 2002 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 Long-term assurance liabilities to policyholders € m 1,612 251 1,361 9 5 1,375 306 1,069 1,037 429 119.4c 123.0c 118.2c STG £m STG £0.6505 = € 1 US $m US $1.0487 = € 1 PLN m PLN 4.0210 = € 1 1,048 163 885 6 3 894 199 695 675 279 77.7p 80.0p 76.9p 1,690 263 1,427 10 5 1,442 321 1,121 1,088 450 125.2¢ 129.0¢ 124.0¢ 6,482 1,009 5,473 37 20 5,530 1,232 4,298 4,170 1,726 480.1 PLN 494.6 PLN 475.3 PLN € m Stg £m US $m PLN m 4,788 53,447 18,450 457 1,178 5,503 3,115 34,767 12,002 297 766 3,580 5,022 56,050 19,349 479 1,235 5,770 19,254 214,911 74,188 1,836 4,736 22,127 2,226 1,448 2,334 8,950 86,049 55,975 90,239 346,002 16,137 52,976 3,077 4,544 2,172 274 4,643 2,226 10,497 34,461 2,002 2,955 1,413 178 3,021 1,448 16,923 55,556 3,227 4,765 2,278 287 4,869 2,334 64,886 213,018 12,373 18,268 8,734 1,102 18,671 8,950 86,049 55,975 90,239 346,002 131131 Five year financial summary 2002 Summary of consolidated US $m profit and loss account(1) 2,466 Net interest income before exceptional item – Deposit interest retention tax 2,466 Net interest income after exceptional item 65 Other finance income 1,590 Other income before exceptional item – Exceptional foreign exchange dealing losses 4,121 Total operating income after exceptional items 2,431 Total operating expenses 1,690 Group operating profit before provisions 263 Provisions 1,427 Group operating profit 10 5 – Income from associated undertakings Profit on disposal of property Profit on disposal of business 1,442 Group profit before taxation 321 Taxation on ordinary activities Impact of phased reduction in Irish corporation tax rates on deferred tax balances – 321 25 8 Dividends on non-equity shares Equity and non-equity minority interests 2002 € m 2,351 – 2,351 62 1,517 – 3,930 2,318 1,612 251 1,361 9 5 – 1,375 306 – 306 24 8 2001 Restated € m 2,258 – 2,258 67 1,426 (789) 2,962 2,284 678 204 474 4 6 93 577 55 – 55 23 15 Group profit attributable to the ordinary 1,088 shareholders of Allied Irish Banks, p.l.c. 1,037 484 450 Dividends on equity shares 2.4 Dividend cover – times 125.2¢ 129.0¢ 124.0¢ Earnings per € 0.32 share – basic Earnings per € 0.32 share – adjusted Earnings per € 0.32 share – diluted 2002 Summary of consolidated US $m balance sheet(1) 90,239 Total assets 61,332 Total loans 75,706 Total deposits 1,350 Dated capital notes 408 Undated capital notes 520 Reserve capital instruments Equity and non-equity minority interests in subsidiaries Shareholders’ funds: non-equity interests Shareholders’ funds: equity interests 287 246 4,623 7,434 Total capital resources 429 2.4 119.4c 123.0c 118.2c 2002 € m 86,049 58,483 72,190 1,287 389 496 274 235 4,408 7,089 380 1.3 56.2c 119.4c 55.9c 2001 € m 89,359 57,445 72,813 1,594 426 496 312 279 4,851 7,958 Year ended 31 December 1998 1999 € m 1,770 – 1,770 71 1,052 – 2,893 1,658 1,235 92 1,143 3 2 15 1,163 333 – 333 28 16 786 288 2.7 92.5c 93.5c 91.6c € 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 2000 € m 2,022 (113) 1,909 71 1,304 – 3,284 1,997 1,287 134 1,153 3 5 – 1,161 319 – 319 38 20 784 335 2.3 91.6c 106.7c 91.0c Year ended 31 December 1998 € m 1999 € m 2000 € m 80,543 50,239 65,210 1,836 413 – 272 264 4,944 7,729 67,959 43,127 55,241 1,587 397 – 227 245 4,460 6,916 53,875 35,496 44,840 970 170 – 213 210 2,829 4,392 (1) The financial data in the above tables and the supplementary tables on page 133 reflects the implementation of FRS 17 - Retirement benefits (‘FRS 17’) in each of the years 1999 to 2002. FRS 17 was implemented in the preparation of the Accounts for 2001 with restatement of 2000 and 1999. It was not practicable to restate the earlier years as the data was not available. 132132 Other financial data Return on average total assets(1) 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(1) Tier 1 capital ratio Total capital ratio 2002 % 1.24 22.4 41.4 5.4 1.6 3.00 6.9 10.1 2001 Restated % 2000 % (2) (2) 0.62 9.9 78.5 5.8 1.9 2.99 6.5 10.1 1.12(3) 16.7(3) 42.7 6.3 1.9 3.02 6.3 10.8 Year ended 31 December 1998 1999 % 1.36 20.9 36.6 6.1 1.9 3.27 6.4 11.3 % (4) 1.28 25.4(4) 37.9 4.7 1.8 3.33 7.5 11.1 (1)The 2001 amounts have been restated to reflect the implementation of UITF Abstract 33 - Obligations in Capital Instruments. (2)Excluding the impact of the exceptional foreign exchange dealing losses, the return on average total assets was 1.23% and the return on average ordinary shareholders’ equity was 19.4%. (3)Excluding the impact of the deposit interest retention tax settlement, the return on average total assets was 1.26% and the return on average ordinary shareholders’ equity was 18.7%. (4)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%. 