Allied Irish Bank
Annual Report 2014

Plain-text annual report

Annual Financial Report 2014 For the year ended 31 December 2014 Allied Irish Banks, p.l.c. AIB Description AIB is a financial services group operating predominantly in the Republic of Ireland and the UK. We provide a comprehensive range of services to personal, business and corporate customers in our target markets and have leading market shares in banking products in the Republic of Ireland. AIB’s business has been restructured in recent years with the aim of becoming a customer focused, profitable and lower risk institution, well positioned to support economic recovery in Ireland while seeking to generate sustainable shareholder returns. Contents 2014 Financial Summary Chairman’s statement Chief Executive Officer’s review Our strategy Our customers Governance at a glance Corporate Social Responsibility Business review Operating and financial review Comprehensive assessment Capital management Risk Management Principal risks and uncertainties Framework Individual risk types Governance and oversight The Board and Executive Officers Report of the Directors Schedule to Report of the Directors Corporate Governance statement Remuneration report Supervision and Regulation Financial statements Statement of Directors’ responsibilities Independent Auditor’s Report Accounting policies Critical accounting judgements and estimates Consolidated financial statements Notes to the consolidated financial statements Parent company financial statements Notes to the parent company financial statements General information Shareholder information Glossary of terms Principal addresses Index Annual Financial Report 2014 Page 3 4 6 11 15 20 24 28 44 45 51 60 158 161 163 167 189 190 218 223 230 326 332 57 179 185 193 381 382 387 388 Important Information and Forward Looking Statement Important Information and Forward Looking Statement Important Information – Valuation AIB has 523,438,445,437 (excluding 35,680,114 treasury shares) ordinary shares in issue, c. 99.8% of which are held by the Ireland Strategic Investment Fund (ISIF), mainly following the issue of 500 billion ordinary shares to the National Pension Reserve Fund Commission (the predecessor to the ISIF) at €0.01 per share in July 2011. Based on the number of ordinary shares currently in issue and the closing share price of 3 March 2015, AIB trades on a valuation multiple of c. 6x (excluding the 2009 Preference Shares) the net asset value (NAV) of the Group as at 31 December 2014. The Group continues to note that the median for comparable European banks is c.1x NAV. Forward-looking statement This document contains certain forward-looking statements with respect to the financial condition, results of operations and business of AIB Group and certain of the plans and objectives of the Group. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements sometimes use words such as ‘aim’, ‘anticipate’, ‘target’, ‘expect’, ‘estimate’, ‘intend’, ‘plan’, ‘goal’, ‘believe’, ‘may’, ‘could’, ‘will’, ‘seek’, ‘continue’, ‘should’, ‘assume’, or other words of similar meaning. Examples of forward-looking statements include, among others, statements regarding the Group’s future financial position, capital structure, Government shareholding in the Group, income growth, loan losses, business strategy, projected costs, capital ratios, estimates of capital expenditures, and plans and objectives for future operations. Because such statements are inherently subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking information. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward- looking statements. These are set out in the Principal Risk and Uncertainties on pages 51 to 56 in the 2014 Annual Financial Report. In addition to matters relating to the Group’s business, future performance will be impacted by Irish, UK and wider European and global economic and financial market considerations. Any forward-looking statements made by or on behalf of the Group speak only as of the date they are made. The Group cautions that the list of important factors on pages 51 to 56 of the 2014 Annual Financial Report is not exhaustive. Investors and others should carefully consider the foregoing factors and other uncertainties and events when making an investment decision based on any forward-looking statement. 2 2014 Financial Summary Operating performance Profit before tax €1,111m €2,798m Return to profitability from higher income, lower costs and reduced provisions. In addition to a strong underlying profitable performance, the impact of €437 million of income from balance sheet actions and realisations, together with the net charge of exceptional items of €233 million is included in the reported profit before tax. Net interest margin(1) 1.69% 32bps Continuing positive momentum in NIM mainly driven by lower interest earning assets and lower costs of funding those assets. Pre-provision operating profit(2) Operating expenses(2) €1,127m €673m Positive contribution from business segments through 2014 with €956 million from Irish operations and €171 million from the UK. €1,403m 5% Cost reductions in line with expectation. €67 million reduction on 2013 and €345 million (20%) lower than 2012. Total income(2) €2,530m €606m Significant increase in net interest income of €342 million (lower funding costs and ELG charge) and other income of €264 million (gains on disposal of AFS securities and loans along with re-estimating cashflows on NAMA bonds). Credit provision writeback €185m €2,101m 2014 net writeback of €185 million compared to a net charge of €1,916 million in 2013 reflecting level of debt restructuring and economic improvement with a reduction in new impairments. Balance Sheet / Capital Common equity tier 1 ratio(3) Monetary authority funding Loan to deposit ratio(4) 16.4% 1.4% €3.4bn €9.3bn 99% 1% Capital position remains robust with the improvement mainly due to retained profits in the year and lower risk weighted assets. Significant reduction in ECB funding which now accounts for 3% of AIB’s total funding requirement, down from 12% in 2013. Loan to deposit ratio in line with 2013 as net loans reduced €2.3 billion, while customer accounts reduced €1.7 billion. Provision coverage ratio(5) 51% 55% Dec 2013 Reduction driven by write-off of provisions within portfolios with higher provision cover and writebacks from restructuring. Impaired loans €22.2bn €6.7bn Reduction reflecting debt restructuring activity during the year which included structuring sustainable solutions for customers, write-offs and repayments partly offset by new impaired loans. Liquidity coverage ratio 116% 105% Dec 2013 Improvement of 11% since 2013 mainly driven by increased high quality liquid assets and retail deposits. (1)Net interest margin excluding eligible liabilities guarantee (“ELG”) charge. (2)Before exceptional items. Exceptional items are detailed on page 29. (3)Common equity tier 1 (“CET 1”) transitional capital ratio. (4)Customer accounts includes repos of €2.2 billion. (5)Specific provisions as a percentage of impaired loans. 3 Annual Financial Report 2014“The 2014 results demonstrate the significant progress made in the recovery of AIB. Rebuilding public confidence and trust in the bank is paramount. Our focused leadership team, dedicated workforce, clear strategy and improved risk governance will continue to progress us to that goal.” Chairman’s Statement Richard Pym Chairman 4 The 2014 results demonstrate the significant progress made in the recovery of AIB. They show a €1.1 billion profit before tax, a major improvement from a loss of €1.7 billion in 2013. In addition, during the year, the bank received approval for its Restructuring Plan from the EU Commission and also passed the Comprehensive Assessment of capital adequacy conducted by the ECB and the EBA. As a newcomer to AIB, I have been very impressed by what I have seen since I arrived in October 2014. In my introductory visits around the bank, I have met dedicated and enthusiastic colleagues who prioritise the needs of our customers. I have also seen how our leading digital products provide customers with easy access to banking facilities. Our customers have been very loyal to us during these last difficult years and we appreciate it. It is very encouraging to see how our measures of brand strength have improved during the year and there has also been a remarkable turnaround within the bank in colleague engagement. Chairman’s StatementThe Irish nation has been badly damaged by the past failings of its financial system. After a period of significant restructuring, AIB’s continued progress is supportive of economic recovery, and similarly the Group is benefiting from the improvement in Ireland’s growth. Continued constructive collaboration between the Government and the bank will serve to strengthen the national economy and benefit society as a whole. AIB remains deeply conscious of its debt to the Irish people and I want to reiterate our thanks for that immense support. Irish taxpayers have invested approximately €21 billion in AIB and we believe that investment will be returned over a period of time. Rebuilding public confidence and trust in the bank is paramount. Our focused leadership team, dedicated workforce, clear strategy and improved governance will continue to progress us to that goal. Richard Pym Chairman 4 March 2015 2014 was a landmark year for AIB, testimony to the transformative work of our outgoing Chief Executive, David Duffy, and his team. It is to his credit that in three years he led the bank’s turnaround and leaves behind a stable, profitable lender headed by a strong leadership team with a clear focus on customer experience, growth, and prudent risk management. David’s successor will be announced shortly and we look forward to continuing to drive ahead with AIB’s strategy under new leadership. I took over as Chairman when David Hodgkinson retired. David joined AIB in 2010 when the bank was in a very challenged position and he set about the task of rebuilding it. He was joined by David Duffy in 2011. Together they have made a huge contribution to AIB and we thank them both for their accomplishment. We also said goodbye to Tom Wacker and Dick Spring as non-Executive Directors of the Board of AIB. Tom left before I joined AIB and I enjoyed my brief time working with Dick Spring. He is a hugely experienced Irish public representative who brought the national interest into focus in Board discussions. We thank both Tom and Dick for their service on the Board over a number of years. AIB is 99.8% owned by the State, and the Department of Finance has commissioned preparatory work on the capital structure which, when completed, will enable the Government to determine if and when it disposes of any of its capital instruments or equity shareholding. It is entirely a matter for the Government to decide and the role of AIB is to ensure that the business is delivering its strategic objectives and medium term targets in order to achieve value for shareholders. 5 Annual Financial Report 2014Chief Executive’s Review “2014 saw AIB successfully execute its three year plan to deliver a bank that is sustainably profitable, adequately capitalised and appropriately funded. We have a strong momentum in our business and are committed to supporting our customers by understanding their needs, providing suitable solutions and serving them through our omni channel distribution model. We are focused on growing our lending to support the Irish economy and delivering sustainable returns for our shareholders.” Chief Executive’s Review Delivering our Strategic Objectives Introduction Three years ago we embarked on a challenging journey to transform AIB into a stable, customer focused, profitable organisation. Having established a track record of delivery over that period, 2014 was a milestone year for the bank. We achieved significantly improved financial results, and a material de-risking of the balance sheet, all while constantly maintaining focus on rebuilding our customers’ trust, improving customer service levels and strengthening our internal governance. Over a three year period we have delivered a c. €4.8 billion turnaround in the Group’s profit before tax. Returning to sustainable profitability in 2014 was a result of broad based improvements in all key areas and geographies of the business: growth in income, including improving Net Interest Margin (NIM); continued David Duffy Chief Executive 6 organisational efficiency; reducing loan impairments; and increased levels of new customer lending. The Group is now profitable again and, for the first time in a number of years, is generating capital which supports our ability to further increase our lending volumes. Approval of the Group’s Restructuring Plan by the EU Commission, and the successful completion of the ECB/ EBA’s Comprehensive Assessment during 2014, were important external validations of the Group’s long term strategy and the progress made to date in implementing an extensive change and restructuring programme. Although much has been achieved over the past three years, we recognise that we have more to do. Overall, the Group is now in a much stronger position to support our customers and the Irish economy as we move on to the next phase of our journey. We will measure our future success not just on what we do for customers, but how we conduct ourselves through our business decisions. Our strategic direction over the next number of years will be driven by that customer focus while managing regulatory and financial priorities and starting the process of returning capital to the State. Focused on Supporting our Customers We continue to align our customer strategy and propositions across the Irish and UK businesses and to seek appropriate lending opportunities. Following significant restructuring, and as a profitable organisation, we are focused on sustainable and prudent growth and are well positioned in the personal, business and corporate banking market segments in which we operate. The operating environment in Ireland and the UK improved steadily during 2014 and this has translated into tangible progress in growing our new lending volumes, particularly in the SME and Corporate sectors. Improved growth levels are also evident in the mortgage and personal lending markets. We approved over €13 billion in lending during 2014, c.37% higher than 2013, and customer drawdowns were c.50% higher year on year. We maintained our strong mortgage market share with c.33% of mortgage drawdowns in the Republic of Ireland in 2014. Transaction volumes in the market continued to increase, albeit from historically low levels. We have introduced a number of improvements to our customer proposition, including online mortgage application, dedicated mortgage advisors and competitive lending rates for new and existing customers. In support of the increased demand for housing in Ireland, we launched a €350 million New Homes Development fund in 2014. This fund was one of a number of sector specific funds launched by the group in support of our business customers. Overall lending drawdowns to SME and Corporate customers in Ireland and the UK were higher than 2013. Lending activity was higher across all the major sectors, in particular Agriculture, Wholesale/Retail Trade, Manufacturing and Tourism. This growth reflects the increased demand for credit as the economic environment improved, coupled with the successful implementation of our differentiated, sector specialist, customer engagement strategy. We have continued to invest in our omni channel customer strategy, namely the branch network, online, mobile and direct offerings to provide more convenient and accessible banking services for our customers. This differentiated service model includes increased innovation, technology and digitisation across our multiple distribution channels. Large numbers of our customers are migrating to mobile, internet and tablet banking and we offer an expanding range of online deposit and lending products. We remain focused on simplifying our structure to achieve cost and income benefits in the future, but importantly also to improve our customers’ experience. Adopting a fair and equitable approach to customers in difficulty is fundamental to maintaining good working relationships over time. We have developed and implemented a comprehensive range of sustainable solutions for our customers in mortgage arrears. The total number of accounts in arrears in the Irish residential mortgage portfolio declined by 18% in 2014 and significant numbers of AIB customers have 7 Annual Financial Report 2014Chief Executive’s Review been offered and accepted affordable and sustainable solutions. We have gained traction with our customer treatment strategies for SMEs as we seek to protect employment and viable businesses. We remain focused on reducing the substantial number of impaired loans that remain on the balance sheet. “Adopting a fair and equitable approach to customers in difficulty is fundamental to maintaining good working relationships over time.” Financial Performance Return to Sustainable Profitability Our financial performance in 2014 is the outcome of a significant number of measures undertaken since 2012, including improving our NIM and non interest income, reducing our cost base and resolving legacy asset quality issues. A number of these strategic objectives have been achieved ahead of plan. For the full year 2014, we reported a profit before tax of € 1.1 billion, a c.€ 2.8 billion improvement on the loss before tax in 2013. Excluding Eligible Liabilities Guarantee (ELG) costs, NIM increased to 1.69% for 2014 as funding costs reduced and asset yields held broadly stable. There were a number of specific transactions during the year, including disposals in the Available for Sale portfolio and asset disposals, which have had a positive impact on our performance. However, even when these items are excluded, the bank has returned to sustainable profitability. Overall operating income increased 31% year on year. 1 For further detail please see Glossary of terms on page 385 of this report. 8 Excluding exceptional items, we achieved our c.€0.35 billion operating cost reduction target in 2014, relative to 2012 levels. Cost discipline will remain an ongoing component of our strategy in 2015 and beyond as we implement the next phase of our transformation programme, and as we work towards achieving our medium term target of a cost income ratio of less than 50%. 2014 saw increasing stabilisation in the asset quality of our loan portfolios. Total impaired loans reduced by €6.7 billion or 23% during 2014 to €22.2 billion. This reduction reflects improving economic conditions, coupled with the significant restructuring activity completed for customers in difficulty. This has the dual benefit of reducing the legacy risk in the balance sheet and increasing the levels of performing loans. The underlying credit impairment charge is trending towards more normalised levels driven by a reduction in new impaired loans. This, together with the amount of customer loan restructuring achieved by our Financial Solutions Group (FSG) in an improving economic environment, has resulted in a net writeback of provisions for 2014. The solutions and customer engagement processes developed in FSG have gathered momentum and we expect the level of impaired loans to continue to reduce in 2015, subject to market conditions. However we will continue to adopt an approach in concluding these case by case restructuring solutions that is mutually beneficial for the Group and our customers. Our overall funding position continued to stabilise. Underlying customer accounts, excluding repos1, increased during 2014. A decline in the volume of repos was offset, in part, by an increase in customer current account volumes. The loan to deposit ratio was 99% at 31 December 2014 from 100% a year earlier. This change was due, in part, to a reduction in net loans, as redemptions continue to outstrip new lending despite the significant improvement in new lending volumes. Continued growth in new lending across our loan portfolio is a key priority for 2015, in line with a prudent and conservative risk appetite. The Group also benefited from the continuing repayment of NAMA Senior Bonds, the volume of which reduced during the year by 40% to €9.4 billion. Any future actions in respect of the Group’s capital structure will be subject to relevant regulatory and shareholder approvals where necessary. There is no definitive set of outcomes or completion date for these discussions. Relationship with the State The Group has received significant support from the State over the last number of years and is deeply cognisant of its responsibilities to generate value for the shareholder over time. The Group is now profitable and generating capital. AIB has paid c. €2.4 billion in fees and coupons since 2008 to the State. We remain focused on generating sustainable returns for our shareholders over time, subject to the financial performance of the Group and evolving regulatory and market capital requirements. Following the injections of capital into the group since 2009, the State holds 99.8% of the ordinary shares in the Group and therefore the significant majority of the value of the Group rests with the State. The day to day relationship between the Group and the State is governed by the March 2012 Relationship Framework document specified by the Minister for Finance. Following the approval of the EU Restructuring Plan in May 2014, the Group is now in a monitoring phase until December 2017 in relation to its performance against the commitments outlined in the plan. These commitments are in line with the Group’s existing operational plans and medium term targets. Further information on the EU Restructuring Plan is contained on page 317 of this report. Our successful and balanced return to the funding markets continued in 2014 with €1.0 billion in issuances and we have also broadened our funding base with €3 billion in additional sources of funds. We will continue to monitor market conditions and will access the funding markets when appropriate. We reduced our monetary authority funding to €3.4 billion at end 31 December 2014, from €12.7 billion a year earlier. Capital Our capital position strengthened over the year due to retained earnings and a 3% decline in risk weighted assets. Our transitional Common Equity Tier 1 (CET1) ratio increased to 16.4% and our fully loaded CET1 ratio, including the €3.5 billion 2009 Preference Shares, was 11.8%. The Group’s increasing capital levels are supportive of our aims to grow lending volumes to support our customers and Irish economic recovery. The Group expects to continue its discussions with the Department of Finance regarding the appropriate capital structure of the Group in the context of regulatory and market requirements. These discussions are currently focused on: • Options in relation to the €3.5 billion 2009 Preference Shares, including the possible conversion into ordinary shares of part or all of the Preference Shares. • Options in relation to the €1.6 billion Contingent Capital Notes which mature in July 2016. • A possible significant consolidation in the number of ordinary shares in issue given AIB currently has in excess of 523 billion ordinary shares in issue. Based on the closing share price on 3 March 2015, the bank trades on a valuation multiple of c. 6x (exluding the 2009 Preference Shares) the net asset value of the Group as at 31 December 2014. The Group continues to note that the median for comparable European banks is c. 1x NAV. 9 Annual Financial Report 2014 our staff. I would like to take this opportunity to thank them again for their continued commitment and service to our customers. Our ambition of becoming a leading consumer brand in Ireland will not be possible without their dedication and hard work. AIB’s staff have been central to our recovery and are key to our future. Acknowledgement Finally, I announced in January that I will be stepping down from my positions as CEO and Executive Director at the Group. My time at AIB has been immensely rewarding both professionally and personally. Having returned to profitability, received approval of the Group’s EU Restructuring Plan and passed the recent ECB/EBA Comprehensive Assessment, I believe now is the right time for a new CEO to lead the Group through the next phase of its recovery and growth and a multi-year process of returning capital to the State. The Board, leadership team and all members of staff have worked tirelessly to bring the Group back to a position of stability and growth and I am thankful for the support I have received. While a number of challenges lie ahead, I am confident that the Board and management are well placed to continue delivering on the Group’s strategic objectives. David Duffy Chief Executive Officer 4 March 2015 Chief Executive’s Review Outlook Economic conditions in AIB’s main markets of Ireland and the UK have continued to improve and this has positively impacted the performance of the Group. Having returned to profitability we are well placed to benefit from the expected increase in economic activity in the main markets in which we operate. However, we continue to face a number of challenges, including the requirement to reduce the size of our significant impaired loan portfolios, ensuring the Group’s capital structure is appropriate in the context of evolving regulatory and market requirements, the continued decline in net loan volumes, and pension scheme volatility. Additionally we have a challenging agenda which includes risk in execution of our strategy, including managing risks related to the recruitment and retention of key staff and expertise, while managing an industry wide challenge in ensuring robust IT systems. Global growth forecasts reflect a number of ongoing uncertainties, including the historically low interest rate environment, the uneven pace of economic output in the Eurozone and the outcome of geo-political events in Eastern Europe and the Middle East, which could impact on economic activity in AIB’s main operating markets. The Group will continue to focus on making steady progress towards reaching our medium term performance targets, while importantly improving service levels for our customers. We are seeking to prudently grow our business lending volumes while maintaining simplification of our operations and enhancing our customer proposition, both in the Irish and UK businesses. We believe we are well positioned from a capital and funding perspective to support our customers and the continued recovery in the Irish economy. Staff Over the past few years AIB has focused on building a culture that prioritises our customers in everything we do. Our progress to date and the implementation of the next phase of our strategy relies on the dedication of 10 Our Strategy Performance Momentum and Delivery to Date 2014 represented the final year of a 3 year strategic plan to return the bank to sustainable profitability. 2012 Restructuring of the business 2013 Focus on commercial agenda 2014 Growth & Profitability Customers and our People • We are lending more and our customer satisfaction rates are increasing • We have made significant improvements to our customer proposition • Our staff engagement levels have increased dramatically Our Business • We have returned to profitability and are generating capital • We have materially reduced provision charges and our total impaired loans have fallen significantly • We received approval of our Restructuring Plan from the EU in May 2014 • We successfully passed the ECB/EBA Comprehensive Assessment in October 2014 • We have made continued progress towards delivering our medium term targets Operating Income Operating Expenses (1) Profit/(loss) before taxation from continuing operations 2,530 1,924 1,424 2012 2013 2014 Loan to Deposit Ratio 115 100 99 €m 2,700 1,800 900 0 % 120 110 100 90 € m 1,800 1,200 600 0 € bn 30.0 25.0 20.0 15.0 1,748 1,470 1,403 2012 2013 2014 (1) Excluding exceptional items € m 2,000 1,000 (1,000) (2,000) (3,000) (4,000) 1,111 (1,687) (3,729) 2012 2013 2014 Impaired loans Transitional CET 1 ratio | Fully loaded CET 1 ratio (1) 29.4 28.9 22.2 16.4 15.0 11.8 10.5 % 18 12 6 0 01-Jan-14 Dec-14 01-Jan-14 Dec-14 (1)Based on full implementation of the Basel III CRD IV regulations and includes 2009 Preference Shares Dec -12 Dec -13 Dec -14 Dec -12 Dec -13 Dec -14 Current performance against our medium term targets Description Fully loaded CET1 Ratio Net Interest Margin Cost Income Ratio Credit Impairment Charge Loan to Deposit Ratio (1) As of 1 Jan 2014 Original Target >10% >2.00% <50% <65bps 100-120% 2013 10.5%(1) 1.37% 76% 224bps 100% 2014 11.8% 1.69% 55% (22bps) 99% Status Update On track On track On track On track On track 11 Annual Financial Report 2014Our Strategy Our Vision To be a customer driven bank, recognised as a leading consumer brand. Our Strategic Objectives Our three year strategy has delivered significant benefits to the bank and our customers. The next phase of our journey builds on the momentum we have achieved in our performance during those three years. Understand our customers’ needs Serve through our omni channel distribution model Strategic Objectives Continuously innovate to provide suitable solutions for customers Relentless delivery of simplification and digitisation Supporting economic recovery Prudently managing our balance sheet Progress towards medium term targets Enabled by increasing employee engagement We are investing in our people and propositions, including a sector specialist approach to lending to our SME and Corporate customers and the availability of dedicated mortgage advisors. We are recognising and adapting to new consumer behaviours in mobile and online, social media and channel blending preferences. This is an ongoing journey we are taking with our customers. Understanding our customers’ needs Strategic ambitions: • The right customer experience, first time and every time • Industry leading Net Promoter Scores® 1 Our customers are central to our strategy. Using analytics we seek to identify their needs. We are listening to the feedback from 50,000 individuals who took part in our Customer Experience Programme. We are using these insights and analytics to deliver personalised and tailored offerings and we are measuring our progress through our Net Promoter Scores. 1 The Net Promoter Score, or NPS® is a measurement programme that tracks AIB customers’ loyalty and advocacy. 12 Continuously innovate to provide suitable solutions for customers Serve through our omni channel distribution model Key strategic ambitions: Key strategic ambitions: • To be the leading Retail, SME and Corporate Bank in Ireland • Increase usage and integration of digital distribution channels • To become the No.1 challenger bank in Northern Ireland • Continue to build on our market leading mobile and online adoption rates • To be the best bank for owner-managed businesses in Great Britain • Provide tailored advisory services in our branch network By listening to our customers, we answer their needs by providing appropriate products and services, while seeking returns appropriate to the level of risk undertaken, on a sustainable basis. We aim to maintain our leading market shares in Ireland through propositions that differentiate in each of our personal, business and corporate banking customer segments. Our refreshed structure resulting in a simpler, lower risk bank, is intended to improve our customers’ experience of us. We have also reshaped our Corporate & Institutional Banking segment in our Irish business to better serve the needs of these customers. We believe we have a fair and equitable approach to resolving the issues experienced by our customers who are in financial difficulty, and offer them the most comprehensive set of resolution solutions in the market. Restructuring our impaired loan portfolio will focus on returning these customers to stability and integration into our core banking relationships portfolios. We want our customers to have seamless access to our banking services in whatever way they want. Our omni channel approach combines our physical branch network with online, mobile and direct offerings. It gives customers the latest technology, supported by improving service levels. Our innovative digital banking location, the “LAB”, allows us to test the latest digital technology in a live environment, learn lessons and implement them. In parallel, we are continuing to invest in our branch network, which remains central to our long term strategy. We are introducing new branch layouts, better designed to enhance our customers’ experience through people, processes and technology. “Complete Consistent Connected” 13 Annual Financial Report 2014 Our Strategy Relentless delivery of simplification and digitisation Summary Key strategic ambitions: • Continuously improve our customer experience • Deliver our medium term cost income ratio target of less than 50% Today AIB is a profitable bank, generating capital to meet our customers’ lending needs as they, in turn, help drive economic recovery. Looking ahead, we are well placed to support a growing economy, within the framework of a reformed governance structure and a prudent risk appetite. A simplified and more efficient AIB is better for our customers, our staff and ultimately our cost base. Our simplification and change agenda is broad based and continues to deliver an improved customer experience at a sustainable cost. Through our existing channels we offer a differentiated approach and are building on our market leading adoption rates as more customers engage with us online or through our mobile channel. The recent introduction of our innovative eMortgage application is one example of how we are enhancing and expanding our offerings. We have worked hard to reduce the risk profile of the Group, and to find solutions for our customers in difficulty. This remains a key focus for 2015 and beyond. Our staff are pivotal to our customer engagement strategy and are the foundation upon which the Group’s recovery is based. We want to achieve employee engagement scores at world class levels, building on the tangible progress made in 2014. We will continue to invest in our people and focus on their professional development to motivate and retain the talent required to deliver our vision and strategic priorities. Our change programme is being managed under the guidance and control of our Group Chief Operating Officer. Key initiatives will see us consolidate processing and servicing activities, promote greater resilience in our IT systems, and continued strategic sourcing. We want to constantly improve our customer experience, and these initiatives are designed to increase our speed to market on innovative customer propositions. While recognising that we have made significant progress in recent years, we have more to do. In 2015 and beyond, we will maintain a clear focus on those core priorities which underpin our ambition to be a leading consumer brand: innovating to meet our customers’ needs; driving integration across all of our channels; and relentlessly simplifying our processes. 14  Our Customers Customer centric brand values We are working hard to hold our customers at the heart of everything we do. An in-depth knowledge of the needs of our customers is a good starting place. It brings efficiency to how we drive and shape products and services that customers want. Acknowledging what our customers want focuses our activities and helps them experience a better bank. We are making good progress with this customer focus but recognise that we have more to do. T O U R CUSTOMER E R TOGETHER W T T E W E P U E WE A R E B L P M I S T I P E E K E W W E A (cid:31) RE BUILDING T R U S T A S FI R E A R E S T E M P O W E R I N G N D A PPRECIATIO N In AIB, our principal Brand Value is ‘we put our customers first.’ This has been developed by our people and our customers. We want our customers to have a superior experience in each and every interaction with us. This means that we are understanding our customers because we listen to them, recognise their financial needs and offer them solutions that meet those needs. We are embedding this in the culture of our organisation and making it visible in everything we do. The Voice of the Customer feedback from over 50,000 customers We sought feedback from over 50,000 of our customers in Ireland and the UK through our Customer Experience Programme. We have listened to our customers and as a result we are enhancing our interaction with them, creating and improving initiatives for them and giving them more choice and greater accessibility. 15 Annual Financial Report 2014 Our Customers This is a journey, and the good news is that we are making progress. The primary tool we use to measure the success of this programme is our Net Promoter Score®1. We want to improve these scores and we have seen real progress in what our customers have experienced in 2014. Tailored offerings for distinct customer segments and sectors We have enhanced our offerings for our different markets. Throughout 2014, we have undertaken distinct segment and sector initiatives which we believe are innovative and which improve our customers’ experience of us. Personal customers AIB’s goal is to be at the heart of our personal customers’ financial lives while delivering exceptional customer experience. We have strong market shares in products for our personal customers in Ireland and we provided 60,000 personal loans in 2014. These propositions combine suitable products with informed relationship management that reach them consistently through all our channels. Mortgages Car Loans Personal Loans Credit Cards No.1 or Joint No.1 Market Shares Main Current Accounts Deposits Regular Savings We increased our lending significantly to our personal customers in the second half of 2014 as consumer sentiment and general economic conditions improved. In the Republic of Ireland, we lent €0.4 billion to personal customers, an increase of 29% year on year. We focused on new initiatives to make the process seamless for customers, which included online fulfilment for personal loans with a decision within three hours. Youth market We are focused on having a leading presence in the student market. We updated and improved our proposition, including a larger presence on campus in 15 universities and colleges in Ireland and a new student loan facility to help with education expenses. 2014 was the 13th year of the AIB Build a Bank Challenge, a national competition for second level students to run their own school bank. The AIB Student Plus Account was awarded the best value student account by bonkers.ie, the price comparison website. Mortgages For most people, buying their home is the biggest financial transaction of their lives. AIB is proud to have a leading market share of mortgage drawdowns in the Republic of Ireland, which demonstrates our support to customers during this important time for them. We supported c. 16,000 customers in gaining mortgage approval in Ireland in 2014. We also reduced our standard variable interest rate and our fixed interest rate products for new and existing mortgage customers in Ireland in 2014. We want our customers to have access to specialist advice when making this important decision. We introduced mortgage advisors to our Irish branch network, who support customers throughout the mortgage application and approval process. The EBS brand re-emerged in 2014 with increased locations for mortgage consultations, including flexible meeting times to suit customers’ needs. AIB eMortgage is the first online mortgage application- to-approval proposition on the Irish market and it is gaining traction with our customers. 1 The Net Promoter Score, or NPS® is a measurement program that tracks AIB customers’ loyalty and advocacy. 16 AIB had a 33% market share of mortgage drawdowns in 2014 in Ireland with €1.3 billion in total drawdowns, a 34% increase on 2013. industry and business. In partnership with industry bodies we have continued to commission in-depth research reports. To support our customers, we have also hosted nationwide sector specific seminars. We have launched sector specific funds, including a €200 million Export Fund, €300 million Long Term Care Fund and a €350 million New Homes Development Fund. In addition, we launched a €500 million Agriculture Fund, underpinning our commitment to this sector. In response to feedback from our business customers, AIB has rolled out a series of other initiatives to support this customer segment, including our ‘Backing Brave’ programme. This programme includes credit decisions for SME loans up to €30,000 within 48 hours. We have also introduced a dedicated SME phone desk which operates extended business hours and to support new entrepreneurs we launched a Start-up Academy. In 2014 AIB approved €6.4 billion in business credit to the SME sector in Ireland, a 50% increase year on year. In the UK, AIB GB was awarded “Best Service from a Business Bank 2014” by Moneyfacts Awards. This is in recognition of its relationship management proposition together with a focus on its customer service. New and additional lending in AIB GB increased 63% year on year to circa £1.3 billion. This underlines our focus on lending to the business market and our target market of owner managed businesses. In direct response to listening to the ‘voice of our SME customers’ in Northern Ireland we introduced two business funds, the Business Support Fund and the Owner Managed Fund. Mortgage drawdowns in First Trust Bank in Northern Ireland increased by 42% year on year following an expansion of our suite of mortgage products. Business customers No.1 Bank for Start-ups c. 15,500 SME customer start-ups supported in 2014 Joint No.1 Bank for main current account No.1 Bank for main loans No.1 Bank for main leasing agreement No.1 Bank for credit cards AIB is committed to actively supporting economic recovery and job creation. We are doing this by backing entrepreneurs, early start-ups and established SMEs. AIB has embedded its sectoral led approach, providing customers with leading sector specialists who understand the challenges and opportunities of their 17 Annual Financial Report 2014Our Customers Corporate customers Customers in financial difficulties We continue to develop and strengthen our relationships with corporate and institutional customers by providing sectoral expertise, tailored financial solutions and a premium customer service. Our sector specialist corporate banking teams work closely with our Customer Treasury Service and specialist product teams to ensure that we continue to strongly support our customers as well as the Irish economy. We provide a range of financing solutions to our customers from senior debt and working capital solutions through to mezzanine and equity finance. In 2014, including the UK, lending to Corporate customers increased by 57% year on year. The reshaping of our Corporate & Institutional Banking segment at the beginning of 2015 will enhance our mid-market and corporate offering and allow the UK and Irish businesses to collaborate more closely on opportunities. Leading position in Irish banking market No. 1 bank to the Foreign Direct Investment (FDI) market. Awarded ‘Deal of the Year’ for the second consecutive year in the Loans & Financing Category of the Finance Dublin Magazine awards. We work with our customers who are in financial difficulty and help them bring stability and certainty to their situation. This has been a key area of focus during 2014. The Financial Solutions Group (FSG) has approximately 1,600 skilled staff dedicated to resolving the issues of customers in difficulty, who are further supported by their colleagues in the wider AIB branch network AIB seeks to consensually resolve mortgage and SME arrears cases with customers who engage with the bank, based on an assessment of affordability. In support of our strategy the Group has developed what we believe is the most comprehensive suite of sustainable mortgage arrears solutions in the Irish market. We have further supported this agenda by establishing and funding a customer engagement channel in partnership with a consumer debt advocacy organisation that provides independent third party representation. This service is available free to customers in Ireland in mortgage difficulty. While we have much more to do to help our customers, this approach is working, with arrears in AIB’s Republic of Ireland mortgage portfolio down 18% in 2014. Significant progress is also evident in SME restructuring and we have developed and deployed a comprehensive customer treatment strategy for SME customers in difficulty with business and non-core connected debt. We have met or exceeded all of our restructuring targets in 2014. The approach being taken in FSG to restructuring the debt of our customers in difficulty is fundamental to the AIB strategy of maintaining our relationship with our customers as they recover. Importantly the success of this strategy can be measured by the number of customers who have been offered and accepted affordable and sustainable solutions. Continuing to work with our customers in difficulty remains a key priority for the Group. 18 ATMs Branches Tablet Banking Internet Banking Mobile Banking Phone Banking Community Bank Omni channel delivery AIB has an omni channel customer strategy which focuses on customer convenience and consistency. We are the leading Irish bank in driving mobile banking uptake and transaction automation. We are developing our capabilities across channels, putting technology to work for customers to interact with our banking services at a time and through a channel that works for them. In 2014, customers continued to adopt our digital channels. Significant numbers of our customers in Ireland are active on AIB’s online services, including c.520 000 active mobile users and c.100,000 active tablet users. Our customers completed 33 million transactions online in 2014 across internet, tablet, mobile and IBB. In our branch network, through ongoing adoption of technology, we have given customers a new way to bank with us through our ‘quick banking’ facilities. The ‘LAB’ is an innovative digital banking location which allows us to test our digital concepts in a live environment with our customers. These have included concepts such as the eMortgage, SME online lending application, and more recently the Smartwatch, where feedback from customers helps shape product and services. 1 Excludes current accounts Adoption is not limited to transactional banking as customers embrace the omni channel sales experience. Currently, c.49% of key products1 sold to personal and SME customers in the Republic of Ireland are conducted through AIB Direct Channels. As a result of continuous investment in digital platforms, AIB received external recognition, winning the “Best Adoption of Social Media” at the CCMA awards, and the AIB Tablet banking app won the best financial services app at The Appys Awards and “Best Innovation in Financial Services” at the Digital Media Awards. Our omni channel approach is also being adopted in the Northern Ireland and GB businesses as we move to a more consistent model across our markets. In conjunction with our market leading digital channels, AIB continues to maintain the largest physical distribution network in Ireland with c.200 AIB branches, c. 70 EBS outlets and a joint venture with An Post with over 1,000 locations nationwide. In the UK, AIB has 16 business centres in Great Britain to service our SME and mid-corporate customers. We provide banking services through 30 branches and outlets under the trading name of First Trust Bank in Northern Ireland. The physical network coupled with AIB’s robust offer of products and services in digital channels allow the bank to better serve our customers in a meaningful and effective way. 19 Annual Financial Report 2014Governance at a Glance Governance at a glance Our Governance Framework AIB’s Governance Framework reflects best practice standards, guidelines and statutory obligations and ensures our organisation and control arrangements provide appropriate governance of the Group’s strategy, operations and mitigation of related material risks. Oversight by skilled and experienced Board of Directors, the majority of whom are independent Strong and independent internal and external audit functions Chief Executive Officer and Executive Leadership Team comprising strong and diverse management capability Clear organisational structure with well defined and transparent lines of accountability and responsibility Effective structures and processes to identify, manage, monitor and report risk Robust internal control mechanisms including sound administrative, accounting and IT systems, procedures and controls Well documented and executed delegation of authority framework Comprehensive, coherent suite of policies standards and procedures The Framework underpins effective decision making and accountability and is the basis on which we conduct our business and engage with our customers and stakeholders. 20 The Board and its Committees Supported by the Governance Framework, the Board oversees: • Strategic and operational planning; • Risk management and compliance; • Financial management and external reporting; and • Succession planning and culture. The Board is supported in its endeavours by a number of Board Committees which consider, in greater depth than would be practicable at Board meetings, matters within the Board’s responsibilities. AIB Board Board Audit Committee Board Risk Committee Board Remuneration Committee Quality and integrity of accounting policies, financial reporting and disclosure, internal control framework and audit Risk management and compliance framework, risk profile, concentrations and trends Remuneration policies and practices, remuneration of Chairman, CEO, Executive Directors and Leadership Team Board Nomination & Corporate Governance Committee Board composition, committee membership, and corporate governance and social responsibility policies and practices Chief Executive Officer to whom the Board has delegated responsibility for the day-to-day running and performance of the Group The Chief Executive Officer The Board delegates to the Chief Executive Officer (CEO) responsibility for strategy formulation and execution, and the day to day running of the business ensuring an effective organisation structure, the appointment, motivation and direction of senior executive management and the operational management of the Group’s businesses. The Executive Leadership Team The Leadership Team is the most senior executive committee of the Bank. The Leadership Team, under the stewardship of the CEO, has responsibility for the day-to-day management of the Group’s operations. It assists and advises the CEO in reaching decisions on and delivery of the Group’s strategy, governance, internal controls, performance and risk management. 21 Annual Financial Report 2014Governance at a Glance Board of Directors Non-executive directors Richard Pym Chairman since December 2014, Non-Executive Director since October 2014, Chairman of the Nomination & Corporate Governance Committee, Member of the Remuneration Committee. Dr. Michael Somers Deputy Chairman, Non-Executive Director since January 2010, Chairman of the Board Risk Committee, and Member of the Nomination & Corporate Governance Committee. Catherine Woods Non-Executive Director since October 2011, Senior Independent Director, Chairman of the Audit Committee and Member of the Board Risk Committee, Chairman of EBS Limited and Director of AIB Mortgage Bank. Simon Ball Non-Executive Director since October 2011, Member of the Board Risk Committee and Nomination & Corporate Governance Committee. Tom Foley Non-Executive Director since September 2012, Member of the Audit Committee and Remuneration Committee, Director of AIB Group (UK) p.l.c., and EBS Limited. Peter Hagan Non-Executive Director since July 2012, Member of the Audit Committee, Board Risk Committee, Nomination & Corporate Governance Committee and Remuneration Committee. Jim O’Hara Non-Executive Director since October 2011, Chairman of the Remuneration Committee, Member of the Audit Committee, and Nomination & Corporate Governance Committee. Director of EBS Limited. Executive Directors David Duffy Chief Executive Officer and Executive Director since December 2011; has advised the Board of his decision to step down as CEO on a date to be agreed. Mark Bourke Chief Financial Officer and Executive Director since May 2014. Bernard Byrne Executive Director since June 2011, formerly Finance Director, currently Director of Retail and Business Banking. 22 The Executive Leadership Team David Duffy Chief Executive Officer Mark Bourke Chief Financial Officer Bernard Byrne Director of Retail and Business Banking Dominic Clarke Chief Risk Officer Helen Dooley Group General Counsel Orlagh Hunt Group HR Director Enda Johnson Head of Corporate Affairs and Strategy Fergus Murphy Director of Corporate and Institutional Banking Brendan O’Connor Head of Financial Solutions Group Steve Reid Managing Director, AIB Group (UK) p.l.c., Stephen White Group Chief Operating Officer Full details of AIB’s corporate governance arrangements, including constituent roles and responsibilities and biographical details for Directors and Executive Leadership Team Members, are included in the Governance and Oversight Section of the Annual Financial Report from page 157 to 187. 23 Annual Financial Report 2014Corporate Social Responsibility BRENDAN CUMMINS... 2 ALL IRELANDS 5 ALL STARS 0 AIB CLUB ALL IRELANDS #THETOUGHEST FINALS ST. PATRICK’S DAY, CROKE PARK THE TOUGHEST OF THEM ALL AIB201R0088148S_GAA.indd 2 10/02/2014 14:10 Corporate Social Responsibility At AIB we aim to make a positive contribution to the communities in which we operate. This is part of our strategy to contribute to economic recovery in Ireland over time. In this section we outline some of our activity to support these goals under three pillars of Corporate Social Responsibility. AIB in the Community Beyond our immediate commercial activity, we see a responsibility to involve ourselves in our local communities. We have had a fruitful association with the Gaelic Athletic Association (GAA) for over 30 years. We consolidated this association 24 years ago when we became official sponsor of the GAA Football and Hurling All-Ireland Club Championships. Today that sponsorship covers Junior, Intermediate and Senior levels. In 2014 we added Camogie to the list. During 2014 our marketing campaign for the GAA sponsorship - ‘The Toughest’ - celebrated the commitment of players in the AIB GAA Club Championships. In addition we won “Best Sports Sponsorship Award” at the 2014 Irish Sponsorship Awards as well as “Best Use of Social Media” in a sponsorship. In the Agricultural sector, we run agri seminars around the country each being well attended by large numbers of farmers. We sponsor the National Ploughing Championships, the Tullamore Show and AIB National Livestock Show, the Irish Grassland Association Dairy Summer Tour and the AIB Macra na Feirme Club of the Year. 24 BRENDAN CUMMINS... 2 ALL IRELANDS 5 ALL STARS 0 AIB CLUB ALL IRELANDS #THETOUGHEST FINALS ST. PATRICK’S DAY, CROKE PARK AIB201R0088148S_GAA.indd 2 10/02/2014 14:10 THE TOUGHEST OF THEM ALL Our programme of financial education initiatives in communities and schools continues through organisations such as the National Consumer Agency and Junior Achievement. AIB and the Environment AIB made good progress on energy and environmental initiatives in 2014. The Group has taken a leading role in promoting the Women in Business agenda in partnership with Network Ireland. In the technology sector we were once again one of the main sponsors of the annual Web Summit, attended by over 10,000 international delegates. We published a new Group Energy Policy and we were awarded ISO 50001 accreditation for the management of gas and electrical energy usage in our Bankcentre head office. Here we reduced energy consumption by 27%. We plan to extend this energy management system to other office locations in the Republic of Ireland and the UK in 2015. For the past four years AIB has partnered with GIY (Grow It Yourself), which helps people and communities to grow their own food, through our Get Ireland Growing Fund. GIY added 110 grants to community food projects in 2014 including 46 school gardens and 20 community gardens. Under a revised Group Environmental Policy we were awarded the ISO 14001 accreditation for the management of our environment in late 2014. In our submission to the Carbon Disclosure Project we disclosed a score of 75% and a Grade C performance for reducing Carbon emissions. In 2014, we continued our support of the Press Photographers Association of Ireland. This was our twelfth year sponsoring the Photojournalism Awards which celebrate the best of Irish photojournalism. The exhibition which followed the awards, featuring 118 prints, went on tour to selected AIB branches as well as forming master classes for schools, camera clubs and photography students around the country. Our staff are involved in driving initiatives to raise money for local and national causes in the Republic of Ireland, Northern Ireland and the UK. At a corporate level we invited charities into AIB Bankcentre to take part in a Christmas market. Also during 2014 we started to support Change for Charity in the majority of our branches, where we collect from members of the public for the benefit of major charities. In partnership with GoCar.ie we give our people the choice of a more sustainable approach to transport. Three GoCars are on site at Bankcentre and our people can book and hire them as an alternative to using their own cars for work and to hiring taxis. Working in tandem with one of our business customers, we have started a unique biodiversity project with four beehives housing 60,000 honey bees on the roof of Bankcentre. The project, which is believed to be the first rooftop apiary in Dublin, has had higher than expected honey yields. We redeveloped the AIB branch in University College Dublin (Belfield Branch), installing a renewable power system of 50 square meters of solar panels to generate a significant amount of the branch’s energy needs. In 2014, EBS also continued its charity support with an ongoing partnership with Temple Street Children’s Hospital in Dublin. An Energy Efficiency Awareness day was held in Bankcentre introducing employees to AIB business customers active in energy efficiency. A sustainability working group was set up in 2014 to increase awareness inside and outside the bank about AIB’s sustainability. Our main achievement has been a sponsorship agreement with Sustainable Energy Authority of Ireland called the One Good Idea 25 Annual Financial Report 2014leaders. The values act as our guiding compass in all we do – the ‘how’ of what we do. Following the launch of the brand values, we then held Brand Value Activation sessions across the bank, before bringing them alive in our work to make a difference to customers’ experience of AIB. We made enhancements to our learning and development platform to offer classroom and web- based learning on a range of topics under the banner iLearn. Over 6,000 employees have attended classroom training and completed over 180,000 web-based training modules since iLearn launched in February 2014. Recognising the level of change we experience as an organisation, we have also run workshops to support people through transition. These workshops encourage those running change programmes to consider the people aspect of change. We also support our people leaders with training through the AIB Leadership Framework and a new Leadership Curriculum. Development is not just about learning, it is about people having the energy and mindset to grow. This year we launched The Well, an online resource with information and resources designed to help everyone to be at their best. It includes tips and activities to maximise energy, increase wellbeing, build resilience and promote physical, mental, emotional and spiritual health. Corporate Social Responsibility programme. It aims to increase students’ understanding of climate change and energy efficiency, encouraging them to take individual responsibility for tackling these important issues. In 2014, 204 projects were submitted from 68 schools representing approximately 2,000 students, with the One Good Idea now an annual feature in many teachers’ calendars. AIB and our people Employee engagement is a critical aspect of any company’s performance. Our metrics show that, following a period of radical restructuring and rebuilding the Group, the measure of our employee enagement has tripled on this time last year. The increase is equivalent to five years’ worth of significant progress in just over a year, according to our engagement partners, Gallup. We made dramatic increases in all business areas. Our efforts here are far from over. We will continue to invest in our people, focus on their professional development and wellbeing and encourage maximum collaboration, partnership and teamwork to build the pride and confidence of AIB. In early 2014 we developed a new set of brand values, which our people and our customers helped to develop. We launched the brand values in early 2014 at our second Leadership Summit to 1,200 of our people 26 Business review 1. Operating and financial review 2. Comprehensive assessment 3. Capital management Page 28 44 45 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 27 n o i t a m r o n f i l a r e n e G Business review - 1. Operating and financial review Summary income statement Net interest income Net fee and commission income Trading and other operating income Other income(1) Total operating income Personnel expenses General and administrative expenses Depreciation, impairment and amortisation Total operating expenses Operating profit before provisions Writeback/(provisions) for impairment on loans and receivables Writeback of provisions for liabilities and commitments (Provisions)/writeback of provisions for impairment on financial investments available for sale Total writeback/(provisions) Operating profit/(loss) Associated undertakings Profit on disposal of property Profit on disposal of business Profit/(loss) from continuing operations before exceptional items Profit/(loss) on disposal of loans and transfer of financial instruments to NAMA Gain arising on disposal of Aviva Life Holdings (“ALH”) Termination benefits Bank levy Retirement benefit curtailment Restructuring and restitution expenses Total exceptional items Profit/(loss) before taxation from continuing operations Income tax (charge)/credit from continuing operations Profit/(loss) after taxation from continuing operations Profit after taxation from discontinued operations(2) Profit/(loss) for the year Operating contribution before provisions by segment Domestic Core Bank (“DCB”) AIB UK Financial Solutions Group (“FSG”) Group Operating profit before provisions 2014 € m 1,687 390 453 843 2,530 (767) (551) (85) (1,403) 1,127 185 4 (1) 188 1,315 23 6 - 1,344 2 - (24) (60) - (151) (233) 1,111 (230) 881 34 915 € m 1,176 171 146 (366) 1,127 2013 € m 1,345 378 201 579 1,924 (851) (519) (100) (1,470) 454 (1,916) 3 9 (1,904) (1,450) 7 1 1 (1,441) (226) 10 (86) - 240 (184) (246) (1,687) 90 (1,597) - (1,597) € m 692 74 54 (366) 454 % change 25 3 125 46 31 -10 6 -15 -5 148 - 33 - - - 229 500 - - - - - - - - - - - - - - % change 70 131 170 - 148 (1)Other income includes interest rate hedge volatility with 2013 re-presented (€ 5 million negative in 2014, € 9 million positive in 2013). (2)Profit on the disposal of Ark Life Assurance Company Limited. 28 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Business review - 1. Operating and financial review Basis of presentation The following operating and financial review is prepared in line Overview of results 2014 marked a return to post provision profitability and saw the with how the Group’s performance is reported to management successful culmination of the Group’s three year plan to return and Board. The information presented excludes exceptional to sustainable profitability. The Group has benefited from the items that management believes obscures the underlying economic recovery and the results of strong management performance trends in the business. A list of the items classified actions over this period. This is reflected in higher levels of as exceptional are included below. Percentages presented income, lower operating expenses and in particular a credit throughout this report are calculated on the underlying figures provision writeback in 2014. and therefore may differ from the percentages based on the rounded numbers in the report. Profit before taxation from continuing operations (after exceptional items) amounted to € 1,111 million in 2014 Exceptional items The Group’s performance is presented to exclude those items compared to a loss of € 1,687 million in 2013. This includes income amounting to € 437 million (€ 93 million in 2013) as a that management believe obscures the underlying performance result of balance sheet actions and realisations. The net trends in the business. charge for exceptional items in 2014 is € 233 million Total exceptional items Profit/(loss) on disposal of loans and transfer of financial instruments to NAMA Gain arising on disposal of Aviva Life Holdings (“ALH”) Termination benefits Bank levy Retirement benefit curtailment Restructuring and restitution expenses Total exceptional items (€ 246 million in 2013). 2014 € m 2013 € m 2 - (24) (60) - (151) (233) (226) 10 (86) - 240 (184) (246) Profit before taxation from continuing operations and before exceptional items was € 1,344 million in 2014 compared to a loss of € 1,441 million in 2013, with improvement across net interest income, other income, operating expenses and provisions. Net interest income increased by € 342 million compared to 2013, reflecting a lower ELG charge (€ 114 million lower) as a result of the cessation of the ELG scheme, a lower cost of deposits and other liabilities and higher asset pricing, partly offset by lower average interest earning assets. – Loss on disposal of loans: € 201 million loss in 2013 on Other income was € 264 million higher than 2013. This non-core deleveraging which completed in 2013. performance benefited from income amounting to € 437 million Gains/losses in 2014 on disposal of loans are included in (€ 93 million in 2013) as a result of balance sheet actions and other income as part of business performance. realisations. – Profit/(loss) on transfer of financial instruments to NAMA: Valuation adjustments on previous transfers of financial assets to NAMA amounted to € 2 million credit in 2014, (€ 25 million charge in 2013). – A € 10 million gain was realised on the disposal of Aviva Life Holdings (“ALH”) in 2013. Balance sheet actions and realisations Net profit on disposal of AFS securities Re-estimating the timing of cash flows on NAMA senior bonds – Termination benefits: The cost of the voluntary severance Settlements and other gains programme was € 24 million in 2014 (€ 86 million in 2013). Balance sheet actions and realisations – Bank levy of € 60 million in 2014. – Retirement benefit curtailment of € 240 million recognised in 2014 € m 181 132 124 437 2013 € m 31 62 - 93 2013 following the closure of the defined benefit pension In addition negative valuation adjustments on derivatives with schemes to future accrual and removal of discretionary customers were partly offset by an increase in banking fee pension increases. and commission income of 3% to € 390 million, € 25 million – Restructuring and restitution expenses of € 151 million in coupon on NAMA subordinated bonds and higher foreign 2014 (€ 184 million in 2013). These include costs associated exchange income. with restitution, transformation, re-organisation and writedown of intangible assets. Total operating expenses were € 67 million (5%) lower – Interest rate hedge volatility is no longer classified as an compared to 2013. This reduction in costs mainly related to exceptional item for the purpose of the operating and the impact of staff exits as part of the early retirement/ financial review and accordingly 2013 has been voluntary severance schemes. re-presented. Interest rate hedge volatility is included in other income and was € 5 million negative in 2014 Provisions for impairment on loans and receivables reduced compared to € 9 million positive in 2013. by € 2,101 million from a provision charge of € 1,916 million in 2013 to a provision writeback of € 185 million in 2014. See the Risk management section on page 94 for more detail on provisions. Allied Irish Banks, p.l.c. Annual Financial Report 2014 29 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Business review - 1. Operating and financial review Net interest income • NIM excluding ELG up 32 bps to 1.69%. Net interest income 2014 € m 1,687 • Substantially reduced funding costs and higher margins on new lending partly offset by lower net loans and redemptions of NAMA senior bonds. • Negative impact of 20 bps on NIM in 2014 due to low yielding NAMA bonds. 2013 % € m change 1,345 25 -7 Average interest earning assets 103,370 111,004 % % change Group net interest margin 1.63 Group net interest margin excluding ELG 1.69 Group net interest margin excluding ELG and NAMA senior bonds 1.89 1.21 1.37 0.42 0.32 1.54 0.35 The Group net interest margin excluding ELG increased Continued deposit pricing actions in 2014 managed down the 32 basis points (“bps”) to 1.69%. NIM increased to 1.78% in cost of customer accounts without negatively impacting retail the second half-year compared with 1.60% in the half-year to customer balances. This factor combined with stable yields on June 2014. Excluding the impact of the Group’s low yielding customer loans as a result of higher margins on new lending NAMA senior bonds, NIM increased to 1.97% in the second resulted in the gap between asset yields and the cost of funds half-year compared with 1.82% in the half-year to June 2014. increasing from 86 bps in H1 2013 to 137 bps in H2 2014. Growth in NIM 1.82 1.60 1.67 1.45 1.97 1.78 % 2.00 1.75 1.50 1.42 1.28 1.25 1.00 H1 2013 H2 2013 H1 2014 H2 2014 NIM excluding ELG NIM excluding ELG & NAMA senior bonds Net interest income increased by € 342 million (25%) to € 1,687 million in 2014 from € 1,345 million in 2013. The increase was mainly due to lower funding costs and a reduction in the cost of the ELG scheme of € 114 million which was partly offset by lower loan income on reduced loan balances. Overall wholesale rates were lower driven by reductions in both long term interest rates and credit spreads. % 1.50 1.00 0.50 0.00 Movement in ECB Refi and 1 month Euribor 0.68 0.43 0.12 0.14 0.24 0.22 0.09 0.04 H1 2013 H2 2013 H1 2014 H2 2014 ECB Refi 1 month Euribor Eligible liabilities guarantee (“ELG”) The ELG charge was € 59 million in 2014 compared with Asset yields improved from 285 bps to 290 bps as higher yields € 173 million in 2013. The reduction in the charge was due to on loans to customers and net interest on swaps were partly the cessation of the ELG scheme in the Republic of Ireland for offset by lower yields on financial investments available for sale. new liabilities in March 2013. As existing liabilities that are The cost of funds excluding ELG reduced from 187 bps to covered by the scheme mature, the ELG charge will continue 161 bps. These trends are set out in the following graph on a to reduce. half-yearly basis. % 4.00 Net Interest Margin Drivers 3.00 2.87 2.83 2.86 0.86 2.01 2.00 1.00 0.00 1.74 1.64 1.57 2.94 1.37 ELG charge Half-year to June 2013 Half-year to December 2013(1) Half-year to June 2014 Half-year to December 2014(1) € m 123 50 32 27 H1 2013 H2 2013 H1 2014 H2 2014 Asset Yield Cost of Funds (excluding ELG) (1)The total liabilities guaranteed under the ELG Scheme at 31 December 2014 amounted to € 5 billion (€ 8 billion at 31 December 2013). 30 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Business review - 1. Operating and financial review Average balance sheet (1) Assets Loans and receivables to customers NAMA senior bonds Financial investments available for sale Other interest earning assets Net interest on swaps Average interest earning assets Non interest earning assets Year ended 31 December 2014 Average Interest Average rate balance % € m € m 65,391 12,569 19,444 5,966 2,237 80 567 22 91 3.42 0.64 2.92 0.36 Average balance € m 69,902 16,743 18,621 5,738 Year ended 31 December 2013 Interest Average rate % € m 2,326 130 652 19 36 3.33 0.78 3.50 0.33 103,370 2,997 2.90 111,004 3,163 2.85 8,237 9,635 Total assets 111,607 2,997 120,639 3,163 Liabilities & shareholders' equity Deposits by banks Customer accounts Subordinated liabilities Other debt issued Average interest earning liabilities Non interest earning liabilities Shareholders’ equity 46 637 256 312 1,251 0.25 1.30 18.30 3.49 1.61 18,515 48,944 1,401 8,921 77,781 22,426 11,400 123 968 241 313 1,645 0.47 1.87 18.38 3.63 1.87 26,242 51,669 1,311 8,622 87,844 21,975 10,820 Total liabilities & shareholders’ equity 111,607 1,251 120,639 1,645 Net interest income excluding ELG Eligible liabilities guarantee (“ELG”)(1) Net interest income including ELG 1,746 1.69 (59) (0.06) 1,687 1.63 1,518 1.37 (173) (0.16) 1,345 1.21 The net interest margin excluding ELG increased 32 bps from increases in financial investments available for sale of 1.37% in 2013 to 1.69% in 2014. The net interest margin has € 0.8 billion. Net interest on swaps increased € 55 million continued an upward trajectory since its trough in Q3 2012. mainly due to increased investment in swaps to manage The factors contributing to the increase of 32 bps were an income volatility combined with the continued low short term increase in yields on interest earning assets (5 bps) and a interest rate environment. decrease in the cost of funding those assets (27 bps). Interest income from loans was lower in 2014 as a result of a € 1,645 million in 2013 to € 1,251 million in 2014 due to a € 4.5 billion reduction in average loans as loan amortisation reduced funding requirement which resulted in lower volumes exceeded new lending. Lower loan balances and their impact of deposits by banks. This along with the impact of pricing on income along with movements in wholesale market rates actions on customer accounts and lower wholesale market were partly offset by loan pricing actions during 2013/2014 and rates resulted in lower funding costs. The cost of interest earning liabilities reduced from higher margins on new lending. Interest income from financial investments available for sale bonds, the net interest margin excluding ELG was 1.89% in reduced € 85 million as higher yielding securities were sold 2014 compared to 1.54% in 2013. Excluding the impact of the Group’s low yielding NAMA senior i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i and replaced with lower yielding securities to improve diversification. NAMA senior bond interest income reduced € 50 million as a result of reduced volumes following redemptions of € 6.3 billion in 2014 and lower interest rates. Average interest earning assets reduced from € 111 billion to € 103 billion as lower customer loans of € 4.5 billion and lower NAMA senior bonds of € 4.2 billion were partly offset by (1)The Average Balance Sheet (note 55 to the financial statements) is presented differently and includes the cost of ELG in interest within liabilities and shareholders’ equity. Allied Irish Banks, p.l.c. Annual Financial Report 2014 n o i t a m r o n f i l a r e n e G 31 Business review - 1. Operating and financial review Other income • 4% increase in banking fees and commissions. • Dividend of € 25 million received on the NAMA subordinated bond. • Improved other operating income due to accelerated NAMA senior bond repayments and disposals of both government bonds (AFS) and loans. Other income Dividend income Fee and commission income Less: Fee and commission expense Net trading (loss)/income Foreign exchange gains Miscellaneous operating income Balance sheet actions and realisations Other income before exceptional items 2014 € m 2013 % € m change 25 430 (40) (24) 11 4 437 843 4 525 414 (36) 93 1 10 93 579 4 11 - - -60 370 46 Other income before exceptional items was € 843 million in 2014 compared with € 579 million in 2013, an increase of € 264 million in negative valuation adjustments mainly on sterling customer (46%). Other income consisted of net fee and commission derivative positions which result in funding and counterparty income of € 390 million compared to € 378 million, trading/other risk which can create volatility. Reductions in medium to long income of € 428 million compared to income of € 197 million and term sterling swap rates have increased this volatility. There dividend income of € 25 million compared to € 4 million. was a € 30 million increase in negative mark to market on Dividend income Dividend income was € 25 million in 2014 relating to NAMA subordinated bonds compared to dividend income of € 4 million in 2013 from equity shares held as financial investments available for sale. Net fee and commission income Net fee and commission income was € 12 million (3%) higher than 2013 as current account fees and other retail banking customer fees increased. This was partly offset by lower insurance commission income and higher credit card commission expense. Net trading (loss)/income Foreign exchange contracts Interest rate contracts and debt securities Credit derivative contracts Equity securities and index contracts Net trading (loss)/income 2014 € m 45 (68) (2) 1 (24) 2013 % € m change 37 53 - 3 93 22 - - -67 - interest rate swaps and € 14 million increase in negative interest rate hedge volatility. Balance sheet actions and realisations Net profit on disposal of AFS securities Re-estimating the timing of cash flows on NAMA senior bonds Settlements and other gains Balance sheet actions and realisations 2014 € m 181 132 124 437 2013 € m 31 62 - 93 Balance sheet actions and realisations There was € 437 million of income arising from balance sheet actions and realisations in 2014 compared to income of € 93 million in 2013. Income in 2014 included a net profit of € 181 million from the disposal of available for sale debt and equity securities compared to a net profit of € 31 million in 2013. Having considered NAMA’s current performance against achieving its strategic objectives, AIB has recognised a gain of € 132 million reflecting a revised expected timing of repayments including those received in the year. A similar gain of € 62 million was recognised in 2013. Net trading (loss)/income Trading income was € 24 million negative in 2014 compared to Settlements and other gains of € 124 million in 2014 include income of € 93 million in 2013. Foreign exchange contracts € 50 million profit on the disposal of loans to customers, improved € 8 million to € 45 million in 2014 due to increased € 27 million income on settlement of a claim, a € 24 million fair activity levels. value gain on re-estimation of cashflows on loans previously restructured and € 23 million due to a fair value gain on equity Debt securities and interest rate contracts reduced by warrants received as part of previous customer debt € 121 million to € 68 million negative due to € 75 million increase restructuring. 32 Allied Irish Banks, p.l.c. Annual Financial Report 2014 2013 % € m change 851 519 100 -10 6 -15 -5 -3 -10 Business review - 1. Operating and financial review Total operating expenses (1) • Costs down € 67 million (5%). • Average staff numbers down 1,264 (10%). Operating expenses Personnel expenses General and administrative expenses Depreciation, impairment and amortisation 2014 € m 767 551 85 • Costs down € 345 million (20%) compared to 2012. Total operating expenses before exceptional items 1,403 1,470 Total operating expenses before exceptional items were € 1,403 million in 2014 compared to € 1,470 million in 2013, a Staff numbers at year end (FTE)(2) Average staff numbers (FTE)(2) 11,047 11,384 11,431 12,648 reduction of € 67 million (5%). Reduction in staff numbers (period end)(2) 12,718 FTE 14,000 12,000 10,000 11,431(3) 11,385 11,047 Cost Trend 716 313 403 686 313 297 389 707 754 306 448 717 339 378 € m 1,000 750 500 250 0 Jun 2013 Dec 2013 Jun 2014 Dec 2014 H1 2013 H2 2013 H1 2014 H2 2014 Personnel expenses Other costs Personnel expenses Personnel expenses reduced € 84 million (10%) with a reduction Depreciation, impairment and amortisation The charge for depreciation, impairment and amortisation of in costs reflecting lower staff numbers. Average staff numbers € 85 million was € 15 million (15%) lower than 2013. The reduced by 1,264 (10%) which reflected the early retirement/ acceleration of depreciation in prior years resulted in a lower voluntary severance scheme in 2013 and 2014 and selective depreciation charge in 2014, relative to 2013. Cost income ratio Cost income ratio of 55% equates to costs of € 1,403 million and income of € 2,530 million. Costs exclude exceptional items of € 233 million and income includes € 437 million of balance sheet actions and realisations. outsourcing of some back office and support functions. As part of the early retirement/voluntary severance scheme approximately 3,200 staff have left the Group to date under the scheme. General and administrative expenses General and administrative expenses increased € 32 million (6%) with savings across most classifications as part of ongoing cost management and control more than offset by an increase in costs as a result of outsourcing initiatives and additional technology costs. General and administrative expenses of € 296 million in the half-year to December 2014 increased € 41 million compared to € 255 million in the half-year to June 2014 due to the timing of external provider fees and technology costs and increased outsourcing initiatives. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i (1)Excluding exceptional items. (2)Staff numbers quoted in the commentary above are on a full time equivalent (“FTE”) basis. (3)Excluding Ark Life staff numbers of 146. Ark Life was held for sale at 31 December 2013. Allied Irish Banks, p.l.c. Annual Financial Report 2014 33 n o i t a m r o n f i l a r e n e G Business review - 1. Operating and financial review Asset quality (1) • Improved demand for credit resulted in new lending of € 5.9 billion in 2014. • Significant restructuring progress, with impaired loans reduced by € 6.7 billion (23%). • Credit provisions reduced from a charge of € 1,916 million in 2013, to a net writeback of € 185 million in 2014. Provisions The income statement impairment provision charge for 2014 was a net recovery of € 0.2 billion (2013: € 1.9 billion charge) including a writeback of IBNR of € 0.1 billion. Excluding FSG, the charge as a % of average loans for 2014 was 0.46%, compared to 1.61% in 2013. Both DCB and AIB UK are showing a reduced bad debt charge with the DCB charge decreasing by 76% and AIB UK decreasing by 58%. Total Impairment Charge Asset quality income statement Credit writeback/(provisions) Other provisions Total writeback/(provisions) Provision charge % Provision charge % DCB Provision charge % AIB UK Provision charge % FSG Asset quality balance sheet Impaired loans Balance sheet provisions Amounts written off Specific provisions/Impaired loans Total provisions/Total loans 2014 € m 185 3 188 (0.22) 0.43 0.54 (2.29) 2013 % € m change (1,916) 12 (1,904) - -75 - 2.24 1.74 1.18 3.97 31 Dec 31 Dec 2013 % € bn change 2014 € bn -23 -27 310 22.2 12.4 4.7 % 51 16 28.9 17.1 1.1 % 55 21 € bn 2.5 2.0 1.5 1.0 0.5 0 -0.5 1.9 2013 €2.1bn lower reduction in downward migration to criticised grades. New Credit quality in the portfolio has begun to improve, with a -0.2 2014 lending increased to € 5.9 billion in 2014 (€ 3.9 billion in 2013). SMEs in Republic of Ireland and corporate loans accounted for € 2.6 billion of this figure with Mortgages in Republic of Ireland accounting for a further € 1.3 billion. The credit quality of new loans drawn since 2013 is satisfactory and in line with expectation. The provision recovery was driven by restructuring activity and a reduction in new impairments due to the improved economic environment. Significant progress was made during 2014 in Republic of Ireland mortgages Residential mortgages in the Republic of Ireland amounted to working with customers to restructure facilities. Each case € 36.3 billion, split 82% owner-occupier and 18% buy-to-let. requires an in-depth review of cash flows and security, updated Total loans in arrears in the portfolio decreased by 18% in the for current valuations and performance. This work resulted in year consisting of a decrease of 22% in the owner occupier writebacks of provisions in some cases, offset by provisions portfolio and a decrease of 7% in the buy to let portfolio. from new impairments of € 0.5 billion. Credit quality Criticised loans decreased by € 7.8 billion in the year, primarily Weighted average loan-to values in the residential mortgage portfolio improved from 103% at 31 December 2013 to 87% at 31 December 2014 due to price increases and loan amortisation. driven by a reduction in impaired loans of € 6.7 billion due to restructures, write-offs and repayments, partly offset by new SME / other commercial The SME / other commercial portfolio of € 12.9 billion is impaired loans. geographically split 65% in the Republic of Ireland and 35% in € bn 50 40 30 20 10 0 Credit Profile – Criticised Loans the United Kingdom. The portfolio is concentrated in 41.8 28.9 6.1 6.8 €7.8bn decrease Credit quality within the portfolio improved due to restructuring sub-sectors that are dependent on the domestic economies. 34.0 22.2 6.6 5.2 and the stronger economic environment, with a significant reduction in new impairments. Within the Republic of Ireland, the improved performance was mainly observed in urban areas, with rural locations remaining weak. Dec 2013 Dec 2014 Watch Vulnerable Impaired (1)The commentary on asset quality summarises the key messages and trends. More extensive disclosures are in the Risk management section from pages 60 to 126. 34 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Business review - 1. Operating and financial review Asset quality (continued) Balance sheet provisions Specific provisions as a percentage of impaired loans decreased from 55% at 31 December 2013 to 51% at 31 December 2014. This was driven by write-offs of provisions within portfolios with higher provision cover and writebacks from restructuring. Provision write-offs are generated through both restructuring agreements with customers and also write-offs of provisions where further recovery is considered unlikely. The stock of IBNR impairment provisions has been maintained at € 1.1 billion as of 31 December 2014. It includes the impact of an increase in Emergence Period for mortgages from 9 to 12 months and for non-mortgages from 6 to 8 months for the Republic of Ireland. The level of IBNR reflects the need to maintain a conservative estimate of unidentified incurred loss within the portfolio. Associated undertakings Income from associated undertakings in 2014 was € 23 million compared with € 7 million in 2013. This increase is mainly due to higher profits from AIB’s share in the joint venture with First Data International trading as AIB Merchant Services. Income tax The total taxation charge for 2014 was € 230 million compared with a total taxation credit of € 90 million in 2013 reflecting a return to profitability in 2014 as compared with the losses in 2013. Subject to specific exceptions, deferred tax assets in respect of accumulated tax losses continue to be recognised in full on the basis that it is expected that tax losses will be utilised in full against future profit. These exceptions are set out in note 32 to the financial statements. Discontinued operations Profit on the disposal of Ark Life Assurance Company Limited of € 34 million, following completion of the sale on 8 May 2014 has been reported under discontinued operations. See note 17 to the financial statements. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 35 n o i t a m r o n f i l a r e n e G Business review - 1. Operating and financial review Balance sheet commentary • New lending of € 5.9 billion was 50% higher Balance sheet 31 Dec 31 Dec 2013 % € bn change 2014 € bn than 2013. • Reduction in NAMA senior bonds of € 6.2 billion (40%) to € 9.4 billion mainly due to redemptions of € 6.3 billion in 2014. • Customer deposits remained stable and ECB funding reduced by € 9.3 billion. Loans to customers Gross loans to customers Gross loans at € 75.8 billion were down € 7.0 billion (8%) since 31 December 2013 or € 8.1 billion (10%) excluding the impact of currency movements. The reduction was due to restructuring activity of € 5.5 billion and loan redemptions of € 8.5 billion partly offset by new lending of € 5.9 billion. New lending at higher Gross loans to customers Provisions 75.8 (12.4) 82.8 (17.1) Net loans to customers 63.4 Financial investments available for sale 20.2 NAMA senior bonds 9.4 Other assets 14.5 65.7 20.4 15.6 16.0 Total assets 107.5 117.7 Customer accounts Deposits by banks - ECB Other market funding Debt securities in issue Other liabilities Total liabilities 64.0 3.4 13.4 7.9 7.2 95.9 65.7 12.7 10.4 8.8 9.6 107.2 Shareholders’ equity 11.6 10.5 margins of € 5.9 billion in 2014 was 50% higher than 2013. New Total liabilities & shareholders’ equity 107.5 117.7 -8 -27 -4 -1 -40 -9 -9 -3 -73 29 -10 -25 -11 10 -9 lending in Republic of Ireland of € 4.2 billion, up 43% and new lending in UK of € 1.7 billion, up 63%. Provisions Balance sheet provisions have decreased from € 17.1 billion to € 12.4 billion mainly due to the utilisation of provisions as part of structuring sustainable solutions for customers and write-offs. See the Risk management section on page 93 for more detail on the movement in provisions during 2014. Net loans to customers Net loans reduced € 2.3 billion (4%) or € 3.3 billion (5%) excluding the impact of currency movements and reflect the gross loan movements as set out above along with the impact of provisions. Net loans in DCB were broadly stable at € 44.1 billion (70% of total net loans). There was a reduction of 14% in AIB UK to € 10.4 billion and FSG net loans reduced 13% to € 8.9 billion. The table below sets out the movement in loans to customers from 1 January 2014 to 31 December 2014. Loan to deposit ratio % 99 % change 100 -1 € bn 80 70 60 50 40 30 20 Net loans movement 5.9 -8.2 65.7 63.4 Dec 2013 New Lending Redemptions/ Other Dec 2014 Loans to customers Opening balance (1 January 2014) New lending volumes New impaired loans Restructures and write-offs(1) Redemptions of existing loans Foreign exchange movements Other movements Closing balance (31 December 2014) (1)Includes non-contractual write-offs. 36 Earning Loans € bn Impaired Loans € bn Gross IBNR Specific Loans Provisions Provisions € bn € bn € bn Net Loans € bn 53.9 5.9 (1.6) 1.1 (6.6) 0.8 0.1 53.6 28.9 - 1.6 (6.6) (1.9) 0.3 (0.1) 22.2 82.8 5.9 - (5.5) (8.5) 1.1 - 75.8 (15.9) (1.2) - (0.5) 5.3 - (0.1) (0.1) (11.3) - - - - - 0.1 (1.1) 65.7 5.9 (0.5) (0.2) (8.5) 1.0 - 63.4 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Business review - 1. Operating and financial review Financial investments available for sale (“AFS”) AFS assets decreased from € 20.4 billion to € 20.2 billion The reduction included a decrease in repos of € 3.6 billion and recognition of deposits from Ark Life € 0.9 billion as customer during 2014. Sales of € 8.0 billion and maturities of € 0.7 billion accounts following deconsolidation / sale of Ark Life in May 2014. were offset by purchases of € 7.3 billion and an increase in fair There was strong growth in current accounts offset by a reduction value of € 1.3 billion. To improve diversification, overall Irish in deposits. The average cost of customer accounts dropped from Sovereign and Sovereign Guaranteed Bank Debt were 187 bps in 2013 to 130 bps in 2014. reduced by € 1.2 billion and Spanish and Italian Sovereign holdings were increased by € 2.2 billion. This portfolio rebalancing saw an increase in Supranational and Government Deposits by banks - ECB There was a reduction of € 9.3 billion (73%) in monetary Agency securities which improved the proportion of High authority funding during the year as the overall funding Quality Liquid Assets ("HQLA") within the portfolio. Due to the requirement reduced and the Group was able to access other improvement in the Irish Sovereign market, the sales of sources of funding as set out below. securities and equities generated net income of € 181 million net of hedge termination costs. The increase in fair value of € 1.3 billion was driven by a tightening of Irish Sovereign credit Other market funding Other market funding increased € 3.0 billion in 2014 as more spreads and also a fall in fixed interest rates and an uplift in normalised market conditions emerged and AIB was able to the NAMA subordinated debt holding of € 0.3 billion as the fair broaden its funding base. This increase offset the reductions in value estimate increased to 79.4% from 15.5%. Further detail both repos within customer accounts and debt securities in issue. in respect of AFS is covered on pages 127 to 129. NAMA senior bonds In 2014 € 6.3 billion of NAMA bonds were redeemed. This Debt securities in issue Debt securities in issue reduced € 0.9 billion from € 8.8 billion to € 7.9 billion during 2014. The reductions were predominantly followed the success of NAMA in executing its strategy due to € 0.9 billion of unsecured debt maturities and enabling it to continue its accelerated redemptions during the € 1.0 billion related to liability management in the form of debt year. Redemptions of low yielding NAMA senior bonds buyback. The reductions were partly offset by a 5 year improved the Group’s overall net interest margin. € 500 million fixed rate senior unsecured debt issue and a Other assets Other assets of € 14.5 billion comprised: - - - - cash and loans to banks of € 7.3 billion up 18% from € 6.2 billion. deferred taxation of € 3.6 billion broadly in line with 2013. derivative financial instruments of € 2.0 billion up 25% from € 1.6 billion. the remaining assets of € 1.6 billion reduced 6% from € 1.7 billion. At 31 December 2013 Ark Life assets of € 2.7 billion were classified as held for sale. Ark Life was disposed of in May 2014. See note 17 to the financial statements for further detail. 7 year AIB Mortgage Bank ACS issuance of € 500 million in 2014. The two issuances have been part of a balanced and measured re-engagement in the wholesale markets. Other liabilities Other liabilities of € 7.2 billion comprised: - - - - derivative financial instruments of € 2.3 billion up € 0.3 billion (15%) from € 2.0 billion. contingent capital notes maturing in 2016 with a carrying value of € 1.5 billion (nominal value of € 1.6 billion). retirement benefit liabilities € 1.2 billion compared to € 0.2 billion in 2013 following changes in actuarial assumptions used to value the Irish scheme’s liabilities. the remaining liabilities of € 2.2 billion reduced 8% from Customer accounts Customer accounts reduced € 1.7 billion (3%) to € 64.0 billion € 2.4 billion. At 31 December 2013 Ark Life liabilities of € 3.6 billion were or € 2.6 billion (4%) excluding the impact of currency movements. classified as held for sale. Ark Life was sold in May 2014. See Stabilising Funding Profile note 17 to the financial statements for further detail. 138% 83.7 115% 73.3 100% 99% 60.7 63.6 65.7 65.7 63.4 64.0 € bn 100 75 50 25 0 Shareholders’ equity Shareholders’ equity increased € 1.1 billion from € 10.5 billion in 2013 to € 11.6 billion in 2014. This increase was mainly due to profit for 2014 of € 0.9 billion and positive fair value gains on available for sale securities and cash flow hedges of € 1.1 billion. The net pension deficit reserve has increased from a deficit of € 0.1 billion at 31 December 2013 to a deficit of € 0.9 billion at 31 December 2014 mainly due to a reduction in the discount rate used to calculate the pension scheme’s Dec 2011 Dec 2012 Dec 2013 Dec 2014 Net Loans Customer Accounts Loan to Deposit ratio liabilities. Allied Irish Banks, p.l.c. Annual Financial Report 2014 37 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Business review - 1. Operating and financial review Funding Customer accounts contributed 63% of the total funding requirement at 31 December 2014, up from 60% at 31 December 2013. At 31 December 2014, the Group held € 40 billion in qualifying liquid assets/contingent funding (including liquid assets in AIB Group (UK) p.l.c. which are unavailable for use at an overall Group level) of which approximately € 20 billion was not available due to repurchase, secured loan and other agreements. For further detail on funding see pages 142 to 144. 12% 17% 11% € bn 75 50 25 0 Source of funds Dec 2013 Dec 2014 3% 21% 13% 60% 63% Customer Accounts Wholesale Funding Capital Monetary Authority Funding Summary Balance Sheet movements 65.7 63.4 65.7 64.0 15.6 9.4 Net Loans NAMA Senior Bonds Customer Accounts Dec 2013 Dec 2014 12.7 3.4 Monetary Authority Funding Capital See Capital section on pages 45 to 49. 38 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Business review - 1. Operating and financial review Segment reporting AIB reports the following key segments: Domestic Core Bank Segment transfers AIB completed non-core deleveraging during 2013 under the (“DCB”), AIB UK, Financial Solutions Group (“FSG”) and Group. Financial Measures Programme. Upon completion of the Reporting on this segment basis commenced in 2013. non-core deleveraging target, certain assets were transferred back to the relevant segments. Domestic Core Bank (“DCB”) services the personal, business and corporate customers of AIB in the Republic of Ireland, in In addition a decision was made to transfer management of addition to wealth management services and has a strong Corporate Banking Britain (“CBB”) to AIB UK segment as part presence in all key sectors including SMEs, mortgages, personal of a strategy change to grow and manage the corporate and corporate banking. All owner occupier mortgages in the business under the AIB GB brand. Republic of Ireland are reported in DCB. This segment also includes the Group’s treasury and capital markets functions. The transfers were effective from 1 July 2013. If the transfers had been effective from 1 January 2013, the estimated contribution statement impact for the first half of 2013 is set out in the table below. H1 2013 Contribution statement impact € m DCB AIB UK € m Net interest income Other income Total operating expenses Total provisions Operating contribution 14 (1) 1 (14) - 15 (1) (6) (46) (38) FSG € m (29) 2 5 60 38 Total € m - - - - - AIB UK comprises retail and commercial banking operations in Great Britain operating under the trading name Allied Irish Bank (GB) (“AIB GB”) and in Northern Ireland operating under the trading name First Trust Bank (“FTB”). UK Structured Lending Services (“SLS”) deals with AIB UK customers in difficulty within one centre of expertise. Financial Solutions Group (“FSG”) is dedicated to supporting business and personal customers in financial difficulties on a case by case basis and Third Party Servicing of NAMA loans. Non-impaired loans connected to customers in financial difficulty are also reported in this segment. Group includes central control and support functions costs which include operations & technology, risk, audit, finance, general counsel, human resources and corporate affairs & strategy. Certain overheads related to these activities are managed and reported in the Group segment. The segments’ performance statements include all income and direct costs but exclude certain overheads which are managed centrally and the costs of these are included in the ‘Group’ segment. Funding and liquidity charges are based on each segment’s funding requirements and the Group’s funding cost profile, which is informed by wholesale and retail funding costs. Income on capital is allocated to segments based on each segment’s capital requirement. The cost of services between segments is based on the estimated actual cost incurred in providing the service. A summarised view of the Group’s segmental performance is available in note 1 to the consolidated financial statements. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 39 n o i t a m r o n f i l a r e n e G Business review - 1. Operating and financial review 750 843 981 710 Contribution before exceptional items 1,002 (142) Domestic Core Bank (“DCB”) • Operating contribution of € 981 million in 2014 compared to a negative of € 151 million in 2013. • Net loans of € 44.1 billion in line with 2013. • New lending of € 4.2 billion in 2014. € m 2,000 1,500 1,000 500 0 -500 Growth in operating contribution 1,886 1,442 -151 195 2013 2014 Total income Total provisions Total operating expenses Operating contribution Net interest income Net interest income of € 1,190 million for 2014 was € 217 million (22%) higher than 2013. Taking account of the transfers(1), net interest income was € 203 million higher than 2013 due to reductions in the ELG charge following cessation of the ELG scheme for new liabilities on 28 March 2013, lower customer deposit costs and lower wholesale funding costs. These positive impacts were partly offset by lower loan volumes, lower income on NAMA bonds, and the impact of both lower interest rates and yields on treasury operations. 2013 % € m change DCB contribution statement(1) Net interest income before ELG ELG Net interest income Other income(2) Total operating income Total operating expenses 2014 € m 1,231 (41) 1,190 696 1,886 (710) Operating contribution before provisions 1,176 Total provisions (195) Operating contribution Associated undertakings Contribution before disposal of property Profit on disposal of property 981 18 999 3 1,120 (147) 973 469 1,442 (750) 692 (843) (151) 8 (143) 1 10 -72 22 48 31 -5 70 -77 - 125 - 200 - Cost income ratio DCB balance sheet metrics(1) Gross loans Net loans Customer accounts Loan to deposit ratio % 38 % change 52 -14 31 Dec 31 Dec 2013 % € bn change 2014 € bn 47.2 44.1 51.2 % 86 47.6 44.3 53.6 -1 - -4 % change 83 3 amortisation of € 44 million was € 10 million (19%) lower than 2013 mainly due to the acceleration of depreciation in prior years. Other income Other income improved € 227 million (48%) to € 696 million due to the disposal of available for sale debt and equity securities which were € 150 million higher than 2013 as a result of the restructuring of the portfolio, income on settlement of a claim of Provisions Total provisions of € 195 million for 2014 were € 648 million lower than 2013. Taking account of the transfers(1), total provisions were € 662 million lower than 2013. The decrease € 27 million and a profit on disposal of corporate loans of was mainly due to improving economic conditions and a lower € 50 million. Gains on the re-estimation of the timing of cash level of loans recognised as impaired. flows on NAMA senior bonds increased by € 70 million. These positive items were partly offset by negative valuation adjustments on customer derivative positions. Operating expenses Total operating expenses reduced € 40 million (5%) to Balance sheet Gross loans reduced € 0.4 billion since 31 December 2013 as loan amortisation exceeded new lending on the mortgage portfolio was partly offset by growth in SME and corporate loans. Customer accounts reduced € 2.4 billion (4%) since € 710 million for 2014 as reduced staff numbers resulted in 31 December 2013. Excluding the reduction in repos of lower salary and associated costs compared with 2013. € 3.6 billion and the recognition of deposits from Ark Life of Personnel expenses of € 406 million were € 46 million (10%) € 0.9 billion as customer accounts following deconsolidation/ lower than 2013 mainly as a result of reductions in staff sale of Ark Life, customer accounts increased € 0.3 billion since numbers. General and administrative expenses of € 260 million 31 December 2013 with strong growth in current accounts partly were € 16 million (7%) higher than 2013 primarily as a result of offset by a reduction in deposits as a result of liability pricing outsourcing initiatives in selected operational and support management. functions. The charge for depreciation, impairment and (1)The balance sheet transfers were effective on 1 July 2013. If the transfers had been effective from 1 January 2013, the estimated contribution statement impact for the first half of 2013 is set out on page 39. (2)Other income includes interest rate hedge volatility with 2013 re-presented. 40 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Business review - 1. Operating and financial review AIB UK • Operating contribution of £ 81 million in 2014 compared to a negative of £ 69 million in 2013. • Cost income ratio improvement, 50% for 2014 compared to 69% in 2013. • New lending of £ 1.3 billion in 2014. Growth in operating contribution 209 277 AIB UK contribution statement(1) Net interest income before ELG ELG Net interest income Other income Total operating income Total operating expenses Operating contribution before provisions Total provisions Operating contribution Associated undertakings 145 133 139 Contribution before disposal of property 81 57 Profit on disposal of property -69 Contribution before exceptional items Contribution before exceptional items € m 109 2014 £ m 228 (7) 221 56 277 81 4 85 2 87 2013 % £ m change 161 (10) 151 58 209 (69) 1 (68) - (68) (80) 42 -30 46 -3 33 -4 116 -57 - 300 - - - - (139) (145) 138 (57) 64 (133) £ m 300 200 100 0 -100 2013 2014 Total income Total provisions Total operating expenses Operating contribution Cost income ratio Net interest income Net interest income of £ 221 million was £ 70 million (46%) higher than 2013. Taking account of the transfers(1), net interest income was £ 57 million higher than 2013 due to lower funding costs as a result of deposit pricing actions and the impact of loan repricing. Other income Other income of £ 56 million for 2014 was £ 2 million (3%) lower than 2013. Fee and commission income was £ 5 million higher AIB UK balance sheet metrics(1) Gross loans Net loans Customer accounts than 2013 but trading and other operating income was £ 7 million Loan to deposit ratio lower than 2013 principally due to a £ 10 million negative valuation adjustments on customer derivative positions. % 50 % change 69 -19 31 Dec 31 Dec 2013 % £ bn change 2014 £ bn 9.5 8.1 9.0 % 90 11.2 9.4 9.1 -15 -14 -1 % change 103 -13 Total operating expenses Total operating expenses of £ 139 million for 2014 were Balance sheet AIB UK gross loans to customers decreased £ 1.7 billion (15%) £ 6 million (4%) lower than 2013. Taking account of the transfers(1), total operating expenses were £ 11 million lower than 2013 as reduced staff numbers resulted in lower salary and to £ 9.5 billion since 31 December 2013 following loan amortisation during the year of £ 3.0 billion of which £ 1.3 billion was in criticised loans (a 25% reduction on 2013) partly offset by associated costs partly offset by higher general and new lending of £ 1.3 billion, an increase of £ 0.5 billion (63%) on administrative expenses. 2013. Customer accounts of £ 9.0 billion are broadly in line with 31 December 2013. The loan to deposit ratio has decreased to The increase in total income and the decrease in total operating 90% in 2014 compared to 103% in 2013. The decrease was expenses resulted in an improvement of 19% in the cost income driven by reductions in net loans. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i ratio from 69% for 2013 to 50% for 2014. Provisions Total provisions of £ 57 million were £ 76 million lower than 2013. Taking account of the transfers(1), provisions were £ 115 million lower than 2013 with the net specific charge lower than 2013. During the year, credit quality improved with non-performing loans reducing by £ 0.8 billion mainly through asset sales. The lower net specific charge in 2014 was driven by a combination of lower new specific provisions and higher recoveries. (1)The balance sheet transfers were effective on 1 July 2013. If the transfers had been effective from 1 January 2013, the estimated contribution statement impact for the first half of 2013 is set out on page 39. Allied Irish Banks, p.l.c. Annual Financial Report 2014 n o i t a m r o n f i l a r e n e G 41 € bn 25 20 15 10 5 0 Business review - 1. Operating and financial review Financial Solutions Group (“FSG”) • Reduction in gross loans of € 5.4 billion (25%) mainly due to restructuring activity during the year. • Operating contribution of € 600 million in 2014 compared to a negative of € 852 million in 2013. • Total provisions writeback of € 454 million compared to a charge of € 906 million in 2013 due to lower impaired loans and improving economic conditions. FSG balance sheet metrics(1) Gross loans Net loans Customer accounts FSG contribution statement(1) Net interest income before ELG ELG Net interest income Other income Total operating income Total operating expenses Balance sheet Gross loans reduced € 5.4 billion (25%) since 31 December 2013 mainly due to debt restructuring and write-offs during the year. Provisions have reduced € 4.1 billion (35%) since 31 December 2013 mainly due to write-offs and restructuring activity. Operating contribution before provisions Total writeback/(provisions) Operating contribution Associated undertakings Gross loans movement Contribution before exceptional items 21.8 -4.5 -0.9 16.4 Cost income ratio 31 Dec 31 Dec 2013 % € bn change 2014 € bn 16.4 8.9 1.3 21.8 10.2 1.1 -25 -13 18 2014 € m 2013 % € m change 230 (9) 221 72 293 204 (14) 190 25 215 (147) (161) 13 -36 16 188 36 -9 146 454 600 - 600 % 50 54 170 (906) (852) (3) (855) - - - - % change 75 -25 average staff numbers. General and administrative expenses were higher than 2013 mainly due to increased outsourcing costs. Dec 2013 Restructuring Redemptions Dec 2014 (incl FX) Provisions Total writeback of € 454 million in 2014 compared with a provision charge of € 906 million in 2013. Taking account of the transfers(1), total provisions were € 1,300 million lower than 2013 and reflected the level of debt restructuring completed in the year, reduction in the amount of additional provisions required and improving economic conditions. Net interest income Net interest income of € 221 million in 2014 was € 31 million (16%) higher than 2013. Taking account of the transfers(1), net interest income was € 60 million higher than 2013 mainly due to lower funding costs partly offset by reduced income from lower loan balances. Other income Other income of € 72 million in 2014 was € 47 million (188%) higher than 2013 mainly due to fair value gains on equity warrants and the re-estimation of cashflows on loans previously restructured. Operating expenses Total operating expenses reduced € 14 million (9%) to € 147 million in 2014 compared with 2013. Taking account of the transfers(1), total operating expenses were € 9 million lower than 2013, with lower salary and associated costs due to lower (1)The balance sheet transfers were effective on 1 July 2013. If the transfers had been effective from 1 January 2013, the estimated contribution statement impact for the first half of 2013 is set out on page 39. 42 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Business review - 1. Operating and financial review 2014 € m 2013 % € m change 1 6 7 (373) 5 17 22 (388) (366) 1 Group • Total operating expenses have reduced by € 15 million (4%). Group contribution statement Net interest income Other income Total operating income Total operating expenses Total operating income Total operating income decreased € 15 million (68%) primarily due to the negative impact of interest rate hedge volatility. Operating expenses Operating expenses in Group include unallocated overheads relating to operations & technology, risk, audit, finance, general counsel, human resources and corporate affairs & strategy. Total operating expenses decreased € 15 million (4%) to € 373 million for 2014 due to lower salary and associated costs resulting from reduced staff numbers and lower depreciation and amortisation. Personnel expenses of € 157 million for 2014 were € 5 million (3%) lower than 2013 as a result of the reduction in average staff numbers and associated staff costs. General and administrative expenses of € 187 million for 2014 were in line with 2013 due to additional outsourcing costs offset by reductions in other cost lines as a result of ongoing cost management. Depreciation, impairment and amortisation of € 29 million for 2014 was € 10 million (26%) lower than 2013 due to the acceleration of depreciation in prior years. Operating contribution before provisions (366) Total (provisions)/writeback (1) Contribution before disposal of business Profit on disposal of business (367) (365) - 1 Contribution before exceptional items (367) (364) € m 500 400 300 200 100 0 Reduction in costs 388 226 162 373 216 157 2013 2014 Staff costs Other costs -80 -65 -68 -4 - - -1 - -1 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 43 n o i t a m r o n f i l a r e n e G Business review - 2. Comprehensive assessment Comprehensive Assessment (“CA”) The CA European wide stress testing exercise was conducted which takes into account collateral valuations, current trading conditions, and the timing of cash flow realisation. In arriving at by the European Banking Authority (“EBA”) and the European the 2014 impairment provision recovery of € 0.2 billion, the Central Bank (“ECB”) in conjunction with AIB’s National Group considered the results of the AQR and the Central Bank Competent Authority, the Central Bank of Ireland (“CBI”). The of Ireland’s impairment guidelines. The Group is satisfied that capital adequacy threshold used for the baseline stress test balance sheet provisions as at 31 December 2014 take into scenario was set at 8.0% Common Equity Tier 1 (“CET 1”) and consideration the findings of the AQR. set at 5.5% CET 1 in the adverse stress test scenario. Both scenarios were assessed for capital under the transitional arrangements as set out in Capital Requirements Directive IV (“CRD IV”), over a 3 year period from 2014 - 2016. The stress tests were conducted on a Static Balance Sheet basis where the stress tests were based on how the balance sheet as at end December 2013 would perform over three years and on a Dynamic Balance Sheet basis where some assumptions from the Restructuring Plan on loan restructuring, cost reductions and new lending were allowed. The results of the CA confirmed that AIB has capital buffers comfortably above minimum requirements under all stress test assessment scenarios. AIB therefore did not require any additional capital as a result of the CA process. The published results confirm that in all scenarios, AIB’s capital ratios exceed the CA baseline and adverse stress test thresholds over the period as outlined below: AIB results of Dynamic Comprehensive assessment Balance Sheet Balance Sheet Static CET 1 ratio at 1 January 2014 AQR(1) adjusted CET 1 ratio Buffer(2) Adjusted CET 1 ratio after Baseline Scenario Buffer(2)(4) Adjusted CET 1 ratio after Adverse Scenario Buffer(3)(4) 15.0% 14.6% 6.6% 12.4% 4.4% 6.9% 1.4% 15.0% 14.6% 6.6% 14.3% 6.3% 10.3% 4.8% The aggregate adjustment due to the outcome of the AQR process would have equated to a reduction of 35 bps to the CET 1 ratio of 15.0% as at 1 January 2014. A provision requirement of € 0.2 billion, 1.3% of balance sheet provisions as of 1 January 2014 was indicated. The Group determines impairment provisions on an ongoing basis in accordance with IFRS accounting standards, (1)Asset Quality Review (“AQR”). (2)Minimum threshold of 8.0%. (3)Minimum threshold of 5.5%. (4)Lowest capital level versus threshold over 3 year period. 44 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Business review - 3. Capital management The objectives of the Group’s capital management policy are to at all times comply with the regulatory capital requirements and to ensure that the Group has sufficient capital to cover the current and future risk inherent in its business and to support its future development. The Group does this through a semi-annual Internal Capital Adequacy Assessment Process (“ICAAP”), which is subject to supervisory review and evaluation. This is AIB’s main capital management tool and gives a clear picture of the Group’s capital and material risks. The key stages in the ICAAP process are as follows: – a Risk Appetite Statement is prepared consistent with the Group’s business strategy. The risk appetite is set annually at the outset of the annual financial planning process and is monitored on a quarterly basis by measuring the current risk profile against the risk appetite; – material risk assessment identifies all relevant (current and anticipated) risks and identifies those that require capital adequacy assessment; – – – financial planning drives the levels of required capital to support growth plans and meet regulatory requirements. Base and stress capital plans are produced as part of the integrated financial planning process; stress testing is applied to capital plans and to all material risks in order to test the resilience of the Group and inform capital needs as they arise; and the final stage of the ICAAP is the production of base and stressed capital plans over a three year timeframe, comparing the capital requirements to available capital. The objective is to demonstrate that the Group has adequate capital resources in excess of minimum regulatory capital requirements and internal capital requirements. Capital regulation The European Union (“EU”) adopted legislative package, known as CRD IV, came into force on 1 January 2014, with some of its provisions being phased-in from 2014. CRD IV consists of the Capital Requirements Regulation (“CRR”) which is directly applicable across firms in the EU, and the new Capital Requirements Directive (“CRD”), which has been implemented by member states of the European Economic Area through national law. CRD IV is designed to strengthen the regulation of the banking sector and to implement the Basel III agreement in the EU legal framework. On 31 March 2014, the Minister for Finance signed into Irish law two regulations to give effect to CRD IV. The European Union (Capital Requirements) Regulations 2014 gave effect to CRD IV and the European Union (Capital Requirements) (No.2) Regulations 2014 gave effect to a number of technical requirements in order that the CRR can operate effectively in Irish law. CRD IV measures include: – enhanced requirements for quality and quantity of capital. CRD IV also harmonises the deductions from own funds in order to determine the amount of regulatory capital that is prudent to recognise for regulatory purposes. Some of the new provisions of CRD IV are being introduced on a phased basis from 2014, these typically follow 20% in 2014, 40% in 2015 etc. until 2018. The main exception(1) to this relates to the deduction for the deferred tax asset which will be deducted at 10% per annum commencing in 2015. AIB commenced reporting to its regulator under the transitional CRD IV rules during 2014. The transitional capital ratios presented on page 47 take account of these phasing arrangements. The fully loaded capital ratios represent the full implementation of CRD IV; – a liquidity coverage ratio (“LCR”) which will require banks to have sufficient high quality liquid assets to withstand a 30-day stressed funding scenario that is specified by supervisors. An additional measure is the net stable funding ratio (“NSFR”) which is a longer term structural ratio designed to address liquidity mismatches. The NSFR provides incentives for banks to use stable funding; – a leverage ratio which is designed to act as a non-risk sensitive back-stop measure to reduce the risk of build-up of excessive leverage in an individual bank and the financial system as a whole. The implications of the leverage ratio will be closely monitored prior to its possible move to a binding requirement on 1 January 2018; – – a single set of harmonised prudential rules which banks throughout the EU must respect. The new rules remove a large number of national options and discretions that were previously available; and other measures including enhanced governance, sanctions, capital buffers, remuneration controls and improved transparency. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i A new system of financial supervision, the Single Supervisory Mechanism (‘’SSM’’), comprising the European Central Bank (‘’ECB’’) and the national competent authorities of EU countries has been established. The SSM places the ECB as the central prudential supervisor of financial institutions in the Eurozone, including AIB, and in those non-eurozone EU countries that choose to join the SSM. On 4 November 2014, the ECB commenced its supervisory role under the SSM. The aims of the SSM are to ensure the safety and soundness of the EU banking system and to increase financial integration and stability in the EU. Although the ECB has been conferred with the task of ensuring financial stability, some functions such as consumer protection, supervision of payment services and the combat of money laundering remain at national level. (1)The CBI published their ‘Implementation of Competent Authority Discretions and Options in CRD IV and CRR’ on 24 December 2013, updated on 21 May 2014 to reflect national transposition of CRD IV, which clarifies the application of transitional rules in Ireland under CRD IV. n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 45 Business review - 3. Capital management The Bank Recovery and Resolution Directive (“BRRD”) and the Single Resolution Mechanism (“SRM”) marks another step by European authorities in improving the stability of the financial system, adding a common recovery and resolution framework to the already established SSM. The overarching goal of the new bank recovery and resolution framework established by the BRRD/SRM package is to break the linkages between national banking systems and sovereigns. The new framework is intended to enable resolution authorities to resolve failing banks with a lower risk of triggering contagion to the broader financial system, while sharing the costs of resolution with bank shareholders and creditors. To achieve this objective, the BRRD includes explicit provisions for the ‘bail-in’ of senior creditors where necessary. This specific ‘bail-in’ of certain senior creditors is not required to be brought into force until the beginning of 2016. Relevant capital metrics in this regard include: – – the Minimum Requirement Eligible Liabilities (“MREL”) which is being introduced as part of the BRRD. It is designed to ensure that banks have sufficient loss-absorbing capacity through capital and liabilities eligible to be bailed in. the Total Loss Absorption Capacity (“TLAC”) which is a proposed minimum requirement for total capital. It is proposed to be imposed from 2019 on banks that are deemed by the Financial Stability Board (“FSB”) to be globally systemically important banks (“G–SIBs”) (currently a list of 29 banks not including AIB). The Group’s transitional Common Equity Tier 1 (“CET1”) ratio was 16.4% as at 31 December 2014, an increase of 140 bps in the year. The fully loaded CET1 ratio was 11.8% including the 2009 Preference Shares which continue to be considered as CET1 until 31 December 2017. Excluding the 2009 Preference Shares, the fully loaded CET1 reduces to 5.9%. These levels of capital will enable the Group to progress on-going discussions with the Department of Finance on determining the appropriate level and mix of capital for the Group. Capital structure Resolutions to reorganise the share capital of the Group were passed at an extraordinary general meeting held on 19 June 2014. These included the renominalisation of the ordinary shares and a resolution to allow for the increase of distributable reserves by € 5.0 billion. An application was made to the High Court in July 2014 for approval of that increase in distributable reserves. On 15 October 2014, the High Court granted an order permitting a share capital reduction which gave rise to additional distributable reserves totalling € 5.0 billion. This reduction was effected on 16 October 2014. 46 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Business review - 3. Capital management Regulatory capital and capital ratios Basel II as reported 31 December 2013 € m 10,494 Core/common equity tier 1 capital Gross common equity tier 1 – Less preference dividend 10,494 Common equity tier 1 after preference dividend (179) (34) (284) (642) (151) – (158) (120) (1,568) 8,926 833 595 140 (158) 1,410 Regulatory adjustments – Goodwill and intangibles – – – – – – Cash flow hedge reserves Reversal of fair value of contingent capital instrument Available for sale securities Pension Deferred tax Unconsolidated financial investments – Other Core/common equity tier 1 capital Tier 2 capital Subordinated debt Credit provisions Other Regulatory adjustments – Unconsolidated financial investments Total tier 2 capital 10,336 Total capital Risk weighted assets 59,038 Credit risk 177 3,174 – 6 Market risk Operational risk Credit valuation adjustment Other CRD lV transitional basis Pro-forma 1 January 31 December 2014 € m 2014 € m CRD lV fully loaded basis(1) Pro-forma 1 January 2014 € m 31 December 2014 € m 11,572 (280) 11,292 (174) (383) (189) (1,369) 557 – – (17) (1,575) 9,717 538 453 17 – 10,494 – 10,494 (179) (34) (284) (649) (132) – – (93) (1,371) 9,123 828 453 93 – 1,008 10,725 1,374 10,497 11,572 (280) 11,292 (174) (383) – – (121) (3,640) – – (4,318) 6,974 538 136 – – 674 7,648 10,494 – 10,494 (179) (34) – – (54) (3,838) – – (4,105) 6,389 828 132 – – 960 7,349 54,348 56,489 54,348 56,489 471 2,822 1,468 5 177 3,174 1,037 6 471 2,822 1,468 5 177 3,174 1,037 6 62,395 Total risk weighted assets 59,114 60,883 59,114 60,883 14.3% Core tier 1/common equity tier 1 ratio 16.6% Total capital ratio 16.4% 18.1% 15.0% 17.2% 11.8% 12.9% 10.5% 12.1% (1)Fully loaded ratios are calculated including the 2009 Preference Shares (which will continue to be considered CET1 until 31 December 2017). i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 47 n o i t a m r o n f i l a r e n e G Business review - 3. Capital management Capital ratios at 1 January 2014 Transitional ratio On implementation of CRD IV, the pro-forma CET1 ratio on a transitional basis at 1 January 2014 was 15.0%. This compared to a Basel II core tier 1 ratio of 14.3% at 31 December 2013. Under CRD IV, the supervisory deductions in relation to Ark Life (unconsolidated financial investments), which were deducted 50:50 from tier 1 and tier 2 capital under Basel II, was no longer applicable. Under CRD IV, the main changes to risk weighted assets (“RWAs”) were a) a substantial element of deferred tax assets was removed from the credit RWAs; b) the life assurance business, Ark Life, generates additional credit RWAs; c) a credit valuation adjustment was included, where AIB is required to hold additional capital for entering into over-the-counter (“OTC”) derivative contracts. Fully loaded ratio On implementation of CRD IV, the pro-forma CET1 ratio on a fully loaded basis at 1 January 2014 was 10.5%. This compared to a Basel II core tier 1 ratio of 14.3% at 31 December 2013. Under CRD IV, deferred tax assets relating to unutilised tax losses are deducted in arriving at a fully loaded CET1 ratio. In addition, the available for sale (“AFS”) reserve and pension reserve form part of the fully loaded CET1 ratio. The movements in RWA from Basel II to CRD IV are explained above. Capital ratios at 31 December 2014 Transitional ratio The CET1 transitional ratio has increased from 15.0% at 1 January 2014 to 16.4% at 31 December 2014. This is driven primarily by profit of € 915 million generated during 2014 and a release of € 75 million in Tier 2 capital to CET1 following the disposal of Ark Life, partly offset by the impact of the higher pension deficit at 31 December 2014 which arose as a result of a decrease in the discount rate applied in the valuation of pension liabilities. A deduction, being a foreseeable charge, has been made in respect of the full dividend of € 280 million due on 13 May 2015 on the 2009 Preference Shares. This has reduced CET1 and total capital ratios by 0.5%. The decrease in credit risk RWAs of € 2.1 billion reflects a reduction in net loans in addition to the impact of the disposal of Ark Life. The RWAs attaching to operational risk reduced by € 352 million, reflecting the reduced levels of income in the annual calculation. The CET1 transitional ratio, at 16.4%, is significantly in excess of the minimum CET1 regulatory requirements. The total capital ratio has increased from 17.2% at 1 January 2014 to 18.1% at 31 December 2014. This reflects the increase in CET1 capital described above, offset by a € 366 million reduction in tier 2 capital, primarily relating to a) the continuing reduction in the Tier 2 qualifying amount of the contingent capital instrument that is due to mature in July 2016 and b) the transfer of Tier 2 capital to CET1 following the disposal of Ark Life. The capital figures reflect the audited 2014 year end profit for the Group. The quarterly SSM regulatory capital reporting process will include these profits in due course. Fully loaded ratio The transitional CET1 ratio of 16.4% compares to 11.8% on a fully loaded basis at 31 December 2014. This reflects a reduction in CET1 of € 2,743 million. The main drivers of this reduction are: – – the full deduction of the deferred tax asset (‘’DTA’’) of € 3,640 million under fully loaded 1 January 2014: €3,838 million. Under transitional rules, the phasing in deduction of the DTA will commence in 2015 at 10% per annum. the AFS reserve of € 1,369 million, driven by unrealised gains in sovereign debt securities and the revaluation of the Group’s NAMA subordinated bonds, is included in the fully loaded position while it is excluded on a transitional basis at 31 December 2014. – the fully loaded CET1 position takes full account of the pension deficit within revenue reserves whereas under transitional rules the impact of this deficit has been restricted. The difference in treatment amounted to € 678 million at 31 December 2014. The total capital ratio for AIB on a fully loaded basis has increased from 12.1% to 12.9%, reflecting the factors outlined above, partly offset by the continuing reduction in the Tier 2 qualifying amount of the contingent capital instrument. The fully loaded capital ratios include the 2009 Preference Shares which continue to be considered as CET1 until 31 December 2017. Excluding the 2009 Preference Shares, the reported fully loaded CET1 of 11.8% at 31 December 2014 would reduce to 5.9%. 48 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Leverage ratio CRD IV also introduces a leverage ratio which is defined as tier 1 capital divided by a non-risk adjusted measure of assets. Based on full implementation of CRD IV, the leverage ratio, including the 2009 Preference Shares, was 6% at 31 December 2014 (31 December 2013: 5%). This primarily reflects an increase in tier 1 capital as outlined above and a reduction in asset balances. Excluding the 2009 Preference Shares, the reported leverage ratio of 6% at 31 December 2014 would reduce to 3%. Minimum Requirement Eligible Liabilities (“MREL”) Based on current guidance, AIB’s MREL ratio at 31 December 2014 was 11.1% on a fully loaded basis (13.7% under transitional rules). Total Loss Absorption Capacity (“TLAC”) Based on current guidance, AIB’s TLAC ratio at 31 December 2014 was 12.9% on a fully loaded basis (18.1% under transitional rules). i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 49 n o i t a m r o n f i l a r e n e G Risk management 1. Principal risks and uncertainties 2. Framework 2.1 Risk management framework 2.2 Risk appetite 2.3 Risk governance 2.4 Risk identification and assessment process 2.5 Stress and scenario testing 2.6 Risk culture 3. Individual risk types 3.1 Credit risk(1) – Credit exposure – Credit risk management – Credit profile of the loan portfolio: Credit profile of residential mortgages Segmental analysis of the loan portfolio Credit ratings of total loans and receivables to customers – Financial investments available for sale 3.2 Credit risk – Forbearance 3.3 Liquidity risk 3.4 Market risk 3.5 Operational risk 3.6 Regulatory compliance risk 3.7 Structural foreign exchange risk 3.8 Pension risk Page 51 57 57 57 59 59 59 60 65 70 80 97 115 123 127 130 139 150 154 155 156 156 (1)The credit risk disclosures in this section are aligned with the Central Bank of Ireland guidelines issued in December 2011 and May 2013 respectively. 50 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Risk management – 1. Principal risks and uncertainties Introduction The Group is exposed to a number of material risks and in order to minimise these risks, the Group has implemented comprehensive risk management strategies. Although the Group invests substantial time and effort in its risk management strategies and techniques, there is a risk that these may fail to fully mitigate the risks in some circumstances, particularly if confronted with risks that were not identified or anticipated. The principal risks and uncertainties facing the Group fall under the following broad categories: – Macro-economic and geopolitical risk – Regulatory and legal risks – Risks relating to business operations, governance and internal control systems This list of principal risks and uncertainties should not be considered as exhaustive and other factors, not yet identified, or not currently considered material, may adversely affect the Group. Macro-economic and geopolitical risk The Group’s business may be adversely affected by the economic and market conditions it operates in Deterioration in the performance of the Irish economy or other relevant economies has the potential to adversely affect the Group’s overall financial condition and performance. Such investments are de-scoped or de-prioritised, and may serve to increase operational risk in the near-term. Market conditions are also impacted by the competitive environment in which the Group operates. The entry of bank and non-bank competitors into the Group's markets may put additional pressure on the Group's income streams and consequently have an adverse impact on its financial performance. The Group's financial planning process evaluates the impact deterioration could result in reductions in business activity, lower of economic and market conditions on the Group's capital, demand for the Group’s products and services, reduced funding and profitability under both forecast and stress availability of credit, increased funding costs and, decreased scenarios. Additionally, sensitivity analysis is used to evaluate asset values. the impact of individual risk drivers. Performance against the Group’s financial plan is monitored by management and the While there are some signs of improvement and stabilisation in Board on a monthly basis. the Irish economy, any renewed stress on or deterioration of the economy could impact the return of normalised markets for commercial and residential property. As the Group remains heavily exposed to the Irish property market, a prolonged delay in the recovery of the Irish market could have a negative impact on Constraints on the Group’s access to funding may adversely affect liquidity risk management Conditions could arise which would constrain funding or levels of arrears, the Group’s collateral values and consequently, liquidity opportunities for the Group. Currently, the Group funds have a material impact on the Group’s future performance and its activities primarily from customer deposits. However, a loss results. of confidence by depositors in the Group, the Irish banking industry or the Irish economy could lead to losses of funding or General economic conditions continue to be challenging for liquidity resources over a short period of time. Concerns customers. A continued high level of unemployment together with around debt sustainability and sovereign downgrades in the any further reduction in borrowers’ disposable income has the Eurozone could impact the Group’s deposit base and could potential to negatively impact customers’ ability to repay existing impede access to wholesale funding markets, impacting the loans. This could result in additional write downs and impairment ability of the Group to issue debt securities to the market. charges for the Group and negatively impact its capital and earnings position. Challenging economic conditions will also influence the demand for credit in the economy. A declining or A stable customer deposit base and asset deleveraging has allowed the Group to materially reduce its funding from the continuing muted demand for credit has the potential to impact European Central Bank (“ECB”). This, in turn, has allowed an the Group’s financial position. increase in unencumbered high quality liquid assets. The Group has also identified certain management and mitigating Deterioration in the economic and market conditions in which the actions which could be considered on the occurrence of a Group operates could negatively impact on the Group's liquidity stress event. However, in the unlikely event that the income, and may put additional pressure on the Group to more Group exhausted these sources of liquidity it would be aggressively manage its cost base. This may have negative necessary to seek alternative sources of funding from the consequences for the Group to the extent that strategic monetary authorities. Allied Irish Banks, p.l.c. Annual Financial Report 2014 51 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management – 1. Principal risks and uncertainties The Capital Requirements Regulation (No. 575/2013) (“CRR”) Group’s financial condition. Any change in membership of such and the Capital Requirements Directive (2013/36/EU) (“CRD” and associations or reductions in the perceived creditworthiness of together with the CRR, “CRD IV”) require banks such as AIB to one or more significant borrower or financial institution, could meet targets set for the new Basel III liquidity related ratios: the lead to market-wide liquidity problems, losses and defaults, Net Stable Funding Ratio and Liquidity Coverage Ratio. Meeting which could adversely affect the Group’s results, financial the phased implementation deadlines of these requirements condition and future prospects. The Group's stress testing could impose additional costs on the Group while failure to framework evaluates its risk profile under a range of scenarios, demonstrate appropriate progress may lead to regulatory including systemic threats which are caused by or give rise to sanction. contagion risk. The most severe systemic risks, together with their associated risk mitigants (where available) are evaluated The Group's liquidity management framework sets out the as part of the Group's Recovery Planning framework. manner in which the Group's funding and liquidity risk profile is managed. See pages 139 to 149 for further detail. The Group faces market risks, including non-trading interest rate risk The following market risks arise in the normal course of the The Group may be adversely affected by further austerity and budget measures introduced by the Government The current and future budgetary and taxation policy of Ireland and other measures adopted by the Irish Government may Group's banking business; interest rate risk, credit spread risk have an adverse impact on borrowers’ ability to repay their (including Sovereign risk), basis risk and FX risk. loans and, as a result, the Group’s business. Furthermore, Changes in the shape and level of interest rate curves impact the of the Group through the imposition of measures such as the economic value of the Group's underlying assets and liabilities. bank levy introduced in Budget 2014. This bank levy imposes The level of the Group's earnings is exposed to basis risk i.e. an an additional taxation liability on the Group and applies during imperfect correlation in the adjustment of the rates earned and 2014, 2015 and 2016. The annual levy paid by the Group in some measures may directly impact the financial performance paid on different products with otherwise similar repricing 2014 amounted to € 60 million. characteristics. The persistence of exceptionally low interest rates for an extended period could adversely impact the Group’s The Terms of Reference proposed by the Joint Committee for earnings through the compression of net interest margin. the Inquiry into the Banking Crisis were agreed by Dáil Éireann and Seanad Éireann in November 2014. The purpose of the Widening credit spreads could adversely impact the value of the Inquiry is to inquire into the reasons why Ireland experienced a Group’s available for sale (“AFS”) bond positions. systemic banking crisis, including the political, economic, social, cultural, financial and behavioural factors and policies Trading book risks predominantly result from supporting client which impacted on or contributed to the crisis and the businesses with small residual discretionary positions remaining. preventative reforms implemented in the wake of the crisis. Credit Value Adjustments (“CVA”) and Funding Value The costs and potential implications for the Group of this Adjustments (“FVA”) to derivative valuations arising from inquiry are uncertain at this time. customer activity have potentially the largest trading book derived impact on earnings. The Group assesses this risk by undertaking sensitivity analysis in its financial planning process, and monitoring Changes in foreign exchange rates, particularly the euro-sterling financial performance against the Group’s financial plan on a rate, affect the value of assets and liabilities denominated in monthly basis. foreign currency and the reported earnings of the Group’s non-Irish subsidiaries. Regulatory and legal risks The Group manages this risk through a number of financial risk management frameworks as described in pages 139 to 153 and Increased regulation and supervision A significant number of new regulations have been issued by page 156. Risk positions are monitored on a regular basis at the the various regulatory authorities in the recent past. Asset and Liability Committee (“ALCo”). Contagion risks could disrupt the markets and adversely affect the Group’s financial condition The risk of contagion in the markets in which the Group operates The Eurozone’s largest banks, including the Group, came under the direct supervision of, and are deemed to be authorised by the ECB since the introduction on 4 November 2014 of the Single Supervisory Mechanism (“SSM”). and dislocations caused by the interdependency of financial The main aims of the SSM are to ensure the safety and markets’ participants and of members of currency and soundness of the European banking system and to increase supranational economic associations is an on-going risk to the financial integration and stability in Europe. A Single Resolution 52 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Mechanism (“SRM”) is being introduced including a single resolution board and a single fund for the resolution of banks. The requirements of the SRM are set out in the Banking Recovery and Resolution Directive (“BRRD”) which is to come into effect in 2015 and the Group is making preparations for the The future of the Group’s business activities are subject to possible interventions by the Government or the disposal of the State’s ownership and other interests in the Group The Group is substantially owned by an agency of the Irish Single Resolution Authority (“SRA”) which comes into effect in State and accordingly, subject to EU state aid rules, controlled 2016. The establishment of the SRM is designed to ensure that by the Irish Government. Such ownership or control may affect supervision and resolution is exercised at the same level for the Group’s operations, financial condition and future prospects. countries that share the supervision of banks within the SSM. The single resolution fund will be financed by bank levies In order to comply with contractual commitments imposed on raised at national level and the SRM will come into force on 1 January 2016. Further information on regulatory change is set out in the “Governance and Oversight - 6 Supervision and Regulation” section of this Report. The challenge of meeting this degree of regulatory change will place a strain on the Group’s resources, particularly during a period of significant organisational transformation. The challenge of meeting tight implementation deadlines while balancing competing resource priorities and demands adds to the regulatory risk of the Group. These may also impact significantly on the Group’s future product range, distribution channels, funding sources, capital requirements and consequently, reported results and financing requirements. The potential impact of new regulatory requirements is regularly evaluated by the Group's management and cross-functional programmes are put in place to ensure that the Group is able to meet new regulatory requirements. The Group is subject to substantial and changing conduct regulations The Group is exposed to many forms of Conduct Risk, which the Group in connection with its recapitalisation by the Irish State and with the requirements of EU state aid applicable in respect of that recapitalisation, a Relationship Framework was agreed between the Irish Minister for Finance (‘the Minister’) and the Group in March 2012. This provides the framework under which the relationship between the Minister and the Group is governed. Under the Relationship Framework, the authority and responsibility for strategy and commercial policies (including business plans and budgets) and conducting the Group's day-to-day operations rest with the Board of AIB and its management team, but the appointment or removal of the chairman or chief executive officer of AIB are reserved for the Minister, and in respect of which the Board may only engage with the prior consent of the Minister. Nevertheless, for so long as ownership of the Group remains within State control, there remains a risk of intervention by the Irish Government in relation to the operations and policies of the Group. Such interventions may have a negative impact on the operations of the Group. The Irish Government may sell or otherwise dispose of its ownership and other economic interests in the Group to any private or public entity, including any intergovernmental institution. Any such sale or disposal, and any conditions attaching to it, may materially affect the Group’s operations, may arise in a number of ways. In particular, the Group may financial condition and future prospects. be subject to allegations of mis-selling of financial products, including, as a result of having sales practices and/or reward structures in place that are determined to have been inappropriate, which may result in adverse regulatory action (including significant fines) or requirements to amend sales processes, withdraw products or provide restitution to affected customers, any or all of which could result in the incurrence of significant costs, may require provisions to be recorded in the financial statements and could adversely impact future revenues from affected products. The Group has implemented a Conduct Framework detailing its approach to the management of Conduct Risk and oversight of Conduct Risk is the responsibility of the Products and Conduct Committee. The Group actively engages and co-operates with all relevant external stakeholders including governmental authorities. The Group is subject to Government/European Commission supervision and oversight As a result of the recapitalisations of AIB by the Irish Government, the Group is subject to various obligations under the Relationship Framework as agreed between the Minister and the Group in March 2012, and a number of Subscription and Placing Agreements impacting on the Group’s governance, remuneration, operations and lending activities. These obligations are in addition to certain commitments and restrictions on the operation of the Group’s business under the Credit Institutions (Financial Support) Scheme 2008 (the “CIFS Scheme”) and the National Asset Management Agency (“NAMA”) programme, all of which may serve to limit the Group’s operations and place significant demands on the reporting systems and resources of the Group. Allied Irish Banks, p.l.c. Annual Financial Report 2014 53 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management – 1. Principal risks and uncertainties As a result of the above mentioned supports by the Government, the Group is also subject to obligations in respect of the European Commission’s approval in May 2014 of AIB’s The Group faces elevated operational risks Operational risk is defined as risks arising from inadequate or failed internal processes, people and systems, or from external Restructuring Plan. In that respect, the Group has committed to a events. The Group faces an elevated operational risk profile range of measures relating to customers in difficulty, costs caps given the current economic environment and the ongoing and reductions, acquisitions and exposures, coupon payments, significant organisational changes. promoting competition and the repayment of aid to the State. The Group actively engages and co-operates with all relevant external stakeholders including governmental authorities. The Group’s participation in the NAMA Programme gives rise to certain residual financial risks As a participating institution under the NAMA Act, during 2010 One of the Group's key operational risks is people risk. The Group’s efforts to restore and sustain the stability of its business on a long-term basis depend, in part, on the availability of skilled management and the continued service of key members of staff. Under the terms of the recapitalisation of the Group by the and 2011, AIB transferred financial assets to NAMA with a net Irish Government, the Group is required to comply with certain carrying value of € 15.5 billion for which it received as executive pay and compensation arrangements. As a result of consideration NAMA senior bonds and NAMA subordinated these restrictions, the Group cannot guarantee that it will be bonds. Provisions of the NAMA Act provide for certain circumstances in which the Group could face additional liabilities in relation to assets transferred. In addition, credit exposure to NAMA arises from the senior and subordinated NAMA bonds acquired by AIB in consideration for the transfer of assets to NAMA. The Group monitors this risk by periodically reviewing the carrying value of its NAMA senior and subordinated bonds, including external benchmarking. Risks relating to business operations, governance and internal control systems The Group is subject to inherent credit risks in respect of customers and counterparties which could adversely affect the Group’s results, financial condition and future prospects Risks arising from changes in credit quality and the recoverability able to attract, retain and remunerate highly skilled and qualified personnel in a highly competitive market. Failure by the Group to staff its day-to-day operations appropriately or failure to attract and appropriately develop, motivate and retain highly skilled and qualified personnel could have an adverse effect on the Group’s results, financial condition and prospects. The Group’s business is dependent on processing and reporting accurately and efficiently a high volume of complex transactions across numerous and diverse products and services. Any weakness in these systems or processes could have an adverse effect on the Group's results and on its ability to deliver appropriate customer outcomes during the affected period. In addition, any breach in security of the Group’s systems (for example from increasingly sophisticated cybercrime attacks), could disrupt its business, result in the disclosure of confidential information or create significant financial and/or legal exposure and the possibility of damage to the Group’s reputation and/or brand. The Group mitigates its operational risks by having detailed risk assessment and internal control requirements in relation of loans and other amounts due from customers and to the management of its key people, process and systems counterparties are inherent in a wide range of the Group’s risk, and through comprehensive and robust business businesses. In addition to the credit exposures arising from loans continuity management arrangements. These are set out in to individuals, SMEs and corporates, the Group also has the Group's Operational Risk Framework which is described exposure to credit risk arising from loans to financial institutions, on page 154. its trading portfolio, available for sale (“AFS”) portfolio, derivatives and from off-balance sheet guarantees and commitments. The Group has been exposed to increased counterparty risk as a result of the risk of financial institution failures during the global economic crisis. The Group is also exposed to credit risks relating to sovereign issuers. Concerns in respect of Ireland and other sovereign issuers, including other European Union Member States, have adversely affected and could continue to adversely affect the financial performance of the Group. Risk of litigation arising from the Group’s activities The Group operates in a legal and regulatory environment that exposes it to potentially significant litigation and regulatory risks. Disputes and legal proceedings in which the Group may be involved are subject to many uncertainties, and the outcomes of such disputes are often difficult to predict, particularly in the early stages of a case or investigation. Adverse regulatory action or adverse judgments in litigation could result in a monetary fine or penalty, adverse monetary judgement or settlement and/or restrictions or limitations on The Group has extensive credit policies, limits and controls in the Group’s operations or result in a material adverse effect on place which are described in detail on pages 60 to 79. the Group’s reputation. 54 Allied Irish Banks, p.l.c. Annual Financial Report 2014 The Group has a centralised legal team under the Group is to be phased in evenly over 10 years commencing in 2015. General Counsel and relevant internal and external legal The Group monitors this risk by regularly reviewing the basis expertise is retained to mitigate associated risks as appropriate. for recognition of its deferred tax assets. The Group may be subject to the risk of having insufficient capital to meet increased minimum regulatory requirements The Group is subject to minimum capital requirements as set out in CRD IV and implemented under the Single Supervisory Mechanism. As a result of these requirements banks in the EU have been, and will continue to be required to increase the quantity and the quality of their regulatory capital. Given this regulatory context, and the levels of uncertainty in the current The value of certain financial instruments recorded at fair value is determined using financial models incorporating assumptions, judgements, and estimates that may change over time, or may ultimately turn out to be inaccurate, and the value realised by the Group for these assets may be materially different from their current, or estimated, fair value In accordance with International Financial Reporting economic environment, there is a possibility that the economic Standards (“IFRS”), the Group recognises at fair value: outturn over the Group's capital planning period may be (i) derivative financial instruments; materially worse than expected and/or that losses on the Group’s (ii) financial instruments at fair value through profit or loss; credit portfolio may be above forecast levels. Were such losses (iii) certain hedged financial assets and financial liabilities; and to be significantly greater than currently forecast, or capital (iv) financial assets classified as AFS. requirements for other material risks to increase significantly, The best evidence of fair value is quoted prices in an active there is a risk that the Group’s capital position could be eroded to market. Disruption to quoted prices increases reliance on the extent that it would have insufficient capital to meet its valuation techniques which requires the use of judgement in regulatory requirements. In addition, capital levels may be the estimation of fair value. This judgement includes, but is not negatively affected by volatility arising from the pension schemes limited to, evaluating available market information, determining and the available for sale portfolio values. the cash flows for the instruments, identifying a risk free discount rate and applying an appropriate credit spread. This risk is mitigated by evaluating the adequacy of the Group's Valuation techniques that rely to a greater extent on capital under both forecast and stress conditions as part of the non-observable data require a higher level of management Internal Capital Adequacy Assessment Process (“ICAAP”). The judgement to calculate fair value than those based on wholly ICAAP process includes the identification and evaluation of observable credit spread. potential capital mitigants. The Group’s deferred tax assets depend substantially on the generation of future profits over an extended number of years The Group’s business performance may not reach the level assumed in the projections supporting the carrying value of the deferred tax assets. Lower than anticipated profitability within The choice of contributors, the quality of market data used for pricing, and the valuation techniques used are all subject to internal review and approval procedures. Given the uncertainty and subjective nature of valuing financial instruments at fair value, any change in these variables could give rise to the financial instruments being carried at a different value, with a consequent impact on the Group’s results, financial condition Ireland and the UK would lengthen the anticipated period over and future prospects. which the Group’s Irish and UK tax losses would be used. The value of the deferred tax assets relating to unused tax losses The Group mitigates this risk by having comprehensive constitutes substantially all of the deferred tax assets recognised valuation and accounting policies and methodologies in place in the Group’s statement of financial position. A significant reduction in anticipated profit, or changes in tax legislation, for the valuation of certain financial assets, and in undertaking control activities which provide assurance that these are being regulatory requirements, accounting standards or relevant adhered to. practices, could adversely affect the basis for recognition of the value of these losses, which would adversely affect the Group’s results and financial condition, including capital and future prospects. The Group’s risk management strategies and techniques may be unsuccessful The Group is exposed to a number of material risks. Although the Group invests substantially in its risk management The new capital adequacy rules under CRD IV require the Group strategies and techniques, there is a risk that these fail to fully inter alia, to deduct from its CET1, the value of most of the Group’s deferred tax assets, including all deferred tax assets arising from unused tax losses. This deduction from CET1 mitigate the risks in some circumstances. The Group mitigates this risk by regularly reviewing the design and operating effectiveness of its risk management policies and methodologies. These reviews are supplemented in some instances by external review and validation. Allied Irish Banks, p.l.c. Annual Financial Report 2014 55 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management – 1. Principal risks and uncertainties The Group is subject to model risk The Group develops and uses models across a range of risks and activities including, but not limited to, capital management, Negative impacts on the Group’s reputation may impact its financial performance Damage to the Group’s reputation may adversely affect credit grading, valuations, liquidity, pricing and stress testing. relationships with the Group’s stakeholders including Where the Group uses risk measurement techniques based on customers, staff and supervisors. Such damage may lead to historical observations, there is a risk that these under or over impacts on the Group’s capability to attract and retain estimate exposure to the extent that future market conditions customers, attract, motivate and retain staff and engage deviate from historic norms. As a result, the Group may positively with supervisors. This may lead to impacts on the experience material unexpected losses. Group’s ability to conduct its affairs and in turn on the financial performance of the Group. The Group may incur losses as a result of inaccuracies in these models, the data used to build them or decisions made based on The Group manages its reputational risk through its incomplete understanding of these models. management of other material risk types. For any risk, the potential reputational impact is considered alongside the The Group mitigates this risk by having comprehensive policies direct and indirect financial consequence. The Nominations in place in relation to models, appropriate segregation of duties and Corporate Governance Committee is responsible for between model build and validation, senior executive approval overseeing the Group's management of reputational risk. and oversight of models and on-going testing of the performance of models. 56 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Risk management – 2. Framework Introduction The principal risks and uncertainties to which the Group is exposed are set out in the previous section. The governance and organisation framework through which the Group manages and seeks, where possible, to mitigate these risks, is described below. 2.1 Risk management framework The Group assumes a variety of risks in undertaking its business activities. Risk is defined as any event that could damage the core earnings capacity of the Group, increase earnings or cash-flow volatility, reduce capital, threaten business reputation or viability, and/or breach regulatory or legal obligations. AIB has adopted an Enterprise Risk Management approach to identifying, assessing and managing risks. To support this approach, a number of Board approved frameworks and policies are in place which set out the key principles, roles and responsibilities and governance arrangements through which the Group's material risks are managed. The core aspects of the Group's risk management approach are described below. 2.2 Risk appetite The Group’s risk appetite is defined as the maximum amount ‘three lines of defence’ framework in the delineation of accountabilities for risk governance. Under the three lines of defence model, primary responsibility for risk management lies with business line management. The Risk Management function, headed by the Group Chief Risk Officer (“CRO”) provides the second line of defence, providing independent oversight and challenge to business line managers. The third line of defence is the Group Internal Audit function, under the Head of Group Internal Audit (“GIA”), which provides independent assurance to the Audit Committee of the Board on the effectiveness of the system of internal control. Changes to the composition of the Leadership Team and Board, both during 2014 and subsequently, which includes the appointment of a new CRO from 1 November 2014 are described on pages 158 to 161. 2.3.2 Committees with risk management responsibilities The Board has delegated a number of risk governance responsibilities to various committees and key officers. The diagram below summarises the current risk committee structure of the Group. of risk that the Group is willing to accept or tolerate in order to The role of the Board, the Audit Committee, and the Board deliver on its strategic and business objectives. The Group Risk Committee (“BRC”) is set out in the Governance and Risk Appetite Statement (“RAS”) is a blend of qualitative statements and quantitative limits and triggers linked to the Group's strategic objectives. The Group RAS is reviewed and approved by the Board at least annually or more often if required, in alignment with the annual business and financial planning process. A Group RAS was in place during the year under review, and was last updated in January 2015. AIB authorised bank subsidiaries and business segments are required to document and align their own risk appetite statements with the Group statement. While the Board reviews the Group RAS, the Leadership Team is accountable for ensuring that risks remain within appetite. The Group’s risk profile is measured against its risk appetite and adherence to both the Group RAS and business segment risk appetite statements are reported on a monthly basis to the Executive Risk Committee (“ERC”) and Board Risk Committee (“BRC”). Should any breaches of Group RAS oversight - 4. Corporate Governance statement of this report. The Leadership Team comprises the senior executive managers of the Group who manage the strategic business risks of the Group. It establishes the business strategy and risk appetite within which the risk management function operates. The role of the Executive Risk Committee (“ERC”) is to foster risk governance within the Group, to ensure that risks within the Group are appropriately managed and controlled, and to evaluate the Group's risk appetite against the Group’s strategy. It is a sub-committee of the Leadership Team chaired by the Chief Financial Officer (“CFO”) and its membership includes the CEO, CRO, Chief Operating Officer (“COO”), and the Head of Internal Audit. The ERC's principal duties and responsibilities include reviewing the effectiveness of the Group’s risk frameworks and policies, monitoring and reviewing the Group’s risk profile, risk trends, risk concentrations and policy exceptions, and monitoring adherence to approved risk appetite and other i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i limits arise, these, together with associated management limits. The ERC acts as the parent body of two other risk and action plans, are escalated to the Board for review, and also control committees, namely the Group Credit Committee reported to the Central Bank of Ireland (“CBI”)/Single (“GCC”) and the Products and Conduct Committee (“PCC”). Supervisory Mechanism (“SSM”), in line with the provisions of Principal responsibilities of the GCC include: the exercising of its Corporate Governance Code. 2.3 Risk governance 2.3.1 Risk management organisation The Board has ultimate responsibility for the governance of all risk taking activity in the Group. The Group has adopted a approval authority for exposure limits to customers of the Group; exercising approval authority for credit policies; considering quarterly provision levels, assurance reviews and credit review reports; the approval of credit inputs to credit decisioning models, as well as the review and approval of other credit related matters as they occur. The PCC approves the launch and ongoing performance of products and oversees the n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 57 Risk management – 2. Framework Group’s conduct risk management. The PCC plays a key role in In ensuring sound capital and liquidity management and promoting and supporting a customer centric ethos and culture planning, ALCo reviews and approves models for the valuation across the Group. of financial instruments, for the measurement of market and liquidity risk, for regulatory capital (‘IRB models’), and for the The role of the Asset and Liability Committee (“ALCo”) is to act calculation of expected and unexpected credit losses and as the Group’s strategic balance sheet management forum that stress testing. In addition, ALCo directs the shape of the combines a business-decisioning and risk governance balance sheet through funds transfer pricing, direction on mandate. It is a sub-committee of the Leadership Team, product pricing and review and analysis of risk adjusted chaired by the Director of Finance and its membership returns on capital. includes the CFO, the CRO and the heads of significant business areas. ALCo is tasked with decision-making in respect of the The Group Disclosure Committee is responsible for reviewing Group’s balance sheet structure, including capital, liquidity, compliance of Group financial information with legal and funding, interest rate risk in the Banking Book (“IRRBB”) from an regulatory requirements prior to external publication, and for economic value and net interest margin perspective, foreign exercising oversight of the Accounting Policies Forum, which exchange (“FX”) hedging risks and other market risks. ensures that the accounting policies adopted by the Group conform to the highest standards in financial reporting. Risk Governance Structure Board of Directors Board Risk Committee Audit Committee Remuneration Committee Nominations & Corporate Governance Committee Leadership Team Executive Risk Committee Asset & Liability Committee (ALCo) Group Disclosure Committee Group Credit Committee Products and Conduct Committee UK ALCo d r a o B e v i t u c e x E 58 Allied Irish Banks, p.l.c. Annual Financial Report 2014 2.3.3 Changes to committee structures in 2014 Towards the end of 2014, a review of the Group's 2.5 Stress and scenario testing The Group’s risk identification and assessment framework governance arrangements was undertaken. As a result, the described above is supported by a framework of stress Strategic Credit Forum (“SCF”) was retired and ERC testing, scenario and sensitivity analysis and reverse stress assumed direct responsibility for its activities. The SCF was testing. The Group undertakes a regular programme of stress charged with responsibility for governance of Group credit risk testing across all its material risks to ensure that risk strategy, credit risk appetite, credit quality and impairment assessment is dynamic and forward looking and considers provision adequacy. The Capital Committee (“CC”) and not only existing risks but also potential and emerging threats. Product Pricing Committee (“PPC”) were also retired and their responsibilities subsumed within ALCo. The CC was A key deliverable in 2014 was the stress testing component of responsible for fostering sound capital management and the European Central Bank's Comprehensive Assessment of planning within the Group, ensuring that the quality and the resilience of euro-zone banks. quantum of capital held by the Group was commensurate with its business objectives and risk appetite, and approving Reverse stress testing is undertaken as part of the Group's regulatory capital models. The PPC had delegated authority Recovery Planning i.e. the means by which the Group for the oversight and direction of balance sheet management assesses the key threats to its viability and the available and net interest margin including the approval of product mitigants to address them. pricing. 2.4 Risk identification and assessment process The Group uses a variety of approaches and methodologies 2.6 Risk culture The Group seeks to promote a strong risk culture throughout the organisation which encourages the prompt identification to identify and assess its principal risks and uncertainties. A and escalation of issues and fosters an environment of Material Risk Assessment (“MRA”) is undertaken on at least continuous improvement and ‘learning from mistakes’. Risk an annual basis. The MRA identifies and assesses the most training is an important part of fostering a sound risk culture. material risks facing the Group in terms of their likelihood and A Risk Academy is in place which provides access to impact, and separately evaluates whether an explicit amount recommended training and education for risk professionals as of capital is required to be held against them as part of the well as supporting the on-going development of risk skills Group's Internal Capital Adequacy Assessment Process across the AIB organisation. (“ICAAP”). Other assessments of risk are undertaken, as required, by business areas, focussing on the nature of the risk, the adequacy of the internal control environment and whether additional management action is required. Ad hoc risk assessments are also undertaken in response to specific internal or external events. A monthly CRO Report is presented to the ERC and BRC which sets out the risk profile of the Group and seeks to identify emerging threats. More information on the risk assessment techniques specific to the management of individual risk types is provided on pages 60 to 156. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 59 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk Credit risk is the risk that the Group will incur losses as a result of a customer or counterparty being unable or unwilling to meet a commitment that they had entered into. Credit exposure arises in relation to lending activities to customers and banks, including ‘off-balance sheet’ guarantees and commitments, the trading portfolio, financial investments available for sale, and derivatives. Concentrations in particular portfolio sectors, such as property and construction can impact the overall level of credit risk. Credit risk management objectives are to: – Establish and maintain a control framework to ensure credit risk taking is based on sound credit management principles; – Control and plan credit risk taking in line with external stakeholder expectations; – Identify, assess and measure credit risk clearly and accurately across the Group and within each separate business, from the level of individual facilities up to the total portfolio; and – Monitor credit risk and adherence to agreed controls. AIB lends to personal and retail customers, commercial entities and government entities and banks. Credit risk arises on the drawn amount of loans and receivables, but also as a result of loan commitments, such as undrawn loans and overdrafts, and other credit related commitments, such as guarantees, performance bonds and letters of credit. These credit related commitments are subject to the same credit assessment and management as loans and receivables. Credit risk organisation and structure The Group’s credit risk management systems operate through a hierarchy of lending authorities. All customer loan requests are subject to a credit assessment process. The role of the Credit Risk function is to provide direction, oversight and challenge of credit risk-taking. The Group Risk Appetite Statement sets out the credit risk appetite and framework. Credit Risk appetite is set at Board level and is described, reported and monitored through a suite of metrics. These metrics are supported by more detailed appetite metrics at a segment level. These are also supported by a comprehensive suite of credit risk policies, concentration limits and product and country limits to manage concentration risk and exposures within the Group’s approved risk appetite. The Group’s risk appetite for credit risk is reviewed and approved annually. AIB operates credit approval criteria which: – Includes a clear indication of the Group’s target market(s), in line with Group and Segment Risk Appetite Statements; – Requires a thorough understanding and assessment of the borrower or counterparty, as well as the purpose and structure of credit, and the source of repayment; and – Enforces compliance with minimum credit assessment and facility structuring standards. Credit risk approval is undertaken by experienced credit risk professionals operating within a defined delegated authority framework. The AIB Board is the ultimate credit approval authority and grants authority to various Credit Committees, and individuals to approve limits. Credit limits are approved in accordance with the Group’s written policies and guidelines. All exposures above certain levels require approval by the Group Credit Committee (“GCC”). Other exposures are approved according to a system of tiered individual authorities which reflect credit competence, proven judgement and experience. Depending on the borrower/connection, grade or weighted average facility grade and the level of exposure, limits are sanctioned by the relevant credit authority. Material lending proposals are referred to credit units for independent assessment/approval or formulation of a recommendation and subsequent adjudication by the applicable approval authority. Measurement of credit risk One of the objectives of credit risk management is to accurately quantify the level of credit risk to which the Group is exposed. The use of internal credit rating models is fundamental in assessing the credit quality of loan exposures, with variants of these used for the calculation of regulatory capital. The primary model measures used are: – Probability of default (“PD”) – the likelihood that a borrower is unable to repay his obligations; – Exposure at default (“EAD”) – the exposure to a borrower who is unable to repay his obligations at the point of default; – Loss given default (“LGD”) – the loss associated with a defaulted loan or borrower; and – Expected loss (“EL”) – the loss that can be incurred as a result of lending to a borrower that may default. It is the average expected loss in value over a specified period. 60 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk Measurement of credit risk (continued) To calculate PD, the Group assesses the credit quality of borrowers and other counterparties and assigns a credit grade or score to these. This grading is fundamental to credit sanctioning and approval, and to the on-going credit risk management of loan portfolios. It is a key factor in determining whether credit exposure limits are sanctioned for new borrowers, at which authority level they can be approved, and how any existing limits are managed for current borrowers. The ratings methodology and criteria used in assigning borrowers to grades varies across the models used for the portfolios, but models generally use a combination of statistical analysis (using both financial and non-financial inputs) and expert judgement. For the purposes of calculating credit risk, each ‘probability of default model’ segments counterparties into a number of rating grades, each representing a defined range of default probabilities (details of these rating scales are published in the Group’s Pillar 3 disclosures). Exposures migrate between rating grades if the assessment of the counterparty probability of default changes. These individual rating models continue to be refined and recalibrated based on experience. The calculation of internal ratings differs between portfolios. In the retail portfolio, which is characterised by a large number of customers with small individual exposures, risk assessment and decisioning is largely automated through the use of statistically-based scoring models. All counterparties are assessed using the appropriate model or scorecard prior to credit approval. Mortgage applications are generally assessed centrally with particular reference to affordability, assisted by scoring models. However, for larger cases with connected exposures, some mortgage applications are assessed by the relevant credit authority. Both application scoring for new customers and behavioural scoring for existing customers are used to assess and measure risk as well as to facilitate the management of these portfolios. In the non-retail portfolio, the grading systems utilise a combination of objective information, essentially financial data (e.g. borrowers’ earnings before interest, tax, depreciation and amortisation (“EBITDA”); interest cover; and balance sheet gearing) and qualitative assessments of non-financial risk factors such as management quality and competitive position within the sector/industry. The combination of expert lender judgement and statistical methodologies varies according to the size and nature of the portfolio, together with the availability of relevant default experience applicable to the portfolio. Credit grading and scoring systems facilitate the early identification and management of any deterioration in loan quality. Changes in the objective information are reflected in the credit grade of the borrower with the resultant grade influencing the management of individual loans. Special attention is paid to lower quality performing loans or ‘criticised’ loans. In AIB, criticised loans include ‘watch’, ‘vulnerable’ and ‘impaired’ loans which are defined as follows: The credit is exhibiting weakness but with the expectation that existing debt can be fully repaid from normal cash flows. Watch: Vulnerable: Credit where repayment is in jeopardy from normal cash flows and may be dependent on other sources. Impaired: A loan is impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event/events has an impact such that the present value of future cash flows is less than the current carrying value of the financial asset or group of assets and requires an impairment provision to be recognised in the income statement. The Group’s criticised loans are subject to more intense assessment and review because of the increased risk associated with them. Credit management and credit risk management continues to be a key area of focus. Resourcing, structures, policy and processes are subjected to on-going review in order to ensure that the Group is best placed to manage asset quality and assist borrowers in line with agreed treatment strategies. Use of PD, LGD, and EAD within regulatory capital and impairment provisioning As at 31 December 2014, the Group used a combination of Standardised and Internal Ratings Based (“IRB”) approaches for the calculation of regulatory capital. Under the Standardised approach, regulatory risk weightings are determined on a fixed percentage basis, depending on the portfolios, as specified in the relevant regulations. The Group has regulatory approval to use certain of its internal credit models in the calculation of its capital requirements. 42% (31 December 2013: 37%) of credit risk weighted assets were calculated using internal credit models. This approval covers the adoption of the Foundation IRB approach for non-retail exposures and Advanced IRB for retail exposures. The Group divides its internal rating systems into non-retail and retail approaches. Both approaches differentiate PD estimates into between 9 and 16 grades in addition to the category of default. In all cases, impaired exposures and exposures 90 days or more past due are considered to be in default. Allied Irish Banks, p.l.c. Annual Financial Report 2014 61 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk Measurement of credit risk (continued) Non-retail For non-retail exposures, the Foundation IRB approach is used for sovereign, bank, corporate, commercial, ‘not for profit’ and project finance portfolios. The Foundation IRB approach is used where banks use their own estimate of PD and regulatory estimates of LGD and EAD. To calculate PD, the Group assesses the quality of borrowers and other counterparties using criteria particular to the type of borrower under consideration. Retail For retail exposures, the Advanced IRB approach is adopted for Republic of Ireland residential mortgages (excluding EBS mortgages) where the Group uses its own estimates of PD, LGD and EAD. PDs and LGDs are calibrated on the basis of internal data, supplemented with benchmarking to external sources. The Group has a formalised governance framework around the internal ratings process. Each rating model is subject to an annual validation process, undertaken by an independent validation team. The table below shows the distribution of outstanding non-impaired credit exposures to customers in terms of EAD, PD, LGD and EL by IRB portfolios. Residential mortgages Owner-occupier Buy-to-let Corporate SME Total Residential mortgages Owner-occupier Buy-to-let Corporate SME Total EAD € m 15,282 2,961 18,243 5,330 2,503 26,076 EAD € m 15,803 3,211 19,014 4,924 2,522 26,460 Average PD % Average LGD % 1.23 2.12 1.37 1.82 5.26 1.84 27.48 30.45 27.96 45.22 45.00 33.13 Average PD % Average LGD % 1.32 2.13 1.46 2.59 5.49 2.05 27.56 30.75 28.10 45.17 45.00 32.89 2014 EL(1) € m 71 41 112 50 59 221 2013 EL(1) € m 79 45 124 67 62 253 (1)EL has been adjusted following the outcome of the 2013 Balance Sheet Assessment by the CBI. The average PD and LGD have decreased mainly due to the improving grade profile of the non-impaired book, the improving economic environment and the migration to impaired of some higher PD accounts during 2014. For financial reporting purposes, impairment allowances are recognised only with respect to losses that have been incurred at the balance sheet date based on objective evidence of impairment, accordingly, these will differ from amounts calculated from expected loss models. *Forms an integral part of the audited financial statements 62 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk Measurement of credit risk (continued) Control mechanisms for rating systems The Group ALCo approves all risk rating models, model development, model implementation and, all associated polices. The Group mitigates model risk for IRB portfolios as follows: – The Group has specific policies on documentation, data quality and management, and validation; and – All models are subject to in-depth analysis and review, at least annually. This is carried out by a dedicated unit and is independent of credit origination and management functions. Credit risk principles and policy* The Group implements and operates policies covering the identification, assessment, approval, monitoring, control and reporting of credit risk. The Credit Risk Framework sets out, at a high level, how the Group identifies, assesses, approves, monitors, reports and controls credit risk. It contains minimum standards that are applied across the Group to provide a common and consistent approach to the management of credit risk. More detailed policies, standards and guidelines provide more explicit instructions for applying these minimum standards to specific products, business lines, market segments, processes and roles. These are reviewed at least annually. Policy exceptions must be approved and reported. Policy breaches are not permitted and must be reported to senior management and the Credit Risk function. Credit Risk monitor credit performance trends, review and challenge exceptions to planned outcomes and track portfolio performance against agreed credit risk indicators. This allows the Group to take early and proactive mitigating actions for any potential areas of concern. The more significant credit policies are approved by the Board. Credit concentration risk* Credit concentration risk arises where any single exposure or group of exposures, based on common risk characteristics, has the potential to produce losses large enough relative to the Group’s capital, total assets, earnings or overall risk level to threaten its ability to maintain its core objectives. Credit policy is aligned to the Group’s risk appetite and restricts exposure to certain high risk countries and more vulnerable sectors. Exposures are monitored to prevent excess concentration of risk. The Board approved Large Exposures and Approval Authorities Policy sets the maximum limit by grade for exposures to individual counterparties or group of connected counterparties taking into account features such as security, default risk and term. Concentration risk to sectors and movements in such concentrations are monitored regularly to prevent excessive concentration of risk, guide risk appetite and limit setting, identify unwanted concentrations, and provide an early warning indicator for potential excesses. Such measures facilitate the measurement of concentrations by balance sheet size and risk profile relative to other portfolios within the Group and in turn facilitate appropriate management action and decision making. Country risk* Credit risk is also influenced by country risk, where country risk is defined as the risk that circumstances arise in which customers and other counterparties within a given country may be unable/unwilling to fulfil or are precluded from fulfilling their obligations to the Group due to economic or political circumstances. These are managed in line with the Country Policy limits which define maximum credit risk appetite for those countries through direct sovereign bond exposure, interbank exposure as well as corporate and equity exposures. Exposures against limits are monitored on an on-going basis and reported in line with processes detailed in the Country Exposure Policy. Credit risk on derivatives* The credit risk on derivative contracts is the risk that the Group’s counterparty in the contract defaults prior to maturity at a time when AIB has a claim on the counterparty under the contract. AIB would then have to replace the contract at the current market rate, which may result in a loss. Derivatives are used by AIB to meet customer needs, to reduce interest rate risk, currency risk, and in some cases credit risk and also for proprietary trading purposes. Risks associated with derivatives are managed from a credit, market and operational perspective. The total credit exposure consists partly of the current replacement cost and partly of the potential future exposure. The potential future exposure is an estimation, which reflects possible changes in market values during the remaining life of the individual contract. The Group uses a simulation tool to estimate possible changes in future market values and computes the credit exposure to a high level of statistical significance. Exposures against limits are monitored on an on-going basis. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 63 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk Measurement of credit risk (continued) Credit risk assurance and review* The credit management process is underpinned by an independent system of review. Assessment of the effectiveness of risk management practices and adherence to risk controls is carried out by Credit Risk and Credit Review teams who facilitate a wide range of assurance and review work. These include cyclical credit reviews, non-standard reviews, and bespoke assignments, including impairment adequacy reviews, as required. This provides executive and senior management with assurance and guidance on credit quality, effectiveness of credit risk controls as well as the robustness of impairment provisions. Stress testing and scenario analysis* The credit portfolio is subjected to stress testing and scenario analysis. Events are modelled at a Group wide level, at a segment and business unit level and by rating model and portfolio. *Forms an integral part of the audited financial statements 64 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit exposure Maximum exposure to credit risk from on balance sheet and off balance sheet financial instruments is presented before taking account of any collateral held or other credit enhancements (unless such enhancements meet accounting offsetting requirements). For financial assets recognised on the statement of financial position, the maximum exposure to credit risk equals their carrying amount, and for financial guarantees and similar contracts granted, it is the maximum amount the Group would have to pay if the guarantees were called upon. For loan commitments and other credit related commitments that are irrevocable over the life of the respective facilities, it is generally the full amount of the committed facilities. The following table sets out the maximum exposure to credit risk that arises within the Group and distinguishes between those assets that are carried in the statement of financial position at amortised cost and those carried at fair value: Maximum exposure to credit risk Balances at central banks(3) Items in course of collection Disposal groups and non-current assets held for sale Trading portfolio financial assets(5) Derivative financial instruments Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments available for sale(6) Included elsewhere: Trade receivables Accrued interest Financial guarantees Loan commitments and other credit related commitments Amortised cost(1) € m Fair value(2) € m 4,879 146 – – – 1,865 63,362 9,423 – – – – 2,038 – – – 2014* Total € m 4,879 146 – – 2,038 1,865 63,362 9,423 Amortised cost(1) € m Fair value(2) € m 3,536 164 28(4) – – 2,048 65,713 15,598 – – – 1 1,629 – – – – 19,772 19,772 – 20,251 2013* Total € m 3,536 164 28 1 1,629 2,048 65,713 15,598 20,251 73 426 – – 73 426 57 502 – – 57 502 80,174 21,810 101,984 87,646 21,881 109,527 1,246 9,082 10,328 – – – 1,246 9,082 10,328 1,353 8,236 9,589 – – – 1,353 8,236 9,589 Total 90,502 21,810 112,312 97,235 21,881 119,116 (1)All amortised cost items are ‘loans and receivables’ per IAS 39 definitions. (2)All items measured at fair value except financial investments available for sale and cash flow hedging derivatives are classified as ‘fair value through profit or loss’. (3)Included within cash and balances at central banks of € 5,393 million (2013: € 4,132 million). (4)Comprises loans and receivables to banks and customers measured at amortised cost. (5)Excluding equity shares of € 1 million (2013: € 1 million). (6)Excluding equity shares of € 413 million (2013: € 117 million). i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 65 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit exposure Credit risk mitigants* The perceived strength of a borrower’s repayment capacity is the primary factor in granting a loan, however, AIB uses various approaches to help mitigate risks relating to individual credits including: transaction structure, collateral and guarantees. Collateral or guarantees are usually required as a secondary source of repayment in the event of the borrower’s default. The main types of collateral for loans and receivables to customers are described below under the section on Collateral. Credit policy and credit management standards are controlled and set centrally by the Credit Risk function. Very occasionally, credit derivatives are purchased to hedge credit risk. Current levels are minimal and their use is subject to the normal credit approval process. The Group enters into netting agreements for derivatives with certain counterparties, to ensure that in the event of default, all amounts outstanding with those counterparties will be settled on a net basis. Derivative transactions with wholesale counterparties are typically collateralised under a Credit Support Annex in conjunction with the International Swaps and Derivatives Association (“ISDA”) Master Agreement. The Group also has in place an interbank exposure policy which establishes the maximum exposure for each counterparty bank depending on credit grade. Each bank is assessed for the appropriate exposure limit within the policy. Risk generating business units in each segment are required to have an approved bank or country limit prior to granting any credit facility, or approving any obligation or commitment which has the potential to create interbank or country exposure. Collateral* Collateral or guarantees are usually required as a secondary source of repayment in the event of the borrower’s default. Credit risk mitigation includes the requirement to obtain collateral as set out in the Group’s policies and procedures. The Group maintains guidelines on the acceptability of specific classes of collateral. The principal collateral types for loans and receivables are: – Charges over business assets such as premises, inventory and accounts receivables; – Mortgages over residential and commercial real estate; and – Charges over financial instruments such as debt securities and equities. The nature and level of collateral required depends on a number of factors such as the type of the facility, the term of the facility and the amount of exposure. Collateral held as security for financial assets other than loans and receivables is determined by the nature of the instrument. Debt securities and treasury products are generally unsecured, with the exception of asset backed securities, which are secured by a portfolio of financial assets. Collateral is not usually held against loans and receivables to financial institutions, including central banks, except where securities are held as part of reverse repurchase or securities borrowing transactions or where a collateral agreement has been entered into under a master netting agreement. In accordance with the Group policy, collateral should always be valued by an appropriately qualified source at the time of lending. Methodologies for valuing collateral* As property loans represent a significant concentration within the Group’s loans and receivables portfolio, some key principles have been applied in respect of property collateral held by the Group. For impaired property exposures, cash flows will generally emanate from the development and/or disposal of the assets which comprise the collateral held by the Group. The Group’s preference is to work with the obligor to progress the realisation of the collateral although in some cases the Group will foreclose its security to protect its position. The Group typically holds various types of collateral as security for these loans, e.g. land, developments available for sale/rent and investment properties or a combination of these assets through cross collateralisation. Where cash flows arising from the realisation of collateral held are included in impairment assessments, management typically rely on valuations or business appraisals from independent external professionals. However, in accordance with the Group’s policy on Collateral Valuation, the Group uses a number of methods to assist in reaching appropriate valuations for collateral held. These include: – Consultations with valuers; – Use of professional valuations; – Use of internally developed residual value methodologies; – The application of local knowledge in respect of the property and its location; and – Use of internal guidelines. These are described as follows: *Forms an integral part of the audited financial statements 66 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit exposure Credit risk mitigants* (continued) Methodologies for valuing collateral* (continued) Consultations with valuers would represent circumstances where local external valuers are asked to give verbal ‘desk top’ updates on their view of the assets’ value. This is a tactical view only and is not relied upon for risk assessment purposes. Consultation also takes place on general market conditions to help inform the Group’s view on the particular property valuation. The valuers are external to the Group and are familiar with the location and asset for which the valuation is being requested. Use of professional valuations would represent circumstances where external firms are requested to provide formal written valuations in respect of the property. Up to date external professional valuations are sought in circumstances where it is believed that sufficient transactional evidence is available to support an expert objective view. Historic valuations are also used as benchmarks to compare against current market conditions and assess house price reductions from peak. Available market indices for relevant assets, e.g. residential and investment property are also used in valuation assessments. The residual value methodology assesses the value in the land or property asset after meeting the incremental costs to complete the development. This approach looks at the cost of developing the asset to determine the residual value for the Group, including covering the costs to complete and additional funding costs. The key factors considered include: (i) the development potential given the location of the asset; (ii) its current or likely near term planning status; (iii) levels of current and likely future demand; (iv) the relevant costs associated with the completion of the project; and (v) expected market prices of completed units. If, following internal considerations which may include consultations with valuers, it is concluded that the optimal value for the Group will be obtained through the development/completion of the project; a residual value methodology is used. When, in the opinion of the Group, the land is not likely to be developed or it is non-commercial to do so, agricultural/green field values may be applied. Alternative use value (subject to planning permission) would also be considered. Application of local market knowledge would represent circumstances where the local bank management familiar with the property concerned and with local market conditions, and with knowledge of recent completed transactions would provide indications of the likely realisable value and a potential timeline for realisation. Current yields and estimated likely yields are applied to current rentals in valuing investment property. When assessing properties that are used for operational business or trading purposes, these are generally valued by applying a multiple to stabilised EBITDA, e.g. hotels and nursing homes. For licensed premises, these are valued by applying a multiple to stabilised net turnover (average over three years). When assessing the value of residential properties, recent transactional analysis of comparable sales in the area combined with the Central Statistics Office (”CSO”) Residential Property Price index in the Republic of Ireland are used. Applying one or a combination of the above methodologies, in line with the Group’s Valuation Policy, has resulted in a wide range of discounts to original collateral valuations, influenced by the nature, status and year of purchase of the asset. The frequency, and availability, of such up-to-date valuations remains a key factor within impairment provisions determination. Additionally, all relevant costs likely to be associated with the realisation of the collateral are taken into account in the cash flow forecasts. The spread of discounts is influenced by the type of collateral, e.g. land, developed land or investment property and also its location. The valuation arrived at is therefore, a function of the nature of the asset, e.g. un-serviced land in a rural area will most likely suffer a greater reduction in value if purchased at the height of a property boom than a fully let investment property with strong lessees. The discounts to original collateral value, having applied the valuation methodologies to reflect current market conditions, can be as high as 95% for land assets where values have been marked down to agricultural/green field site values. When assessing the level of impairment provision required for property loans, apart from the value to be realised from the collateral, other cash flows, such as recourse to other assets or sponsor support, are also considered, where available. The other key driver is the time it takes to receive the funds from the realisation of collateral. While this depends on the type of collateral and the stage of its development, the period of time to realisation is typically one to seven years but sometimes this time period is exceeded. These estimates are periodically reassessed on a case by case basis. In assessing the value of collateral for impaired mortgage loans in the Republic of Ireland, the Group has used a house price fall from peak of 50% (49% Dublin and 51% non-Dublin) as a base. The CSO index at 31 December 2014 shows a 38% fall from peak. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 67 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit exposure Credit risk mitigants* (continued) Collateral for the non-mortgage portfolio* For non-mortgage lending, collateral is taken where available, and will typically include a charge over the business assets such as stock and debtors. In some cases, a charge over property collateral or a personal guarantee supported by a lien over personal assets may also be taken. Collateral is reviewed on a regular basis in accordance with credit policy. The value of collateral is assessed at origination of the loan or in the case of criticised loans, when testing for impairment. However, as the Group does not capture collateral values on its loan systems, it is not possible to quantify the fair value of collateral for non-impaired loans on an on-going basis at a portfolio level. It should be noted that when testing a loan for impairment, the present value of future cash flows, including the value of collateral held, and the likely time taken to realise any security is estimated. A provision is raised for the difference between this present value and the carrying value of the loan. Therefore, for non-mortgage impaired loans, the net exposure after provision would be indicative of the fair value. Collateral for the residential mortgage portfolio* For residential mortgages, the Group takes collateral in support of lending transactions for the purchase of residential property. Collateral valuations are required at the time of origination of each residential mortgage. The Group adjusts open market property values to take account of the costs of realisation and any discount associated with the realisation of collateral. The fair value at 31 December 2014 is based on property values at origination or date of latest valuation and applying the CSO Residential Property Price index (Republic of Ireland) and Nationwide (United Kingdom) indices to these values to take account of price movements in the interim. Summary of risk mitigants by selected portfolios Set out below are details of risk mitigants used by the Group in relation to financial assets detailed in the maximum exposure to credit risk table on page 65. Loans and receivables to customers – residential mortgages* The following table shows the fair value of collateral held for the Group’s residential mortgage portfolio as at 31 December 2014 and 31 December 2013: Fully collateralised(1) Loan-to-value ratio: Less than 50% 50% - 70% 71% - 80% 81% - 90% 91% - 100% Partially collateralised Collateral value relating to loans over 100% loan-to-value Total collateral value Gross residential mortgages Statement of financial position specific provisions Statement of financial position IBNR provisions Net residential mortgages 5,972 5,837 3,347 3,381 2,742 21,279 6,380 27,659 29,014 Neither past due nor impaired € m Past due but not impaired € m 2014 Total Neither past due nor impaired € m € m Past due but not impaired € m Impaired 2013 Total € m € m Impaired € m 542 824 577 690 769 254 236 132 129 126 877 6,768 6,897 4,056 4,200 3,637 4,630 4,176 2,786 2,708 2,752 241 239 148 163 173 964 395 514 413 465 606 5,266 4,929 3,347 3,336 3,531 2,393 20,409 3,402 25,558 17,052 355 1,232 1,323 3,634 7,036 8,509 10,369 35,927 38,846 9,880 26,932 29,688 779 1,743 1,993 4,774 7,167 9,083 15,433 35,842 40,764 (2,877) (2,877) (3,333) (3,333) (550) 5,632 35,419 (619) 5,750 36,812 (1)The fair value of collateral held for residential mortgages which are fully collateralised has been capped at the carrying value of the loans outstanding at each year end. *Forms an integral part of the audited financial statements 68 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit exposure Credit risk mitigants* (continued) Derivatives* Derivative financial instruments are shown on the statement of financial position at their fair value. Those with a positive fair value are reported as assets which at 31 December 2014 amounted to € 2,038 million (2013: € 1,629 million) and those with negative fair value are reported as liabilities which at 31 December 2014 amounted to € 2,334 million (2013: € 1,960 million). The enforcement of netting agreements would potentially reduce the statement of financial position carrying amount of derivative assets and liabilities by € 1,221 million (2013: € 957 million). The Group also has Credit Support Annexes (“CSAs”) in place which provide collateral for derivative contracts. As at 31 December 2014, € 843 million (2013: € 820 million) of CSAs are included within financial assets as collateral for derivative liabilities and € 279 million (2013: € 188 million) of CSAs are included within financial liabilities as collateral for derivative assets (note 43 to the consolidated financial statements). Additionally, the Group has agreements in place which may allow it to net the termination values of cross currency swaps upon occurrence of an event of default. Loans and receivables to banks* Interbank placings, including central banks, are largely carried out on an unsecured basis apart from reverse repurchase agreements. At 31 December 2014, repurchase agreements amounted to Nil (2013: € 16 million). NAMA senior bonds* NAMA senior bonds, which at 31 December 2014 had a carrying value of € 9,423 million (2013: € 15,598 million), are guaranteed by the Irish Government as to principal and interest. Financial investments available for sale* At 31 December 2014, government guaranteed senior bank debt which amounted to € 120 million (2013: € 381 million) was held within the available for sale portfolio. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 69 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit risk management Credit risk monitoring* To manage credit risk effectively, the Group has developed and implemented processes and information systems to monitor and report on individual credits and credit portfolios. It is the Group’s practice to ensure that adequate up to date credit management is available to support the credit management of individual account relationships and the overall loan portfolio. Credit risk, at a portfolio level is monitored and reported regularly to senior management and the Board Risk Committee. Credit managers pro-actively manage the Group’s credit risk exposures at a transaction and relationship level. Monitoring is done through credit exposure and excess management, regular review of accounts, being up to date with any developments in customer business, obtaining updated financial information and monitoring of covenant compliance. This is reported on a quarterly basis to senior management and includes information and detailed commentary on loan book growth, quality of the loan book and loan impairment provisions including individual large impaired exposures. Changes in sectoral and single name concentrations are tracked on a quarterly basis highlighting changes to risk concentration in the Group’s loan book. A report on any exceptions to credit policy is presented and reviewed on a monthly basis. The Group allocates significant resources to ensure on-going monitoring and compliance with approved risk limits. Credit risk, including compliance with key credit risk limits is reported monthly. As a matter of policy, all facilities granted to corporate and wholesale customers are subject to a review on, at least, an annual basis, even when they are performing satisfactorily. Annual review processes are supplemented by more frequent portfolio and case review processes in addition to arrears or excess management processes. Once an account has been placed on a watch list, or early warning list, the exposure is carefully monitored and where appropriate, exposure reductions are effected. Criticised borrowers are tested for impairment at the time of annual review, or earlier, if there is a material adverse change or event in their credit risk profile. In addition, assessment for impairment is required for all cases where borrowers are 90 days past due as a result of payment arrears or on receipt of a forbearance request. The Group operates a number of schemes to assist borrowers who are experiencing financial stress. The material elements of these schemes through which the Group has granted a concession, whether temporarily or permanently are set out below. The Group employs a dedicated approach to loan workout and to monitoring and proactively managing impaired loans. Specialised teams within the Financial Solutions Group (“FSG”), focus on managing the majority of criticised loans. Specialist recovery functions deal with customers in default, collection or insolvency. Their mandate is to maximise return on impaired debt and to support customers in difficulty. Whilst the basic principles for managing weaknesses in corporate, commercial and retail exposures are broadly similar, the solutions reflect the differing nature of the assets. Forbearance* Forbearance occurs when a borrower is granted a temporary or permanent concession or an agreed change to the terms of a loan (‘forbearance measure’) for reasons relating to the actual or apparent financial stress or distress of that borrower. A forbearance agreement is entered into where the customer is in financial difficulty to the extent that they are unable currently to repay both the principal and interest in accordance with the original contract terms. Modifications to the original contract can be of a temporary (e.g. interest only) or permanent (e.g. term extension) nature. The Group uses a range of initiatives to support customers. The Group considers requests from customers who are experiencing cash flow difficulties on a case by case basis and will assess these requests against their current and likely future financial circumstances and their willingness to resolve such difficulties, taking into account legal and regulatory obligations. Key principles include supporting viable Small Medium Enterprises (“SMEs”), and providing support to enable customers remain in the family home, whenever possible. The Group has implemented the standards for the Codes of Conduct in relation to customers in difficulty as set out by the Central Bank of Ireland ensuring these customers are dealt with in a professional and timely manner. *Forms an integral part of the audited financial statements 70 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit risk management Forbearance* (continued) Mortgage portfolio The Group has developed a Mortgage Arrears Resolution Strategy (“MARS”) for dealing with mortgage customers in difficulty or likely to be in difficulty. This builds on and formalises the Group’s Mortgage Arrears Resolution Process (“MARP”). The strategy is built on three key factors: i) Segmentation – identifying customers in difficulty; ii) Sustainability – customer assessment; and iii) Suitable Treatment – identifying solutions. The core objectives are to ensure that arrears solutions are sustainable in the long term and that they comply with the spirit and the letter of all regulatory requirements. MARS includes the following new longer-term forbearance solutions which have been devised to assist existing Republic of Ireland primary residential mortgage customers in difficulty: Positive equity sustainable solution – This solution involves a reduced payment to support customers who do not qualify for other forbearance solutions such as split loans due to positive equity; Low fixed interest rate sustainable solution – This solution aims to support customers who have an income (and can afford a mortgage), but the income is not currently sufficient to cover full capital and interest repayments on their mortgage based on the current interest rate(s) and/or personal circumstances. Their current income is, however, sufficient to cover full capital and interest at a lower rate. It involves the customer being provided with a low fixed interest rate for an agreed period after which the customer will convert to a prevailing market rate for the remainder of the term of the mortgage on the basis that there is currently a reasonable expectation that the customer’s income and/or circumstances will improve over the period of the reduced rate. The customer must pay full capital and interest throughout; Split mortgages – A split mortgage will be considered where a customer can afford a mortgage but their income is not sufficient to fully support their current mortgage. The existing mortgage is split into two parts: Loan A being the sustainable element, which is repaid on the basis of principal and interest, and Loan B being the unsustainable element, which is deferred and becomes repayable at a later date. This solution may also include an element of debt write-off; Negative equity trade down – This solution allows a customer to sell his/her house and subsequently purchase a new property and transfer the negative equity portion of the original property to a new loan secured on the new property. A negative equity trade down mortgage will be considered where a customer will reduce monthly loan repayments and overall indebtedness by trading down to a property more appropriate to his/her current financial and other circumstances; and Voluntary sale for loss – A voluntary sale for loss solution will be considered where the loan is deemed to be unsustainable and the customer is agreeable to selling the property and putting an appropriate agreement in place to repay any residual debt. This solution may also include an element of debt-write off. Credit policies are in place which outline the principles and processes underpinning the Group’s approach to mortgage forbearance. Non-mortgage portfolio The Group has also developed treatment strategies for customers in the non-mortgage portfolio who are experiencing financial difficulties. The approach has been to develop strategies on an asset class basis, and to then apply those strategies at the customer level to deliver a holistic debt management solution. This approach is based on customer affordability and applying the following core principles:. – Customers must be treated objectively and consistently; – Customer circumstances and debt obligations must be viewed holistically; and – Solutions will be provided where customers are cooperative, and are willing but unable to pay. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 71 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit risk management Forbearance* (continued) Non-mortgage portfolio (continued) The restructuring process is one of structured engagement to assess the long term levels of sustainable and unsustainable debt. The process broadly moves from an initial customer disclosure stage, through to engagement and analysis, through to an initial proposal from the Group, followed by credit approval, documentation and drawdown. The commercial aspects of this process require that customer affordability is viewed holistically, to include all available sources of finance for debt repayment, including unencumbered assets. The debt solutions provided allow the customer to enter into a performance based arrangement, typically over a five year period, which will be characterised by the disposal of non-core assets, contribution of unencumbered assets, and contribution toward residual debt from available cash flow. This process may result in debt write-off, where applicable. A request for forbearance will always be a trigger event for the Group to undertake an assessment of the customer’s financial circumstances prior to any decision to grant a forbearance treatment. This may result in the downgrading of the credit grade assigned and if a loss is deemed to be incurred, this will result in a specific impairment provision. Loans to which forbearance have been applied continue to be classified as forborne until the forbearance measures expire or until an appropriate probation period has passed. Types of forbearance include temporary arrangements such as placing the facility on interest only and permanent sustainable solutions including fundamental restructures which include an element of potential debt write down, part capital/interest basis for a period of time; extension of the facility term; split loans; and in some cases, a debt for equity swap or similar structure. See accounting policy number 15 – Impairment of financial assets within the Accounting policies section of this report. The effectiveness of the forbearance measures over the lifetime of those arrangements will be measured and reviewed. A forbearance measure is deemed to be effective if the borrower meets the modified or original terms of the contract over a sustained period of time resulting in an improved outcome for the Group and the borrower. Further details on forbearance are set out in ‘Risk management – 3.2 Additional credit information – Forbearance’ *Forms an integral part of the audited financial statements 72 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit risk management Loan loss provisioning* The Group’s provisioning policy requires that impairment be recognised promptly and consistently across the different loan portfolios. A financial asset is considered to be impaired, and therefore, its carrying amount is adjusted to reflect the effect of impairment, when there is objective evidence that events have occurred which give rise to an adverse impact on the estimated future cash flows that can be reliably estimated. Impairment provisions are calculated on individual loans and receivables and on groups of loans assessed collectively. All exposures, individually or collectively, are regularly reviewed for objective evidence of impairment. Impairment losses are recorded as charges to the income statement. The carrying amount of impaired loans on the balance sheet is reduced through the use of impairment provision accounts. Losses expected from future events are not recognised. The identification of loans for assessment as impaired is facilitated by the Group’s credit rating systems. As described previously, changes in the variables which drive the borrower’s credit rating may result in the borrower being downgraded. This in turn influences the management of individual loans with special attention being paid to lower quality or criticised loans, i.e. in the Watch, Vulnerable or Impaired categories. The credit rating of an exposure is one of the key factors used to determine if a case should be assessed for impairment. It is Group’s policy to provide for impairment promptly and consistently across the loan book. All business areas formally review and confirm the appropriateness of their provisioning methodologies and the adequacy of their impairment provisions on a quarterly basis. Loans are tested for impairment on receipt of a forbearance request and when accounts reach 90 days past due. The following are triggers to prompt/guide Case Managers regarding the requirement to assess for impairment: Mortgage portfolio triggers – Deterioration in the debt service capacity. – A material decrease in rents received on a buy-to-let property. Commercial property triggers – A material decrease in the property value. – A material decrease in estimated future cash flows. – The lack of an active market for the assets concerned. – The absence of a market for refinancing options. Small Medium Enterprises (“SME”) portfolio triggers – Trading losses or a material weakening in trade which leads to concerns over the ability of the business to meet scheduled debt service. – Diversion of cash flows from earning assets to support non-earning assets. – A material decrease in turnover or the loss of a major customer. – A default or breach of contract. In addition, the following factors are taken into consideration when assessing whether a loss event has occurred: – Loss of a significant tenant/material reduction in rental income. – Significant financial difficulty. – Decrease in cash flow. – Lack of objective evidence to prove the viability of the business. – Material damage and loss to a firm’s assets and/or production capacity. – Loss of critical staff. – Material increase in costs. – Market/customer forced reduction in prices with no commensurate increase in volumes. – Planned sale of property asset did not take place. – Loss of employment. – Disappearance of an active market for refinancing or sale of assets. – Net worth. – Country risk. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 73 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit risk management Loan loss provisioning* (continued) Specific provisions Specific impairment provisions arise when the recovery of a loan or group of loans is in doubt based on impairment triggers as outlined above and an assessment that all the expected future cash flows either from the loan itself or from the associated collateral will not be sufficient to repay the loan. The amount of the specific impairment provision is the difference between the present value of expected future cash flows for the impaired loan(s) discounted at the original effective interest rate and the carrying value of the loan(s). When raising specific impairment provisions, AIB divides its impaired portfolio into two categories, namely ‘Individually significant’ and ‘Individually insignificant’. The individually significant threshold is €/£ 500,000 by customer connection (threshold is € 750,000 for EBS). The calculation of an impairment charge for loans below the “significant” threshold is undertaken on a collective basis. Individually significant loans and receivables All loans that are considered individually significant are assessed on a case-by-case basis throughout the year for any objective evidence that a loan may be impaired. Assessment is based on ability to pay and collateral value. Collateral values are assessed based on the AIB Group Property Valuation Guidelines as described on pages 66 to 67. Individually significant provisions are calculated using discounted cash flows for each exposure. The cash flows are determined with reference to the individual characteristics of the borrower including an assessment of the cash flows that may arise from foreclosure less costs to sell in respect of obtaining and selling any associated collateral. The time period likely to be required to realise the collateral and receive the cash flows is taken into account in estimating the future cash flows and discounting these back to present value. Individually insignificant loans and receivables Provisioning is assessed on a collective basis to estimate losses for homogeneous groups of loans that are considered individually insignificant. This applies for customer connections less than £/€ 500,000 or € 750,000 for EBS. Individually insignificant – Mortgage portfolio (Republic of Ireland) The individually insignificant mortgage provisioning methodology applies to both owner occupier and buy-to-let exposures. Individually insignificant mortgage specific provisions are calculated using an individually insignificant and IBNR mortgage provisioning model. This methodology is based on the calculation of three possible resolution outcomes: cure; advanced forbearance with loss; and repossession (forced and voluntary), with different loss rates associated with each. The methodology is regularly reviewed and updated to reflect current data on loss history and portfolio development as well as incorporating additional loss parameters assessed on restructuring outcomes. The model parameters were refined during the year based on an additional one year data set. Key model parameters at 31 December 2014 for owner occupier mortgages are as follows: cure (4%); and repossession/advanced forbearance (96%), in line with 2013. The corresponding buy-to-let model parameters at 31 December 2014 are as follows: cure (0.5%) and repossession/advanced forbearance (99.5%), in line with 2013. Cured loans are loans that were impaired and are no longer impaired and have performed satisfactorily for 12 months excluding any impact from forbearance. The modelled loss is calculated on a case by case basis, by subtracting the net present value of the modelled recovery amount from the current loan balance. The model parameters are determined from observed data where possible. Where not directly observable, related measures are used to infer the parameter where possible; otherwise, it is based on expert judgement. The relevant model parameters include: percentage of forced disposals; costs and time to dispose (voluntary and forced); house price fall from peak; loss rate on advanced forbearance; and haircut on sale (voluntary and forced). The model parameters are reviewed at a Group Credit Committee on a quarterly basis. *Forms an integral part of the audited financial statements 74 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit risk management Loan loss provisioning* (continued) Individually insignificant – Non-mortgage portfolio (Republic of Ireland) A new non-mortgage individually insignificant and IBNR model was introduced and implemented for the year-end 2014. Previously, the recovery rates for the non-mortgage individually insignificant portfolio were established for each pool by assessing the Group’s loss experience for these pools over the past four years and by examining the amount and timing of cash flows received from the date the loan was identified as impaired. The new model now also takes into consideration underlying security in determining the appropriate provision cover rate for impaired exposures. The specific provision for impaired cases is calculated using a LGD model, which differentiates loss based on loan size, product type and sector. Individually insignificant – Mortgage and non-mortgage portfolio (United Kingdom) Individually insignificant mortgage specific provisions are calculated based on a model which assumes that the outcome for all impaired loans is repossession. The individually insignificant non-mortgage specific provisions are calculated based on recovery rates observed over the past 4 years. Incurred but not reported (“IBNR”) provisions Individually assessed loans for which no evidence of loss has been specifically identified on an individual basis are grouped together according to their credit risk characteristics for the purpose of calculating an estimated collective loss. This reflects impairment losses that the Group has incurred as a result of events occurring before the balance sheet date, which the Group is not able to identify on an individual loan basis, and that can be reliably estimated. These losses will only be individually identified in the future. As soon as information becomes available which identifies losses on individual loans within the Group, those loans are removed from the Group and assessed on an individual basis for impairment. IBNR provisions can only be recognised for incurred losses i.e. losses that are present in the portfolio at the reporting date and are not permitted for losses that are expected to happen as a result of likely future events. IBNR provisions are determined by reference to loss experience in the portfolio and to the credit environment at the reporting date. Provisioning statistical models are used to determine the appropriate level of IBNR provisions for a portfolio/group of exposures with similar risk characteristics. A new non-mortgage model was introduced in the Republic of Ireland for year-end December 2014 as described above. The model estimates IBNR losses taking into consideration the following: – – – historical loss experience (loss emergence rates based on historic grade migration experience or probability of default) in portfolios of similar credit risk characteristics (for example, by sector, loan grade or product); the estimated period between impairment occurring and the loss being identified and evidenced by the establishment of an appropriate provision against the individual loan (emergence period); loss given default rates based on historical loan loss experience, adjusted for current observable data; – management’s experienced judgement as to whether current economic and credit conditions are such that the actual level of inherent losses at the balance sheet date is likely to be greater or less than that suggested by historical experience; and – an assessment of higher risk portfolios, e.g. non-impaired forborne mortgages and restructured loans. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 75 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit risk management Loan loss provisioning* (continued) Republic of Ireland residential mortgage portfolio – IBNR The residential mortgage portfolio IBNR is calculated using the individually insignificant and IBNR mortgage model as described above. The table below sets out the parameters used in the calculation of IBNR for the mortgage portfolio as at 31 December 2014 and 31 December 2013: Good upper(1) Good lower(1) Watch(1) Vulnerable(1) The parameters for Cured and Forborne non-impaired, are set out below.These sub portfolios carry a higher level of IBNR: Cured Forborne – non-impaired Exposure € m 12,928 8,386 2,546 764 Owner-occupier Average PD % Average LGD % 0.9 2.8 15.6 81.6 18.9 20.4 21.7 20.6 Exposure € m 1,055 1,390 426 233 477 1,798 37.9 23.9 19.6 19.9 197 446 Buy-to-let Average PD % 1.5 5.5 27.0 71.2 54.5 30.6 2014 Average LGD % 15.6 19.3 20.4 20.2 21.5 21.3 2013 Good upper(1) Good lower(1) Watch(1) Vulnerable(1) The parameters for Cured and Forborne non-impaired, are set out below. These sub portfolios carry a higher level of IBNR: Cured Forborne – non-impaired (1)For definition see page 123. Owner-occupier Buy-to-let Average PD % Average LGD % Average PD % Average LGD % 0.8 2.5 16.0 69.9 42.0 26.3 18.5 20.5 20.6 20.8 14.6 19.4 1.4 4.1 17.6 73.5 68.6 25.4 18.1 22.5 24.2 25.4 27.9 25.6 Average PD and LGD are based on the PDs and LGDs, weighted by the EAD for all owner-occupier and buy-to-let loans included in the individually insignificant and IBNR mortgage model. The mortgage provision model calculates individually insignificant specific provisions and IBNR provisions. Additional IBNR, where appropriate, determined by management judgement, is applied at a portfolio level and is not included in the analysis above. *Forms an integral part of the audited financial statements 76 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit risk management Loan loss provisioning* (continued) Republic of Ireland non-mortgage portfolio – IBNR The non-mortgage portfolio IBNR (excludes a number of portfolios, in particular: credit cards; property and construction; and corporate loans) is calculated using the individually insignificant and IBNR mortgage model as described above. The table below sets out the parameters used in the calculation of IBNR for this portfolio: Good upper Good lower Watch Vulnerable Included within the above are: > 90 days past due but not impaired Cured in the past 12 months Non-mortgage Average PD % 2014 Average LGD % 0.4 1.8 7.4 19.9 17.5 14.4 45.1 47.4 48.6 47.8 49.1 48.4 Exposure € m 48 4,129 701 861 251 228 The IBNR for the portfolio is calculated as PD multiplied by LGD multiplied by Exposure (adjusted for the Emergence Period) with the PD and LGD coming from statistical models. The IBNR for the property and construction portfolio and larger exposures continues to be calculated based on the “average annual loss rate” for each homogeneous pool, suitably adjusted where appropriate for any factors currently affecting the portfolio, which may not have been a feature in the past. Credit card provisions (specific and IBNR) are calculated on a custom built provisioning model. Additional IBNR, where appropriate, determined by management judgement, is applied at a portfolio level and is not included in the analysis above. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 77 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit risk management Loan loss provisioning* (continued) Emergence period The emergence period is key to determining the level of IBNR provisions. Emergence periods are determined by assessing the time it takes following a loss event for an unidentified impaired loan to be recognised as an impaired loan requiring a provision. Emergence periods for each portfolio are determined by taking into account current credit management practices, historic evidence of assets moving from ‘good’ to ‘bad’ and actual case studies. Emergence periods are reflective of the characteristics of the particular portfolio. Emergence periods are estimated based on historic loan loss experience supported by back testing, and as appropriate, individual case sampling. Emergence periods are reviewed on at least an annual basis. At 31 December 2014, a change to the Republic of Ireland emergence periods was made for the mortgage portfolio (increase from 9 to 12 months) and for the non-mortgage portfolios (increase from 6 to 8 months, with the exception of credit cards and corporate portfolios, where emergence periods remain at 3 and 6 months respectively). Increasing the emergence period gave rise to higher IBNR provisions of € 93 million for the mortgage portfolio and € 44 million for the non-mortgage portfolio. The increases were driven by more data becoming available (including the impact of forbearance), the inclusion of a statistical confidence measure for non-mortgages, and also a continued emphasis on maintaining a conservative estimate of the unidentified incurred loss within the portfolio. The average emergence period for UK mortgages is 8 months with the non-mortgage emergence period ranging from between 3 to 7 months. Approval process The Group operates an approval framework for impairment provisions which are approved, depending on amount, by various delegated authorities and referred to Area Credit Committee level, as required. These committees are chaired by the Chief Credit Officer (“CCO”) or alternate specified Chair as outlined in the terms of reference for Credit Committees (approved by ERC annually), where the valuation/impairment is reviewed and challenged for appropriateness and adequacy. Impairments in excess of the segment authorities are approved by the Group Credit Committee and the Board (where applicable). Segment impairments and provisions are ultimately reviewed by the Group Credit Committee as part of the quarterly process. The valuation assumptions and approaches used in determining the impairment provisions required are documented and the resulting impairment provisions are reviewed and challenged as part of the approval process by segment and Group senior management. Write-offs When the prospects of recovering a loan, either partially or fully, do not improve, a point will come when it will be concluded that as there is no realistic prospect of recovery, the loan (and any related specific provision) will be written off. Where the loan is secured, the write-off will take account of receipt of the net realisable value of the security held. Partial write-offs may also occur when it is considered that there is no prospect for the recovery of the provisioned amount, for example when a loan enters a legal process. The provision is written off but the remaining reduced loan balance remains on the balance sheet as impaired. In addition, write-offs may reflect restructuring activity with customers who are subject to the terms of the agreement and satisfactory performance. Reversals of Impairment If the amount of an impairment loss decreased in a subsequent period, and the decrease can be related objectively to an event occurring after the impairment was recognised, the excess is written back by reducing the loan impairment provision amount. The writeback is recognised in the income statement. Impact of changes to key assumptions and estimates on impairment provisions Management is required to exercise judgement in making assumptions and estimations when calculating loan impairment provisions on both individually and collectively assessed loans and receivables. A significant judgemental area is the calculation of individually insignificant and IBNR impairment provisions which are subject to estimation uncertainty. The methods involve the use of historical information which is supplemented with significant management judgement to assess whether current economic and credit conditions are such that the actual level of inherent losses is likely to be greater or less than that suggested by historical experience. In normal circumstances, historical experience provides the most objective and relevant information from which to assess inherent loss within each portfolio, though sometimes it provides less relevant information about the inherent loss in a given *Forms an integral part of the audited financial statements 78 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit risk management Loan loss provisioning* (continued) Impact of changes to key assumptions and estimates on the impairment provisions (continued) portfolio at the balance sheet date, for example, when there have been changes in economic, regulatory or behavioural conditions which result in the most recent trends in portfolio risk factors not being fully reflected in the statistical models. In these circumstances, the risk factors are taken into account by adjusting the impairment provisions derived solely from historical loss experience. Risk factors include loan portfolio growth, product mix, unemployment rates, bankruptcy trends, geographical concentrations, loan product features, economic conditions such as national and local trends in housing markets, the level of interest rates, portfolio seasoning, account management policies and practices, changes in laws and regulations, and other influences on customer payment patterns. The methodology and the assumptions used in calculating impairment losses are reviewed regularly in light of differences between loss estimates and actual loss experience. For example, loss rates and the expected timing of future recoveries are benchmarked against actual outcomes where available to ensure they remain appropriate. However, the exercise of judgement requires the use of assumptions which are highly subjective and very sensitive to the risk factors, in particular, to changes in economic and credit conditions across a large number of geographical areas. Given the relative size of the Republic of Ireland mortgage portfolio, the key variables include house price fall from peak 50% (49% Dublin and 51% non-Dublin) which determines the collateral value supporting loans in the mortgage portfolio and cure rates (rates by which defaulted or delinquent accounts are assumed to return to performing status). A 1% favourable change in the cure rate used for the collective mortgage provisions would result in a reduction in impairment provisions of 1.5% (blended rate of owner-occupier/buy-to-let) of c. € 22 million. The value of collateral is estimated by applying changes in house price indices to the original assessed value of the property. A 1% change in the house price fall from peak assumption used for the collective mortgage provisions for December 2014 is estimated to result in movements in provisions of c. € 34 million (€ 26 million specific provision and € 8 million IBNR). An increase in the assumed repossession rate of 1% for collective mortgage provisions would result in an increase in provisions of 0.2% (blended rate of owner-occupier/buy-to-let) of c. € 3 million. For the € 11.3 billion or 51% of impaired loans for which automated cash flows are available, changes in interest rates and cash flow timing would have the following impact: – – If interest rates increased by 1%, this would have an impact on the discounting effect, resulting in an increase in impairment provisions of c. € 98 million. If anticipated cash receipt timelines moved out by 1 year, the impact on impairment provisioning would be an increase of c. € 130 million. An IBNR provision is made for impairments that have been incurred but have not been separately identifiable at the balance sheet date. This provision is sensitive to changes in the time between the loss event and the date the impairment is specifically identified. This period is known as the loss emergence period. In the Republic of Ireland mortgage portfolio, the emergence period is currently 12 months; a decrease of one month in the loss emergence period in respect of the loan portfolio assessed would result in a decrease of c. € 30 million. In the Republic of Ireland non-mortgage portfolio, an increase of one month in the loss emergence period in respect of the loan portfolio assessed for IBNR provisions would result in an increase of c. € 35 million. For the United Kingdom, the impact would be an increase of c. £ 8 million. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 79 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio AIB Group’s customer loan portfolio comprises loans (including overdrafts), instalment credit and finance lease receivables. An overdraft provides a demand credit facility combined with a current account. Borrowings occur when the customer's drawings take the current account into debit. The balance may, therefore, fluctuate with the requirements of the customer. Although overdrafts are contractually repayable on demand (unless a fixed term has been agreed), provided the account is deemed to be satisfactory, full repayment is not generally demanded without notice. The tables below show for the years ended 31 December 2014 and 31 December 2013 loans and receivables to customers by industry sector and geography(1): (i) Total loans and receivables to customers; (ii) Impaired loans and receivables to customers; and (iii) Provisions for impairment on loans and receivables to customers. Included on statement of financial position as Loans and Disposal receivables groups and to non-current customers assets held for sale € m € m 1,818 265 1,733 15,537 6,253 1,010 887 5,646 38,846 3,837 75,832 51,146 2,524 22,162 75,832 (123) 59 (12,406) 63,362 – – – – – – – – – – – – – – – – – – – Loans and receivables to customers* Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal: Residential mortgages Other Gross loans and receivables Analysed as to: Neither past due nor impaired Past due but not impaired Impaired – provisions held Unearned income Deferred costs Provisions for impairment Total statement of financial position (1)Based on booking office. Total Total Analysed geographically(1) Republic of Ireland Kingdom United Rest of the World 2014 € m 1,747 239 1,271 11,220 5,055 819 589 € m 71 25 462 4,317 1,198 191 295 2,969 2,634 36,324 3,429 2,522 408 63,662 12,123 € m – 1 – – – – 3 43 – – 47 € m 1,818 265 1,733 % 2.4 0.3 2.3 15,537 20.5 8.2 1.3 1.2 7.5 51.2 5.1 100.0 6,253 1,010 887 5,646 38,846 3,837 75,832 51,146 2,524 22,162 75,832 (123) 59 (12,406) 63,362 The credit portfolio is diversified within each of its geographic markets by spread of locations, industry classification and individual customer. Other than property and construction (15%) and residential mortgages in the Republic of Ireland (48%) as at 31 December 2014, no one industry or loan category, in any geographic market accounts for more than 10% of AIB Group’s total loan portfolio. *Forms an integral part of the audited financial statements 80 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio Included on statement of financial position as Loans and receivables to customers € m 1,830 268 1,547 19,747 6,927 1,026 650 5,772 40,764 4,292 82,823 50,326 3,586 28,911 82,823 (101) 74 (17,083) Disposal groups and non-current assets held for sale € m – 28 – – – – – – – – 28 28 – – 28 – – – Total Total Analysed geographically(1) Republic of Ireland United Rest of the World Kingdom 2013+ € m 1,772 268 1,211 14,626 5,311 838 472 € m 58 23 336 5,121 1,616 188 174 3,027 2,646 38,151 3,859 2,613 433 € m – 5 – – – – 4 99 – – 69,535 13,208 108 € m 1,830 296 1,547 % 2.2 0.4 1.9 19,747 23.8 8.3 1.2 0.8 7.0 49.2 5.2 100 6,927 1,026 650 5,772 40,764 4,292 82,851 50,354 3,586 28,911 82,851 (101) 74 (17,083) 65,713 28 65,741 Loans and receivables to customers* Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal: Residential mortgages Other Gross loans and receivables Analysed as to: Neither past due nor impaired Past due but not impaired Impaired - provisions held Unearned income Deferred costs Provisions for impairment Total statement of financial position (1)Based on booking office. +The industry sector ‘lease financing’ is no longer reported by the Group. Accordingly, for December 2013, where tables show a sectoral analysis, lease financing is re-presented in the relevant sector to which the borrower belongs. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 81 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Included on statement of financial position as Loans and receivables customers Disposal groups and to non-current assets held for sale € m € m 302 83 233 8,836 2,109 100 183 763 8,509 1,044 22,162 – – – – – – – – – – – 2014 Analysed geographically(1) Total Republic of Ireland United Rest of the World Kingdom € m 302 83 233 8,836 2,109 100 183 763 8,509 1,044 € m 293 83 179 6,951 1,831 73 168 572 8,217 974 € m 9 – 54 1,885 278 27 15 191 292 70 22,162 19,341 2,821 € m – – – – – – – – – – – 2013+ Included on statement of financial position as Loans and receivables to customers € m 345 74 405 13,176 3,053 173 230 949 9,083 1,423 28,911 Disposal groups and non-current assets held for sale € m – – – – – – – – – – – Analysed geographically(1) Total Republic of Ireland United Rest of the World Kingdom € m 345 74 405 13,176 3,053 173 230 949 9,083 1,423 28,911 € m 334 70 278 10,721 2,645 171 211 756 8,788 1,345 € m 11 – 127 2,455 408 2 19 181 295 78 25,319 3,576 € m – 4 – – – – – 12 – – 16 Impaired loans and receivables to customers* Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal: Residential mortgages Other Total Impaired loans and receivables to customers* Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal: Residential mortgages Other Total (1)Based on booking office. +The industry sector ‘lease financing’ is no longer reported by the Group. Accordingly, for December 2013, where tables show a sectoral analysis, lease financing is re-presented in the relevant sector to which the borrower belongs. *Forms an integral part of the audited financial statements 82 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio Included on statement of financial position as Provisions for impairment on loans and receivables to customers* Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal Residential mortgages Other Specific IBNR Total Provisions for impairment on loans and receivables to customers* Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal Residential mortgages Other Specific IBNR Total (1)Based on booking office. Loans and receivables customers Disposal groups and to non-current assets held for sale € m € m 185 40 144 5,478 1,217 69 96 493 2,877 716 11,315 1,091 12,406 – – – – – – – – – – – – – Included on statement of financial position as Loans and receivables to customers € m 256 43 255 8,136 1,857 126 134 666 3,333 1,092 15,898 1,185 17,083 Disposal groups and non-current assets held for sale € m – – – – – – – – – – – – – 2014 Analysed geographically(1) Total Republic of Ireland United Rest of the World Kingdom € m 178 40 115 4,326 1,072 44 90 391 2,724 663 9,643 € m 7 – 29 1,152 145 25 6 102 153 53 1,672 € m 185 40 144 5,478 1,217 69 96 493 2,877 716 11,315 1,091 12,406 € m – – – – – – – – – – – 2013+ Analysed geographically(1) Total Republic of Ireland United Rest of the World Kingdom € m 256 43 255 8,136 1,857 126 134 666 3,333 1,092 15,898 1,185 17,083 € m 248 43 203 6,693 1,648 125 123 552 3,204 1,038 € m 8 – 52 1,443 209 1 11 105 129 54 13,877 2,012 x x € m – – – – – – – 9 – – 9 x 83 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G +The industry sector ‘lease financing’ is no longer reported by the Group. Accordingly, for December 2013, where tables show a sectoral analysis, lease financing is re-presented in the relevant sector to which the borrower belongs. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio The following table analyses loans and receivables to customers by segment showing asset quality and impairment provisions for the years ended 31 December 2014 and 31 December 2013: Gross loans and receivables to customers* DCB € m AIB UK € m FSG € m 2014 Total € m 31,808 7,038 38,846 3,837 15,537 12,889 4,723 DCB € m AIB UK € m FSG € m 30,714 3,817 34,531 2,318 2,785 4,624 3,268 2,252 361 2,613 432 5,208 4,302 905 – 3,620 3,620 1,542 11,754 4,815 134 2013+ Total € m 32,966 7,798 40,764 4,292 19,747 13,741 4,307 29,631 3,567 33,198 2,341 2,647 4,685 4,241 2,177 345 2,522 407 4,395 4,492 392 – 3,126 3,126 1,089 8,495 3,712 90 47,112 12,208 16,512 75,832 47,526 13,460 21,865 82,851 Residential mortgages: Owner-occupier Buy-to-let Other personal Property and construction SME/other commercial Corporate Total Analysed as to asset quality(1) Satisfactory Watch Vulnerable Impaired Total criticised loans Total loans percentage Criticised loans/total loans Impaired loans/total loans Impairment provisions – 33,581 3,571 2,915 7,045 13,531 % 29 15 statement of financial position € m Specific IBNR Total impairment provisions Provision cover percentage Specific provisions/impaired loans Total provisions/impaired loans Total provisions/total loans Income statement – impairment charge/(credit) Specific IBNR Total impairment charge/(credit) Impairment charge/(credit)/ 2,310 714 3,024 % 33 43 6 € m 308 (105) 203 % 7,051 1,222 1,049 2,886 5,157 % 42 24 € m 1,718 85 1,803 % 60 62 15 € m 129 (59) 70 % 1,219 379 2,683 12,231 15,293 % 93 74 € m 7,287 292 7,579 % 60 62 46 € m (512) 61 (451) % 41,851 5,172 6,647 22,162 33,981 % 45 29 € m 11,315 1,091 12,406 % 51 56 16 € m (75) (103) (178) % 33,019 4,587 3,034 6,886 14,507 % 31 14 € m 2,401 828 3,229 % 35 47 7 € m 713 137 850 % 7,048 1,481 1,251 3,680 6,412 % 48 27 € m 2,070 132 2,202 % 56 60 16 € m 254 (88) 166 % 973 718 1,829 18,345 20,892 % 96 84 41,040 6,786 6,114 28,911 41,811 % 50 35 € m 11,427 225 € m 15,898 1,185 11,652 17,083 % 62 64 53 € m 1,091 (194) 897 % % 55 59 21 € m 2,058 (145) 1,913 % average loans 0.43 0.54 (2.29) (0.22) 1.74 1.18 3.97 2.24 (1)Satisfactory: credit which is not included in any of the criticised categories of Watch, Vulnerable and Impaired loans. For a definition of the criticised categories, see page 61. +The industry sector ‘lease financing’ is no longer reported by the Group. Accordingly, for December 2013, where tables show a sectoral analysis, lease financing is re-presented in the relevant sector to which the borrower belongs. *Forms an integral part of the audited financial statements 84 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio The following summarises the key points affecting the credit profile of the loan portfolio: – Improved demand for credit resulted in new lending of € 5.9 billion in 2014. – Significant progress was made during 2014 in working with customers to restructure facilities. – Impairment provisions reduced from a charge of € 1,913 million in 2013, to a net writeback of € 178 million in 2014 driven by restructuring activity and a significant reduction in new impairments due to the improved economic environment. The Group is predominantly Republic of Ireland and United Kingdom focused and most sectors have experienced improved trading conditions in 2014 due to the stronger economic environment. The Group has material concentrations in residential mortgages and property and construction. The satisfactory portfolio grew by 2% in 2014. This return to growth is in contrast to the trends observed in 2012 and 2013 when it reduced by 20% and 13% respectively. This has been due to increased demand for credit across most sectors and a reduction in downward grade migration. New business drawdowns increased to € 5.9 billion in 2014 (2013 € 3.9 billion), and included SME/other commercial in the Republic of Ireland (€ 0.9 billion), corporate loans (€ 1.7 billion) and Republic of Ireland mortgages (€ 1.3 billion). Restructuring Restructuring the loans of customers in difficulty was a key focus for the Group during 2014. Treatment strategies, as described on pages 70 to 72, have been developed for customers who are experiencing financial difficulties. The approach is one of structured engagement with co-operating customers to assess their long term levels of sustainable debt. A non-retail customer in difficulty typically has exposures across a number of asset classes, including owner-occupier and buy-to-let mortgages, SME debt and associated property exposures. The aim is to apply the treatment strategies at a customer level to deliver a holistic solution which prioritises owner-occupier and viable SME debt. Each case requires an in-depth review of cash flows and security, updated for current valuations and business performance. This process may result in writebacks or top-ups of provisions across asset classes or for the customer as a whole. Write-offs may also be a feature of this process. Credit quality Credit quality in the portfolio has begun to improve. Criticised loans, including impaired, decreased by 19%, driven by the restructuring activity, write-offs and lower downward grade migration. Within criticised loans, vulnerable loans increased by c.€ 0.5 billion which was due to the restructuring of impaired loans during the year. Most individually assessed loans are initially graded as vulnerable following restructure. Residential mortgages Residential mortgages amounted to 51% of total loans and receivables to customers, with the loans mainly located in the Republic of Ireland (94%) with most of the remainder in Northern Ireland. The portfolio consists of 82% owner-occupier loans and 18% buy-to-let. Total loans in arrears in the Republic of Ireland mortgage portfolio decreased by 18% during the year, including a decrease of 22% in the owner-occupier portfolio and a decrease of 7% in the buy-to-let portfolio. The amount of loans which were new into arrears in 2014 fell by 43% in comparison to those entering arrears for the first time in 2013. These decreases in arrears can be attributed to increased restructuring activity and improved economic conditions. Overall loans to value in the Republic of Ireland mortgage portfolio have improved due to property price increases and loan amortisation. Further detailed disclosures in relation to the Republic of Ireland mortgage portfolio are provided on pages 98 to 107 and the United Kingdom mortgage portfolio on pages 108 to 114. Property and construction The property and construction portfolio amounted to 20% of total loans and receivables. The property market in the Republic of Ireland has seen resurgence in demand as well as increased property values during 2014. This reflects a more positive economic environment and increased liquidity which has resulted in a greater level of transactions across all sectors. The portfolio is comprised of 69% investment loans (€ 10.7 billion), 26% land and development loans (€ 4.1 billion) and 5.1% other property and construction loans (€ 0.8 billion). Overall, the portfolio reduced by € 4.2 billion or 21% during 2014, with all of the reduction coming from the criticised grades. This reduction is due to the impact of write-offs, amortisations and repayments, resulting from asset disposals by customers within the criticised portfolio. Further detailed disclosures in relation to the property and construction portfolio are provided on pages 117 to 119. Allied Irish Banks, p.l.c. Annual Financial Report 2014 85 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio SME/other commercial The SME/other commercial lending portfolio amounted to 17% of total loans and receivables. The geographical split is 65% in the Republic of Ireland with the remaining 35% in the United Kingdom. This portfolio in both the Republic of Ireland and the United Kingdom is concentrated in sub-sectors which are reliant on the domestic economies. Key sub-sectors include agriculture,hotels, retail, and other services. Credit quality within the portfolio has improved due to restructuring and the improved economic environment. Further detailed disclosures in relation to the SME/other commercial lending portfolio are provided on pages 120 to 121. Loans and receivables to customers for the remaining portfolios consisted of € 3.8 billion in other personal loans and € 4.7 billion to corporate borrowers. These portfolios are profiled in more detail on pages 115 to 116 and 122 respectively. Impairment provisions Specific provisions as a percentage of impaired loans decreased from 55% at 31 December 2013 to 51% at 31 December 2014. This was mainly driven by restructures and write-offs of provisions within portfolios with higher provision cover which had the impact of reducing overall cover for the remaining portfolio. Provision write-offs are generated through both restructuring agreements with customers and also write-offs of provisions where further recovery is considered unlikely. IBNR provisions of € 1.1 billion were held at 31 December 2014 compared to € 1.2 billion at 31 December 2013. Despite the improvement in performance, the IBNR reduced only slightly compared to December 2013 and includes the impact of an increase in the emergence period in the Republic of Ireland for mortgages from 9 to 12 months and for non-mortgages from 6 to 8 months. The level of IBNR reflects the need to maintain a conservative estimate of unidentified incurred loss within the portfolio. The income statement provision writeback of € 178 million compared to a charge of € 1.9 billion in 2013. Income statement specific provisions included € 541 million from new impairments and a € 616 million writeback of provisions (net of top-ups). This writeback amounted to c. 2% of opening impaired loans, and was generated primarily by the restructuring assessment process described above and a reduction in the house price fall from peak assumption used for the mortgage individually insignificant provision model from 55% at December 2013 to 50% during 2014. The table on the following page profiles the asset quality of the Group’s loans and receivables as at 31 December 2014 and 31 December 2013. Profiles of past due but not impaired loans are detailed on pages 89 and 90, impaired loans are detailed on pages 91and 92 and provisions are detailed on pages 93 to 95. 86 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio The following table profiles the asset quality of the Group’s loans and receivables as at 31 December 2014 and 31 December 2013. Asset quality* Neither past due nor impaired Past due but not impaired Impaired – provisions held Gross loans and receivables Specific provisions IBNR provisions Total provisions for impairment Residential mortgages € m 29,014 1,323 8,509 38,846 (2,877) (550) (3,427) Other Property and SME/other personal construction commercial € m € m € m 2,590 203 1,044 3,837 (716) (52) (768) 6,226 475 8,836 8,991 503 3,395 15,537 12,889 (5,478) (174) (2,054) (254) (5,652) (2,308) Corporate € m 4,325 20 378 4,723 (190) (61) (251) 2014 Total € m 51,146 2,524 22,162 75,832 (11,315) (1,091) (12,406) Gross loans and receivables less provisions 35,419 3,069 9,885 10,581 4,472 63,426 Unearned income Deferred costs Net loans and receivables Asset quality* Neither past due nor impaired Past due but not impaired Impaired – provisions held Gross loans and receivables Specific provisions IBNR provisions Total provisions for impairment Residential mortgages € m 29,688 1,993 9,083 40,764 (3,333) (619) (3,952) (123) 59 63,362 2013+ Total € m 50,354 3,586 28,911 82,851 (15,898) (1,185) (17,083) Corporate € m 3,791 40 476 4,307 (228) (79) (307) Other Property and SME/other construction commercial € m € m personal € m 2,536 333 1,423 4,292 (1,092) (55) (1,147) 5,913 658 13,176 19,747 (8,136) (324) (8,460) 8,426 562 4,753 13,741 (3,109) (108) (3,217) Gross loans and receivables less provisions 36,812 3,145 11,287 10,524 4,000 65,768 Unearned income Deferred costs Net loans and receivables (101) 74 65,741 Gross loans and receivables to customers reduced by 8.5% to € 75.8 billion in 2014. The reduction was driven by a decrease in criticised loans of € 7.8 billion primarily due to provision write-offs of € 4.7 billion and loan repayments mainly due to asset sales. The satisfactory portfolio grew by 2% in 2014. Loans which were neither past due nor impaired increased to 67% of total loans, up from 61% as at 31 December 2013. +The industry sector ‘lease financing’ is no longer reported by the Group. Accordingly, for December 2013, where tables show a sectoral analysis, lease financing is re-presented in the relevant sector to which the borrower belongs. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 87 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Analysis of loans and receivables to customers by contractual residual maturity and interest rate sensitivity The following tables analyse gross loans and receivables to customers by contractual residual maturity and interest rate sensitivity. Overdrafts, which in the aggregate represent approximately 2% of the portfolio at 31 December 2014, are classified as repayable within one year. Approximately 7% of AIB Group’s loan portfolio is provided on a fixed rate basis. Fixed rate loans are defined as those loans for which the interest rate is fixed for the full term of the loan. The interest rate risk exposure is managed within agreed policy parameters. The analysis below includes loans and receivables to customers amounting to Nil (31 December 2013: € 28 million) within disposal groups and non-current assets held for sale. Loans and receivables to customers Fixed rate Variable rate Total € m Republic of Ireland ......................4,038 ..............59,624 ..............63,662 United Kingdom ..............................898 ..............11,225 ..............12,123 Rest of the World ................................– ....................47 ....................47 € m € m Total loans by maturity 4,936 70,896 75,832 Fixed rate € m Variable rate € m Total € m Republic of Ireland ......................4,375 ..............65,160 ..............69,535 United Kingdom ..............................839 ..............12,369 ..............13,208 Rest of the World ................................– ..................108 ..................108 Total loans by maturity 5,214 77,637 82,851 year Within 1 After 1 year but within 5 years € m € m 24,612 4,529 22 29,163 6,773 2,826 25 9,624 Within 1 year € m 30,579 5,468 86 36,133 After 1 year but within 5 years € m 5,452 2,817 20 8,289 After 5 years € m 32,277 4,768 – 37,045 After 5 years € m 33,504 4,923 2 38,429 2014 Total € m 63,662 12,123 47 75,832 2013 Total € m 69,535 13,208 108 82,851 88 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio Aged analysis of contractually past due but not impaired gross loans and receivables to customers* Industry sector Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal Residential mortgages Credit cards Other Segment DCB AIB UK FSG As a percentage of total gross loans Industry sector Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal Residential mortgages Credit cards Other Segment DCB AIB UK FSG As a percentage of total gross loans 1–30 days € m 31–60 days € m 50 – 21 140 69 6 12 69 552 30 50 999 733 118 148 999 % 1.32 10 – 4 37 18 1 1 26 259 7 14 377 280 36 61 377 % 0.50 1–30 days € m 31–60 days € m 62 1 21 210 71 7 11 90 857 33 122 1,485 1,141 154 190 1,485 % 1.79 13 1 4 61 13 1 2 11 391 9 22 528 414 45 69 528 % 0.64 61–90 days 91–180 days 181–365 days € m € m € m 3 – 1 28 7 – – 3 151 4 13 210 145 28 37 210 % 0.28 9 – 1 58 28 – 2 10 116 3 18 245 131 27 87 245 % 0.32 15 – 2 58 35 – – 11 127 1 15 264 128 20 116 264 % 0.35 61–90 days 91–180 days 181–365 days € m € m € m 17 – 1 48 18 – – 18 280 6 18 406 282 57 67 406 % 0.49 15 1 5 64 20 2 2 16 245 4 44 418 245 55 118 418 % 0.50 11 – 4 119 37 1 3 13 144 1 27 360 151 43 166 360 % 0.43 The figures reported are inclusive of overdrafts, bridging loans and cases with expired limits. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 > 365 days € m 40 3 8 154 31 3 – 24 118 – 48 429 120 14 295 429 % 0.57 > 365 days € m 34 1 20 156 32 3 1 19 76 – 47 389 109 25 255 389 % 0.47 2014 Total € m 127 3 37 475 188 10 15 143 1,323 45 158 2,524 1,537 243 744 2,524 % 3.33 2013 Total € m 152 4 55 658 191 14 19 167 1,993 53 280 3,586 2,342 379 865 3,586 % 4.33 89 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Aged analysis of contractually past due but not impaired gross loans and receivables to customers* (continued) Loans past due but not impaired reduced by € 1.1 billion to € 2.5 billion or 3.3% of total loans and receivables to customers (2013: € 3.6 billion or 4.3%). Residential mortgage loans which were past due but not impaired at 31 December 2014, amounted to € 1.3 billion. This represents 52% of total loans which were past due but not impaired ( 2013: € 2.0 billion or 56%). The level of residential mortgage loans in early arrears (less than 30 days) decreased by 36% in 2014, due to active management of early arrears cases and the improving economic environment. Property and construction loans which were past due but not impaired represent a further 19% or € 0.5 billion of total loans which were past due but not impaired (2013: 18% or € 0.7 billion), with other personal at 8% or € 0.2 billion (2013: 9% or € 0.3 billion). *Forms an integral part of the audited financial statements 90 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio Impaired loans for which provisions are held* The following table shows impaired loans which are assessed for impairment either individually or collectively with the relevant specific impairment provisions: Gross loans and receivables € m Impaired loans Individually Collectively assessed assessed Total % of total loans € m € m € m Retail Residential mortgages Other personal lending Total retail Commercial Property and construction SME/commercial Total commercial Corporate Total Specific impairment provisions at 31 December 2014 Specific provision cover percentage 38,846 3,837 42,683 15,537 12,889 28,426 4,723 75,832 3,453 691 4,144 8,543 2,981 11,524 378 16,046 5,056 353 5,409 293 414 707 – 8,509 1,044 9,553 8,836 3,395 12,231 378 6,116 22,162 22 27 22 57 26 43 8 29 9,185 2,130 11,315 % 57 % 35 % 51 Gross loans and receivables € m Impaired loans Individually Collectively assessed assessed Total % of total loans € m € m € m Retail Residential mortgages Other personal lending Total retail Commercial Property and construction SME/commercial Total commercial Corporate Total Specific impairment provisions at 31 December 2013 Specific provision cover percentage 40,764 4,292 45,056 19,747 13,741 33,488 4,307 82,851 4,104 866 4,970 12,668 4,054 16,722 476 22,168 4,979 557 5,536 508 699 1,207 – 9,083 1,423 10,506 13,176 4,753 17,929 476 6,743 28,911 22 33 23 67 35 54 11 35 12,875 3,023 15,898 % 58 % 45 % 55 +The industry sector ‘lease financing’ is no longer reported by the Group. Accordingly, for December 2013, where tables show a sectoral analysis, lease financing is re-presented in the relevant sector to which the borrower belongs. Specific provisions as a percentage of impaired loans decreased from 55% at 31 December 2013 to 51% at 31 December 2014. This was mainly driven by restructures and write-offs of provisions within portfolios with higher provision cover which had the impact of reducing overall cover for the remaining portfolio. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G 2014 Specific impairment provisions % of impaired loans Total € m 2,877 716 3,593 5,478 2,054 7,532 190 11,315 34 69 38 62 61 62 50 51 2013+ Specific impairment provisions % of impaired loans Total € m 3,333 1,092 4,425 8,136 3,109 11,245 228 15,898 37 77 42 62 66 63 48 55 91 Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Impaired loans for which provisions are held* (continued) The provision cover for the collectively assessed portfolio reduced from 45% to 35%. This was driven by a lower proportion of non-mortgage loans within the collective models (smaller loans with lower security and higher provision cover), a reduction in the mortgage individually insignificant provision cover (due to the improvement in the house price fall from peak assumption), and a reduction in the individually insignificant non-mortgage provision cover due to provision write-offs and the implementation of a new individually insignificant non-mortgage model which takes into consideration underlying security as described on page 75. *Forms an integral part of the audited financial statements 92 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio Movements on impairment provisions The following table sets out the movements on the Group impairment provisions for the years ended 31 December 2014 and 31 December 2013: At 1 January Exchange translation adjustments (Credit to)/charge against income statement – customers(1) Credit to income statement – banks(2) Amounts written off(3) Recoveries of amounts written off in previous years(3) At 31 December Total provisions are split as follows: Specific IBNR Amounts include: Residential mortgages € m 3,952 12 (76) – (461) – 3,427 2,877 550 3,427 Other Property and SME/Other personal construction commercial € m € m € m 1,147 9 15 – 8,460 97 (244) – 3,224 22 81 (7) Corporate € m 307 10 46 – 2014* Total € m 17,090 150 (178) (7) (403) (2,664) (1,013) (114) (4,655) – 768 716 52 768 3 1 5,652 2,308 5,478 174 5,652 2,054 254 2,308 2 251 190 61 251 Loans and receivables to customers (note 24 to the consolidated financial statements) At 1 January Exchange translation adjustments Other Charge against income statement – customers(1) – banks(2) Amounts written off(3) Disposals Recoveries of amounts written off in previous years(3) At 31 December Total provisions are split as follows: Specific IBNR Amounts include: Residential mortgages € m Other Property and construction € m personal € m SME/Other commercial € m 3,206 1,139 8,126 3,478 – 20 813 – (87) – – (4) – 125 – (114) – 1 (44) (34) 724 – (296) (16) – (23) – 221 3 (456) – 1 3,952 1,147 8,460 3,224 3,333 619 3,952 1,092 55 1,147 8,136 324 8,460 3,116 108 3,224 Corporate € m 583 (5) – 30 – (181) (120) – 307 228 79 307 Loans and receivables to banks (note 23 to the consolidated financial statements) Loans and receivables to customers (note 24 to the consolidated financial statements) (1 )Geographic split :Republic of Ireland a credit of € 205 million (2013: a charge of € 1,726 million); United Kingdom a charge of € 27 million (2013: a charge of € 185 million) and Rest of the World Nil (2013: a charge of € 2 million). (2)Geographic split: Republic of Ireland a credit of € 7 million (2013: a charge of € 3 million); United Kingdom Nil (2013: Nil) and Rest of the World Nil (2013: Nil). (3)For geographical and sector split, see page 96. *Forms an integral part of the audited financial statements 6 12,406 11,315 1,091 12,406 12,406 12,406 2013* Total € m 16,532 (76) (14) 1,913 3 (1,134) (136) 2 17,090 15,905 1,185 17,090 7 17,083 17,090 Allied Irish Banks, p.l.c. Annual Financial Report 2014 93 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Provisions – income statement The following table analyses the income statement provision charge/(credit) split between individually significant, individually insignificant and IBNR for loans and receivables for the years ended 31 December 2014 and 31 December 2013: Specific provisions – Individually significant loans and receivables – Individually insignificant loans and receivables IBNR Total provisions for impairment charge/(credit) on loans and receivables to customers Writeback of provisions for impairment on loans and receivables to banks Writeback of provisions for liabilities and commitments Provisions for impairment on financial investments available for sale Total DCB € m 188 120 (105) 203 AIB UK € m 97 32 (59) 70 FSG € m (335) (177) 61 2014* Total € m (50) (25) (103) (451) (178) Specific provisions – Individually significant loans and receivables – Individually insignificant loans and receivables IBNR Total provisions for impairment charge on loans and receivables to customers Provisions for impairment on loans and receivables to banks Provisions charge for liabilities and commitments Writeback of provisions for impairment on financial investments available for sale Total DCB € m 279 434 137 850 AIB UK € m 206 48 (88) 166 FSG € m 973 118 (194) 897 (7) (4) 1 (188) 2013* Total € m 1,458 600 (145) 1,913 3 17 (9) 1,924 *Forms an integral part of the audited financial statements 94 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio Provisions – income statement (continued) The following table analyses by segment the income statement impairment provision charge/(credit) for the years ended 31 December 2014 and 31 December 2013: DCB AIB UK FSG Total Residential mortgages € m (24) 17 (69) (76) Other € m 227 53 (382) (102) 2014* Total € m 203 70 (451) (178) Residential mortgages € m 679 (9) 143 813 Other € m 171 175 754 2013* Total € m 850 166 897 1,100 1,913 The following table analyses by segment the income statement impairment provision charge/(credit) as a percentage of average loans expressed as basis points (“bps”) for the years ended 31 December 2014 and 31 December 2013: DCB AIB UK FSG Total Residential mortgages bps (7) 68 (202) (19) Other bps 169 51 2014* Total bps 43 54 (235) (229) (26) (22) Residential mortgages bps 195 (34) 384 197 Other bps 122 154 400 249 2013* Total bps 174 118 397 224 Loan impairment provisions reduced from a charge of € 1.9 billion in 2013, to a net writeback of € 178 million in 2014. The writeback comprised of € 75 million in specific provision writebacks and a release of IBNR provisions of € 103 million (31 December 2013: € 2.1 billion charge in specific provisions and release of IBNR provisions of € 145 million). The specific provision writeback of € 75 million can be split into € 541 million new impairment provisions and a € 616 million writeback (net of top-ups), which amounted to 2% of opening impaired loans. The writeback was mainly due to the restructuring process described on page 85 and was driven primarily by increases in asset values, additional security in some cases, and improvements in trading performance and cash flows. In addition, the house price fall from peak assumption used in the mortgage individually insignificant provision model was changed from 55% at 31 December 2013 to 50% during 2014. This resulted in a specific provision writeback of approximately € 130 million. The 2014 income statement provision charge of € 203 million in DCB comprises a specific charge of € 308 million and an IBNR release of € 105 million. This compares to an income statement specific provision charge of € 713 million and an IBNR charge of € 137 million for 2013. The provision charge reduced mainly due to a lower level of new impairments, and the impact of the improvement in the house price fall from peak assumption. The 2014 income statement provision recovery of € 451 million in FSG comprises a writeback of specific provisions of € 512 million and an IBNR charge of € 61 million. This compares to an income statement specific provision charge of € 1,091 million and an IBNR release of € 194 million for 2013. The specific provision turnaround in 2014 was driven primarily by an increase in writebacks (net of top-ups) and by a lower level of new impairments. The IBNR charge of € 61 million in 2014 was mainly due to an increase in IBNR for the SME sector due to increased risks observed within the portfolio during 2014. The impairment provision charge in AIB UK decreased from € 166 million to € 70 million reflecting continued improvement in economic conditions during 2014. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 95 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Loans written off and recoveries of previously written off loans The following table analyses loans written off and recoveries of previously written off loans by geography and industry sector for the years ended 31 December 2014 and 2013. Loan Loans written off IRELAND Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal – Residential mortgages – Other UNITED KINGDOM Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal – Residential mortgages – Other REST OF THE WORLD Energy Manufacturing Property and construction Distribution Transport Other services TOTAL 2014 € m 56.2 14.3 80.9 2,257.3 530.3 58.9 53.9 191.4 447.4 385.0 4,075.6 1.6 – 8.3 407.1 77.0 0.5 6.0 34.4 13.9 17.5 566.3 1.6 – – – – 11.4 13.0 2013 € m 2.9 0.3 40.3 158.9 291.4 57.0 38.2 47.3 66.7 91.3 794.3 0.2 – 18.6 128.0 106.7 1.7 0.4 54.7 10.6 8.9 329.8 2.4 – 6.6 0.4 – 0.1 9.5 4,654.9 1,133.6 Recoveries of loans previously written off 2013 € m 2014 € m – – 0.1 0.3 0.1 – 0.1 0.6 – 0.1 1.3 – – – 3.1 – – – – – – 3.1 1.2 – – – – – 1.2 5.6 – – 0.1 – – – 0.1 – – 0.8 1.0 – – – 0.4 0.1 – 0.3 – – – 0.8 – – – – – – – 1.8 Write-offs as a percentage of total loans and receivables at 1 January 2014, equated to 5.6% compared to 1.3% for 2013. 96 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio Loans and receivables to customers – Residential mortgages Residential mortgages amounted to € 38.8 billion at 31 December 2014, with the majority (94%) relating to residential mortgages in the Republic of Ireland and the remainder relating to the United Kingdom. This compares to € 40.8 billion at 31 December 2013, of which 94% related to residential mortgages in the Republic of Ireland. The split of the residential mortgage book was owner-occupier € 31.8 billion and buy-to-let € 7.0 billion (31 December 2013: owner-occupier € 33 billion and buy-to-let € 7.8 billion). There was an impairment provision credit of € 76 million to the income statement in 2014 comprising a € 4 million specific writeback and a € 72 million IBNR release (2013: € 0.8 billion comprising € 0.7 billion specific charge and a € 0.1 billion IBNR charge). Statement of financial position provisions of € 3.4 billion were held at 31 December 2014, split € 2.9 billion specific and € 0.5 billion IBNR (31 December 2013: € 3.9 billion split € 3.3 billion specific and € 0.6 billion IBNR). This section provides the information listed below in relation to residential mortgages. Republic of Ireland residential mortgages – pages 98 to 107 – Credit profile – Origination profile – Loan-to-value profile: Actual and weighted average indexed loan-to-value ratios of residential mortgages Loan-to-value ratios of residential mortgages (index linked) that were neither past due nor impaired Loan-to-value ratios of residential mortgages (index linked) that were greater than 90 days past due and/or impaired – Credit quality profile – Residential mortgages that were past due but not impaired – Collateral value of residential mortgages that were past due but not impaired – Residential mortgages that were impaired – Properties in possession – Repossessions disposed of United Kingdom (“UK”) residential mortgages – pages 108 to 114 – Credit profile – Origination profile – Loan-to-value profile: Actual and weighted average indexed loan-to-value ratios of UK residential mortgages Loan-to-value ratios of UK residential mortgages (index linked) that were neither past due nor impaired Loan-to-value ratios of UK residential mortgages (index linked) that were greater than 90 days past due and/or impaired – Credit quality profile – UK residential mortgages that were past due but not impaired – Collateral value of UK residential mortgages that were past due but not impaired – UK residential mortgages that were impaired – UK properties in possession Residual debt, which is now unsecured following the disposal of property on which the residential mortgage was secured, is included in the residential mortgage portfolio and as such, is included in the tables within this section. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 97 n o i t a m r o n f i l a r e n e G * 4 1 0 2 l a t o T m € 4 2 3 , 6 3 7 2 9 , 8 2 5 5 , 8 7 1 2 , 8 m € 3 9 6 , 6 8 0 4 , 3 7 3 3 , 3 3 1 2 , 3 t e l - o t - y u B l a t o T m € - r e n w O r e i p u c c o 1 3 6 , 9 2 9 1 5 , 5 5 1 2 , 5 4 0 0 , 5 l a t o T m € 5 2 1 , 3 4 8 5 , 2 7 4 5 , 2 4 6 4 , 2 m € 5 2 1 , 3 4 8 5 , 2 7 4 5 , 2 4 6 4 , 2 G S F t e l - o t - y u B 2 3 5 2 1 1 0 2 4 4 5 4 5 4 2 7 , 2 0 3 3 , 1 4 9 3 , 1 0 3 0 , 1 0 3 0 , 1 % 2 . 3 3 m € ) 2 3 ( ) 1 6 ( ) 3 9 ( % 4 . 1 4 m € ) 9 4 ( ) 8 3 ( ) 7 8 ( % 9 . 7 2 m € 7 1 ) 3 2 ( ) 6 ( % 8 . 1 4 m € ) 7 7 ( 8 ) 9 6 ( % 8 . 1 4 m € ) 7 7 ( 8 ) 9 6 ( – – – – – – % – – – – m € m € - r e n w O r e i p u c c o l a t o T m € 9 9 1 , 3 3 3 4 3 , 6 5 0 0 , 6 3 5 7 , 5 4 9 6 , 1 8 7 4 % 4 . 9 2 m € 5 4 ) 9 6 ( ) 4 2 ( m € 8 6 5 , 3 t e l - o t - y u B B C D m € - r e n w O r e i p u c c o 1 3 6 , 9 2 4 2 8 0 9 7 9 4 7 0 0 3 8 5 % 0 . 0 4 m € 8 2 ) 6 4 ( ) 8 1 ( 9 1 5 , 5 5 1 2 , 5 4 0 0 , 5 4 9 3 , 1 0 2 4 % 9 . 7 2 m € 7 1 ) 3 2 ( ) 6 ( n o i t i s o p l i a c n a n i f f o t n e m e t a t S s e g a g t r o m l a i t n e d s e r i s s o r g l t a o T ) 1 ( ) e u d t s a p s y a d 0 3 > ( s r a e r r a n I ) 1 ( ) e u d t s a p s y a d 0 9 > ( s r a e r r a n I n o i t i s o p l i a c n a n i f f o t n e m e t a t S d e r i a p m i i h c h w f O n o i t i s o p l i a c n a n i f f o t n e m e t a t S i i s n o s v o r p c i f i c e p s i i s n o s v o r p R N B I s n a o l d e r i a p m i i i / s n o s v o r p c i f i c e p S e g a t n e c r e p r e v o c n o i s i v o r P ) t i d e r c ( / e g r a h c t n e m e t a t s e m o c n I i i s n o s v o r p c i f i c e p s i i s n o s v o r p R N B I t n e m e t a t s e m o c n I t n e m e t a t s e m o c n I ) t i d e r c ( t n e m r i a p m i l a t o T : 3 1 0 2 r e b m e c e D 1 3 d n a 4 1 0 2 r e b m e c e D 1 3 d e d n e s r a e y e h t r o f i i s n o s v o r p t n e m r i a p m i i g n w o h s t n e m g e s y b o i l o f t r o p e g a g t r o m l i a i t n e d s e r d n a e r I l f o c i l b u p e R e h t l s e s y a n a e b a t g n w o i l l l o f e h T s e g a g t r o m l a i t n e d i s e r d n a l e r I f o c i l b u p e R – s r e m o t s u c o t i s e l b a v e c e r d n a s n a o L . s t n e m e a t s t l i a c n a n i f d e t i d u a e h t f o t r a p l a r g e t n i n a s m r o F * . t o n r o e u d t s a p r e h t e h w s n a o l d e r i a p m i l l a s e d u c n I l ) 1 ( Allied Irish Banks, p.l.c. Annual Financial Report 2014 s e p y t k s i r l i a u d v d n i I . 3 – t n e m e g a n a m k s R i 98 ) d e u n i t n o c ( o i l o f t r o p n a o l e h t f o e l i f o r p t i d e r C - k s i r t i d e r C 1 . 3 * 3 1 0 2 l a t o T m € 1 5 1 , 8 3 8 2 8 , 9 3 9 1 , 9 8 8 7 , 8 m € 7 3 4 , 7 5 8 8 , 3 8 9 7 , 3 8 5 6 , 3 t e l - o t - y u B l a t o T m € - r e n w O i r e p u c c o 4 1 7 , 0 3 3 4 9 , 5 5 9 3 , 5 0 3 1 , 5 l a t o T m € 0 2 6 , 3 0 1 1 , 3 9 6 0 , 3 5 8 9 , 2 m € 0 2 6 , 3 0 1 1 , 3 9 6 0 , 3 5 8 9 , 2 t e l - o t - y u B G S F 2 9 5 9 4 1 3 4 4 6 4 6 4 4 0 2 , 3 7 4 5 , 1 7 5 6 , 1 1 8 2 , 1 1 8 2 , 1 % 5 . 6 3 m € 2 6 6 0 6 1 2 2 8 % 3 . 2 4 m € 2 2 2 7 3 9 5 2 % 3 . 2 3 m € 0 4 4 3 2 1 3 6 5 % 9 . 2 4 m € 8 3 1 5 3 4 1 % 9 . 2 4 m € 8 3 1 5 3 4 1 – – – – – – % – – – – m € m € - r e n w O i r e p u c c o l a t o T m € 1 3 5 , 4 3 8 1 7 , 6 4 2 1 , 6 3 0 8 , 5 3 2 9 , 1 6 4 5 % 1 . 3 3 m € 4 2 5 5 5 1 9 7 6 m € 7 1 8 , 3 t e l - o t - y u B B C D m € - r e n w O i r e p u c c o 4 1 7 , 0 3 5 7 7 9 2 7 3 7 6 6 6 2 3 0 1 % 4 . 9 3 m € 4 8 2 3 6 1 1 3 4 9 , 5 5 9 3 , 5 0 3 1 , 5 7 5 6 , 1 3 4 4 % 3 . 2 3 m € 0 4 4 3 2 1 3 6 5 n o i t i s o p l i a c n a n i f f o t n e m e t a t S s e g a g t r o m l a i t n e d s e r i s s o r g l t a o T ) 1 ( ) e u d t s a p s y a d 0 3 > ( s r a e r r a n I ) 1 ( ) e u d t s a p s y a d 0 9 > ( s r a e r r a n I n o i t i s o p l i a c n a n i f f o t n e m e t a t S d e r i a p m i i h c h w f O n o i t i s o p l i a c n a n i f f o t n e m e t a t S i i s n o s v o r p c i f i c e p s i i s n o s v o r p R N B I e g a t n e c r e p r e v o c n o i s i v o r P s n a o l d e r i a p m i i i / s n o s v o r p c i f i c e p S . t o n r o e u d t s a p r e h t e h w s n a o l d e r i a p m i l l a s e d u c n I l ) 1 ( e g r a h c t n e m r i a p m i l a t o T i i s n o s v o r p c i f i c e p s i i s n o s v o r p R N B I t n e m e t a t s e m o c n I t n e m e t a t s e m o c n I e g r a h c t n e m e t a t s e m o c n I ) d e u n i t n o c ( s e g a g t r o m l a i t n e d i s e r d n a l e r I f o c i l b u p e R – s r e m o t s u c o t i s e l b a v e c e r d n a s n a o L i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G . s t n e m e a t s t l i a c n a n i f d e t i d u a e h t f o t r a p l a r g e t n i n a s m r o F * s e p y t k s i r l i a u d v d n i I . 3 – t n e m e g a n a m k s R i ) d e u n i t n o c ( o i l o f t r o p n a o l e h t f o e l i f o r p t i d e r C - k s i r t i d e r C 1 . 3 Allied Irish Banks, p.l.c. Annual Financial Report 2014 99 Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Loans and receivables to customers – Republic of Ireland residential mortgages (continued) Residential mortgages in the Republic of Ireland amounted to € 36.3 billion at 31 December 2014 compared to € 38.2 billion at 31 December 2013. The decrease in the portfolio was observed mainly in the criticised grades and was due to amortisation and restructuring. Total drawdowns in 2014 were € 1.3 billion, of which 97% related to owner-occupier, whilst the weighted average indexed loan-to-value for new residential mortgages was 70%, down from 72% in 2013. The split of the residential mortgage portfolio is 82% owner-occupier and 18% buy-to-let and comprised 40% tracker rate, 52% variable rate and 8% fixed rate mortgages. The proportion of the total residential mortgage portfolio in negative equity decreased from 51% at 31 December 2013 to 34% at 31 December 2014 reflecting the increase in residential property prices in Ireland during 2014 and loan amortisation, whilst the quantum of negative equity in the book reduced from € 4.6 billion to € 2.7 billion. Residential mortgage arrears Total loans in arrears in the Republic of Ireland residential mortgage portfolio decreased by 18% during the year, reflecting a decrease of 22% in the owner-occupier portfolio and a decrease of 7% in the buy-to-let portfolio. The amount of loans which were new into arrears in 2014 fell by 43% in comparison to those entering arrears for the first time in 2013. These decreases in arrears can be attributed to increased restructuring activity and improved economic conditions which was evident in both the early arrears (less than 90 days past due) and the late arrears (greater than 90 days past due). Total loans in arrears greater than 90 days at 11.3% decreased in the year to 31 December 2014 and remain below the industry average of 12.9%(1). For the owner-occupier book, loans in arrears greater than 90 days at 9.0% were below the industry average of 11.2%. For the buy-to-let book, loans in arrears greater than 90 days at 24.7% exceeded the industry average of 22.1%. Forbearance The Group has maintained a strong focus on restructuring the residential mortgage portfolio during the year. The Group has successfully met its Mortgage Arrears Resolution Targets (“MART”), with sustainable solutions offered to 100% of loans greater than 90 days past due (as defined by MART), with 58% deemed concluded at the year end, of which 87% were meeting the terms of their agreement at 31 December 2014. Residential mortgages subject to forbearance measures increased by € 0.6 billion to € 5.6 billion at 31 December 2014, compared to a decrease of € 0.8 billion in 2013. A key feature of the forbearance portfolio is the growth in the proportion of advanced forbearance solutions (split mortgages, low fixed interest rate voluntary sale for loss, negative equity trade down and positive equity solutions) driven by the Group's strategy to deliver sustainable long-term solutions to customers and support customers in remaining in their family home. Details of forbearance measures are set out in Section 3.2 below. Impairment provisions Impaired loans decreased from € 8.8 billion at 31 December 2013 to € 8.2 billion at 31 December 2014, mainly due to restructuring, write-offs of provisions and amortisation through asset sales. The level of newly impaired loans declined by 37% in 2014. There was a specific provision writeback of € 32 million in the year compared to a € 662 million charge for 2013. This can be split into a charge for new impairments of € 186 million and a writeback of provisions (net of top-ups) of € 218 million. The writeback was due to a change in the assumption used in the individually insignificant and IBNR mortgage model for the house price fall from peak from 55% to 50% and the impact of restructuring. The specific provision cover level reduced from 36.5% to 33.2% during the year as a result. An IBNR release in 2014 of € 61 million compares to a charge of € 160 million in 2013. This was mainly due to the change in the house price fall from peak assumption as described above and a reduction in required IBNR for the non-impaired forbearance portfolio off-set by an increase in emergence period. Specific provisions of € 0.9 billion were held against the forborne impaired portfolio of € 3.3 billion providing cover of 26.9%. In relation to the non-impaired forborne portfolio of € 2.3 billion, of which € 0.7 billion is on an interest only arrangement or an arrangement to repay amounts greater than interest only, IBNR impairment provisions of € 0.1 billion were held at 31 December 2014. (1)Source: Central Bank of Ireland (“CBI”) Residential Mortgage Arrears and Repossessions Statistics as at 30 September 2014, based on numbers of accounts. *Forms an integral part of the audited financial statements 100 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio Loans and receivables to customers – Republic of Ireland residential mortgages (continued) Residential mortgages by year of origination The following table profiles the Republic of Ireland total residential mortgage portfolio and impaired residential mortgage portfolio by year of origination at 31 December 2014 and 31 December 2013: Republic of Ireland 1996 and before 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total Total Impaired Total Impaired 2014* 2013* Number Balance € m Number Balance € m Number Balance € m 6,144 2,831 3,447 4,601 6,095 6,737 10,551 14,856 20,060 28,295 36,280 35,222 33,384 22,040 15,404 4,653 6,752 5,646 6,060 149 70 114 198 308 423 835 1,402 2,339 3,725 5,807 5,871 5,607 3,335 2,282 682 1,049 906 1,222 954 350 503 658 855 919 1,549 2,469 3,633 5,739 8,672 8,701 6,917 2,835 947 109 28 7 2 34 14 24 46 66 80 170 315 567 1,035 1,841 1,852 1,465 519 162 20 6 1 – 7,812 3,131 3,851 5,547 6,589 7,179 11,210 15,670 21,425 29,435 37,137 35,944 34,075 23,045 15,877 4,839 6,934 5,863 – 189 87 144 236 357 484 945 1,575 2,576 4,080 6,307 6,334 6,066 3,578 2,419 737 1,116 921 – Number 1,083 379 534 729 902 978 1,596 2,562 3,686 5,821 8,660 8,624 6,827 2,632 821 96 18 – – Balance € m 37 15 26 52 72 89 183 348 612 1,117 2,003 1,965 1,580 512 153 20 4 – – 269,058 36,324 45,847 8,217 275,563 38,151 45,948 8,788 The majority (€ 21.0 billion or 58%) of the € 36.3 billion residential mortgage book originated between 2005 and 2008, of which 29% (€ 6.2 billion) was impaired at 31 December 2014. This was driven by reduced household income and increased unemployment in the last number of years, and reflects the decrease in property prices since their peak in 2007. 16% of the residential mortgage portfolio was originated before 2005 of which 23% was impaired at 31 December 2014, while the remaining 26% of the portfolio was originated since 2009 of which 7% was impaired at 31 December 2014. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 101 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio The property values used in the completion of the following loan-to-value tables are determined with reference to the original or most recent valuation, indexed to the Central Statistics Office (“CSO”) Residential Property Price Index in the Republic of Ireland for November 2014. The CSO Residential Property Price Index for November 2014 reported that national residential property prices were 38% lower than their highest level in early 2007 and reported an annual increase in residential property prices of 16% in the year to 30 November 2014. Actual and weighted average indexed loan-to-value ratios of residential mortgages The following table profiles the Republic of Ireland residential mortgage portfolio by the indexed loan-to-value ratios and the weighted average indexed loan-to-value ratios at 31 December 2014 and 31 December 2013: Republic of Ireland Less than 50% 50% to 70% 71% to 80% 81% to 90% 91% to 100% 101% to 120% 121% to 150% Greater than 150% Unsecured Owner-occupier € m % 5,307 5,542 3,256 3,386 2,794 4,328 3,998 947 73 17.9 18.7 11.0 11.4 9.4 14.6 13.5 3.2 0.3 Total Weighted average indexed loan-to-value(1): Stock of residential mortgages at year end New residential mortgages issued during year Impaired residential mortgages 29,631 100.0 83.6 70.5 107.0 Republic of Ireland Less than 50% 50% to 70% 71% to 80% 81% to 90% 91% to 100% 101% to 120% 121% to 150% Greater than 150% Total Weighted average indexed loan-to-value(1): Stock of residential mortgages at year end New residential mortgages issued during year Impaired residential mortgages Owner-occupier € m % 4,130 3,834 2,660 2,589 2,765 5,319 5,553 3,864 13.4 12.5 8.7 8.4 9.0 17.3 18.1 12.6 30,714 100.0 Buy-to-let 2014* Total % 12.0 13.4 8.1 8.8 10.2 17.1 17.4 11.7 1.3 € m 6,109 6,435 3,801 3,976 3,477 5,475 5,162 1,727 162 % 16.8 17.7 10.5 11.0 9.6 15.0 14.2 4.8 0.4 100.0 36,324 100.0 101.4 55.2 119.8 Buy-to-let % 8.0 9.0 6.1 6.8 7.8 16.5 22.3 23.5 87.1 70.0 112.4 2013* Total % 12.4 11.8 8.1 8.1 8.8 17.2 18.9 14.7 € m 4,727 4,504 3,114 3,092 3,347 6,548 7,211 5,608 100.0 38,151 100.0 € m 802 893 545 590 683 1,147 1,164 780 89 6,693 € m 597 670 454 503 582 1,229 1,658 1,744 7,437 98.9 72.2 124.6 119.0 61.6 137.5 102.8 71.9 130.0 (1)Weighted average indexed loan-to-values are the individual indexed loan-to-value calculations weighted by the mortgage balance against each property. 31% of the total owner-occupier and 46% of the total buy-to-let mortgages were in negative equity at 31 December 2014, compared to 48% and 62% respectively at 31 December 2013. The weighted average indexed loan-to-value for the total residential mortgage book was 87.1% at 31 December 2014 compared to 102.8% at 31 December 2013, with the reduction driven primarily by the increase in property prices in 2014, coupled with amortisation of the loan book. *Forms an integral part of the audited financial statements 102 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio (continued) Loan-to-value ratios of residential mortgages (index linked) that were neither past due nor impaired The following table profiles the Republic of Ireland residential mortgages that were neither past due nor impaired by the indexed loan-to-value ratios at 31 December 2014 and 31 December 2013: Republic of Ireland Less than 50% 50% to 70% 71% to 80% 81% to 90% 91% to 100% 101% to 120% 121% to 150% Greater than 150% Unsecured Total Republic of Ireland Less than 50% 50% to 70% 71% to 80% 81% to 90% 91% to 100% 101% to 120% 121% to 150% Greater than 150% Total Owner-occupier Buy-to-let 2014* Total € m 4,739 4,799 2,785 2,851 2,244 3,290 2,706 235 7 % € m 20.0 20.3 11.8 12.0 9.5 13.9 11.5 1.0 0.0 613 615 330 333 360 490 331 133 4 % 19.1 19.2 10.3 10.4 11.2 15.3 10.3 4.1 0.1 € m 5,352 5,414 3,115 3,184 2,604 3,780 3,037 368 11 % 19.9 20.2 11.6 11.8 9.7 14.1 11.3 1.4 0.0 23,656 100.0 3,209 100.0 26,865 100.0 Owner-occupier Buy-to-let 2013* Total € m 3,673 3,321 2,295 2,187 2,278 4,217 3,956 2,105 % 15.3 13.8 9.5 9.1 9.5 17.5 16.5 8.8 € m 451 469 293 315 322 586 628 394 % 13.0 13.6 8.5 9.1 9.3 16.9 18.2 11.4 € m 4,124 3,790 2,588 2,502 2,600 4,803 4,584 2,499 % 15.0 13.8 9.4 9.1 9.4 17.5 16.7 9.1 24,032 100.0 3,458 100.0 27,490 100.0 The proportion of residential mortgages that was neither past due nor impaired and in negative equity at 31 December 2014 decreased in comparison to 31 December 2013, reflecting residential property price increases during the year, coupled with amortisation of the loan book. 27% of residential mortgages that were neither past due nor impaired were in negative equity at 31 December 2014 compared to 43% at 31 December 2013. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 103 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Loan-to-value ratios of residential mortgages (index linked) that were greater than 90 days past due and/or impaired The following table profiles the Republic of Ireland residential mortgages that were greater than 90 days past due and/or impaired by the indexed loan-to-value ratios at 31 December 2014 and 31 December 2013: Owner-occupier Buy-to-let Total 2014* Total residential mortgage portfolio € m 451 620 396 456 467 900 1,161 699 65 % 8.6 11.9 7.6 8.7 9.0 17.2 22.3 13.4 1.3 € m 169 253 201 242 304 630 815 638 85 % 5.1 7.6 6.0 7.2 9.1 18.9 24.5 19.1 2.5 5,215 100.0 3,337 100.0 € m 620 873 597 698 771 1,530 1,976 1,337 150 8,552 % 7.2 10.2 7.0 8.2 9.0 17.9 23.1 15.6 1.8 € m 6,109 6,435 3,801 3,976 3,477 5,475 5,162 1,727 162 % 16.8 17.7 10.5 11.0 9.6 15.0 14.2 4.8 0.4 100.0 36,324 100.0 Owner-occupier Buy-to-let Total 2013* Total residential mortgage portfolio € m 324 386 275 300 366 859 1,317 1,568 5,395 % 6.0 7.1 5.1 5.6 6.8 15.9 24.4 29.1 100.0 € m 129 181 147 177 240 609 989 1,326 3,798 % 3.4 4.8 3.9 4.7 6.3 16.0 26.0 34.9 100.0 € m 453 567 422 477 606 1,468 2,306 2,894 9,193 % 4.9 6.2 4.6 5.2 6.6 16.0 25.1 31.4 € m 4,727 4,504 3,114 3,092 3,347 6,548 7,211 5,608 % 12.4 11.8 8.1 8.1 8.8 17.2 18.9 14.7 100.0 38,151 100.0 Republic of Ireland Less than 50% 50% to 70% 71% to 80% 81% to 90% 91% to 100% 101% to 120% 121% to 150% Greater than 150% Unsecured Total Republic of Ireland Less than 50% 50% to 70% 71% to 80% 81% to 90% 91% to 100% 101% to 120% 121% to 150% Greater than 150% Total The proportion of residential mortgages that was greater than 90 days past due and/or impaired and in negative equity at 31 December 2014 (57%) decreased in comparison to 31 December 2013 (73%), reflecting the increases in residential property prices during the year. *Forms an integral part of the audited financial statements 104 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio Credit quality profile of residential mortgages The following table profiles the asset quality of the Republic of Ireland residential mortgage portfolio as at 31 December 2014 and 31 December 2013: Republic of Ireland Neither past due nor impaired Past due but not impaired Impaired - provisions held Gross residential mortgages Provisions for impairment Owner- occupier € m 23,656 971 5,004 29,631 (1,814) 27,817 Buy-to-let € m 3,209 271 3,213 6,693 (1,442) 5,251 2014* Total € m 26,865 1,242 8,217 36,324 (3,256) 33,068 Owner- occupier € m 24,032 1,552 5,130 30,714 (2,100) 28,614 Buy-to-let € m 3,458 321 3,658 7,437 (1,696) 5,741 2013* Total € m 27,490 1,873 8,788 38,151 (3,796) 34,355 The percentage of the portfolio which is neither past due nor impaired increased in 2014 to 74% from 72% at 31 December 2013. Residential mortgages that were past due but not impaired Residential mortgages are assessed for impairment if they are past due, typically, for more than 90 days or if the borrower exhibits an inability to meet their obligations to the Group based on objective evidence of loss events (‘impairment triggers’) such as a request for a forbearance measure. Loans are deemed impaired where the carrying value of the asset is shown to be in excess of the present value of future cash flows, and an appropriate provision is raised. Where loans are not deemed to be impaired, they are collectively assessed as part of the IBNR provision calculation. The following table profiles the Republic of Ireland residential mortgages that were past due but not impaired at 31 December 2014 and 31 December 2013: Republic of Ireland 1 - 30 days 31 - 60 days 61 - 90 days 91 - 180 days 181 - 365 days Over 365 days Total past due but not impaired Owner- occupier € m 456 195 109 73 79 59 971 Total gross residential mortgages 29,631 Buy-to-let € m 76 48 23 34 40 50 271 6,693 2014* Total € m 532 243 132 107 119 109 Owner- occupier € m 739 324 224 165 72 28 1,242 36,324 1,552 30,714 Buy-to-let € m 94 49 38 62 46 32 321 7,437 2013* Total € m 833 373 262 227 118 60 1,873 38,151 The amount of loans past due but not impaired at 31 December 2014 decreased by 34% when compared to 31 December 2013, driven by the improved economic environment and an increased focus on the management of early arrears. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 105 n o i t a m r o n f i l a r e n e G 3.1 Credit risk – Credit profile of the loan portfolio Collateral value of residential mortgages that were past due but not impaired The following table profiles the collateral value of Republic of Ireland residential mortgages that were past due but not impaired at 31 December 2014 and 31 December 2013: Republic of Ireland 1 - 30 days 31 - 60 days 61 - 90 days 91 - 180 days 181 - 365 days Over 365 days Total past due but not impaired Owner- occupier € m 428 181 101 71 76 57 914 Buy-to-let € m 71 44 21 30 37 43 2014* Total € m 499 225 122 101 113 100 Owner- occupier € m 648 281 192 147 68 27 Buy-to-let € m 82 43 33 52 38 27 2013* Total € m 730 324 225 199 106 54 246 1,160 1,363 275 1,638 The collateral value for the past due but not impaired portfolio was equal to 93% of the outstanding loan balances at 31 December 2014, an increase from 87% at 31 December 2013. Residential mortgages that were impaired The following table profiles the Republic of Ireland residential mortgages that were impaired at 31 December 2014 and 31 December 2013: Republic of Ireland Not past due 1 - 30 days 31 - 60 days 61 - 90 days 91 - 180 days 181 - 365 days Over 365 days Total impaired Owner- occupier € m 1,174 267 125 101 306 536 2,495 5,004 Total gross residential mortgages 29,631 Buy-to-let € m 706 98 67 60 180 352 1,750 3,213 6,693 2014* Total € m 1,880 365 192 161 486 888 4,245 8,217 Owner- occupier € m 686 173 146 152 615 916 2,442 5,130 36,324 30,714 Buy-to-let € m 873 165 126 125 308 494 1,567 3,658 7,437 2013* Total € m 1,559 338 272 277 923 1,410 4,009 8,788 38,151 Impaired loans decreased by € 0.6 billion during 2014 due to restructuring and write-offs of provisions. In addition the rate of new impairment slowed significantly in 2014 in comparison to 2013, driven by an improved economic environment. Of the residential mortgage portfolio that was impaired at 31 December 2014, € 1.9 billion or 23% was not past due (2013: € 1.6 billion or 18%), of which € 1.2 billion (2013: € 0.8 billion) was subject to forbearance measures at 31 December 2014. This includes c. € 0.3 billion which were subject to advanced forbearance (mainly split mortgages) which remain impaired for a probation period (typically 12 months) following restructure. *Forms an integral part of the audited financial statements 106 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio Republic of Ireland residential mortgages – properties in possession(1) AIB seeks to avoid repossession through working with customers, but where agreement cannot be reached, AIB proceeds to repossession of the property or the appointment of a receiver, using external agents to realise the maximum value as soon as is practicable. Where the Group believes that the proceeds of sale of a property will comprise only part of the recoverable amount of the loan against which it was being held as security, the customer remains liable for the outstanding balance and the remaining loan continues to be recognised on the statement of financial position. For the purpose of the following table, a residential property is considered to be in AIB’s possession when AIB has taken possession of and is in a position to dispose of the property. This includes situations of repossession, voluntary surrender and abandonment of the property. This is a change from repossessions reported prior to 2014. Accordingly, the stock of residential properties in possession at 31 December 2013 now includes 218 properties which were in AIB’s possession through abandonment, but where AIB had not secured legal title. The Group intends to dispose of all such properties in the foreseeable future. The number (stock) of properties in possession at 31 December 2014 and 31 December 2013 is set out below: Owner-occupier Buy-to-let Total 2014* Balance outstanding € m 145 19 164 Stock 548 82 630 Stock 308 70 378 2013* Balance outstanding € m 82 18 100 (1)The number of residential properties in possession relates to those held as security for residential mortgages only. The increase in the stock of residential properties in possession in 2014 relates to the addition of 352 properties (2013: 119 properties), partly offset by the disposal of 100 properties (2013: 92 properties). There has been a significant increase in stock due to the focus on restructuring during the year. The majority of the properties taken into possession were by way of voluntary surrender or abandonment of the property. Republic of Ireland residential mortgages – repossessions disposed of The following table analyses the disposals of repossessed properties for the years ended 31 December 2014 and 31 December 2013: Number of Outstanding Gross sales proceeds balance at disposals repossession on disposal date € m € m 60 40 100 17 12 29 7 5 12 Number of disposals Outstanding balance at repossession date € m Gross sales proceeds on disposal € m 67 25 92 19 8 27 6 3 9 Costs to sell € m – – – Costs to sell € m 1 – 1 Loss on sale(1) 2014* Average loan-to- value at sale price % € m 10 7 17 234 252 241 Loss on sale(1) 2013* Average loan-to- value at sale price % € m 14 5 19 277 279 278 Owner-occupier Buy-to-let Total Owner-occupier Buy-to-let Total (1)Before specific impairment provisions. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i The disposal of 100 residential properties in the Republic of Ireland resulted in a total loss on disposal of € 17 million (before specific impairment provisions) and compares to 2013 when 92 residential properties were disposed of resulting in a total loss of € 19 million. Losses on the sale of such properties are recognised in the income statement as part of the specific provision charge. *Forms an integral part of the audited financial statements n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 107 Risk management – Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio United Kingdom (“UK”) residential mortgages The following table analyses the UK residential mortgage portfolio showing impairment provisions for the years ended 31 December 2014 and 31 December 2013: Statement of financial position Total gross residential mortgages In arrears (>30 days past due)(1) In arrears (>90 days past due)(1) Of which impaired Statement of financial position specific provisions Statement of financial position IBNR provisions Provision cover percentage Specific provisions/impaired loans Income statement charge/credit) Income statement specific provisions Income statement IBNR provisions Total impairment charge/(credit) (1)Includes all impaired loans whether past due or not. Owner- occupier € m 2,177 293 262 239 119 16 % 49.7 € m 24 (10) 14 Buy-to-let € m 345 60 56 53 34 2 % 64.2 € m 4 (1) 3 2014* Total € m 2,522 353 318 292 153 18 % 52.4 € m 28 (11) 17 Owner- occupier € m 2,252 325 295 243 99 24 % 40.6 € m 26 (8) 18 Buy-to-let € m 361 66 60 52 30 3 % 58.5 € m 8 (35) (27) 2013* Total € m 2,613 391 355 295 129 27 % 43.8 € m 34 (43) (9) The UK mortgage portfolio is predominantly based in Northern Ireland (74% of total) with the remainder located in Great Britain. Total loans in arrears in the UK residential mortgage portfolio decreased in the twelve months to December 2014 driven by improved economic conditions, with total loans in arrears greater than 90 days reducing from 12.5% to 11.1%. Statement of financial position specific provisions of € 153 million were held at 31 December 2014 and provided cover of 52.4% (31 December 2013: € 129 million providing cover of 43.8%). The cover increased in 2014 due to a change in the UK individually insignificant model assumption for disposal costs and a reduced market valuation for a small number of high value properties. Statement of financial position IBNR provisions of € 18 million were held at 31 December 2014, down from € 27 million at 31 December 2013, reflecting an improvement in estimated incurred loss in the non-impaired portfolio. *Forms an integral part of the audited financial statements 108 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio United Kingdom residential mortgages by year of origination The following table profiles the UK total residential mortgage portfolio and impaired residential mortgage portfolio by year of origination at 31 December 2014 and 31 December 2013: United Kingdom 1996 and before 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Total Total Impaired Total Impaired Number Balance € m Number Balance € m Number Balance € m Number Balance € m 2014* 2013* 389 85 104 229 226 4,210 1,453 1,964 2,263 3,025 4,002 3,531 1,428 702 370 178 196 326 409 19 4 5 13 12 133 79 138 183 291 500 608 249 82 44 18 25 44 75 4 – 5 2 2 176 82 164 161 305 440 499 117 34 11 3 1 1 – – – – – – 9 4 16 12 31 66 112 30 6 6 – – – – 501 108 137 282 272 4,681 1,573 2,153 2,456 3,195 4,237 3,712 1,563 800 403 203 203 333 – 23 4 7 14 18 148 89 146 196 304 515 638 277 96 47 21 26 44 – 4 – 5 – 2 208 76 195 181 309 462 497 108 26 10 5 1 – – – – – – – 10 4 17 14 33 69 112 26 8 1 1 – – – 25,090 2,522 2,007 292 26,812 2,613 2,089 295 The majority (€ 1.6 billion or 65%) of the € 2.5 billion residential mortgage book in the UK was originated between 2005 and 2008, of which 14% (€ 0.2 billion) was impaired at 31 December 2014 driven by reduced household income and reflecting the decrease in property prices since their peak in 2007. 23% of the residential mortgage portfolio was originated before 2005 of which 7% was impaired at 31 December 2014, while the remaining 12% of the portfolio was originated since 2009 of which 4% was impaired at 31 December 2014. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 109 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio The property values used in the completion of the following loan-to-value tables are determined with reference to the original or most recent valuation, indexed to the Nationwide House Price Index (“HPI”) in the UK for Quarter 3 2014. The index for Quarter 3 2014 reported that house prices across the UK increased by 8% for the year to the end of Quarter 3 2014. In Northern Ireland (which includes 74% of the UK residential mortgage portfolio), the Nationwide HPI for Quarter 3 2014 reported that house prices were 47% lower than their peak in 2007 and reported an increase of 7% for the year to the end of Quarter 3 2014. Actual and weighted average indexed loan-to-value ratios of United Kingdom residential mortgages The following table profiles the UK residential mortgage portfolio by the indexed loan-to-value ratios and the weighted average indexed loan-to-value ratios at 31 December 2014 and 31 December 2013: United Kingdom Less than 50% 50% to 70% 71% to 80% 81% to 90% 91% to 100% 101% to 120% 121% to 150% Greater than 150% Unsecured Total Weighted average indexed loan-to-value(1): Stock of residential mortgages at year end New residential mortgages issued during year Impaired residential mortgages United Kingdom Less than 50% 50% to 70% 71% to 80% 81% to 90% 91% to 100% 101% to 120% 121% to 150% Greater than 150% Owner-occupier € m % 580 423 232 202 141 184 198 183 34 26.6 19.5 10.6 9.3 6.5 8.4 9.1 8.4 1.6 Buy-to-let 2014* Total € m 79 39 23 22 19 49 61 36 17 % 22.9 11.4 6.7 6.3 5.4 14.1 17.7 10.5 5.0 € m 659 462 255 224 160 233 259 219 51 % 26.1 18.4 10.1 8.9 6.3 9.2 10.3 8.7 2.0 2,177 100.0 345 100.0 2,522 100.0 81.2 68.9 129.9 Owner-occupier € m % 479 378 212 219 164 238 249 313 21.2 16.8 9.4 9.7 7.3 10.6 11.1 13.9 € m 60 47 21 25 20 34 56 98 91.6 50.1 129.6 Buy-to-let % 16.6 13.1 5.8 6.9 5.5 9.3 15.6 27.2 100.0 105.4 60.1 151.0 82.6 68.8 129.9 2013* Total % 20.6 16.3 8.9 9.4 7.0 10.4 11.7 15.7 € m 539 425 233 244 184 272 305 411 2,613 100.0 92.0 73.0 123.8 Total Weighted average indexed loan-to-value(1): Stock of residential mortgages at year end New residential mortgages issued during year Impaired residential mortgages 2,252 100.0 361 89.9 73.1 118.6 (1)Weighted average indexed loan-to-values are the individual indexed loan-to-value calculations weighted by the mortgage balance against each property. 26% of the total owner-occupier and 42% of the total buy-to-let mortgages were in negative equity at 31 December 2014, compared to 36% and 52% respectively at 31 December 2013, driven primarily by the increase in property prices in 2014, coupled with amortisation of the loan book. The weighted average indexed loan-to-value for the total residential mortgage book was 82.6% at 31 December 2014 compared to 92.0% at 31 December 2013, reflecting the increase in residential property prices in the period. *Forms an integral part of the audited financial statements 110 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio Loan-to-value ratios of United Kingdom residential mortgages (index linked) that were neither past due nor impaired The following table profiles the UK residential mortgages that were neither past due nor impaired by the indexed loan-to-value ratios at 31 December 2014 and 31 December 2013: United Kingdom Less than 50% 50% to 70% 71% to 80% 81% to 90% 91% to 100% 101% to 120% 121% to 150% Greater than 150% Total United Kingdom Less than 50% 50% to 70% 71% to 80% 81% to 90% 91% to 100% 101% to 120% 121% to 150% Greater than 150% Total Owner-occupier Buy-to-let € m 544 388 210 178 122 160 161 104 % 29.1 20.8 11.3 9.5 6.5 8.6 8.6 5.6 € m 76 35 22 19 16 39 51 24 % 27.0 12.2 7.7 6.8 5.8 13.7 18.1 8.7 2014* Total % 28.9 19.7 10.8 9.1 6.4 9.2 9.9 6.0 € m 620 423 232 197 138 199 212 128 1,867 100.0 282 100.0 2,149 100.0 Owner-occupier Buy-to-let € m 448 341 180 188 136 202 205 206 % 23.5 17.9 9.4 9.9 7.2 10.6 10.7 10.8 € m 58 45 18 18 16 30 46 61 % 19.8 15.3 6.1 6.3 5.7 10.2 15.7 20.9 2013* Total % 23.0 17.5 9.0 9.4 7.0 10.5 11.4 12.2 € m 506 386 198 206 152 232 251 267 1,906 100.0 292 100.0 2,198 100.0 Residential mortgages that were neither past due nor impaired and in negative equity at 31 December 2014 decreased in comparison to 31 December 2013, reflecting the increases in residential property prices in the year. 25% of residential mortgages that were neither past due nor impaired were in negative equity at 31 December 2014 compared to 34% at 31 December 2013. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 111 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Loan-to-value ratios of United Kingdom residential mortgages (index linked) that were greater than 90 days past due and/or impaired The following table profiles the UK residential mortgages that were greater than 90 days past due and/or impaired by the indexed loan- to-value ratios at 31 December 2014 and 31 December 2013: Owner-occupier Buy-to-let Total € m 24 25 18 20 16 19 34 72 34 % 9.4 9.6 6.9 7.5 6.1 7.2 12.9 27.5 12.9 262 100.0 € m 2 3 2 2 2 9 9 10 17 56 % 3.2 5.2 2.6 3.9 3.3 16.9 15.5 18.3 31.1 € m 26 28 20 22 18 28 43 82 51 % 8.3 8.8 6.2 6.9 5.6 8.9 13.3 25.9 16.1 Owner-occupier Buy-to-let Total € m 23 29 24 24 26 32 39 98 % 8.0 9.8 8.3 8.2 8.7 10.7 13.1 33.2 295 100.0 € m 1 2 3 6 2 2 9 35 60 % 2.0 3.1 4.2 9.8 4.1 4.0 15.3 57.5 100.0 € m 24 31 27 30 28 34 48 133 355 2014* Total residential mortgage portfolio € m 659 462 255 224 160 233 259 219 51 % 26.1 18.4 10.1 8.9 6.3 9.2 10.3 8.7 2.0 2013* Total residential mortgage portfolio € m 539 425 233 244 184 272 305 411 % 20.6 16.3 8.9 9.4 7.0 10.4 11.7 15.7 % 6.9 8.7 7.6 8.5 8.0 9.5 13.4 37.4 100.0 2,613 100.0 100.0 318 100.0 2,522 100.0 United Kingdom Less than 50% 50% to 70% 71% to 80% 81% to 90% 91% to 100% 101% to 120% 121% to 150% Greater than 150% Unsecured Total United Kingdom Less than 50% 50% to 70% 71% to 80% 81% to 90% 91% to 100% 101% to 120% 121% to 150% Greater than 150% Total The proportion of residential mortgages that was greater than 90 days past due and/or impaired and in negative equity (excluding unsecured loans) at 31 December 2014, decreased in comparison to 31 December 2013, driven by a decrease in the amount of loans greater than 90 days past due and/or impaired at year end coupled with an increase in property prices in the year. *Forms an integral part of the audited financial statements 112 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio Credit quality profile of United Kingdom residential mortgages The following table profiles the asset quality of the UK residential mortgage portfolio as at 31 December 2014 and 31 December 2013: United Kingdom Neither past due nor impaired Past due but not impaired Impaired - provisions held Gross residential mortgages Provisions for impairment Owner- occupier € m 1,867 71 239 2,177 (135) 2,042 Buy-to-let € m 282 10 53 345 (36) 309 2014* Total € m 2,149 81 292 2,522 (171) 2,351 Owner- occupier € m 1,906 103 243 2,252 (123) 2,129 Buy-to-let € m 292 17 52 361 (33) 328 2013* Total € m 2,198 120 295 2,613 (156) 2,457 United Kingdom residential mortgages that were past due but not impaired Residential mortgages are assessed for impairment if they are past due, typically for more than 90 days, or if the borrower exhibits an inability to meet its obligations to the Group based on objective evidence of loss events (‘impairment triggers’) such as a request for forbearance. Loans are deemed impaired where the expected future cash flows either from the loan itself or from associated collateral will not be sufficient to repay the loan and an appropriate provision is raised. Where loans are not deemed to be impaired, they are collectively assessed as part of the IBNR provision calculation. The following table profiles UK residential mortgages that were past due but not impaired at 31 December 2014 and 31 December 2013: United Kingdom 1 - 30 days 31 - 60 days 61 - 90 days 91 - 180 days 181 - 365 days Over 365 days Total Owner- occupier € m 17 13 18 8 7 8 71 Buy-to-let € m 3 3 1 1 1 1 10 2014* Total € m 20 16 19 9 8 9 81 Owner- occupier € m Buy-to-let € m 21 15 15 16 20 16 3 3 3 2 6 – 2013* Total € m 24 18 18 18 26 16 103 17 120 Collateral value of United Kingdom residential mortgages that were past due but not impaired The following table profiles the collateral value of UK residential mortgages that were past due but not impaired at 31 December 2014 and 31 December 2013: United Kingdom 1 - 30 days 31 - 60 days 61 - 90 days 91 - 180 days 181 - 365 days Over 365 days Total Owner- occupier € m Buy-to-let € m 15 11 16 8 7 7 64 2 2 1 1 1 1 8 2014* Total € m 17 13 17 9 8 8 72 *Forms an integral part of the audited financial statements Owner- occupier € m Buy-to-let € m 19 13 13 14 18 13 90 2 3 2 2 6 – 2013* Total € m 21 16 15 16 24 13 15 105 n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 113 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio United Kingdom residential mortgages that were impaired The following table profiles the UK residential mortgages that were impaired at 31 December 2014 and 31 December 2013: United Kingdom Not in arrears 1 - 30 days 31 - 60 days 61 - 90 days 91 - 180 days 181 - 365 days Over 365 days Total impaired Owner- occupier € m Buy-to-let € m 13 3 6 8 19 34 156 239 3 – 2 1 3 13 31 53 345 2014* Total € m 16 3 8 9 22 47 187 292 2,522 Owner- occupier € m Buy-to-let € m 10 2 4 10 17 51 149 243 2,252 1 1 – 1 5 15 29 52 361 2013* Total € m 11 3 4 11 22 66 178 295 2,613 Total gross residential mortgages 2,177 The stock of impaired loans remained stable at 31 December 2014 in comparison to 31 December 2013. United Kingdom residential mortgages – properties in possession(1) For the purpose of the following table, a residential property is considered to be in AIB’s possession when AIB has taken possession of and is in a position to dispose of the property. This includes situations of repossession, voluntary surrender and abandonment of the property. The number (stock) of properties in possession as at 31 December 2014 and 31 December 2013 is set out below: Owner-occupier Buy-to-let Total Stock 72 33 105 2014* Balance outstanding € m 26 5 31 Stock 136 76 212 2013* Balance outstanding € m 36 14 50 (1)The number of residential properties in possession relates to those held as security for residential mortgages only. The decrease in the stock of residential properties in possession relates to the disposal of 234 properties during 2014 and the removal of 12 properties from the stock following the clearance of arrears on the related mortgages, partly off-set by taking 139 properties into possession. The disposal of 234 residential properties in possession resulted in a loss on disposal of € 28 million before specific impairment provisions (31 December 2013: disposal of 205 properties resulting in a loss on disposal of € 24 million). Losses on the sale of properties in possession are recognised in the income statement as part of the specific provision charge. *Forms an integral part of the audited financial statements 114 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – credit profile of the loan portfolio Loans and receivables to customers – Other personal lending The following table analyses other personal lending by segment showing asset quality and impairment provisions for the years ended 31 December 2014 and 31 December 2013: DCB € m AIB UK € m Analysed as to asset quality Satisfactory Watch Vulnerable Impaired Total criticised loans 1,914 143 131 153 427 Total gross loans and receivables 2,341 Total loans percentage Criticised loans/total loans Impaired loans/total loans Impairment provisions – statement of financial position Specific IBNR Total impairment provisions Provision cover percentage Specific provisions/impaired loans Total provisions/impaired loans Total provisions/total loans % 18 7 € m 112 28 140 % 73 92 6 253 46 38 70 154 407 % 38 17 € m 53 2 55 % 76 79 14 FSG € m 58 33 177 821 1,031 1,089 % 95 75 € m 551 22 573 % 67 70 53 2014* Total € m 2,225 222 346 1,044 1,612 3,837 % 42 27 € m 716 52 768 % 69 74 20 DCB € m AIB UK € m 1,909 169 132 108 409 2,318 % 18 5 € m 75 29 104 % 69 96 4 259 46 50 77 173 432 % 40 18 € m 54 3 57 % 70 74 13 Income statement charge/(credit) € m € m € m € m € m € m Specific IBNR Total impairment charge/(credit) Impairment charge/(credit) 50 – 50 % 3 (2) 1 % (35) (1) (36) % 18 (3) 15 % 41 6 47 % 3 (9) (6) % FSG € m 58 41 205 1,238 1,484 1,542 % 96 80 € m 963 23 986 % 78 80 64 € m 103 (19) 84 % 2013* Total € m 2,226 256 387 1,423 2,066 4,292 % 48 33 € m 1,092 55 1,147 % 77 81 27 € m 147 (22) 125 % /average loans 2.19 0.39 (2.63) 0.38 1.99 (1.29) 5.08 2.83 The other personal lending portfolio at € 3.8 billion reduced by € 0.5 billion during the year and comprises € 2.9 billion in loans and overdrafts and € 0.9 billion in credit card facilities. During 2014, the level of loans and receivables with satisfactory credit quality remained stable, with debt amortisation offset by new lending. This is in contrast to the decline in satisfactory grades experienced in 2012 and 2013, where amortisation exceeded the demand for credit. An increase in demand for personal loans which was observed during the year, was particularly evident in the second half of the year, due to both the improved economic environment and an expanded product offering, including on-line approval through internet and telephone banking applications. The portfolio experienced a € 0.5 billion reduction in criticised loans in 2014, of which € 0.4 billion was written off. At 31 December 2014, € 1.6 billion or 42% of the portfolio was criticised of which impaired loans amounted to € 1.0 billion (2013: € 2.1 billion or 48% and € 1.4 billion). *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 115 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management - 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Loans and receivables to customers – Other personal lending (continued) The reduction in the specific provision cover on impaired loans of 8% in the year is mainly due to the impact of write-offs of provisions on loans within the portfolio with higher provision cover as well as the implementation of a new individually insignificant non-mortgage model which takes into consideration underlying security, where available, as described on page 75. The specific provision cover in DCB increased from 69% to 73% due to an increase in smaller loans and credit card exposures (with higher provision cover) within the impaired loans. The reduced income statement provision charge was due to a lower level of new impairments compared with 2013 and provision writebacks due to restructuring and the new individually insignificant non-mortgage model. Provisions from new impairments amounted to € 75 million. 116 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio Loans and receivables to customers – Property and construction The following table analyses property and construction lending by segment showing asset quality and impairment provisions for the years ended 31 December 2014 and 31 December 2013: Investment Commercial investment Residential investment Land and development Commercial development Residential development Contractors Housing associations DCB € m AIB UK € m 2,078 269 2,347 125 101 226 74 – 2,012 798 2,810 84 902 986 154 445 FSG € m 4,333 1,166 5,499 786 2,084 2,870 126 – 2014* Total € m 8,423 2,233 10,656 995 3,087 4,082 354 445 DCB € m AIB UK € m 2,189 281 2,470 141 105 246 69 – 2,323 781 3,104 184 1,338 1,522 155 427 FSG € m 6,031 1,380 7,411 1,067 3,087 4,154 189 – 2013+* Total € m 10,543 2,442 12,985 1,392 4,530 5,922 413 427 Total gross loans and receivables 2,647 4,395 8,495 15,537 2,785 5,208 11,754 19,747 Analysed as to asset quality Satisfactory 1,554 1,357 Watch Vulnerable Impaired Total criticised loans Total loans percentage Criticised loans/total loans Impaired loans/total loans Impairment provisions – statement of financial position Specific IBNR Total impairment provisions Provision cover percentage Specific provisions/impaired loans Total provisions/impaired loans Total provisions/total loans Income statement charge/(credit) Specific IBNR Total impairment charge/(credit) Impairment charge/(credit) 343 220 530 1,093 % 41 20 € m 223 25 248 % 42 47 9 € m 113 (93) 20 % 681 450 1,907 3,038 % 69 43 € m 1,166 45 1,211 % 61 64 28 € m 32 (39) (7) % 684 145 1,267 6,399 7,811 % 92 75 € m 4,089 104 4,193 % 64 66 49 € m (235) (22) (257) % 1,727 1,398 3,595 1,169 1,937 8,836 383 255 420 11,942 1,058 % 77 57 € m 5,478 174 5,652 % 62 64 36 € m (90) (154) (244) % % 38 15 € m 149 123 272 % 35 65 10 € m 62 3 65 % 788 534 2,488 3,810 % 73 48 € m 1,459 80 1,539 % 59 62 30 € m 150 (19) 131 % 472 472 542 10,268 11,282 % 96 87 € m 6,528 121 6,649 % 63 65 56 € m 605 (77) 528 % 3,597 1,643 1,331 13,176 16,150 % 82 67 € m 8,136 324 8,460 % 62 64 43 € m 817 (93) 724 % i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i /average loans 0.77 (0.15) (2.48) (1.36) 1.93 2.39 4.39 3.47 +The industry sector ‘lease financing’ is no longer reported by the Group. Accordingly, for December 2013, where tables show a sectoral analysis, lease financing is re-presented in the relevant sector to which the borrower belongs. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 117 n o i t a m r o n f i l a r e n e G Risk management - 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Loans and receivables to customers – Property and construction (continued) The property and construction sector amounted to 20% of total loans and receivables, or 16% of loans and receivables less impairment provisions. The portfolio is comprised of 69% investment loans (€ 10.7 billion), 26% land and development loans (€ 4.1 billion) and 5% other property and construction loans (€ 800 million). AIB UK accounts for 28% of the portfolio. Overall, the portfolio reduced by € 4.2 billion or 21% during 2014, with all of the reduction coming from the criticised grades. This reduction is due primarily to the impact of restructuring activity (as described on page 85) and to write-offs, amortisations and repayments, resulting from asset disposals by customers within the criticised grades. Total provision write-offs for property and construction for the year were € 2.7 billion. The restructuring of impaired loans during the year resulted in an increase in vulnerable loans in this sector. Most individually assessed restructured loans are initially graded as vulnerable. The property market in the Republic of Ireland has seen resurgence in demand as well as increased values. This reflects a more positive economic environment and increased liquidity which has resulted in a greater level of transactions across all sectors. It is important to note however, that the improved market demand and values are off a low base. The demand remains particularly evident in prime locations with demand continuing to be lower in secondary areas. The commercial market in the United Kingdom had a positive year against a backdrop of increased liquidity from domestic and global investors. Accordingly, the rate of downward grade migration and new impairments significantly decreased during 2014 as a result of the improved market conditions. There was a writeback of specific provisions net of top-ups of € 166 million (c. 1% of opening impaired loans) mainly due to the restructuring process described on page 85. This was partially off-set by provisions for new impairments which amounted to € 76 million. The IBNR provision has reduced by € 150 million due to a reduction in portfolio risk as a workout strategy has been finalised for most cases in the portfolio, reducing uncertainty regarding potential losses. Investment Property investment loans amounted to € 10.7 billion at 31 December 2014 (31 December 2013: € 13.0 billion) of which € 8.4 billion related to commercial investment. The reduction was largely as a result of asset sales which reduced loan balances and restructures within the criticised loan portfolio along with amortisation and repayment of debt. € 7.1 billion of the investment property portfolio related to loans for the purchase of property in the Republic of Ireland, € 3.3 billion in the United Kingdom, and € 192 million in other geographical locations. The commercial property market outperformed expectations in 2014. Greater liquidity, evident across most markets, fuelled the increase in transactions particularly, in the second half of the year. Prime office rents have been driven upwards by a shortage of supply, particularly in Dublin 2 and Dublin 4. Price increases are dominated by prime locations, with rural locations remaining fragile. While there is continued strong demand for prime retail space, 2014 also saw some evidence of rental growth in regional locations. The positive market conditions combined with the restructuring activity completed during the year resulted in a writeback of provisions. € 7.8 billion or 73% of the investment property portfolio was criticised at 31 December 2014 compared with € 10.2 billion or 78% at 31 December 2013. Included in criticised loans was € 5.2 billion loans which were impaired (2013: € 7.6 billion) and on which the Group had € 2.7 billion in statement of financial position specific provisions, providing cover of 53% (2013: € 3.9 billion or 51%). Total impairment provisions as a percentage of total loans is 27%, down from 32% at 31 December 2013. The impairment credit to the income statement of € 193 million on the investment property element of the property and construction portfolio compared to a charge of € 465 million in 2013, with the reduction due to increased provision writebacks. 118 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Credit profile of the loan portfolio Loans and receivables to customers – Property and construction (continued) Land and development At 31 December 2014, land and development loans amounted to € 4.1 billion (2013: € 5.9 billion). € 3.1 billion of this portfolio related to loans in the Republic of Ireland and € 1 billion in the United Kingdom. The increase in house price values evident in 2014 combined with a lack of supply of new homes has led to an increased demand for well located sites with planning permission already in place, and particularly for three and four bedroom houses. Prices remain weak outside of the main urban areas, however, liquidity has improved with a more normalised market observed, even in more rural locations. € 3.8 billion of the land and development portfolio was criticised at 31 December 2014 (2013 € 5.6 billion), including € 3.5 billion of loans which were impaired (2013: € 5.3 billion) and on which the Group had € 2.6 billion in statement of financial position specific provisions, providing cover of 75% (2013: 77%). The impairment credit of € 40 million to the income statement compared to a charge of € 239 million in 2013. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 119 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Loans and receivables to customers – SME/other commercial lending The following table analyses SME/other commercial lending by segment showing asset quality and impairment provisions for the years ended 31 December 2014 and 31 December 2013: Agriculture Distribution: Hotels Licensed premises Retail/wholesale Other distribution Other services Other DCB € m 1,167 427 235 899 83 1,644 1,248 626 Total gross loans and receivables 4,685 AIB UK € m 71 650 134 276 20 1,080 2,534 807 4,492 FSG € m 472 692 514 929 86 2,221 665 354 2014* Total € m 1,710 1,769 883 2,104 189 4,945 4,447 1,787 3,712 12,889 Analysed as to asset quality Satisfactory Watch Vulnerable Impaired 3,444 3,321 584 333 324 390 229 552 Total criticised loans 1,241 1,171 Total loans percentage Criticised loans/total loans Impaired loans/total loans Impairment provisions – statement of financial position Specific IBNR Total impairment provisions Provision cover percentage Specific provisions/impaired loans Total provisions/impaired loans Total provisions/total loans Income statement charge/(credit) Specific IBNR Total impairment charge/(credit) Impairment charge/(credit) % 26 7 € m 167 127 294 % 51 90 6 € m 81 75 156 % % 26 12 € m 291 15 306 % 53 56 7 € m 20 (7) 13 % 290 156 747 2,519 3,422 % 92 68 € m 1,596 112 1,708 % 63 68 46 € m (164) 76 (88) % 7,055 1,130 1,309 3,395 5,834 % 45 26 € m 2,054 254 2,308 % 61 68 18 € m (63) 144 81 % DCB € m 1,158 360 240 936 82 1,618 1,276 572 4,624 AIB UK € m 58 870 154 226 22 1,272 2,414 558 4,302 3,395 2,792 748 273 208 472 323 715 1,229 1,510 % 27 5 € m 101 51 152 % 48 73 3 € m 74 (21) 53 % % 35 17 € m 375 22 397 % 52 56 9 € m 26 (17) 9 % FSG € m 535 952 638 1,213 105 2,908 863 509 2013+* Total € m 1,751 2,182 1,032 2,375 209 5,798 4,553 1,639 4,815 13,741 226 133 626 3,830 4,589 % 95 80 € m 2,633 35 2,668 % 69 70 56 € m 249 (90) 159 % 6,413 1,353 1,222 4,753 7,328 % 53 35 € m 3,109 108 3,217 % 66 68 24 € m 349 (128) 221 % /average loans 3.36 0.28 (1.99) 0.60 1.10 0.20 3.19 1.55 +The industry sector ‘lease financing’ is no longer reported by the Group. Accordingly, for December 2013, where tables show a sectoral analysis, lease financing is re-presented in the relevant sector to which the borrower belongs. *Forms an integral part of the audited financial statements 120 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – credit profile of the loan portfolio Loans and receivables to customers – SME/other commercial lending (continued) The SME/other commercial lending portfolio amounted to 17% of total loans and receivables. The geographical split is 65% in the Republic of Ireland and the remaining 35% in the United Kingdom. Loans and receivables in this sector reduced by € 0.85 billion from € 13.7 billion as at 31 December 2013, primarily due to provision write-offs. Satisfactory loans and receivables increased within all segments in 2014, mainly due to new drawdowns exceeding amortisations. In contrast, this satisfactory portfolio declined in 2013 and 2012 by 9% and 15% respectively due to low demand for credit and downward grade migration. The UK SME portfolio increased by € 0.5 billion during 2014, partly due to a realignment of the business (resulting in a higher level of loans being categorised as SME/other commercial instead of corporate) and the impact of sterling appreciation. Total new SME lending within the Republic of Ireland was € 0.9 billion. The SME portfolio in both the Republic of Ireland and the United Kingdom is concentrated in sub-sectors which are reliant on the domestic economies. There is now evidence that the Republic of Ireland is moving into a period of sustainable economic growth. Results of the SME Credit Demand Survey carried out by RED C and published in November 2014 highlight significantly improved trading conditions for Irish SMEs. This improvement is mainly observed in urban areas, with rural locations remaining weak. Notwithstanding the positive signals and improving economic outlook, the domestic market remains challenging with many SMEs experiencing difficulties managing their finances. The Group continues to strongly engage in restructuring existing facilities in order to sustain viable SME businesses as described on page 85. The following are the key themes within the largest segments of the portfolio: – The agriculture sub-sector (13% of the portfolio) performed well in 2014, with growth in demand for new credit due to expansion by farmers in preparation for the removal of EU milk quotas. – The hotels sub-sector comprises 14% of the portfolio. Whilst trading conditions remain challenging, a significant improvement was observed in 2014 due to a stronger local economy and increased numbers of tourists. Valuations for hotels improved, with a number of foreign investors and fund managers competing for available properties. – The licensed premises sub-sector comprises 7% of the portfolio. The market is weak and still struggling from the impact of austerity. However, some locations such as Dublin and central Cork are showing improved performances based on the improving economic outlook. – The retail/wholesale sub-sector (16% of the portfolio) improved in 2014 due to the stronger economic environment, nevertheless, there is still stress in the sub-sector, particularly in rural areas. – The other services sub-sector comprises 35% of the portfolio which includes businesses such as solicitors, accounting, audit, tax, computer services, R&D, consultancy, hospitals, nursing homes and plant and machinery. This sub-sector performed well in 2014 with an increase in drawdowns. Credit quality within the portfolio improved due to restructuring and the improved economic environment. The level of criticised loans reduced from € 7.3 billion to € 5.8 billion, mainly due to a reduction of € 1.4 billion in impaired loans. Specific provision write-offs for the year were € 1.0 billion. The specific provision cover decreased from 66% at December 2013 to 61% at December 2014 mainly due to write-offs of provisions for loans with higher provision cover, writebacks due to restructuring, and the implementation of a new individually insignificant non-mortgage model as described on page 75. Specific provisions on new impairments amounted to € 132 million, and were off-set by a writeback of € 195 million (net of top-ups). An increase in the level of IBNR of € 144 million was required, mainly due to a specific portfolio risk that was identified during the year. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 121 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – credit profile of the loan portfolio Loans and receivables to customers – Corporate lending The following table analyses corporate lending by segment showing asset quality and impairment provisions for the years ended 31 December 2014 and 31 December 2013: Satisfactory Watch Vulnerable Impaired Total criticised loans DCB € m 3,867 87 2 285 374 AIB UK € m 315 9 2 66 77 Total gross loans and receivables 4,241 392 Total loans percentage Criticised loans/total loans Impaired loans/total loans Impairment provisions – statement of financial position Specific IBNR Total impairment provisions Provision cover percentage Specific provisions/impaired loans Total provisions/impaired loans Total provisions/total loans Income statement charge/(credit) Specific IBNR Total impairment charge/(credit) Impairment charge/(credit) % 9 7 € m 114 56 170 % 40 60 4 € m 19 (18) 1 % FSG € m 47 – 16 27 43 90 % 48 30 % 20 17 € m € m 55 5 60 % 83 91 15 21 – 21 % 78 78 23 € m € m 46 – 46 % (1) – (1) % AIB UK € m FSG € m 2014* Total € m 4,229 96 20 378 494 DCB € m 2,686 99 137 346 582 4,723 3,268 134 4,307 € m € m 2013* Total € m 3,511 105 215 476 796 % 18 11 € m 228 79 307 % 48 64 7 € m 49 (19) 30 % 53 – 55 26 81 % 60 19 22 – 22 % 85 85 16 € m (4) (13) (17) % 772 6 23 104 133 905 % 15 11 53 – 53 % 51 51 6 % 18 11 € m 153 79 232 % 44 67 7 € m € m 12 (6) 6 % 41 – 41 % % 10 8 € m 190 61 251 % 50 66 5 € m 64 (18) 46 % /average loans 0.02 7.77 (0.46) 1.00 0.18 3.67 (9.02) 0.63 The corporate portfolio amounted to € 4.7 billion at 31 December 2014 compared with € 4.3 billion at 31 December 2013. Within this, satisfactory loans increased by 20% compared to 2013, with drawdowns exceeding amortisation by € 0.7 billion. The growth in the DCB segment was due to increased demand within the Republic of Ireland, driven by the improved business environment. In addition, Corporate Banking North America originated loans within DCB increased by € 0.6 billion (further details are included on page 126). The AIB UK corporate portfolio reduced by € 0.5 billion. This decline was driven by a realignment of the business, with more business being categorised as SME/other commercial. The credit profile of the corporate lending portfolio continues to outperform the other loan portfolios due to less reliance on the Republic of Ireland domestic market, and on the property market. Criticised loans have decreased by 38% or € 0.3 billion in 2014, including a write-off of provisions of € 0.1 billion. The income statement provision charge for the year was € 46 million or 1.0% of average customer loans (2013: € 30 million or 0.63%). The provision cover for impaired loans increased slightly from 48% to 50%. IBNR provisions reduced from € 79 million to € 61 million or from 2.1% to 1.4% of non-impaired loans and receivables, in line with improved impairment trends. *Forms an integral part of the audited financial statements 122 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – credit profile of the loan portfolio Credit ratings* Internal credit ratings The Group uses various rating tools in managing its credit risk. The role of rating tools in identifying and managing loans including those of lower credit quality is highlighted in further detail on pages 60 to 62. These lower credit quality loans are referred to as ‘Criticised loans’ and include Watch, Vulnerable and Impaired, and are defined on page 61. For reporting purposes loans and receivables to customers are categorised into: – Neither past due nor impaired; – Past due but not impaired; and – Impaired. Neither past due nor impaired are those loans that are neither contractually past due and/or have not been categorised as impaired by the Group. Past due but not impaired are those loans where a contractually due payment has not been made. ‘Past due days’ is a term used to describe the cumulative number of days a missed payment is overdue. In the case of instalment type facilities, days past due arise once an approved limit has been exceeded. This category can also include an element of facilities where negotiation with the borrower on new terms and conditions has not yet concluded to fulfilment while the original loan facility remains outside its original terms. When a facility is past due, the entire exposure is reported as past due, not just the amount of any excess or arrears. Impaired loans are defined as follows: a loan is impaired if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the assets (a ‘loss event’) and that loss event (or events) has an impact such that the present value of future cash flows is less than the current carrying value of the financial asset or group of assets and requires an impairment provision to be recognised in the income statement. Loans that are neither past due nor impaired are further classified into ‘Good upper, Good lower, Watch and Vulnerable’, which are defined as follows: Good upper: Strong credit with no weakness evident. Typically includes elements of the residential mortgages portfolio combined with strong corporate and commercial lending. Good lower: Satisfactory credit with no weakness evident. Typically includes new business written and existing satisfactorily performing exposures across all portfolios. Watch: Vulnerable: The credit is exhibiting weakness but with the expectation that existing debt can be fully repaid from normal cash flows. Credit where repayment is in jeopardy from normal cash flows and may be dependent on other sources. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 123 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – credit profile of the loan portfolio Credit ratings* (continued) Internal credit ratings of loans and receivables to customers The internal credit ratings profile of loans and receivables to customers by asset class at 31 December 2014 and 31 December 2013 is as follows: Neither past due nor impaired Good upper Good lower Watch Vulnerable Total Past due but not impaired Good upper Good lower Watch Vulnerable Total Total impaired Total gross loans and receivables Unearned income Deferred costs Impairment provisions Total Neither past due nor impaired Good upper Good lower Watch Vulnerable Total Past due but not impaired Good upper Good lower Watch Vulnerable Total Total impaired Total gross loans and receivables Unearned income Deferred costs Impairment provisions Total Residential mortgages € m Other Property and construction € m personal € m SME/other commercial € m 13,711 10,956 2,207 2,140 29,014 4 76 348 895 1,323 8,509 38,846 181 1,989 192 228 2,590 1 54 30 118 203 1,044 3,837 96 3,433 1,115 1,582 6,226 – 66 54 355 475 47 6,886 1,050 1,008 8,991 8 114 80 301 503 8,836 15,537 3,395 12,889 378 4,723 Residential mortgages € m Other personal € m Property and construction € m SME/other commercial € m 13,070 12,148 2,776 1,694 29,688 10 65 653 1,265 1,993 9,083 40,764 190 1,916 207 223 2,536 2 118 49 164 333 1,423 4,292 153 3,310 1,538 912 5,913 – 134 105 419 658 83 6,195 1,243 905 8,426 1 134 110 317 562 13,176 19,747 4,753 13,741 476 4,307 Corporate € m 765 3,446 96 18 4,325 2 16 – 2 20 Corporate € m 696 2,793 105 197 3,791 2 20 – 18 40 2014 Total € m 14,800 26,710 4,660 4,976 51,146 15 326 512 1,671 2,524 22,162 75,832 (123) 59 (12,406) 63,362 2013+ Total € m 14,192 26,362 5,869 3,931 50,354 15 471 917 2,183 3,586 28,911 82,851 (101) 74 (17,083) 65,741 +The industry sector ‘lease financing’ is no longer reported by the Group. Accordingly, for December 2013, where tables show a sectoral analysis, lease financing is re-presented in the relevant sector to which the borrower belongs. The table above shows an increase in vulnerable loans in the property and construction sector of € 0.6 billion which was primarily due to restructuring of impaired loans during the year. Following a restructure, loans are graded initially as vulnerable. *Forms an integral part of the audited financial statements 124 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – credit profile of the loan portfolio Credit ratings* (continued) External credit ratings of financial assets The external credit ratings profile of loans and receivables to banks, NAMA senior bonds, trading portfolio financial assets (excluding equity securities) and financial investments available for sale (excluding equity shares) at 31 December 2014 and 31 December 2013 is as follows: AAA/AA A/A- BBB+/BBB/BBB- Sub investment Unrated Total AAA/AA A/A- BBB+/BBB/BBB- Sub investment Unrated Total Bank € m 3,991 1,615 7 149 – 5,762 Bank € m 3,408 1,564 718 – 63 5,753 Corporate € m Sovereign € m Other € m 2014 Total € m 8,204 20,234 2,469 150 3 4,114 18,619(1) 2,462 – – 99 – – 1 – – – – – 3 3 25,195(2) 100 31,060 Corporate € m Sovereign € m Other € m – – 14 – 1 15 5,417 – 26,171(1) 6 – 31,594(2) 304 133 85 14 – 536 2013 Total € m 9,129 1,697 26,988 20 64 37,898 (1)Includes NAMA senior bonds which do not have an external credit rating and to which the Group has attributed a rating of A- (31 December 2013: BBB+) i.e. the external rating of the Sovereign. (2)Includes supranational banks and government agencies. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 125 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – credit profile of the loan portfolio Corporate Banking North America lending including leveraged debt The Group has a specialised leveraged lending team in North America and which is involved in participating in the provision of finance to US corporations for mergers, acquisitions, buy-outs and general corporate purposes. The portfolio increased by c. 62% in 2014 (43% on a constant currency basis) as part of a strategic decision to grow this portfolio. Loans originated by this team are reported on the basis of the booking office i.e., Ireland € 1,523 million and Rest of the World € 18 million. Furthermore, these loans are reported under the operating segment of DCB, with the property loans below included under the property and construction analysis and all other loans reported under the Corporate asset class. A sectoral analysis of the portfolio is as follows: Drawn balances Agriculture Property and construction Distribution Energy Financial Manufacturing Transport Other services 2014* € m 9 5 164 27 71 443 207 615 1,541 2013* € m 3 – 59 45 42 275 119 405 948 At 31 December 2014, 90% of the portfolio was graded BB or better, with no loans classified as impaired. 92% of the customers in this portfolio are domiciled in the USA, 4% in Canada and 4% in the Rest of the World. Large exposures AIB’s Group Large Exposure Policy sets out maximum exposure limits to, or on behalf of, a customer or a group of connected customers. At 31 December 2014, the Group’s top 50 exposures amounted to € 5.1 billion, and accounted for 6.8% (€ 7.5 billion and 9.1% at 31 December 2013) of the Group’s on-balance sheet total gross loans and receivables to customers. In addition, these customers have undrawn facilities amounting to c. € 200 million. No single customer exposure exceeded regulatory requirements. In addition, the Group holds NAMA senior bonds amounting to € 9.4 billion (31 December 2013: € 15.6 billion). *Forms an integral part of the audited financial statements 126 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Financial investments available for sale The following table analyses the carrying value (fair value) of financial investments available for sale by major classifications together with the unrealised gains and losses at 31 December 2014 and 31 December 2013: 2014* Unrealised Unrealised gross gains gross losses € m € m Unrealised gross gains € m 2013* Unrealised gross losses € m Debt securities Irish Government securities Euro government securities Non Euro government securities Supranational banks and government agencies Collateralised mortgage obligations Other asset backed securities Euro bank securities Non Euro bank securities Non Euro corporate securities Other investments Total debt securities Equity securities(1) Total financial investments available for sale Fair value € m 9,107 3,631 182 2,852 99 1 3,897 – 3 – 1,327 170 9 119 – – 105 – – – 19,772 413 1,730 338 20,185 2,068 Fair value € m 10,328 1,968 608 3,092 – 535 3,671 34 3 12 20,251 117 – – – – (1) – – – (1) – (2) (3) (5) 910 110 54 29 – 1 59 – – – 1,163 38 – (1) – (6) – (54) (7) – – – (68) (7) (75) 20,368 1,201 (1)Includes NAMA subordinated bonds with a fair value of € 374 million (2013: € 73 million) of which unrealised gains amount to € 327 million (2013:€ 26 million). The following tables categorise AIB Group’s available-for-sale debt securities by contractual residual maturity and weighted average yield at 31 December 2014 and 2013: Irish Government securities Euro government securities Non Euro government securities Supranational banks and government agencies Collateralised mortgage obligations Other asset backed securities Euro bank securities Non Euro corporate securities Total ............................................................ Irish Government securities Euro government securities Non Euro government securities Supranational banks and government agencies Other asset backed securities Euro bank securities Non Euro bank securities Non Euro corporate securities Other investments Within 1 year € m Yield % After 1 but within 5 years € m Yield % After 5 but within 10 years € m Yield % – 230 29 150 – – 95 3 507 – 2.0 2.2 2.0 – – 1.0 – 1.8 5,632 1,167 90 1,775 – – 3,014 – 11,678 4.7 1.5 2.7 1.1 – – 1.0 – 2.9 2,933 2,234 63 900 – – 788 – 6,918 3.3 1.7 1.8 1.3 – – 1.3 – 2.3 Within 1 year € m Yield % After 1 but within 5 years € m Yield % After 5 but within 10 years € m Yield % – 226 81 381 – 461 34 3 – – 1.6 2.3 2.1 – 1.3 2.9 – – 5,513 804 250 1,942 13 2,823 – – 12 4.8 1.7 1.2 1.2 0.4 1.9 – – – 4,517 805 136 761 – 387 – – – 4.3 2.7 3.8 1.5 – 1.4 – – – 2014 After 10 years € m Yield % 542 – – 27 99 1 – – 669 3.3 – – 2.0 1.5 0.3 – – 3.0 2013 After 10 years € m Yield % 298 133 141 8 522 – – – – 5.2 3.7 4.3 0.5 0.5 – – – – Total ............................................................ 1,186 1.7 11,357 3.2 6,606 3.6 1,102 2.6 *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 127 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.1 Credit risk – Financial investments available for sale The following tables analyse the available for sale portfolio by geography at 31 December 2014 and 31 December 2013: Government securities Republic of Ireland Italy France Spain Netherlands Germany Austria Portugal United Kingdom Rest of the World Asset backed securities United Kingdom United States of America Spain Rest of the World Bank securities Republic of Ireland France Netherlands United Kingdom Australia Sweden Canada Finland Norway Belgium Germany Denmark Spain Irish Government € m Euro government € m 2014* Non Euro government € m Irish Government € m Euro government € m 2013* Non Euro government € m 9,107 – – – – – – – – – – 1,253 468 1,209 294 225 102 – – 80 9,107 3,631 – – – – – – – – 146 36 182 10,328 – – – – – – – – – – 228 753 – 505 271 155 6 – 50 10,328 1,968 2014* Total € m – 99 1 – 100 Euro € m 484 741 486 486 221 192 84 142 193 53 77 75 437 3,671 2014* Euro € m Non Euro € m 266 818 561 439 380 263 378 234 253 183 50 72 – 3,897 – – – – – – – – – – – – – – – – – – – – – – 519 89 608 2013* Total € m 69 74 322 70 535 2013* Non Euro € m – – – – – 34 – – – – – – – 34 *Forms an integral part of the audited financial statements 128 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.1 Credit risk – Financial investments available for sale Debt securities Debt securities available for sale (“AFS”) have decreased from a fair value of € 20.3 billion at 31 December 2013 to € 19.8 billion at 31 December 2014. Sales and maturities of € 8.8 billion (nominal € 8.5 billion) were partially offset by purchases of € 7.3 billion (nominal € 6.8 billion) and an increase in fair value of € 1 billion. The sales during the year generated € 369 million in profit on disposal. The increase in fair value was due to a tightening of Irish sovereign spreads and the impact of lower interest rates on fixed rate security holdings. Sovereign holdings were diversified during the year with a reduction in Irish sovereign holdings of € 1.2 billion and an increase in Spanish and Italian sovereign holdings of € 2.2 billion. The external ratings profile of the portfolio continues to improve with almost half the portfolio upgrading from a rating of BBB to a rating of A– in 2014, in line with the Irish sovereign rating upgrades from Fitch, Standard & Poor’s and Moody’s. The breakdown by rating was AAA: 23% (2013: 23%), AA: 16% (2013: 19%), A: 48% (2013: 2%), BBB: 12% (2013: 55%) and sub investment grade 1% (2013: 0%). Equity securities Equity securities available for sale increased by € 0.3 billion due to the increase in fair value of the NAMA subordinated debt holding. NAMA subordinated bonds are included within AFS equity securities. The fair value of these bonds at 31 December 2014 increased to € 374 million (31 December 2013: € 73 million) as the fair value estimate increased from 15.5% to 79.4% due to continued improvements in NAMA’s financial position and forecasts. Asset backed securities Asset backed holdings in Spain, Portugal and the UK were sold during the first half of the year. The overall reduction in asset backed holdings helped improve the Group’s Liquidity Coverage Ratio and Net Stable Funding Ratio. Bank securities At 31 December 2014, the fair value of bank securities of € 3.9 billion (31 December 2013: € 3.7 billion) included € 2.8 billion of covered bonds (31 December 2013: € 2.9 billion), € 0.9 billion of senior unsecured bank debt (31 December 2013: € 0.5 billion) and € 0.1 billion of government guaranteed senior bank debt (31 December 2013: € 0.4 billion). Spanish and Irish bank securities reduced by € 0.6 billion, Canadian and Australian holdings increased by € 0.5 billion, with € 0.1 billion increases each in Belgian and Finnish holdings. Republic of Ireland The fair value of Irish debt securities in the AFS category amounted to € 9.4 billion at 31 December 2014 (31 December 2013: € 10.8 billion) and consisted of sovereign debt € 9.1 billion (31 December 2013: € 10.3 billion), senior unsecured bonds of € 0.14 billion and covered bonds of € 0.13 billion (31 December 2013: € 0.1 billion). The Group no longer holds Irish Government guaranteed senior bank debt (31 December 2013: € 0.4 billion). The NAMA subordinated debt holding is classified as an available for sale equity and has a fair value of € 374 million (31 December 2013: € 73 million). In addition to Irish Government securities outlined above, the Group holds NAMA senior debt amounting to € 9.5 billion nominal (31 December 2013: € 15.8 billion), which is guaranteed by the Irish Government and is classified as loans and receivables. Spain The fair value of Spanish debt securities at 31 December 2014 was € 1.2 billion (31 December 2013: € 0.7 billion). During the period, almost all Spanish holdings of asset backed securities and covered bonds were sold and € 1.2 billion of sovereign debt was purchased across a range of issues with maturities between 5 and 8 years. Italy The fair value of Italian debt securities of € 1.3 billion at 31 December 2014 comprised solely of sovereign debt securities (31 December 2013: € 0.2 billion). The additional c. € 1 billion of Italian sovereign debt was purchased across a range of issues with maturities between 4 and 8 years. . Allied Irish Banks, p.l.c. Annual Financial Report 2014 129 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.2 Additional credit risk information – Forbearance* The following table sets out the risk profile of loans and receivables to customers (before impairment provisions) analysed as to non-forborne and forborne at 31 December 2014: Residential mortgages € m Other Property and construction € m personal € m SME/other commercial € m Corporate € m 13,285 10,485 1,856 1,520 27,146 867 5,188 180 1,750 153 117 2,200 141 788 96 3,362 1,041 446 4,945 354 7,888 46 6,630 910 585 8,171 373 2,809 765 3,446 90 – 4,301 18 264 33,201 3,129 13,187 11,353 4,583 426 471 351 620 1,868 456 3,321 5,645(1) 1 239 39 111 390 62 256 708 – 71 74 1,136 1,281 121 948 2,350 1 256 140 423 820 130 586 1,536 – – 6 18 24 2 114 140 2014 Total € m 14,372 25,673 4,050 2,668 46,763 1,753 16,937 65,453 428 1,037 610 2,308 4,383 771 5,225 10,379 Non-forborne loans and receivables to customers Neither past due nor impaired: Good upper Good lower Watch Vulnerable Total Past due but not impaired Impaired Total Forborne loans and receivables to customers Neither past due nor impaired: Good upper Good lower Watch Vulnerable Total Past due but not impaired Impaired Total Total loans and receivables to customers 38,846 3,837 15,537 12,889 4,723 75,832 Weighted average interest rate of forborne loans and receivables to customers % 2.8 % 6.5 % 3.1 % 3.9 % 4.2 % 3.3 (1)Republic of Ireland: € 5,570 million and United Kingdom: € 75 million. The Republic of Ireland residential mortgage forbearance portfolio is profiled in more detail on pages 131 to 136 and further detail on the non-mortgage forbearance portfolio is included on pages 137 to 138. Interest income is recognised, based on the original effective interest rate, on forborne loans in accordance with Accounting policy number 6 and is included in ‘Interest and similar income’ in the Income Statement. The application of the effective interest method has the effect of recognising income receivable evenly in proportion to the amount outstanding over the period to repayment. Interest income on non-impaired forborne loans is based on the gross loan balance, whereas the net carrying amount after specific provisions is used for impaired forborne loans. Interest income on impaired loans amounted to € 329 million in 2014. At 31 December 2014, the net carrying amount of impaired loans amounted to € 10,847 million which included forborne impaired mortgages of € 2,421 million and forborne impaired non-mortgages of € 854 million. *Forms an integral part of the audited financial statements 130 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.2 Additional credit risk information – Forbearance* Republic of Ireland residential mortgages The Group has developed a Mortgage Arrears Resolution Strategy (“MARS”) for dealing with mortgage customers in difficulty or likely to be in difficulty, which builds on and formalises the Group’s Mortgage Arrears Resolution Process. The core objectives of MARS are to ensure that arrears solutions are sustainable in the long term and that they comply with the spirit and the letter of all regulatory requirements. MARS includes long-term forbearance solutions which have been devised to assist existing Republic of Ireland primary residential mortgage customers in difficulty. Further details on MARS together with available forbearance strategies in operation to assist borrowers who have difficulty in meeting repayment commitments are set out on page 71. The following table analyses the movements in the stock of loans subject to forbearance by (i) owner-occupier, (ii) buy-to-let and (iii) total residential mortgages at 31 December 2014 and 31 December 2013: Republic of Ireland owner-occupier At 1 January Additions Expired arrangements Payments Interest Closed accounts(1) Transfer from owner-occupier to buy-to-let At 31 December Republic of Ireland buy-to-let At 1 January Additions Expired arrangements Payments Interest Closed accounts(1) Transfer from owner-occupier to buy-to-let At 31 December Republic of Ireland – Total At 1 January Additions Expired arrangements Payments Interest Closed accounts(1) At 31 December (1)Accounts closed during year due primarily to customer repayments and redemptions. Number 19,848 12,561 (4,15 6) – – (507) (32) 2014 Balance € m 2,952 1,691 (639) (219) 77 (30) (2) Number 22,248 6,873 (8,706) – – (521) (46) 2013 Balance € m 3,544 981 (1,463) (107) 35 (35) (3) 27,714 3,830 19,848 2,952 Number 8,309 1,893 (2,155) – – (143) 32 7,936 2014 Balance € m 1,998 345 (480) (125) 26 (26) 2 1,740 Number 2014 Balance 28,157 14,454 (6,311) – – (650) 35,650 € m 4,950 2,036 (1,119) (344) 103 (56) 5,570 Number 8,925 2,061 (2,577) – – (146) 46 8,309 Number 31,173 8,934 (11,283) – – (667) 28,157 2013 Balance € m 2,233 459 (612) (73) 14 (26) 3 1,998 2013 Balance € m 5,777 1,440 (2,075) (180) 49 (61) 4,950 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i The stock of loans subject to forbearance measures increased by € 0.6 billion in 2014 compared to a decrease in 2013 of € 0.8 billion. This trend reflects the impact of the increase in permanent sustainable solutions such as split mortgages, arrears capitalisations, Low Fixed Interest Rate and Positive Equity solutions. In contrast, forbearance decreased in 2013 as customers were removed from temporary forbearance measures such as interest only. The trend towards more permanent solutions can also be seen from the 44% decline in expired arrangements from 11,283 to 6,311. *Forms an integral part of the audited financial statements n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 131 Risk management – 3. Individual risk types 3.2 Additional credit risk information – Forbearance* Republic of Ireland residential mortgages (continued) Residential mortgages subject to forbearance measures by type of forbearance The following table further analyses by type of forbearance, (i) owner-occupier, (ii) buy-to-let and (iii) total residential mortgages that were subject to forbearance measures in the Republic of Ireland at 31 December 2014 and 31 December 2013: Republic of Ireland owner-occupier Interest only Reduced payment (greater than interest only) Payment moratorium Arrears capitalisation Term extension Split mortgages Voluntary sale for loss Low fixed interest rate Positive equity solution Other Total forbearance Republic of Ireland buy-to-let Interest only Reduced payment (greater than interest only) Payment moratorium Arrears capitalisation Term extension Split mortgages Voluntary sale for loss Low fixed interest rate Positive equity solution Total forbearance Republic of Ireland – Total Interest only Reduced payment (greater than interest only) Payment moratorium Arrears capitalisation Term extension Split mortgages Voluntary sale for loss Low fixed interest rate Positive equity solution Other Total forbearance *Forms an integral part of the audited financial statements Total Number Balance € m Loans > 90 days in arrears and/or impaired Number Balance € m 2014 Loans neither > 90 days in arrears nor impaired Number Balance € m 3,609 1,326 510 13,409 5,518 2,384 342 375 223 18 566 251 79 1,860 592 370 26 59 22 5 1,804 854 152 8,030 624 2,305 220 260 112 4 294 183 23 1,187 75 349 20 40 11 1 1,805 472 358 5,379 4,894 79 122 115 111 14 272 68 56 673 517 21 6 19 11 4 27,714 3,830 14,365 2,183 13,349 1,647 Total Number Balance € m Loans > 90 days in arrears and/or impaired Number Balance € m 2014 Loans neither > 90 days in arrears nor impaired Number Balance € m 2,017 836 352 3,641 860 15 208 2 5 468 195 48 881 118 2 27 – 1 1,119 466 183 3,058 190 14 162 1 3 289 115 26 775 32 2 25 – – 898 370 169 583 670 1 46 1 2 179 80 22 106 86 – 2 – 1 7,936 1,740 5,196 1,264 2,740 476 Total Number Balance € m 5,626 2,162 862 17,050 6,378 2,399 550 377 228 18 1,034 446 127 2,741 710 372 53 59 23 5 Loans > 90 days in arrears and/or impaired Number Balance € m 2,923 1,320 335 583 298 49 11,088 1,962 814 2,319 382 261 115 4 107 351 45 40 11 1 2014* Loans neither > 90 days in arrears nor impaired Number Balance € m 2,703 842 527 5,962 5,564 80 168 116 113 14 451 148 78 779 603 21 8 19 12 4 35,650 5,570 19,561 3,447 16,089 2,123 132 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.2 Additional credit risk information – Forbearance* Republic of Ireland residential mortgages (continued) Residential mortgages subject to forbearance measures by type of forbearance (continued) Republic of Ireland owner-occupier Interest only Reduced payment (greater than interest only) Payment moratorium Arrears capitalisation Term extension Split mortgages Other(1) Total forbearance Republic of Ireland buy-to-let Interest only Reduced payment (greater than interest only) Payment moratorium Arrears capitalisation Term extension Split mortgages Other(1) Total forbearance Republic of Ireland – Total Interest only Reduced payment (greater than interest only) Payment moratorium Arrears capitalisation Term extension Split mortgages Other(1) Total Loans > 90 days in arrears and/or impaired Number Balance € m Number Balance € m 4,189 1,661 352 7,067 6,233 236 110 694 350 54 1,150 657 35 12 1,771 980 113 4,555 989 162 75 320 238 16 805 108 23 6 2013 Loans neither > 90 days in arrears nor impaired Number Balance € m 2,418 681 239 2,512 5,244 74 35 374 112 38 345 549 12 6 19,848 2,952 8,645 1,516 11,203 1,436 Total Loans > 90 days in arrears and/or impaired Number Balance € m Number Balance € m 3,276 1,157 110 2,926 810 – 30 844 258 23 758 112 – 3 2,196 721 80 2,606 143 – 22 620 166 17 701 23 – 3 2013 Loans neither > 90 days in arrears nor impaired Number Balance € m 1,080 224 436 30 320 667 – 8 92 6 57 89 – – 8,309 1,998 5,768 1,530 2,541 468 Total Loans > 90 days in arrears and/or impaired Number Balance € m Number Balance € m 7,465 2,818 462 9,993 7,043 236 140 1,538 608 77 1,908 769 35 15 3,967 1,701 193 7,161 1,132 162 97 940 404 33 1,506 131 23 9 2013 Loans neither > 90 days in arrears nor impaired Number Balance € m 3,498 1,117 269 2,832 5,911 74 43 598 204 44 402 638 12 6 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Total forbearance (1)Mainly comprise ‘voluntary sale for loss’ solutions. 28,157 4,950 14,413 3,046 13,744 1,904 A key feature of the forbearance portfolio is the growth in the proportion of advanced forbearance solutions (split mortgages, low fixed interest rate voluntary sale for loss, negative equity trade down and positive equity solutions) driven by the Group's strategy to deliver sustainable long-term solutions to customers. Advanced forbearance solutions at € 510 million accounted for 9% of the total forbearance portfolio as at 31 December 2014, compared to less than 1% (€ 47 million) as at 31 December 2013. Following restructure, loans are reported as impaired for a probationary period of at least 12 months (unless a larger individually assessed case). *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 133 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.2 Additional credit risk information – Forbearance* Republic of Ireland residential mortgages (continued) Residential mortgages subject to forbearance measures by type of forbearance (continued) Other permanent standard forbearance solutions are term extensions and arrears capitalisation (which often includes a term extension). Permanent forbearance solutions are reported within the stock of forbearance for 5 years, and therefore, represent in some cases forbearance solutions which were agreed up to 5 years ago. They include loans where a subsequent interest only or other temporary arrangement had expired at 31 December 2014, but where an arrears capitalisation or term extension was awarded previously. Arrears capitalisation is the largest category of forbearance solution at 31 December 2014, accounting for 49% of the total forbearance portfolio (31 December 2013: 39% of the total forbearance portfolio). A high proportion of the arrears capitalisation portfolio (72%) is impaired or 90 days in arrears. This reflects the historic nature of the forbearance event for part of the portfolio and the requirement that loans complete a probationary period of at least 12 months before being upgraded from impairment, as described above. The Group’s processes for assessing customers and agreeing sustainable forbearance solutions have improved over the last 2 years with the development of advanced forbearance products. This is reflected in the performance of the arrears capitalisations booked in 2014 (€ 1.1 billion), of which 94% were either not in arrears or less than 90 days past due at 31 December 2014. The focus on long term sustainable solutions is evident from the decrease in the stock of solutions which are typically temporary, including interest only (reduced by € 0.5 billion to € 1.0 billion) and reduced payment greater than interest only. *Forms an integral part of the audited financial statements 134 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.2 Additional credit risk information – Forbearance* Republic of Ireland residential mortgages (continued) Residential mortgages subject to forbearance measures – past due but not impaired All loans that are assessed for a forbearance solution are tested for impairment either individually or collectively, irrespective of whether such loans are past due or not. Where the loans are deemed not to be impaired, they are collectively assessed as part of the IBNR provision calculation. The following table profiles the Republic of Ireland residential mortgage portfolio that was subject to forbearance measures and which was past due but not impaired at 31 December 2014 and 31 December 2013: Republic of Ireland 1 – 30 days 31 – 60 days 61 – 90 days 91 – 180 days 181 – 365 days Over 365 days Total past due but not impaired Owner- occupier € m 138 63 42 33 41 33 350 Buy-to-let € m 31 14 8 15 16 18 2014 Total € m 169 77 50 48 57 51 102 452 Owner- occupier € m 154 70 53 55 34 14 380 Buy-to-let € m 22 13 11 22 14 13 95 2013 Total € m 176 83 64 77 48 27 475 The amount of loans subject to forbearance and past due but not impaired decreased in the full year to 31 December 2014 by € 23 million, driven by a decrease in the arrears of less than 180 days, which was offset by an increase in arrears greater than 180 days. The proportion of the portfolio past due but not impaired reduced marginally in the period from 10% at 31 December 2013 to 8% at 31 December 2014. Residential mortgages subject to forbearance measures – impaired The following table profiles the Republic of Ireland residential mortgage portfolio that was subject to forbearance measures and which was impaired at 31 December 2014 and 31 December 2013: Republic of Ireland Not past due 1 – 30 days 31 – 60 days 61 – 90 days 91 – 180 days 181 – 365 days Over 365 days Total impaired Owner- occupier € m 874 221 87 62 143 191 498 Buy-to-let € m 363 52 29 28 75 159 509 2,076 1,215 2014 Total € m 1,237 273 116 90 218 350 1,007 3,291 Owner- occupier € m 331 98 72 64 205 246 397 Buy-to-let € m 439 78 62 63 143 217 479 2013 Total € m 770 176 134 127 348 463 876 1,413 1,481 2,894 Impaired loans subject to forbearance increased by € 0.4 billion during the year. Statement of financial position specific provisions of € 0.9 billion were held against the forborne impaired book at 31 December 2014, providing cover of 26.9%, while the income statement specific provision charge was € 124 million for the year. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 135 n o i t a m r o n f i l a r e n e G Risk management – 3. Individual risk types 3.2 Additional credit risk information – Forbearance* Republic of Ireland residential mortgages (continued) Residential mortgages subject to forbearance measures by indexed loan-to-value ratios The following table profiles the Republic of Ireland residential mortgage portfolio that was subject to forbearance measures by the indexed loan-to-value ratios at 31 December 2014 and 31 December 2013: Republic of Ireland Less than 50% 50% – 70% 71% – 80% 81% – 90% 91% – 100% 101% – 120% 121% – 150% Greater than 150% Unsecured Total forbearance Owner- occupier € m 557 648 391 397 387 632 640 151 27 Buy-to-let € m 126 164 128 151 165 330 383 266 27 3,830 1,740 2014 Total € m 683 812 519 548 552 962 1,023 417 54 5,570 Owner- occupier € m 334 336 230 223 237 508 614 470 – Buy-to-let € m 74 107 91 117 142 326 523 618 – 2,952 1,998 2013 Total € m 408 443 321 340 379 834 1,137 1,088 – 4,950 The degree of negative equity in the residential mortgage portfolio in the Republic of Ireland that was subject to forbearance measures at 31 December 2014 reduced to 37% of the owner-occupier and 56% of the buy-to-let mortgages compared to 54% and 73% respectively at 31 December 2013, due primarily to the increase in property prices in 2014. *Forms an integral part of the audited financial statements 136 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.2 Additional credit risk information – Forbearance* Non-mortgage The following table sets out an analysis of non-mortgage forbearance solutions at 31 December 2014: Total Balance € m Loans neither > 90 days in arrears nor impaired Balance € m Loans > 90 days in arrears but not impaired Balance € m Other personal Interest only Reduced payment (greater than interest only) Payment moratorium Arrears capitalisation Term extension Fundamental restructure Restructure Other Total Property and construction Interest only Reduced payment (greater than interest only) Payment moratorium Arrears capitalisation Term extension Fundamental restructure Restructure Other Total SME/other commercial Interest only Reduced payment (greater than interest only) Payment moratorium Arrears capitalisation Term extension Fundamental restructure Restructure Other Total Corporate Reduced payment (greater than interest only) Payment moratorium Arrears capitalisation Fundamental restructure Restructure Other Total 67 7 4 36 105 17 462 10 708 455 29 18 60 294 722 663 109 29 5 3 2 98 16 262 5 420 119 10 18 6 240 710 202 50 2,350 1,355 198 36 9 47 172 180 838 56 1,536 3 13 7 17 36 64 140 87 8 7 10 120 169 457 32 890 1 – – 17 – 6 24 9 – – 3 2 – 16 2 32 11 1 – 8 7 3 16 1 47 8 2 – 2 7 4 34 3 60 2 – – – – – 2 Total non-mortgage forbearance 4,734 2,689 141 *Forms an integral part of the audited financial statements Impaired Specific loans provisions on impaired loans Balance € m Balance € m 29 2 1 31 5 1 184 3 256 325 18 – 46 47 9 445 58 948 103 26 2 35 45 7 347 21 586 – 13 7 – 36 58 114 1,904 19 2 1 17 2 – 129 2 172 166 8 – 26 16 – 279 31 526 50 13 1 19 12 3 215 9 322 – 8 4 – 17 1 30 1,050 2014 Specific provision cover % % 66 100 100 55 40 – 70 67 67 51 44 – 57 34 – 63 53 55 49 50 50 54 27 43 62 43 55 – 62 57 – 47 2 26 55 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 137 Risk management – 3. Individual risk types 3.2 Additional credit risk information – Forbearance* Non-mortgage (continued) The Group has developed treatment strategies for customers in the non-mortgage portfolio who are experiencing financial difficulties and who require a restructure. The approach has been to develop strategies on an asset class basis, and to then apply those strategies at the customer level to deliver a holistic debt management solution. The approach is based on assessing the affordability level of the customer, and then applying asset based treatment strategies to determine the long term levels of sustainable and unsustainable debt. Further information on non-mortgage forbearance is included on pages 71 to 72. Non-retail customers in difficulty typically have exposures across a number of asset classes including SME debt, associated property exposures and residential mortgages. As at December 2014, non-mortgage loans reported as being subject to forbearance amounted to € 4.7 billion of which € 1.9 billion is impaired with specific provision cover of 55%. The majority of these forborne loans are in the property and construction (€ 2.4 billion) and SME/other commercial (€ 1.5 billion) sectors. Within non-mortgage forbearance categories, ‘Fundamental restructure’ (€ 0.9 billion in total) includes longer term solutions where customers have been through a full review as described above, have proven sustainable cash flows/repayment capacity and their sustainable debt has been restructured. This may include debt write-off. Loans to borrowers that are fundamentally restructured typically result in the initial loans together with any related impairment provisions being derecognised and the new restructured loans being graded as ‘vulnerable’ in most cases. Approximately € 2.3 billion of non-mortgage loans were de-recognised during 2014, with related impairment provisions and suspended interest of c.€ 1.2 billion. The ‘Restructure’ category (€ 2.0 billion) includes some longer term/permanent solutions where the existing customer debt was deemed to be sustainable post restructuring. The solutions offered include interest only with asset disposal or bullet/fixed payment, debt consolidation, amongst others. This category also includes cases which were restructured prior to the current treatment strategies being developed. Some of these cases may yet qualify for a ‘Fundamental Restructure’ following a full review of sustainable repayment capacity. The remaining forbearance categories include borrowers that have been afforded temporary forbearance measures which, depending on performance, may in time, move out of forbearance or qualify for a more permanent forbearance solution. *Forms an integral part of the audited financial statements 138 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.3 Liquidity risk* Liquidity risk is the risk that the Group will not be able to fund its assets and meet its payment obligations as they come due, without incurring unacceptable costs or losses. 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. Risk identification and assessment Liquidity risk is assessed by modelling cash flows of the Group over a series of maturity bands. Behavioural assumptions are applied to those assets and liabilities whose contractual repayment dates are not reflective of their inherent stability. Both contractual and behaviourally adjusted cash flows are compared against the Group’s stock of unencumbered liquid assets to determine, by maturity bands, the adequacy of the Group’s liquidity position. In addition, the Group monitors and manages the funding support provided by its deposit base to its loan book through a series of measures including the CRD IV related liquidity ratios i.e. the Liquidity Coverage Ratio (“LCR”) and Net Stable Funding Ratio (“NSFR”) as required by the 2013 Capital Requirements Regulation (“CRR”) and the Capital Requirements Directive (“CRD”) and ultimately the LCR as required by the recently published European Commission Delegated Regulation (“the Delegated Act”) to supplement the CRR and which is scheduled to come into force on 1 October 2015. Risk management and mitigation AIB has a comprehensive Funding and Liquidity Framework for managing the Group’s liquidity risk. The Funding and Liquidity Framework is designed to comply with evolving regulatory standards and ensure that the Group maintains sufficient financial resources of appropriate quality for the Group’s funding profile. The Funding and Liquidity Framework is delivered through a combination of policy formation, review and governance, analysis, stress testing and limit setting and monitoring. In addition to the CRR liquidity requirements, the Group’s liquidity management policy seeks to ensure AIB’s compliance with the “Principles for Sound Liquidity Risk Management and Supervision” as set out by the Basel Committee on Banking Supervision (September 2008) and the Central Bank of Ireland’s (“CBI”) “Requirements for the Management of Liquidity Risk” (June 2009) and in doing so ensures that it has sufficient liquidity to meet its current and forecasted requirements. AIB is required to comply with the liquidity requirements of the CBI/SSM and also with the requirements of local regulators overseas which include regulatory restrictions on the transfer of liquidity within the Group. In addition, it operates a funding strategy designed to anticipate additional funding requirements based on projected balance sheet movements and to maintain a diversified funding base with an emphasis on high quality, stable customer deposit funding whilst maintaining an appropriate balance between short term and long term funding sources at an appropriate cost. The liquidity and funding requirements of the Group are managed and controlled by the Treasury function. Euro and Sterling are the most important currencies to the Group from a liquidity and funding perspective. The Group manages its liquidity in a number of ways: – Firstly, through the active management of its liability maturity profile, it aims to ensure a balanced spread of repayment obligations with a key focus on 0 to 8 day and 9 day to 1 month time periods. Monitoring ratios also apply to longer periods for long term funding stability; – Secondly, the Group aims to maintain a stock of high quality liquid assets to meet its obligations as they fall due. Discounts are applied to these assets based on their cash-equivalence and price sensitivity; and – Finally, net inflows and outflows are monitored on a daily basis. Risk monitoring and reporting In common with other areas of risk management, the Group operates a “three lines of defence” model. Liquidity risk management is undertaken in the Treasury function which in 2014 reported to the Director of Products and Capital Markets with reporting and monitoring carried out by Treasury ALM which reports to the Chief Financial Officer (“CFO”). These areas comprise the first line. Second line control and assurance is provided by Financial Risk reporting to the Chief Risk Officer (“CRO”), and Group Internal Audit comprises the third line. The Group liquidity and funding position is reported regularly to Group Asset and Liability Committee (“ALCo”), the Executive Risk Committee (“ERC”) and the Board Risk Committee (“BRC”). In addition, the Leadership Team and the Board are briefed on liquidity and funding on an on-going basis. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 139 n o i t a m r o n f i l a r e n e G Risk management - 3. Individual risk types 3.3 Liquidity risk* At 31 December 2014, the Group held € 40 billion in qualifying liquid assets/contingent funding (including € 3 billion in liquid assets only available for use within the UK) of which approximately € 20 billion was not available due to repurchase, secured loan and other agreements. The available Group liquidity pool comprises the remainder and is held to cover contractual and stress outflows. As at 31 December 2014, the Group liquidity pool was € 17 billion (2013: € 14 billion). During 2014, the month-end liquidity pool ranged from € 14 billion to € 19 billion and the month-end average balance was € 16 billion. Composition of the Group liquidity pool as at 31 December 2014 and 31 December 2013 Cash and deposits with central banks Total government bonds Other: Agencies and agency mortgage-backed securities Other including NAMA senior bonds Total other Total Cash and deposits with central banks Total government bonds Other: Agencies and agency mortgage-backed securities Other including NAMA senior bonds Total other Total (1)Basis of calculation for LCR differs to the Group’s basis. Liquidity pool available (ECB eligible) € bn 2014 Liquidity pool of which LCR eligible(1) Level 1 € bn Level 2 € bn – 4.5 – 11.3 11.3 15.8 2.9 4.5 – 7.5 7.5 14.9 – – – – – – Liquidity pool(1) € bn 0.9 4.5 – 11.4 11.4 16.8 Liquidity pool € bn Liquidity pool available (ECB eligible) € bn 2013 Liquidity pool of which Basel III LCR eligible Level 1 € bn Level 2 € bn 0.3 3.4 0.3 9.7 10.0 13.7 – 3.4 0.3 9.7 10.0 13.4 2.0 3.5 – 4.1 4.1 9.6 – – 0.1 – 0.1 0.1 Level 1 – High Quality Liquid Assets (“HQLA”) include amongst others domestic currency (euro) denominated bonds issued or guaranteed by European Economic Area (“EEA”) sovereigns, other very highly rated sovereign bonds and unencumbered cash at central banks. Level 2 – HQLA include highly rated sovereign bonds, highly rated covered bonds and certain other strongly rated securities. The above is based on May 2014 CBI guidelines (CBI LCR guidelines) for the LCR interim observation period. The Delegated Act comes into force in October 2015 and contains some changes in relation to qualifying liquid assets. Management of the Group liquidity pool AIB manages its liquidity pool on a centralised basis. The composition of the liquidity pool is subject to limits set by the Board and the independent Risk functions. These pool assets primarily comprise government guaranteed bonds. AIB improved its liquidity buffer during the course of 2014 from € 14 billion to € 17 billion. The liquidity buffer has increased, predominantly due to a combination of profits for the year, and positive movement in the liquid asset portfolio due to yield compression. *Forms an integral part of the audited financial statements 140 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.3 Liquidity risk* Other contingent liquidity AIB has access to other unencumbered assets which provide a source of contingent liquidity. These are not in the Group’s liquidity pool. However, as a contingency, these assets may be monetised in a stress scenario to generate liquidity through their use as collateral for secured funding or outright sale. Liquidity regulation AIB Group is required to comply with the liquidity requirements of the Single Supervisory Mechanism (“SSM”) (CBI prior to November 2014) and also with the requirements of local regulators in jurisdictions in which it operates. The Group monitors and reports its current and forecast position against Basel III and CRD IV related liquidity metrics – the LCR and the NSFR. The LCR is designed to promote short term resilience of a bank’s liquidity risk profile by ensuring that it has sufficient high quality liquid resources to survive an acute stress scenario lasting for 30 days. The NSFR has a time horizon of one year and has been developed to promote a sustainable maturity structure of assets and liabilities. The minimum LCR requirement is to be introduced in October 2015 at 60%, rising to 100% by January 2018. The minimum NSFR requirement is scheduled to be introduced in January 2018 at 100%. Based on the current regulatory LCR guidelines, as at 31 December 2014, AIB had an estimated LCR of c.116%. At 31 December 2014, the Group had an estimated NSFR of c.112%. The Group has adopted a prudent approach to the LCR calculation in the observation period(1). The LCR and NSFR of c.105% and c.95% respectively reported at 2013 were based on the Group’s interpretation of Basel III standards as at 31 December 2013. In addition to the LCR guidelines referred to above, in January 2014, a consultative document was issued by the Basel Committee on Banking Supervision with revised NSFR rules. The 31 December 2014 NSFR is based on the Group’s interpretation of these rules. During 2014, the Group commenced regulatory reporting in line with CRD IV requirements. Based on the Basel III standards and their EU implementation through the CRD IV, and ultimately, the recently published Delegated Act, AIB is set to comply with these ratios. (1)The period from 31 March 2014 to 1 October in 2015, when the 60% minimum LCR is effective, will be used by the CBI/SSM as an observation period during which time the CBI/SSM will monitor reporting institutions convergence towards the minimum standard. Liquidity risk stress testing Stress testing is a key component of the liquidity risk management framework. The Group undertakes liquidity stress testing and has established a Liquidity Contingency Plan (“LCP”) which is designed to ensure that the Group can manage its business in stressed liquidity conditions and emerge from a temporary liquidity crisis as a creditworthy institution. The LCP is determined with reference to net contractual and contingent outflows under a variety of stress scenarios and is used to size liquidity pool requirements. Stress tests include both firm-specific and systemic risk events and a combination of both. Stressed assumptions are applied to the Group’s liquidity buffer and liquidity risk drivers. These scenario events are reviewed in the context of the Group’s LCP, which details corrective action options under various levels of stress events. European Banking Authority (“EBA”) prescribed stress scenarios are also measured. A stress scenario for one month of stress is measured which assumes outflows consistent with a firm-specific stress for the first two weeks of the stress period, followed by relatively lower outflows consistent with a market-wide stress for the remainder of the stress period. Survival periods of various durations are measured as part of liquidity stress testing. The purpose of these stress tests is to ensure the continued stability of the Group’s liquidity position, within the Group’s pre-defined liquidity risk tolerance levels. The results are reported to the ALCo, Leadership Team and Board, and to other committees. Once Board approved survival limits are breached, the LCP will be activated. The LCP can also be activated by management decision independently of the stress tests. Under normal market conditions, the liquidity pool is managed to be at least 100% of anticipated net outflows under each of the stress scenarios. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 141 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management - 3. Individual risk types 3.3 Liquidity risk* Internal and regulatory liquidity stress tests comparison The LCP stress scenarios, including the EBA prescribed stress scenarios and CRD IV LCR, are all broadly comparable short term stress scenarios in which the adequacy of defined liquidity resources are assessed against contractual and contingent stress outflows. The EBA stress scenarios and the Basel III/CRD IV related ratios provide an independent assessment of the Group’s liquidity risk profile. Stress test Time horizon Calculation EBA liquidity stress Liquidity Coverage Ratio (LCR) Net Stable Funding Ratio (NSFR) 1 month 30 days 1 year Liquid assets to Liquid assets to Stable funding net cash outflows net cash outflows resources to stable funding requirements As at December 2014, the Group held liquid assets in excess of minimum required levels for internal stress measurement purposes and the CRD IV LCR requirement. Internal Stress testing also considers stress periods of between 1 month and 1 year, breaches of which would trigger the LCP. Compliance with internal regulatory stress tests as at 31 December 2014 and 31 December 2013: Liquidity pool as a percentage of anticipated net cash flows Liquidity holding as a % of one month stress requirement CRD IV LCR (1)2013 based on Basel III. 2014 % 182 116 2013 % 137 105(1) Funding structure The Group’s funding strategy is to deliver a sustainable, diversified and robust customer deposit base at economic pricing and to continue rebuilding a strong wholesale funding franchise with appropriate access to term markets in order to support core lending activities. The strategy aims to deliver a solid funding structure that complies with internal and regulatory policy requirements and reduces the probability of a liquidity stress, i.e. an inability to meet funding obligations as they fall due. Sources of funds Customer accounts Deposits by central banks and banks – secured – unsecured Certificates of deposit and commercial paper Covered bonds Securitisations Senior debt Capital Total source of funds Other 31 December 2014 % € bn 31 December 2013 % € bn 63 16 – – 4 1 3 13 100 64.0 16.4 0.4 – 3.8 0.8 3.3 13.0 101.7 5.8 107.5 60 21 – – 3 1 4 11 100 65.7 22.6 0.5 0.1 3.3 1.0 4.3 11.8 109.3 8.1 117.4 *Forms an integral part of the audited financial statements 142 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.3 Liquidity risk* Funding structure (continued) Customer accounts The following table analyses average deposits by customers for 2014 and 2013: Current accounts Deposits: Demand Time Repurchase agreements Total x x 19,710 16,619 2014 Total € m 2013 Total € m 9,504 31,032 4,890 65,136 9,305 34,914 3,808 64,646 Current accounts are both interest bearing and non-interest cheque bearing accounts raised through AIB Group’s branch network in the Republic of Ireland, Northern Ireland and Great Britain. Demand deposits attract interest rates which vary from time to time in line with movements in market rates and according to size criteria. Such accounts are not subject to withdrawal by cheque or similar instrument and have no fixed maturity dates. Time deposits are generally larger, attract higher rates of interest than demand deposits and have predetermined maturity dates. Customer accounts by currency The following table analyses customer deposits by currency as at 31 December: Euro US dollar Sterling Other currencies Total 2014 Total € m 50,245 1,212 12,458 103 64,018 2013 Total € m 52,788 1,143 11,631 105 65,667 The Group maintains access to a variety of sources of wholesale funds, including those available from money markets, repo markets and term investors. Customer deposits represent the largest source of funding for the Group, and the core retail franchises and accompanying deposit base in both Ireland and the UK provide a stable and reasonably predictable source of funds. Customer accounts have decreased by € 1.7 billion in the full year 2014, with decreases in customer repos and rate sensitive deposits as margins were managed downwards being partially offset by increases in current account balances. The level of customer deposits and the reduction in customer loan balances means the Group continues to have a strong loan to deposit ratio. The Group’s loan to deposit ratio as at 31 December 2014 was 99% (31 December 2013: 100%). While the Group continued to participate in CBI/ECB operations, 2014 saw a reduction of € 9.3 billion in ECB funding. CBI/ECB funding amounted to € 3.4 billion at 31 December 2014, down from € 12.7 billion at 31 December 2013. CBI/ECB drawings no longer include funding from the ECB’s 3 year Long-Term Refinancing Operations (“LTROs”) (31 December 2013: € 11 billion). However, included in the € 3.4 billion is € 1.9 billion of Targeted Longer-Term Refinancing Operations (“TLTRO”) which locks in low cost term funding that will benefit the Group’s NSFR. Wholesale funding markets saw continued improvement in sentiment towards Ireland and towards AIB in 2014. The Group raised secured funding through a € 500 million covered bond issuance and an unsecured € 500 million medium term note. These were issued at spreads of 95 bps and 180 bps respectively over market rates, an improvement compared to 180 bps and 235 bps on issuances in the second half of 2013. The two issuances have been part of a balanced and measured re-engagement in the wholesale markets. Senior debt funding of € 3.3 billion at 31 December 2014 decreased from € 4.3 billion at 31 December 2013 due to maturing bonds. This was predominantly due to € 0.8 billion of senior debt maturities and € 0.7 billion related to liability management in the form of a buyback of senior ELG covered debt that was due to mature in quarter one 2015. The reductions were partly offset by the € 0.5 billion issuance outlined above. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 143 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management - 3. Individual risk types 3.3 Liquidity risk* The Group continues to engage with the markets in a measured and consistent manner extending the duration of funding transactions. In November 2014, the Group renegotiated the terms of the 2013 € 500 million Credit Card funding deal, at a reduced level of € 200 million. The performance of the economy will drive credit demand and the retention and gathering of stable customer accounts in a challenging and increasingly competitive market environment, together with continued access to unsecured wholesale term markets will be the key factors influencing the Group’s capacity for asset growth and the future shape of the Group. Coupled with actions to restructure stressed assets, this is paramount to increasing the Group’s pool of available liquid assets and to the Group’s overall funding/liquidity strategy. Composition of wholesale funding As at 31 December 2014, total wholesale funding outstanding was € 26 billion (2013: €33 billion). € 17 billion of wholesale funding matures in less than one year (2013: € 12 billion). € 9 billion of wholesale funding had a residual maturity of over one year, including € 1.9 billion of TLTRO drawings (2013: € 21 billion). As at 31 December 2014, outstanding wholesale funding comprised € 21 billion of secured funding (2013: € 27 billion) and € 5 billion of unsecured funding (2013: € 6 billion). Deposits from banks Certificate of deposits and commercial paper Senior unsecured Covered bonds/ABS Subordinated liabilities Total 31 December 2014 Of which: Secured Unsecured Deposits from banks Certificate of deposits and commercial paper Senior unsecured Covered bonds/ABS Subordinated liabilities Total 31 December 2013 Of which: Secured Unsecured Not more than 1 month € bn 9.9 – – – – 9.9 9.5 0.4 9.9 Not more than 1 month € bn 7.9 0.1 – – – 8.0 7.4 0.6 8.0 Over 1 month but not Over 3 months but not Over 6 months but not more than more than more than 1 year 6 months 3 months € bn € bn € bn 4.6 – 2.2 – – 6.8 4.6 2.2 6.8 Over 1 month but not more than 3 months € bn 3.2 – – – – 3.2 3.2 – 3.2 – – – – – – – – – – – – 0.6 – 0.6 0.6 – 0.6 Over 3 months but not more than 6 months € bn Over 6 months but not more than 1 year € bn – – – – – – – – – 0.1 – 0.8 – – 0.9 0.1 0.8 0.9 Total less than 1 year Total over 1 year € bn 14.5 – 2.2 0.6 – 17.3 14.7 2.6 17.3 € bn 2.3 – 1.1 4.0 1.4 8.8 6.4 2.4 8.8 Total less than 1 year Total over 1 year € bn 11.2 0.1 0.8 – – € bn 11.9 – 3.5 4.3 1.4 2014 Total € bn 16.8 – 3.3 4.6 1.4 26.1 21.1 5.0 26.1 2013 Total € bn 23.1 0.1 4.3 4.3 1.4 12.1 21.1 33.2 10.7 1.4 12.1 16.2 4.9 21.1 26.9 6.3 33.2 *Forms an integral part of the audited financial statements 144 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.3 Liquidity risk* Currency composition of wholesale debt At 31 December 2014, 99% (2013: 97%) of wholesale funding was in euro. A negligible balance was held in other currencies, mainly GBP and USD. AIB manages cross-currency refinancing risk to foreign-exchange cash-flow limits. Encumbrance The asset encumbrance disclosure has been produced in line with the Group’s interpretation of the 2014 EBA Guidelines on disclosure of encumbered and unencumbered assets. An asset is defined as encumbered if it has been pledged as collateral against an existing liability, and as a result is no longer available to the Group to secure funding, satisfy collateral needs or to be sold. The ability to encumber certain pools of assets is a key element of the Group’s funding and liquidity strategy. In particular, encumbrance through the repo markets plays an important role in funding the Group’s NAMA senior bonds and financial investments available for sale portfolios. The funding of customer loans is also supported through the issuance of covered bonds and securitisations. Other lesser sources of encumbrance include cash placed, mainly with banks, in respect of derivative liabilities, sterling notes and coins issued and loan collateral pledged in support of pension liabilities in AIB Group (UK) p.l.c.. The Group has seen, and would expect to continue to see a downward trend in encumbrance as the Group’s funding requirement is reduced through NAMA bond repayments. The Group includes two authorised mortgage banks, AIB Mortgage Bank and EBS Mortgage Finance that issue residential mortgage backed covered securities (“ACS”). In addition, the Group uses a number of securitisation vehicles for funding purposes. As well as direct market issuance, the mortgage banks and the securitisation vehicles repo bonds centrally for liquidity management purposes. Unused bonds held centrally contribute to the Group’s liquidity buffer and do not add to the Group’s encumbrance level unless used in a repurchase agreement or pledged externally. Secured funding between the parent and other Group entities (e.g. EBS Ltd and AIB Group (UK) p.l.c.) is an element of the Group’s liquidity management processes. The following table analyses total assets by (1) encumbered assets and (2) unencumbered assets as at 31 December 2014: Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments available for sale: Debt securities Equity securities Other Total Assets Encumbered assets € m € m 1,865 63,362 9,423 19,772 413 12,620 107,455 1,727 11,102 1,405 14,893 – 175 29,302 2014 Unencumbered assets Other Readily available € m € m 138 13,523 8,018 4,879 – 2,650 – 38,737 – – 413 9,795 29,208 48,945 The Group had an encumbrance ratio of 27% as at 31 December 2014, i.e. it is point in time encumbrance. The encumbrance level is based on the amount of assets that are required in order to meet regulatory and contractual commitments. Both mortgage banks hold higher levels of assets in their covered pools in order to meet rating agency requirements and beyond this for reasons of operational flexibility. € 13,523 million of residential loan mortgages included in loans and receivables to customers are unencumbered but are regarded by the Group as readily encumberable as they are held in covered bond and securitisation structures. The remaining loan assets in this category € 38,737 million, whilst unencumbered, are not regarded as being available in support of liquidity management at present. Other assets such as deferred tax assets, derivative assets, property, plant and equipment are not regarded as encumberable. Financial liabilities of € 23,771 million matched encumbered assets amounting to € 27,131 million (including collateral received from counterparties which is available for encumbrance). The fair value of collateral received available for encumbrance amounted to € 457 million of which Nil was encumbered. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 145 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Risk management - 3. Individual risk types 3.3 Liquidity Risk* Encumbrance (continued) Asset encumbrance of loans and receivables to customers Loans and receivables to customers are only classified as readily available if they are already in a form such that they can be used to raise funding without further management actions. This includes excess collateral already in secured funding vehicles and collateral pre-positioned at central banks and available for use in secured financing transactions. All other loans and receivables are conservatively classified as not readily available, however, a proportion would be suitable for use in secured funding structures, this portion increasing as economic conditions improve and as the Group restructures its stressed loan assets. The following table analyses the asset encumbrance of loans and receivables to customers as at 31 December 2014: Mortgages (residential mortgage backed securities) Retail and SME (credit card issuance) Other Total Assets € bn 23.3 0.3 1.0 24.6 Externally issued notes € bn Other secured funding € bn 4.5 – – 4.5 3.1 0.2 – 3.3 2014 Retained notes € bn 4.3 – – 4.3 AIB issues asset backed securities (“ABS”), covered bonds and other similar secured instruments that are secured primarily over customer loans and receivables. Notes issued under these programmes are also used in repurchase agreements with market counterparties and in central bank facilities. In addition to securities already in issue, at 31 December 2014, the Group had excess collateral within its asset backed funding programmes that could readily be used to issue additional bonds of € 3.8 billion. Firm financing repurchase agreements The following table analyses the firm financing repurchase agreements as at 31 December 2014 and 31 December 2013: Less than 1 month € bn 1 month to 3 months € bn Over 3 months € bn Maturity profile 10 5 3 2014 Total € bn 18 Less than 1 month € bn 1 month to 3 months € bn Over 3 months € bn 10 6 12 2013 Total € bn 28 Credit ratings The Group’s debt ratings as at 4 March 2015 for all debt/deposits not covered by the ELG scheme are as follows: – S&P long-term "BB" and short-term "B"; – Fitch long-term "BBB" and short-term "F2"; and – Moody's long-term "Ba2" for deposits and "Ba3" for senior unsecured debt and short-term "Not Prime" for deposits and senior unsecured debt. Bank and sovereign rating downgrades have the potential to adversely affect the Group’s liquidity position and this has been factored into the Group’s stress tests. *Forms an integral part of the audited financial statements 146 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.3 Liquidity risk* Financial assets and financial liabilities by contractual residual maturity Financial assets Derivative financial instruments(3) Loans and receivables to banks(4) Loans and receivables to customers(4) NAMA senior bonds(5) Financial investments available for sale(2) Other financial assets Financial liabilities Deposits by central banks and banks Customer accounts Derivative financial instruments(3) Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities Financial assets Financial assets of disposal groups(1)(2)(4) Trading portfolio financial assets(2) Derivative financial instruments(3) Loans and receivables to banks(4) Loans and receivables to customers(4) NAMA senior bonds(5) Financial investments available for sale(2) Other financial assets Financial liabilities Deposits by central banks and banks Customer accounts Derivative financial instruments(3) Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities Repayable on demand € m – 1,828 25,078 – 3 – 3 months or less but not repayable on demand € m 23 37 873 9,423 226 499 1 year or less but over 3 months 5 years or less but over 1 year Over 5 years 2014 Total € m € m € m € m 75 – 820 – 1,120 – 3,212 9,624 37,045 – 278 – – 11,678 – – 7,587 – 2,038 1,865 75,832 9,423 19,772 499 26,909 11,081 3,565 22,122 45,752 109,429 366 31,678 – – – 443 32,487 14,151 16,779 131 2,241 – 3 – 10,895 156 548 – – 2,251 4,665 806 3,972 1,411 – – 1 1,241 1,100 16,768 64,018 2,334 7,861 40 – 1,451 446 33,305 11,599 13,105 2,382 92,878 Repayable on demand € m – – – 1,680 31,854 – 3 – 3 months or less but not repayable on demand € m – – 33 373 871 15,598 246 559 1 year or less but over 3 months 5 years or less but over 1 year Over 5 years 2013 Total € m € m € m € m – – 210 2 3,408 – 937 – – – 900 – 28 1 486 – 8,289 38,402 – 11,357 – – 7,708 – 28 1 1,629 2,055 82,824 15,598 20,251 559 33,537 17,680 4,557 20,546 46,625 122,945 218 27,646 – – – 526 28,390 10,860 21,929 80 139 – 2 143 11,654 143 828 – – 11,900 4,438 666 6,918 1,316 – – – 1,071 874 23,121 65,667 1,960 8,759 36 – 1,352 528 33,010 12,768 25,238 1,981 101,387 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i (1)Only disposal groups that contain financial assets and financial liabilities have been included. (2)Excluding equity shares. (3)Shown by maturity date of contract. (4)Shown gross of provisions for impairment, unearned income and deferred costs. (5)New notes will be issued at each maturity date, with the next maturity date being 2 March 2015. Upon maturity, the issuer has the option to settle in cash or issue new notes and to date has issued new notes. *Forms an integral part of the audited financial statements n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 147 Risk management - 3. Individual risk types 3.3 Liquidity risk* Financial liabilities by undiscounted contractual maturity The balances in the table below include the undiscounted cash flows relating to principal and interest on financial liabilities and as such will not agree directly with the balances on the consolidated statement of financial position. All derivative financial instruments with the exception of interest rate swaps have been included in the ‘3 months or less but not repayable on demand’ category at their mark to market value. Interest rate swaps have been analysed based on their contractual maturity undiscounted cash flows. In the daily management of liquidity risk, the Group adjusts the contractual outflows on customer deposits to reflect the inherent stability of these deposits. Offsetting the liability outflows are cash inflows from the assets on the statement of financial position. Additionally, the Group holds a stock of high quality liquid assets, which are held for the purpose of covering unexpected cash outflows. The following table analyses, on an undiscounted basis, financial liabilities by remaining contractual maturity: Financial liabilities Deposits by central banks and banks Customer accounts Derivative financial instruments Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities Financial liabilities Deposits by central banks and banks Customer accounts Derivative financial instruments Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities Repayable on demand € m 366 31,678 – – – 443 32,487 Repayable on demand € m 218 27,653 – – – 526 28,397 3 months or less but not repayable on demand € m 1 year or less but over 3 months 5 years or less but over 1 year Over 5 years 2014 Total € m € m € m € m 14,156 16,961 139 2,342 – 3 7 11,070 415 726 160 – 33,601 12,378 2,260 4,931 1,161 4,328 1,761 – 14,441 – 1 721 1,136 128 – 16,789 64,641 2,436 8,532 2,049 446 1,986 94,893 3 months or less but not repayable on demand € m 10,865 22,138 406 258 – 2 1 year or less but over 3 months 5 years or less but over 1 year Over 5 years € m € m 146 11,897 323 1,023 160 – 12,079 4,846 884 7,399 1,920 – 27,128 2013 Total € m 23,308 66,534 2,590 9,572 2,201 528 € m – – 977 892 121 – 33,669 13,549 1,990 104,733 *Forms an integral part of the audited financial statements 148 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.3 Liquidity risk* Financial liabilities by undiscounted contractual maturity (continued) The undiscounted cash flows potentially payable under guarantees and similar contracts, included below within contingent liabilities, are classified on the basis of the earliest date the facilities can be called. The Group is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. The Group expects that most guarantees it provides will expire unused. The Group has given commitments to provide funds to customers under undrawn facilities. The undiscounted cash flows have been classified on the basis of the earliest date that the facility can be drawn. The Group does not expect all facilities to be drawn, and some may lapse before drawdown. Contingent liabilities Commitments Contingent liabilities Commitments Payable on demand € m 1,246 9,082 10,328 Payable on demand € m 1,353 8,236 9,589 3 months or less but not repayable on demand € m 1 year or less but over 3 months 5 years or less but over 1 year Over 5 years € m € m € m – – – – – – – – – – – – 3 months or less but not repayable on demand € m 1 year or less but over 3 months 5 years or less but over 1 year Over 5 years € m € m € m – – – – – – – – – – – – 2014 Total € m 1,246 9,082 10,328 2013 Total € m 1,353 8,236 9,589 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 149 n o i t a m r o n f i l a r e n e G Risk management - 3. Individual risk types 3.4 Market risk* Market risk is the risk relating to the uncertainty of returns attributable to fluctuations in market factors. Where the uncertainty is expressed as a potential loss in earnings or value, it represents a risk to the income and capital position of the Group. The Group is primarily exposed to market risk through the interest rate and credit spread factors and to a lesser extent through foreign exchange equity and inflation rate risk factors. The Group assumes market risk as a result of its banking book and trading book activities. Credit spread risk is the exposure of the Group’s financial position to adverse movements in the credit spreads of bonds held in the trading or available for sale (“AFS”) securities portfolio. Credit spreads are defined as the difference between bond yields and interest rate swap rates of equivalent maturity. The AFS bond portfolio is the principal source of credit spread risk. Interest rate risk in the banking book (“IRRBB”) is the current or prospective risk to both the earnings and capital of the Group as a result of adverse movements in interest rates being applied to positions held in the banking book. The Group also assumes market risk through its trading book activities which relate to all positions in financial instruments (principally derivatives) that are held with trading intent or in order to hedge positions held with trading intent. Risks associated with valuation adjustments such as credit value adjustment (“CVA”) and funding value adjustment (“FVA”) are managed by the trading unit in the Group’s treasury function. The Group’s treasury function is responsible for managing market risk in the Group. This includes a mandate to trade on its own account in selected wholesale markets. The trading strategies employed by Treasury are desk and market specific with risk tolerances approved on an annual basis through the Group’s Risk Appetite Statement. Risk identification and assessment Market risk is identified and assessed using portfolio sensitivities, Value at Risk (“VaR”) and stress testing. Interest rate gaps and sensitivities to various risk factors are measured and reported on a daily basis. In addition, market risk is measured using the VaR technique. VaR is calculated to a 95% confidence level using a one day holding period and is based on one year of historic data. VaR is augmented using stress testing where various portfolios are revalued using a range of severe but plausible market rate scenarios. The Group Asset and Liability Committee (“ALCo”) is a sub-committee of the Leadership Team and advises the Chief Financial Officer (“CFO”) on the management of the Group’s assets and liabilities (including the management of capital, funding and liquidity, and net interest margin) and on the management of market risks (including structural foreign exchange hedging). ALCo monitors the Group’s IRRBB and approves relevant policies, limits, behavioural assumptions and the Market Risk Strategy and Appetite Statement. Treasury Asset and Liability Management (“TALM”), reporting to the CFO, is responsible for identifying, measuring, monitoring and reporting the Group’s aggregate market risk profile and managing the Group’s financial instruments valuation processes, in addition to estimating the level of capital required to support market risks. The Financial Risk function, reporting to the Chief Risk Officer (“CRO”), is responsible for exercising independent risk oversight and control over the Group’s market risk. In particular, Financial Risk provides oversight on the integrity and effectiveness of the risk and control environment. It provides assurance that the risk dimensions of the business activity are understood and ensures the escalation of any limit excesses as they arise. It proposes and maintains the Market Risk Management Framework and Policies as the basis of the Group’s control architecture for market risk activities, including the annual agreement of market risk limits (subject to the Board approved Risk Appetite Statement). The Financial Risk function is also responsible for the integrity of the market risk measurement methodologies. *Forms an integral part of the audited financial statements 150 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.4 Market risk* Risk management and mitigation Market risk in the Group is managed by Treasury. Treasury proactively manages the market risk on the Group’s balance sheet as well as providing risk management solutions to the core customers of the Group. Within Treasury, available for sale credit spread risk, IRRBB and trading risk are managed by distinct business units. The ALCo is the governance committee for market risk. Market risk is managed against a range of limits approved at ALCo, both forward looking, such as VaR limits and stress test limits, and financial, such as stop-loss limits. These limits align with the Group’s business strategy through the articulation of an annual financial plan and Risk Appetite Statement. Market risk is managed subject to the Market Risk Management Framework and its associated policies. Credit risk issues inherent in the market risk portfolios are also subject to the credit risk framework that was described in the previous section. Risk monitoring and reporting Quantitative and qualitative information is used at all levels of the organisation, up to and including the Board, to identify, assess and respond to market risk. The actual format and frequency of risk reporting depends on the audience and purpose and ranges from transaction-level control and activity reporting to enterprise level risk profiles. For example, front office and risk functions receive the full range of daily control and activity, valuation, sensitivity and risk measurement reports, while ALCo receives a monthly market risk commentary and summary risk profile. Market risk exposures are reported to the Executive Risk Committee (“ERC”) and Board Risk Committee (“BRC”) on a monthly basis through the CRO Report. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 151 n o i t a m r o n f i l a r e n e G Risk management - 3. Individual risk types 3.4 Market risk* The following table sets out the allocation of financial assets and financial liabilities subject to market risk between trading and non-trading portfolios, showing the principal market risks to which the assets and liabilities are exposed at 31 December 2014 and 31 December 2013: Carrying amount € m Market risk measures Trading Non-trading portfolios € m portfolios € m Risk factors 2014 Assets subject to market risk Cash and balances at central banks Trading portfolio financial assets Derivative financial instruments Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments available for sale Liabilities subject to market risk Deposits by central banks and banks Customer accounts Derivative financial instruments Debt securities in issue Subordinated liabilities and other capital instruments Assets subject to market risk Cash and balances at central banks Disposal groups and non-current assets held for sale(1) Trading portfolio financial assets 5.393 1 2,038 1,865 63,362 9,423 20,185 16,768 64,018 2,334 7,861 1,451 Carrying amount € m 4,132 28 2 Derivative financial instruments 1,629 1,001 Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments available for sale Liabilities subject to market risk Deposits by central banks and banks Customer accounts Derivative financial instruments Debt securities in issue Subordinated liabilities and other capital instruments (1)Includes loans and receivables to customers held for sale. 2,048 65,713 15,598 20,368 23,121 65,667 1,960 8,759 1,352 – – – – – – 923 – – – 1 5,393 Interest rate – Interest rate, credit spreads 1,024 1,014 Interest rate, foreign exchange, – – – – – – 1,150 – – 1,865 63,362 9,423 20,185 16,768 64,018 1,184 credit spreads Interest rate Interest rate Interest rate Interest rate, credit spreads Interest rate Interest rate Interest rate, foreign exchange, credit spreads 7,861 1,451 Interest rate, credit spreads Interest rate, credit spreads Market risk measures Trading Non-trading portfolios € m portfolios € m Risk factors 2013 – – 2 4,132 Interest rate 28 – 628 2,048 65,713 15,598 20,368 23,121 65,667 1,037 Interest rate Interest rate, credit spreads Interest rate, foreign exchange, credit spreads Interest rate Interest rate Interest rate Interest rate, credit spreads Interest rate Interest rate Interest rate, foreign exchange, credit spreads 8,759 1,352 Interest rate, credit spreads Interest rate, credit spreads For details of the interest rate risk gap position for non-trading portfolios refer to note 48 to the consolidated financial statements. *Forms an integral part of the audited financial statements 152 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.4 Market risk* Market risk profile The table below shows the sensitivity of the Group’s banking book to a hypothetical immediate and sustained 100 basis point (“bp”) movement in interest rates on 31 December 2014 and 31 December 2013 and the impact on net interest income over a twelve month period. Sensitivity of projected net interest income to interest rate movements + 100 basis point parallel move in all interest rates – 100 basis point parallel move in all interest rates 2014 € m 21 (25) 2013 € m (50) 8 31 December The above analysis is subject to certain simplifying assumptions such as all interest rate movements occurring simultaneously and in a parallel manner. Additionally, it is assumed that no management action is taken in response to the rate movements. The following table summarises Treasury’s VaR profile for the years ended 31 December 2014 and 2013, measured in terms of Value at Risk. For VaR measurement, AIB employs a 95% confidence interval, a 1-day holding period and a 1-year sample period. Interest rate risk 1 day holding period: Average High Low 31 December VaR (trading book) VaR (banking book) Total VaR 2014 € m 2013 € m 2014 € m 2013 € m 2014 € m 2013 € m 0.1 0.5 – 0.1 0.1 0.6 – 0.2 3.5 5.6 1.2 1.5 1.5 3.9 1.0 2.9 3.5 5.6 1.2 1.5 1.5 3.9 0.9 2.7 The following table sets out the VaR for foreign exchange rate and equity risk for the years ended 31 December 2014 and 2013: 1 day holding period: Average High Low 31 December Foreign exchange rate risk VaR (trading book) 2013 € m 2014 € m 0.04 0.10 0.02 0.03 0.04 0.05 0.02 0.05 Equity risk VaR (trading book) 2014 € m 0.05 0.11 0.02 0.02 2013 € m 0.36 0.73 0.02 0.03 The modest VaR position during 2014 is explained by the very low levels of open risk being run in Treasury across interest rate, foreign exchange and equity positions. Within the interest rate category, Treasury adapted its discretionary position throughout the year in line with its dynamic reappraisal of the risk reward opportunities associated with the evolution of the Euro yield curve. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 153 n o i t a m r o n f i l a r e n e G Risk management - 3. Individual risk types 3.5 Operational risk* Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. It includes legal risk, but excludes strategic and business risk. In essence, operational risk is a broad canvas of individual risk types which include information technology, business continuity, health and safety risks, and legal risk. Operational risk operating model AIB’s operating model for operational risk is designed to ensure the framework outlined below is embedded and executed robustly across the Group. The key principles of the model are: – A strong operational risk function, appropriately staffed and clearly independent of the first line of defence; and – Technology in place to support assessment and mitigation of operational risks. Risk identification and assessment Risk and Control Self-Assessment (‘self-assessment’) is a core process in the identification and assessment of operational risk across the enterprise. The process serves to ensure that key operational risks are proactively identified, evaluated, monitored and reported, and that appropriate action is taken. Self-assessment of risks is completed at business unit level and these are incorporated into the Operational Risk Self Assessment Risk template (“SART”) for the business unit. SARTs are regularly reviewed and updated by business unit management. A materiality matrix is in place to enable the scaling of risks and plans must be developed to introduce mitigants for the more significant risks. Monitoring processes are in place at business and support level and a central Operational Risk Team undertakes risk based reviews to ensure the completeness and robustness of each business unit’s self-assessment, and that appropriate attention is given to the more significant risks. Risk management and mitigation Each business area is primarily responsible for managing its own operational risks. An overarching Operational Risk Management (“ORM”) framework is in place, designed to establish an effective and consistent approach to operational risk management across the enterprise. The ORM framework is also supported by a range of specific policies addressing issues such as information security and continuity and resilience. An important element of the Group’s operational risk management framework is the on-going monitoring through self-assessment of risks, control deficiencies and weaknesses, including the tracking of incidents and loss events. The role of Operational Risk is to review operational risk management activities across the Group including setting policy and promoting best practice disciplines, augmented by an independent assurance process. The Group requires all business areas to undertake risk assessments and establish appropriate internal controls in order to ensure that all components, taken together, deliver the control objectives of key risk management processes. In addition, an insurance programme is in place, including a self insured retention, to cover a number of risk events which would fall under the operational risk umbrella. These include financial lines policies (comprehensive crime/computer crime; professional indemnity/civil liability; employment practices liability; directors and officers liability) and a suite of general insurance policies to cover such things as property and business interruption, terrorism, combined liability and personal accident. Risk monitoring and reporting The primary objective of the operational risk management reporting and control process within the Group is to provide timely, pertinent operational risk information to the appropriate management level so as to enable appropriate corrective action to be taken and to resolve material incidents which have already occurred. A secondary objective is to provide a trend analysis on operational risk and incident data for the Group. The reporting of operational incidents and trend data, as required, at the Executive Risk and Board Risk Committees supports these two objectives. In addition, the Board, Group Audit Committee and the Executive Risk Committee receive summary information on significant operational incidents on a regular basis. Business units are required to review and update their assessment of their operational risks on a regular basis. Operational risk teams undertake review and challenge assessments of the business unit risk assessments. In addition, quality assurance teams, which are independent of the business, undertake reviews of the operational controls in the retail branch networks as part of a combined regulatory/compliance/operational risk programme. *Forms an integral part of the audited financial statements 154 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3.6 Regulatory compliance risk* Regulatory compliance risk is defined as the risk of regulatory sanctions, material financial loss or loss to reputation which the Group may suffer as a result of failure to comply with all applicable laws, regulations, rules, standards and codes of conduct applicable to its activities. Regulatory Compliance is an enterprise-wide function which operates independently of the business. The function is responsible for identifying compliance obligations arising in each of the Group’s operating markets. Regulatory Compliance work closely with management in assessing compliance risks and provide advice and guidance on addressing these risks. Risk-based monitoring of compliance by the business with regulatory obligations is undertaken. Risk identification and assessment The Regulatory Compliance function is specifically responsible for independently identifying and assessing current and forward looking ‘conduct of business’ compliance obligations, as well as Financial Crime regulation and regulation on privacy and data protection. The identification, interpretation and communication roles relating to other legal and regulatory obligations have been assigned to functions with specialist knowledge in those areas. For example, employment law is assigned to Human Resources, taxation law to Group Taxation and prudential regulation to the Finance and Risk functions, with emerging prudential regulations being monitored by the Compliance Upstream unit. Regulatory Compliance undertakes a periodic detailed assessment of the key conduct of business compliance risks and associated mitigants. The Regulatory Compliance function operates a risk framework approach that is used in collaboration with business units to identify, assess and manage key compliance risks at business unit level. These risks are incorporated into the SARTs for the relevant business unit. Risk management and mitigation The Board, operating through the Audit Committee, approves the Group’s compliance policy and the mandate for the Regulatory Compliance function. Management is responsible for ensuring that the Group complies with its regulatory responsibilities. The Leadership Team’s responsibilities in respect of compliance include the establishment and maintenance of the framework for internal controls and the control environment in which compliance policy operates. They ensure that Regulatory Compliance is suitably independent from business activities and that it is adequately resourced. The primary role of the Regulatory Compliance function is to provide direction and advice to enable management to discharge its responsibility for managing the Group’s compliance risks. The principal compliance risk mitigants are risk identification, assessment, measurement and the establishment of suitable controls at business level. In addition, the Group has insurance policies that cover a number of risk events which fall under the regulatory compliance umbrella. Risk monitoring and reporting Regulatory Compliance undertakes risk-based monitoring of compliance with relevant policies, procedures and regulatory obligations. Monitoring can be undertaken by either dedicated compliance monitoring teams, or in collaboration with other control functions such as Group Internal Audit and/or Operational Risk. Risk prioritised annual compliance monitoring plans are prepared based on the risk assessment process. Monitoring is undertaken both on a business unit and a process basis. The annual monitoring plan is reviewed regularly, and updated to reflect changes in the risk profile from emerging risks, changes in risk assessments and new regulatory ‘hotspots’. Issues emerging from compliance monitoring are escalated for management attention, and action plans and implementation dates are agreed. The implementation of these action plans is monitored by Regulatory Compliance . Regulatory Compliance report to the Group General Counsel and independently to the Board, through the Audit Committee, on the effectiveness of the processes established to ensure compliance with laws and regulations within its scope. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 155 n o i t a m r o n f i l a r e n e G Risk management - 3. Individual risk types 3.7 Structural foreign exchange risk* Structural foreign exchange risk is the exposure of the Group’s consolidated ratios to changes in exchange rates and results from net investment in subsidiaries, associates and branches, the functional currencies being currencies other than euro. The Group is exposed to foreign exchange risk as it translates foreign currencies into euro at each reporting period and the currency profile of the Group’s capital may not necessarily match that of its assets and risk-weighted assets. Exchange differences on structural exposures are recognised in ‘other income’ in the financial statements. The Group ALCo monitors structural foreign exchange risk and the foreign exchange sensitivity of consolidated capital ratios. This impact is measured in terms of basis points sensitivities using scenario analysis. The amount of structural foreign exchange risk is not material to the Group. 