2001 Restated € 2000 € Year ended 31 December 1998 1999 € € US $ Supplementary information for US investors Per American Depositary Share (ADS):(1) 2.46 Net income per alternative presentation (note 64)(2) 1.04 Dividend(4) – Tax credit on dividend(5) 10.37 Net assets per alternative presentation (note 64) Amounts in accordance with US GAAP: 974m Net income(2) 966m Net income attributable to ordinary stockholders 2.22 Net income per ADS 14.02 Net assets per ADS 90,642m Total assets 6,254m Ordinary stockholders’ equity 2002 € 2.35 0.98 – 9.88 1.70 0.88 – 11.06 929m 921m 2.12 13.37 630m 615m 1.43 12.98 86,432m 88,561m 5,963m 5,716m 1.49(3) 0.78 – 10.84 571m(6) 551m(7) 1.29(8) 11.56 78,216m 5,050m 1.78 0.68 – 10.23 663m 647m 1.52 10.27 65,929m 4,420m 1.48 0.56 0.07 6.57 650m 633m 1.49 8.80 53,603m 3,761m (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)The 2001 amounts have been restated to reflect the implementation of UITF Abstract 33 - Obligations in Capital Instruments. (3)€ 1.73 (US$ 1.61) when adjusted to exclude the impact of the deposit interest retention tax settlement. (4)The actual dividend payable to US stockholders will depend on the €/US $ exchange rate prevailing. (5)For dividends payable after 5 April 1999 the tax credit is zero. (6)€ 674m (US$ 628m) when adjusted to exclude the impact of the deposit interest retention tax settlement. (7)€ 654m (US$ 609m) when adjusted to exclude the impact of the deposit interest retention tax settlement. (8)€ 1.53 (US$ 1.42) 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(1) Return on average ordinary stockholders’ equity Dividend payout ratio Average ordinary stockholders’ equity 2002 % 2001 Restated % 2000 % Year ended 31 December 1998 1999 % % 1.11 15.80 46.6 0.79 11.25 61.7 0.83(2) 11.33(2) 60.7 1.15 15.27 44.4 1.25 17.90 37.7 as a percentage of average total assets 6.78 6.61 6.65 7.06 6.68 (1)The 2001 amounts have been restated to reflect the implementation of UITF Abstract 33 - Obligations in Capital Instruments. (2)Excluding the impact of the deposit interest retention tax settlement, the return on average total assets was 0.97% and the return on average ordinary shareholders’ equity was 13.30%. 133133 Principal addresses Ireland & Britain Group Headquarters Bankcentre, PO Box 452, Ballsbridge, Dublin 4, Ireland. Telephone + 353 1 660 0311 http://www.aibgroup.com AIB Bank (ROI) Bankcentre, Ballsbridge, Dublin 4. Telephone + 353 1 660 0311 Facsimile + 353 1 283 0490 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, Belmont Road, Uxbridge, Middlesex UB8 1SA. Telephone + 44 1895 272 222 Facsimile + 44 1895 239 774 AIB Finance & Leasing Sandyford Business Centre, Blackthorn Road, Sandyford, Dublin 18. Telephone + 353 1 660 3011 Facsimile + 353 1 295 9779 aibfinl@aib.ie Ark Life Assurance Company Limited 8 Burlington Road, Dublin 4. Telephone + 353 1 668 1199 Facsimile + 353 1 637 5737 info@arklife.ie 134 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 AIB Global Treasury 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/Govett Investments Management Limited Shackleton House, 4 Battle Bridge Lane, London SE1 2HR. Telephone + 44 207 378 7979 Facsimile + 44 207 638 3468 email@govett.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 International Financial Services Limited AIB International Centre, IFSC, Dublin 1. Telephone + 353 1 874 0777 Facsimile + 353 1 874 3050 Goodbody Stockbrokers Ballsbridge Park, Ballsbridge, Dublin 4. Telephone + 353 1 667 0400 Facsimile + 353 1 667 0422 AIB Corporate Banking Bankcentre, Ballsbridge, Dublin 4. Telephone + 353 1 660 0311 Facsimile + 353 1 668 2508 corporatebanking@aib.ie AIB Corporate Finance Limited 85 Pembroke Road, Ballsbridge, Dublin 4. Telephone + 353 1 667 0233 Facsimile + 353 1 667 0250 AIB Irish Capital Management Limited 85 Pembroke Road, Ballsbridge, Dublin 4. Telephone + 353 1 668 8860 Facsimile + 353 1 668 8831 AIB/BNY Securities Services (Ireland) Limited Guild House, Guild Street, IFSC, Dublin 1. Telephone + 353 1 641 8500 Facsimile + 353 1 829 0833 Corporate Business Britain St Helen’s, 1 Undershaft, London EC3A 8AB. Telephone + 44 207 090 7100 Facsimile + 44 207 090 7101 Principal addresses (continued) USA Poland Rest of the World Allied Irish Bank 405 Park Avenue, New York, NY 10022. Telephone + 1 212 339 8000 Facsimile + 1 212 339 8008 AIB Capital Markets Banking New York 405 Park Avenue, New York, NY 10022. Telephone + 1 212 339 8000 Facsimile + 1 212 339 8008 AIB Global Treasury 405 Park Avenue, New York, NY 10022. Telephone + 1 212 339 8000 Facsimile + 1 212 339 8006 Bank Zachodni WBK S.A. Rynek 9/11, 50-950 Wroclaw. Telephone + 48 71 370 1000 Facsimile + 48 61 856 4015 Bank Zachodni WBK S.A. Poznanskie Centrum Finansowe, Plac Andersa 5, 61-894 Poznan. Telephone + 48 61 856 4900 Facsimile + 48 61 856 4015 AIB European Investments (Warsaw) Sp. z o.o. Krolewska Building, 4th floor, ul.Marszalkowska 142, 00-061 Warsaw. Telephone + 48 22 586 8002 Facsimile + 48 22 586 8001 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 720 711 AIB Frankfurt Oberlindau 5, D-60323, Frankfurt am 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 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). 