3.8 Pension risk* Pension risk is the risk that the funding position of the Group’s defined benefit schemes would deteriorate to such an extent that the Group would be required to make additional contributions above what is already planned to cover its pension obligations towards current and former employees. Furthermore, IAS pension deficits as reported are now a deduction from capital under CRD IV which came into force on 1 January 2014. The Group maintains a number of defined benefit pension schemes for current and former employees, further details of which are included in note 11 to the consolidated financial statements. These defined benefit schemes were closed to future accrual from the 31 December 2013. Approval was received from the Pensions Authority in 2013 in relation to a funding plan up to January 2018 with regard to regulatory Minimum Funding Standard requirements of the AIB Group Irish Pension Scheme. In the United Kingdom, the Group has established an asset backed funding vehicle to provide the required regulatory funding to the UK Scheme. While the Group has taken certain risk mitigating actions, a level of volatility associated with pension funding remains due to potential financial market fluctuations and possible changes to pension and accounting regulations. This volatility can be classified as market risk and actuarial risk. Market risk arises because the estimated market value of the pension scheme assets may decline or their investment returns may reduce due to market movements. Actuarial risk arises due to the risk that the estimated value of the pension scheme liabilities may increase due to changes in actuarial assumptions. The ability of the pension schemes to meet the projected pension payments is managed by the Trustees through the dynamic diversification of the investment portfolios across geographies and asset classes. As the schemes are closed to future accrual, each Trustee Board has commenced a process of de-risking their investment strategy to reduce market risk. . *Forms an integral part of the audited financial statements 156 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Governance and oversight 1. The Board and Executive Officers 2. Report of the Directors 3. Schedule to Report of the Directors 4. Corporate Governance statement 5. Remuneration report 6. Supervision and Regulation Page 158 161 163 167 179 185 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 157 157 n o i t a m r o n f i l a r e n e G Governance and oversight – 1. The Board and Executive Officers Certain information in respect of the Directors and Executive Officers is set out below. Richard Pym – Chairman – Non-Executive Director and Nomination and Corporate Governance Committee Chairman Mr Pym was co-opted to the Board on 13 October 2014 as Chairman Designate and Non-Executive Director and was appointed Chairman with effect from 1 December 2014. He is a Chartered Accountant with extensive experience in financial services having held a number of senior roles including Group Chief Executive Officer of Alliance & Leicester plc. He is Chairman of Nordax Bank AB (publ) and UK Asset Resolution Limited, the entity which manages, on behalf of the UK Government, the run off of the Government owned closed mortgage books of Bradford & Bingley plc and NRAM plc. Mr Pym is a former Chairman of The Co-operative Bank plc, BrightHouse Group plc, Halfords Group plc and a former Non-Executive Director of The British Land Company plc, Old Mutual plc and Selfridges plc. Mr Pym is a member of the Remuneration Committee and Chairman of the Nomination and Corporate Governance Committee. (Age 65) Simon Ball BSc (Economics), FCA – Non-Executive Director Mr Ball is currently the Non-Executive Deputy Chairman and Senior Independent Director of Cable & Wireless Communications plc, a Non-Executive Director of Commonwealth Games England, and Non-Executive Chairman of Anchura Group Limited. Prior to this, he served as Group Finance Director of 3i Group plc and the Robert Fleming Group, held a series of senior finance and operational roles at Dresdner Kleinwort Benson and was Director General, Finance, for HMG Department for Constitutional Affairs. Mr Ball, who joined the Board in October 2011, has been a member of the Board Risk Committee since November 2011 and a member of the Nomination and Corporate Governance Committee, since February 2013. He was appointed Chairman of the Nomination and Corporate Governance Committee in June 2013 to oversee the process to appoint a new Non-Executive Chairman and stood down from that role in December 2014 following the Chairman’s appointment. (Age 54) Mark Bourke* B.E., ACA, AITI - Chief Financial Officer Mr Bourke joined AIB in April 2014 as Chief Financial Officer and member of the Leadership Team and was co-opted to the Board on 29 May 2014. He joined AIB from IFG Group plc where he held a number of senior roles, including Group Chief Executive Officer, Deputy Chief Executive Officer and Finance Director. Mr Bourke began his career at PricewaterhouseCoopers (PwC) in 1989 and is a former partner in international tax services with PwC US in California. He is a member of Chartered Accountants Ireland and the Irish Taxation Institute. (Age 48) Bernard Byrne* FCA – Director of Retail and Business Banking Mr Byrne joined AIB in May 2010 as Group Chief Financial Officer and member of the Leadership Team, was appointed Director of Personal, Business and Corporate Banking in 2011, and took up his current role in 2015. He began his career as a Chartered Accountant with PricewaterhouseCoopers (PwC) in 1988 and joined ESB International in 1994, where he was the Commercial Director for International Investments. In 1998, he took up the post of Finance Director with IWP International plc. He moved to ESB in 2004 where he held the post of Group Finance and Commercial Director until he left to join AIB. Mr Byrne joined the Board in June 2011 and was appointed Non-Executive Director of EBS Limited in July 2011. (Age 46) David Duffy* B.B.S., MA – Chief Executive Officer Mr Duffy joined AIB in December 2011 as Chief Executive Officer and Chair of the Leadership Team. He has held a number of senior roles in the international banking industry including, most recently, the position of Chief Executive Officer at Standard Bank International covering Asia, Latin America, the UK and Europe. He was previously Head of Global Wholesale Banking Network of ING Group and President and Chief Executive Officer of the ING franchises in the US and Latin America. He worked with Goldman Sachs International in various senior positions including Head of Human Resources Europe. Mr Duffy joined the Board in December 2011. (Age 53) Tom Foley BComm, FCA – Non-Executive Director Mr Foley is a former Executive Director of KBC Bank Ireland and has held a variety of senior management and board positions with KBC in Corporate, Treasury and Personal Banking in Ireland and the UK. He was a member of the Nyberg Commission of Investigation into the Banking Sector during 2010 and 2011 and the Department of Finance (Cooney) Expert Group on Mortgage Arrears and Personal Debt during 2010. He qualified as a Chartered Accountant with PricewaterhouseCoopers (PwC) and is a former senior executive with Ulster Investment Bank and is a Non-Executive Director of BPV Finance (International) plc, and IntesaSanPaolo Life Limited. Mr Foley joined the Board in September 2012 and is a member of the Audit Committee and Remuneration Committee. He was appointed Non-Executive Director of EBS Limited in November 2012. (Age 61) 158 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Governance and oversight – 1. The Board and Executive Officers Peter Hagan BSc, Dip BA – Non-Executive Director Mr Hagan is former Chairman and CEO of Merrill Lynch’s US commercial banking subsidiaries, he was also a director of Merrill Lynch International Bank (London), Merrill Lynch Bank (Swiss), ML Business Financial Services and FDS Inc. Over a period of 35 years he has held senior positions in the international banking industry, including as Vice Chairman and Representative Director of the Aozora Bank (Tokyo, Japan). During 2011 and until September 2012, he was a director of each of the US subsidiaries of IBRC. He is at present a consultant in the fields of financial service litigation and regulatory change. He is currently a director and treasurer of 170 East 70th Corp. and a director of the Thomas Edison State College Foundation. Mr Hagan joined the Board in July 2012 and is a member of the Board Risk Committee, the Nomination and Corporate Governance Committee, the Remuneration Committee and the Audit Committee. (Age 66) Jim O’Hara – Non-Executive Director and Remuneration Committee Chairman Mr O'Hara is a former Vice President of Intel Corporation and General Manager of Intel Ireland, where he was responsible for Intel’s technology and manufacturing group in Ireland. He is a Non-Executive Director of Fyffes plc and Chairman of a number of indigenous technology start up companies. He is a past President of the American Chamber of Commerce in Ireland and former board member of Enterprise Ireland. Mr O’Hara joined the Board in October 2010 and has been a member of the Audit Committee, Remuneration Committee and Nomination and Corporate Governance Committee since January 2011, and was appointed Chairman of the Remuneration Committee in July 2012. He was appointed Non-Executive Director of EBS Limited in June 2012. (Age 64) Dr Michael Somers BComm, M.Econ.Sc, Ph.D – Non-Executive Director, Deputy Chairman and Board Risk Committee Chairman Dr Somers is former Chief Executive of the National Treasury Management Agency. He is Chairman of Goodbody Stockbrokers, a Non-Executive Director of Fexco Holdings Limited, Willis Group Holdings plc, Hewlett-Packard International Bank plc, the Institute of Directors, and President of the Ireland Chapter of the Ireland-US Council. He has previously held the posts of Secretary, National Debt Management, in the Department of Finance, and Secretary, Department of Defence. He is a former Chairman of the Audit Committee of the European Investment Bank and Director of the European Investment Bank and former Member of the EC Monetary Committee. Dr Somers was Chairman of the group that drafted the National Development Plan 1989-1993 and of the European Community group that established the European Bank for Reconstruction and Development. He was formerly a member of the Council of the Dublin Chamber of Commerce and a Non-Executive Director of St. Vincent's Healthcare Group Ltd. He joined the Board in January 2010 as a nominee of the Minister for Finance under the Government's National Pensions Reserve Fund Act 2000 (as amended) and has been Chairman of the Board Risk Committee since November 2010. (Age 72) Catherine Woods BA, Mod (Econ) – Senior Independent Non-Executive Director and Audit Committee Chairman Ms Woods is a Non-Executive Director of AIB Mortgage Bank, and Chairman of EBS Limited (from 12 February 2013). She is the Finance Expert on the adjudication panel established by the Government to oversee the rollout of the National Broadband scheme and is a former Vice President and Head of the European Banks Equity Research Team, JP Morgan, where her mandates included the recapitalisation of Lloyds of London and the re-privatisation of Scandinavian banks. Ms Woods is a former director of An Post, and a former member of the Electronic Communications Appeals Panel. She joined the Board in October 2010, has been a member of the Audit Committee and Board Risk Committee since January 2011 and was appointed Chairman of the Audit Committee in July 2011. She was appointed as Senior Independent Non-Executive Director for the AIB Board in January 2015. (Age 52) * Executive Directors Executive Officers (in addition to Executive Directors above) Dominic Clarke, LLB, ACA - Chief Risk Officer Mr Clarke joined AIB in May 2012 as Head of Internal Audit and was appointed to his current role as Chief Risk Officer in November 2014. He was a Managing Director in Deutsche Bank and worked previously for Barclays in the UK and trained as a chartered accountant at PwC’s Banking and Capital Markets practice. He also holds a Law degree. (Age 42) Helen Dooley LLB – Group General Counsel Ms Dooley was appointed to her current role as Group General Counsel and to the Leadership Team in October 2012 and in June 2014 she also assumed responsibility for the Compliance function. Ms Dooley previously held the role of Head of Legal in EBS Limited. Prior to this, she held a number of other senior roles in EBS including Head of Regulatory Compliance and Company Secretary. Ms Dooley began her career in 1992 working principally as a banking and restructuring lawyer with Wilde Sapte solicitors in London, moving to Hong Kong in 1998 to work for Johnson Stokes & Master solicitors and returning to Ireland in 2001 to work for A&L Goodbody solicitors. (Age 46) Allied Irish Banks, p.l.c. Annual Financial Report 2014 159 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Governance and oversight – 1. The Board and Executive Officers Orlagh Hunt BA, FCIPD – Group HR Director Ms Hunt was appointed to her current role and the Leadership Team in September 2012. She joined AIB from RSA (formerly Royal & Sun Alliance) where she was Group HR and Customer Director, based in London with responsibility for driving the HR agenda in 28 countries across the UK, Asia, Middle East, Latin America and Canada. Ms Hunt began her career in HR with Tesco and moved subsequently to Walker Snack Foods. She was appointed Head of Human Resources at AXA Life Assurance in 2000 prior to joining RSA in 2003. (Age 42) Enda Johnson – Head of Corporate Affairs and Strategy Mr Johnson joined AIB as Head of Strategy in May 2012 and was appointed to his current role and the Leadership Team in July 2012. He worked previously as a senior analyst with the National Treasury Management Agency, including a secondment at the Department of Finance. Before joining the National Treasury Management Agency in 2010, he worked with Merrill Lynch in New York, London and California, in their investment banking and equity capital markets divisions. Mr Johnson has a Bachelor of Arts degree in Economics and Bachelor of Science degree in Engineering from Brown University. (Age 35) Fergus Murphy BSc (Mgt), MA, DABS, AMCT, FIBI – Director of Corporate and Institutional Banking Mr Murphy was appointed to the Leadership Team in July 2011, in his former role as Managing Director of EBS Limited, following the acquisition of EBS by AIB. He was subsequently appointed Group Services and Transformation Director in December 2011, Head of Products and Capital Markets in 2012 and took up his current role in January 2015. Before joining EBS Building Society as Chief Executive in January 2008, he held a number of senior positions including Chief Executive of ACC Bank plc, Chief Executive of Rabobank Asia, Global Treasurer and Global Head Investment Book Rabobank International and Managing Director of Rabobank Ireland plc. He is a Board member of the Irish Business and Employers Confederation (“IBEC”) and chairs the IBEC Audit Committee. He is former Chairman of Financial Services Ireland. (Age 51) Brendan O’Connor BA, MBA – Head of Financial Solutions Group Mr O’Connor was appointed to his current role and the Leadership Team in February 2013. He joined AIB in 1984. From 1988 to 2009 he worked in AIB Group Treasury in New York and Dublin before moving to AIB Corporate Banking in 2009. He has held a number of senior roles throughout the organisation including Head of AIB Global Treasury Services and Head of Corporate Banking International. Prior to his most recent appointment he was Head of AIB Business Banking. (Age 49) Steve Reid FCIOBS, MSFA - Managing Director, AIB Group (UK) p.l.c. Mr Reid was appointed to his current role and the Leadership Team in July 2013. He previously worked with National Australia Group Europe where he held a number of senior roles including Retail Banking Director. He also held a number of senior roles in Barclays and Woolwich banks during a career spent exclusively in financial services. (Age 51) Stephen White – BComm - Group Chief Operating Officer Mr White was appointed to his current role and the Leadership Team in July 2014. Prior to this he was based in Melbourne, Australia, where he worked for National Australia Bank (“NAB”). He held a number of senior executive roles with NAB, including Executive General Manager Customer Payments and Processing and Chief Operating Officer of the Business Bank. Prior to this time in Australia he also held a number of senior executive roles in the UK including Clydesdale/Yorkshire Bank, Abbey National and NHS Direct. He was educated at Edinburgh University. (Age 43) 160 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Governance and oversight – 2. Report of the Directors for the year ended 31 December 2014 The Directors of Allied Irish Banks, p.l.c. (‘the Company’) present their report and the audited financial statements for the year ended 31 December 2014. A Statement of the Directors’ responsibilities is shown on page 189. Results The Group’s profit attributable to the ordinary shareholders of the Company amounted to € 915 million and was arrived at as shown in the consolidated income statement on page 223. Dividend There was no dividend paid to ordinary shareholders in 2014. Going concern The Group’s activities are subject to risks and uncertainties as set out on pages 51 to 56. Notwithstanding these risks factors and uncertainties, the Directors have prepared the financial statements on a going concern basis. In making its assessment, the Directors have considered a wide range of information relating to present and future conditions. These have included financial plans approved by the Board in December 2014 covering the period 2015 to 2017, the Restructuring Plan approved by the European Commission in May 2014, liquidity and funding forecasts, and capital resources projections, all of which have been prepared under base and stress scenarios. In addition, the Directors have considered the outlook for the Irish, the eurozone and UK economies and the factors and uncertainties impacting their performance. Furthermore, the Directors have considered the results of the Comprehensive Assessment stress testing conducted by the European Central Bank in conjunction with the Central Bank of Ireland and published in October 2014, which confirm that AIB Group has capital buffers comfortably above minimum requirements under stress test assessment scenarios. Capital Information on the structure of the Company’s share capital, including the rights and obligations attaching to each class of shares, is set out in note 39 and in the Schedule on pages 163 to 164. On 13 May 2014, arising from the decision of AIB not to pay a dividend amounting to € 280 million on the 2009 Preference Shares, the National Pensions Reserve Fund Commission (“NPRFC”)(1) became entitled to bonus shares in lieu and the Company issued 2,177,293,934 new ordinary shares by way of a bonus issue to the NPRFC(1). As at 31 December 2014, some 35.7 million shares (0.007% of issued ordinary shares), purchased in previous years were held as Treasury Shares; see note 40. Accounting policies The principal accounting policies, together with the basis of preparation of the financial statements, are set out on pages 194 to 217. Review of activities The Statement by the Chairman on page 4 to 5, the review by the Chief Executive Officer on pages 6 to 10 and the Operating and financial review on pages 28 to 43 contain a review of the development of the business of the Company during the year, of recent events, and of likely future developments. Directors The following Board changes occurred with effect from the dates shown: – Mr Mark Bourke was appointed Executive Director on 29 May 2014; – Mr Tom Wacker retired as Non-Executive Director on 12 October 2014; i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i – Mr Richard Pym was appointed Non-Executive Director and Chairman Designate on 13 October 2014, and assumed the role of Chairman on 1 December 2014; – Mr David Hodgkinson stood down as Chairman of the Board on 30 November 2014 and retired as Non-Executive Director on 18 December 2014; – Mr Dick Spring retired as Non-Executive Director on 18 December 2014; – On 19 January 2015, AIB advised that Mr David Duffy had informed the Board of his decision to step down as CEO and Executive Director on a date to be agreed. The names of the Directors, together with a short biographical note on each Director, are shown on pages 158 to 160. The appointment and replacement of Directors, and their powers, are governed by law and the Articles of Association, and information on these is set out on pages 165 to 166. (1)National Treasury Management Agency as controller and manager of the Ireland Strategic Investment Fund (NTMA / ISIF with effect 22 December 2014). Allied Irish Banks, p.l.c. Annual Financial Report 2014 161 n o i t a m r o n f i l a r e n e G Governance and oversight – 2. Report of the Directors for the year ended 31 December 2014 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 the Remuneration report on page 183. Directors’ Remuneration The Company’s policy with respect to Directors’ remuneration is included in the Remuneration report on page 179. Details of the total remuneration of the Directors in office during 2014 and 2013 are shown in the Remuneration Report on pages 180 to 184. Substantial Interests in the Share Capital The following substantial interests in the Ordinary Share Capital (excluding shares held as Treasury Shares) had been notified to the Company at 13 May 2014: – NPRFC(1) 99.8%. Corporate Governance The Directors’ Corporate Governance Statement appears on pages 167 to 178 and forms part of this Report. Additional information is included in the Schedule to the Report of the Directors on pages 163 to 166. Political Donations The Directors have satisfied themselves that there were no political contributions during the year, that require disclosure under the Electoral Act 1997. Books of Account The measures taken by the Directors to secure compliance with the Company's obligation to keep proper books of account are the use of appropriate systems and procedures, including those set out in the Internal Control section of the Corporate Governance Statement on pages 177 and 178, 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 page 387; and at the Company's other principal offices, as shown on those pages. Principal Risks and Uncertainties Information concerning the principal risks and uncertainties facing the Company, as required under the terms of the European Accounts Modernisation Directive (2003/51/EEC) (implemented in Ireland by the European Communities (International Financial Reporting Standards and Miscellaneous Amendments) Regulations 2005), is set out in the Risk management section on pages 51 to 56. Branches outside the State The Company has established branches, within the meaning of EU Council Directive 89/666/EEC (implemented in Ireland by the European Communities (Branch Disclosures) Regulations 1993), in the United Kingdom and the United States of America. Auditor The Auditor, Deloitte & Touche, has signified willingness to continue in office in accordance with Section 160(2) of the Companies Act 1963. (1)National Treasury Management Agency as controller and manager of the Ireland Strategic Investment Fund (NTMA / ISIF with effect 22 December 2014). David Duffy Chief Executive Officer Richard Pym Chairman 4 March 2015 162 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Governance and oversight – 3. Schedule to Report of the Directors for the year ended 31 December 2014 Schedule to Report of the Directors Information required to be contained in the Directors’ Annual Report by the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006. As required by these Regulations, the information contained below represents the position as of 31 December 2014. Capital Structure The authorised share capital of the Company is € 1,790,000,000 divided into 702,000,000,000 Ordinary Shares of € 0.0025 each (‘Ordinary Shares’) and 3,500,000,000 2009 Non-Cumulative Preference Shares of € 0.01 each (‘2009 Preference Shares’). The issued share capital of the company is 523,474,125,551 Ordinary Shares and 3,500,000,000 2009 Preference Shares. For so long as the Government Preference Shareholder holds 2009 Preference Shares, subject to certain exceptions, the consent of the Minster will be required for the passing of certain share capital resolutions of the Company, including resolutions relating to: (i) an increase in the authorised share capital; (ii) a re-issue of Treasury Shares; (iii) the issue of any shares; or (iv) the redemption, consolidation, conversion or sub-division of the share capital. The exceptions referred to above include any issue of shares made for the purposes of redeeming or purchasing the 2009 Preference Shares. Rights and Obligations of Each Class of Share The following rights attach to the Ordinary Shares: – The right to receive duly declared dividends, in cash or, where offered by the Directors, by allotment of additional Ordinary Shares. – The right to attend and speak, in person or by proxy, at general meetings of the Company. – The right to vote, in person or by proxy, at general meetings of the Company having, in a vote taken by show of hands, one vote, and, on a poll, a vote for each Ordinary Share held. – The right to appoint a proxy, in the required form, to attend and/or vote at general meetings of the Company. – The right to receive, (by post or electronically), twenty-one days at least before the Annual General Meeting, a copy of the Directors’ and Auditor’s reports accompanied by (a) copies of the balance sheet, profit and loss account and other documents required by the Companies Acts to be annexed to the balance sheet or (b) such summary financial statements as may be permitted by the Companies Acts. – The right to receive notice of general meetings of the Company. – In a winding-up of the Company, and subject to payments of amounts due to creditors and to holders of shares ranking in priority to the Ordinary Shares, repayment of the capital paid up on the Ordinary Shares and a proportionate part of any surplus from the realisation of the assets of the Company. There is attached to the Ordinary Shares an obligation for the holder, when served with a notice from the Directors requiring the holder to do so, to inform the Company in writing not more than 14 days after service of such notice, of the capacity in which the shareholder holds any share of the Company and if such shareholder holds any share other than as beneficial owner to furnish in writing, so far as it is within the shareholder’s knowledge, the name and address of the person on whose behalf the shareholder holds such share or, if the name or address of such person is not forthcoming, such particulars as will enable or assist in the identification of such person and the nature of the interest of such person in such share. Where the shareholder served with such notice (or any person named or identified by a shareholder on foot of such notice), fails to furnish the Company with the information required within the time specified, the shareholder shall not be entitled to attend meetings of the Company, nor to exercise the voting rights attached to such share, and, if the shareholder holds 0.25% or more of the issued Ordinary Shares, the Directors will be entitled to withhold payment of any dividend payable on such shares and the shareholder will not be entitled to transfer such shares except by sale through a Stock Exchange to a bona fide unconnected third party. Such sanctions will cease to apply after not more than seven days from the earlier of receipt by the Company of notice that the member has sold the shares to an unconnected third party or due compliance, to the satisfaction of the Company, with the notice served as provided for above. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i The following rights attach to the 2009 Preference Shares: – The right to receive a non-cumulative cash dividend at a fixed rate of 8% of the subscription price per annum payable annually, at the discretion of the Directors, in arrears on each anniversary of the date of the issue of the shares. – The right to receive this dividend ranks: (a) (b) (c) pari passu with other shares constituting core tier 1 capital (excluding the Ordinary Shares); junior to certain other preferred securities; and in priority to the Ordinary Shares. – In the event that a dividend on 2009 Preference Shares is not paid in cash, the right to receive a bonus issue of Ordinary Shares (‘Bonus Shares’) calculated by dividing the amount of the unpaid dividend by the average price of an Ordinary Share over the 30 trading days prior to the dividend payment date, subject to an adjustment in circumstances where the Bonus Shares are not issued on the dividend payment date. n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 163 Governance and oversight – 3. Schedule to Report of the Directors for the year ended 31 December 2014 – Where the issue of Bonus Shares is deferred, the holders of 2009 Preference Shares are granted voting rights at general meetings of the Company equivalent to the voting rights that would have attached to the Bonus Shares if they had been issued on the relevant dividend payment date (‘Provisional Voting Rights’) provided these shall not be exercisable to vote: (a) against any Directors’ resolution for the issue of core tier 1 securities to redeem or purchase all or any of the 2009 Preference Shares; or (b) on any resolution on any action by the Company in relation to ‘Preferred Securities’ as defined in the Memorandum and Articles of Association. – The right to receive copies of the circulars to shareholders but not to attend, speak or vote at general meetings save while held by a Government Body and then only in the following circumstances and the following manner: (a) (b) on a resolution seeking approval for a change of control of the Company or a sale of all or substantially all of its business; and on a resolution to appoint, re-elect or remove directors. – Subject as provided below, on either of the foregoing resolutions (and while held by a Government Body) the right to cast a number of votes equal to 25% of all votes capable of being cast by shareholders (including the 2009 Preference Shareholder) on a poll at a – general meeting of the Company. If the NPRFC(1) and Government Entities, through their holding of Ordinary Shares (or other securities issued in future), control 25% or more of the total voting rights, then the 2009 Preference Shares will carry no voting rights. If those entities, through their holding of Ordinary Shares (or other securities issued in future), control less than 25% of the total voting rights, then, in respect of resolutions to appoint, re-elect or remove directors and any resolution concerning a proposed change of control of AIB, the 2009 Preference Shares carry the right to “top-up” their total voting rights to 25% of the total voting rights, including the votes attaching to the 2009 Preference Shares. – In a winding up of the Company or a return of capital by the Company (other than a redemption or purchase of shares) the right to receive a repayment of the capital (including premium) paid up, rank as follows: (a) (b) (c) pari passu with the repayment of the paid up nominal value on Ordinary Shares; in priority to the payment of any further amount on Ordinary Shares; and junior to the repayment of capital on all other classes of shares that rank ahead of the Ordinary Shares. – The right while held by a Government Body to appoint directly either (a) 25% of the Directors where the total number of Directors is 15 or less or (b) 4 Directors where the total number of Directors is 16, 17 or 18 (in either case including any Directors nominated by the Minister pursuant to the Government Guarantee Schemes). Redemption of 2009 Preference Shares The following terms and conditions apply in relation to the redemption of the 2009 Preference Shares: – The 2009 Preference Shares will not be redeemable at the option of the holder. – The 2009 Preference Shares may be redeemed or purchased, in whole or in part, at any time subject to the consent of Central Bank/SSM provided that the redemption or purchase is made up of distributable profits and/or the proceeds of an issue of shares constituting core tier 1 capital. – The redemption price for the first five years shall be € 1.00 per 2009 Preference Share, being the original subscription price including premium of each 2009 Preference Share. Thereafter, the redemption price of each 2009 Preference Share will be € 1.25, including premium. – The Company shall be required to redeem all of the 2009 Preference Shares if there are less than 35,000,000 2009 Preference Shares in issue, subject to the Central Bank’s/SSM’s consent. – The Company may redeem or purchase 2009 Preference Shares which are held by a Government Entity without being required to redeem or purchase any 2009 Preference Shares held by another person. – On redemption or purchase of 2009 Preference Shares, the Company will be required to issue any outstanding Bonus Shares. Percentage of Total Share Capital Represented by Each Class of Share The Ordinary Shares represent approximately 98% of the authorised share capital and approximately 97.4% of the issued share capital of the Company. The 2009 Preference Shares represent approximately 2% of the authorised share capital and approximately 2.6% of the issued share capital of the Company. Restrictions on the Transfer of Shares Save as set out below, there are no limitations in Irish law or in the Company’s Articles of Association on the holding of the Ordinary Shares and there is no requirement to obtain the approval of the Company, or of other holders of the Ordinary Shares, for a transfer of Ordinary Shares. (a) The Ordinary Shares are, in general, freely transferable but the Directors may decline to register a transfer of Ordinary Shares upon notice to the transferee, within two months after the lodgement of a transfer with the Company, in the following cases: (i) a lien held by the Company on the shares; (1)National Treasury Management Agency as controller and manager of the Ireland Strategic Investment Fund (NTMA / ISIF with effect 22 December 2014). 164 Allied Irish Banks, p.l.c. Annual Financial Report 2014 (ii) in the case of a purported transfer to an infant or a person lawfully declared to be incapable for the time being of dealing with their affairs; or (iii) in the case of a single transfer of shares which is in favour of more than four persons jointly. – Ordinary Shares held in certificated form are transferable upon production to the Company’s Registrars of the Original Share certificate and the usual form of stock transfer duly executed by the holder of the shares. – Shares held in uncertificated form are transferable in accordance with the rules or conditions imposed by the operator of the relevant system which enables title to the Ordinary Shares to be evidenced and transferred without a written instrument and in accordance with the Companies Act 1990 (Uncertificated Securities) Regulations 1996. – The rights attaching to Ordinary Shares remain with the transferor until the name of the transferee has been entered on the Register of Members of the Company. (b) 2009 Preference Shares are freely transferable provided that the minimum number of 2009 Preference Shares transferred to any one person is not less than 50,000. Exercise of Rights of Shares in Employees’ Share Schemes The AIB Approved Employees’ Profit Sharing Scheme 1998 and the Allied Irish Banks, p.l.c. Share Ownership Plan (UK) provide that voting rights in respect of shares held in trust for employees who are participants in those schemes are, on a poll, to be exercised only in accordance with any directions in writing by the employees concerned to the Trustees of the relevant scheme. Deadlines for exercising Voting Rights Voting rights at general meetings of the Company are exercised when the chairman puts the resolution at issue to the vote of the meeting. A vote decided by a show of hands is taken forthwith. A vote taken on a poll for the election of the Chairman or on a question of adjournment is also taken forthwith and a poll on any other question is taken either immediately, or at such time (not being more than thirty days from the date of the meeting at which the poll was demanded or directed) as the chairman of the meeting directs. Where a person is appointed to vote for a shareholder as proxy, the instrument of appointment must be received by the Company not less than forty-eight hours before the time appointed for holding the meeting or adjourned meeting at which the appointed proxy proposes to vote, or, in the case of a poll, not less than forty-eight hours before the time appointed for taking the poll. Rules Concerning Amendment of the Company’s Articles of Association As provided in the Companies Acts, 1963 to 2013, the Company may, by special resolution, alter or add to its Articles of Association. A resolution is a special resolution when it has been passed by not less than three-fourths of the votes cast by shareholders entitled to vote and voting in person or by proxy, at a general meeting at which not less than twenty-one clear days’ notice specifying the intention to propose the resolution as a special resolution, has been duly given. A resolution may also be proposed and passed as a special resolution at a meeting of which less than twenty-one clear days’ notice has been given if it is so agreed by a majority in number of the members having the right to attend and vote at any such meeting, being a majority together holding not less than ninety per cent in nominal value of the shares giving that right. Rules Concerning the Appointment and Replacement of Directors of the Company – Other than in the case of a casual vacancy, Directors are appointed on a resolution of the shareholders at a general meeting, usually the Annual General Meeting. – No person, other than a Director retiring at a general meeting is eligible for appointment as a Director without a recommendation by the Directors for that person’s appointment unless, not less than forty-two days before the date of the general meeting, written notice by a shareholder, duly qualified to be present and vote at the meeting, of the intention to propose the person for appointment and notice in writing signed by the person to be proposed of willingness to act, if so appointed, shall have been given to the Company. – A shareholder may not propose himself or herself for appointment as a Director. – The Directors have power to fill a casual vacancy or to appoint an additional Director (within the maximum number of Directors fixed by the Company in general meeting) and any Director so appointed holds office only until the conclusion of the next Annual General Meeting following his appointment, when the Director concerned shall retire, but shall be eligible for reappointment at that meeting. – One third of the Directors for the time being (or if their number is not three or a multiple of three, not less than one third), are obliged to retire from office at each Annual General Meeting on the basis of the Directors who have been longest in office since their last appointment. While not obliged to do so, the Directors have, in recent years, adopted the practice of all (those wishing to continue in office) offering themselves for re-election at the Annual General Meeting. – A person is disqualified from being a Director, and their office as a Director ipso facto vacated, in any of the following circumstances: – – – if at any time the person has been adjudged bankrupt or has made any arrangement or composition with his or her creditors generally; if found to be mentally disordered in accordance with law; if the person be prohibited or restricted by law from being a Director; Allied Irish Banks, p.l.c. Annual Financial Report 2014 165 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Governance and oversight – 3. Schedule to Report of the Directors for the year ended 31 December 2014 – – – if, without prior leave of the Directors, he or she be absent from meetings of the Directors for six successive months (without an alternate attending) and the Directors resolve that his or her office be vacated on that account; if, unless the Directors or a court otherwise determine, he or she be convicted of an indictable offence; except in the case of a Government Appointee, if he or she be requested, by resolution of the Directors, to resign his or her office as Director on foot of a unanimous resolution (excluding the vote of the Director concerned) passed at a specially convened meeting at which every Director is present (or represented by an alternate) and of which not less than seven days’ written notice of the intention to move the resolution and specifying the grounds therefore, has been given to the Director; – except in the case of a Government Appointee, if he or she has reached an age specified by the Directors as being that at which that person may not be appointed a Director or, being already a Director, is required to relinquish office and a Director who reaches the specified age continues in office until the last day of the year in which he or she reaches that age; or – in the case of a Government Appointee, if removed from office by the Government Preference Shareholder pursuant to the Articles of Association. – In addition, the office of Director is vacated, subject to any right of appointment or reappointment under the Articles, if: – – – – not being a Director holding for a fixed term an executive office in his or her capacity as a Director, if he or she resigns their office by a written notice given to the Company, upon the expiry of such notice; or being the holder of an executive office other than for a fixed term, the Director ceases to hold such executive office on retirement or otherwise; or the Director tenders his or her resignation to the Directors and the Directors resolved to accept it; or he or she ceases to be a Director pursuant to any provision of the Articles. – Notwithstanding anything in the Articles of Association or in any agreement between the Company and a Director, the Company may, by Ordinary Resolution of which extended notice has been given in accordance with the Companies Acts, remove any Director before the expiry of his or her period of office. – The Minister for Finance has power to nominate such number of non-executive directors equal to either (a) 25 per cent of the Directors when the total number of Directors is 15 or less or (b) 4 Directors where the total number of Directors is 16, 17 or 18. The Powers of the Directors Including in Relation to the Issuing or Buying Back by the Company of its Shares Under the Articles of Association, the business of the Company is to be managed by the Directors who may exercise all the powers of the Company subject to the provisions of the Companies Acts, the Memorandum and Articles of Association of the Company and to any directions given by special resolution of a general meeting. The Articles of Association further provide that the Directors may make such arrangement as may be thought fit for the management, organisation and administration of the Company’s affairs including the appointment of such executive and administrative officers, managers and other agents as they consider appropriate and delegate to such persons (with such powers of sub-delegation as the Directors shall deem fit) such functions, powers and duties as the Directors may deem requisite or expedient. Pursuant to resolution of the shareholders, in accordance with the provisions of the Companies Acts, the Directors are unconditionally authorised until 26 July 2016 to exercise all the powers of the Company to allot relevant securities up to the aggregate nominal amount of € 6,892,692,445. By such authority, the Directors may make offers or agreements which would, or might, require the allotment of such securities after 26 July 2016. Any Treasury Shares for the time being held by the Company may, by decision of the Directors, be re-issued off market. Where Treasury Shares are re-issued for the purposes of the AIB Approved Employees’ Profit Sharing Scheme 1998, the Allied Irish Banks, p.l.c. Share Ownership Plan (UK), the AIB Group Share Option Scheme or the AIB Group Performance Share Plan 2005, the minimum price at which a Treasury Share may be re-issued is the issue price as provided for in such a scheme. In all other circumstances the minimum price shall be 95% of the Appropriate Price. The “Appropriate Price” is the average of the closing quotation prices of the Ordinary Shares for the five business days immediately preceding the day on which the Treasury Share is re-issued, as published in the Irish Stock Exchange Daily Official List (or any successor publication thereto or any equivalent publication for securities admitted to trading on the Enterprise Securities Market). For any business day on which there is no dealing on the Ordinary Shares on that Exchange, the minimum price will be the price equal to (i) the mid-point between the high and low market guide prices and for the Ordinary Shares as published in the Irish Stock Exchange Daily Official List (or any successor publication thereto or any equivalent publication for securities admitted to trading on the Enterprise Securities Market); or (ii) if there is only one such market guide price so published, the price so published. The maximum price at which a Treasury Share may be re-issued off-market is 120% of the Appropriate Price. 166 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Governance and oversight – 4. Corporate Governance statement Corporate Governance arrangements and practices AIB’s Governance Framework encompasses the leadership, direction and control of AIB and its subsidiaries (collectively referred to as ‘AIB’, the ‘Group’ or the ‘Company’), reflects best practice standards, guidelines and statutory obligations and ensures that the organisation and control arrangements are appropriate to governance of the Group’s strategy, operations and mitigation of related material risks. The Framework underpins effective decision making and accountability and is the basis on which we conduct our business and engage with our customers and stakeholders. The Group’s governance arrangements include: – – – – – – – – – a Board of Directors of sufficient size and expertise, the majority of whom are independent Non-Executive Directors, to oversee the operations of the Group; a Chief Executive Officer to whom the Board has delegated responsibility for the day-to-day running of the Group, ensuring an effective organisation structure, the appointment, motivation and direction of Senior Executive Management, and for the operational management, compliance and performance of all the Group’s businesses; an Executive Leadership Team comprising strong and diverse management capabilities; a clear organisational structure with well defined, transparent and consistent lines of responsibility; a well-documented and executed delegation of authority framework; a framework and policy architecture which comprises a comprehensive and coherent suite of frameworks, policies, procedures and standards covering business and financial planning, corporate governance and risk management; effective structures and processes to identify, manage, monitor and report the risks to which the Group is or might be exposed; adequate internal control mechanisms, including sound administrative and accounting procedures, IT systems and controls, and remuneration policies and practices which are consistent with and promote sound and effective risk management; and strong and functionally independent internal and external audit functions. AIB is subject to the provisions of the Central Bank of Ireland’s Corporate Governance Code for Credit Institutions and Insurance Undertakings (‘the Central Bank Code’ which is available on www.centralbank.ie), including compliance with requirements which specifically relate to ‘major/high impact institutions’, which imposes minimum core standards upon all credit institutions and insurance undertakings licensed or authorised by the Central Bank of Ireland. The Company has also adopted the provisions of the UK Corporate Governance Code (the UK Code which is available on www.frc.org.uk). The Directors believe that the Company complied with the provisions of the Central Bank Code throughout 2014. They also believe the Company is in compliance with the provisions of the UK Code, other than in the following instances: – provision B.7.1 which requires that all directors should be subject to annual election by shareholders; Dr Michael Somers was appointed Non-Executive Director in 2010 as a nominee of the Minister for Finance under the Irish Government’s National Pensions Reserve Fund Act 2000 (as amended), the terms of which do not require him to stand for election or regular re-election by shareholders; – provision C.3.2 which requires that the Board Risk Committee, if composed of independent directors, or the Board should review the company’s internal control and risk management systems, otherwise, this activity should be undertaken by the Audit Committee; review of the company’s internal control and risk management systems is performed by the Board Risk Committee which is chaired by Dr Michael Somers who, as a shareholder appointed director is not deemed independent for the purposes of the UK Code; and – provision D.2.2 with regard to the Remuneration Committee’s delegated responsibility for setting remuneration for all Executive Directors and the Chairman, including pension rights and any compensation payments; under the terms of capital injection agreements with the Irish Government and the Relationship Framework agreed with the Minister, neither the Committee nor the Board has autonomy in that regard. During 2014, there were other provisions of the UK Code with which the Company was not compliant, including those relating to independence of the former Chairman on appointment, of shareholder appointed directors and of the committees of which such directors are, or were, members, the appointment of a Senior Independent Non-Executive Director, and the formulation of a Board Diversity Policy, matters which have since been resolved. AIB’s corporate governance practices also reflect Irish company law, the Listing Rules of the Enterprise Securities Market of the Irish Stock Exchange and, in relation to the UK businesses, UK company law. Allied Irish Banks, p.l.c. Annual Financial Report 2014 167 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Governance and oversight – 4. Corporate Governance statement The Board of Directors The Board is responsible for corporate governance, encompassing leadership, direction and control of AIB and its subsidiaries (collectively referred to as ‘AIB’ or the ‘Group’), and is accountable to shareholders for financial performance. While arrangements have been made by the Directors for delegation of the management, organisation and administration of the Company’s affairs, the following matters are specifically reserved for decision by the Board: – – – – – – – – to retain primary responsibility for corporate governance within the Company at all times and oversee the efficacy of governance arrangements; to determine the Company's strategic objectives and policies, and to ensure that the necessary financial and human resources and operational capabilities are in place for the Company to meet its objectives; to approve the annual financial plan, interim and annual financial statements, operating and capital budgets, major acquisitions and disposals, and risk appetite limits, frameworks and relevant policies; to appoint the Chairman of the Board, Board Directors, Chief Executive Officer and Members of the Leadership Team, to address related succession planning, and to approve, where appropriate, the removal of persons in charge of Control Functions; to endorse the appointment of people who may have a material impact on the risk profile of the Company and monitor on an ongoing basis their appropriateness for the role; to render an account of the Company's activities to its shareholders; to protect the assets of the Company taking into account the interests of the shareholders and the employees in general with appropriate regard for the interests of other stakeholders; and to put in place and monitor procedures designed to ensure that the Company complies with the law and good corporate citizenship. The Board is responsible for approving high level policy and strategic direction in relation to the nature and scale of risk that AIB is prepared to assume in order to achieve its strategic objectives. The Board ensures that an appropriate system of internal controls is maintained and reviews its effectiveness. Specifically the Board: – – – – sets the Group’s Risk Appetite, incorporating risk limits; approves Risk Frameworks, incorporating risk strategies, policies, and principles; approves stress testing and capital plans under the Group’s Internal Capital Adequacy Assessment Process (“ICAAP”); and approves other high-level risk limits as required by Credit, Capital, Liquidity and Market policies. The Board receives regular updates on the Group’s risk profile through the Chief Risk Officer’s monthly report, and relevant updates from the Chairman of the Board Risk Committee. An overview of the Board Risk Committee’s activities is detailed on pages 173 and 174. AIB has received significant support from the Irish State (‘the State’) in the context of the financial crisis because of its systemic importance to the Irish financial system, as a result of which the State holds c. 99.8% of the issued ordinary shares of the Company. The relationship between AIB and the State as shareholder is governed by a Relationship Framework (‘the Framework’). Within the Framework, the Board retains full responsibility and authority for all of the operations and business of the Group in accordance with its legal and fiduciary duties and retains responsibility and authority for ensuring compliance with the regulatory and legal obligations of the Group. The names of the Directors, with brief biographical notes, are shown on pages 158 and 160. Chairman The Chairman’s responsibilities include the leadership of the Board, ensuring its effectiveness, setting its agenda, ensuring that the Directors receive adequate, accurate and timely information, facilitating the effective contribution of the Non-Executive Directors, ensuring the proper induction of new directors, the on-going training and development of all directors, and reviewing the performance of individual directors. Mr Richard Pym was appointed Chairman Designate on 13 October 2014 and assumed the role of Non-Executive Chairman with effect from 1 December 2014. Mr David Hodgkinson stood down as Non-Executive Chairman on 30 November 2014 and retired from the Board on 18 December 2014. The role of the Chairman is separate from the role of the Chief Executive Officer, with clearly-defined responsibilities attaching to each; these are set out in writing and agreed by the Board. 168 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Chief Executive Officer The Chief Executive Officer (“CEO”) is responsible for the day-to-day running of the Group, ensuring an effective organisation structure, the appointment, motivation and direction of senior executive management, and for the operational management of all the Group’s businesses. Mr David Duffy was appointed CEO on 12 December 2011. On 19 January 2015, AIB advised that Mr Duffy had informed the Board of his decision to step down as CEO and Executive Director to pursue a career opportunity overseas. Mr Duffy will remain in position to support the Board in identifying his successor with his final departure date to be agreed. The Board has commenced a process to appoint a permanent successor to the role, subject to all relevant approvals. Senior Independent Non-Executive Director The Senior Independent Non-Executive Director is available to shareholders if they have concerns which contact through the normal channels of Chairman or CEO have failed to resolve, or for which such contact is considered by the shareholder(s) concerned to be inappropriate. Ms Catherine Woods was appointed Senior Independent Non-Executive Director with effect from 30 January 2015. Company Secretary The Directors have access to the advice and services of the Company Secretary, Mr David O’Callaghan, who is responsible for ensuring that Board procedures are followed and that applicable rules and regulations are complied with. Board meetings The Chairman sets the agenda for each Board meeting. The Directors are provided with relevant papers in advance of the meetings to enable them to consider the agenda items, and are encouraged to participate fully in the Board’s deliberations. The Board held fourteen scheduled meetings during 2014, and one additional out-of-course meeting. Attendance at Board meetings and meetings of Committees of the Board is reported on below. During a number of Board meetings, the Non-Executive Directors met in the absence of the Executive Directors, in accordance with good governance standards. A number of Non-Executive Directors of the Parent Company are also Non-Executive Directors of the Company’s major regulated subsidiary companies, namely AIB Group (UK) p.l.c., AIB Mortgage Bank and EBS Limited. Board membership It is the policy of the Board that a majority of the Directors should be Non-Executive. At 31 December 2014, there were 7 Non-Executive Directors and 3 Executive Directors. The Board deems the appropriate number of Directors to meet the requirements of the business to be between 10 and 14. Non-Executive Directors are appointed so as to maintain an appropriate balance on the Board, and to ensure a sufficiently wide and relevant mix of backgrounds, skills and experience to provide strong and effective leadership and appropriate challenge to executive management. There is a procedure in place to enable the Directors to take independent professional advice, at the Group’s expense. The Group holds insurance cover to protect Directors and Officers against liability arising from legal actions brought against them in the course of their duties. Performance evaluation During 2014, the Board retained the services of Boardroom Review to undertake an independent evaluation of the Board’s performance. Boardroom Review have been undertaking such reviews for a number of years and have worked with a variety of FTSE and other companies across many sectors. The results of the review which included recommendations for minor modifications to the workings of the Board and its Committees, were presented to the Board and adopted. The Chairman meets annually with each Director individually to review their performance. These reviews include discussion of, inter alia, the Director’s individual contributions and performance at the Board and relevant Board Committees, the conduct of Board meetings, the performance of the Board as a whole and its committees, compliance with Director-specific provisions of the Central Bank Code, the requirements of the Central Bank of Ireland’s Fitness and Probity Regulations, and other specific matters which the Chairman and/or Directors may wish to raise. Attendance at Board and Committee meetings is one of a number of important factors considered in evaluating Directors’ performance, and a table showing each Board Member’s attendance at such meetings is shown on the following page and separately within the commentary on each of the Board Committees on subsequent pages. Allied Irish Banks, p.l.c. Annual Financial Report 2014 169 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Governance and oversight – 4. Corporate Governance statement Attendance at scheduled Board and Board Committee Meetings Board (scheduled) Board (out of course) Audit Committee Board Risk Remuneration Committee Committee A B A 10 B 10 A B Nomination and Corporate Governance Committee A 6 B 6 Name Directors Simon Ball Mark Bourke (appointed 29 May 2014) Bernard Byrne David Duffy Tom Foley Peter Hagan David Hodgkinson (retired 18 December 2014) Jim O’Hara Richard Pym (appointed 13 October 2014) Dr Michael Somers Dick Spring (retired 18 December 2014) Tom Wacker (retired 12 October 2014) A 14 9 14 14 14 14 14 14 3 14 14 11 B 14 9 14 14 14 14 14 14 3 14 11 9 Catherine Woods 14 14 A 1 1 1 1 1 1 1 1 1 1 1 1 B 1 1 1 1 1 1 1 0 1 1 1 1 4 4 4 4 3 4 4 4 6 6 6 6 6 6 6 6 5 6 13 3 13 2 10 10 13 13 10 13 9 13 10 10 10 9 10 10 Column A indicates the number of scheduled meetings held during 2014 which the Director was eligible to attend; Column B indicates the number of meetings attended by each Director during 2014. Terms of appointment Non-Executive Directors are generally appointed for a three-year term, with the possibility of renewal for a further three years; the term may be further extended, on the recommendation of the Nomination and Corporate Governance Committee. Dr Michael Somers was appointed Non-Executive Director in 2010 as a nominee of the Minister for Finance under the Irish Government’s National Pensions Reserve Fund Act 2000 (as amended) for a three year term to 31 December 2012. Dr Somers was reappointed a Non-Executive Director, under the same regime, for a further period of one year with effect from 1 January 2013, and for a further two years with effect from 1 January 2014. Following appointment, in accordance with the requirements of the Articles of Association, Directors are required to retire at the next Annual General Meeting (“AGM”), and may go forward for reappointment, and are subsequently required to make themselves available for re-appointment at intervals of not more than three years. Since 2005, all directors have retired from office at each AGM and have offered themselves for reappointment with the exception of directors appointed by the Government. Under the terms of the Government’s capital injection agreements, Government appointed directors are not, and have not been, required to stand for election or regular re-election by shareholders. Letters of appointment, as well as dealing with appointees’ responsibilities, stipulate that a specific time commitment is required from Directors. A copy of the standard terms of the letter of appointment of Non-Executive Directors is available on request from the Company Secretary. The Board has determined that all Non-Executive Directors in office at December 2014, namely Mr Simon Ball, Mr Tom Foley, Mr Peter Hagan, Mr Jim O’Hara, Mr Richard Pym, Dr Michael Somers and Ms Catherine Woods are independent in character and judgement and free from any business or other relationship with the Company or the Group that could affect their judgement. In 2011, the Central Bank of Ireland confirmed that Dr Somers should be considered independent for the purposes of the Central Bank Code. Notwithstanding Dr Somers designation as non-independent under the UK Code arising from his appointment by the Irish State as shareholder, the Board is satisfied that Dr Somers exercises independence of thought and action in fulfilling his duties as a Non-Executive Director. 170 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Induction and professional development There is an induction process for new directors, the contents of which varies for Executive and Non-Executive Directors. In respect of the latter, the induction is designed to provide familiarity with the Group and its operations, and comprises the provision of relevant briefing material, including details of the Group’s strategic, business and financial plans, and a programme of meetings with the Chief Executive Officer and the Senior Management of businesses and support and control functions. A programme of targeted and continuous professional development is in place for Non-Executive Directors. Board Committees The Board is assisted in the discharge of its duties by a number of Board Committees, whose purpose it is to consider, in greater depth than would be practicable at Board meetings, matters for which the Board retains responsibility. The composition of such Committees is reviewed annually by the Board. A description of these Committees, each of which operates under Terms of Reference approved by the Board, and their membership, is given later in this section. The minutes of all meetings of Board Committees are circulated to all Directors, for information and are formally noted by the Board. Papers for all Board Committee meetings are also made available to all Directors, irrespective of membership. This provides an opportunity for Directors who are not members of those Committees to seek additional information or to comment on issues being addressed at Committee level. The Terms of Reference of the Audit Committee, the Board Risk Committee, the Nomination and Corporate Governance Committee and the Remuneration Committee are available on AIB’s website: www.aibgroup.com. In carrying out their duties, Board Committees are entitled to take independent professional advice, at the Group’s expense, where deemed necessary or desirable by the Committee Members. Audit Committee Members: Ms Catherine Woods, Chairman; Mr Tom Foley; Mr Peter Hagan (from 25 September 2014); Mr Jim O’Hara; Mr Tom Wacker (retired from the Board 12 October 2014). Member attendance during 2014: Tom Foley Jim O’Hara Peter Hagan Catherine Woods Tom Wacker Current Member Current Member Current Member Current Member Former Member A 13 13 3 13 10 B 13 13 2 13 9 Column A indicates the number of Committee meetings held during 2014 which the Member was eligible to attend; Column B indicates the number of meetings attended by each Member during 2014. The Audit Committee comprises four Non-Executive Directors whom the Board has determined have the collective skills and relevant financial experience to enable the Committee to discharge its responsibilities. The Audit Committee has oversight responsibility for: – – – – the quality and integrity of the Group’s accounting policies, financial statements and disclosure practices; compliance with relevant laws, regulations, codes of conduct and “conduct of business” rules; the independence and performance of the External Auditor (“the Auditor”) and the Group Internal Auditor; and the adequacy and performance of systems of internal control and the management of financial and non-financial risks. These responsibilities are discharged through its meetings with and receipt of reports from the Auditor, the Chief Financial Officer, the Group Internal Auditor, the Chief Risk Officer, the Group General Counsel and the Head of Compliance each of whom, attend the Committee’s meetings by invitation. Other senior executives also attend by invitation where appropriate. The following, whilst not intended to be exhaustive, is a summary of the activities undertaken by the Committee in the past year in the discharge of its responsibilities. The Committee: i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i – reviewed the Group’s annual and interim financial statements prior to approval by the Board, including: the Group’s accounting policies and practices; the minutes of the Group Disclosure Committee (an Executive Committee whose role is to ensure the compliance of AIB Group Financial Information with legal and regulatory requirements prior to external publication); reports on compliance; effectiveness of internal controls; and the findings, conclusions and recommendations of the Auditor and Group Internal Auditor; – in the context of reviewing the financial statements, engaged with management in respect of accounting matters, the most significant of which related to: – the assessment that the preparation of the financial statements on a going concern basis remained appropriate; the level of provisions for impairment on loans and receivables as at 31 December 2014; n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 171 Governance and oversight – 4. Corporate Governance statement – the engagement with customers in financial difficulty and associated loan restructuring activity, where the Committee received updates from Management on the operational procedures and processes in place to implement approved forbearance solutions and products, and on the associated accounting considerations and treatments; the basis of recognition of deferred tax assets in Ireland and the UK; and retirement benefit obligations and related accounting treatment and disclosure requirements; – – – considered other matters where Management judgement was important to the results and financial position of the Group. Following input from the Auditor as appropriate, the Committee satisfied itself that Management’s estimates, judgements and disclosures were appropriate and in compliance with financial reporting standards. A detailed analysis of the significant matters is provided in the ‘critical accounting policies and estimates’ (on pages 218 to 222); – provided advice to the Board in respect of the Annual Financial Report, confirming that the Committee is satisfied that the Annual Financial Report for the year ended 31 December 2014, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company’s performance, business model and strategy; reviewed the scope of the independent audit, and the findings, conclusions and recommendations of the Auditor; satisfied itself through regular reports from the Group Internal Auditor, the Chief Financial Officer, the Chief Risk Officer, the Auditor and the Head of Compliance that the system of internal controls over financial reporting was effective; received regular updates from Group Internal Audit, including monthly reports detailing Internal Audit reports issued during the previous month, control issues identified and related remediating actions, and rolling quarterly updates on related progress; received rolling updates from the Chief Risk Officer and the Head of Compliance to satisfy itself that the Group was in compliance with all regulatory and compliance obligations and considered key developments and emerging issues, the operation of the Speak-Up process and key interactions with regulators in the various jurisdictions; reviewed the minutes of all meetings of subsidiary companies’ Audit Committees, requesting and receiving further clarification on issues when required, and met with, and received annual reports from, the subsidiary Audit Committee chairmen; and held formal confidential consultations during the year separately with the Auditor, the Chief Risk Officer and the Group Internal – – – – – – Auditor, in each case with only Non-Executive Directors present. Internal Audit The Committee provides assurance to the Board regarding the independence and performance of the Group Internal Audit function. The Committee considered and approved the Internal Audit annual audit plan and the adequacy of resources allocated to the function. Throughout the year, the Chairman of the Committee met with the Group Internal Auditor between scheduled meetings of the Committee to discuss forthcoming agendas for Committee meetings and material issues arising, and the Committee met with the Group Internal Auditor in confidential session once during 2014, in the absence of management. The Group Internal Auditor has unrestricted access to the Chairman of the Audit Committee. The Committee is responsible for making recommendations in relation to the Group Internal Auditor, including appointment, replacement, and remuneration, in conjunction with the Remuneration Committee, and confirming the Group Internal Auditor’s independence. In November 2014, the then Group Internal Auditor was appointed to the role of Chief Risk Officer. The Committee is engaged with Management and the Nomination and Corporate Governance Committee regarding the appointment of a suitable replacement. External Audit Deloitte & Touche was appointed Auditor by shareholders at the Company’s AGM in 2013 following a competitive tender process which was overseen by the Members of the Audit Committee, who led interviews with and assessment of the short-listed candidates and made a final recommendation to the Board on the appointment. The Committee provided oversight in relation to the Auditor’s effectiveness and relationship with the Group, including agreeing the Auditor’s terms of engagement, remuneration, and monitoring the independence and objectivity of the Auditor, including approving, within pre-determined limits approved by the Board, the range and nature of non-audit services provided and related fees (see note 15 on page 248). The Committee considered the detailed audit plan in respect of the annual and interim financial statements, and the Auditor’s findings, conclusions and recommendations arising from the interim review and annual audit. The Committee, through consideration of the work undertaken, confidential discussions with the Auditor and based on feedback received from management in respect of the audit process, satisfied itself with regard to the Auditor’s effectiveness. The Committee met with the Auditor in confidential session twice during 2014, in the absence of management, and the Committee Chairman met with the Auditor between scheduled meetings of the Committee to discuss material issues arising. 172 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Board Risk Committee Members: Dr Michael Somers, Chairman; Mr Simon Ball; Mr Peter Hagan, Mr Dick Spring (retired from the Board on 18 December 2014) and Ms Catherine Woods. Member attendance during 2014: Simon Ball Peter Hagan Dr Michael Somers Dick Spring Catherine Woods Current member Current member Current member Former member Current member A 10 10 10 10 10 B 10 10 10 9 10 Column A indicates the number of Committee meetings held during 2014 which the Member was eligible to attend; Column B indicates the number of meetings attended by each Member during 2014. The Board Risk Committee assists the Board in proactively fostering sound risk governance within the Group through ensuring that risks are appropriately identified and managed, and that the Group’s strategy is informed by, and aligned with, the Board approved risk appetite. The Board Risk Committee comprises four Non-Executive Directors whom the Board has determined have the collective skills and relevant experience to enable the Committee to discharge its responsibilities. To ensure co-ordination of the work of the Board Risk Committee with the risk related considerations of the Audit Committee, the Chairman of the Audit Committee is also a member of the Board Risk Committee. The Board Risk Committee has responsibility for: – – providing oversight and advice to the Board in relation to current and potential future risks facing the Group and risk strategy in that regard, including the Group’s risk appetite and tolerance; the effectiveness of the Group’s risk management infrastructure; – monitoring and reviewing the Group’s risk profile, risk trends, risk concentrations and risk policies; – considering and acting upon the implications of reviews of risk management undertaken by Group Internal Audit and/or external third parties. The responsibilities of the Committee are discharged through its meetings and commissioning, receiving and considering reports from the Chief Risk Officer, the Chief Credit Officer, the Chief Financial Officer, the Group Internal Auditor and other members of management. The following attend the Committee’s meetings by invitation: the Auditor, the Chief Executive Officer, the Chief Financial Officer, the Chief Risk Officer, the Chief Credit Officer, and the Group Internal Auditor. Other senior executives also attend, where appropriate. The following, while not intended to be exhaustive, is a summary of the key items considered, reviewed and/or approved or recommended by the Committee during the past year: – monthly reports from the Chief Risk Officer which provided an overview of key risks including liquidity and funding, capital adequacy, credit risk, market risk, regulatory risk, business risk, conduct risk and related mitigants; periodic reports and presentations from Management and the Chief Credit Officer regarding the credit quality, performance, provision levels and outlook of key credit portfolios within the Group; items of a risk related nature, including: – – – – – – – the governance and organisational framework; the risk appetite framework and risk appetite statement; the funding and liquidity policy, strategy and related stress tests; risk frameworks and policies, including those relating to (i) credit and credit risk, (ii) capital management, (iii) financial risk, including market risk, and (iv) conduct risk; and capital planning, including consideration of the Group ICAAP reports and related firm wide stress test scenarios; i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i − reports from management on a number of specific areas in order to ensure that appropriate management oversight and control was evident, including: (a) Anti-Money Laundering/Financial Sanctions policies and frameworks; (b) significant operational risk events and potential risks; (c) credit risk performance and trends, including days past due and monthly overview of significant credit transactions; (d) the operating model for material outsourcing; and (e) regulatory developments, including business preparedness for the introduction of the Single Supervisory Mechanism (“SSM”) in November 2014; – presentations from the individual businesses on their high level risks and related mitigants; n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 173 Governance and oversight – 4. Corporate Governance statement – management’s plans and progress in meeting the actions required in the Central Bank of Ireland’s Risk Mitigation Programme; and – the Group’s Risk Management infrastructure including actions taken to strengthen the Group’s risk management governance, people skills and system capabilities. The Committee is also responsible for making recommendations in relation to the Chief Risk Officer, including appointment, replacement, and remuneration, in conjunction with the Remuneration Committee, and confirming the Chief Risk Officer’s independence. In November 2014, Mr Peter Rossiter resigned as Chief Risk Officer and was succeeded by Mr Dominic Clarke. The Committee meets individually on an annual basis with the Chief Risk Officer, Chief Credit Officer and the Group Internal Auditor in confidential session, in the absence of management. The Chief Risk Officer has unrestricted access to the Chairman of the Board Risk Committee. Nomination and Corporate Governance Committee Members: Mr Richard Pym, Chairman (from 19 December 2014); Mr Simon Ball, (Chairman from 13 June 2013 to 19 December 2014); Mr David Hodgkinson (retired from the Board on 18 December 2014); Mr Peter Hagan, Mr Jim O’Hara, Dr Michael Somers; Mr Dick Spring (retired from the Board on 18 December 2014). Member attendance during 2014: Simon Ball David Hodgkinson Peter Hagan Jim O’Hara Dr Michael Somers Dick Spring Current member Former member Current member Current member Current member Former member A 6 6 6 6 6 6 B 6 6 6 6 5 6 Column A indicates the number of Committee meetings held during 2014 which the Member was eligible to attend; Column B indicates the number of meetings attended by each Member during 2014. The Nomination and Corporate Governance Committee’s responsibilities include: recommending candidates to the Board for appointment as Directors, reviewing the size, structure, composition, diversity and skills of the Board, the Board Committees and subsidiary company Boards and the independence of Non-Executive Directors, reviewing Board and Senior Executive succession planning, and monitoring the Group’s corporate social responsibilities and activities concerning customers, staff, the marketplace, the environment and the community. The following, while not intended to be exhaustive, is a summary of the key items considered, reviewed and/or approved or recommended by the Committee during the past year: – – the appointment of a successor as Chairman of the Board following an extensive candidate search and evaluation process; the schedule of matters reserved for the Board; – Board skills and succession planning; – – – – – – – appointments to key executive positions; compliance with the Central Bank of Ireland and UK Corporate Governance Codes; the independence of individual Directors and the Board; consideration of appropriate external service providers to conduct the Board’s performance evaluation; leadership development and succession planning; formulation of a Board Diversity Policy and agreement of meaningful targets for female membership of the Board; and alignment of corporate social responsibility strategy and initiatives with the Company’s overall strategy. Board appointments The search for suitable candidates for the Board is a continuous process, and recommendations for appointment are made based on merit and objective criteria, having regard for the skills, experience and diversity requirements of the Board. In addressing appointments to the Board, the Nomination and Corporate Governance Committee prepares a role specification having regard for the skills and experience required for any particular role. The services of experienced third party professional search firms are retained for non-executive director appointments. The typical process involves the search firm identifying an appropriate pool of candidates based on the Committee’s specification and providing independent assessments of the candidates for the Committee’s consideration. The Committee works with the search firm to produce a shortlist of candidates from the pool who are then contacted by the firm to assess their interest in the role and availability. A series of 174 Allied Irish Banks, p.l.c. Annual Financial Report 2014 meetings and interviews may be conducted with potential candidates, at different stages in the process, by the search firm, the Chairman and members of the Committee. A comprehensive due diligence process is undertaken which includes candidates’ self-certification of probity and financial soundness and external checks involving a review of various publicly available sources. The due diligence process facilitates the Committee in satisfying itself as to the candidate’s independence, fitness and probity, and capacity to devote sufficient time to the role. A final recommendation is made to the Board by the Committee. The Relationship Framework specified by the Minister for Finance, which governs the relationship between the Company and the State as shareholder, requires the Board to obtain the written consent of the Minister in accordance with a pre-determined consent/ consultation procedure (“the procedure”) before appointing, reappointing or removing the Chairman or Chief Executive Officer, and to consult with the Minister in accordance with the procedure in respect of all other Board appointments proposed. The processes described above were followed during 2014 for the selection and appointment of Mr Richard Pym as Chairman, with Korn Ferry Whitehead Mann (“KFWM”) having been retained to support that appointment. KFWM has also worked with the Group on executive and other non-executive searches and in support of executive leadership development. Diversity Employee diversity and inclusion in AIB is addressed through policy, practices and values which recognise that a productive workforce comprises different work styles, cultures, generations, genders and ethnic backgrounds and oppose all forms of unlawful or unfair discrimination. The efficacy of related policy and practices and the embedding of Company values is overseen by the Board. The Board recognises and embraces the benefits of diversity among its own Members, including diversity of skills, experience, background, gender, ethnicity and other qualities, and is committed to achieving the most appropriate blend and balance of diversity possible over time. To this end, the Board approved a Board Diversity Policy during February 2015 which states that the Board’s aim, with regard to gender diversity, is to ensure that the percentage of females on the Board reaches or exceeds 25 per cent by the end of 2016 and thereafter. The Nomination and Corporate Governance Committee is responsible for developing measurable objectives to effect the implementation of this policy and for monitoring progress towards achievement of the objectives. The policy and performance relative to the target will be reviewed annually by the Committee in conjunction with Board succession and skills planning. Remuneration Committee Members: Mr Jim O’Hara (Chairman); Mr Tom Foley; Mr Peter Hagan; Mr David Hodgkinson (retired from the Board on 18 December 2014); Mr Richard Pym (from 19 December 2014). Member attendance during 2014: Tom Foley Peter Hagan Jim O’Hara David Hodgkinson Current member Current member Current member Former member A 4 4 4 4 B 3 4 4 4 Column A indicates the number of Committee meetings held during 2014 which the Member was eligible to attend; Column B indicates the number of meetings attended by each Member during 2014. The Remuneration Committee’s responsibilities include recommending to the Board: Group remuneration policies and practices; the remuneration of the Chairman of the Board (which matter is considered in his absence); and, performance-related and share-based incentive schemes when appropriate. The Committee also determines the remuneration of the Chief Executive Officer, and, in consultation with the Chief Executive Officer, the remuneration of other Executive Directors, when in office, and the other members of the Leadership Team, under advice to the Board. The Remuneration Committee is also required to review the remuneration components of Identified Staff who are individuals classified by AIB as ‘material risk takers’ in accordance with the Remuneration Guidelines of the European Banking Authority (“EBA”). Remuneration matters of a significant nature are also considered by the Board. AIB’s Remuneration Policy is currently governed by the Subscription and Placing Agreements in place with the Irish State and encompasses all financial benefits available to employees across the Group. Allied Irish Banks, p.l.c. Annual Financial Report 2014 175 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Governance and oversight – 4. Corporate Governance statement The following, while not intended to be exhaustive, is a summary of the key items considered, reviewed and/or approved or recommended by the Committee during 2014: – – – – – the proposed remuneration of the incoming Chairman; compliance with CRD IV remuneration related provisions and the Central Bank of Ireland’s guidelines on the remuneration of sales staff; the tender process for the appointment of external Independent Remuneration Consultants; the 2013 Annual Financial Report remuneration disclosures and the 2013 Remuneration Disclosure Report; and the Terms of Reference of the Remuneration Committee were also reviewed in 2014 by the Committee and updated to reflect minor administrative changes. Directors’ remuneration Details of the total remuneration of the Directors in office during 2014 and 2013 are shown in the Remuneration Report on pages 180 to 184. Relations with shareholders The Group has a number of procedures in place to allow its shareholders and other stakeholders to stay informed about matters affecting their interests. In addition to this Annual Financial Report, which is only sent to those shareholders who request it, the following communication tools are used by the Group: Shareholders’ Report The Shareholders’ Report (‘the Report’) is a summary version of AIB’s Annual Financial Report. This Report, which covers AIB’s performance in the previous year, is sent to shareholders who have opted to receive it instead of the full Annual Financial Report. This summary report does not form part of the Annual Financial Report and is referred to for reference purposes only. Website The website, www.aibgroup.com, contains, for the previous five years, the Annual Financial Report, the Interim Report/Half-yearly Financial Report, and the Annual Report on Form 20-F for relevant years. The Group’s presentation to fund managers and analysts of annual and interim financial results are also available on the Company’s website. For the period 2008 to 2013, the Annual Financial Report and the Annual Report on Form 20-F have been combined. None of the information on the website is incorporated in, or otherwise forms part of, this Annual Financial Report. Annual General Meeting (“AGM”) All shareholders are invited to attend the AGM and to participate in the proceedings. At the AGM, it is practice to give a brief update on the Group’s performance and developments of interest for the year to date. Separate resolutions are proposed on each separate issue and voting is conducted by way of poll. The votes for, against, and withheld, on each resolution, including proxies lodged, are subsequently published on AIB’s website. Proxy forms provide the option for shareholders to direct their proxies to withhold their vote. It is usual for all Directors to attend the AGM and to be available to meet shareholders before and after the meeting. The Chairmen of the Board Committees are available to answer questions about the Committees’ activities. A help desk facility is available to shareholders attending. The Company’s 2015 AGM is scheduled to be held on Tuesday, 28 April 2015, at the Head Office at Bankcentre, Ballsbridge, Dublin 4, and it is intended that the Notice of the Meeting will be posted to shareholders at least 21 days before the meeting, in accordance with statutory requirements. Accountability and Audit Accounts and Directors’ Responsibilities The Statement concerning the responsibilities of the Directors in relation to the financial statements appears on page 189. Going Concern The Group’s activities are subject to risk factors and uncertainties as set out on pages 51 to 56. Notwithstanding these risks and uncertainties, the Directors have prepared the financial statements on a going concern basis as they are satisfied, having considered the risks and uncertainties impacting the Group, that is has the ability to continue in business for the period of assessment. 176 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Directors’ Statement on Risk Management and Internal Controls The Board of Directors is responsible for the effective management of risks and opportunities and for the system of internal control in the Group. The Group operates a continuous risk management process which identifies and evaluates the key risks facing the Group and its subsidiaries. The system of internal control is designed to ensure that there is thorough and regular evaluation of the nature and extent of risks and the ability of the Group to react accordingly, rather than to eliminate risk. This is done through a process of identification, measurement, monitoring and reporting, which provides reasonable, but not absolute, assurance against material misstatement or loss. This process includes an assessment of the effectiveness of internal control, which was in place for the full year under review up to the date of approval of the accounts, and which accords with the Central Bank Code and the UK Corporate Governance Code. Supporting this process, the Group’s system of internal control is based on the following: Board governance and oversight – The Board reviews the effectiveness of the system of internal control on a continuous basis supported by a number of sub-committees including a Board Risk Committee (“BRC”), an Audit Committee, a Remuneration Committee and a Nomination and Corporate Governance Committee. – The BRC is responsible for fostering sound risk governance within the Group, ensures risks within the Group are appropriately identified, managed and controlled and ensures that the Group’s strategy is informed by, and aligned with, the Group’s Risk Appetite Statement. – The Audit Committee reviews various aspects of internal control, including the design and operating effectiveness of the financial reporting framework, the Group’s statutory accounts and other published financial statements and information. It also ensures that no restrictions are placed on the scope of the statutory audit or the independence of the Internal Audit and Regulatory Compliance functions. – The Audit Committee’s review of the Business Governance Assurance process at regular intervals throughout the year forms an integral part of its assessment of the internal control environment. – The Chief Financial Officer (“CFO”), the Chief Risk Officer (“CRO”) and the Group Internal Auditor are involved in all meetings of the Audit Committee and BRC. – AIB’s remuneration policies are set and governed by the Remuneration Committee whose purpose, duties and membership are to ensure that remuneration policies and practices are consistent with and promote effective risk management. – The Nomination and Corporate Governance Committee’s responsibilities include, amongst others, recommending candidates to the Board for appointment as Directors and reviewing the size, structure and composition of the Board and the Board Committees. – Risk management committees are in place with approved terms of reference (“ToR”) that operate under delegated authority from the Board and Leadership Team. Executive risk management and control – At the executive level, a Leadership Team is in place with responsibility for establishing business strategy, risk appetite, enterprise risk management and control. – The Group operates a ‘three lines of defence’ framework in the delineation of accountabilities for risk governance. – The Executive Risk Committee (“ERC”) which is a sub-committee of the Leadership Team reviews the effectiveness and application of the Group’s risk frameworks and policies, risk profile, risk concentrations and adherence to Board approved risk appetite and limits. – The Group Asset and Liability Committee (“ALCo”) is a sub-committee of the Leadership Team and acts as the Group’s strategic balance sheet management forum that combines a business decisioning and risk governance mandate. – There is a centralised risk control function headed by the CRO who is responsible for ensuring that risks are identified, measured, monitored and reported on, and for reporting on risk mitigation actions. – The Risk function is responsible for establishing and embedding risk management frameworks, ensuring that material risk policies are reviewed, and reporting on adherence to risk limits as set by the Board of Directors. – The Group’s risk profile is measured against its risk appetite on a monthly basis and exceptions are reported to the ERC and BRC via the monthly CRO report. Material breaches of risk appetite are escalated to the Board and reported to the Central Bank of Ireland/SSM. – The centralised Credit function is headed by a Chief Credit Officer who reports to the CRO. – There is an independent Compliance function which provides advisory services to the Group and which monitors and reports on conduct of business and financial crime compliance and forthcoming regulations across the Group, and on management’s focus on compliance matters. – There is an independent Group Internal Audit function which is responsible for independently assessing the effectiveness of the Group’s corporate governance, risk management and internal controls and which reports directly to the Chairman of the Audit Committee. – AIB employees who perform Pre-Approved Controlled functions/Controlled functions meet the required standards as outlined in AIB’s Fitness and Probity programme. Allied Irish Banks, p.l.c. Annual Financial Report 2014 177 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Governance and oversight – 4. Corporate Governance statement For further information on the Risk Management framework of the Group see pages 57 to 59 of this report. Given the work of the Board, BRC, Audit Committee and representations made by the Executive that appropriate actions are in place to address any shortcoming in the control framework identified, the Board is satisfied that there was an effective system of control in place throughout the year. Code of conduct In June 2012, the Group adopted a new Code of Conduct in relation to business ethics that applies to all employees (the “Code of Conduct”). The Code of Conduct sets out the key standards for behaviour and conduct that apply to all employees, and includes particular requirements regarding responsibilities of management for ensuring that business and support activities are carried out to the highest standards of behaviour. The application of the Code of Conduct is underpinned by policies, practices and training which are designed to ensure that the Code is understood and that all employees act in accordance with it. The Code of Conduct was extensively revised and re-launched to staff in September 2014. As part of the implementation of the Code of Conduct, the Group encourages its employees to raise any concerns of wrongdoing through a number of channels, both internal and external (Speak-Up policy). One such channel includes a confidential external helpline. Employees are assured that if they raise a concern in good faith, the Group will not tolerate any victimisation or unfair treatment of the employee as a result. The Protected Disclosure Act 2014 (Republic of Ireland) came into law in July 2014 and provides statutory protection for whistleblowers in relation to reporting potential wrongdoing in the workplace. An extensive review of the Speak Up policy in 2014 addressed the requirements of the Protected Disclosure Act 2014, as well as the UK Public Interest Disclosure Act 1998 (as amended 2013) and the recommendations of the UK Whistleblowing Commission (2013). The Code of Conduct and supporting policies are subject to annual review and update to the Board. 178 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Governance and oversight – 5. Remuneration report Board Remuneration Committee AIB’s Remuneration Policy is set and governed by the Remuneration Committee in accordance, currently, with relevant provisions of the Subscription and Placing Agreements in place with the Irish State and the Relationship Framework specified by the Minister for Finance. The Remuneration Policy encompasses all financial benefits available to employees across the Group. Details of the Remuneration Committee membership, the number of meetings and the matters considered during 2014 are set out in the Corporate Governance Statement on page 175. The Committee’s Terms of Reference may be viewed in the Corporate Governance section of the Group website at www.aibgroup.com. Remuneration Policy and Governance AIB’s Remuneration Policy provides the framework by which AIB seeks to reward employees while also supporting the Group’s long term strategic objectives. The Board recognises the need to embed the right skill-sets and customer centric employee behaviours which drive the achievement of sustainable growth for all stakeholders. The Board further aims to ensure that policy and reward decisions facilitate the Bank in attracting, retaining and motivating high calibre individuals, and provide fair, competitive remuneration and promote effective risk management, consistent with the bank’s risk appetite statement. During 2014, the Remuneration Policy was updated to incorporate the provisions of the Capital Requirements Directive (CRD IV) which came into force with effect from 1 January 2014. AIB published its Remuneration Disclosure Report 2013 in May 2014 as part of its Pillar 3 Disclosures. The Disclosure Report summarised AIB’s principal remuneration policies and practices in relation to decision making and governance of remuneration, the link between pay and performance, the remuneration of those staff whose professional activities are considered to have a material impact on AIB’s risk profile and the design features of variable incentive schemes. The Remuneration Disclosure Report 2014 will be included in the Group’s Pillar 3 Disclosures and will be available on AIB’s website. Compliance with Capital Requirements Directive (CRD IV) The Capital Requirements Directive IV (CRD IV) contained a number of additional remuneration provisions which principally related to setting appropriate ratios between fixed and variable remuneration, the application of malus and clawback arrangements and the introduction of qualitative and quantitative criteria for those staff whose professional activities have a material impact on the Group’s risk profile (“Identified Staff”). While the Remuneration Policy was updated in 2014 to reflect these new provisions, there were no bonus or other variable or incentive schemes in operation during 2014 and therefore, the provisions were not applied in practice. Changes in pension arrangements Arising from the Labour Court and Labour Relations Commission recommendations of July 2013 on pay, pensions and future working hours, the AIB Group defined benefit pension schemes closed to future accrual on 31 December 2013. With effect from 1 January 2014, employees were migrated to a new defined contribution scheme with a standard employer contribution of 10% plus an additional matched employer contribution, subject to limits based on age bands of 12%, 15% or 18%. Remuneration Review There were no general salary increases awarded in 2014 as remuneration continued to be closely monitored in line with financial performance and the constraints arising under the Subscription and Placing Agreements. Out of course salary increases were overseen by the Remuneration Committee and managed within tight budgetary parameters, the increases being primarily restricted to retaining key staff and skills or to instances where staff stepped up to expanded roles in light of restructuring or staff departures under the severance schemes. The salaries of Senior Executives within the Bank were managed by the Remuneration Committee in accordance with the Subscription and Placing Agreements. Remuneration was principally comprised of fixed pay and pension provisions. There were no bonus schemes or share incentive schemes in operation during 2014. Allied Irish Banks, p.l.c. Annual Financial Report 2014 179 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Governance and oversight – 5. Remuneration report Directors’ remuneration* The following tables detail the total remuneration of the Directors in office during 2014 and 2013: Remuneration € 000 € 000 € 000 € 000 € 000 € 000 Directors’ fees Parent and Irish subsidiary companies(1) Directors’ fees AIB Group (UK) p.l.c.(2) Salary Annual taxable benefits(3) Pension contribution(4) 2014 Total Executive Directors Mark Bourke (Appointed 29 May 2014) Bernard Byrne David Duffy Non-Executive Directors Simon Ball Tom Foley Peter Hagan David Hodgkinson(1(b)) (Chairman to 30 November 2014, retired on 18 December 2014) Jim O’Hara Richard Pym(1(a)) (Appointed 13 October 2014, Chairman from 1 December 2014) Dr Michael Somers (Deputy Chairman) Dick Spring (retired on 18 December 2014) Tom Wacker(2) (retired on 12 October 2014) Catherine Woods Former Directors Declan Collier(2) Kieran Crowley(2) Stephen L Kingon(2) Anne Maher(5) David Pritchard(2) Other(6) Total 85 90 88 265 100 80 120 77 59 115 1,079 41 44 44 56 50 64 108 266 450 425 1,141 18 30 – 48 53 90 64 337 570 489 207 1,396 85 90 88 265 100 80 120 77 103 115 1,123 56 50 64 41 108 26 2,864 *Forms an integral part of the audited financial statements 180 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Directors’ remuneration* (continued) (1 ) Fees paid to Non-Executive Directors during 2014 were based on the following computations: (a) Mr Richard Pym was appointed a Non-Executive Director on 13 October 2014 and Chairman with effect from 1 December 2014. Mr Pym is paid an annual non-pensionable flat fee of € 365,000 which includes remuneration for all services as a director of Allied Irish Banks, p.l.c.; the fee above is the proportion earned between 13 October and 31 December 2014; (b) Mr David Hodgkinson, who retired as Non-Executive Chairman on 30 November 2014 and as a Director on 18 December 2014, was paid an annual non-pensionable flat fee of € 275,000 during his tenure; the fee above is the proportion earned between 1 January and 18 December 2014; (c) All other Non-Executive Directors are paid a basic, non-pensionable fee of € 65,000 in respect of service as a Director and additional non-pensionable remuneration in respect of other responsibilities, such as through the chairmanship or membership of Board Committees or the board of a subsidiary company, or performing the roles of Deputy Chairman or Senior Independent Non-Executive Director; (2) Current or former Non-Executive Directors of Allied Irish Banks, p.l.c. who also serve as Directors of AIB Group (UK) p.l.c. (“AIB UK”) are separately paid a non-pensionable flat fee, which is agreed and paid by AIB UK, in respect of their service as a Director of that company. In that regard, Messrs. Wacker, Collier, Crowley, Kingon and Pritchard earned fees as quoted during 2014; (3) ‘Annual taxable benefits’ represents a reduced non-pensionable cash allowance in lieu of company car, medical insurance and other contractual benefits following an internal review of pay and benefits in 2012; (4) ’Pension Contribution’ represents agreed payments to a defined contribution scheme to provide post-retirement pension benefits for Executive Directors from normal retirement date. The fees of the Non-Executive Directors are non-pensionable; (5) Ms Anne Maher is a former Non-Executive Director of Allied Irish Banks, p.l.c. who has, since her resignation, continued as a Director of the Corporate Trustee of the AIB Irish Pension Scheme and of the AIB Defined Contribution Scheme, in respect of which she earned fees as quoted; (6) ’Other’ represents the payment of pensions to former Directors or their dependants granted on an ex-gratia basis and are fully provided for in the Statement of Financial Position; (7) All Directors’ fees are subject to (i) Irish tax and other statutory deductions including Pay Related Social Insurance, from which non-Irish resident directors can be exempt, and Universal Social Charge, and (ii) the consent / consultation procedure outlined in the Relationship Framework specified by the Irish Minister for Finance in respect of the relationship between the Irish Minister for Finance and Allied Irish Banks, p.l.c. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 181 n o i t a m r o n f i l a r e n e G Governance and oversight – 5. Remuneration report Directors’ remuneration* (continued) Remuneration Executive Directors Bernard Byrne David Duffy Non-Executive Directors Simon Ball Tom Foley Peter Hagan David Hodgkinson (Chairman) Jim O’Hara Dr Michael Somers (Deputy Chairman) Dick Spring Tom Wacker Catherine Woods Former Directors Declan Collier Kieran Crowley Stephen L Kingon Anne Maher David Pritchard Other Total Directors’ fees Parent and Irish subsidiary companies € 000 Directors’ fees AIB Group (UK) p.l.c. Salary Annual taxable benefits Pension contribution 2013 Total € 000 € 000 € 000 € 000 € 000 85 104 87 275 127 150 77 63 159 1,127 31 35 35 35 47 58 94 361 425 786 30 – 30 99 64 163 490 489 979 85 104 87 275 127 150 77 98 159 1,162 35 47 58 31 94 41 2,447 *Forms an integral part of the audited financial statements 182 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Directors’ remuneration* (continued) Interests in shares The beneficial interests of the Directors and the Secretary in office at 31 December 2014, and of their spouses and minor children, in the Company’s ordinary shares are as follows: Ordinary shares Directors: Simon Ball Mark Bourke Bernard Byrne David Duffy Tom Foley Peter Hagan Jim O’Hara Richard Pym Dr Michael Somers Catherine Woods Secretary: David O’Callaghan **or date of appointment, if later 31 December 2014 1 January 2014** – – – – 100 – – – – – – – 100 – – – 13,437 – 13,437 – 7,490 7,490 Throughout 2014, the Directors were prohibited from dealing in the Company’s shares due to significant ongoing corporate activity and close periods in advance of public disclosures. The following table sets out the beneficial interests of the Directors and Leadership Team (Senior Executive Officers) members of AIB as a group (including their spouses and minor children) at 31 December 2014. Title of class Identity of person or group Ordinary shares Directors and Leadership Team members of AIB as a group Number owned Percent of class 17,659 *** ***The total shares in issue at 31 December 2014, excluding 35,680,114 Treasury Shares, was 523,438,445,437. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2014 183 n o i t a m r o n f i l a r e n e G Governance and oversight – 5. Remuneration report Directors’ remuneration* (continued) Share options No share options were granted or exercised during 2014 and there were no options to subscribe for ordinary shares outstanding in favour of the Executive Directors or Company Secretary at 31 December 2014. The Chairman and the Non-Executive Directors do not participate in the share options plans. The aggregate number of share options outstanding at 31 December 2014 in the names of Executive Directors and members of the Leadership Team was 5,000 as follows: Outstanding as at 31 December 2013: Add: Options held by Senior Executive Officers appointed during 2014 Add: Options granted during 2014 Less: Options exercised during 2014 Less: Options lapsed during 2014 Less: Options held by Senior Executive Officers who left office during 2014 Options outstanding as at 31 December 2014 7,000 – – – (2,000) – 5,000 Performance shares There were no conditional grants of awards of ordinary shares outstanding to Executive Directors or the Secretary at 31 December 2014. Apart from the interests set out above, the Directors and Secretary in office at year-end, and their spouses and minor children, have no other interests in the shares of the Company. There were no changes in the Directors’ and Secretary’s interests shown above between 31 December 2014 and 4 March 2015. The year-end closing price, on the Enterprise Securities Market of the Irish Stock Exchange, of the Company’s ordinary shares was € 0.08 per share; during the year, the price ranged from € 0.07 to € 0.17. Service contracts There are no service contracts in force for any Director with the Company or any of its subsidiaries. *Forms an integral part of the audited financial statements 184 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Governance and oversight – 6. Supervision and Regulation 6.1 Current climate of regulatory change The regulatory landscape for the banking sector continues to evolve with a strong focus on supporting the stability of the banking system and ensuring appropriate resolution and recovery mechanisms are in place post the global financial crisis. The Group is committed to proactively identifying regulatory and compliance obligations arising in each of the Group’s operating markets in Ireland, the United Kingdom and the United States and ensuring the implementation of regulatory change on time. 6.2 Ireland Overview of financial services legislation The development of the banking union framework (committed to at European Union (“EU”) level by heads of state and governments in 2012) progressed in 2014 with the implementation of the EU Single Banking Supervisory Mechanism (“SSM”) and the implementation and transposition of the Capital Requirements Regulation and the Capital Requirements Directive IV (together “CRD IV”). During 2014 the Group’s key focus areas included: SSM; CRD IV; the Banking Recovery and Resolution Directive (Directive 2014/59EU) (" BRRD"); European Markets Infrastructure Regulation (Regulation (EU) 648/2012) (“EMIR”); Protected Disclosures Act 2014; Credit Reporting Act 2013; Central Bank of Ireland’s (“CBI”) Corporate Governance Code for Credit Institutions and Insurance Undertakings; the recast Deposit Guarantee Schemes Directive (Directive 2014/49/EU) (the “DGSD”); the directive on credit agreements relating to residential immovable property (Directive 2014/17/EU), known as the Mortgage Credit Directive (“MCD”) and the CBI’s Guidelines on Variable Remuneration for Sales Staff. Capital Requirements Directive IV (“CRD IV”) CRD IV which, amongst other things, implements Basel III rules in the EU became applicable on 1 January 2014 on a phased basis, with full effect on 1 January 2019. During 2014, the Group focussed on the implementation of CRD IV to ensure the timely alignment with its new requirements. The Group will continue this focus in 2015, with particular emphasis on the various regulatory and the implementing technical standards being published at EU level to support the full implementation process of CRD IV. BRRD BRRD was published in June 2014 and is to come into effect in 2015. The overarching goal of BRRD is to break the linkages between national banking systems and sovereigns. In particular, it is intended to enable authorities to resolve failing banks at a national level (including cross-border banks) to lower the risk of impacting the broader financial system, while sharing the costs of resolution with bank shareholders and creditors. To achieve this objective, the BRRD includes explicit provisions for the 'bail-in' of senior creditors where necessary. The 'bail-in' provisions are not required to be brought into force until the beginning of 2016. During 2014 the Group reviewed and updated its recovery plan that has been submitted to the CBI. During 2015 the Group will complete further updates to the recovery plan and will continue to work with the CBI on resolution planning. EMIR EMIR is intended to increase the stability and transparency of over-the-counter derivative markets in the EU and is being introduced in a phased manner over 2013-2015. It imposes requirements with regard to transacting derivatives, including clearing and margining, reporting to central repositories, and risk mitigation techniques. During 2014, the Group introduced processes to ensure compliance with the new regulatory obligations brought about by EMIR in 2014 and will continue the implementation process throughout 2015 as the additional EMIR regulatory obligations become applicable. Markets in Financial Instruments Directive A recast Directive on Markets in Financial Instruments (Directive 2014/65/EU) (“MiFID II”) and a Regulation on Markets in Financial Instruments (Regulation (EU) No 600/2014) (“MiFIR”) were published in the official journal of the EU in May 2014. MiFID II covers investor protection, transparency rules and organisational requirements. MiFIR covers pre and post trade transparency. MiFID II and MiFIR must be implemented in all EU Member States by quarter one, 2017. Much of the detailed requirements of MiFID II and MiFIR will be set out in the regulatory and implementing technical standards to be developed by the European Securities Market Authority (ESMA) which the Group will focus on during 2015. Allied Irish Banks, p.l.c. Annual Financial Report 2014 185 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Governance and oversight – 6. Supervision and Regulation 6.2 Ireland (continued) CBI Codes and Guidelines On a national level, the Group addressed the regulatory obligations set out in the CBI’s publication of a revised and updated Corporate Governance Code for Credit Institutions and Insurance Undertakings and the CBI’s Guidelines on Variable Remuneration for Sales Staff. 6.3 Regulatory change horizon 2015 - Ireland Throughout 2015, as further regulatory reform continues to emerge from regulators, the Group will continue to focus on the management of regulatory change and its compliance obligations in particular on the DGSD and the MCD. DGSD In June 2014, the DGSD was published by the EU. The DGSD requires the harmonisation of deposit guarantee schemes across Europe focussing on faster payout, improved financing and enhanced customer information. EU Member States will be required to make certain changes to the manner in which their deposit guarantee schemes are operated with the majority of changes to be implemented by 3 July 2015. The DGSD has yet to be transposed into Irish law and the Group is preparing for implementation. MCD The MCD was published in March 2014 and must be implemented by March 2016. The MCD will bring about some key changes in relation to revised pre-contractual information, revised Annual Percentage Rate calculation, restrictions on early repayment and minimum competency levels for staff “manufacturing” mortgages. The MCD has yet to be transposed into Irish law and therefore its final impact is uncertain, however the Group has mobilised a working group to assess the impact of the MCD and prepare for implementation. Central Bank (Supervision and Enforcement) Act 2013 (Section 48) (Housing Loan Requirements) Regulations 2015 (S.I. 47 of 2015) (“Housing Loan Requirements Regulations”) The Housing Loan Requirements Regulations were signed into law on 9 February 2015. Amongst the measures introduced are limits on loan-to-value and loan-to-income for principal dwelling houses and buy-to-lets. CBI Revised SME Lending Code At a national level, the Group is monitoring the expected implementation during 2015 by the CBI of a revised Code of Conduct for Business Lending to Small and Medium Enterprises 2012. Credit Reporting Act 2013 During 2014, the CBI provided a revised timeframe in relation to the implementation of the Credit Reporting Act 2013 with regard to the central credit register. The Group awaits further update from the CBI and will monitor this throughout 2015. Companies Act 2014 The Group is monitoring the expected commencement, during 2015, of the Companies Act 2014. The Group will ensure that, at the commencement date, it is prepared for any measures introduced, including those which will affect the Group’s relationship with its customers, e.g. new classifications of companies and new rules for registering security with the Companies Registration Office. 186 Allied Irish Banks, p.l.c. Annual Financial Report 2014 6.4 United Kingdom During 2014, AIB Group (UK) p.l.c. continued to prioritise compliance with its regulatory obligations in Great Britain and Northern Ireland and will remain focussed on this throughout 2015. Immigration Act The UK Immigration Act 2014 (“Immigration Act”) came into law in December 2014 and prohibits banks and building societies from opening current accounts for persons who do not have leave to remain in the United Kingdom, referred to as ‘disqualified persons. During 2014, AIB Group (UK) p.l.c. addressed the regulatory obligations arising from the Immigration Act and to ensure compliance. Mortgage regulation The Mortgage Market Review brought about significant changes to mortgage regulation in the UK and came into force in April 2014. One of the key changes is that, with limited exceptions, mortgage sales must be on an advised basis. AIB Group (UK) p.l.c. received approval from the Financial Conduct Authority (“FCA”) to provide mortgage advice on regulated mortgage contracts. In 2015, the Prudential Regulatory Authority and FCA will implement the Senior Managers and Certification Regime for UK banks. This will replace the current approved persons regime and is intended to enable regulators to better hold senior managers to account for the quality of their decision making. The exact implementation date is currently unknown but is likely to be in the latter half of the year. 6.5 United States Applicable federal and state securities laws and regulations Although AIB delisted its ordinary shares from the New York Stock Exchange in August 2011, it had continued to be subject to regulation and supervision by the United States Securities and Exchange Commission (the “SEC”). On 9 December 2014, AIB filed a certificate under Form 15F with the SEC. This filing will enable AIB to terminate the registration of its American Depositary Shares (“ADSs”) (representing 10 ordinary shares of EUR 0.0025 each) under Section 12(g) of the Securities Exchange Act 1934 (the “Exchange Act”), and its reporting obligations under Section 13(a) and Section 15(d) of the Exchange Act with the SEC. Upon such filing, AIB’s reporting obligations with the SEC were immediately suspended. The termination of AIB’s registration and reporting obligations are expected to become effective no later than 90 days after the filing of Form 15F. Accordingly, AIB will no longer file its Annual Report on Form 20F with the SEC. Compliance with federal and state banking laws and regulations During 2014, AIB’s state-licensed branch in New York continued to prioritise compliance with its regulatory obligations in the United States and will remain focussed on this throughout 2015. In particular, it will continue to monitor ongoing business activities with regard to the Dodd Frank Act 2010. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 187 n o i t a m r o n f i l a r e n e G Financial statements 1. Statement of Directors’ responsibilities 2. Independent Auditor’s Report 3. Accounting Policies 4. Critical accounting judgements and estimates 5. Consolidated financial statements 6. Notes to the consolidated financial statements 7. Parent company financial statements 8. Notes to the parent company financial statements Page 189 190 193 218 223 230 326 332 188 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Statement of Directors’ responsibilities The following statement which should be read in conjunction with the statement of Auditors' responsibilities set out with their Audit Report, is made with a view to distinguishing for shareholders the respective responsibilities of the Directors and of the Auditor in relation to the financial statements. The Directors are responsible for preparing the Annual Report and the Group and Company financial statements, in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Company financial statements for each financial year. Under that law the directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the EU and have elected to prepare the Company financial statements in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Acts 1963 to 2013. The Directors have also elected to prepare the Group financial statements in accordance with IFRSs as issued by the International Accounting Standards Board ("lASB"). The Group and Company financial statements are required by law and IFRSs as adopted by the EU to present fairly the financial position and performance of the Group and Company: the Companies Acts 1963 to 2013 provide in relation to such financial statements that references in the relevant part of that Act to financial statements giving a true and fair view are references to their achieving a fair presentation. In preparing each of the Group and Company financial statements, the Directors are required to: select suitable accounting policies and then apply them consistently; – – make judgements and estimates that are reasonable and prudent; – state that the financial statements comply with IFRSs as adopted by the EU and IFRSs issued by the IASB; and – prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and Company will continue in business. The Directors are responsible for keeping proper books of account that disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies Acts 1963 to 2013.They are also responsible for taking such steps as are reasonably open to them to safeguard the assets of the Group and Company and to prevent and detect fraud and other irregularities. Under applicable law, the Directors are also responsible for preparing a Directors' Report and reports relating to directors' remuneration and corporate governance that comply with that law and Enterprise Securities Market ("ESM") Rules. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in Ireland governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Each of the Directors confirm, to the best of their knowledge and belief, that: – – – – they have complied with the above requirements in preparing the financial statements; the Group financial statements, prepared in accordance with IFRSs as issued by the IASB and as adopted by the EU, give a true and fair view of the state of the Group's affairs as at 31 December 2014 and of its profit for the year then ended; the Company financial statements prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the state of the Company's affairs as at 31 December 2014; the Directors' report, Business review and Risk management sections, contained in the Annual Report includes a fair review of the development and performance of the business and the financial position of the Group, together with a description of the principal risks and uncertainties faced by the Group; and – the Annual Report, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy. For and on behalf of the Board i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s s t t n n e e m m e e t t a a t t s s l l i i a a c c n n a a n n F F i i Richard Pym Chairman 4 March 2015 David Duffy Chief Executive Officer Allied Irish Banks, p.l.c. Annual Financial Report 2014 189 n o i t a m r o n f i l a r e n e G Independent Auditor’s Report Independent Auditor’s Report to the members of Allied Irish Banks, p.l.c. Opinion In our opinion: – – the Group financial statements give a true and fair view, in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, of the state of the Group’s affairs as at 31 December 2014 and of its profit for the year then ended; the parent company financial statements give a true and fair view, in accordance with IFRSs, as adopted by the European Union as applied in accordance with the provisions of the Companies Acts 1963 to 2013, of the state of the parent company’s affairs as at 31 December 2014; and – the financial statements have been properly prepared in accordance with the Companies Acts, 1963 to 2013. The financial statements comprise the Group financial statements: the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of financial position, the consolidated statement of cash flows and the consolidated statement of changes in equity; and the parent company financial statements: the parent company statement of financial position, the parent company statement of cash flows, and the parent company statement of changes in equity; and the related notes. The financial reporting framework that has been applied in their preparation is Irish law and IFRSs as adopted by the European Union and, as regards the parent company financial statements, as applied in accordance with the provisions of the Companies Acts, 1963 to 2013. Our assessment of risks of material misstatement The assessed risks of material misstatement described below are those that had the greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team: Risk of material misstatement Loan impairment and restructuring The risk that provisions for impairment on loans and receivables Our audit response to the risk We undertook an assessment of the provisioning practices to do not represent an appropriate estimate of the losses incurred. compare them with the requirements of IFRS. This includes the risk that the estimate of cashflows on restructuring cases is not appropriately measured. We tested credit management processes and controls over both new lending and for restructuring transactions; front line The determination of appropriate provisions requires a significant credit monitoring and assessment; the operations and amount of management judgment and relies on available data. controls over collective and latent models; and the work of the credit review function. In examining both sample loan cases and models we challenged management on the judgments made regarding the application of triggers, status of restructures, collateral valuation and realisation time frames; and examined the credit risk functions analysis of data at a portfolio level. We tested samples of the data used in the models together with the calculations in and the output from the models. Where appropriate, this work involved assessing third party valuations of collateral, internal valuation guidelines derived from benchmark data; external expert reports on borrowers’ business plans; and enterprise valuations to determine whether appropriate valuation methodologies were employed and assessing the objectivity of the external experts used. Deferred tax Risk related to the incorrect recognition or measurement of We reviewed the plans and the model used by management deferred taxation. Deferred tax assets are recognised for unused to assess the likelihood of future profitability and challenged tax losses to the extent that it is probable that there will be management’s assessment of a range of positive and sufficient future taxable profits against which the losses can be negative evidence for the projection of long-term future used. The assessment of the conditions for the recognition of a profitability. We reviewed management’s analysis of their deferred tax asset is a critical judgment given the inherent consideration of the “more likely than not” test and reviewed uncertainties associated with projecting profitability over a long the sensitivity analysis disclosed. time period. 190 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Risk of material misstatement IT Controls The Groups IT environment is complex with financial accounting Our audit response to the risk We examined the design and execution of IT controls systems dependent on IT. Deficiencies in the privileged access including those relating to systems access, IT operations and controls over a number of significant applications could have had program change, including mitigating controls where relevant. a significant impact on financial reporting controls and systems. Where deficiencies affected specific applications within our audit scope we extended our control testing to provide assurance over both the compensating controls and the completeness and accuracy of management information used in key controls. Where appropriate we extended the scope of our substantive procedures. Retirement Benefit Obligations The risk that the recognition and measurement of pension and We challenged the appropriateness of key assumptions and other retirement benefit obligations are inappropriate. sensitivities used in determining retirement benefits including discount rates, inflation rates and mortality assumptions. We tested the calculation of the asset and liability. Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any of the risks described above, and we do not express an opinion on these individual matters. Our assessment of materiality We define materiality as the magnitude of misstatement that makes it probable that the economic decisions of a reasonably knowledgeable person relying on the financial statements, would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work. We determined materiality for the Group to be € 75 million, which we set at less than 1% of shareholders equity which we have determined, in our professional judgement, to be one of the principal benchmarks within the financial statements of the Group. We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of € 3.75 million as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements. An overview of the scope of our audit Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. Based on that assessment, we focussed our Group audit scope primarily on the audit work in six legal entities all of which were subject to a full audit, whilst the remaining legal entities were subject to specified audit procedures, where the extent of our testing was based on our assessment of the risks of material misstatement and of the materiality of the Group’s operations in those entities. In addition, audits are performed for entity statutory purposes for all legal entities. At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances. As part of the group audit, the group engagement team issued instructions to all component audit teams, and evaluated the outputs from each audit location. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s s t t n n e e m m e e t t a a t t s s l l i i a a c c n n a a n n F F i i Matters on which we are required to report by the Companies Acts 1963 to 2013 – We have obtained all the information and explanations which we consider necessary for the purposes of our audit; – In our opinion proper books of account have been kept by the parent company; – The parent company balance sheet is in agreement with the books of account; – In our opinion the information given in the Report of the Directors is consistent with the financial statements and the description in the Corporate Governance Statement of the main features of the internal control and risk management systems in relation to the process for preparing the Group financial statements is consistent with the Group financial statements; and – The net assets of the parent company, as stated in the parent company balance sheet 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 2014 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 parent company. n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 191 Independent Auditor’s Report (continued) Matters on which we are required to report by exception Our duty to read other information in the Annual Report Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the annual report is: – materially inconsistent with the information in the audited financial statements; or – – apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of performing our audit; or otherwise misleading. Respective responsibilities of directors and auditors As explained more fully in the Directors’ Responsibilities Statement, the directors are responsible for the preparation of the financial statements that give a true and fair view. Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors. 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 auditor’s 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. Scope of the audit of the financial statements An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report. Gerard Fitzpatrick For and on behalf of Deloitte & Touche Chartered Accountants and Statutory Audit Firm Hardwicke House Hatch Street Dublin 2 Ireland 4 March 2015 192 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Accounting policies* 1 Reporting entity 2 Statement of compliance 3 Basis of preparation 4 Basis of consolidation 5 6 7 Foreign currency translation Interest income and expense recognition Fee and commission income 8 Net trading income 9 Dividend income 10 Operating leases 11 Employee benefits 12 Non-credit risk provisions 13 Income tax, including deferred income tax 14 Impairment of property, plant and equipment, goodwill and intangible assets 15 Impairment of financial assets 16 Determination of fair value of financial instruments 17 NAMA senior bonds 18 Financial assets 19 Financial liabilities 20 Property, plant and equipment 21 Intangible assets 22 Derivatives and hedge accounting 23 Non-current assets held for sale and discontinued operations 24 Collateral and netting 25 Financial guarantees 26 Sale and repurchase agreements (including stock borrowing and lending) 27 Leases 28 Shareholders’ equity 29 Segment reporting 30 Cash and cash equivalents 31 Prospective accounting changes i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i *Forms an integral part of the audited financial statements. Allied Irish Banks, p.l.c. Annual Financial Report 2014 193 193 n o i t a m r o n f i l a r e n e G Accounting policies The significant accounting policies that the Group applied in the preparation of the financial statements are set out in this section. 1 Reporting entity Allied Irish Banks, p.l.c. (‘the parent company’ or ‘the Company’) is a company domiciled in Ireland. The address of the Company’s registered office is Bankcentre, Ballsbridge, Dublin 4, Ireland. The consolidated financial statements include the financial statements of Allied Irish Banks, p.l.c. and its subsidiary undertakings, collectively referred to as the ‘Group’, where appropriate, including certain special purpose entities and are prepared to the end of the financial year. The Group is and has been primarily involved in retail and corporate banking. 2 Statement of compliance The consolidated financial statements have been prepared in accordance with International Accounting Standards and International Financial Reporting Standards (collectively “IFRSs”) as issued by the International Accounting Standards Board (“IASB”) and International Financial Reporting Standards as adopted by the European Union (“EU”) and applicable for the year ended 31 December 2014. The accounting policies have been consistently applied by Group entities and are consistent with the previous year, unless otherwise described. The consolidated financial statements also comply with the Companies Acts 1963 to 2013 and the Communities (Credit Institutions: Accounts) Regulations, 1992 (as amended) and the Asset Covered Securities Acts 2001 and 2007. The parent company financial statements and related notes set out on pages 326 to 380 have been prepared in accordance with International Financial Reporting Standards as issued by the IASB and International Financial Reporting Standards as adopted by the EU as applicable for the year ended 31 December 2014 and with Irish Statute. In publishing the parent company financial statements together with the Group financial statements, AIB has taken advantage of the exemption in paragraph 2 of Regulation 5 of the European Communities (Credit Institutions: Accounts) Regulations, 1992 not to present its parent company income statement, statement of comprehensive income and related notes that form part of these financial statements. 3 Basis of preparation Functional and presentation currency The financial statements are presented in euro, which is the functional currency of the parent company and a significant number of its subsidiaries, rounded to the nearest million. Basis of measurement The financial statements have been prepared under the historical cost basis, with the exception of the following assets and liabilities which are stated at their fair value: derivative financial instruments, financial instruments at fair value through profit or loss, certain hedged financial assets and financial liabilities and financial assets classified as available-for-sale. The financial statements comprise the consolidated income statement, the consolidated statement of comprehensive income, the consolidated and parent company statements of financial position, the consolidated and parent company statements of cash flows, and the consolidated and parent company statements of changes in equity together with the related notes. These notes also include financial instrument related disclosures which are required by IFRS 7 and revised IAS 1, contained in the Financial review and the Risk management sections of this Annual Financial Report. The relevant information on those pages is identified as forming an integral part of the audited financial statements. Use of judgements and estimates The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of certain assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. The estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Since management’s judgement involves making estimates concerning the likelihood of future events, the actual results could differ from those estimates. The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future period affected. The estimates that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the next year are in the areas of loan impairment and impairment of other financial instruments; the recoverability of deferred tax; determination of the fair value of certain financial assets and financial liabilities; and retirement benefit obligations. In addition, the designation of financial assets and financial liabilities has a significant impact on their income statement treatment and could have a significant impact on reported income. A description of these judgements and estimates is set out in ‘Critical accounting judgements and estimates’ on pages 218 to 222. 194 Allied Irish Banks, p.l.c. Annual Financial Report 2014 3 Basis of preparation (continued) Going concern The financial statements for the year ended 31 December 2014 have been prepared on a going concern basis as the Directors are satisfied, having considered the risks and uncertainties impacting the Group, that it has the ability to continue in business for the period of assessment. The period of assessment used by the Directors is twelve months from the date of approval of these annual financial statements. In making its assessment, the Directors have considered a wide range of information relating to present and future conditions. These have included financial plans covering the period 2015 to 2017 approved by the Board in December 2014, the restructuring plan approved by the European Commission in May 2014, liquidity and funding forecasts, and capital resources projections, all of which have been prepared under base and stress scenarios. In formulating these plans, the current Irish economic environment and forecasts for growth and employment were considered as well as the stabilisation of property prices. The Directors have also considered the outlook for the eurozone and UK economies, and the factors and uncertainties impacting their performance. In addition, the Directors have considered the results of the Comprehensive Assessment stress testing conducted by the European Central Bank in conjunction with the Central Bank of Ireland and published in October 2014, which confirm that AIB Group has capital buffers comfortably above minimum requirements under stress test assessment scenarios. The Directors have also considered the principal risks and uncertainties which could materially affect the Group’s future business performance and profitability and which are outlined on pages 51 to 56. The Directors believe that the capital resources are sufficient to ensure that the Group is adequately capitalised both in a base and stress scenario. The Group’s regulatory capital resources are detailed on pages 45 to 49. The Group funding and liquidity profile is outlined on page 139 to 149. In relation to liquidity and funding, the Directors are satisfied, based on AIB’s position in the market place, that in all reasonable circumstances required liquidity and funding from the Central Bank of Ireland/ECB would be available to the Group during the period of assessment. Conclusion On the basis of the above, the Directors believe that it is appropriate to prepare the financial statements on a going concern basis having concluded that there are no material uncertainties related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern over the period of assessment. Adoption of new accounting standards The following standards/amendments to standards have been adopted by the Group and the Company during the year ended 31 December 2014. Amendments to IAS 32 Financial Instruments: Presentation on Offsetting Financial Assets and Financial Liabilities These amendments are effective from 1 January 2014. The amendments clarify that the right of set-off must be currently available and legally enforceable for all counterparties in the normal course of business, as well as in the event of default, insolvency or bankruptcy. The adoption of these amendments did not impact on the presentation of the financial position of the Group. Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosures of Interests in Other Entities and IAS 27 Separate Financial Statements on Investment Entities These amendments, which are effective from 1 January 2014, provide an exception for investment entities to consolidate particular subsidiaries. These subsidiaries should be measured at fair value through profit and loss in the consolidated and separate financial statements. The amendments also set out the disclosure requirements for investment entities. The adoption of these amendments did not impact the Group’s financial position or results. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 195 n o i t a m r o n f i l a r e n e G Accounting policies 3 Basis of preparation (continued) Amendments to IAS 36 Impairment of Assets on Recoverable Amount Disclosures for Non-Financial Assets These amendments, which are effective from 1 January 2014, clarify that the scope of the disclosures about the recoverable amount of impaired assets is limited to those that are based on fair value less costs of disposal. The amendments require an entity to disclose: – – – – – the level of the fair value hierarchy within which the fair value of the asset is categorised; a description of the valuation technique(s) used to measure the fair value less costs of disposal, where the fair value measurement is categorised within Level 2 or Level 3 of the fair value hierarchy; the key assumptions which management has based its determination of fair value less costs of disposal, where the fair value measurement is categorised within Level 2 or Level 3 of the fair value hierarchy; the discount rates used to determine current and previous impairments where the recoverable amount of impaired assets, based on fair value less costs of disposal, was measured using a present value technique; and removal of requirement to disclose recoverable amounts of cash generating units where there is no impairment. The adoption of these amendments will impact the disclosures required for the recoverable amount of impaired non-financial assets where this is based on fair value less costs of disposal. Amendments to IAS 39 Financial Instruments: Recognition and Measurement on Novation of Derivatives and Continuation of Hedge Accounting These amendments, which are effective from 1 January 2014, provide an exception to the requirement to discontinue hedge accounting where a hedging derivative is novated, provided certain criteria are met. Annual improvements Other amendments, resulting from Annual Improvements to IFRSs issued by the IASB which the Group adopted in 2014, did not have any impact on the accounting policies, financial position or performance of the Group. Changes to accounting policies Arising from the adoption of the IFRSs set out above, the following accounting policy was revised effective from 1 January 2014: – Derivatives and hedge accounting (Accounting Policy number 22). 4 Basis of consolidation Subsidiary undertakings A subsidiary undertaking is an investee controlled by the Group. The Group controls an investee when it has power over the investee, is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Subsidiaries are consolidated in the Group’s financial statements from the date on which control commences until the date that control ceases. The Group reassesses whether it controls a subsidiary when facts and circumstances indicate that there are changes to one or more elements of control. Loss of control If the Group loses control of a subsidiary, the Group: (i) derecognises the assets (including any goodwill) and liabilities of the former subsidiary at their carrying amounts at the date control is lost; (ii) derecognises the carrying amount of any non-controlling interests in the former subsidiary at the date control is lost (including any attributable amounts in other comprehensive income); (iii) recognises the fair value of any consideration received and any distribution of shares of the subsidiary; (iv) recognises any investment retained in the former subsidiary at its fair value at the date when control is lost; and (v) recognises any resulting difference of the above items as a gain or loss in the income statement. The Group subsequently accounts for any investment retained in the former subsidiary in accordance with IAS 39 Financial Instruments: Recognition and Measurement, or when appropriate, IAS 28 Investments in Associates and Joint Ventures. 196 Allied Irish Banks, p.l.c. Annual Financial Report 2014 4 Basis of consolidation (continued) Structured entities A structured entity is an entity designed so that its activities are not governed by way of voting rights. The Group assesses whether it has control over such an entity by considering factors such as the purpose and design of the entity; the nature of its relationship with the entity; and the size of its exposure to the variability of returns of the entity. Business combinations The Group accounts for the acquisition of businesses using the acquisition method except for those businesses under common control. Under the acquisition method, the consideration transferred in a business combination is measured at fair value, which is calculated as the sum of: – – – the acquisition date fair value of assets transferred by the Group; liabilities incurred by the Group to the former owners of the acquiree; and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition related costs are recognised in the income statement as incurred. Goodwill is measured as the excess of the sum of: – – – – the fair value of the consideration transferred; the amount of any non-controlling interests in the acquiree; and the fair value of the acquirer’s previously held equity interest in the acquiree, if any; less the net of the acquisition date fair value of the identifiable assets acquired and liabilities assumed. The Group commonly acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets, and income arising thereon, are excluded from the financial statements, as they are not assets of the Group. Non-controlling interests For each business combination, the Group recognises any non-controlling interest in the acquiree either: – – at fair value; or at their proportionate share of the acquiree’s identifiable net assets. For changes in the Group’s interest in a subsidiary that do not result in a loss of control, the Group adjusts the carrying amounts of the controlling and non-controlling interests to reflect the changes in their relative interests in the subsidiary. The difference between the change in value of the non-controlling interest and the fair value of the consideration paid or received is recognised directly in equity and attributed to the equity holders of the parent. Common control transactions The Group accounts for the acquisition of businesses or investments in subsidiary undertakings between members of the Group at carrying value at the date of the transaction unless prohibited by company law or IFRS. This policy also applies to the acquisition of businesses by the Group of other entities under the common control of the Irish Government. Where the carrying value of the acquired net assets exceeds the fair value of the consideration paid, the excess is accounted for as a capital contribution (accounting policy number 28 Shareholders’ equity - capital contributions). On impairment of the subsidiary in the parent company’s separate financial statements, an amount equal to the impairment charge net of tax in the income statement is transferred from capital contribution reserves to revenue reserves. The entire capital contribution is transferred to revenue reserves on final sale of the subsidiary. For acquisitions under common control, comparative data is not restated. The consolidation of the acquired entity is effective from the acquisition date with intercompany balances eliminated at a Group level on this date. Associated undertakings An associated undertaking is an entity over which the Group has significant influence, but not control, over the entity’s operating and financial policy decisions. If the Group holds 20% or more of the voting power of an entity, it is presumed that the Group has significant influence, unless it can be clearly demonstrated that this is not the case. Investments in associated undertakings are initially recorded at cost and increased (or decreased) each year by the Group’s share of the post acquisition net income (or loss), and other movements reflected directly in other comprehensive income of the associated undertaking. Allied Irish Banks, p.l.c. Annual Financial Report 2014 197 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Accounting policies 4 Basis of consolidation (continued) Associated undertakings Goodwill arising on the acquisition of an associated undertaking is included in the carrying amount of the investment. When the Group’s share of losses in an associate has reduced the carrying amount to zero, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations to make payments on behalf of the associate. Where the Group continues to hold more than 20% of the voting power in an investment but ceases to have significant influence, the investment is no longer accounted for as an associate. On the loss of significant influence, the Group measures the investment at fair value and recognises any difference between the carrying value and fair value in profit or loss and accounts for the investment in accordance with IAS 39 Financial Instruments: Recognition and Measurement. The Group’s share of the results of associated undertakings after tax reflects the Group’s proportionate interest in the associated undertaking and is based on financial statements made up to a date not earlier than three months before the period end reporting date, adjusted to conform with the accounting policies of the Group. Since goodwill that forms part of the carrying amount of the investment in an associate is not recognised separately, it is, therefore, not tested for impairment separately. Instead, the entire amount of the investment in an associate is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired. Transactions eliminated on consolidation Intra-group balances and any unrealised income and expenses, arising from intra-group transactions are eliminated on consolidation. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Unrealised gains and losses on transactions with associated undertakings are eliminated to the extent of the Group’s interest in the investees. Consistent accounting policies are applied throughout the Group for the purposes of consolidation. 5 Foreign currency translation Items included in the financial statements of each of the Group’s entities are measured using their functional currency, being the currency of the primary economic environment in which the entity operates. Transactions and balances Foreign currency transactions are translated into the respective entity’s functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are re-translated at the rate prevailing at the period end. Foreign exchange gains and losses resulting from the settlement of such transactions and from the re-translation at period end exchange rates of the amortised cost of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Exchange differences on equities and similar non-monetary items held at fair value through profit or loss are reported as part of the fair value gain or loss. Exchange differences on equities classified as available for sale financial assets, together with exchange differences on a financial liability designated as a hedge of the net investment in a foreign operation are reported in other comprehensive income. Foreign operations The results and financial position of all Group entities that have a functional currency different from the euro are translated into euro as follows: – – – – 198 assets and liabilities including goodwill and fair value adjustments arising on consolidation of foreign operations are translated at the closing rate; income and expenses are translated into euro at the average rates of exchange during the period where these rates approximate to the foreign exchange rates ruling at the dates of the transactions; foreign currency translation differences are recognised in other comprehensive income; and since 1 January 2004, the Group’s date of transition to IFRS, all such exchange differences are included in the foreign currency translation reserve within shareholders’ equity. When a foreign operation is disposed of in full, the relevant amount of the foreign currency translation reserve is transferred to the income statement. When a subsidiary is partly disposed of, the relevant proportion of foreign currency translation reserve is re-attributed to the non-controlling interest. Allied Irish Banks, p.l.c. Annual Financial Report 2014 6 Interest income and expense recognition Interest income and expense is recognised in the income statement for all interest-bearing financial instruments using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument to the net carrying amount of the financial asset or financial liability. The application of the method has the effect of recognising income receivable and expense payable on the instrument evenly in proportion to the amount outstanding over the period to maturity or repayment. In calculating the effective interest rate, the Group estimates cash flows (using projections based on its experience of customers’ behaviour) considering all contractual terms of the financial instrument but excluding future credit losses. The calculation takes into account all fees, including those for any expected early redemption, and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. All costs associated with mortgage incentive schemes are included in the effective interest rate calculation. Fees and commissions payable to third parties in connection with lending arrangements, where these are direct and incremental costs related to the issue of a financial instrument, are included in interest income as part of the effective interest rate. Interest income and expense presented in the consolidated income statement includes: – – Interest on financial assets and financial liabilities at amortised cost on an effective interest method; Interest on financial investments available for sale on an effective interest method; – Net interest income and expense on qualifying hedge derivatives designated as cash flow hedges or fair value hedges which are recognised in interest income or interest expense; and – Interest income and funding costs of trading portfolio financial assets, excluding dividends on equity shares. 7 Fee and commission income Fees and commissions are generally recognised on an accruals basis when the service has been provided, unless they have been included in the effective interest rate calculation. Loan syndication fees are recognised as revenue when the syndication has been completed and the Group has retained no part of the loan package for itself or retained a part at the same effective interest rate as applicable to the other participants. Portfolio and other management advisory and service fees are recognised based on the applicable service contracts. Asset management fees relating to investment funds are recognised over the period the service is provided. The same principle is applied to the recognition of income from wealth management, financial planning and custody services that are continuously provided over an extended period of time. Commitment fees, together with related direct costs, for loan facilities where drawdown is probable are deferred and recognised as an adjustment to the effective interest rate on the loan once drawn. Commitment fees in relation to facilities where drawdown is not probable are recognised over the term of the commitment on a straight line basis. Other credit related fees are recognised as the service is provided except for arrangement fees where it is likely that the facility will be drawn down and which are included in the effective interest rate calculation. 8 Net trading income Net trading income comprises gains less losses relating to trading assets and trading liabilities and includes all realised and unrealised fair value changes. 9 Dividend income Dividend income is recognised when the right to receive dividend income is established. Usually this is the ex-dividend date for equity securities. 10 Operating leases Payments made under operating leases are recognised in the income statement on a straight line basis over the term of the lease. Lease incentives received and premiums paid at inception of the lease are recognised as an integral part of the total lease expense over the term of the lease. Allied Irish Banks, p.l.c. Annual Financial Report 2014 199 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Accounting policies 11 Employee benefits Retirement benefit obligations The Group provides employees with post-retirement benefits mainly in the form of pensions. The Group provides a number of retirement benefit schemes including defined benefit and defined contribution as well as a hybrid scheme that has both defined benefit and defined contribution elements. In addition, the Group contributes, according to local law in the various countries in which it operates, to governmental and other schemes which have the characteristics of defined contribution schemes. The majority of the defined benefit schemes are funded. Full actuarial valuations of defined benefit schemes are undertaken every three years and are updated to reflect current conditions at each year-end reporting date. Scheme assets are measured at fair value determined by using current bid prices. Scheme liabilities are measured on an actuarial basis by estimating the amount of future benefit that employees have earned for their service in current and prior periods and discounting that benefit at the market yield on a high quality corporate bond of equivalent term and currency to the liability. The calculation is performed by a qualified actuary using the projected unit credit method. The difference between the fair value of the scheme assets and the present value of the defined benefit obligation at the year-end reporting date is recognised in the statement of financial position. Schemes in surplus are shown as assets and schemes in deficit, together with unfunded schemes, are shown as liabilities. Actuarial gains and losses are recognised immediately in other comprehensive income. Changes with regard to benefits payable to retirees which represent a constructive obligation under IAS 37 Provisions, Contingent Liabilities and Contingent Assets are accounted for as a negative past service cost. These are recognised in the income statement. The cost of providing defined benefit pension schemes to employees, comprising the service cost and net interest on the net defined benefit liability (asset), calculated by applying the discount rate to the net defined benefit liability (asset), is charged to the income statement within personnel expenses. Remeasurements of the net defined benefit liability (asset), comprising actuarial gains and losses and the return on scheme assets (excluding amounts included in net interest on the net deferred benefit liability (asset)) are recognised in other comprehensive income. Amounts recognised in other comprehensive income in relation to remeasurements of the net defined benefit liability (asset) will not be reclassified to profit or loss in a subsequent period. The Group recognises the effect of an amendment to a defined benefit scheme when the plan amendment occurs, which is when the Group introduces or withdraws a defined benefit scheme, or changes the benefits payable under existing defined benefit schemes. A curtailment is recognised when a significant reduction in the number of employees covered by a defined benefit scheme occurs. Gains or losses on plan amendments and curtailments are recognised in the income statement as a past service cost. The costs of managing the defined benefit scheme assets are deducted from the return on scheme assets. All costs of running the defined benefit schemes are recognised in profit or loss when they are incurred. The cost of the Group’s defined contribution schemes is charged to the income statement in the accounting period in which it is incurred. Any contributions unpaid at the year-end reporting date are included as a liability. The Group has no further obligation under these schemes once these contributions have been paid. Short-term employee benefits Short-term employee benefits, such as salaries and other benefits, are accounted for on an accruals basis over the period during which employees have provided services. Bonuses are recognised to the extent that the Group has a legal or constructive obligation to its employees that can be measured reliably. The cost of providing subsidised staff loans is charged within personnel expenses. Termination benefits Termination benefits are recognised as an expense at the earlier of when the Group can no longer withdraw the offer of those benefits and when the Group recognises costs for a restructuring under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which includes the payment of termination benefits. For termination benefits payable as a result of an employee’s decision to accept an offer of voluntary redundancy, which is not within the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, the Group recognises the expense at the earlier of when the employee accepts the offer and when a restriction on the Group’s ability to withdraw the offer takes effect. 200 Allied Irish Banks, p.l.c. Annual Financial Report 2014 12 Non-credit risk provisions Provisions are recognised for present legal or constructive obligations arising as consequences of past events where it is probable that a transfer of economic benefit will be necessary to settle the obligation, and it can be reliably estimated. When the effect is material, provisions are determined by discounting expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Payments are deducted from the present value of the provision, and interest at the relevant discount rate, is charged annually to interest expense using the effective interest method. Changes in the present value of the liability as a result of movements in interest rates are included in other income. The present value of provisions is included in other liabilities. When a decision is made that a leasehold property will cease to be used in the business, provision is made, where the unavoidable costs of future obligations relating to the lease are expected to exceed anticipated income. Before the provision is established, the Group recognises any impairment loss on the assets associated with the lease contract. Restructuring costs Where the Group has a 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 restructuring, including retirement benefits and redundancy costs, when an obligation exists. The provision raised is normally utilised within twelve months. Future operating costs are not provided for. Legal claims and other contingencies Provisions are made for legal claims where the Group has present legal or constructive obligations as a result of past events and it is more likely than not that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Contingent liabilities are possible obligations whose existence will be confirmed only by the occurrence of uncertain future events or present obligations where the transfer of economic benefit is uncertain or cannot be reliably estimated. Contingent liabilities are not recognised but are disclosed in the notes to the financial statements unless the possibility of the transfer of economic benefit is remote. A provision is recognised for a constructive obligation where a past event has led to an obligating event. This obligating event has left the Group with little realistic alternative but to settle the obligation and the Group has created a valid expectation in other parties that it will discharge the obligation. 13 Income tax, including deferred income tax Income tax comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised in other comprehensive income, in which case it is recognised in other comprehensive income. Income tax relating to items in equity is recognised directly in equity. Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted at the reporting date and any adjustment to tax payable in respect of previous years. Deferred income tax is provided, using the balance sheet liability method, on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax is determined using tax rates based on legislation enacted or substantively enacted at the reporting date and expected to apply when the deferred tax asset is realised or the deferred tax liability is settled. Deferred income tax assets are recognised when it is probable that future taxable profits will be available against which the temporary differences will be utilised. The deferred tax asset is reviewed at the end of each reporting period and the carrying amount will reflect the extent that sufficient taxable profits will be available to allow all of the asset to be recovered. The tax effects of income tax losses available for carry forward are recognised as an asset to the extent that it is probable that future taxable profits will be available against which these losses can be utilised. Deferred and current tax assets and liabilities are only offset when they arise in the same tax reporting group and where there is both the legal right and the intention to settle the current tax assets and liabilities on a net basis or to realise the asset and settle the liability simultaneously. The principal temporary differences arise from depreciation of property, plant and equipment, revaluation of certain financial assets and financial liabilities including derivative contracts, provisions for pensions and other post-retirement benefits, and in relation to acquisitions, on the difference between the fair values of the net assets acquired and their tax base. Allied Irish Banks, p.l.c. Annual Financial Report 2014 201 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Accounting policies 13 Income tax, including deferred income tax (continued) Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the difference will not reverse in the foreseeable future. In addition, the following temporary differences are not provided for: goodwill, the amortisation of which is not deductible for tax purposes, and assets and liabilities the initial recognition of which, in a transaction that is not a business combination, affects neither accounting nor taxable profit. Income tax payable on profits, based on the applicable tax law in each jurisdiction, is recognised as an expense in the period in which the profits arise. 14 Impairment of property, plant and equipment, goodwill and intangible assets Annually, or more frequently where events or changes in circumstances dictate, property, plant and equipment and intangible assets are assessed for indications of impairment. If indications are present, these assets are subject to an impairment review. Goodwill and intangible assets not yet available for use are subject to an annual impairment review. The impairment review comprises a comparison of the carrying amount of the asset or cash generating unit with its recoverable amount. Cash-generating units are the lowest level at which management monitors the return on investment in assets. The recoverable amount is determined as the higher of fair value less costs to sell of the asset or cash generating unit and its value in use. Value in use is calculated by discounting the expected future cash flows obtainable as a result of the asset's continued use, including those resulting from its ultimate disposal, at a market-based discount rate on a pre-tax basis. For intangible assets not yet available for use, the impairment review takes into account the cash flows required to bring the asset into use. The carrying values of property, plant and equipment and intangible assets are written down by the amount of any impairment and this loss is recognised in the income statement in the period in which it occurs. A previously recognised impairment loss may be reversed in part or in full when there is an indication that the impairment loss may no longer exist and there has been a change in the estimates used to determine the asset’s recoverable amount. The carrying amount of the asset will only be increased up to the amount that it would have been had the original impairment not been recognised. Impairment losses on goodwill are not reversed. 15 Impairment of financial assets It is Group policy to make provisions for impairment of financial assets to reflect the losses inherent in those assets at the reporting date. Impairment The Group assesses at each reporting date whether there is objective evidence that a financial asset or a portfolio of financial assets is impaired. A financial asset or portfolio of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the asset and on or before the reporting date (‘a loss event’), and that loss event or events has had an impact such that the estimated present value of future cash flows is less than the current carrying value of the financial asset, or portfolio of financial assets. Objective evidence that a financial asset or a portfolio of financial assets is impaired includes observable data that comes to the attention of the Group about the following loss events: a) significant financial difficulty of the issuer or obligor; b) a breach of contract, such as a default or delinquency in interest or principal payments; c) the granting to the borrower of a concession, for economic or legal reasons relating to the borrower’s financial difficulty that d) e) f) the Group would not otherwise consider; it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for that financial asset because of financial difficulties; or observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the portfolio, including: i adverse changes in the payment status of borrowers in the portfolio; and ii national or local economic conditions that correlate with defaults on the assets in the portfolio. 202 Allied Irish Banks, p.l.c. Annual Financial Report 2014 15 Impairment of financial assets (continued) Incurred but not reported The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant (i.e. individually insignificant). If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics under the collective incurred but not reported (“IBNR”) assessment. An IBNR impair- ment provision represents an interim step pending the identification of impairment losses on an individual asset in a group of financial assets. As soon as information is available that specifically identifies losses on individually impaired assets in a group, those assets are removed from the group. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment. Collective evaluation for impairment For the purpose of collective evaluation of impairment (individually insignificant impaired assets and IBNR), financial assets are grouped on the basis of similar risk characteristics. These characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the counterparty’s ability to pay all amounts due according to the contractual terms of the assets being evaluated. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Impairment loss For loans and receivables and assets held to maturity, the amount of impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate. The amount of the loss is recognised using an allowance account and is included in the income statement. Following impairment, interest income is recognised using the original effective rate of interest which was used to discount the future cash flows for the purpose of measuring the impairment loss. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed by adjusting the allowance account. The amount of the reversal is recognised in the income statement. When a loan has been subjected to a specific provision and the prospects of recovery do not improve, a time will come when it may be concluded that there is no real 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 against the related provision for loan impairment. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the income statement. Collateralised financial assets – Repossessions The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure, costs for obtaining and settling the collateral, and whether or not foreclosure is probable. For loans which are impaired, the Group may repossess collateral previously pledged as security in order to achieve an orderly realisation of the loan. AIB will then offer this repossessed collateral for sale. However, if the Group believes the proceeds of the sale will comprise only part of the recoverable amount of the loan with the customer remaining liable for any outstanding balance, the loan continues to be recognised and the repossessed asset is not recognised. However, if the Group believes that the sale proceeds of the asset will comprise all or substantially all of the recoverable amount of the loan, the loan is derecognised and the acquired asset is accounted for in accordance with the applicable accounting standard. Any further impairment of the repossessed asset is treated as an impairment of the relevant asset and not as an impairment of the original loan. Allied Irish Banks, p.l.c. Annual Financial Report 2014 203 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Accounting policies 15 Impairment of financial assets (continued) Past due loans When a borrower fails to make a contractually due payment, a loan is deemed to be past due. ‘Past due days’ is a term used to describe the cumulative numbers of days that a missed payment is overdue. Past due days commence from the close of business on the day on which a payment is due but not received. In the case of overdrafts, past due days are counted once a borrower: – – – has breached an advised limit; has been advised of a limit lower than the then current outstandings; or has drawn credit without authorisation. When a borrower is past due, the entire exposure is reported as past due, rather than the amount of any excess or arrears. Financial investments available for sale In the case of equity securities classified as available for sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether impairment exists. Where such evidence exists, the cumulative net loss that had previously been recognised in other comprehensive income is recognised in the income statement as a reclassification adjustment. Reversals of impairment of equity securities are not recognised in the income statement and increases in the fair value of equity securities after impairment are recognised in other comprehensive income. In the case of debt securities classified as available for sale, impairment is assessed on the same criteria as for all other debt financial assets. Impairment is recognised by transferring the cumulative loss that has been recognised directly in other comprehensive income to the income statement. Any subsequent increase in the fair value of an available for sale debt security is included in other comprehensive income unless the increase in fair value can be objectively related to an event that occurred after the impairment was recognised in the income statement, in which case the impairment loss or part thereof is reversed. Loans renegotiated and forbearance From time to time, the Group will modify the original terms of a customer’s loan either as part of the on-going relationship with the customer or arising from changes in the customer’s circumstances such as when that customer is unable to make the agreed original contractual repayments. Forbearance A forbearance agreement is entered into where the customer is in financial difficulty to the extent that they are unable to repay both the principal and interest on their loan in accordance with their original contract. Following an assessment of the customer’s repayment capacity, a potential solution will be determined from the options available. There are a number of different types of forbearance options including interest and/or arrears capitalisation, interest rate adjustments, payment holidays, term extensions and equity swaps. These are detailed in the Credit Risk sections 3.1 and 3.2. A request for a forbearance solution acts as a trigger for an impairment test. All loans that are assessed for a forbearance solution are tested for impairment under IAS 39 and where a loan is deemed impaired, an appropriate provision is raised to cover the difference between the loan’s carrying value and the present value of estimated future cashflows discounted at the loan’s original effective interest rate. Where, having assessed the loan for impairment and the loan is not deemed to be impaired, it is included within the collective assessment as part of the IBNR provision calculation. Forbearance mortgage loans, classified as impaired, may be upgraded from impaired status, subject to a satisfactory assessment by the appropriate credit authority as to the borrower’s continuing ability and willingness to repay and confirmation that the relevant security held by the Group continues to be enforceable. In this regard, the borrower is required to display a satisfactory performance following the restructuring of the loan in accordance with new agreed terms, comprising typically, a period of twelve months of consecutive payments of full principal and interest and, the upgrade would initially be to Watch/Vulnerable grades. In some individually assessed mortgage and non-mortgage cases, based on assessment by the relevant credit authority, the upgrade out of impaired to performing status may be earlier than twelve months, as the debt may have been reduced to a sustainable level. Where upgraded out of impaired, loans are included in the Group’s collective assessment for IBNR provisions. Where the terms on a renegotiated loan which has been subject to an impairment provision differ substantially from the original loan terms either in a quantitative or qualitative analysis, the original loan is derecognised and a new loan is recognised at fair value. Any difference between the carrying amount of the loan and the fair value of the new renegotiated loan terms is recognised in the income statement. Interest accrues on the new loan based on the current market rates in place at the time of the renegotiation. Where a loan has been subject to an impairment provision and the renegotiation leads to a customer granting equity to the Group in exchange for any loan balance outstanding, the new instrument is recognised at fair value with any difference to the loan carrying amount recognised in the income statement. 204 Allied Irish Banks, p.l.c. Annual Financial Report 2014 15 Impairment of financial assets (continued) Non-forbearance renegotiation Occasionally, the Group may temporarily amend the contractual repayments terms on a loan (e.g. payment moratorium) for a short period of time due to a temporary change in the life circumstances of the borrower. Because such events are not directly linked to repayment capacity, these amendments are not considered forbearance. The changes in expected cash flows are accounted for under IAS 39 paragraph AG8 i.e. the carrying amount of the loan is adjusted to reflect the revised estimated cash flows which are discounted at the original effective interest rate. Any adjustment to the carrying amount of the loan is reflected in the income statement. However, where the terms on a renegotiated loan differ substantially from the original loan terms either in a quantitative or qualitative analysis, the original loan is derecognised and a new loan is recognised at fair value. Any difference arising between the derecognised loan and the new loan is recognised in the income statement. Where a customer’s request for a modification to the original loan agreement is deemed not to be a forbearance request (i.e. the customer is not in financial difficulty to the extent that they are unable to repay both the principal and interest), these loans are not disaggregated for monitoring/reporting or IBNR assessment purposes. 16 Determination of fair value of financial instruments The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Group has access at that date. The Group considers the impact of non-performance risk when valuing its financial liabilities. Financial instruments are initially recognised at fair value and, with the exception of financial assets at fair value through profit or loss, the initial carrying amount is adjusted for direct and incremental transaction costs. In the normal course of business, the fair value on initial recognition is the transaction price (fair value of consideration given or received). If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is determined by a quoted price in an active market for the same financial instrument, or by a valuation technique which uses only observable market inputs, the difference between the fair value at initial recognition and the transaction price is recognised as a gain or loss. If the fair value is calculated by a valuation technique that features significant market inputs that are not observable, the difference between the fair value at initial recognition and the transaction price is deferred. Subsequently, the difference is recognised in the income statement on an appropriate basis over the life of the financial instrument, but no later than when the valuation is supported by wholly observable inputs; the transaction matures; or is closed out. Subsequent to initial recognition, the methods used to determine the fair value of financial instruments include quoted prices in active markets where those prices are considered to represent actual and regularly occurring market transactions. Where quoted prices are not available or are unreliable because of market inactivity, fair values are determined using valuation techniques. These valuation techniques maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The valuation techniques used incorporate the factors that market participants would take into account in pricing a transaction. Valuation techniques include the use of recent orderly transactions between market participants, reference to other similar instruments, option pricing models, discounted cash flow analysis and other valuation techniques commonly used by market participants. Quoted prices in active markets Quoted market prices are used where those prices are considered to represent actual and regularly occurring market transactions for financial instruments in active markets. Valuations for negotiable instruments such as debt and equity securities are determined using bid prices for asset positions and offer prices for liability positions. Where securities are traded on an exchange, the fair value is based on prices from the exchange. The market for debt securities largely operates on an ‘over the counter’ basis which means that there is not an official clearing or exchange price for these security instruments. Therefore, market makers and/or investment banks (‘contributors’) publish bid and offer levels which reflect an indicative price that they are prepared to buy and sell a particular security. The Group’s valuation policy requires that the prices used in determining the fair value of securities quoted in active markets must be sourced from established market makers and/or investment banks. Allied Irish Banks, p.l.c. Annual Financial Report 2014 205 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Accounting policies 16 Determination of fair value of financial instruments (continued) Valuation techniques In the absence of quoted market prices, and in the case of over-the-counter derivatives, fair value is calculated using valuation techniques. Fair value may be estimated using quoted market prices for similar instruments, adjusted for differences between the quoted instrument and the instrument being valued. Where the fair value is calculated using discounted cash flow analysis, the methodology is to use, to the extent possible, market data that is either directly observable or is implied from instrument prices, such as interest rate yield curves, equities and commodities prices, credit spreads, option volatilities and currency rates. In addition, the Group considers the impact of own credit risk and counterparty risk when valuing its derivative liabilities. The valuation methodology is to calculate the expected cash flows under the terms of each specific contract and then discount these values back to a present value. The assumptions involved in these valuation techniques include: – The likelihood and expected timing of future cash flows of the instrument. These cash flows are generally governed by the terms of the instrument, although management judgement may be required when the ability of the counterparty to service the instrument in accordance with the contractual terms is in doubt. In addition, future cash flows may also be sensitive to the occurrence of future events, including changes in market rates; and – Selecting an appropriate discount rate for the instrument, based on the interest rate yield curves including the determination of an appropriate spread for the instrument over the risk-free rate. The spread is adjusted to take into account the specific credit risk profile of the exposure. All adjustments in the calculation of the present value of future cash flows are based on factors market participants would take into account in pricing the financial instrument. Certain financial instruments (both assets and liabilities) may be valued on the basis of valuation techniques that feature one or more significant market inputs that are not observable. When applying a valuation technique with unobservable data, estimates are made to reflect uncertainties in fair values resulting from a lack of market data, for example, as a result of illiquidity in the market. For these instruments, the fair value measurement is less reliable. Inputs into valuations based on non-observable data are inherently uncertain because there is little or no current market data available from which to determine the price at which an orderly transaction between market participants would occur under current market conditions. However, in most cases there is some market data available on which to base a determination of fair value, for example historical data, and the fair values of most financial instruments will be based on some market observable inputs even where the non-observable inputs are significant. All unobservable inputs used in valuation techniques reflect the assumptions market participants would use when fair valuing the financial instrument. The Group tests the outputs of the valuation model to ensure that it reflects current market conditions. The calculation of fair value for any financial instrument may require adjustment of the quoted price or the valuation technique output to reflect the cost of credit risk and the liquidity of the market, if market participants would include one, where these are not embedded in underlying valuation techniques or prices used. The choice of contributors, the quality of market data used for pricing, and the valuation techniques used are all subject to internal review and approval procedures. Transfers between levels of the fair value hierarchy The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change occurred. 17 NAMA senior bonds NAMA senior bonds were received as consideration for financial assets transferred to NAMA and also as part of the ‘Anglo’ and ‘EBS’ transactions. These bonds are designated as loans and receivables and are separately disclosed in the statement of financial position as ‘NAMA senior bonds’. The bases for measurement, interest recognition and impairment are the same as those for loans and receivables (see accounting policy numbers 6, 15 and 18). At initial recognition, the bonds were measured at fair value. The bonds carry a guarantee of the Irish Government, however, they are not marketable instruments. The only secondary market activity in the instruments is their sale and repurchase (‘repo’) to the European Central Bank (“ECB”) within the regular Eurosystem open market operations. The bonds are not traded in the market and there are no comparable bonds trading in the market. 206 Allied Irish Banks, p.l.c. Annual Financial Report 2014 17 NAMA senior bonds (continued) The fair value on initial recognition was determined using a valuation technique. The absence of quoted prices in an active market required increased use of management judgement in the estimation of fair value. This judgement included but was not limited to: evaluating available market information; evaluating relevant features of the instruments which market participants would factor into an appropriate valuation technique; determining the cash flows generated by the instruments including cash flows from assumed repo transactions; identifying a risk free discount rate; and applying an appropriate credit spread. On an on-going basis and in accordance with IAS 39, AG8, the Group reviews its assumptions as regards the amount and timing of expected cash flows based on experience to date and other relevant information. The revised cash flows are discounted at the bonds’ original effective interest rate. Any difference between the revised discounted cash flows and the previous carrying value is recognised as ‘other operating income’ in the income statement. 18 Financial assets The Group classifies its financial assets into the following categories: - financial assets at fair value through profit or loss; loans and receivables; and available for sale financial assets. Purchases and sales of financial assets are recognised on trade date, being the date on which the Group commits to purchase or sell the assets. Loans are recognised when cash is advanced to the borrowers. Interest is calculated using the effective interest method and credited to the income statement. Dividends on available for sale equity securities are recognised in the income statement when the entity’s right to receive payment is established. Impairment losses and translation differences on the amortised cost of monetary items are recognised in the income statement. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or when the Group has transferred substantially all the risks and rewards of ownership. Financial assets at fair value through profit or loss This category can have two sub categories: - Financial assets held for trading; and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if it is acquired principally for the purpose of selling in the near term; part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking; or if it is so designated at initial recognition by management, subject to certain criteria. The assets are recognised initially at fair value and transaction costs are taken directly to the income statement. Interest and dividends on assets within this category are reported in interest income, and dividend income, respectively. Gains and losses arising from changes in fair value are included directly in the income statement within net trading income. Derivatives are also classified in this category unless they have been designated as hedges or qualify as financial guarantee contracts. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and which are not classified as available for sale. They arise when the Group provides money or services directly to a customer with no intention of trading the loan. Loans and receivables are initially recognised at fair value adjusted for direct and incremental transaction costs and are subsequently carried on an amortised cost basis. Available for sale Available for sale financial assets are non-derivative financial investments that are designated as available for sale and are not categorised into any of the other categories described above. Available for sale financial assets are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. Available for sale financial assets are initially recognised at fair value adjusted for direct and incremental transaction costs. They are subsequently held at fair value. Gains and losses arising from changes in fair value are included in other comprehensive income until sale or impairment when the cumulative gain or loss is transferred to the income statement as a recycling adjustment. Assets reclassified from the held for trading category are recognised at fair value. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Parent Company financial statements: Investment in subsidiary and associated undertakings The Company accounts for investments in subsidiary and associated undertakings that are not classified as held for sale at cost less provisions for impairment. If the investment is classified as held for sale, the Company accounts for it at the lower of its carrying value and fair value less costs to sell. Dividends from a subsidiary or an associated undertaking are recognised in the income statement, when the Company’s right to receive the dividend is established. n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 207 Accounting policies 19 Financial liabilities Issued financial instruments or their components are classified as liabilities where the substance of the contractual arrangement results in the Group having a present obligation to either deliver cash or another financial asset to the holder, to exchange financial instruments on terms that are potentially unfavourable or to satisfy the obligation otherwise than by the exchange of a fixed amount of cash or another financial asset for a fixed number of equity shares. Financial liabilities are initially recognised at fair value, being their issue proceeds (fair value of consideration received), net of transaction costs incurred. Financial liabilities are subsequently measured at amortised cost, with any difference between the proceeds net of transaction costs and the redemption value recognised in the income statement using the effective interest method. Where financial liabilities are classified as trading they are also initially recognised at fair value with the related transaction costs taken directly to the income statement. Gains and losses arising from changes in fair value are recognised directly in the income statement within net trading income. Preference shares which carry a mandatory coupon, are classified as financial liabilities. The dividends on these preference shares are recognised in the income statement as interest expense using the effective interest method. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expired. Any gain or loss on the extinguishment or remeasurement of a financial liability is recognised in profit or loss. 20 Property, plant and equipment Property, plant and equipment are stated at cost, or deemed cost, less accumulated depreciation and provisions for impairment, if any. Additions and subsequent expenditures are capitalised only to the extent that they enhance the future economic benefits expected to be derived from the asset. No depreciation is provided on freehold land. Property, plant and equipment are depreciated on a straight line basis over their estimated useful economic lives. Depreciation is calculated based on the gross carrying amount, less the estimated residual value at the end of the assets’ economic lives. The Group uses the following useful lives when calculating depreciation: Freehold buildings and long-leasehold property 50 years Short leasehold property life of lease, up to 50 years Costs of adaptation of freehold and leasehold property Branch properties Office properties Computers and similar equipment Fixtures and fittings and other equipment up to 10 years(1) up to 15 years(1) 3 – 7 years 5 – 10 years The Group reviews its depreciation rates regularly, at least annually, to take account of any change in circumstances. When deciding on useful lives and methods, the principal factors that the Group takes into account are the expected rate of technological developments and expected market requirements for, and the expected pattern of usage of, the assets. When reviewing residual values, the Group estimates the amount that it would currently obtain for the disposal of the asset, after deducting the estimated cost of disposal if the asset was already of the age and condition expected at the end of its useful life. Gains and losses on disposal of property, plant and equipment are included in the income statement. It is Group policy not to revalue its property, plant and equipment. (1)Subject to the maximum remaining life of the lease. 21 Intangible assets Computer software and other intangible assets Computer software and other intangible assets are stated at cost, less amortisation on a straight line basis and provisions for impairment, if any. The identifiable and directly associated external and internal costs of acquiring and developing software are capitalised where the software is controlled by the Group, and where it is probable that future economic benefits that exceed its cost will flow from its use over more than one year. Costs associated with maintaining software are recognised as an expense when incurred. Capitalised computer software is amortised over 3 to 7 years. Other intangible assets are amortised over the life of the asset. Computer software and other intangible assets are reviewed for impairment when there is an indication that the asset may be impaired. Intangible assets not yet available for use are reviewed for impairment on an annual basis. 208 Allied Irish Banks, p.l.c. Annual Financial Report 2014 22 Derivatives and hedge accounting Derivatives, such as interest rate swaps, options and forward rate agreements, currency swaps and options, and equity index options are used for trading purposes while interest rate swaps, currency swaps, cross currency interest rate swaps and credit derivatives are used for hedging purposes. The Group maintains trading positions in a variety of financial instruments including derivatives. Trading transactions arise both as a result of activity generated by customers and from proprietary trading with a view to generating incremental income. Non-trading derivative transactions comprise transactions held for hedging purposes as part of the Group’s risk management strategy against assets, liabilities, positions and cash flows. Derivatives Derivatives are measured initially at fair value on the date on which the derivative contract is entered into and subsequently remeasured at fair value. Fair values are obtained from quoted market prices in active markets, including recent market transactions, and from valuation techniques using discounted cash flow models and option pricing models as appropriate. Derivatives are included in assets when their fair value is positive, and in liabilities when their fair value is negative, unless there is the legal ability and intention to settle an asset and liability on a net basis. The best evidence of the fair value of a derivative at initial recognition is the transaction price (i.e. the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e. without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. Profits or losses are only recognised on initial recognition of derivatives when there are observable current market transactions or valuation techniques that are based on observable market inputs. Embedded derivatives Some hybrid contracts contain both a derivative and a non-derivative component. In such cases, the derivative component is termed an embedded derivative. Where the economic characteristics and risks of embedded derivatives are not closely related to those of the host contract, and the hybrid contract itself is not carried at fair value through profit or loss, the embedded derivative is treated as a separate derivative, and reported at fair value with gains and losses being recognised in the income statement. Hedging All derivatives are carried at fair value and the accounting treatment of the resulting fair value gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Where derivatives are held for risk management purposes, and where transactions meet the criteria specified in IAS 39 Financial Instruments: Recognition and Measurement, the Group designates certain derivatives as either: – – – hedges of the fair value of recognised assets or liabilities or firm commitments (‘fair value hedge’); or hedges of the exposure to variability of cash flows attributable to a recognised asset or liability, or a highly probable forecasted transaction (‘cash flow hedge’); or hedges of a net investment in a foreign operation. When a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument and hedged item as well as its risk management objectives and its strategy for undertaking the various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Group discontinues hedge accounting when: a) b) c) it is determined that a derivative is not, or has ceased to be, highly effective as a hedge; the derivative expires, or is sold, terminated, or exercised; the hedged item matures or is sold or repaid; or d) a forecast transaction is no longer deemed highly probable. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i To the extent that the changes in the fair value of the hedging derivative differ from changes in the fair value of the hedged risk in the hedged item; or the cumulative change in the fair value of the hedging derivative differs from the cumulative change in the fair value of expected future cash flows of the hedged item, ineffectiveness arises. The amount of ineffectiveness, (taking into account the timing of the expected cash flows, where relevant) provided it is not so great as to disqualify the entire hedge for hedge accounting, is recorded in the income statement. In certain circumstances, the Group may decide to cease hedge accounting even though the hedge relationship continues to be highly effective by no longer designating the financial instrument as a hedge. n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 209 Accounting policies 22 Derivatives and hedge accounting (continued) Fair value hedge accounting Changes in fair value of derivatives that qualify and are designated as fair value hedges are recorded in the income statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the fair value hedging adjustment cumulatively made to the carrying value of the hedged item is, for items carried at amortised cost, amortised over the period to maturity of the previously designated hedge relationship using the effective interest method. For available for sale financial assets, the fair value adjustment for hedged items is recognised in the income statement using the effective interest method. If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised immediately in the income statement. Cash flow hedge accounting The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is initially recognised directly in other comprehensive income and included in the cash flow hedging reserve in the statement of changes in equity. The amount recognised in other comprehensive income is reclassed to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect profit or loss, and in the same line item in the statement of comprehensive income. Any ineffective portion of the gain or loss on the hedging instrument is recognised in the income statement immediately. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss recognised in other comprehensive income from the time when the hedge was effective remains in equity and is reclassified to the income statement as a reclassification adjustment as the forecast transaction affects profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in other comprehensive income from the period when the hedge was effective is reclassified to the income statement. Net investment hedge Hedges of net investments in foreign operations, including monetary items that are accounted for as part of the net investment, are accounted for similarly to cash flow hedges. The effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income and the ineffective portion is recognised immediately in the income statement. The cumulative gain or loss previously recognised in other comprehensive income is recognised in the income statement on the disposal or partial disposal of the foreign operation. Hedges of net investments may include non-derivative liabilities as well as derivative financial instruments. Derivatives that do not qualify for hedge accounting Certain derivative contracts entered into as economic hedges do not qualify for hedge accounting. Changes in the fair value of these derivative instruments are recognised immediately in the income statement. 23 Non-current assets held for sale and discontinued operations Discontinued operations A discontinued operation is a component of the Group’s business that represents a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale, that has been disposed of, has been abandoned or that meets the criteria to be classified as held for sale. Discontinued operations are presented in the income statement (including comparatives) as a separate amount, comprising the total of the post-tax profit or loss of the discontinued operations for the period together with any post-tax gain or loss recognised on the measurement of relevant assets to fair value less costs to sell, or on disposal of the assets/disposal groups constituting discontinued operations. In presenting interest income and interest expense and various expenses relating to discontinued operations, account is taken of the continuance or otherwise of these income statement items post disposal of the discontinued operation. Corporate overhead, which was previously allocated to the business being disposed of, is considered to be part of continuing operations. In the statement of financial position, the assets and liabilities of discontinued operations are shown within the caption ‘Disposal groups and non-current assets/(liabilities) held for sale’ separate from other assets and liabilities. On reclassification as discontinued operations, there is no restatement in the statement of financial position of prior periods for assets and liabilities held for sale. Disposal groups and non-current assets held for sale A non-current asset or a disposal group comprising assets and liabilities is classified as held for sale if it is expected that its carrying amount will be recovered principally through sale rather than through continuing use, it is available for immediate sale and sale is highly probable within one year. For the sale to be highly probable, the appropriate level of management must be committed to a plan to sell the asset or disposal group. On initial classification as held for sale, generally, non-current assets and disposal groups are measured at the lower of previous carrying amount and fair value less costs to sell with any adjustments taken to the income statement. The same applies to gains and losses on subsequent remeasurement. However, financial assets within the scope of IAS 39 continue to be measured in accordance with that standard. 210 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Disposal groups and non-current assets held for sale (continued) Impairment losses subsequent to classification of assets as held for sale are recognised in the income statement. Subsequent increases in fair value, less costs to sell of the assets that have been classified as held for sale are recognised in the income statement, to the extent that the increase is not in excess of any cumulative impairment loss previously recognised in respect of the asset. Assets classified as held for sale are not depreciated. Gains and losses on remeasurement and impairment losses subsequent to classification as disposal groups and non-current assets held for sale are shown within continuing operations in the income statement, unless they qualify as discontinued operations. Disposal groups and non-current assets held for sale which are not classified as discontinued operations are presented separately from other assets and liabilities on the statement of financial position. Prior periods are not reclassified. Acquisition of a subsidiary acquired exclusively with a view to its resale A subsidiary that is acquired and held exclusively for disposal and meets the definition of an asset held for sale is not excluded from consolidation. However, it is measured and accounted for under IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations, initially at fair value less costs to sell. It is consolidated but the results of the subsidiary are treated as a discontinued operation. AIB acquired its investment in Ark Life in March 2013 with a view to its resale. Accordingly, AIB adopted the approach set out in IFRS 5 implementation guidance, example 13, in accounting for its investment in Ark Life at the acquisition date and at subsequent reporting dates. This required Ark Life to be valued at the lower of its carrying value and its fair value less costs to sell at each reporting date. Individual assets and liabilities acquired with a view to resale were not fair valued. For presentation purposes in the statement of financial position, Ark Life’s identifiable liabilities were measured at fair value and this amount was added to the fair value less costs to sell figure to ascertain the value of the assets to be disclosed. Separate analysis of individual assets and liabilities was not required in the notes to the financial statements. Inter-company assets and liabilities were eliminated against the carrying amount of the disposal group where applicable. Inter-company interest income/expense of the continuing group was recorded in the consolidated income statement. Hedge accounting for deposits accepted by AIB from Ark Life was discontinued with effect from the acquisition date of Ark Life. 24 Collateral and netting The Group enters into master netting agreements with counterparties, to ensure that if an event of default occurs, all amounts outstanding with those counterparties will be settled on a net basis. Collateral The Group obtains collateral in respect of customer receivables where this is considered appropriate. The collateral normally takes the form of a lien over the customer’s assets and gives the Group a claim on these assets for both existing and future customer liabilities. The collateral is, in general, not recorded on the statement of financial position. The Group also receives collateral in the form of cash or securities in respect of other credit instruments, such as stock borrowing contracts and derivative contracts in order to reduce credit risk. Collateral received in the form of securities is not recorded on the statement of financial position. Collateral received in the form of cash is recorded on the statement of financial position with a corresponding liability. Therefore, in the case of cash collateral, these amounts are assigned to deposits received from banks or other counterparties . Any interest payable or receivable arising is recorded as interest expense or interest income respectively. In certain circumstances, the Group will pledge collateral in respect of its own liabilities or borrowings. Collateral pledged in the form of securities or loans and receivables continues to be recorded on the statement of financial position. Collateral paid away in the form of cash is recorded in loans and receivables to banks or customers. Any interest payable or receivable arising is recorded as interest expense or interest income respectively. Netting Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, therefore, the related assets and liabilities are presented gross on the statement of financial position. Allied Irish Banks, p.l.c. Annual Financial Report 2014 211 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Accounting policies 25 Financial guarantees Financial guarantees are given to banks, financial institutions and other bodies on behalf of customers to secure loans, overdrafts and other banking facilities (‘facility guarantees’) and to other parties in connection with the performance of customers under obligations relating to contracts, advance payments made by other parties, tenders, retentions and the payment of import duties. In its normal course of business, Allied Irish Banks, p.l.c. (the parent company) issues financial guarantees to other Group entities. Financial guarantees are initially recognised in the financial statements at fair value on the date that the guarantee is given. Subsequent to initial recognition, the Group’s liabilities under such guarantees are measured at the higher of the initial measurement, less amortisation calculated to recognise in the income statement the fee income earned over the period, and the best estimate of the expenditure required to settle any financial obligation arising as a result of the guarantees at the year-end reporting date. Any increase in the liability relating to guarantees is taken to the income statement in provisions for undrawn contractually committed facilities and guarantees. 26 Sale and repurchase agreements (including stock borrowing and lending) Financial assets may be lent or sold subject to a commitment to repurchase them (‘repos’). Such securities are retained on the statement of financial position when substantially all the risks and rewards of ownership remain with the Group. The liability to the counterparty is included separately on the statement of financial position. Similarly, when securities are purchased subject to a commitment to resell (‘reverse repos’), or where the Group borrows securities, but does not acquire the risks and rewards of ownership, the transactions are treated as collateralised loans, and the securities are not usually included in the statement of financial position. The difference between the sale and repurchase price is accrued over the life of the agreements using the effective interest method. Securities lent to counterparties are also retained in the financial statements. The exception to this is where these are sold to third parties, at which point the obligation to repurchase the securities is recorded as a trading liability at fair value and any subsequent gain or loss included in trading income. 27 Leases Lessor Assets leased to customers are classified as finance leases if the lease agreements transfer substantially all the risks and rewards of ownership, with or without ultimate legal title. When assets are held subject to a finance lease, the present value of the lease payments, discounted at the rate of interest implicit in the lease, is recognised as a receivable. The difference between the total payments receivable under the lease and the present value of the receivable is recognised as unearned finance income, which is allocated to accounting periods under the pre-tax net investment method to reflect a constant periodic rate of return. Assets leased to customers are classified as operating leases if the lease agreements do not transfer substantially all the risks and rewards of ownership. The leased assets are included within property, plant and equipment on the statement of financial position and depreciation is provided on the depreciable amount of these assets on a systematic basis over their estimated useful lives. Lease income is recognised on a straight line basis over the period of the lease unless another systematic basis is more appropriate. Lessee Operating lease rentals payable are recognised as an expense in the income statement on a straight line basis over the lease term unless another systematic basis is more appropriate. 28 Shareholders’ equity Issued financial instruments, or their components, are classified as equity where they meet the definition of equity and confer on the holder a residual interest in the assets of the Group. On extinguishment of equity instruments, gains or losses arising are recognised net of tax directly in the statement of changes in equity. Share capital Share capital represents funds raised by issuing shares in return for cash or other consideration. Share capital comprises ordinary shares, deferred shares and preference shares of the entity. Share premium When shares are issued at a premium whether for cash or otherwise, the excess of the amount received over the par value of the shares is transferred to share premium. Share issue costs Incremental costs directly attributable to the issue of new shares or options are charged, net of tax, to the share premium account. 