135 Additional information for shareholders 1. Internet-based Shareholder Services Ordinary Shareholders with access to the internet may – check their shareholdings on the Company’s Share Register; – check recent dividend payment details; and – download standard forms required to initiate changes in details held by the Registrar, by accessing AIB’s website at www.aibgroup.com, clicking on the ‘Check your Shareholding’ option, and following the on-screen instructions.When prompted, the Shareholder Reference Number (shown on the shareholder’s share certificate, dividend counterfoil and personalised circulars) should be entered. Alternatively, these services may be accessed via the Registrar’s website at www.computershare.com. Shareholders may also use AIB’s website to access the Company’s Annual Report & Accounts. 2. 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. 3. 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 4. 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 3 above). 5. Dividend Reinvestment Plan - Ordinary Shareholders The Company operates a Dividend Reinvestment Plan, under which shareholders are usually offered the right to elect to receive new shares in lieu of cash in respect of their dividends. 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 140. 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. 136136 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 Irish tax legislation. 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, Government Offices, Nenagh, Co.Tipperary, Ireland. Telephone +353-67-33533. Facsimile +353-67-33822. E-mail infodwt@revenue.ie. General With certain exceptions, which include dividends received by non-resident shareholders who have furnished valid declaration forms (see below), dividends paid by Irish resident companies are subject to DWT at the standard rate of income tax, currently 20%. 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).Therefore, Plan participants who are subject to DWT 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 paid, whether in the form of cash or as new shares, to 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 either for offset against their income tax liability, or for repayment, where it exceeds the total income tax liability. – 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 (see below), 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’); - Certain permanently incapacitated persons who are exempt from income tax; trusts established for the benefit of such persons; and Thalidomide victims exempt from income tax in respect of income arising from the investment of certain compensation payments. Copies of the relevant declaration form may be obtained from the Company’s Registrar at the address shown at 3 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 a shareholder 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. 137137 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 resident in a relevant territory and controlled by a non-Irish resident/residents; (d) 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 (e) 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, and: – 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 (i) a certificate signed by the trustee(s) showing the name and address of each settlor and beneficiary; and (ii) a certificate from the Irish Revenue Commissioners, certifying that they have noted the information provided by the trustees. – Categories (c), (d) and (e) above: The company’s auditor must certify the declaration. In addition, in the case of companies in category (c) above, the declaration must be certified by the tax authority of the country in which the shareholder is resident for tax purposes. 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. In accordance with the requirements of legislation, this information is also furnished to the Irish Revenue Commissioners. 138138 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 (‘BONY’), 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 BONY or the intermediary concerned, as the case may be, 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 Note:The following information, which is given for the general guidance of ADR holders, does not purport to be a definitive guide to relevant taxation provisions.While it is believed to be accurate at the time of publication of this Report, ADR holders should take professional advice if they are in any doubt about their individual tax positions. 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 withholding 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 140; (ii) the holder’s Registered Broker, where applicable; or (iii) the holder’s financial/taxation adviser. 139139 Additional information for shareholders (continued) Shareholder Accounts % Number Number 12,911,155 92,503,131 93,067,216 107,508,381 591,456,636 Shares % 2 10 10 12 66 42 39 14 5 – 100 897,446,519 100 62 38 297,646,738 599,799,781 100 897,446,519 33 67 100 37,238 34,530 12,837 4,265 396 89,266 55,749 33,517 89,266 Shareholding analysis as at 31 December 2002 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: Thursday, 24 April 2003 Dividend payment dates – Ordinary Shares: – Final Dividend 2002 - 25 April 2003 (Share Certificates posted to Dividend Reinvestment Plan Participants - 1 May 2003) – Interim Dividend 2003 - 26 September 2003 Interim results: Unaudited interim results for the half-year ending 30 June 2003 will be announced on 30 July 2003.The Interim Report for the half-year ending 30 June 2003 will be published as a press advertisement shortly thereafter, instead of being posted to shareholders. It will also be available on the Company’s website - www.aibgroup.com. 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 ‘Check your Shareholding’ 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.adrbny.com or Allfirst Shareholder Relations Telephone 1-800-458-0348 Email: ann.l.kerman@allfirst.com 140140 Index A Accounting policies Accounts D 42 42 Dealing profits Debt securities Accounts in sterling, US dollars, etc. 131 Debt securities in issue Acquisition of strategic stake Deferred taxation in M&T 17 & 53 Deposit interest retention tax Administrative expenses Amortisation of goodwill Amounts written off fixed asset investments Approval of accounts Associated undertakings 60 60 60 127 76 Deposits by banks Depreciation Derivatives Directors Directors’ interests Directors’ remuneration Audit Committee 7 & 38 Dividend income Auditors Auditors’ remuneration Average balance sheets and interest rates 36 63 117 Dividends Divisional commentary E Earnings per share Employees 49 Equity shares B Balance sheet C Capital management Cash flow statement Central government bills Chairman’s statement Class actions Commitments Contingent liabilities and commitments Corporate Governance Statement 25 51 & 108 66 4 96 F Fair value Financial and other information 115 Financial calendar Financial highlights Financial review Five year financial summary 95 37 71 87 81 59 85 60 33 & 97 6 112 109 59 65 19 66 115 74 103 116 140 1 25 132 115 Credit risk 27 & 69 Form 20-F Critical accounting policies Customer accounts 10 86 G Group Chief Executive’s Review 8 I 59 & 100 Independent auditors’ report Intangible fixed assets Integration costs Interest payable Interest rate sensitivity Internal control L Liquidity risk Loans and advances to banks Loans and advances to customers Long-term assurance business 129 79 60 59 106 39 30 67 68 82 M Market risk Minority interests 27, 29 & 30 65 & 90 O Operational risk 27 & 29 Other interest receivable Other finance income Other liabilities Other operating income Outlook Own shares 58 59 87 60 18 80 141141 Exchange rates 10 & 116 N Exceptional foreign exchange Nomination and Remuneration dealing losses 59 & 118 Committee 7, 38 & 109 Index (continued) P Performance review Principal addresses Profit and loss account Profit and loss account reserves Profit on disposal of business Profit retained Prospective accounting developments Provisions for bad and S Securitised assets Segmental information Share capital Share premium account Shareholder information Shares in Group undertakings 10 134 47 94 63 65 70 53 91 93 136 77 Social Affairs Committee 7 & 38 18 Statement of Directors’ Responsibilities 128 16 & 52 89 79 15 & 64 114 53 118 doubtful debts 14 & 70 Statement of total recognised gains Provisions for liabilities and losses and charges 88 Subordinated liabilities R T Reconciliation of movements Tangible fixed assets in shareholders’ funds Report of the Directors Reporting currency Repurchase of ordinary shares Reserves Restructuring costs Retirement benefits Risk Governance 52 35 Taxation Transactions with directors 115 Turnover 94 93 60 61 26 U US reporting purposes – Supplementary Group financial information 142142 AIB Group Bankcentre PO Box 452 Dublin 4 Ireland Telephone +353 (0) 1 660 0311 www.aibgroup.com 

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