212 Allied Irish Banks, p.l.c. Annual Financial Report 2014 28 Shareholders’ equity (continued) Dividends and distributions Dividends on ordinary shares are recognised in equity in the period in which they are approved by the Company’s shareholders, or in the case of the interim dividend when it has been approved for payment by the Board of Directors. Dividends declared after the year-end reporting date are disclosed in note 57. Dividends on preference shares accounted for as equity are recognised in equity when approved for payment by the Board of Directors. Other capital reserves Other capital reserves represent transfers from retained earnings in accordance with relevant legislation. Revaluation reserves Revaluation reserves represent the unrealised surplus, net of tax, which arose on revaluation of properties prior to the implementation of IFRS at 1 January 2004. Capital redemption reserves These reserves arose from the renominalisation of the ordinary shares of the Company where deferred shares were created and cancelled. Available for sale securities reserves Available for sale securities reserves represent the net unrealised gain or loss, net of tax, arising from the recognition in the statement of financial position of available for sale financial investments at fair value. Cash flow hedging reserves Cash flow hedging reserves represent the net gains or losses, net of tax, on effective cash flow hedging instruments that will be reclassified to the income statement when the hedged transaction affects profit or loss. Capital contributions Capital contributions represent the receipt of non-refundable considerations arising from transactions with the Irish Government (note 42). These contributions comprise both financial and non-financial net assets. The contributions are classified as equity and may be either distributable or non-distributable. Capital contributions are distributable if the assets received are in the form of cash or another asset that is readily convertible to cash, otherwise, they are treated as non-distributable. Capital contributions arose during 2011 from (a) EBS transaction; (b) Anglo transaction; (c) issue of contingent capital notes; and (d) non-refundable receipts from the Irish Government and the NPRFC. The capital contribution from the EBS transaction is treated as non-distributable as the related net assets received are largely non-cash in nature. In the case of the Anglo transaction the excess of the assets over the liabilities comprised of NAMA senior bonds. On initial recognition, this excess was accounted for as a non-distributable capital contribution. However, according as NAMA repays these bonds, the proceeds received will be deemed to be distributable and the relevant amount will be transferred from the capital contribution account to revenue reserves. AIB issued contingent convertible capital notes to the Irish Government (note 38) where the proceeds of issue amounting to €1.6 billion exceeded the fair value of the instruments issued. This excess has been accounted for as a capital contribution and will be treated as distributable according as the fair value adjustment on the notes amortises to the income statement. The non-refundable receipts of € 6,054 million from the Irish Government and the NPRFC(1) are distributable. These are included in revenue reserves. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Revenue reserves Revenue reserves represent retained earnings of the parent company, subsidiaries and associated undertakings together with amounts transferred from share premium and capital redemption reserves following Irish High Court approval. It is shown net of the cumulative deficit within the defined benefit pension schemes and other appropriate adjustments. Foreign currency translation reserves The foreign currency translation reserves represent the cumulative gains and losses on the retranslation of the Group’s net investment in foreign operations, at the rate of exchange at the year-end reporting date net of the cumulative gain or loss on instruments designated as net investment hedges. (1)National Treasury Management Agency as controller and manager of the Ireland Strategic Investment Fund (NTMA / ISIF with effect 22 December 2014). Allied Irish Banks, p.l.c. Annual Financial Report 2014 213 n o i t a m r o n f i l a r e n e G Accounting policies 28 Shareholders’ equity (continued) Treasury shares Where the Company or other members of the consolidated Group purchase the Company’s equity share capital, the consideration paid is deducted from total shareholders’ equity as treasury shares until they are cancelled. Where such shares are subsequently sold or re-issued, any consideration received is included in shareholders’ equity. Share based payments reserves The share based payment expense charged to the income statement is credited to the share based payment reserve over the vesting period of the shares and options. Upon grant of shares and exercise and lapsing of options, the amount in respect of the award credited to the share based payment reserves is transferred to revenue reserves. 29 Segment reporting An operating segment is a component of the Group that engages in business activities from which it earns revenues and incurs expenses. The Group has identified reportable segments on the basis of internal reports about components of the Group that are regularly reviewed by the Chief Operating Decision Maker (“CODM”) in order to allocate resources to the segment and assess its performance. Based on this identification, the reportable segments are the operating segments within the Group, the head of each being a member of the Leadership Team. The Leadership Team is the CODM and it relies primarily on the management accounts to assess performance of the reportable segments and when making resource allocation decisions. Transactions between operating segments are on normal commercial terms and conditions, with internal charges and transfer pricing adjustments reflected in the performance of each operating segment. Revenue sharing agreements are used to allocate external customer revenues to an operating segment on a reasonable basis. Geographical segments provide products and services within a particular economic environment that is subject to risks and rewards that are different to those components operating in other economic environments. The geographical distribution of profit before taxation is based primarily on the location of the office recording the transaction. In addition, geographic distribution of loans and related impairment is also based on the location of the office recording the transaction. 30 Cash and cash equivalents For the purposes of the cash flow statement, cash comprises cash on hand and demand deposits, and cash equivalents comprise highly liquid investments that are convertible into cash with an insignificant risk of changes in value and with a maturity of less than three months from the date of acquisition. 214 Allied Irish Banks, p.l.c. Annual Financial Report 2014 31 Prospective accounting changes The following new standards and amendments to existing standards approved by the IASB in 2014 or prior years, but not early adopted by the Group, will impact the Group’s financial reporting in future periods. The Group is currently considering the impacts of these new standards and amendments. The new accounting standards and amendments which are more relevant to the Group are detailed below: Pronouncement Nature of change IASB effective date Amendments to IFRS 11 Joint The amendments to IFRS 11 Joint Arrangements state that, Annual periods Arrangements: Accounting for where a joint operator acquires an interest in a joint operation beginning on or after Acquisitions of Interests in Joint that constitutes a business, it must apply all of the principles 1 January 2016 Operations on business combinations accounting in IFRS 3 Business Combinations, and other IFRSs. The joint operator must disclose the information that is required in those IFRSs in relation to business combinations. These amendments are not expected to have a significant impact on AIB Group The amendments are subject to EU endorsement. Amendments to IAS 16 Property, The amendment to IAS 16 Property, Plant and Equipment clarifies Annual periods Plant and Equipment and IAS 38 that the use of a revenue-based method to calculate depreciation beginning on or after Intangible Assets: Clarification of of an asset is not appropriate. 1 January 2016 Acceptable Methods of Depreciation and Amortisation The amendment to IAS 38 Intangible Assets introduces a rebuttable presumption that a revenue-based amortisation method for intangible assets is inappropriate. There are limited circumstances when this presumption can be overturned. These amendments will not impact AIB Group. The amendments are subject to EU endorsement. Amendments to IAS 27 Separate The amendments to IAS 27 Separate Financial Statements allow Annual periods Financial Statements: Equity entities to use the equity method to account for investments in beginning on or after Method in Separate Financial subsidiaries, joint ventures and associates in their separate 1 January 2016 Statements financial statements. These amendments are not expected to have a significant impact on AIB Group The amendments are subject to EU endorsement. Amendments to IFRS 10 The amendments address an inconsistency between the Annual periods Consolidated Financial Statements requirements in IFRS 10 Consolidated Financial Statements beginning on or after and IAS 28 Investments in Associates and those in IAS 28 Investments in Associates and Joint Ventures 1 January 2016 and Joint Ventures: Sale or in dealing with the sale or contribution of assets between an Contribution of Assets between an investor and its associate or joint venture. A full gain or loss is Investor and its Associate or Joint recognised when a transaction involves a business (whether it Venture is housed in a subsidiary or not). A partial gain or loss is recognised when a transaction involves assets that do not constitute a business, even if these assets are housed in a subsidiary. These amendments are not expected to have a significant impact on AIB Group The amendments are subject to EU endorsement. Allied Irish Banks, p.l.c. Annual Financial Report 2014 215 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Accounting policies 31 Prospective accounting changes (continued) Pronouncement Nature of change IASB effective date Amendments to IAS 1 Presentation These amendments to IAS 1 are designed to further encourage Annual periods of Financial Statements: Disclosure companies to apply professional judgement in determining what beginning on or after Initiative information to disclose in their financial statements. Furthermore, 1 January 2016 the amendments clarify that companies should use professional judgement in determining where and in what order information is presented in the financial disclosures. These amendments are not expected to have a significant impact on AIB Group The amendments are subject to EU endorsement. Amendments to IFRS 10, IFRS 12 These amendments address issues that have arisen and provide Annual periods and IAS 28 Investment Entities: clarification in the context of applying the consolidation exception beginning on or after Applying the Consolidation Exception for investment entities. 1 January 2016 These amendments are not expected to have a significant impact on AIB Group The amendments are subject to EU endorsement Annual Improvements to IFRSs The IASB's annual improvements project provides a process for Annual periods 2012-2014 Cycle making amendments to IFRSs that are considered non-urgent but beginning on or after necessary. The amendments clarify guidance and wording, or 1 July 2016 correct for relatively minor unintended consequences, conflicts or oversights in existing IFRSs. Annual Improvements to IFRSs 2012- 2014 Cycle amends IFRSs in relation to four issues addressed during this cycle. None of the amendments are expected to have a significant impact on reported results or disclosures. The amendments are subject to EU endorsement. IFRS 15 Revenue from Contracts IFRS 15, which was issued in May 2014, replaces IAS 11 Annual periods with Customers Construction Contracts and IAS 18 Revenue in addition to IFRIC 13, beginning on or after IFRIC 15, IFRIC 18 and SIC-31. IFRS 15 specifies how and when an 1 January 2017 entity recognises revenue from a contract with a customer through the application of a single, principles based five-step model. The standard specifies new qualitative and quantitative disclosure requirements to enable users of financial statements understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The impacts of this standard are being considered by AIB Group. The standard is subject to EU endorsement. 216 Allied Irish Banks, p.l.c. Annual Financial Report 2014 31 Prospective accounting changes (continued) Pronouncement Nature of change IASB effective date IFRS 9 Financial Instruments In July 2014, the IASB issued the final version of IFRS 9 Financial Annual periods Instruments. This completes the IASB’s project to replace IAS 39 beginning on or after Financial Instruments: Recognition and Measurement. The main 1 January 2018 changes are as follows: Classification and measurement IFRS 9 introduces a single, principles-based classification approach that has two measurement categories: amortised cost and fair value. The basis of classification depends on how an entity manages its financial instruments (its business model) and the contractual cash flow characteristics of the financial assets. Impairment IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with an ‘expected credit loss’ model with this model being applied to all financial instruments. IFRS 9 requires an entity to account for expected credit losses from when financial instruments are first recognised and to recognise full lifetime expected credit losses on a timely basis. Hedge accounting IFRS 9 replaces the rules-based general hedge accounting requirements in IAS 39 Financial Instruments: Recognition and Measurement with a principles-based approach that more closely aligns the accounting treatment with risk management activities. However, an entity may continue to apply the hedge accounting requirements of IAS 39. The accounting for macro hedges is not included within IFRS 9 and continues to be accounted for in accordance with the requirements of IAS 39. Own credit IFRS 9 requires that changes in the fair value of an entity’s own debt caused by changes in its own credit quality be recognised in other comprehensive income rather than in profit or loss. The Group is currently assessing the impact that IFRS 9 will have on its financial statements. While the impact is expected to be significant, it is not practicable to provide a reasonable estimate of the effects at this time but expect to do so prior to the effective date. The standard is subject to EU endorsement. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 217 n o i t a m r o n f i l a r e n e G Critical accounting judgements and estimates The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of certain assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. The estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances. Since management judgement involves making estimates concerning the likelihood of future events, the actual results could differ from those estimates. The accounting policies that are deemed critical to AIB’s results and financial position, in terms of the materiality of the items to which the policy is applied and the estimates that have a significant impact on the financial statements are set out in this section. In addition, estimates with a significant risk of material adjustment in the next year are also discussed. Going concern The financial statements for the year ended 31 December 2014 have been prepared on a going concern basis as the Directors are satisfied, having considered the risks and uncertainties impacting the Group, that it has the ability to continue in business for the period of assessment. In making its assessment, the Directors have considered a wide range of information relating to present and future conditions. These have included: financial plans approved in December 2014 covering the period 2015 to 2017; the Restructuring Plan approved by the European Commission in May 2014; liquidity and funding forecasts, and capital resources projections; and the results of the Comprehensive Assessment stress testing conducted by the ECB. There have all been prepared under base and stress scenarios having considered the outlook for the Irish, the eurozone and UK economies. In addition, the Directors have considered the commitment of support provided to AIB by the Irish Government. Loan impairment AIB’s accounting policy for impairment of financial assets is set out in accounting policy number 15. The provisions for impairment on loans and receivables at 31 December 2014 represent management’s best estimate of the losses incurred in the loan portfolios at the reporting date. The estimation of loan losses is inherently uncertain and depends upon many factors, including loan loss trends, portfolio grade profiles, local and international economic climates, conditions in various industries to which AIB Group is exposed and other external factors such as legal and regulatory requirements. Credit risk is identified, assessed and measured through the use of credit rating and scoring tools. The ratings influence the management of individual loans. Special attention is paid to lower quality rated loans and when appropriate, loans are transferred to specialist units to help avoid default, or where in default, to help minimise loss. The credit rating triggers the impairment assessment and if relevant the raising of specific provisions on individual loans where there is doubt about their recoverability. The management process for the identification of loans requiring provision is underpinned by independent tiers of review. Credit quality and loan loss provisioning are independently monitored by credit and risk management on a regular basis. All AIB segments assess and approve their provisions and provision adequacy on a quarterly basis. These provisions are in turn reviewed and approved by the AIB Group Credit Committee on a quarterly basis with ultimate Group levels being approved by the Audit Committee and the Board. Key assumptions underpinning the Group’s estimates of collective and IBNR provisioning are back tested with the benefit of experience and revisited for currency on a regular basis. After a period of time, when it is concluded that there is no real prospect of recovery of loans/part of loans which have been subjected to a specific provision, the Group writes off that amount of the loan deemed irrecoverable against the specific provision held against the loan. Specific provisions A specific provision is made against problem loans when, in the judgement of management, the estimated repayment realisable from the obligor, including the value of any security available, is likely to fall short of the amount of principal and interest outstanding on the obligor’s loan or overdraft account. The amount of the specific provision made in the financial statements is intended to cover the difference between the assets’ carrying value and the present value of estimated future cash flows discounted at the assets’ original effective interest rates. Specific provisions are created for cases that are individually significant (i.e. above certain thresholds), and also collectively for assets that are not individually significant. 218 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Specific provisions (continued) The amount of specific provision required on an individually assessed loan is highly dependent on estimates of the amount of future cash flows and their timing. Individually insignificant impaired loans are collectively evaluated for impairment provisions. As this process is model driven, the total amount of the Group’s impairment provisions on these loans is somewhat uncertain as it may not totally reflect the impact of the prevailing market conditions. For further details please refer to: ‘Impact of changes to key assumptions and estimates on the impairment provisions’ on pages 78 and 79 of the Risk management section of this report. The property and construction loan portfolio continues to have a high level of provisions following the downturn in both the Irish and UK economies. While collateral values have stabilised and recovered somewhat, market activity remains low relative to normalised levels. Accordingly, the estimation of cash flows likely to arise from the realisation of such collateral is subject to a high degree of uncertainty. Incurred but not reported provisions Incurred but not reported (“IBNR”) provisions are also maintained to cover loans which are impaired at the reporting date and, while not specifically identified, are known from experience to be present in any portfolio of loans. IBNR provisions are maintained at levels that are deemed appropriate by management having considered: credit grading profiles and grading movements; historic loan loss rates; changes in credit management; procedures, processes and policies; levels of credit management skills; local and international economic climates; portfolio sector profiles/industry conditions; and current estimates of loss in the portfolio. The total amount of impairment loss in the Group’s non-impaired portfolio, and therefore, the adequacy of the IBNR allowance, is inherently uncertain. There may be factors in the portfolio that have not been a feature of the past and changes in credit grading profiles and grading movements may lag the change in the credit profile of the customer. In addition, current estimates of loss within the non-impaired portfolio and the period of time it takes following a loss event for an individual loan to be recognised as impaired (‘emergence period’) are subject to a greater element of estimation due to the speed of change in the economies in which the Group operates. For further details of the potential impact of an increase in the emergence period, please refer to: ‘Impact of changes to key assumptions and estimates on the impairment provisions’ on pages 78 and 79 of the Risk management section of this report. Forbearance The Group’s accounting policy for forbearance is set out in accounting policy number 15 ‘Impairment of financial assets’ which incorporates forbearance. The Group has developed a number of forbearance strategies for both short-term and longer-term solutions to assist customers experiencing financial difficulties. The forbearance strategies involve modifications to contractual repayment terms in order to improve the collectability of outstanding debt, to avoid default, and where relevant, to avoid repossessions. Forbearance strategies take place in both retail and business portfolios, particularly, residential mortgages. Where levels of forbearance are significant, higher levels of uncertainty with regard to judgement and estimation are involved in determining their effects on impairment provisions. Further information on forbearance strategies is set out in the ‘Risk management’ section of this report. Deferred taxation The Group’s accounting policy for deferred tax is set out in accounting policy number 13. Details of the Group’s deferred tax assets and liabilities are set out in note 32. Deferred tax assets are recognised for unused tax losses to the extent that it is probable (defined for this purpose as more likely than not) that there will be sufficient future taxable profits against which the losses can be used. For a company with a history of recent losses, there must be convincing other evidence to underpin this assessment. The recognition of the deferred tax asset relies on the assessment of future profitability and the sufficiency of those profits to absorb losses carried forward. It requires significant judgements to be made about the projection of long-term future profitability because of the period over which recovery extends. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i In assessing the future profitability of the Group, the Board has considered a range of positive and negative evidence for this purpose. Among this evidence, the principal positive factors include: – – – – the financial support provided to the Irish State under the EU/IMF programme and the fact that Ireland successfully exited the three-year bailout programme in December 2013; the financial support provided by the Irish Government to AIB as agreed with the EU/IMF from 2009 to 2011; the Irish Government’s committed support to AIB and its nomination of the Group as one of two pillar banks in the smaller reconstructed Irish banking sector; the Restructuring Plan approved by the European Commission in May 2014, targeting a return to profitability in 2014 and the ability to grow profits thereafter; n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 219 Critical accounting judgements and estimates Deferred taxation (continued) – Management actions taken in 2012 to 2014 in returning the Group to a normalised earnings path; – – – the absence of any expiry dates for Irish and UK tax losses; the non-enduring nature of the loan impairments at levels which resulted in losses in prior years; and external forecasts for Ireland, and the UK economies which indicate continued economic recovery through the period of the medium-term financial plan. This is evident in a levelling off of bad debts growth, reductions in unemployment and increased spending. The Board considered negative evidence and the inherent uncertainties in any long-term financial assumptions and projections, including: – – – – – – the absolute level of deferred tax assets compared to the Group’s equity; the reduced size of the Group’s operations following re-structuring; the quantum of profits required to be earned and the extended period over which it is projected that the tax losses will be utilised; the challenge of forecasting over a long period, taking account of the level of competition, market dynamics and resultant margin and funding pressures; potential instability in the eurozone and global economies over an extended period; and recent taxation changes (including Bank Levy and proposed changes to the UK tax rates) and the likelihood of future developments and their impact on profitability and utilisation. The Group’s strategy and its medium term financial plan targeted a return to profitability by 2014 and growth in profitability thereafter. The return to profitability objective was realised in 2014 and growth thereafter has been reaffirmed in the annual planning exercise covering the period 2015 to 2017 undertaken by the Group in the second half of 2014. Growth assumptions and profitability levels underpinning the plan are within market norms. Taking account of all relevant factors, and in the absence of any expiry date for tax losses in Ireland, the Group further believes that it is more likely than not that there will be future profits in the medium term, and beyond, in the relevant Irish Group companies against which to use the tax losses. In this regard, the Group has carried out an exercise to determine the likely number of years required to utilise the deferred tax asset under the following scenario based on the financial planning outturn 2015-2017. Assuming a sustainable market return on equity (9%) over the long term for future profitability levels in Ireland and a GDP growth in Ireland of 2.5%, based on this scenario, it will take in excess of 20 years for the deferred tax asset (€ 3.24 billion) to be utilised. Furthermore, under this scenario, it is expected that 51% of the deferred tax asset will be utilised in 15 years with 84% utilised in 20 years. In a more stressed scenario with a return on equity of 8% and GDP growth of 1.5%, the utilisation period increases by a further 3 years. The Group’s analysis of the results of the scenarios examined would not alter the basis of recognition or the current carrying value. Notwithstanding the absence of any expiry date for tax losses in the UK, AIB has concluded that the recognition of deferred tax assets in its UK subsidiary be limited to the amount projected to be realised within a time period of 15 years. This is the timescale within which the Group believes that it can assess the likelihood of its UK profits arising as being more likely than not. The carrying value of deferred tax assets relating to UK tax losses reduced by € 86 million, reflecting a lower level of expected profitability in the 15 year period. Furthermore, in December 2014, the UK Chancellor announced in his Autumn Statement a proposal that, from 1 April 2015, only fifty per cent of a bank’s annual trading profits can be sheltered by unused tax losses arising before that date. As the legislation had not been substantively enacted at 31 December 2014, the proposed change has not been reflected in the 2014 financial statements. Once the legislation is substantively enacted, this could result in an immediate reduction of c £178 million (€ 229 million) in the Group’s UK deferred tax asset, based on the 2014 year end position. However, for certain other subsidiaries and branches, the Group has also concluded that it is more likely than not that there will be insufficient profits to support recognition of deferred tax assets. The amount of recognised deferred tax assets arising from unused tax losses amounts to € 3,670 million of which € 3,242 million relates to Irish tax losses and € 428 million relates to UK tax losses. IAS 12 does not permit a company to apply present value discounting to its deferred tax assets or liabilities, regardless of the estimated timescales over which those assets or liabilities are projected to be realised. The Group’s deferred tax assets are projected to be realised over a long timescale, benefiting from the absence of any expiry date for Irish or UK tax losses. As a result, the carrying value of the deferred tax assets on the statement of financial position does not reflect the economic value of those assets. 220 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Determination of fair value of financial instruments The Group’s accounting policy for the determination of fair value of financial instruments is set out in accounting policy number 16. The best evidence of fair value is quoted prices in an active market. The absence of quoted prices increases reliance on valuation techniques and requires the use of judgement in the estimation of fair value. This judgement includes but is not limited to: evaluating available market information; determining the cash flows for the instruments; identifying a risk free discount rate and applying an appropriate credit spread. Valuation techniques that rely to a greater extent on non-observable data require a higher level of management judgement to calculate a fair value than those based wholly on observable data. The choice of contributors, the quality of market data used for pricing, and the valuation techniques used are all subject to internal review and approval procedures. Given the uncertainty and subjective nature of valuing financial instruments at fair value, any change in these vari- ables could give rise to the financial instruments being carried at a different valuation, with a consequent impact on shareholders’ equity and, in the case of derivatives and contingent capital instruments, the income statement. NAMA senior bonds designation and valuation The Group’s accounting policy for NAMA senior bonds is set out in accounting policy number 17. These bonds are separately disclosed in the statement of financial position. NAMA senior bonds are designated as loans and receivables as they meet the criteria to be so designated. The bases for measurement, interest recognition and impairment for NAMA senior bonds are the same as those for loans and receivables (see accounting policy numbers 6, 15, and 18). There is no active market for the NAMA senior bonds, accordingly, the fair value at initial recognition was determined using a valuation technique. The absence of quoted prices in an active market required an increased use of management judgement in the estimation of fair value. This judgement included, but was not limited to: evaluating available market information; determining the cash flows generated by the instruments and their expected timing; identifying a risk free discount rate and applying an appropriate credit spread. The valuation technique and critical assumptions used were subject to internal review and approval procedures. While the Group believes its estimates of fair value are appropriate, the use of different measurements, valuation techniques or assumptions could have given rise to the NAMA senior bonds being measured at a different valuation at initial recognition, with a consequent impact on the income statement. During both 2014 and 2013, AIB reviewed its assumptions as to the expected timing of future cash flows based on its experience of repayments to date, as required by IAS 39, AG8. Following these reviews, AIB adjusted the carrying value of the bonds and reflected the difference € 132 million (2013: € 62 million) between the previous carrying value and new carrying value in the income statement. If the revised assumptions when reassessed prove to be different, this will impact the carrying value and income statement in future periods. NAMA senior bonds are subject to the same credit review processes and procedures as for loans and receivables (accounting policy number 15). Retirement benefit obligations The Group’s accounting policy for retirement benefit plans is set out in accounting policy number 11. The Group provides a number of defined benefit and defined contribution retirement benefit schemes in various geographic locations, the majority of which are funded. All defined benefit schemes were closed to future accrual with effect from 31 December 2013. Scheme assets are valued at fair 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. Actuarial gains and losses are recognised immediately in the statement of comprehensive income. Allied Irish Banks, p.l.c. Annual Financial Report 2014 221 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Critical accounting judgements and estimates Retirement benefit obligations (continued) In calculating the scheme liabilities and the charge to the income statement, the Directors have chosen a number of financial and demographic assumptions within an acceptable range, under advice from the Group’s actuaries which include price inflation, pension increases, earnings growth and the longevity of scheme members. The impact on the income statement and statement of financial position could be materially different if a different set of assumptions were used. The assumptions adopted for the Group's pension schemes are set out in note 11 to the financial statements, together with a sensitivity analysis of the scheme liabilities to changes in those assumptions. Basis of consolidation For third party acquisitions, assets acquired and liabilities assumed are measured at their acquisition date fair values. Where these acquisitions relate to the acquisition of a business between entities under the control of the Irish Government, assets acquired and liabilities assumed are measured at their carrying value in the books of the transferor at the date of transfer, adjusted for any differences in accounting policies. 222 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Consolidated income statement for the year ended 31 December 2014 Continuing operations Interest and similar income Interest expense and similar charges Net interest income Dividend income Fee and commission income Fee and commission expense Net trading (loss)/income Profit/(loss) on disposal/transfer of loans and receivables Other operating income Other income Total operating income Administrative expenses Impairment and amortisation of intangible assets Impairment and depreciation of property, plant and equipment Total operating expenses Operating profit/(loss) before provisions Writeback/(provisions) for impairment on loans and receivables Writeback/(provisions) for liabilities and commitments (Provisions)/writeback for impairment on financial investments available for sale Operating profit/(loss) Associated undertakings Profit on disposal of property Profit on disposal of businesses Profit/(loss) before taxation from continuing operations Income tax (charge)/credit from continuing operations Profit/(loss) after taxation from continuing operations Discontinued operations Profit after taxation from discontinued operations Profit/(loss) for the year Attributable to: Owners of the parent: Profit/(loss) from continuing operations Profit from discontinued operations Basic earnings/(loss) per share Continuing operations Discontinued operations Diluted earnings/(loss) per share Continuing operations Discontinued operations Richard Pym Chairman 4 March 2015 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Notes 2 3 4 5 5 6 7 8 9 30 31 26 37 12 29 13 14 16 17 18(a) 18(a) 18(b) 18(b) 2014 € m 3,090 (1,403) 1,687 25 430 (40) (1) 52 379 845 2,532 (1,527) (65) (46) (1,638) 894 185 4 (1) 1,082 23 6 – 1,111 (230) 881 34 915 881 34 915 0.2c – 0.2c 0.2c – 0.2c 2013 € m 3,321 (1,973) 1,348 4 414 (36) 102 (226) 104 362 1,710 (1,359) (73) (51) (1,483) 227 (1,916) (17) 2012 € m 3,916 (2,810) 1,106 1 396 (29) (100) (803) 50 (485) 621 (1,716) (60) (60) (1,836) (1,215) (2,434) (9) 9 (86) (1,697) (3,744) 7 2 1 (1,687) 90 (1,597) 10 2 3 (3,729) 172 (3,557) – – (1,597) (3,557) (1,597) (3,557) – – (1,597) (3,557) (0.3c) – (0.3c) (0.3c) – (0.3c) (0.7c) – (0.7c) (0.7c) – (0.7c) 223 223 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G David Duffy Chief Executive Officer Catherine Woods Director David O’Callaghan Company Secretary Consolidated statement of comprehensive income for the year ended 31 December 2014 Profit/(loss) for the year Other comprehensive income – continuing operations Items that will not be reclassified to profit or loss: Net change in property revaluation reserves Net actuarial (losses)/gains in retirement benefit schemes, net of tax Total items that will not be reclassified to profit or loss Items that may be reclassified subsequently to profit or loss: Net change in foreign currency translation reserves Net change in cash flow hedges, net of tax Net change in fair value of available for sale securities, net of tax Notes 16 16 16 16 Total items that may be reclassified subsequently to profit or loss Other comprehensive income for the year, net of tax from continuing operations Total comprehensive income for the year Attributable to: Owners of the parent: Continuing operations Discontinued operations 2014 € m 915 (1) (939) (940) 27 348 728 1,103 163 1,078 1,044 34 1,078 2013 € m 2012 € m (1,597) (3,557) (1) 251 250 (9) (18) 513 486 736 (2) (716) (718) 34 (162) 1,295 1,167 449 (861) (3,108) (861) – (861) (3,108) – (3,108) Richard Pym Chairman 4 March 2015 224 David Duffy Chief Executive Officer Catherine Woods Director David O’Callaghan Company Secretary Allied Irish Banks, p.l.c. Annual Financial Report 2014 Consolidated statement of financial position as at 31 December 2014 Assets Cash and balances at central banks Items in course of collection Disposal groups and non-current assets held for sale Trading portfolio financial assets Derivative financial instruments Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments available for sale Interests in associated undertakings Intangible assets Property, plant and equipment Other assets Current taxation Deferred taxation Prepayments and accrued income Retirement benefit assets Total assets Liabilities Deposits by central banks and banks Customer accounts Disposal groups held for sale Derivative financial instruments Debt securities in issue Current taxation Other liabilities Accruals and deferred income Retirement benefit liabilities Provisions for liabilities and commitments Subordinated liabilities and other capital instruments Total liabilities Shareholders’ equity Share capital Share premium Reserves Total shareholders’ equity Total liabilities and shareholders’ equity Notes 49 20 21 22 23 24 27 28 29 30 31 32 11 33 34 20 22 35 36 11 37 38 39 39 2014 € m 5,393 146 14 1 2,038 1,865 63,362 9,423 20,185 69 171 290 211 10 3,576 526 175 2013 € m 4,132 164 2,782 2 1,629 2,048 65,713 15,598 20,368 58 176 301 242 1 3,828 609 83 107,455 117,734 16,768 64,018 – 2,334 7,861 – 1,225 729 1,239 258 1,451 95,883 1,344 1,752 8,476 11,572 107,455 23,121 65,667 3,593 1,960 8,759 48 1,321 943 177 299 1,352 107,240 5,248 2,848 2,398 10,494 117,734 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Richard Pym Chairman 4 March 2015 David Duffy Chief Executive Officer Catherine Woods Director David O’Callaghan Company Secretary Allied Irish Banks, p.l.c. Annual Financial Report 2014 225 n o i t a m r o n f i l a r e n e G Consolidated statement of cash flows for the year ended 31 December 2014 Reconciliation of profit/(loss) before taxation to net cash inflow/(outflow) from operating activities Profit/(loss) for the year before taxation from continuing operations 1,111 (1,687) (3,729) Notes 2014 € m 2013 € m 2012 € m Adjustments for: Profit on disposal of businesses Profit on disposal of property, plant and equipment (Profit)/loss on disposal/transfer of loans and receivables Dividends received from equity securities Dividends received from associated undertakings Associated undertakings net income (Writeback)/provisions for impairment on loans and receivables (Writeback)/provisions for liabilities and commitments Provisions/(writeback) for impairment on financial investments available for sale Change in other provisions Retirement benefits – defined benefit credit Termination benefits Contributions to defined benefit pension schemes 14 13 7 4 29 29 26 37 12 11 11 Depreciation, amortisation and impairment 30 & 31 3 8 8 8 4 Interest on subordinated liabilities and other capital instruments Net loss on buy back of debt securities in issue Profit on disposal of financial investments available for sale Loss on termination of fair value hedging swaps Remeasurement of NAMA senior bonds Amortisation of premiums and discounts Change in prepayments and accrued income Change in accruals and deferred income Net cash inflow/(outflow) from operating activities before changes in operating assets and liabilities Change in deposits by central banks and banks Change in customer accounts Change in loans and receivables to customers(1) Change in NAMA senior bonds Change in loans and receivables to banks Change in trading portfolio financial assets Change in derivative financial instruments Change in items in course of collection Change in debt securities in issue Change in notes in circulation Change in other assets Change in other liabilities Dividends received from equity securities Effect of exchange translation and other adjustments Net cash (outflow)/inflow from operating assets and liabilities Net cash (outflow)/inflow from operating activities before taxation Taxation (paid)/refund Net cash (outflow)/inflow from operating activities Investing activities (note a) Financing activities (note b) Change in cash and cash equivalents Opening cash and cash equivalents Effect of exchange translation adjustments Closing cash and cash equivalents – (6) (52) (25) (11) (23) (185) (5) 1 70 (3) (2) (87) 111 256 1 (389) 208 (132) 31 87 (220) 736 (6,395) (3,586) 3,736 6,343 (420) 1 (271) 24 (886) 5 36 (299) 25 (223) (1,910) (1,174) (26) (1,200) 1,706 (160) 346 5,730 308 6,384 (1) (2) 226 – (3) (7) 1,916 17 (9) 84 (131) (3) (234) 124 241 – (41) 10 (62) (57) (51) (316) (3) (2) 803 – (14) (10) 2,434 9 86 175 (123) 132 (236) 120 223 – (31) 7 – (128) 114 153 14 (20) (5,309) (8,456) 3,397 5,078 1,916 567 21 249 26 2,654 6,798 2,438 265 33 (776) 13 (1,875) (4,996) (50) (5) (264) – 78 3,829 3,843 40 3,883 (3,827) (160) (104) 5,926 (92) 5,730 9 254 (102) – (31) (1,897) (1,917) 42 (1,875) 546 (160) (1,489) 7,373 42 5,926 226 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Consolidated statement of cash flows (continued) for the year ended 31 December 2014 (a) Investing activities Net cash outflow on acquisition of business combinations Purchase of financial investments available for sale Proceeds from sales and maturity of financial investments available for sale Additions to property, plant and equipment Disposal of property, plant and equipment Additions to intangible assets Proceeds of disposal of investment in associated undertakings Proceeds of disposal of investment in businesses and subsidiaries Dividends received from associated undertakings Cash flows from investing activities (b) Financing activities Interest paid on subordinated liabilities and other capital instruments Cash flows from financing activities Notes 17 28 8 & 28 31 13 & 31 30 29 29 2014 € m – (7,336) 2013 € m 2012 € m (325)(2) (6,666) – (5,059) 8,791 3,040 5,685 (47) 9 (60) 2 336(4) 11 (32) 15 (62) 10 190(3) 3 1,706 (3,827) (160) (160) (160) (160) (37) 3 (71) – 11 14 546 (160) (160) (1)Also includes loans and receivables to customers within disposal groups and non-current assets held for sale. (2)Acquisition of Ark Life Assurance Company Limited. (3)Disposal of Aviva Life Holdings Ireland Limited. (4)Disposal of Ark Life Assurance Company Limited. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 227 n o i t a m r o n f i l a r e n e G m € 4 9 4 , 0 1 3 1 m € m € ) 2 6 4 ( m € ) 2 4 4 ( 5 1 9 3 6 1 8 7 0 , 1 – – – – – – – 2 7 5 , 1 1 – – – – – – – ) 8 ( – ) 8 ( 5 – – – – – – – – – – – 7 2 7 2 – – – – – – – ) 2 6 4 ( ) 5 1 4 ( ) 2 ( m € 5 1 9 ) 9 3 9 ( ) 4 2 ( 4 6 5 – – 8 5 7 0 0 0 , 5 7 4 6 , 5 1 2 6 , 5 5 3 m € – 8 4 3 8 4 3 – – – – – – – m € 1 4 6 – 8 2 7 8 2 7 – – – – – – – 8 1 m € – ) 1 ( ) 1 ( – – – – – – – 3 8 3 9 6 3 , 1 7 1 – – – – – – m € – – – – 6 2 9 , 3 ) 6 2 9 , 3 ( l a t o T e r a h S d e s a b s e v r e s e r s t n e m y a p s e r a h s y r u s a e r T n g i e r o F y c n e r r u c s e v r e s e r n o i t a l s n a r t e u n e v e R s e v r e s e r w o l f h s a C e l b a l i a v A n o i t a u l a v e R l a t i p a C i g n g d e h s e v r e s e r e l a s r o f s e v r e s e r s e i t i r u c e s s e v r e s e r s e v r e s e r n o i t p m e d e r l t n e r a p f o s r e d o h y t i u q e o t e l b a t u b i r t t A – – – ) 4 6 5 ( – – – – ) 5 7 ( ) 9 3 6 ( 8 5 9 , 1 l a t i p a C s e v r e s e r e r a h S i m u m e r p e r a h S l a t i p a c m € 7 9 5 , 2 m € 8 4 8 , 2 m € 8 4 2 5 , – – – – ) 2 2 ( – – – – 2 2 r a e y e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T r a e y e h t r o f t i f o r P ) 6 1 t e o n ( e m o c n i i e v s n e h e r p m o c r e h O t r a e y e h t r o f e m o c n i i e v s n e h e r p m o c l a t o T d e d r o c e r , s r e n w o h t i w s n o i t c a s n a r T y t i u q e n i y l t c e r i d s r e n w o o t s n o i t i u b i r t s d d n a y b s n o i t u b i r t n o C 4 1 0 2 y r a u n a J 1 t A ) 1 4 e o n ( t s n o i t u b i r t n o c l a t i p a C u e i l n i d e u s s i s e r a h s y r a n d r O i p u o r G e h t f o ) 9 3 e o n ( t i d n e d v d f o i – ) 6 2 9 3 ( , ) 1 4 d n a 9 3 s e t o n ( s e r a h s d e r r e e d f o n o i t a f l l e c n a C – – ) 4 7 0 , 1 ( – – – ) 6 9 0 , 1 ( ) 4 0 9 3 ( , 2 5 7 , 1 4 4 3 1 , ) 1 4 d n a 9 3 s e o n ( t l a t i p a c f o n o i t c u d e R ) 1 4 e o n ( t s t n e m e v o m r e h t O s t n e m y a p d e s a b e r a h S s n o i t i u b i r t s d d n a y b s n o i t u b i r t n o c l t a o T p u o r G e h t f o s r e n w o o t 4 1 0 2 r e b m e c e D 1 3 t A y t i u q e n i s e g n a h c f o t t n e m e a t s d e t a d i l o s n o C 4 1 0 2 r e b m e c e D 1 3 d e d n e r a e y e h t r o f 228 Allied Irish Banks, p.l.c. Annual Financial Report 2014 l t n e r a p f o s r e d o h y t i u q e o t e b a t u b i r t t l A l a t o T m € 4 1 1 1 4 2 , 1 1 5 5 3 , 1 1 6 3 7 ) 1 6 8 ( ) 7 9 5 , 1 ( – – – – – 4 9 4 , 0 1 – 3 2 3 2 – – – – – – ) 0 1 ( ) 0 1 ( 3 1 e r a h S d e s a b m € s e v r e s e r s t n e m y a p s e r a h s y r u s a e r T i n g e r o F y c n e r r u c s e v r e s e r l n o i t a s n a r t e u n e v e R s e v r e s e r i g n g d e h s e v r e s e r w o l f h s a C l e a s r o f l e b a l i a v A s e v r e s e r s e i t i r u c e s s e v r e s e r n o i t a u a v e R l l a t i p a C s e v r e s e r e r a h S i m u m e r p e r a h S l a t i p a c m € ) 2 6 4 ( – ) 2 6 4 ( – – – – – – – – m € ) 3 3 4 ( – ) 3 3 4 ( – ) 9 ( ) 9 ( – – – – – ) 2 6 4 ( ) 2 4 4 ( m € 6 9 9 4 1 1 0 1 1 , 1 1 5 2 ) 7 9 5 , 1 ( ) 6 4 3 , 1 ( 9 1 2 – 0 1 5 ) 2 ( 4 3 2 m € – 7 6 7 6 – ) 8 1 ( ) 8 1 ( – – – m € 2 9 2 – 2 9 2 – 3 1 5 3 1 5 – – – ) 4 1 ( ) 4 6 1 ( ) 4 1 ( 5 3 ) 4 6 1 ( 1 4 6 m € – 4 2 4 2 – ) 1 ( ) 1 ( – – – ) 5 ( ) 5 ( 8 1 – m € 8 3 6 , 2 8 3 6 , 2 – – – – m € 0 9 8 , 2 0 9 8 , 2 – – – ) 9 1 2 ( – – – 8 7 1 – – ) 2 4 ( ) 1 4 ( ) 2 4 ( – m € 6 0 2 , 5 6 0 2 , 5 – – – – – – 2 4 2 4 7 9 5 , 2 8 4 8 , 2 8 4 2 , 5 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l r a e y e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T r a e y e h t r o f e m o c n i i e v s n e h e r p m o c l a t o T ) 6 1 t e o n ( e m o c n i i e v s n e h e r p m o c r e h t O r a e y e h t r o f s s o L d e t r o p e r s a 3 1 0 2 y r a u n a J 1 t A y c i l o p g n i t n u o c c a n i e g n a h C d e t a t s e r s A ) 1 4 e o n ( t s n o i t u b i r t n o c l a t i p a C u e i l n i d e u s s i s e r a h s y r a n d r O i p u o r G e h t f o s r e n w o o t y t i u q e n i y l t c e r i d d e d r o c e r s n o i t i u b i r t s d d n a y b s n o i t u b i r t n o C , s r e n w o h t i w s n o i t c a s n a r T ) 9 3 e o n ( t i d n e d v d f o i i a c n a n F i s n o i t i u b i r t s d d n a y b s n o i t u b i r t n o c l t a o T p u o r G e h t f o s r e n w o o t 3 1 0 2 r e b m e c e D 1 3 t A s t n e m y a p d e s a b e r a h S s t n e m e v o m r e h t O n o i t a m r o n f i l a r e n e G y t i u q e n i s e g n a h c f o t t n e m e a t s d e t a d i l o s n o C 3 1 0 2 r e b m e c e D 1 3 d e d n e r a e y e h t r o f Allied Irish Banks, p.l.c. Annual Financial Report 2014 229 Notes to the consolidated financial statements Note Page Note Page 1 2 3 4 5 6 7 8 9 Segmental information Interest and similar income Interest expense and similar charges Dividend income Net fee and commission income Net trading (loss)/income Profit/(loss) on disposal/transfer of loans and receivables Other operating income Administrative expenses 10 Share-based compensation schemes 11 Retirement benefits 12 13 14 15 16 (Provisions)/writeback for impairment on financial investments available for sale Profit on disposal of property Profit on disposal of businesses Auditor’s fees Taxation 17 Discontinued operations 18 Earnings per share 19 Distributions on equity shares 20 Disposal groups and non-current assets held for sale 21 Trading portfolio financial assets 22 Derivative financial instruments 23 24 25 Loans and receivables to banks Loans and receivables to customers Amounts receivable under finance leases and hire purchase contracts 26 Provisions for impairment on loans and receivables 27 NAMA senior bonds 28 29 30 Financial investments available for sale Interests in associated undertakings Intangible assets 231 237 237 237 237 238 238 239 239 240 241 247 247 247 248 249 251 252 253 253 254 255 260 260 261 261 262 263 266 268 31 Property, plant and equipment 32 Deferred taxation 33 Deposits by central banks and banks 34 Customer accounts 35 Debt securities in issue 36 Other liabilities 37 38 Provisions for liabilities and commitments Subordinated liabilities and other capital instruments 39 Share capital 40 Own shares 41 Capital reserves and capital redemption reserves 42 Capital contributions 43 Offsetting financial assets and financial liabilities 269 270 273 274 274 274 275 276 277 279 280 280 281 44 Memorandum items: contingent liabilities and commitments, and contingent assets 285 45 Subsidiaries and consolidated structured entities 46 Off-balance sheet arrangements and transferred financial assets Fair value of financial instruments Interest rate sensitivity Statement of cash flows 47 48 49 50 Related party transactions 51 Commitments 52 Employees 53 Regulatory compliance 54 55 Financial and other information Average balance sheets and interest rates 56 Non-adjusting events after the reporting period 57 Dividends 58 Approval of financial statements 288 290 294 305 308 309 320 321 321 322 323 325 325 325 230 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Notes to the consolidated financial statements 1 Segmental information The operating segments of the Group are as follows: – Domestic Core Bank (“DCB”); – AIB UK; – Financial Solutions Group (“FSG”); and – Group. These segments reflect the internal reporting structure which is used by management to assess performance and allocate resources. Domestic Core Bank (“DCB”) services the personal, business and corporate customers of AIB in the Republic of Ireland, in addition to wealth management services and has a strong presence in all key sectors including SMEs, mortgages, personal and corporate banking. All owner occupier mortgages in the Republic of Ireland are reported in DCB. This segment also includes the Group’s treasury and capital markets functions. AIB UK comprises retail and commercial banking operations in Great Britain operating under the trading name Allied Irish Bank (GB) (“AIB GB”) and in Northern Ireland operating under the trading name First Trust Bank (“FTB”). UK Structured Lending Services (“SLS”) deals with AIB UK customers in difficulty within one centre of expertise. Financial Solutions Group (“FSG”) is dedicated to supporting business and personal customers in financial difficulties on a case by case basis and Third Party Servicing of NAMA loans. Non-impaired loans connected to customers in financial difficulty are also reported in this segment. Group includes central control and support functions costs which include operations and technology, risk, audit, finance, general counsel, human resources and corporate affairs and strategy. Certain overheads related to these activities are managed and reported in the Group segment. The segments’ performance statements include all income and direct costs but exclude certain overheads which are managed centrally and the costs of these are included in the ‘Group’ segment. Funding and liquidity charges are based on each segment’s funding requirements and the Group’s funding cost profile, which is informed by wholesale and retail funding costs. Income on capital is allocated to segments based on each segment’s capital requirement. The cost of services between segments and from central support functions is based on the estimated actual cost incurred in providing the service. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 231 231 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 1 Segmental information (continued) Operations by business segment Net interest income Other income Total operating income Personnel expenses General and administrative expenses Depreciation, impairment and amortisation Total operating expenses Operating profit/(loss) before provisions (Provisions)/writeback for impairment DCB AIB UK € m € m 1,190 696 1,886 (406) (260) (44) (710) 1,176 275 69 344 (99) (69) (5) (173) 171 FSG € m 221 72 293 (105) (35) (7) (147) 146 on loans and receivables (196) (70) 451 Writeback/(provisions) for liabilities and commitments (Provisions) for impairment on financial investments available for sale Total (provisions)/writeback Operating profit/(loss) Associated undertakings Profit on disposal of property Profit/(loss) before taxation from 2 (1) (195) 981 18 3 – – (70) 101 5 3 3 – 454 600 – – Group Total Exceptional** € m € m 1 6 7 (157) (187) (29) 1,687 843 2,530 (767) (551) (85) items € m – 2 2 (24) (185) (26) 2014 Total € m 1,687 845 2,532 (791) (736) (111) (373) (1,403) (235) (1,638) (366) 1,127 (233) 894 – (1) – (1) 185 4 (1) 188 – – – – 185 4 (1) 188 (367) 1,315 (233) 1,082 – – 23 6 – – 23 6 continuing operations 1,002 109 600 (367) 1,344 (233) 1,111 **Exceptional and one-off items are shown separately above. These are items that management believe obscures the underlying performance trends in the business. Exceptional items include: – Profit on transfer of financial instruments to NAMA; – Termination benefits; – Bank levy; and – Restructuring and restitution expenses. For further information on these items see page 29. 232 Allied Irish Banks, p.l.c. Annual Financial Report 2014 1 Segmental information (continued) Operations by business segment Net interest income Other income/(loss) Total operating income/(loss) Personnel expenses General and administrative expenses Depreciation, impairment and amortisation Total operating expenses Operating profit/(loss) before provisions Provisions for impairment on loans DCB AIB UK € m € m 973 469 1,442 (452) (244) (54) (750) 692 177 68 245 (109) (56) (6) (171) 74 FSG € m 190 25 215 (128) (32) (1) (161) 54 and receivables (853) (166) (897) Writeback/(provisions) for liabilities and commitments Writeback/(provisions) for impairment on financial investments available for sale Total (provisions)/writeback Operating loss Associated undertakings Profit on disposal of property Profit on disposal of business – 10 (843) (151) 8 1 – 10 – (156) (82) 2 – – (8) (1) (906) (852) (3) – – Group Total Exceptional** € m € m items € m 2013 Total € m 5 17 22 (162) (187) (39) (388) (366) – 1 – 1 1,345 579 1,924 (851) (519) (100) (1,470) 3 1,348 (217) 362 (214) 1,710 147 (136) (24) (13) (704) (655) (124) (1,483) 454 (227) 227 (1,916) – (1,916) 3 9 (20) (17) – 9 (1,904) (20) (1,924) (365) (1,450) (247) (1,697) – – 1 7 1 1 – 1 – 7 2 1 Loss before taxation from continuing operations (142) (80) (855) (364) (1,441) (246) (1,687) Upon completion of the deleveraging target in the second half of 2013, certain assets transferred between segments with effect from 1 July 2013. **Exceptional and one-off items are shown separately above. These are items that management believe obscures the underlying performance trends in the business. Exceptional items include: – – Loss on disposal of loans; Loss on transfer of financial instruments to NAMA; – Termination benefits; – Retirement benefit curtailment; – Restructuring and restitution expenses; and – Gain on disposal of Aviva Life Holdings (“ALH”). For further information on these items see page 29. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 233 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 1 Segmental information (continued) DCB AIB UK € m € m Operations by business segment Net interest income Other income/(loss) Total operating income Personnel expenses General and administrative expenses Depreciation, impairment and amortisation Total operating expenses Operating profit/(loss) before provisions Provisions for impairment on loans and receivables Provisions for liabilities and commitments Provisions for impairment on financial investments available for sale Total provisions Operating loss Associated undertakings Profit on disposal of property Profit on disposal of business Profit/(loss) before taxation from continuing operations 747 346 1,093 (517) (238) (54) (809) 284 (202) (4) (84) (290) (6) 13 – 1 8 FSG € m 230 (45) 185 (168) (69) (6) (243) (58) Group Total Exceptional** € m € m items € m 27 (50) (23) (246) (196) (47) 1,106 318 1,424 (1,041) (589) (118) (489) (1,748) – (803) (803) 33 (119) (2) (88) 2012 Total € m 1,106 (485) 621 (1,008) (708) (120) (1,836) (512) (324) (891) (1,215) 102 67 169 (110) (86) (11) (207) (38) (97) (2,135) – – (5) (2) (97) (2,142) – – – – (2,434) (9) (86) (2,529) – – – – (2,434) (9) (86) (2,529) (135) (2,200) (512) (2,853) (891) (3,744) 2 – – (5) – 2 – 2 – 10 2 3 – – – 10 2 3 (133) (2,203) (510) (2,838) (891) (3,729) **Exceptional and one-off items are shown separately above. These are items that management believe obscures the underlying performance trends in the business. Exceptional items include: – Loss on disposal of loans; – Profit on transfer of financial instruments to NAMA; – Termination benefits; – Retirement benefit curtailment; and – Restructuring and restitution expenses. 234 Allied Irish Banks, p.l.c. Annual Financial Report 2014 1 Segmental information (continued) Other amounts – statement of financial position Loans and receivables to customers Interests in associated undertakings Total assets Customer accounts Total liabilities(1) Capital expenditure Loans and receivables to customers Loans and receivables held for sale Interests in associated undertakings Total assets Customer accounts Total liabilities(1) Capital expenditure DCB € m 44,125 51 82,672 51,231 81,673 104 DCB € m 44,251 – 44 89,080 53,605 90,083 89 AIB UK € m 10,374 18 15,907 11,504 12,927 2 AIB UK € m 11,225 – 14 15,636 10,918 12,420 3 FSG € m 8,863 – 8,876 1,283 1,283 1 FSG € m 10,237 28 – 13,018 1,144 4,737 2 Group € m – – – – – – Group € m – – – – – – – 2014 Total € m 63,362 69 107,455 64,018 95,883 107 2013 Total € m 65,713 28 58 117,734 65,667 107,240 94 (1)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 liabilities. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 235 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 1 Segmental information (continued) Geographic information - continuing operations(1)(2) Gross external revenue Inter-geographical segment revenue Total revenue Geographic information - continuing operations(1)(2) Gross external revenue Inter-geographical segment revenue Total revenue Geographic information - continuing operations(1) Gross external revenue Inter-geographical segment revenue Total revenue Republic of Ireland € m United Kingdom € m Rest of the World € m 1,975 314 2,289 547 (308) 239 10 (6) 4 Republic of Ireland € m United Kingdom € m Rest of the World € m 1,546 (47) 1,499 169 53 222 (5) (6) (11) Republic of Ireland € m United Kingdom € m Rest of the World € m 164 54 218 517 (34) 483 (60) (20) (80) 2014 Total € m 2,532 – 2,532 2013 Total € m 1,710 – 1,710 2012 Total € m 621 – 621 Revenue from external customers comprises interest and similar income (note 2) interest expense and similar charges (note 3) and all other items of income (notes 4 to 8). Geographic information Non-current assets(3) Geographic information Non-current assets(3) Geographic information Non-current assets(3) Republic of Ireland € m United Kingdom € m Rest of the World € m 441 19 1 Republic of Ireland € m 454 United Kingdom € m 22 Rest of the World € m 1 Republic of Ireland € m 489 United Kingdom € m 30 Rest of the World € m 1 2014 Total € m 461 2013 Total € m 477 2012 Total € m 520 (1)The geographical distribution of total revenue is based primarily on the location of the office recording the transaction. (2)For details of significant geographic concentrations, see the Risk management section. (3)Non-current assets comprise intangible assets, and property, plant and equipment. 236 Allied Irish Banks, p.l.c. Annual Financial Report 2014 2 Interest and similar income Interest on loans and receivables to customers Interest on loans and receivables to banks Interest on trading portfolio financial assets Interest on NAMA senior bonds Interest on financial investments available for sale 2014 € m 2,421 22 – 80 567 3,090 2013 € m 2,520 19 – 130 652 2012 € m 2,976 31 1 329 579 3,321 3,916 Interest income includes a credit of € 138 million (2013: a credit of € 138 million; 2012: a credit of € 217 million) removed from other comprehensive income in respect of cash flow hedges. Interest income reported above, calculated using the effective interest method, relates to financial assets not carried at fair value through profit or loss. Interest income recognised on impaired loans amounts to € 329 million (2013: € 373 million; 2012: € 392 million). 3 Interest expense and similar charges Interest on deposits by central banks and banks Interest on customer accounts Interest on debt securities in issue Interest on subordinated liabilities and other capital instruments 2014 € m 46 766 335 256 1,403 2013 € m 123 1,265 344 241 1,973 2012 € m 252 1,823 512 223 2,810 Interest expense includes a charge of € 92 million (2013: a charge of € 133 million; 2012: a charge of € 128 million) removed from other comprehensive income in respect of cash flow hedges. Included within interest expense is a charge of € 59 million (2013: € 173 million; 2012: € 388 million) in respect of the Irish Government’s Eligible Liabilities Guarantee (“ELG”) Scheme. Interest expense reported above, calculated using the effective interest method, relates to financial liabilities not carried at fair value through profit or loss. 4 Dividend income Dividend income relates to income from equity shares held as financial investments available for sale and amounts to € 25 million (2013: € 4 million; 2012: € 1 million). In 2014, this dividend income was received on NAMA subordinated bonds. 5 Net fee and commission income Retail banking customer fees Credit related fees Other commissions Insurance commissions Fee and commission income Fee and commission expense(1) 2014 € m 373 30 – 27 430 (40) 390 2013 € m 351 31 – 32 414 (36) 378 2012 € m 322 33 9 32 396 (29) 367 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i (1)Fee and commission expense includes ATM expenses of € 5 million (2013: € 5 million; 2012: € 8 million) and credit card commissions of € 26 million (2013: € 23 million; 2012: € 12 million). Fees and commissions which are an integral part of the effective interest rate are recognised as part of interest and similar income (note 2) or interest expense and similar charges (note 3). n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 237 Notes to the consolidated financial statements 6 Net trading (loss)/income Foreign exchange contracts Interest rate contracts and debt securities Credit derivative contracts Equity securities, index contracts and warrants 2014 € m 45 (68) (2) 24(1) (1) 2013 € m 37 53 – 12(2) 2012 € m 45 (75) (38) (32)(3) 102 (100) (1)Mark to market gain on equity warrants (2)Includes a gain of € 10 million arising on disposal of ALH (note 17). (3)The mark to market loss on put options, held by AIB and Aviva for the sales of ALH and Ark Life respectively, amounted to € 32 million (note 17). The total hedging ineffectiveness on cash flow hedges reflected in the income statement amounted to Nil (2013: a credit of € 7 million; 2012: a charge of € 7 million) and is included in net trading income. 7 Profit/(loss) on disposal/transfer of loans and receivables The following table sets out details of the profit/(loss) on disposal/transfer of loans and receivables: Profit/(loss) on disposal of loans and receivables to customers Profit/(loss) on transfer of loans and receivables to NAMA Total 2014 € m 50 2 52 2013 € m (201) (25) (226) 2012 € m (962) 159 (803) Profit/(loss) on disposal of loans and receivables to customers includes the impact of deleveraging non-core assets of Nil (2013: loss € 193 million; 2012: loss € 962 million). In February 2010, AIB was designated a participating institution under the NAMA Act and following the enactment of legislation in November 2009, financial instruments transferred to NAMA during 2010 and 2011. Whilst these transfers were practically complete at 31 December 2011, a provision was made in respect of adjustments to transfers which had not settled at that date (note 37). Subsequently, NAMA resolved certain issues in relation to loans and receivables which had transferred in 2010 and 2011. This resulted in the profit/(loss) set out above. 238 Allied Irish Banks, p.l.c. Annual Financial Report 2014 8 Other operating income Profit on disposal of available for sale debt securities Loss on termination of hedging swaps(1) Profit on disposal of available for sale equity securities Effect of re-estimating the timing of cash flows on NAMA senior bonds (note 27) Net loss on buy back of debt securities in issue Miscellaneous operating (expense)/income(2) 2014 € m 369 (208) 20 132 (1) 67 379 2013 € m 30 (10) 11 62 – 11 104 (1)Realised loss where the hedged item was disposed of, the majority of which is reported in profit on disposal of available for sale debt securities. (2)Miscellaneous operating income includes: – Foreign exchange gains € 11 million (2013: a credit of € 1 million; 2012: Nil). – Income of € 27 million in settlement of claim (2013: Nil; 2012: Nil). – Nil charge relating to terminated cash flow hedges which has been removed from equity (2013: Nil; 2012: charge of € 2 million). – Effect of realisation/re-estimation of cash flows on loans and receivables previously restructured - credit of € 24 million (2013: Nil; 2012: Nil). 9 Administrative expenses Personnel expenses: Wages and salaries Termination benefits(1) Retirement benefits(2) (note 11) Social security costs Other personnel expenses Total personnel expenses General and administrative expenses: Irish banking levy Other general and administrative expenses Total general and administrative expenses 2014 € m 2013 € m 599 24 91 66 11 791 60 676 736 653 86 (112) 77 – 704 – 655 655 2012 € m 25 (7) 6 – – 26 50 2012 € m 786 171 (102) 85 68 1,008 – 708 708 1,527 1,359 1,716 (1)At 31 December 2014, a charge of € 24 million (2013: a charge of € 86 million; 2012: a charge of € 164 million) has been made to the income statement in respect of termination benefits arising from the voluntary severance programme. This amount comprises Nil (2013: € 23 million; 2012: € 140 million) in respect of past service costs relating to the early retirement scheme and € 24 million (2013: € 92 million; 2012: € 38 million) relating to the voluntary severance scheme (note 11) and Nil (2013: a credit of € 29 million; 2012: € 14 million) in respect of a pension curtailment gain for voluntary severance employees. In addition, a provision of Nil (2013: Nil; 2012: € 7 million) was made in respect of other termination benefits, principally, in the Isle of Man/Channel Islands. (2)Comprises a credit of € 3 million relating to defined benefit expense (2013: credit of € 131 million; 2012: credit of € 123 million), a defined contribution expense charge of € 86 million (2013: € 13 million; 2012: € 13 million) and a long term disability payments expense charge of € 8 million (2013: € 6 million; 2012: € 8 million) (note 11). Employee numbers by segment are set out in note 52. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 239 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 10 Share-based compensation schemes The Group operates a number of share-based compensation schemes as outlined in this note on terms approved by the shareholders. The share-based compensation schemes which AIB Group operates in respect of ordinary shares in Allied Irish Banks, p.l.c., are: (i) The AIB Group Share Option Scheme; (ii) Employees’ Profit Sharing Schemes; (iii) AIB Group Performance Share Plan 2005. At 31 December 2014, the ordinary shares of Allied Irish Banks, p.l.c. were trading at € 0.079 per share, accordingly, there is no expectation that outstanding options will be exercised. (i) AIB Group Share Option Scheme The following disclosures regarding the ‘AIB Group Share Option Scheme’ (the ‘2000 Scheme’) relate to both AIB Group and to Allied Irish Banks, p.l.c.. Options were last granted under this scheme in 2005, and these options vested in 2008 based on the 2007 earnings per share out-turn, and are exercisable up to 2015, however, as these options are deeply out of the money, there is no expectation that they will be exercised. The following table summarises the share option scheme activity over each of the years ended 31 December 2014, 2013 and 2012. Number of options ’000 3,490.7 – (2,285.7) 1,205.0 1,205.0 2014 Weighted average exercise price € 13.85 – 12.62 16.20 16.20 Number of options ’000 5,746.5 – (2,255.8) 3,490.7 3,490.7 2013 Weighted average exercise price € Number of options ’000 13.64 8,353.7 – 13.30 13.85 13.85 – (2,607.2) 5,746.5 5,746.5 2012 Weighted average exercise price € 13.62 – 13.58 13.64 13.64 Outstanding at 1 January Exercised Forfeited/lapsed Outstanding at 31 December Exercisable at 31 December (ii) Employees’ Profit Sharing Schemes The Company operates the ‘AIB Approved Employees’ Profit Sharing Scheme 1998’ (‘the Scheme’) on terms approved by the shareholders at the 1998 Annual General Meeting. All employees, including executive directors of the Company and certain subsidiaries are eligible to participate, subject to minimum service periods and being in employment on the date on which an invitation to participate is issued. The Directors, at their discretion, may set aside each year, for distribution under the Scheme, a sum not exceeding 5% of eligible profits of participating companies. No shares have been awarded under this Scheme since 2008. (iii) AIB Group Performance Share Plan 2005 This Plan was approved by the shareholders at the 2005 AGM. Conditional grants of awards of ordinary shares are made to employees. There were no conditional grants outstanding at the end of December 2012 and there were no awards of performance shares in 2014 or 2013. The plan will terminate in 2015. Income statement expense The total expense arising from share-based payment transactions amounted to Nil for the year ended 31 December 2014 (2013: Nil; 2012: Nil). Limitations on share-based payment schemes The Company complies with guidelines issued by the Irish Association of Investment Managers in relation to shares of Allied Irish Banks, p.l.c. issued under the above schemes. 240 Allied Irish Banks, p.l.c. Annual Financial Report 2014 11 Retirement benefits The Group operates a number of defined contribution and defined benefit schemes for employees. All defined benefit schemes are closed to future accrual. Defined contribution schemes From 1 January 2014, all staff transferred to defined contribution schemes with a standard employer contribution of 10% plus an additional matched employer contribution, subject to limits based on age bands, of 12%, 15% or 18%. In 2014, the employer contribution was 12%, 15% or 18% for each employee irrespective of whether the staff member made a contribution. The same contribution arrangement will continue in 2015. For members of defined contribution schemes in 2013, the standard contribution rate to the Irish DC scheme was 8% and 10% in respect of the defined contribution element of a hybrid arrangement that was in place for certain staff. In 2013, the UK DC scheme had employer contributions ranging from 5% to 20%, increasing as the employee gets older. The member contribution rate also increases with age. All members of the UK DC scheme also accrued benefits under S2P (the UK State Second Pension). The total cost in respect of the Irish DC scheme, the EBS DC scheme and the UK DC scheme for 2014 was € 86 million (2013: € 13 million; 2012: € 13 million). The cost in respect of defined contributions is included in administrative expenses (note 9). Defined benefit schemes All defined benefit schemes operated by the Group closed to future accrual with effect from 31 December 2013 and staff transferred to defined contribution schemes for future pension benefits. This led to a reduction of € 231 million in the defined benefit obligation and a credit to the income statement as a negative past service cost in 2013. The most significant defined benefit schemes operated by the Group are the AIB Group Irish Pension Scheme (‘the Irish scheme’) and the AIB Group UK Pension Scheme (‘the UK scheme’). Retirement benefits for the defined benefit schemes are calculated by reference to service and Final Pensionable Salary at 31 December 2013. The Final Pensionable Salary used in the calculation of this benefit for staff is based on their average pensionable salary in the period between 30 June 2009 and 31 December 2013. This calculation of benefit for each staff member will revalue between 1 January 2014 and retirement date in line with the statutory requirement to revalue deferred benefits. There is no link to any future changes in salaries. Regulatory framework In Ireland, the Pensions Act provisions set out the requirement for a defined benefit scheme that fails the Minimum Funding Standard (“MFS”) to have a funding plan in place and approved by the Pensions Authority. The objective of an MFS funding plan is to set out the necessary corrective action to restore the funding of the scheme over a reasonable time period and enable the scheme to meet the MFS standard at a future date. The AIB MFS funding proposal, which was agreed in 2013 under these regulatory requirements with the Pensions Authority and Trustee of the Irish Scheme, has remaining average contributions of € 50.5 million per annum over the next four years. Responsibilities for governance The Trustees of each Group pension scheme are ultimately responsible for the governance of the schemes. Risks Details of the Pension risk to which the Group is exposed is set out in the Risk section on page 156 of this report. Valuations Independent actuarial valuations for the main Irish and UK schemes are carried out on a triennial basis by the Schemes’ actuary, Mercer. The last such valuations of the Irish and UK schemes were carried out as at 30 June 2012 and 31 December 2011 respectively using Projected Unit Methods. The next actuarial valuations will be carried out in respect of the Irish and UK schemes for valuation dates no later than 30 June 2015 and 31 December 2014 respectively. Actuarial valuations are available for inspection by the members of the schemes. Allied Irish Banks, p.l.c. Annual Financial Report 2014 241 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 11 Retirement benefits (continued) Pension Levy The Irish Finance (No 2) Act 2011 which was signed into law in June 2011, introduced a stamp duty levy of 0.6% on the market value of assets under management in Irish pension schemes, for the years 2011 to 2014 (inclusive). The levy is based on the market value of the assets at the 30 June in each relevant year. The Irish Finance Act 2014 which was signed into law in December 2014, introduced an additional stamp duty levy of 0.15% on the market value of the assets under management in Irish pension schemes, for the years 2014 and 2015 (inclusive). The levy is based on the market value of the assets at the 30 June in each relevant year. In 2014, a levy of € 30.3 million was paid in respect of the Irish defined benefit schemes and a levy of € 2.4 million was paid in respect of the Irish DC schemes. The payment of the levy in respect of the Irish defined benefit schemes was incorporated into the return on pension scheme assets. Contributions The total contributions to all the defined benefit pension schemes operated by the Group in 2015 are estimated to be € 83.6 million. Payments in 2014 amounted to € 87 million, of which € 82 million related to the Irish scheme, as required by regulation, as part of the Scheme’s Minimum Funding Standard regulatory funding plan. Voluntary Severance Programme During 2013, the Group recognised a past service cost in the income statement and an increase in the benefit obligation of € 23 million for the Group’s early retirement scheme. Furthermore, a negative past service cost of € 29 million was recognised in the income statement in relation to employees who left under the voluntary severance scheme and who were members of a Group defined benefit pension scheme. 242 Allied Irish Banks, p.l.c. Annual Financial Report 2014 11 Retirement benefits (continued) Financial assumptions The following table summarises the financial assumptions adopted in the preparation of these financial statements in respect of the main schemes at 31 December 2014 and 2013. The assumptions have been set based upon the advice of the Group’s actuary. Financial assumptions Irish scheme Rate of increase of pensions in payment Discount rate Inflation assumptions UK scheme Rate of increase of pensions in payment Discount rate Inflation assumptions (RPI) Other schemes Rate of increase of pensions in payment Discount rate Inflation assumptions (1)Nil for the next 3 years and 1.75% per annum thereafter. 2014 % 1.40(1) 2.20 1.75 3.00 3.70 3.00 2013 % 1.70 3.90 2.00 3.30 4.70 3.30 0.00 – 3.00 2.20 – 4.00 1.75 – 3.00 0.00 – 3.10 3.90 – 5.00 2.00 – 3.40 Mortality assumptions The life expectancies underlying the value of the scheme liabilities for the Irish and UK schemes at 31 December 2014 and 2013 are shown in the following table: Life expectancy - years Retiring today age 63 Retiring in 10 years at age 63 Males Females Males Females 2014 24.8 26.2 26.1 27.3 2014 26.3 28.6 27.5 29.8 24.7 26.0 26.0 27.2 26.3 28.5 27.4 29.7 Irish scheme 2013 UK scheme 2013 The mortality assumptions for the Irish scheme were updated in 2013 to reflect emerging market experience following a review of mortality undertaken by the Society of Actuaries in 2013. The table shows that a member of the Irish scheme retiring at age 63 on 31 December 2014 is assumed to live on average for 24.8 years for a male (26.3 years for the UK scheme) and 26.2 years for a female (28.6 years for the UK scheme). There will be variation between members but these assumptions are expected to be appropriate for all members. The table also shows the life expectancy for members aged 53 on 31 December 2014 who will retire in ten years. Younger members are expected to live longer in retirement than those retiring now, reflecting a decrease in mortality rates in future years due to advances in medical science and improvements in standards of living. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 243 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 11 Retirement benefits (continued) Movement in defined benefit obligation and scheme assets The following table sets out the movement in the defined benefit obligation and scheme assets during 2014 and 2013: Defined Fair value benefit of scheme obligation € m 2014 Net defined benefit assets liability (asset) € m € m Defined Fair value benefit of scheme obligation € m 2013 Net defined benefit assets liability (asset) € m € m At 1 January Included in profit or loss Current service cost Past service cost: – Termination benefits – Other Interest cost (income) Administration costs Included in other comprehensive income Remeasurements loss (gain): Actuarial loss (gain) arising from: Experience adjustments Changes in demographic assumptions Changes in financial assumptions Return on scheme assets excluding interest income(1) Translation adjustment on non-euro schemes Other Contributions by employer Contributions by employees Benefits paid 5,336 (5,242) 94 5,536 (4,774) – – (4) 215 – 211 (16) – 1,631 – 87 1,702 – – (178) (178) – – – (215) 1 (214) – – – (548) (94) (642) (87) – 178 91 – – (4) – 1 (3) (16) – 1,631 (548) (7) 1,060 (87) – – (87) 78 (6) (238) 221 – 55 8 (130) 101 – (27) (48) – 16 (223) (207) – – – (195) 3 (192) – – – (271) 23 (248) (234) (16) 222 (28) At 31 December 7,071 (6,007) 1,064 5,336 (5,242) Recognised on the statement of financial position as: Retirement benefit assets – UK scheme – Other schemes Total retirement benefit assets Retirement benefit liabilities – Irish scheme – EBS scheme – Other schemes Total retirement benefit liabilities Net pension deficit (1)Includes payment of pension levy. 164 11 175 1,125 97 17 1,239 1,064 762 78 (6) (238) 26 3 (137) 8 (130) 101 (271) (4) (296) (234) – (1) (235) 94 69 14 83 129 37 11 177 94 244 Allied Irish Banks, p.l.c. Annual Financial Report 2014 11 Retirement benefits (continued) Scheme assets The following table sets out an analysis of the scheme assets at 31 December 2014 and 2013: Cash and cash equivalents Equity instruments Quoted equity instruments: Basic materials Consumer goods Consumer services Energy Financials Healthcare Industrials Technology Telecoms Utilities Total quoted equity instruments Unquoted equity instruments Total equity instruments Debt instruments Quoted debt instruments Corporate bonds Government bonds Total quoted debt instruments Unquoted debt instruments Corporate bonds Government bonds Total unquoted debt instruments Total debt instruments Real estate(1)(2) Derivatives(2) Investment funds Quoted investment funds Alternatives Bonds Cash Equity Fixed interest Forestry Liability driven Multi-asset Property Total quoted investment funds Unquoted investment funds Total investment funds Mortgage backed securities(2) Structured debt Fair value of scheme assets at 31 December (1)Located in Europe. (2)A quoted market price in an active market is not available. Allied Irish Banks, p.l.c. Annual Financial Report 2014 2014 € m 185 70 180 148 106 312 147 169 150 49 48 1,379 10 1,389 823 869 1,692 49 28 77 1,769 230 5 13 420 24 133 82 35 801 423 1 1,932 – 1,932 486 11 6,007 2013 € m 278 81 181 144 125 306 128 172 134 55 44 1,370 6 1,376 685 542 1,227 49 28 77 1,304 187 7 13 316 22 241 64 33 547 320 1 1,557 5 1,562 528 – 5,242 245 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 11 Retirement benefits (continued) Sensitivity analysis for principal assumptions used to measure scheme liabilities There are inherent uncertainties surrounding the financial assumptions adopted in calculating the actuarial valuation of the pension schemes. Set out in the table below is a sensitivity analysis of the key assumptions for the Irish scheme and the UK scheme. Note that the changes in assumptions are independent of each other i.e. the effect of the reflected change in the discount rate assumes that there has been no change in the rate of mortality assumption and vice versa. Discount rate (0.25% movement) Inflation (0.25% movement) Future mortality (1 year movement) Irish scheme defined benefit obligation Decrease € m Increase € m UK scheme defined benefit obligation Decrease € m Increase € m (279) 268 164 301 (250) (163) (62) 63 35 65 (59) (35) Maturity of the defined benefit obligation The weighted average duration of the Irish scheme at 31 December 2014 is 22 years and of the UK scheme at 31 December 2014 is 20 years. Asset-liability matching strategies The Irish Scheme has conducted a review of its investment strategies which included a consideration of the nature and duration of its liabilities. The current Minimum Funding Standard regulatory funding plan requires that the scheme’s investment strategy takes account of the liabilities by the completion of the plan in 2018.The implementation of the investment strategy continued in 2014 and is ongoing. The UK scheme has already implemented a de-risking strategy that has resulted in a significant investment in liability matching assets. This strategy includes the elimination of all equity investments and the investment of all assets in a combination of corporate bonds, sovereign bonds and liability matching instruments. Funding arrangements and policy In addition to the funding arrangement set out in ‘Regulatory framework’ on page 241, AIB executed a series of agreements on 22 October 2013 to give effect to an asset backed funding plan for the UK scheme which replaced the previous funding plan. Based on the results of the 31 December 2011 valuation, the asset backed funding plan grants the scheme expected annual payments of £ 22.4 million (range of £ 15 million to £ 35 million), which will be payable quarterly from 1 January 2016 to 31 December 2032. In addition, if the 31 December 2032 actuarial valuation of the scheme reveals a deficit, the scheme will receive a termination payment equal to the lower of that deficit or £ 60 million (note 46). Long-term disability payments AIB provides an additional benefit to employees who suffer prolonged periods of sickness, subject to qualifying terms of the insurer. It provides for the partial replacement of income in event of illness or injury resulting in the employee’s long term absence from work. In 2014, the Group contributed € 8 million (2013: € 6 million; 2012: € 8 million) towards insuring this benefit. This amount is included in administrative expenses (note 9). 246 Allied Irish Banks, p.l.c. Annual Financial Report 2014 12 (Provisions)/writeback for impairment on financial investments available for sale Debt securities (note 28) Equity securities (note 28) (1)Of which Nil (2013: Nil; 2012: € 82 million) relates to NAMA subordinated bonds. 2014 € m (1) – (1) 2013 € m 18 (9)(1) 9 2012 € m – (86)(1) (86) 13 Profit on disposal of property 2014 The sale of properties surplus to requirements gave rise to profit on disposal of € 6 million. 2013 The sale of properties surplus to requirements and cessation of business gave rise to profit on disposal of € 2 million. 2012 Release of deferred profit on sale of property € 2 million. 14 Profit on disposal of businesses 2014 There was no profit or loss on disposal of businesses within the Group during the current financial year. 2013 The Group received an additional consideration of € 1 million which had been deferred in 2012 following the disposal of an offshore subsidiary. 2012 In November 2011, AIB entered into an agreement to sell its investment in AIB Asset Management Holdings (Ireland) Limited and related companies. AIB's investment was derecognised in May 2012, following regulatory approval for the disposal. This resulted in a profit of € 2 million before tax (tax charge: Nil). The sale of an offshore subsidiary also gave rise to a profit of € 1 million (tax charge Nil). i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 247 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 15 Auditor’s fees The disclosure of Auditor’s fees is in accordance with (SI 220)(1). This mandates disclosure of fees paid to the Group Auditor only (Deloitte & Touche Ireland) for services to the parent company in the categories set out below. All years presented are on that basis. Auditor’s fees (excluding VAT): Audit Other assurance services Taxation advisory services Other non-audit services 2014 € m 2013* € m 2.2 0.4 – 0.1 2.7 1.9 0.3 – 0.1 2.3 Included in the above are amounts paid to the Group Auditor, for services provided to other Group companies: – – – – audit € 0.3 million (2013*: € 0.1 million); other assurance services € 0.05 million (2013*: Nil); taxation advisory services Nil (2013*: € 0.01 million); and other non–audit services Nil (2013*: Nil). Other assurance services include fees for additional assurance issued by the firm outside of the audit of the statutory financial statements of the Group and subsidiaries. These fees include assignments where the Auditor, in Ireland, provides assurance to third parties. The Group policy on the provision of non-audit services to the parent and its subsidiary companies includes the prohibition on the provision of certain services and the pre-approval by the Audit Committee of the engagement of the Auditor for non-audit work. The Audit Committee has reviewed the level of non-audit services fees and is satisfied that it has not affected the independence of the Auditor. It is Group policy to subject all large consultancy assignments to competitive tender, where appropriate. The following table shows fees paid to overseas auditors (excluding Deloitte & Touche Ireland) Auditor’s fees excluding Deloitte & Touche Ireland (excluding VAT)(2): 2014 € m 4.8 2013* € m 3.2 (1)SI 220 is titled the European Communities (Statutory Audits) (Directive 2006/43/EC) Regulations 2010. (2)In conjunction with the Prudential Regulatory Authority in the UK, Deloitte LLP were appointed to undertake a Section 166 Review in AIB Group (UK) p.l.c. in 2012. During 2014, € 4.3 million has been paid to Deloitte LLP as this review has continued throughout the year (2013*: € 2.8 million). *Amounts paid in 2013 are from 20 June 2013 (date of appointment of Deloitte & Touche as Group Auditor). 248 Allied Irish Banks, p.l.c. Annual Financial Report 2014 16 Taxation Allied Irish Banks, p.l.c. and subsidiaries Corporation tax in Republic of Ireland Current tax on income for the year Adjustments in respect of prior years Double taxation relief Foreign tax Current tax on income for the year Adjustments in respect of prior years Deferred taxation Origination and reversal of temporary differences Adjustments in respect of prior years Reduction in carrying value of deferred tax assets in respect of carried forward losses Total tax (charge)/credit for the year Effective tax rate 2014 € m 2013 € m 2012 € m (1) – (1) – (1) – 34 34 33 (156) (21) (86) (263) (230) – 17 17 – 17 (32) 1 (31) (14) 88 16 – 104 90 – (2) (2) – (2) 14 (12) 2 – 159 13 – 172 172 20.7% 5.3% 4.6% Factors affecting the effective tax rate The effective income tax rate for 2014 is 20.7% (2013: 5.3%; 2012: 4.6%). The following table explains the differences between the Group’s weighted average statutory corporation tax rates across its geographic locations and its effective income tax rate: Weighted average corporation tax rate Effects of: Expenses not deductible for tax purposes Exempted income, income at reduced rates and tax credits Income taxed at higher rates Deferred tax assets not recognised/reversal of amounts previously not recognised Other differences Change in tax rates(1) Adjustments to tax charge in respect of previous years Effective income tax rate (1)Change in the UK tax rate. ` 2014 % 12.3 1.8 (0.2) – 8.5 (0.6) – (1.1) 20.7 2013 % 14.2 (1.8) 0.8 (1.6) (2.8) 0.3 (4.5) 0.7 5.3 2012 % 14.3 (0.3) 0.1 – (7.2) (0.4) (1.8) (0.1) 4.6 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 249 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 16 Taxation (continued) Analysis of selected other comprehensive income Continuing operations Retirement benefit schemes Actuarial (losses)/gains in retirement benefit schemes Total Foreign currency translation reserves Change in foreign currency translation reserves Total Cash flow hedging reserves Fair value (gains) transferred to income statement Fair value gains/(losses) taken to other comprehensive income Total Available for sale securities reserves Fair value (gains)/losses transferred to income statement Fair value gains taken to other comprehensive income Total Gross € m Tax € m 2014 Net € m Gross € m Tax € m 2013 Net € m Gross € m Tax € m 2012 Net € m (1,067) (1,067) 128 128 (939) (939) (292) (292) 41 41 (251) (251) 830 830 (114) (114) 716 716 27 27 (46) 445 399 – – 5 27 27 (9) (9) (41) (5) (56) (51) 389 348 (15) (20) – – – 2 2 (9) (9) 34 34 (5) (87) (13) (18) (98) (185) – – 10 13 23 34 34 (77) (85) (162) (388) 48 (340) (51) 10 (41) 55 7 62 1,223 (155) 1,068 835 (107) 728 631 580 (77) (67) 554 513 1,412 1,467 (179) 1,233 (172) 1,295 250 Allied Irish Banks, p.l.c. Annual Financial Report 2014 17 Discontinued operations Disposal of Ark Life in 2014 and disposal of Aviva Life Holdings Ireland Limited and acquisition of Ark Life in 2013 2014 In May 2014, AIB disposed of its investment in Ark Life Assurance Company Limited (‘Ark Life’) resulting in a gain on disposal of € 34 million (tax Nil). 2013 Following the exercise of put options in January 2012, AIB’s investment in Aviva Life Holdings Ireland Limited (“ALH”) was held for sale within ‘Disposal groups and non-current assets held for sale’ at 31 December 2012. This was designated as an equity investment at fair value through profit or loss. The sale was completed on 8 March 2013, resulting in a gain on disposal of € 10 million and a tax charge of nil. This gain was reported in ‘Net trading income/(loss)’ (note 6). AIB then acquired a 100% interest in Ark Life for a consideration of € 325 million. The put option that required AIB to acquire Ark Life had a negative valuation of € 23 million at the date of acquisition. The investment in Ark Life was initially measured at a fair value less costs to sell of € 302 million being a market related valuation of Ark Life, primarily taking account of Ark Life’s market consistent embedded value (“MCEV”) of € 447 million. The fair value of the liabilities acquired amounted to € 3.8 billion, while the fair value of the assets acquired amounted to € 4.1 billion. Acquisition related costs for Ark Life amounted to € 3 million and were included in ‘Administrative expenses’ (note 9). Since Ark Life was acquired exclusively with a view to its subsequent disposal, it was classified on acquisition date as a discontinued operation in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. The investment was accounted for in accordance with the accounting policy set out on page 211 of the Annual Financial Report 2014. As set out in the accounting policy, the disposal group was reported at the lower of its carrying amount and fair value less costs to sell at each reporting date. The fair value was equal to or greater than the carrying value at 31 December 2013. However, no income was recorded in the year in accordance with the accounting policy for a subsidiary acquired exclusively for resale. 2012 There were no discontinued operations in the year to 31 December 2012. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 251 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 18 Earnings per share The calculation of basic earnings per unit of ordinary shares is based on the profit/(loss) attributable to ordinary shareholders divided by the weighted average of ordinary shares in issue, excluding treasury shares and own shares held. The diluted earnings per share is based on the profit/(loss) attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue, excluding treasury shares and own shares held, adjusted for the effect of dilutive potential ordinary shares. (a) Basic Profit/(loss) attributable to ordinary shareholders of the parent from continuing operations Profit attributable to ordinary shareholders from discontinued operations Profit/(loss) attributable to ordinary shareholders 2014 € m 881 34 915 2013 € m (1,597) – 2012 € m (3,557) – (1,597) (3,557) Number of shares (millions) Weighted average number of ordinary shares in issue during the year 522,649.6 519,761.0 515,789.0 Earnings/(loss) per share from continuing operations – basic EUR 0.2c EUR (0.3c) EUR (0.7c) Earnings per share from discontinued operations – basic – – – (b) Diluted Profit/(loss) attributable to ordinary shareholders of the parent from continuing operations (note 18 (a)) Dilutive effect of CCN’s interest charge Adjusted profit/(loss) attributable to ordinary shareholders from continuing operations Profit attributable to ordinary shareholders of the parent from discontinued operations Adjusted profit/(loss) attributable to ordinary shareholders Weighted average number of ordinary shares in issue during the year Dilutive effect of options outstanding Dilutive effect of CCNs Potential weighted average number of shares 2014 € m 881 234 1,115 34 1,149 2013 € m 2012 € m (1,597) (3,557) – – (1,597) (3,557) – – (1,597) (3,557) Number of shares (millions) 522,649.6 519,761.0 515,789.0 – 160,000.0 682,649.6 – – – – 519,761.0 515,789.0 Earnings/(loss) per share from continuing operations – diluted EUR 0.2c EUR (0.3c) EUR (0.7c) Earnings per share from discontinued operations – diluted – – – – Bonus shares in lieu of the dividend on the 2009 Preference Shares were issued to the NPRFC(1) in 2014, 2013 and 2012 amounting to: 2,177,293,934; 4,144,055,254; and 3,623,969,972 shares respectively (note 39). These bonus shares have been included in the weighted average number of shares in issue prospectively from the date of issue as they represent a dilution of earnings per share from that date. – The incremental shares from assumed conversion of options are not included in calculating the diluted per share amounts because they are anti-dilutive. – In July 2011, AIB issued € 1.6 billion in contingent capital notes (“CCNs”). These notes are mandatorily redeemable and will convert to AIB ordinary shares, by dividing the capital amount of € 1.6 billion by the conversion price of € 0.01 resulting in 160 billion new ordinary shares (note 38), if the Core Tier 1 capital ratio falls below 8.25%. These incremental shares have been included in calculating the 2014 diluted per share amounts because they were dilutive in 2014 but not in 2013 or 2012. However, the impact is minimal. The ordinary shares are included in the weighted average number of shares on a time apportioned basis. (1)National Treasury Management Agency as controller and manager of the Ireland Strategic Investment Fund (NTMA / ISIF with effect 22 December 2014). 252 Allied Irish Banks, p.l.c. Annual Financial Report 2014 19 Distributions on equity shares No dividends were paid on equity shares in 2014, 2013 or 2012. 20 Disposal groups and non-current assets held for sale At 31 December 2014, disposal groups and non-current assets held for sale include property surplus to requirements. Disposal groups and non-current assets/liabilities are shown as single line items in the statement of financial position with no re-presentation of comparatives. An analysis of the components of these single line items is set out below: Loans and receivables to customers Other Discontinued operations: Ark Life(2) Total disposal groups and non-current assets and liabilities held for sale 2014 2013 Assets € m Liabilities € m Assets € m Liabilities € m – 14 – 14 – – – – 28(1) 7 – – 2,747 3,593 2,782 3,593 (1)Net of provisions of Nil (note 26). (2)Ark Life which had been classified as held for sale as a discontinued operation at 31 December 2013, was disposed of in May 2014 (note 17). Intercompany balances of € 1,148 million between AIB and Ark Life (which included deposits of € 1,011 million) were eliminated on consolidation. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 253 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 21 Trading portfolio financial assets Debt securities Equity securities Of which listed: Debt securities Of which unlisted: Equity securities 2014 € m – 1 1 2014 € m – 1 1 2013 € m 1 1 2 2013 € m 1 1 2 During 2008, trading portfolio financial assets reclassified to financial investments available for sale, in accordance with the amended IAS 39 Financial Instruments: Recognition and Measurement, amounted to € 6,104 million. The fair value of reclassified assets at 31 December 2014 was € 42 million (2013: € 467 million; 2012: € 1,025 million; 2011: € 1,410 million; 2010: € 2,538 million; 2009: € 4,104 million; 2008: € 5,674 million). As at the reclassification date, effective variable interest rates on reclassified trading portfolio financial assets ranged from 4% to 10% with expected gross recoverable cash flows of € 7,105 million. If the reclassification had not been made, the Group’s income statement for the year ended 31 December 2014 would have included unrealised fair value gains on reclassified trading portfolio financial assets of € 15 million (2013: gains € 112 million; 2012: gains € 136 million). After reclassification, the reclassified assets contributed the following amounts to the income statement: Interest on financial investments available for sale Provisions for impairment on financial investments available for sale 2014 € m 2 (1) 2013 € m 11 – 2012 € m 32 – Up to the date of reclassification in 2008, € 55 million of unrealised losses on the reclassified trading portfolio financial assets were recognised in the income statement (year ended December 2007: € 111 million). 254 Allied Irish Banks, p.l.c. Annual Financial Report 2014 22 Derivative financial instruments Derivatives are used to service customer requirements, to manage the Group’s interest rate, exchange rate, equity and credit 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. The majority of the Group’s derivative activities are undertaken at the parent company level (Allied Irish Banks, p.l.c.) and the following discussion applies equally to the parent company and Group. 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 in derivative contracts is the risk that the Group’s counterparty in the contract defaults prior to maturity at a time when the Group has a claim on the counterparty under the contract (i.e. contracts with a positive fair value). The Group would then have to replace the contract at the current market rate, which may result in a loss. 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. The following table presents the total notional principal amount of interest rate, exchange rate, equity and credit derivative contracts for 2014 and 2013 together with the positive and negative fair values attaching to those contracts: Interest rate contracts(1) Notional principal amount Positive fair value Negative fair value Exchange rate contracts(1) Notional principal amount Positive fair value Negative fair value Equity contracts(1) Notional principal amount Positive fair value Negative fair value Credit derivatives(1) Notional principal amount Positive fair value Negative fair value Total notional principal amount Total positive fair value(2) Total negative fair value 2014 € m 73,230 1,852 (2,136) 4,816 48 (73) 3,010 138 (117) 340 – (8) 81,396 2,038 (2,334) 2013 € m 104,072 1,443 (1,847) 4,314 35 (34) 2,390 151 (79) – – – 110,776 1,629 (1,960) (1)Interest rate, exchange rate and credit derivative contracts are entered into for both hedging and trading purposes. Equity contracts are entered into for trading purposes only. (2)70% of fair value relates to exposures to banks (2013: 72%). i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 255 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 22 Derivative financial instruments (continued) 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, derivative instruments are subject to the market risk policy and control framework as described in the Risk Management section. The following table analyses the total notional principal amount of interest rate, exchange rate, equity and credit derivative contracts by residual maturity together with the positive fair value attaching to these contracts where relevant: < 1 year 1 < 5 years € m € m 5 years + € m 2014 Total € m < 1 year € m 1 < 5 years € m 5 years + € m 2013 Total € m Residual maturity Notional principal amount Positive fair value 30,037 33,844 98 820 17,515 1,120 81,396 2,038 53,863 44,558 12,355 110,776 243 900 486 1,629 AIB Group has the following concentration of exposures in respect of notional principal amount and positive fair value of interest rate, exchange rate, equity and credit derivative contracts. The concentrations are based primarily on the location of the office recording the transaction. Republic of Ireland United Kingdom United States of America Notional principal amount 2013 € m 2014 € m Positive fair value 2013 € m 2014 € m 78,035 2,886 475 81,396 107,557 2,833 386 110,776 1,542 469 27 2,038 1,253 358 18 1,629 256 Allied Irish Banks, p.l.c. Annual Financial Report 2014 22 Derivative financial instruments (continued) Trading activities The Group maintains trading positions in a variety of financial instruments including derivatives. These derivative financial instruments include interest rate, foreign exchange, equity and credit derivatives. Most of these positions arise as a result of activity generated by corporate customers while the remainder represent trading decisions of the Group’s derivative and foreign exchange traders with a view to generating incremental income. 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. 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 and by the use of Credit Support Annexes and ISDA Master Netting Agreements. 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, future, 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. Risk management activities In addition to meeting customer needs, the Group’s principal objective in holding or transacting derivatives is the management of inter- est rate and foreign exchange risks which arise within the banking book through the operations of the Group as outlined below. 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 derivatives can be used to hedge the Group’s exposure to foreign exchange risk. Derivative prices fluctuate in value as the underlying interest rate or foreign exchange rates change. If the derivatives are purchased or sold as hedges of statement of final position items, the appreciation or depreciation of the derivatives will generally be offset by the unrealised depreciation or appreciation of the hedged items. To achieve its risk management objectives, the Group uses a combination of derivative financial instruments, particularly interest rate swaps, cross currency interest rate swaps, forward rate agreements, futures, options and currency swaps, as well as other contracts. The notional principal and fair value amounts for instruments held for risk management purposes entered into by the Group at 31 December 2014 and 2013, are presented within this note. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 257 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 22 Derivative financial instruments (continued) The following table shows the notional principal amount and the fair value of derivative financial instruments analysed by product and purpose as at 31 December 2014 and 31 December 2013. A description of how the fair values of derivatives are determined is set out in note 47. Notional principal amount € m 2014 Fair values Assets Liabilities € m € m Notional principal amount € m 2013 Fair values Assets Liabilities € m € m Derivatives held for trading Interest rate derivatives – over the counter (“OTC”) Interest rate swaps Cross-currency interest rate swaps Interest rate options Total interest rate derivatives – OTC Interest rate derivatives – exchange traded Interest rate futures Total interest rate derivatives – exchange traded 17,182 629 677 18,488 1,706 1,706 789 46 3 838 – – (905) (42) (5) (952) – – 14,748 720 794 16,262 121 121 762 47 6 815 – – (761) (43) (6) (810) – – Total interest rate derivatives 20,194 838 (952) 16,383 815 (810) Foreign exchange derivatives – OTC Foreign exchange contracts Currency options bought and sold Total foreign exchange derivatives Equity derivatives – OTC Equity warrants Equity index options Total equity derivatives Credit derivatives – OTC Credit derivatives Total credit derivatives 4,650 166 4,816 23 2,987 3,010 340 340 46 2 48 23 115 138 – – (70) (3) (73) – (117) (117) (8) (8) 4,130 185 4,315 – 2,390 2,390 – – 32 3 35 – 151 151 – – (32) (2) (34) – (79) (79) – – Total derivatives held for trading 28,360 1,024 (1,150) 23,088 1,001 (923) Derivatives held for hedging Derivatives designated as fair value hedges – OTC Interest rate swaps 17,130 Total derivatives designated as fair value hedges 17,130 Derivatives designated as cash flow hedges – OTC Interest rate swaps Cross currency interest rate swaps 32,792 3,114 Total derivatives designated as cash flow hedges 35,906 500 500 511 3 514 (587) (587) (380) (217) (597) Total derivatives held for hedging Total derivative financial instruments 53,036 81,396 1,014 2,038 (1,184) (2,334) 16,433 16,433 68,100 3,155 71,255 87,688 532 532 81 15 96 628 110,776 1,629 (590) (590) (367) (80) (447) (1,037) (1,960) 258 Allied Irish Banks, p.l.c. Annual Financial Report 2014 22 Derivative financial instruments (continued) Cash flow hedges The table below sets out the hedged cash flows which are expected to occur in the following periods: Forecast receivable cash flows Forecast payable cash flows Forecast receivable cash flows Forecast payable cash flows Within 1 year € m 27 8 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 16 11 83 52 114 80 Within 1 year € m 91 31 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 73 38 232 95 240 111 2014 Total € m 240 151 2013 Total € m 636 275 The table below sets out the hedged cash flows, including amortisation of terminated cash flow hedges, which are expected to impact the income statement in the following periods: Forecast receivable cash flows Forecast payable cash flows Forecast receivable cash flows Forecast payable cash flows Within 1 year € m 27 33 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 16 32 83 97 114 99 Within 1 year € m 91 72 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 73 72 232 179 240 117 2014 Total € m 240 261 2013 Total € m 636 440 For AIB Group, the ineffectiveness reflected in the income statement that arose from cash flow hedges is Nil (2013: a credit of € 7 million). The pay fixed cash flow hedges are used to hedge the cash flows on variable rate liabilities and the receive fixed cash flow hedges are used to hedge the cash flows on variable rate assets. The total amount recognised in other comprehensive income net of tax during the year in respect of cash flow hedges was a gain of € 348 million (2013: a charge of € 18 million). Fair value hedges Fair value hedges are entered into to hedge the exposure to changes in the fair value of recognised assets or liabilities arising from changes in interest rates, primarily available for sale securities and fixed rate liabilities. The fair values of financial instruments are set out in note 47. The net mark to market on fair value hedging derivatives, excluding accrual and risk adjustments is negative € 161 million (2013: negative € 56 million) and the net mark to market on the related hedged items is positive € 157 million (2013: positive € 54 million). Netting financial assets and financial liabilities Derivative financial instruments are shown on the statement of financial position at their fair value, those with a positive fair value are reported as assets and those with a negative fair value are reported as liabilities. Details on offsetting financial assets and financial liabilities are set out in note 43. Allied Irish Banks, p.l.c. Annual Financial Report 2014 259 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 23 Loans and receivables to banks Funds placed with central banks Funds placed with other banks Provision for impairment Amounts include: Reverse repurchase agreements Loans and receivables to banks by geographical area(1) Republic of Ireland United Kingdom Rest of the World 2014 € m 664 1,201 – 1,865 2013 € m 656 1,399 (7) 2,048 – 16 2014 € m 402 1,461 2 1,865 2013 € m 478 1,566 4 2,048 (1)The classification of loans and receivables to banks by geographical area is based primarily on the location of the office recording the transaction. Loans and receivables to banks include cash collateral of € 773 million placed with derivative counterparties in relation to net derivative positions and placed with repurchase agreement counterparties (2013: € 798 million) (notes 22 and 43). Under reverse repurchase agreements, the Group accepted collateral in 2013 that it was permitted to sell or repledge in the absence of default by the owner of the collateral. The collateral received consisted exclusively of non-government securities (bank bonds) with a fair value of € 16 million. The fair value of collateral sold or repledged amounted to € 16 million. These transactions were conducted under terms that are usual and customary to standard reverse repurchase agreements. 24 Loans and receivables to customers Loans and receivables to customers Reverse repurchase agreements Amounts receivable under finance leases and hire purchase contracts (note 25) Unquoted debt securities Provisions for impairment (note 26) Of which repayable on demand or at short notice Amounts include: Due from associated undertakings 2014 € m 74,651 110 860 147 2013 € m 81,680 – 965 151 (12,406) (17,083) 63,362 25,078 65,713 31,853 – – The unwind of the discount on the carrying amount of impaired loans amounted to € 329 million (2013: € 373 million) and is included in the carrying value of loans and receivables to customers. This has been credited to interest income. Under reverse repurchase agreements, the Group has accepted collateral with a fair value of € 107 million (2013: Nil) that it is permitted to sell or repledge in the absence of default by the owner of the collateral. In addition, loans and receivables to customers includes cash collateral amounting to € 72 million (2013: € 27 million) placed with derivative counterparties. For details of credit quality of loans and receivables to customers, including forbearance, refer to ‘Risk management – 3.1 and 3.2’. 260 Allied Irish Banks, p.l.c. Annual Financial Report 2014 25 Amounts receivable under finance leases and hire purchase contracts The following balances principally comprise of leasing arrangements involving vehicles, plant, machinery and equipment. Gross receivables Not later than 1 year Later than one year and not later than 5 years Later than 5 years Unearned future finance income Deferred costs incurred on origination Total Present value of minimum payments analysed by residual maturity Not later than 1 year Later than one year and not later than 5 years Later than 5 years Present value of minimum payments Provision for uncollectible minimum payments receivable(1) Net investment in new business (1)Included in the provisions for impairment on loans and receivables to customers (note 26). 2014 € m 386 578 29 993 (136) 3 860 315 519 26 860 80 364 2013 € m 465 617 24 1,106 (144) 3 965 392 552 21 965 223 303 26 Provisions for impairment on loans and receivables The following table shows provisions for impairment on loans and receivables (both to banks and customers) and also includes provisions on loans and receivables within disposal groups and non-current assets held for sale. Further information on provisions for impairment is disclosed in the ‘Risk management’ section. At 1 January Exchange translation adjustments Other(1) (Credit to)/charge against income statement – customers (Credit to)/charge against income statement – banks Amounts written off Disposals Recoveries of amounts written off in previous years At 31 December Total provisions are split as follows: Specific IBNR Amounts include: Loans and receivables to banks (note 23) Loans and receivables to customers (note 24) (1)Includes transfers (to)/from provisions for liabilities and commitments. 2014 Total € m 17,090 150 – (178) (7) (4,655) – 6 12,406 11,315 1,091 12,406 – 12,406 12,406 2013 Total € m 16,532 (76) (14) 1,913 3 (1,134) (136) 2 17,090 15,905 1,185 17,090 7 17,083 17,090 Allied Irish Banks, p.l.c. Annual Financial Report 2014 261 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 27 NAMA senior bonds During 2010 and 2011, AIB received NAMA senior bonds and NAMA subordinated bonds as consideration for loans and receivables transferred to NAMA. The senior bonds carry a guarantee of the Irish Government with interest payable semi-annually each March and September at a rate of six month Euribor. The bonds were issued from 1 March 2010 and all bonds issued on, or after, 1 March in any year will mature on or prior to 1 March in the following year. NAMA may, with the consent of the Group, settle the bonds by issuing new bonds with the same terms and conditions and a maturity date of up to 364 days. The following table provides a movement analysis of the NAMA senior bonds: At 1 January Amortisation of discount Repayments Effect of re-estimating the timing of cash flows At 31 December 2014 € m 15,598 36 (6,343) 132 9,423 2013 € m 17,387 65 (1,916) 62 15,598 On initial recognition of the NAMA senior bonds, AIB made certain assumptions as to the timing of expected repayments. In 2014, having considered recent updates from NAMA on its current performance against achieving its strategic objectives, AIB reviewed its expected pattern of repayments on the NAMA senior bonds and has recognised a gain of € 132 million reflecting a revised pattern of repayment including those received during the year. The adjustment to the carrying amount has resulted in the recognition of a gain of € 132 million (31 December 2013: € 62 million) as set out in note 8 ‘Other operating income’. The estimated fair value of the bonds at 31 December 2014 is € 9,479 million (31 December 2013: € 15,767 million). The nominal value of the bonds is € 9,477 million (31 December 2013: € 15,820 million). Whilst these bonds do not have an external credit rating, the Group has attributed to them a rating of A– (31 December 2013: BBB+) i.e. the external rating of the Sovereign. At 31 December 2014, € 1,805 million (31 December 2013: € 12,435 million) of NAMA senior bonds have been pledged to central banks and banks (note 33). 262 Allied Irish Banks, p.l.c. Annual Financial Report 2014 28 Financial investments available for sale The following table sets out at 31 December 2014 and 31 December 2013, the carrying value (fair value) of financial investments available for sale by major classifications together with the unrealised gains and losses. Unrealised gross gains € m Unrealised gross losses € m Net unrealised gains/ (losses) € m Tax effect € m 2014 Net after tax € m Debt securities Irish Government securities Euro government securities Non Euro government securities Supranational banks and government agencies Collateralised mortgage obligations Other asset backed securities Euro bank securities Non Euro corporate securities Total debt securities Equity securities Equity securities – NAMA subordinated bonds Equity securities – other Total equity securities Total financial investments available for sale Debt securities Irish Government securities Euro government securities Non Euro government securities Supranational banks and government agencies Other asset backed securities Euro bank securities Non Euro bank securities Non Euro corporate securities Other investments Total debt securities Equity securities Equity securities – NAMA subordinated bonds Equity securities – other Total equity securities Total financial investments available for sale Fair value € m 9,107 3,631 182 2,852 99 1 3,897 3 19,772 374 39 413 1,327 170 9 119 – – 105 – 1,730 327 11 338 20,185 2,068 – – – – (1) – – (1) (2) – (3) (3) (5) 1,327 170 9 119 (1) – 105 (1) (166) 1,161 (21) (1) 149 8 (15) 104 – – (13) – (1) – 92 (1) 1,728 (216) 1,512 327 8 335 (41) (2) (43) 286 6 292 2,063 (259) 1,804 Fair value € m 10,328 1,968 608 3,092 535 3,671 34 3 12 Unrealised gross gains € m Unrealised gross losses € m Net unrealised gains/ (losses) € m 910 110 54 29 1 59 – – – – (1) – (6) (54) (7) – – – 910 109 54 23 (53) 52 – – – Tax effect € m (113) (14) (6) (3) 7 (4) – – – 2013 Net after tax € m 797 95 48 20 (46) 48 – – – 20,251 1,163 (68) 1,095 (133) 962 73 44 117 26 12 38 – (7) (7) 26 5 31 (3) – (3) 23 5 28 20,368 1,201 (75) 1,126 (136) 990 Allied Irish Banks, p.l.c. Annual Financial Report 2014 263 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 28 Financial investments available for sale (continued) Analysis of movements in financial investments available for sale At 1 January Exchange translation adjustments Purchases Sales Maturities Writeback/(provisions) for impairment Amortisation of discounts net of premiums Movement in unrealised gains At 31 December Of which: Listed Unlisted Debt securities € m Equity securities € m 20,251 14 7,324 (8,022) (735) (1) (67) 1,008 19,772 19,772 – 19,772 117 – 12 (24) – – – 308 413 – 413 413 2014 Total € m 20,368 14 7,336 (8,046) (735) (1) (67) 1,316 20,185 19,772 413 20,185 Debt securities € m Equity securities € m 16,201 (45) 6,639 (1,795) (1,122) 18 (8) 363 143 – 27 (79) – (9) – 35 2013 Total € m 16,344 (45) 6,666 (1,874) (1,122) 9 (8) 398 20,251 117 20,368 20,239 12 20,251 12 105 117 20,251 117 20,368 Debt securities analysed by remaining contractual maturity Due within one year After one year, but within five years After five years, but within ten years After ten years 2014 € m 507 11,678 6,918 669 19,772 2013 € m 1,186 11,357 6,606 1,102 20,251 264 Allied Irish Banks, p.l.c. Annual Financial Report 2014 28 Financial investments available for sale (continued) The following table sets out at 31 December 2014 and 31 December 2013, an analysis of the securities portfolio with unrealised losses, distinguishing between securities with continuous unrealised loss positions of less than 12 months and those with continuous unrealised loss positions for periods in excess of 12 months. Investments with Investments with unrealised losses unrealised losses of more than 12 months € m of less than 12 months € m Debt securities Collateralised mortgage obligations Non Euro corporate securities Total debt securities Equity securities Equity securities – other Total 70 – 70 11 81 – 3 3 5 8 Investments with unrealised losses of less than 12 months € m Investments with unrealised losses of more than 12 months € m – 909 – 1,293 2,202 2 2,204 62 50 513 160 785 – 785 Debt securities Euro government securities Supranational banks and government agencies Other asset backed securities Euro bank securities Total debt securities Equity securities Equity securities – other Total Fair value Total € m 70 3 73 16 89 Fair value Total € m 62 959 513 1,453 2,987 2 2,989 Unrealised losses of less than 12 months € m (1) – (1) (2) (3) Unrealised losses of less than 12 months € m – (6) – (5) (11) – (11) 2014 Unrealised losses Total Unrealised losses of more than 12 months € m € m (1) (1) (2) (3) (5) – (1) (1) (1) (2) 2013 Unrealised losses Total Unrealised losses of more than 12 months € m € m (1) (1) – (54) (2) (57) (7) (64) (6) (54) (7) (68) (7) (75) Available for sale financial investments with unrealised losses have been assessed for impairment based on the credit risk profile of the counterparties involved. Impairment losses on debt securities of € 1 million (2013: Nil) and Nil (2013: € 9 million) on equity securities have been recognised as set out in note 12. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 265 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 29 Interests in associated undertakings Included in the income statement is the contribution from investments in associated undertakings as follows: Income statement Share of results of associated undertakings(1) Impairment of associated undertakings Profit/(loss) on disposal of investment in associated undertakings(2) Loss recognised on the remeasurement to fair value less costs to sell of disposal groups and non-current assets held for sale Share of net assets including goodwill At 1 January Exchange translation adjustments Disposals(2) Income for the year – Continuing operations Dividends received from associates Impairment on associated undertakings – Continuing operations At 31 December(3) Disclosed in the statement of financial position within: Interests in associated undertakings Of which listed on a recognised stock exchange 2014 € m 2013 € m 2012 € m 23 (2) 2 – 23 16 (8) (1) – 7 15 – – (5) 10 2014 € m 2013 € m 58 1 – 23 (11) (2) 69 69 – 64 (1) (10) 16 (3) (8) 58 58 – (1)Includes AIB Merchant Services € 21 million profit (2013: € 10 million profit; 2012: € 14 million profit), Aviva Health Insurance Ireland Limited € 2 million (2013: € 6 million; 2012: Nil) and Other associates Nil (2013: Nil; 2012: € 1 million profit). (2)Spire Holdings was disposed of during 2014 with € 2 million profit on disposal. LaGuardia Hotel was disposed of during 2013 with € 1 million loss on disposal. (3)Includes the Group’s investments in AIB Merchant Services and Aviva Health Insurance Ireland Limited (2013: AIB Merchant Services and Aviva Health Insurance Ireland Limited). 266 Allied Irish Banks, p.l.c. Annual Financial Report 2014 29 Interests in associated undertakings (continued) The following are the principal associates of the Group at 31 December 2014: Name of associate Principal activity Place of incorporation and operation Proportion of ownership interest and voting power held by the Group at 31 December 2014 % 2013 % (A) Aviva Health Insurance Transaction of health 1 Park Place Ireland Limited insurance business within Hatch Street, Dublin 2 the Republic of Ireland Ireland 30 30 (B) Zoltar Services Limited Provider of merchant Registered Office: Unit 6, trading as AIB Merchant Services payment solutions Belfield Business Park Clonskeagh, Dublin 4 Ireland 49.9 49.9 All of the associates are accounted for using the equity method in these consolidated financial statements. In accordance with the European Communities (Credit Institutions: Accounts) Regulations, 1992, Allied Irish Banks, p.l.c. will annex a full listing of associated undertakings to its annual return to the Companies Registration Office. There was no unrecognised share of losses of associates in 2014 or 2013. Change in the Group’s ownership interest in associates There was no change in the ownership interest in associates. Significant restrictions There is no significant restriction on the ability of associates to transfer funds to the Group in the form of cash or dividends, or to repay loans or advances made by the Group. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 267 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 30 Intangible assets Cost At 1 January Additions – internally generated – externally purchased Amounts written off(1) At 31 December Amortisation/impairment At 1 January Amortisation for the year Impairment for the year Amounts written off(1) At 31 December Net book value at 31 December Software € m Other € m 708 48 12 – 768 532 48 17 – 597 171 3 – – – 3 3 – – – 3 – 2014 Total € m 711 48 12 – 771 535 48 17 – 600 171 Software € m Other € m 689 52 10 (43) 708 502 58 15 (43) 532 176 3 – – – 3 3 – – – 3 – 2013 Total € m 692 52 10 (43) 711 505 58 15 (43) 535 176 (1)Relates to assets which are no longer in use with a nil carrying value. Internally generated intangible assets under construction amounted to: € 40 million (2013: € 35 million). The cost of internally generated software amounted to: € 442 million (2013: € 398 million). Future capital expenditure in relation to both intangible assets and property, plant and equipment is set out in note 51. 268 Allied Irish Banks, p.l.c. Annual Financial Report 2014 31 Property, plant and equipment Cost At 1 January 2014 Reclassification to disposal groups and non-current assets held for sale Additions Disposals Amounts written off(1) Exchange translation adjustments At 31 December 2014 Depreciation/impairment At 1 January 2014 Reclassification to disposal groups and non-current assets held for sale Depreciation charge for the year Impairment charge for the year Reversal of impairment charge for the year Disposals Amounts written off(1) Exchange translation adjustments At 31 December 2014 Net book value at 31 December 2014 Freehold € m 173 (4) 9 (1) (4) 2 175 68 (2) 4 1 – – (4) 1 68 107 Cost At 1 January 2013 Additions Disposals Amounts written off(1) Exchange translation adjustments At 31 December 2013 Depreciation/impairment At 1 January 2013 Depreciation charge for the year Impairment charge for the year Disposals Amounts written off(1) Exchange translation adjustments At 31 December 2013 Net book value at 31 December 2013 (1)Relates to assets which are no longer in use with a Nil carrying value. Freehold Property Long leasehold € m 191 1 (17) (1) (1) 173 68 5 6 (9) (1) (1) 68 105 € m 102 1 (4) – – 99 30 2 2 (2) – – 32 67 Property Long leasehold € m Leasehold under 50 years € m 99 (10) 1 – (2) – 88 32 (2) 4 2 (2) – (2) – 32 56 Equipment 2014 Total € m 469 – 27 (4) (22) 3 473 389 – 20 4 – (2) (22) 3 392 81 € m 883 (14) 47 (5) (56) 7 862 582 (4) 36 12 (2) (2) (56) 6 572 290 Equipment 2013 Total € m 486 17 (19) (13) (2) 469 396 25 – (17) (13) (2) 389 80 € m 920 32 (46) (19) (4) 883 587 40 11 (33) (19) (4) 582 301 142 – 10 – (28) 2 126 93 – 8 5 – – (28) 2 80 46 Leasehold under 50 years € m 141 13 (6) (5) (1) 142 93 8 3 (5) (5) (1) 93 49 The net book value of property occupied by the Group for its own activities was € 199 million (2013: € 216 million), excluding those held as disposal groups and non-current assets held for sale. Property leased to others by AIB Group had a book value of € 2 million (2013: € 2 million). Property and equipment includes € 8 million for items in the course of construction (2013: € 10 million). Future capital expenditure in relation to both property plant and equipment and intangible assets is set out in note 51. Allied Irish Banks, p.l.c. Annual Financial Report 2014 269 269 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 32 Deferred taxation Deferred tax assets: Provision for impairment on loans and receivables Retirement benefits Assets leased to customers Unutilised tax losses Amortised income Other Total gross deferred tax assets Deferred tax liabilities: Cash flow hedges Amortised income on loans Assets used in business Available for sale securities Total gross deferred tax liabilities Net deferred tax assets 2014 € m 4 128 12 3,670 1 46 3,861 (54) (22) (12) (197) (285) 3,576 2013 € m 11 12 17 3,871 2 76 3,989 (3) (45) (23) (90) (161) 3,828 Represented on the statement of financial position as follows: Deferred tax assets 3,576 3,828 For each of the years ended 31 December 2014 and 2013, full provision has been made for capital allowances and other temporary differences. Analysis of movements in deferred taxation At 1 January Exchange translation and other adjustments Deferred tax through other comprehensive income Income statement – Continuing operations (note 16) At 31 December 2014 € m 3,828 41 (30) (263) 3,576 2013 € m 3,845 (15) (106) 104 3,828 Comments on the basis of recognition of deferred tax assets on unused tax losses are included in ‘Critical accounting judgements and estimates’ on pages 218 to 222. Information on the regulatory capital treatment of deferred tax assets is included in ‘Principal risks and uncertainties’ on page 55. At 31 December 2014, recognised deferred tax assets on tax losses and other temporary differences, net of deferred tax liabilities, totalled € 3,576 million (2013: € 3,828 million). The most significant tax losses arise in the Irish tax jurisdiction and their utilisation is dependent on future taxable profits. Temporary differences recognised in other comprehensive income consist of deferred tax on available for sale securities, cash flow hedges and actuarial gains/losses on retirement benefit schemes. Temporary differences recognised in the income statement consist of provision for impairment on loans and receivables, amortised income, assets leased to customers, and assets used in the course of business. Net deferred tax assets of € 3,463 million (2013: € 3,773 million) are expected to be recovered after more than 12 months. For AIB’s principal UK subsidiary, the Group has concluded that the recognition of deferred tax assets be limited to the amount projected to be realised within a time period of 15 years. This is the timescale within which the Group believes that it can asses the likelihood of its profits arising as being more likely than not. For certain other subsidiaries and branches, the Group has concluded that it is more likely than not that there will be insufficient profits to support full recognition of deferred tax assets. In December 2014, the UK Chancellor announced in his Autumn Statement a proposal that, from 1 April 2015, only fifty per cent of a bank’s annual trading profits can be sheltered by unused tax losses arising before that date. As the legislation had not been substantively enacted at 31 December 2014, the proposed change has not been reflected in the 2014 financial statements. Once the legislation is substantively enacted, this could result in an immediate reduction of c £178 million (€ 229 million) in the Group’s UK deferred tax asset, based on the 2014 year end position. 270 Allied Irish Banks, p.l.c. Annual Financial Report 2014 32 Deferred taxation (continued) The Group has not recognised deferred tax assets in respect of Irish tax on unused tax losses of € 226 million (2013: € 269 million) and overseas tax (UK and USA) on unused tax losses of € 2,439 million (2013: € 1,675 million), and foreign tax credits, for Irish tax purposes, of € 5 million (2013: € 5 million). Of these tax losses totalling € 2,665 million for which no deferred tax is recognised, € 66 million expires in 2031, € 46 million in 2032, € 33 million in 2033 and € 17 million in 2034. The aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates for which deferred tax liabilities have not been recognised amounted to Nil (2013: Nil). Deferred tax recognised directly in equity amounted to Nil (2013: Nil). Analysis of income tax relating to other comprehensive income Profit for the year Exchange translation adjustments Net change in cash flow hedge reserves Net change in fair value of available for sale securities Net actuarial losses in retirement benefit schemes Net change in property revaluation reserves Total comprehensive income for the year Attributable to: Owners of the parent Gross Tax Net of tax € m 1,111 27 399 835 (1,067) (1) 1,304 € m (230) – (51) (107) 128 – (260) € m 881 27 348 728 (939) (1) 1,044 2014 Net amount attributable to owners of the parent € m 881 27 348 728 (939) (1) 1,044 1,304 (260) 1,044 1,044 Loss for the year Exchange translation adjustments Net change in cash flow hedge reserves Net change in fair value of available for sale securities Net actuarial gains in retirement benefit schemes Net change in property revaluation reserves Total comprehensive income for the year Attributable to: Owners of the parent € m (1,687) (9) (20) 580 292 (1) (845) (845) € m 90 – 2 (67) (41) – (16) (16) Gross Tax Net of tax 2013 Net amount attributable to owners of the parent € m € m (1,597) (1,597) (9) (18) 513 251 (1) (861) (9) (18) 513 251 (1) (861) (861) (861) i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 271 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 32 Deferred taxation (continued) Analysis of income tax relating to other comprehensive income Gross Tax Net of tax Loss for the year Exchange translation adjustments Net change in cash flow hedge reserves Net change in fair value of available for sale securities Net actuarial gains in retirement benefit schemes Net change in property revaluation reserves Total comprehensive income for the year Attributable to: Owners of the parent 2012 Net amount attributable to owners of the parent € m € m (3,557) (3,557) 34 (162) 1,295 (716) (2) 34 (162) 1,295 (716) (2) (3,108) (3,108) € m (3,729) 34 (185) 1,467 (830) – (3,243) € m 172 – 23 (172) 114 (2) 135 (3,243) 135 (3,108) (3,108) 272 Allied Irish Banks, p.l.c. Annual Financial Report 2014 33 Deposits by central banks and banks Central banks Securities sold under agreements to repurchase Other borrowings Banks Securities sold under agreements to repurchase Other borrowings – secured – unsecured Amounts include: Due to associated undertakings 2014 € m 3,400 – 3,400 12,653 350 365 13,368 16,768 2013 € m 12,725 – 12,725 9,136 750 510 10,396 23,121 – – Securities sold under agreements to repurchase (note 46), (with the exception of € 1.9 billion funded through the ECB two year Targeted Long Term Refinancing Operation (“TLTRO”) (2013: € 11.25 billion funded through the ECB three year Long Term Refinancing Operation (“LTRO”)) mature within six months and are secured by Irish Government bonds, NAMA senior bonds, other marketable securities and eligible assets. In addition, the Group has granted a floating charge over certain residential mortgage pools, the drawings against which were Nil at 31 December 2014 (2013: Nil). Deposits by central banks and banks include cash collateral of € 318 million (2013: € 200 million) received from derivative counterparties in relation to net derivative positions (note 22) and also from repurchase agreement counterparties. Financial assets pledged (a) Financial assets pledged under existing agreements to repurchase, and providing access to future funding facilities with central banks and banks are detailed in the following table: Central banks € m Banks € m 2014 Total € m Total carrying value of financial assets pledged 5,337 13,857 19,194 Of which: Government securities(1) Other securities 1,084 4,253(2) 9,479 4,378 10,563 8,631 Central banks € m 14,662 12,048 2,614 Banks € m 9,938 6,441 3,497 2013 Total € m 24,600 18,489 6,111 (1)Includes NAMA senior bonds. (2)The Group has securitised certain of its mortgage and loan portfolios held in AIB Mortgage Bank and EBS and has also issued covered bonds. These securities, other than issued to external investors, have been pledged as collateral in addition to other securities held by the Group. (b) The Group has securitised credit card receivables with a carrying value of € 297 million (2013: € 675 million) as described in note 46. Funding received from external investors is included above as ‘other borrowings -secured’ and has been secured on these and future credit card receivables. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 273 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 34 Customer accounts Current accounts Demand deposits Time deposits(1) Securities sold under agreements to repurchase(2) Of which: Non-interest bearing current accounts Interest bearing deposits, current accounts and short-term borrowings Amounts include: Due to associated undertakings 2014 € m 21,665 10,004 30,196 2,153 64,018 18,260 45,758 64,018 2013 € m 18,274 9,372 32,238 5,783 65,667 15,384 50,283 65,667 75 150 (1)Following the acquisition of Ark Life in March 2013, deposits amounting to € 1,011 million placed by Ark Life with AIB were eliminated on consolidation at 31 December 2013. Since Ark Life is no longer consolidated following its disposal in May 2014, deposits placed by Ark Life are now included in customer accounts since the date of disposal. (2)The Group pledged government available for sale securities with a fair value of € 2,941 million (31 December 2013: € 5,814 million) and non-government available for sale securities with a fair value of Nil (31 December 2013: € 284 million) as collateral for these facilities and providing access to future funding facilities (see note 43 for further information). At 31 December 2014, the Group’s five largest customer deposits amounted to 9% of total customer accounts. 35 Debt securities in issue Bonds and medium term notes: European medium term note programmes Bonds and other medium term notes Other debt securities in issue: Commercial paper 2014 € m 3,293 4,518 7,811 50 7,861 2013 € m 4,346 4,334 8,680 79 8,759 Debt securities issued during the year amounted to € 3,198 million (31 December 2013: € 3,510 million) of which € 500 million relates to a covered bond issuance (31 December 2013: € 1,000 million), a € 500 million EMTN bond issuance (31 December 2013: € 500 million) with the balance relating to issuances under the short-term commercial paper programme. Debt securities matured or repurchased amounted to € 4,091 million (31 December 2013: € 5,421 million) of which € 937 million (31 December 2013: Nil) related to securities repurchased as part of a debt buyback programme. 36 Other liabilities Notes in circulation Items in transit Creditors Fair value of hedged liability positions Other 2014 € m 422 126 12 325 340 2013 € m 417 213 12 330 349 1,225 1,321 274 Allied Irish Banks, p.l.c. Annual Financial Report 2014 37 Provisions for liabilities and commitments At 1 January Transfers out Exchange translation adjustments Amounts charged to income statement Amounts released to income statement Provisions utilised At 31 December At 1 January Transfers in Transfers out Exchange translation adjustments Amounts charged to income statement Amounts released to income statement Provisions utilised At 31 December Liabilities and charges € m 72 – (1) 1(4) (5)(4) (7) 60 Liabilities and charges € m 21 34 – – 28(4) (11)(4) – 72 NAMA(1) provisions Onerous(2) contracts Legal claims € m 35 – – 6(1) (8)(1) – 33 € m € m 36 – 1 29 (9) (6) 51 14 – – 21 (2) (1) 32 provisions Other(3) Voluntary severance scheme € m € m 139 (5) 5 34 (3) (89) 81 3 – – 1 – (3) 1 NAMA(1) provisions Onerous(2) contracts Legal claims Other provisions € m 31 – – – 18(1) (14)(1) – 35 € m € m 27 – (2) – 20 (1) (8) 36 9 4 – – 4 (2) (1) 14 € m 156 1 (4) (4) 89 (29) (70) 139 Voluntary severance scheme € m 6 – – – 3 – (6) 3 2014 Total € m 299 (5) 5 92 (27) (106) 258 2013 Total € m 250 39 (6) (4) 162 (57) (85) 299 (1)NAMA income statement charge/(credit) relates to ongoing valuation adjustments in relation to loans previously transferred to NAMA. (2)Provisions for the unavoidable costs expected to arise from the closure of properties surplus to requirements. (3)Includes € 58 million provisions in 2014 for refunds to customers. These relate to payment protection insurance in both Ireland and the UK, interest rate hedge products in the UK, credit card insurance, and other restitutions. Provisions in respect of restructuring and reorganisation are also included in ‘Other provisions’. (4)Included in charge/(writeback) of provisions for liabilities and commitments in income statement. The total provisions for liabilities and commitments expected to be settled within one year amount to € 147 million (2013: € 110 million). i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 275 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 38 Subordinated liabilities and other capital instruments Allied Irish Banks, p.l.c. € 1.6bn Contingent Capital Tier 2 Notes due 2016 Proceeds of issue Fair value adjustment on initial recognition Amortisation to date Dated loan capital – European Medium Term Note Programme: € 500m Callable Step-up Floating Rate Notes due October 2017 – nominal value € 25.5 million (maturity extended to 2035 as a result of the SLO) £ 368m 12.5% Subordinated Notes due June 2019 – nominal value £ 79 million (maturity extended to 2035 as a result of the SLO) £ 500m Callable Fixed/Floating Rate Notes due March 2025 – nominal value £ 1million (maturity extended to 2035 as a result of the SLO) Maturity of dated loan capital Dated loan capital outstanding is repayable as follows: 5 years or more € 1.6bn Contingent Capital Tier 2 Notes due 2016 Notes 2014 € m 2013 € m 1,600 (447) 258 1,411 1,600 (447) 163 1,316 (a) 8 32 – 40 8 28 – 36 1,451 1,352 2014 € m 40 2013 € m 36 (a) On 26 July 2011, AIB issued € 1.6 billion in nominal value of Contingent Capital Tier 2 Notes (‘CCNs’) to the Minister for Finance of Ireland (‘the Minister’) for cash consideration of € 1.6 billion. The fair value of these notes at initial recognition was € 1,153 million with € 447 million being accounted for as a capital contribution from the Minister (note 42). Interest is payable annually in arrears on the nominal value of the notes at a fixed rate of 10% per annum. The interest rate may increase up to 18% at the behest of the Minister but with effect only from the date that the CCNs are sold to a third party external to a State entity. The notes are due to mature on 28 July 2016. The CCNs are unsecured and subordinated obligations of AIB. They rank: (i) junior to the claims of all holders of unsubordinated obligations of AIB; (ii) pari passu with the claims of holders of all other subordinated obligations of AIB which qualify as consolidated Tier 2 capital of the Group for regulatory capital purposes or which rank, or are expressed to rank, pari passu with the CCNs; and (iii) senior to the claims of holders of all other subordinated obligations of AIB which rank junior to the CCNs including any subordinated obligations of AIB which qualify as Tier 1 capital of the Group for regulatory purposes. While the CCNs are outstanding, if AIB’s Common Equity Tier 1 (CET 1) Ratio falls below the trigger ratio of 8.25%, the CCNs will immediately and mandatorily convert to ordinary shares of AIB at a conversion price of € 0.01 per share. Dated loan capital The dated loan capital in this section issued under the European Medium Term Note Programme is subordinated in right of payment to the ordinary creditors, including depositors, of the Group. Following the liability management exercises in 2011 and the Subordinated Liabilities Order (“SLO”) in April 2011, residual balances remained outstanding on the dated loan capital instruments above. The SLO, which was effective from 22 April 2011, changed the terms of all of those dated loan agreements outstanding. The original liabilities were derecognised and new liabilities were recognised, with their initial measurement based on the fair value at the SLO effective date. The contractual maturity date changed to 2035 as a result of the SLO, with coupons to be payable at the option of AIB. These instruments will amortise to their nominal value in the period to their maturity in 2035. 276 Allied Irish Banks, p.l.c. Annual Financial Report 2014 39 Share capital Ordinary share capital Ordinary shares of € 0.0025 (2013: € 0.01) each Preference share capital 2009 Non cumulative preference shares of € 0.01 each Deferred share capital Deferred shares of € 0.01 each Authorised 2013 m 2014 m 2014 m Issued 2013 m 702,000.0 702,000.0 523,474.1 521,296.8 3,500.0 3,500.0 3,500.0 3,500.0 – 403,775.2 – – Ordinary share capital/share premium 2014 On 13 May 2014, arising from AIB’s decision not to pay the discretionary dividend on the 2009 Preference Shares amounting to € 280 million, the NPRFC(1) became entitled to bonus shares in lieu and the Company issued 2,177,293,934 ordinary shares of € 0.01 each by way of a bonus issue to the NPRFC(1). This number of shares is equal to the aggregate cash amount of the annual dividend of € 280 million on the NPRFC’s(1) holding of 3.5 billion 2009 Preference Shares, divided by the average ordinary share price per share in the 30 trading days prior to 13 May 2014. In accordance with the Company’s Articles of Association, an amount of € 22 million, equal to the nominal value of the shares issued, was transferred from share premium account Following this transaction, the NPRFC(1) holds 522,558,712,910 ordinary shares in AIB (99.8% of the issued ordinary share capital (31 December 2013: 99.8%)). to ordinary share capital. Following shareholder resolutions passed at the EGM held on 19 June 2014: – – the authorised share capital of the Company was reduced from € 11,092,752,297 to € 1,790,000,000; the ordinary shares of the Company were renominalised, each ordinary share of € 0.01 was subdivided into one ordinary share of € 0.0025 each (carrying the same rights and obligations as an existing ordinary share) and one deferred share of € 0.0075. The deferred shares created on the renominalisation had no voting or dividend rights and had no economic value; and – the Company acquired all of the deferred shares for nil consideration and immediately cancelled them in accordance with its Articles of Association adopted at the EGM, which resulted in € 3,926 million transferring from share capital to a capital redemption reserve fund. On 15 October 2014, the Irish High Court confirmed an application by AIB for a reduction of the share premium account by € 1,074 million, in addition to a reduction of € 3,926 million of its capital redemption reserves (note 41). This resulted in a transfer from these reserve accounts (€ 5 billion) to revenue reserves. 2013 On 13 May 2013, arising from the non-payment of dividend amounting to € 280 million on the 2009 Preference Shares, the NPRFC(1) became entitled to bonus shares in lieu and the Company issued 4,144,055,254 ordinary shares of € 0.01 each by way of a bonus issue to the NPRFC(1). This number of shares is equal to the aggregate cash amount of the annual dividend of € 280 million on the NPRFC’s(1) holding of € 3.5 billion 2009 Non Cumulative Preference Shares, divided by the average price per share in the 30 trading days prior to 13 May 2013. In accordance with the Company’s Articles of Association, an amount of € 42 million, equal to the nominal value of shares issued, was transferred from share premium to ordinary shares. Preference share capital - 2009 Preference Shares On 13 May 2009, in implementing the Government’s recapitalisation of AIB, the Company issued: (i) € 3.5 billion of core tier 1 securities in the form of non-cumulative redeemable preference shares (the ‘2009 Preference Shares’) and (ii) 294,251,819 warrants to subscribe for ordinary shares (the ‘2009 Warrants’), to the NPRFC(1) for an aggregate subscription price of € 3.5 billion. The Government’s national pensions reserve fund is controlled by the NPRFC(1) and managed by the National Treasury Management Agency (“NTMA”). i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i The 2009 Preference Shares carry a fixed non cumulative dividend at a rate of 8% per annum, payable annually in arrears at the discretion of AIB. If a cash dividend is not paid, AIB must issue bonus ordinary shares to the holders of the 2009 Preference Shares by capitalising its reserves. The issue of bonus shares can be deferred by AIB, but if so, the holders of 2009 Preference Shares will acquire voting rights at general meetings of AIB equivalent to the voting rights that would have attached to the bonus shares if they had been issued. The dividend may not be deferred beyond the date on which AIB (a) pays a cash dividend on the 2009 Preference Shares or on the ordinary shares; or (b) redeems or purchases any of the 2009 Preference Shares, or ordinary shares. Arising from this provision, AIB issued ordinary shares in lieu of dividend due to the NPRFC(1) in 2010, 2011, 2012, 2013 and 2014. In accordance with the Company’s Articles of Association, an amount of € 22 million (2013: € 42 million), equal to the nominal value of the shares issued, was transferred from the share premium account to the ordinary share capital account (see below). (1)National Treasury Management Agency as controller and manager of the Ireland Strategic Investment Fund (NTMA / ISIF with effect 22 December 2014). n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 277 Notes to the consolidated financial statements 39 Share capital (continued) Preference share capital - 2009 Preference Shares The 2009 Preference Shares may be purchased or redeemed at the option of AIB, in whole or in part, from distributable profits and/or the proceeds of an issue of shares constituting core tier 1 capital (now CET 1), which for the first five years after the date of issue was at a subscription price of € 1.00 per share (now expired) and thereafter, at a price of € 1.25 per share, subject at all times to the consent of the Central Bank of Ireland/Single Supervisory Mechanism. The 2009 Preference Shares give the Minister the right, while any such preference shares are outstanding, to appoint directly 25 per cent of the directors of AIB and has voting rights equal to 25 per cent. of all votes capable of being cast by shareholders on a poll at a general meeting of the Company on shareholder resolutions relating to: (i) the appointment, reappointment or removal of Directors; and (ii) a change of control of AIB or a sale of all or substantially all of its business. In relation to item (i) above, the 25 per cent. voting rights entitlement is inclusive of the voting rights of all Government entities in respect of any ordinary shares they may hold. To the extent that the NPRFC(1) holds ordinary shares, it is not restricted from exercising its voting rights in respect of such ordinary shares at a general meeting of the Company. The 2009 Preference Shares are freely transferable in minimum lots of 50,000 shares. However, the voting rights attaching to the 2009 Preference Shares, the right to appoint directors to the board of AIB and the veto over certain share capital-related resolutions are not transferable, as those rights are exercisable only by a Government Preference Shareholder. The following tables show the movements in share capital in the statement of financial position during the year: Issued share capital At 1 January: Ordinary shares Preference shares Ordinary shares in lieu of dividend Ordinary shares of € 0.01 each renominalised Ordinary shares of € 0.0025 each arising on renominalisation Deferred shares of € 0.0075 each arising on renominalisation Cancellation of deferred shares At 31 December Of which: Ordinary shares 2009 Preference Shares Share premium At 1 January Transfer to ordinary share capital in respect of ordinary shares issued in lieu of dividend on 2009 Preference Shares Reduction and transfer to revenue reserves At 31 December Structure of the Company’s share capital as at 31 December 2014 Class of share Ordinary share capital 2009 Preference Shares 2014 € m 5,213 35 5,248 22 5,270 (5,235) 1,309 3,926 (3,926) 1,344 1,309 35 1,344 2014 € m 2,848 (22) (1,074) 1,752 2013 € m 5,171 35 5,206 42 5,248 – – – – 5,248 5,213 35 5,248 2013 € m 2,890 (42) – 2,848 Authorised Issued share capital share capital % % 98.0 2.0 97.4 2.6 (1)National Treasury Management Agency as controller and manager of the Ireland Strategic Investment Fund (NTMA / ISIF with effect 22 December 2014). 278 Allied Irish Banks, p.l.c. Annual Financial Report 2014 39 Share capital (continued) The following table shows the Group’s capital resources at 31 December 2014 and 31 December 2013: Capital resources Shareholders’ equity Contingent capital notes (note 38) Dated capital notes (note 38) Total capital resources 2014 € m 11,572 1,411 40 13,023 2013 € m 10,494 1,316 36 11,846 40 Own shares The details of ordinary shares previously purchased under shareholder authority and held as Treasury Shares are as follows: Treasury Shares At 31 December 2014 2013 35,680,114 35,680,114 Since 2008, the company has not reissued any ordinary shares from its pool of Treasury Shares. Employee share schemes and trusts In the past, the Group sponsored a number of employee share schemes whereby purchases of shares were made in the open market to satisfy commitments under the various schemes. At 31 December 2014, 1.5 million shares (2013: 1.5 million) were held by trustees with a book value of € 23 million (2013: € 23 million), and a market value of € 0.1 million (2013: € 0.1 million). The book value is deducted from revenue reserves while the shares continue to be held by the Group. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 279 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 41 Capital reserves and capital redemption reserves Capital reserves At 1 January Transfer to revenue reserves: Anglo business transfer CCNs issuance (note 38) Disposal of Ark Life(1) Other movement At 31 December Capital contribution reserves € m Other capital reserves € m 2,344 253 (470) (94) – (564) – – – (75) (75) – 2014 Total € m 2,597 (470) (94) (75) (639) – Capital contribution reserves € m Other capital reserves € m 2013 Total € m 2,385 253 2,638 (140) (79) – (219) 178(2) – – – – – (140) (79) – (219) 178 1,780 178 1,958 2,344 253 2,597 (1)Arising from the disposal of Ark Life in May 2014, an amount of € 75 million, previously accounted for as capital reserves, has now been transferred to revenue reserves. (2)The capital contribution recognised at a Group level with regard to the EBS acquisition on 1 July 2011 amounted to € 777 million. This reflected, in part, negative available for sale securities reserves and cash flow hedge reserves of € 178 million at the date of acquisition. Given that the underlying portfolio has since largely matured or has been sold at fair value to Allied Irish Banks p.l.c., a transfer of € 178 million, being the original negative reserves, has taken place at Group level from capital contribution reserves to available for sale securities reserves/cash flow hedging reserves. The capital contribution reserves which arose from the acquisition of Anglo deposit business and EBS and the issue of the CCNs were non-distributable on initial recognition but may become distributable as outlined in accounting policy number 28 in this Annual Financial Report. The transfers to revenue reserves relate to the capital contributions being deemed distributable. Capital redemption reserves On 20 June 2014, the ordinary shares of Allied Irish Banks, p.l.c. were renominalised which resulted in the creation of ordinary shares of € 0.0025 each, totalling € 1,309 million and deferred shares of € 0.0075 each, totalling € 3,926 million. The deferred shares were acquired by AIB for Nil consideration and immediately cancelled which resulted in € 3,926 million transferring from share capital to capital redemption reserves (note 39). Following the Irish High Court confirmation on 15 October 2014 of an application by AIB for a reduction of its capital redemption reserve fund, € 3,926 million was transferred to revenue reserves from this account. Capital redemption reserves At 1 January Transfer from share capital (note 39) Reduction and transfer to revenue reserves At 31 December 2014 € m – 3,926 (3,926) – 2013 € m – – – – 42 Capital contributions On 28 July 2011, the Minister for Finance (‘the Minister’) and the NPRFC(1) agreed to contribute € 2,283 million and € 3,771 million respectively (total € 6,054 million) as capital contributions to AIB for Nil consideration. These capital contributions constitute CET 1 for regulatory purposes and are included within ‘Revenue reserves’. Neither the Minister nor the NPRFC(1) has an entitlement to seek repayment of these capital contributions. (1)National Treasury Management Agency as controller and manager of the Ireland Strategic Investment Fund (NTMA / ISIF with effect 22 December 2014). 280 Allied Irish Banks, p.l.c. Annual Financial Report 2014 43 Offsetting financial assets and financial liabilities The disclosures set out in the tables below include financial assets and financial liabilities that: – – are offset in the Group’s statement of financial position; or are subject to enforceable master netting arrangements or similar agreements that covers similar financial instruments, irrespective of whether they are offset in the statement of financial position. The similar agreements include derivative clearing agreements, global master repurchase agreements and global master securities lending agreements. Similar financial instruments include derivatives, sales and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and lending agreements. Financial instruments such as loans and receivables and customer accounts are not included in the tables below unless they are offset in the statement of financial position. The Group has a number of ISDA Master Agreements (netting agreements) in place which allow it to net the termination values of derivative contracts upon the occurrence of an event of default with respect to its counterparties. The enforcement of netting agreements would potentially reduce the statement of financial position carrying amount of derivative assets and liabilities by € 1,221 million (2013: € 957 million). The Group’s sale and repurchase and reverse sale and repurchase transactions and securities borrowing and lending are covered by netting agreements with terms similar to those of ISDA Master Agreements. Additionally, the Group has agreements in place which may allow it to net the termination values of cross currency swaps upon the occurrence of an event of default. The ISDA Master Agreements and similar master netting arrangements do not meet the criteria for offsetting in the statement of financial position as they create a right of set-off of recognised amounts that become enforceable only following an event of default, insolvency or bankruptcy of the Group or the counterparties. In addition, the Group and its counterparties do not intend to settle on a net basis or to realise the assets and settle the liabilities simultaneously. The Group provides and accepts collateral in the form of cash and marketable securities in respect of the following transactions: – – – – derivatives sale and repurchase agreements reverse sale and repurchase agreements securities lending and borrowing Collateral is subject to the standard industry terms of Credit Support Annexes (‘CSAs’), which enable the Group to pledge or sell securities received during the term of the transaction. The collateral must be returned on the maturity of the transaction. The terms also give each counterparty the right to terminate the related transactions where the counterparty fails to post collateral. The Credit Support Annexes (“CSAs”) in place provide collateral for derivative contracts. At 31 December 2014, € 843 million (2013: € 820 million) of CSAs are included within financial assets and € 279 million (2013: € 188 million) of CSAs are included within financial liabilities. Additionally, the Group has agreements in place which may allow it to net the termination values of cross currency swaps upon the occurrence of an event of default. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 281 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 43 Offsetting financial assets and financial liabilities (continued) The disclosures set out in the tables below include financial assets and financial liabilities that: – – are offset in AIB Group’s statement of financial position; or are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments, irrespective of whether they are offset in the statement of financial position. The following tables show financial assets and financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements at 31 December 2014: 2014 Net amount € m 3 (7) 2014 Net amount € m Gross Net amounts of amounts of financial recognised financial assets presented liabilities amounts of offset in the in the statement statement recognised financial of financial of financial position € m assets € m Gross € m Related amounts not offset in the statement of financial position Financial collateral (including cash collateral) received € m Financial position instruments € m 1,490 110 1,600 – – – 1,490 (1,221) (279) (10) 110 1,600 (107) (1,328) – (279) Gross Net amounts of amounts of financial recognised financial liabilities presented assets amounts of offset in the in the statement statement recognised financial of financial of financial position liabilities € m € m Gross € m Related amounts not offset in the statement of financial position Financial collateral (including cash collateral) pledged € m Financial position instruments € m 16,053 2,153 2,140 20,346 – – – – 16,053 (16,862) 51 (758) 2,153 2,140 (2,206) (1,221) 20,346 (20,289) 2 (843) (790) (51) 76 (733) Financial assets Derivative financial instruments Note 22 Loans and receivables to customers – Reverse repurchase agreements 24 Total Financial liabilities Deposits by central banks and banks – Note Securities sold under agreements to repurchase Customer accounts – Securities sold under agreements to repurchase Derivative financial instruments 33 34 22 Total 282 Allied Irish Banks, p.l.c. Annual Financial Report 2014 43 Offsetting financial assets and financial liabilities (continued) The following tables show financial assets and financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements at 31 December 2013: Gross amounts of recognised financial liabilities offset in the statement of financial position € m – – – Net amounts of financial assets presented in the statement of financial position € m Related amounts not offset in the statement of financial position Financial collateral (including cash collateral) received € m Financial instruments € m 1,177 (957) (188) 16 1,193 (16) (973) – (188) Gross amounts of recognised financial assets € m 1,177 16 1,193 Gross amounts of recognised financial assets offset in the statement of financial position € m Net amounts of financial liabilities presented in the statement of financial position € m Related amounts not offset in the statement of financial position Financial collateral (including cash collateral) pledged € m Financial instruments € m Gross amounts of recognised financial liabilities € m 2013 Net amount € m 32 – 32 2013 Net amount € m Financial assets Derivative financial instruments Loans and receivables to banks – Note 22 Reverse repurchase agreements 23 Total Financial liabilities Deposits by central banks and banks – Note Securities sold under agreements to repurchase Customer accounts – 33 21,861 Securities sold under agreements to repurchase Derivative financial instruments 34 22 Total 5,783 1,819 29,463 – – – – 21,861 (22,782) 8 (913) 5,783 1,819 (6,098) (957) 29,463 (29,837) (1) (820) (813) (316) 42 (1,187) The gross amounts of financial assets and financial liabilities and their net amounts as presented in the statement of financial position that are disclosed in the above tables are measured on the following bases: – – – – – derivative assets and liabilities – fair value; loans and receivables to banks – amortised cost; loans and receivables to customers – amortised cost; deposits by central banks and banks – amortised cost; and customer accounts – amortised cost The amounts in the above tables that are offset in the statement of financial position are measured on the same basis. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 283 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 43 Offsetting financial assets and financial liabilities (continued) The following tables reconcile the ‘Net amounts of financial assets and financial liabilities presented in the statement of financial position’, as set out in the previous pages, to the line items presented in the statement of financial position at 31 December 2014 and 31 December 2013: Net amounts of financial assets presented in the statement of financial position € m Line item in statement of financial position Carrying amount in statement of financial position € m 2014 Financial assets not in scope of offsetting disclosures € m 1,490 Derivative financial instruments 2,038 548 110 Loans and receivables to customers 63,362 63,252 Net amounts of financial liabilities presented in the statement of financial position € m Line item in statement of financial position Carrying amount in statement of financial position € m 2014 Financial liabilities not in scope of offsetting disclosures € m 16,053 Deposits by central banks and banks 16,768 715 2,153 2,140 Customer accounts Derivative financial instruments 64,018 2,334 61,865 194 Financial assets Derivative financial instruments Loans and receivables to customers – Reverse repurchase agreements Financial liabilities Deposits by central banks and banks – Securities sold under agreements to repurchase Customer accounts – Securities sold under agreements to repurchase Derivative financial instruments Net amounts of financial assets presented in the statement of financial position € m Line item in statement of financial position 1,177 Derivative financial instruments Financial assets Derivative financial instruments Loans and receivables to banks – Reverse repurchase agreements 16 Loans and receivables to banks Net amounts of financial liabilities presented in the statement of financial position € m Line item in statement of financial position Financial liabilities Deposits by central banks and banks – Securities sold under agreements to repurchase Customer accounts – Securities sold under agreements to repurchase Derivative financial instruments 21,861 Deposits by central banks and banks 23,121 1,260 5,783 1,819 Customer accounts Derivative financial instruments 65,667 1,960 59,884 141 Carrying amount in statement of financial position € m 1,629 2,048 Carrying amount in statement of financial position € m 2013 Financial assets not in scope of offsetting disclosures € m 452 2,032 2013 Financial liabilities not in scope of offsetting disclosures € m 284 Allied Irish Banks, p.l.c. Annual Financial Report 2014 44 Memorandum items: contingent liabilities and commitments, and contingent assets 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 statement of financial position. 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 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 the nominal or contract amounts of contingent liabilities and commitments: Contingent liabilities(1) – credit related Guarantees and assets pledged as collateral security: Guarantees and irrevocable letters of credit Other contingent liabilities Commitments(2) Documentary credits and short-term trade-related transactions Undrawn formal standby facilities, credit lines and other commitments to lend: Less than 1 year(3) 1 year and over(4) Contract amount 2013 € m 2014 € m 739 507 1,246 14 6,837 2,231 9,082 10,328 796 557 1,353 17 6,552 1,667 8,236 9,589 (1)Contingent liabilities are off-balance sheet products and include guarantees, standby letters of credit and other contingent liability products such as performance bonds. (2)A commitment is an off-balance sheet product, where there is an agreement to provide an undrawn credit facility. The contract may or may not be cancelled unconditionally at any time without notice depending on the terms of the contract. (3)An original maturity of up to and including 1 year or which may be cancelled at any time without notice. (4)With an original maturity of more than 1 year. Concentration of exposure Republic of Ireland United Kingdom United States of America Total Contingent liabilities Commitments 2014 € m 629 480 137 2013 € m 745 429 179 1,246 1,353 2014 € m 7,580 1,480 22 9,082 2013 € m 7,164 1,045 27 8,236 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 285 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 44 Memorandum items: contingent liabilities and commitments, and contingent assets (continued) The credit ratings of contingent liabilities and commitments as at 31 December 2014 and 2013 are set out in the following table. Details of the Group’s rating profiles are set out in the ‘Risk management’ section of this report. Good upper Good lower Watch Vulnerable Impaired Unrated Total 2014 € m 3,544 3,527 730 196 488 1,843 10,328 2013 € m 2,491 3,937 381 255 669 1,856 9,589 Legal proceedings AIB Group in the course of its business is frequently involved in litigation cases. However, it 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, including governmental proceedings, which may have, or have had during the previous twelve months, a material effect on the financial position, profitability or cashflows of AIB Group. Contingent liability/contingent asset - NAMA (a) Transfers of financial assets to NAMA are complete. However, NAMA continues to finalise certain value to transfer adjustments and the final consideration payable on tranches which have already transferred. Accordingly, the Group has maintained a provision for the amount of the expected outflow in respect of various adjustments. If the actual amounts provided prove to be lower or higher than the provision, an inflow or outflow of economic benefits may result to the Group (notes 37 and 46). (b) The Group has provided NAMA with a series of indemnities relating to transferred assets. Any indemnity payment would result in an outflow of economic benefit for the Group. (c) On dissolution or restructuring of NAMA, the Minister may require that a report and accounts be prepared. If NAMA shows that an aggregate loss has been incurred since its establishment which is unlikely to be made good, the Minister may impose a surcharge on the participating institution. This will involve apportioning the loss on the participating institution, subject to certain restrictions, on the basis of the book value of the assets acquired from that institution in relation to the total book value of assets acquired from all participating institutions. Participation in TARGET 2 - Ireland AIB migrated to the TARGET 2 system during 2008. TARGET 2, being the wholesale payment infrastructure for credit institutions across Europe, is a real time gross settlement system for large volume interbank payments in euro. The following disclosures relate to the charges arising as a result of the migration to TARGET 2: By Deeds of Charge made on 15 February 2008, AIB created first floating charges in favour of the Central Bank of Ireland (‘Central Bank’) over all of AIB’s right, title, interest and benefit, present and future, in and to: (i) the balances then or at any time standing to the credit of Payment Module accounts held by AIB with a Eurosystem central bank (‘Charge over Payment Module Accounts’); and (ii) each of the eligible securities included from time to time in the Eligible Securities Schedule furnished by AIB to the Central Bank (‘Charge over Eligible Securities’). In each case, a ‘Charged Property’, for the purpose of securing all present and future liabilities of AIB in respect of AIB’s participation in TARGET 2, arising from the Deeds of Charge and the Terms and Conditions for participation in TARGET 2 – Ireland (specified from time to time by the Central Bank), including, without limitation, liabilities to the Central Bank, the European Central Bank, or any national central bank of a Member State that has adopted the euro. The Deeds of Charge contain a provision whereby during the subsistence of the security, otherwise than with the prior written consent of the Central Bank, AIB shall not: (a) create or attempt to create or permit to arise or subsist any encumbrance on or over the Charged Property or any part thereof; or (b) otherwise than in the ordinary course of business, sell, transfer, lend or otherwise dispose of the Charged Property or any part thereof or attempt or agree to do so whether by means of one or a number of transactions related or not and whether at one time or over a period of time. 286 Allied Irish Banks, p.l.c. Annual Financial Report 2014 44 Memorandum items: contingent liabilities and commitments, and contingent assets (continued) Participation in TARGET 2 - Ireland The Central Bank amended its collateral management system in May 2014, moving from an earmarking system to a pooling one for certain collateral accepted for Eurosystem credit operations. As part of this transition, AIB and the Central Bank entered into a Framework Agreement in respect of Eurosystem Operations secured over Collateral Pool Assets dated 7 April 2014 (‘Framework Agreement’). The Framework Agreement provided for the release of the Charge over Eligible Securities with effect from 26 May 2014. A deed of charge was made on 7 April 2014 between AIB and the Central Bank in connection with the Framework Agreement (‘Framework Agreement Deed of Charge’). The Framework Agreement Deed of Charge created a first fixed charge in favour of the Central Bank over AIB’s right, title, interest and benefit, present and future in and to eligible assets (as identified as such by the Central Bank) which comprise present and future rights, title, interest, claims and benefits of AIB at that time in and to, or in connection with, a collateral account (the “Collateral Account”) and eligible assets which stand to the credit of the Collateral Account and a first floating charge in favour of the Central Bank over AIB’s right, title, interest and benefit, present and future in and to other eligible assets of AIB. The Charge over Payment Module Accounts remains in place. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 287 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 45 Subsidiaries and consolidated structured entities The following are the material companies of AIB Group at 31 December 2014 and 31 December 2013: Name of company Principal activity Place of incorporation Allied Irish Banks, p.l.c. The parent company of the majority Republic of Ireland of the subsidiaries within the Group. Its activities include banking and financial services – a licensed bank. AIB Mortgage Bank Issue of mortgage covered securities Republic of Ireland EBS Limited – a licensed bank Mortgages and savings – a licensed bank Republic of Ireland AIB Group (UK) p.l.c. trading Banking and financial services Northern Ireland as Allied Irish Bank (GB) in – a licensed bank Great Britain and First Trust Bank in Northern Ireland The proportion of ownership interest and voting power held by the Group in the above subsidiaries is 100%. All subsidiaries of AIB are wholly owned and there are no non-controlling interests in these subsidiaries. Practically all subsidiaries of AIB Group are involved in the provision of financial services or ancillary services. Significant restrictions Each of the subsidiaries listed above which is a licensed bank is required by its respective financial regulator to maintain capital ratios above a certain minimum level. These minimum ratios restrict the payment of dividend by the subsidiary and, where the ratios fall below the minimum requirement, will require the parent company to inject capital to make up the shortfall. Guarantees Allied Irish Banks p.l.c. (the parent company) has guaranteed a number of its subsidiary companies. These companies are listed in note L to the parent company’s financial statements. 288 Allied Irish Banks, p.l.c. Annual Financial Report 2014 45 Subsidiaries and consolidated structured entities (continued) Consolidated structured entities The Group has acted as sponsor and invested in a number of special purpose vehicles in order to generate funding for the Group’s lending activities (with the exception of AIB PFP Scottish Limited Partnership). The Group considers itself a sponsor of a structured entity when it facilitates the establishment of the structured entity. The following special purpose vehicles are consolidated by the Group: – Emerald Mortgages No. 4 Public Limited Company; – Emerald Mortgages No. 5 Limited; – Mespil 1 RMBS Limited; – Tenterden Funding p.l.c.; – Goldcrest Funding No. 1 Limited ; and – AIB PFP Scottish Limited Partnership. Further details on these special purpose vehicles are set out in note 46. There are no contractual arrangements that could require Allied Irish Banks, p.l.c. or its subsidiaries to provide financial support to the consolidated structured entities listed above. During the year, neither Allied Irish Banks, p.l.c. nor any of its subsidiaries provided financial support to a consolidated structured entity and there is no current intention to provide financial support. The Group has no interest in unconsolidated structured entities. Ark Life Assurance Company Limited Ark Life Assurance Company Limited (‘Ark Life’) was acquired in 2013, as a wholly owned subsidiary, with a view to its subsequent disposal. It was classified on acquisition date as a discontinued operation in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. This sale was completed in May 2014 (note 17). Further details on AIB’s principal subsidiaries are set out in note L to the parent company’s financial statements. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 289 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 46 Off-balance sheet arrangements and transferred financial assets Under IFRS, transactions and events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. As a result, the substance of transactions with a special purpose entity (“SPE”) forms the basis for their treatment in the Group’s financial statements. An SPE is consolidated in the financial statements when the substance of the relationship between the Group and the SPE indicates that the SPE is controlled by the entity and meets the criteria set out in IFRS 10 Consolidated Financial Statements. The primary form of SPE utilised by the Group are securitisations and employee compensation trusts. Securitisations The Group utilises securitisations primarily to support the following business objectives: – – – as an investor, AIB has primarily been an investor in securitisations issued by other credit institutions as part of the management of its interest rate and liquidity risks through Treasury; as an investor, securitisations have been utilised by the Group to invest in transactions that offered an appropriate risk-adjusted return opportunity; and as an originator of securitisations to support the funding activities of the Group. AIB controls certain special purpose entities which were set-up to support the funding activities of the Group. Details of these special purpose entities are set out below under the heading ‘Special purpose entities’. AIB controls two special purpose entities set up in relation to the funding of the Group Pension Schemes which are also detailed below. Stock borrowing and lending securities borrowed are not recognised in the financial statements, unless these are sold to third parties, at which point the obligation to repurchase the securities is recorded as a trading liability at fair value and any subsequent gain or loss included in trading income. Employee compensation trusts AIB and some of its subsidiary companies use trust structures to benefit employees and to facilitate the ownership of the Group’s equity by employees. The Group consolidates these trust structures where the risks and rewards of the underlying shares have not been transferred to the employees. Details of these schemes are provided in note 10 ‘Share-based compensation schemes’ to the consolidated financial statements. Transfer of financial assets The Group enters into transactions in the normal course of business in which it transfers previously recognised financial assets. Transferred financial assets may, in accordance with IAS 39 Financial Instruments: Recognition and Measurement: (i) continue to be recognised in their entirety; or (ii) be derecognised in their entirety but the Group retains some continuing involvement. The most common transactions where the transferred assets are not derecognised in their entirety are sale and repurchase agreements, issuance of covered bonds and securitisations. (i) Transferred financial assets not derecognised in their entirety Sale and repurchase agreements Sale and repurchase agreements are transactions in which the Group sells a financial asset to another party, with an obligation to repurchase it at a fixed price on a certain later date. The Group continues to recognise the financial assets in full in the statement of financial position as it retains substantially all the risks and rewards of ownership. The Group’s sale and repurchase agreements are both with central banks, banks and customers. The obligation to pay the repurchase price is recognised within ‘Deposits by central banks and banks’ (note 33) and ‘Customer accounts’ (note 34). As the Group sells the contractual rights to the cash flows of the financial assets, it does not have the ability to use or pledge the transferred assets during the term of the sale and repurchase agreement. The Group remains exposed to credit risk and interest rate risk on the financial assets sold. Details of sale and repurchase activity are set out in notes 33 and 34. The obligation arising as a result of sale and repurchase agreements together with the carrying value of the financial assets pledged are set out in the table below. Issuance of covered bonds Covered bonds, which the Group issues, are debt securities backed by cash flows from mortgages for the purpose of financing loans secured on residential property through its wholly owned subsidiaries, AIB Mortgage Bank and EBS Mortgage Finance. The Group retains all the risks and rewards of these mortgage loans, including credit risk and interest rate risk, and therefore, the loans continue to be recognised on the Group’s statement of financial position with the related covered bonds included within ‘Debt securities in issue’ (note 35). As the Group segregates the assets which back these debt securities into “cover asset pools” it does not have the ability to otherwise use such segregated financial assets during the term of these debt securities. However, of the total debt securities of this type issued amounting to € 10 billion, internal Group companies hold € 6 billion which are eliminated on consolidation. These internally issued bonds are used by the Group as part of sale and repurchase agreements with the Central Bank of Ireland as outlined above. 290 Allied Irish Banks, p.l.c. Annual Financial Report 2014 46 Off-balance sheet arrangements and transferred financial assets (continued) Special purpose entities Securitisations are transactions in which the Group sells loans and receivables to customers (mainly mortgages and credit card receivables) to special purpose entities (“SPEs”), which, in turn, issue notes or deposits to external investors. The notes or deposits issued by the SPEs are on terms which result in the Group retaining the majority of ownership risks and rewards and therefore, the loans continue to be recognised on the Group’s statement of financial position. The Group remains exposed to credit risk, interest rate risk and foreign exchange risk on the loans sold. The liability in respect of the cash received from the external investors is included within ‘Debt securities in issue’ (note 35) or in ‘Deposits by central banks and banks’ (note 33). Under the terms of the securitisations, the rights of the investors are limited to the assets in the securitised portfolios and any related income generated by the portfolios, without further recourse to the Group. The Group does not have the ability to otherwise use the assets transferred as part of securitisation transactions during the term of the arrangement. In 2012, the Group securitised € 533 million of its residential mortgage portfolio held in the AIB UK segment. These mortgages were transferred to a securitisation vehicle, Tenterden Funding p.l.c. (‘Tenterden’). In order to fund the acquired mortgages, Tenterden issued class A notes to external investors and class B notes to an AIB subsidiary. The transferred mortgages have not been derecognised as the Group retains substantially all the risks and rewards of ownership and continue to be reported in the Group’s statement of financial position. Tenterden is consolidated into the Group’s financial statements with the class B notes being eliminated on consolidation. The liability in respect of cash received by Tenterden from the external investors is included within ‘Debt securities in issue’ (note 35) on the statement of financial position. At 31 December 2014, the carrying amount of the assets which the Group continues to recognise is € 332 million (2013: € 380 million) and the carrying amount of the associated liabilities is € 178 million (2013: € 237 million). In 2013, the Group securitised part of its credit card receivables portfolio held in the Domestic Core Bank segment. These credit card receivables were transferred to a securitisation vehicle, Goldcrest Funding No.1 Limited (‘Goldcrest’). In order to fund the acquired receivables, Goldcrest received senior loan facility proceeds from external investors secured on these and future credit card receivables and junior loan facility proceeds from Allied Irish Banks p.l.c.. The transferred receivables have not been derecognised as the Group retains substantially all the risks and rewards of ownership and the credit card receivables continue to be reported in the Group’s statement of financial position. Goldcrest is consolidated into the Group’s financial statements with the junior loan facility being eliminated on consolidation. At 31 December 2014, the carrying amount of the receivables which the Group continues to recognise is € 297 million (2013: € 675 million). The liability in respect of cash received by Goldcrest from external investors is included within ‘Deposits by central banks and banks’ (note 33) on the statement of financial position. Arising from the acquisition of EBS on 1 July 2011, the Group controls three special purpose entities which had previously been set up by EBS: Emerald Mortgages No. 4 Public Limited Company; Emerald Mortgages No. 5 Limited; and Mespil 1 RMBS Limited. Emerald Mortgages No. 4 Public Limited Company The total carrying value of the original residential mortgages transferred by EBS Limited to Emerald Mortgages No. 4 Public Limited Company (‘Emerald 4’) as part of the securitisation amounted to € 1,500 million. The carrying amount of transferred secured loans that the Group has recognised at 31 December 2014 is € 735 million (2013: € 823 million). The carrying amount of the bonds issued by Emerald 4 to third party investors amounts to € 575 million (2013: € 815 million) and is included within ‘Debt securities in issue’ (note 35). Emerald Mortgages No. 5 Limited The total carrying amount of original residential mortgages transferred by EBS Limited to Emerald Mortgages No.5 Limited (‘Emerald 5’) as part of the securitisation amounted to € 2,500 million. The amount of transferred secured loans that the Group has recognised at 31 December 2014 is € 1,533 million (2013: € 1,708 million). Bonds were issued by Emerald 5 to EBS Limited but these are not shown in the Group’s financial statements, as these bonds are eliminated on consolidation. Mespil 1 RMBS Limited The total carrying amount of secured loans that the Group has recognised as at 31 December 2014 is € 814 million (2013: € 903 million) in relation to the transfers from EBS Limited and Haven Mortgages Limited to Mespil 1 RMBS Limited. The bonds issued by Mespil 1 RMBS Limited to EBS Limited are not shown in the Group’s financial statements, as these bonds are eliminated on consolidation. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 291 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 46 Off-balance sheet arrangements and transferred financial assets (continued) The following table summarises as at the 31 December 2014 and 31 December 2013, the carrying value and fair value of financial assets which did not qualify for derecognition together with their associated financial liabilities: Carrying amount of transferred assets Carrying amount of associated liabilities held by third parties Sale and repurchase agreements Covered bond programmes Residential mortgage backed Securitisations € m 22,135(1) 7,379(1) 1,365 € m 18,206(2) 3,765 953 Carrying amount of associated liabilities held by Group companies € m – – 498 Fair value of transferred assets Fair value of associated liabilities held by third parties € m 22,146 6,387 1,286 € m 18,206 4,103 902 Fair value of associated liabilities held by Group companies € m – – 478 Carrying amount of transferred assets € m Sale and repurchase agreements 30,698 Covered bond programmes Residential mortgage backed Securitisations 6,478 1,886 Carrying amount of associated liabilities held by third parties € m 27,644(2) 3,315 1,557 Carrying amount of associated liabilities held by Group companies € m – – 321 Fair value of transferred assets Fair value of associated liabilities held by third parties € m 30,833 5,551 1,801 € m 27,644 3,537 1,394 Fair value of associated liabilities held by Group companies € m – – 321 2014 Net fair value position € m 3,940 2,284 (94) 2013 Net fair value position € m 3,189 2,014 86 (1)The asset pools (€ 20 billion) in the covered bond programme have been apportioned on a pro-rata basis in relation to the value of bonds held by external investors and those held by AIB Group companies. The € 7,379 million above refers to those assets apportioned to external investors. Those held internally by AIB have been used in sale and repurchase agreements or are available for pledging as collateral. (2)See notes 33 and 34. AIB Group (UK) p.l.c. Pension Scheme interest in the AIB PFP Scottish Limited Partnership In December 2013, the Group agreed with the Trustee of the AIB UK Defined Benefit Pension Scheme (“the UK scheme”) a restructure of the funding of the deficit in the UK scheme. The future funding period was extended from 8 to 16 years, commencing in 2016 with the implementation of an asset backed funding arrangement. The Group established a pension funding partnership, AIB PFP Scottish Limited Partnership (“SLP”) under which a portfolio of loans were transferred to the SLP from another Group entity, AIB UK Loan Management Limited (“UKLM”) for the purpose of ring-fencing the repayments on these loans to fund future deficit payments of the UK scheme. Assets ring fenced for this purpose entitle the UK scheme to expected annual payments of £ 22.4 million (range of £ 15 million to £ 35 million) from 2016 until 2033, with a potential termination payment in 2032 of up to £ 60 million. The general partner in the partnership, AIB PFP (General Partner) Limited, which is an indirect subsidiary of Allied Irish Banks p.l.c. has controlling power over the partnership. In addition, the majority of the risks and rewards will be borne by AIB Group as the pension scheme has a priority right to the cash flows from the partnership, such that the variability in recoveries is expected to be borne by AIB Group through UKLM’s junior partnership interest. As UKLM continues to bear substantially all the risks and rewards of the loans, the loans are not derecognised from UKLM’s balance sheet and accordingly, the Group has determined that the SLP should be consolidated into AIB Group. 292 Allied Irish Banks, p.l.c. Annual Financial Report 2014 46 Off-balance sheet arrangements and transferred financial assets (continued) (ii) Transferred financial assets derecognised in their entirety but the Group retains some continuing involvement AIB has a continuing involvement in transferred financial assets where it retains any of the risks and rewards of ownership of the transferred financial assets. Set out below are transactions in which AIB has a continuing involvement in assets transferred. Pension scheme On 31 July 2012, AIB entered into a Contribution Deed with the Trustee of the AIB Group Irish Pension Scheme (‘the Irish Scheme’), whereby it agreed to make contributions to the scheme to enable the Trustee ensure that the regulatory Minimum Funding Standard position of non-pensioner members of the pension scheme was not affected by the agreed early retirement scheme. These contributions amounting to € 594 million were settled through the transfer to the Irish Scheme of interests in a Special Purpose Vehicle (“SPV”) owning loans and receivables previously transferred at fair value from the Group. The loans and receivables were derecognised in the Group’s financial statements as all of the risks and rewards of ownership had transferred. A subsidiary company of the Group was appointed as a service provider for the loans and receivables transferred. Under the servicing agreement, the Group subsidiary company collects the cash flows on the transferred loans and receivables on behalf of the pension scheme in return for a fee. The fee is based on an annual rate of 0.125% of the principal balance outstanding of all transferred loans and receivables on the last day of each calendar month. The Group has not recognised a servicing asset/liability in relation to this servicing arrangement, as the fee is considered to be a market rate. Under the servicing agreement, the Irish Scheme has the right to replace the Group subsidiary company as the service provider with an external third party. In 2014, the Group recognised € 1.2 million (cumulative € 3.2 million) (2013: € 1.5 million (cumulative € 2 million)) in the income statement for the servicing of the loans and receivables transferred. NAMA During 2010 and 2011, AIB transferred financial assets with a net carrying value of € 15,428 million to NAMA. All assets transferred were derecognised in their entirety. As part of this transaction, the Group has provided NAMA with a series of indemnities relating to the transferred assets. Also, on the dissolution or restructuring of NAMA, the Irish Minister for Finance (‘the Minister’) may require a report and accounts to be prepared. If NAMA reports an aggregate loss since its establishment and this is unlikely to be made good, the Minister may impose a surcharge on the participating institution. This will involve apportioning the loss on the participating institution, subject to certain restrictions, on the basis of the book value of the assets transferred by the institution in relation to the total book value of assets transferred by all participating institutions. At this stage, it is not possible to quantify the maximum exposure to loss which may arise on the dissolution or restructuring of NAMA. In addition, the Group has been appointed by NAMA as a service provider for the loans and receivables transferred, for which it receives a fee. The fee is based on the lower of actual costs incurred or 0.1% of the value of the financial assets transferred. The Group has not recognised a servicing asset/liability in relation to this servicing arrangement. In 2014, the Group recognised € 16 million (cumulative € 69 million) (2013: € 16 million (cumulative € 53 million)) in the income statement for the servicing of financial assets transferred to NAMA. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 293 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 47 Fair value of financial instruments The term ‘financial instruments’ includes both financial assets and financial liabilities. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Group has access at that date. The Group’s accounting policy for the determination of fair value of financial instruments is set out in accounting policy number 16. Readers of these financial statements are advised to use caution when using the data in the following tables to evaluate the Group’s financial position or to make comparisons with other institutions. Fair value information is not provided for items that do not meet the definition of a financial instrument. These items include 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 2014. The valuation of financial instruments, including loans and receivables, involves the application of judgement and estimation. Market and credit risks are key assumptions in the estimation of the fair value of loans and receivables. AIB has estimated the fair value of its loans to customers taking into account market risk and the changes in credit quality of its borrowers. Fair values are based on observable market prices where available, and on valuation models or techniques where the lack of market liquidity means that observable prices are unavailable. The fair values of financial instruments are measured according to the following fair value hierarchy that reflects the observability of significant market inputs: Level 1 – financial assets and liabilities measured using quoted market prices from an active market (unadjusted). Level 2 – financial assets and liabilities measured using valuation techniques which use quoted market prices from an active market or measured using quoted market prices unadjusted from an inactive market. Level 3 – financial assets and liabilities measured using valuation techniques which use unobservable market data. All financial instruments are initially recognised at fair value. Financial instruments held for trading and financial instruments in fair value hedge relationships are subsequently measured at fair value through profit or loss. Available for sale securities and cash flow hedge derivatives are subsequently measured at fair value through other comprehensive income. All valuations are carried out within the Finance function of the Group and valuation methodologies are validated by the independent Risk function within the Group. The methods used for calculation of fair value in 2014 are as follows: Financial instruments measured at fair value in the financial statements Trading portfolio financial instruments The fair value of trading debt securities, together with quoted equity shares is based on quoted prices or bid/offer quotations sourced from external securities dealers, where these are available on an active market. Where securities and equities are traded on an exchange, the fair value is based on prices from the exchange. Derivative financial instruments Where derivatives are traded on an exchange, the fair value is based on prices from the exchange. The fair value of over the counter derivative financial instruments is estimated based on standard market discounting and valuation methodologies which use reliable observable inputs including yield curves and market rates. These methodologies are implemented by the Finance function and validated by the Risk function. Where there is uncertainty around the inputs to a derivatives’ valuation model, the fair value is estimated using inputs which provide the Group’s view of the most likely outcome in a disposal transaction between willing counterparties in a functioning market. Where an unobservable input is material to the outcome of the valuation, a range of potential outcomes from favourable to unfavourable is estimated. Counterparty Valuation Adjustment ("CVA") and Funding Valuation Adjustment ("FVA") are applied to all uncollateralised over the counter derivatives. CVA is calculated as: (Option replacement cost x probability of default (“PD”) x loss given default (“LGD”)). PDs are derived from market based Credit Default Swap ("CDS") information. As most counterparties do not have a quoted CDS, PDs are derived by mapping each counterparty to an index CDS by industry sector and credit grade. LGDs are based on the specific circumstances of the counterparty and take into account valuation of offsetting security where applicable. For unsecured counterparties, an LGD of 60% is applied. 294 Allied Irish Banks, p.l.c. Annual Financial Report 2014 47 Fair value of financial instruments (continued) Funding valuation adjustment In line with market practice which continues to evolve, AIB applies a FVA for calculating the fair value of uncollateralised derivative contracts. The application of the FVA in the valuation of uncollateralised derivative contracts, introduces the use of a funding curve for discounting of cash flows where market participants consider that this cost is included in market pricing. The funding curve used is the average funding curve implied by the Credit Default Swaps (“CDS”) of the Group’s most active external derivative counterparties. The logic in applying this curve is to best estimate the FVA which a counterparty would apply in a transaction to close out the Group’s existing positions. The application of FVA, while an overall negative adjustment, contains within it the benefit of own credit which can be applied by Debit Valuation Adjustment (“DVA”) and accordingly, DVA, which had been applied in 2013, is no longer applied to the Group’s derivatives valuations to avoid duplication. Within the range of estimates and fair value sensitivity measurements, a favourable and an adverse scenario have been selected for PDs and LGDs for CVA. The favourable/adverse scenario for customer PDs are (i) a single rating upgrade and (ii) a single rating downgrade respectively. Customer LGDs are shifted according to estimates of improvement in value of security compared with potential derivatives market values. Within the combination of LGD and PD, both are shifted together yielding positive and negative valuations which are disclosed as potential alternative valuations on page 303 For FVA, a favourable scenario is the use of the bond yields of the Group’s most active derivative counterparties while an adverse scenario is the use of the Group’s own estimated senior unsecured bond yields. Financial investments available for sale The fair value of available for sale debt securities and equities has been estimated based on expected sale proceeds. The expected sale proceeds are based on screen bid prices which have been analysed and compared across multiple sources for reliability. Where screen prices are unavailable, fair values are estimated using valuation techniques using observable market data for similar instruments. Where there is no market data for a directly comparable instrument, management judgement, on an appropriate credit spread to similar or related instruments with market data available, is used within the valuation technique. This is supported by cross referencing other similar or related instruments. Financial instruments not measured at fair value but with fair value information presented separately in the notes to the financial statements Loans and receivables to banks The fair value of loans and receivables to banks is estimated using discounted cash flows applying either market rates, where practicable, or rates currently offered by other financial institutions for placings with similar characteristics. Loans and receivables to customers The Group provides lending facilities of varying rates and maturities to corporate and personal customers. Valuation techniques are used in estimating the fair value of loans, primarily using discounted cash flows and applying market rates where practicable. In addition to the assumptions set out above under valuation techniques regarding cash flows and discount rates, a key assumption for loans and receivables is that the carrying amount of variable rate loans (excluding mortgage products) approximates to market value where there is no significant credit risk of the borrower. The fair value of variable rate mortgage products including tracker mortgages is calculated by discounting expected cash flows using discount rates that reflect the interest rate risk in the portfolio. For fixed rate loans, the fair value is calculated by discounting expected cash flows using discount rates that reflect the interest rate risk in that portfolio. For the overall loan portfolio, an adjustment is made for credit risk which at 31 December 2014 took account of the Group’s expectations on credit losses over the life of the loans. NAMA senior bonds The Group’s holding of NAMA Senior Bonds is classified as loans and receivables measured at amortised cost. For disclosure purposes, the fair value of the NAMA senior bonds has been estimated using a valuation technique since there in no active market for these bonds. The valuation technique requires an increased use of management judgement which includes, but is not limited to, evaluating available market information, determining the amount and timing of cash flows generated by the instruments, identifying a risk free discount rate and applying an appropriate credit spread. Allied Irish Banks, p.l.c. Annual Financial Report 2014 295 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 47 Fair value of financial instruments (continued) Deposits by central banks and banks and customer accounts The fair value of current accounts and deposit liabilities which are repayable on demand, or which re-price frequently, approximates 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. Debt securities in issue The estimated fair value of subordinated liabilities and other capital instruments, and debt securities in issue, is based on quoted prices where available, or where these are unavailable, are estimated using valuation techniques using observable market data for similar instruments. Where there is no market data for a directly comparable instrument, management judgement, on an appropriate credit spread to similar or related instruments with market data available, is used within the valuation technique. This is supported by cross referencing other similar or related instruments. Other financial assets and other financial liabilities This caption includes accrued interest receivable and payable and the carrying amount is considered representative of fair value. Commitments pertaining to credit-related instruments Details of the various credit-related commitments and other off-balance sheet financial guarantees entered into by the Group are included in note 44. 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. The tables on the following pages set out the carrying amount and fair value of financial instruments across the three levels of the fair value hierarchy at 31 December 2014 and 31 December 2013: 296 Allied Irish Banks, p.l.c. Annual Financial Report 2014 1 8 4 8 3 1 2 5 8 , 1 0 2 9 , 2 1 0 0 1 2 5 8 , 2 7 9 8 , 3 3 3 1 4 4 2 2 , 2 2 6 4 1 3 9 3 , 5 5 6 8 , 1 5 4 8 , 1 3 9 1 3 , 7 2 9 7 4 , 9 4 9 1 , 9 5 9 9 4 6 4 5 , 6 7 – – 5 8 7 5 5 – – – – 3 1 1 4 6 5 0 , 1 – 6 4 1 1 0 2 , 1 5 4 8 , 1 3 9 1 3 , 7 2 9 7 4 , 9 4 9 1 , 9 5 9 9 4 9 8 4 , 0 7 m € m € m € m € m € m € m € l a t o T 3 l e v e L 2 l e v e L 1 l e v e L r e h t O d n a s n a o L s e l b a v i e c e r m € e l a s r o f e l b a l i a v A s e i t i r u c e s m € e g d e h w o l f h s a C s e v i t a v i r e d m € e g d e h e u l a v r i a F s e v i t a v i r e d 4 1 0 2 y h c r a r e i h e u l a v r i a F n o i t i s o p l a i c n a n i f f o t n e m e t a t s n i t n u o m a g n i y r r a C l a t o T t s o c d e s i t r o m a t A h g u o r h t e u l a v y t i u q e r i a f t A h g u o r h t e u a v l r i a f t A s s o l d n a t i f o r p ) d e u n i t n o c ( s t n e m u r t s n i l a i c n a n i f f o e u l a v r i a F 7 4 1 8 4 3 5 5 9 2 , 1 – – – – 1 8 4 8 3 1 2 5 8 , 1 2 8 3 8 3 5 , 2 1 0 2 9 , 2 1 – 1 – – 2 – – 9 9 2 5 8 , 2 7 9 8 , 3 2 5 8 , 2 0 0 1 7 9 8 , 3 3 3 1 4 0 2 9 , 2 1 0 0 1 2 5 8 , 2 7 9 8 , 3 3 3 1 4 4 1 5 0 0 5 i g n d a r t r o f d e H l m € 1 8 3 8 8 4 8 3 1 l e u a v r i a f t a d e r u s a e m s t e s s a l a i c n a n i F s t e s s a l i a c n a n i f o i l o f t r o p i g n d a r T s e v i t a v i r e d e t a r e g n a h c x E s e v i t a v i r e d e t a r t s e r e t n I s e v i t a v i r e d y t i u q E s t n e m u r t s n i l i a c n a n i f e v i t a v i r e D s e i t i r u c e s y t i u q E l e a s r o f l e b a l i a v a s t n e m t s e v n i l i a c n a n F i i s e c n e g a t n e m n r e v o g d n a s k n a b l a n o i t a n a r p u S s e i t i r u c e s t n e m n r e v o G s e i t i r u c e s d e k c a b t e s s A s e i t i r u c e s e t a r o p r o C s e i t i r u c e s y t i u q E s e i t i r u c e s k n a B 2 8 7 , 1 6 8 3 , 9 1 4 2 2 , 2 2 5 8 1 , 0 2 4 1 5 0 0 5 5 2 0 1 , – 4 6 6 9 7 8 , 4 – – – – – – – – – – – – 4 1 5 3 4 5 , 5 4 1 5 6 4 1 3 9 3 , 5 5 6 8 , 1 3 7 9 , 5 3 9 8 3 , 7 2 3 2 4 , 9 2 6 3 , 3 6 9 9 4 8 8 6 , 0 8 ) 1 ( 4 1 5 9 9 4 3 1 0 , 1 9 7 8 , 4 6 4 1 5 6 8 , 1 3 7 9 , 5 3 9 8 3 , 7 2 3 2 4 , 9 2 6 3 , 3 6 5 7 6 , 9 7 e u a v l r i a f t a d e r u s a e m t o n s t e s s a l a i c n a n F i s k n a b l a r t n e c t l a s e c n a a b d n a h s a C n o i t c e l l o c f o e s r u o c e h t n i s m e t I . s e g a g t r o m l i a c r e m m o c d n a l a i t n e d s e r i s e d u c n I l ) 2 ( . d n a h n o h s a c s e s i r p m o C ) 1 ( s t e s s a l i a c n a n i f r e h t O i s d n o b r o n e s A M A N s r e m o t s u c o t i l s e b a v e c e r d n a s n a o l l t a o T s e g a g t r o m - n o N ) 2 ( s e g a g t r o M s r e m o t s u c o t s k n a b o t l i s e b a v e c e r d n a s n a o L i l s e b a v e c e r d n a s n a o L Allied Irish Banks, p.l.c. Annual Financial Report 2014 297 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G 4 1 0 2 y h c r a r e i h e u l a v r i a F n o i t i s o p l a i c n a n i f f o t n e m e t a t s n i t n u o m a g n i y r r a C ) d e u n i t n o c ( s t n e m u r t s n i l a i c n a n i f f o e u l a v r i a F 7 4 298 l a t o T t s o c d e s i t r o m a t A h g u o r h t e u l a v y t i u q e r i a f t A t i f o r p h g u o r h t e u l a v s s o l d n a r i a f t A l a t o T 3 l e v e L 2 l e v e L 1 l e v e L m € m € m € m € m € m € r e h t O 8 3 7 7 1 1 6 3 1 , 2 4 3 3 , 2 – 1 6 – 9 3 2 0 0 3 3 7 6 5 8 7 9 8 , 1 4 3 0 , 2 5 1 7 5 1 7 – 3 5 0 , 6 1 3 5 6 , 2 1 0 0 4 , 3 5 6 6 , 1 2 4 0 0 , 0 1 3 1 6 , 0 3 5 6 6 , 1 2 4 0 0 , 0 1 3 1 6 , 0 3 3 5 1 , 2 3 5 1 , 2 0 5 9 7 1 , 8 6 4 4 1 3 8 , 1 – – – 6 4 4 9 0 7 , 1 9 9 4 2 , 8 7 – – – – 0 5 5 6 9 – 1 3 8 , 1 6 4 2 , 6 – – – – – – – – – – – – – – 4 1 2 , 7 4 1 2 , 7 8 3 7 7 1 1 6 3 1 , 2 4 3 3 , 2 5 1 7 5 1 7 3 5 0 , 6 1 3 5 0 , 6 1 5 6 6 , 1 2 4 0 0 , 0 1 6 9 1 , 0 3 3 5 1 , 2 0 5 1 1 8 , 7 6 4 4 1 5 4 , 1 4 4 5 , 0 9 5 6 6 , 1 2 4 0 0 , 0 1 6 9 1 , 0 3 3 5 1 , 2 0 5 1 1 8 , 7 6 4 4 1 5 4 , 1 4 4 5 , 0 9 7 9 5 7 8 5 m € e g d e h w o l f h s a C s e v i t a v i r e d m € e g d e h e u l a v r i a F s e v i t a v i r e d i g n d a r t r o f d e H l m € 2 5 9 3 7 7 1 1 8 l e u a v r i a f t a d e r u s a e m s e i t i l i b a i l l a i c n a n i F s e v i t a v i r e d e t a r e g n a h c x E s e v i t a v i r e d e t a r t s e r e t n I s t n e m u r t s n i l i a c n a n i f e v i t a v i r e D s e v i t a v i r e d y t i u q E s e v i t a v i r e d t i d e r C 7 9 5 7 8 5 0 5 1 , 1 l e u a v r i a f t a d e r u s a e m t o n s e i t i l i b a i l l a i c n a n i F s k n a b d n a s k n a b l a r t n e c y b s t i s o p e D s t n e m e e r g a r e d n u d o s l s e i t i r u c e S i s g n w o r r o b r e h t O s t n e m e e r g a r e d n u d o s l s e i t i r u c e S s t n u o c c a t n e r r u C s t i s o p e d d n a m e D s t i s o p e d e m T i e s a h c r u p e r o t s t n u o c c a r e m o t s u C t s e o n m r e t i m u d e m d n a s d n o B e u s s i n i s e i t i r u c e s t b e D e s a h c r u p e r o t e u s s i n i s e i t i r u c e s t b e d r e h t O t r e h o d n a s e i t i l i b a i l i d e t a n d r o b u S s t n e m u r t s n i l a t i p a c s e i t i l i b a i l l i a c n a n i f r e h t O Allied Irish Banks, p.l.c. Annual Financial Report 2014 m € m € m € m € m € m € m € l a t o T 3 l e v e L 2 l e v e L 1 l e v e L r e h t O d n a s n a o L l s e b a v e c e r i l a t o T t s o c d e s i t r o m a t A m € l e b a l e a s r o f l i a v A s e i t i r u c e s m € e g d e h w o l f h s a C s e v i t a v i r e d m € e g d e h e u a v l r i a F s e v i t a v i r e d h g u o r h t e u a v l y t i u q e r i a f t A h g u o r h t s s o l e u a v l d n a t i f r i a f o r p t A y h c r a r e h e u a v i l r i a F n o i t i s o p l i a c n a n i f f o t n e m e t a t s n i t n u o m a g n y r r a C i 3 1 0 2 ) d e u n i t n o c ( s t n e m u r t s n i l a i c n a n i f f o e u l a v r i a F 7 4 1 1 5 3 1 5 1 3 4 4 , 1 4 0 9 , 2 1 5 3 5 2 9 0 , 3 5 0 7 , 3 3 2 1 7 1 1 9 9 9 , 1 2 4 6 1 2 3 1 , 4 8 2 8 4 0 , 2 6 7 9 , 1 3 4 1 1 , 8 2 0 9 0 , 0 6 7 6 7 , 5 1 9 5 5 8 8 7 , 2 8 – – 9 1 4 – – – – – – – 2 1 4 0 1 5 3 5 – 4 6 1 8 2 2 9 3 , 1 6 7 9 , 1 3 4 1 1 , 8 2 0 9 0 , 0 6 7 6 7 , 5 1 9 5 5 0 0 0 , 8 7 – 1 5 3 1 5 1 4 2 0 , 1 1 – – – – 1 1 5 3 1 5 1 3 4 4 , 1 4 1 2 0 9 6 , 2 1 4 0 9 , 2 1 – – – 3 – 1 5 3 5 2 9 0 , 3 5 0 7 , 3 – – 2 1 5 3 5 2 9 0 , 3 5 0 7 , 3 3 2 1 7 1 1 4 0 9 , 2 1 5 3 5 2 9 0 , 3 5 0 7 , 3 3 2 1 7 1 1 – – 6 9 – – 2 3 5 9 2 4 , 1 5 3 0 , 0 2 9 9 9 , 1 2 8 6 3 , 0 2 6 9 2 3 5 3 0 0 1 , – – 6 5 6 6 3 5 , 3 – – – – – 6 9 5 – – – – – – 2 9 1 , 4 6 9 5 4 6 1 2 3 1 , 4 8 2 8 4 0 , 2 4 4 1 , 7 3 9 6 5 , 8 2 3 1 7 , 5 6 8 9 5 , 5 1 9 5 5 2 4 2 , 8 8 ) 1 ( 6 9 5 9 5 5 5 5 1 , 1 4 6 1 6 3 5 , 3 8 2 8 4 0 , 2 – 4 4 1 , 7 3 9 6 5 , 8 2 3 1 7 , 5 6 8 9 5 , 5 1 7 8 0 , 7 8 e u a v l r i a f t a d e r u s a e m t o n s t e s s a l a i c n a n F i s k n a b l a r t n e c t l a s e c n a a b d n a h s a C t n e r r u c - n o n d n a s p u o r g l a s o p s D i n o i t c e l l o c f o e s r u o c e h t n i s m e t I l e a s l r o f d e h s t e s s a i l s e b a v e c e r d n a s n a o L s r e m o t s u c o t s k n a b o t i l s e b a v e c e r d n a s n a o L i l s e b a v e c e r d n a s n a o L s r e m o t s u c o t i l s e b a v e c e r d n a s n a o l l t a o T s e g a g t r o m - n o N ) 2 ( s e g a g t r o M s t e s s a l i a c n a n i f r e h t O i s d n o b r o n e s A M A N . d n a h n o h s a c s e s i r p m o C ) 1 ( 299 . s e g a g t r o m l i a c r e m m o c d n a l a i t n e d s e r i s e d u c n I l ) 2 ( i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G i g n d a r t r o f l d e H m € 1 1 5 1 8 5 3 1 5 1 l e u a v r i a f t a d e r u s a e m s t e s s a l a i c n a n i F s t e s s a l i a c n a n i f o i l o f t r o p i g n d a r T s e v i t a v i r e d e t a r e g n a h c x E s e v i t a v i r e d e t a r t s e r e t n I s e v i t a v i r e d y t i u q E s t n e m u r t s n i l i a c n a n i f e v i t a v i r e D s e i t i r u c e s y t i u q E s e i t i r u c e s t b e D l e a s r o f l e b a l i a v a s t n e m t s e v n i l i a c n a n F i i s e c n e g a t n e m n r e v o g d n a s k n a b l a n o i t a n a r p u S s e i t i r u c e s t n e m n r e v o G s e i t i r u c e s d e k c a b t e s s A s e i t i r u c e s e t a r o p r o C s t n e m t s e v n i r e h t O s e i t i r u c e s y t i u q E s e i t i r u c e s k n a B Allied Irish Banks, p.l.c. Annual Financial Report 2014 l a t o T 3 l e v e L 2 l e v e L 1 l e v e L m € m € m € m € m € r e h t O m € l a t o T t s o c d e s i t r o m a t A m € e g d e h w o l f h s a C s e v i t a v i r e d m € e g d e h e u a v l r i a F s e v i t a v i r e d h g u o r h t e u a v l y t i u q e r i a f t A t i f o r p h g u o r h t e u a v l r i a f t A s s o l d n a y h c r a r e h e u a v i l r i a F n o i t i s o p l i a c n a n i f f o t n e m e t a t s n i t n u o m a g n y r r a C i 3 1 0 2 ) d e u n i t n o c ( s t n e m u r t s n i l a i c n a n i f f o e u l a v r i a F 7 4 300 4 3 9 7 – – – – 4 3 9 7 – 7 4 8 , 1 5 2 1 2 2 7 , 1 0 6 9 , 1 5 2 1 5 3 8 , 1 0 6 2 , 1 0 6 2 , 1 – 1 6 8 , 1 2 6 3 1 , 9 5 2 7 , 2 1 2 7 3 , 9 4 7 2 , 8 1 8 7 8 , 2 3 2 7 3 , 9 4 7 2 , 8 1 8 7 8 , 2 3 3 8 7 , 5 3 8 7 , 5 9 7 4 1 9 , 8 8 2 5 5 7 7 , 1 9 6 2 – – 8 2 5 – – – – – 4 7 – 5 7 7 , 1 – – – – – – – – – – – – – 9 7 1 7 5 , 8 4 2 7 , 0 0 1 0 0 5 , 7 7 4 7 5 , 4 1 0 5 6 , 8 0 6 2 , 1 0 6 2 , 1 1 6 8 , 1 2 1 6 8 , 1 2 2 7 3 , 9 4 7 2 , 8 1 8 3 2 , 2 3 3 8 7 , 5 9 7 0 8 6 , 8 8 2 5 2 5 3 , 1 7 2 4 , 9 9 2 7 3 , 9 4 7 2 , 8 1 8 3 2 , 2 3 3 8 7 , 5 9 7 0 8 6 , 8 8 2 5 2 5 3 , 1 7 2 4 , 9 9 4 3 9 7 – 7 4 8 , 1 0 6 9 , 1 – – – 7 4 4 7 4 4 – – – 0 9 5 0 9 5 i g n d a r t r o f l d e H m € 4 3 9 7 – 0 1 8 3 2 9 l e u a v r i a f t a d e r u s a e m s e i t i l i b a i l l a i c n a n i F s e v i t a v i r e d e t a r e g n a h c x E s e v i t a v i r e d e t a r t s e r e t n I s t n e m u r t s n i l i a c n a n i f e v i t a v i r e D s e v i t a v i r e d y t i u q E s e v i t a v i r e d t i d e r C l e u a v r i a f t a d e r u s a e m t o n s e i t i l i b a i l l a i c n a n i F s k n a b d n a s k n a b l a r t n e c y b s t i s o p e D s t n e m e e r g a r e d n u d o s l s e i t i r u c e S i s g n w o r r o b r e h t O s t n e m e e r g a r e d n u d o s l s e i t i r u c e S s t n u o c c a t n e r r u C s t i s o p e d d n a m e D s t i s o p e d e m T i e s a h c r u p e r o t s t n u o c c a r e m o t s u C t s e o n m r e t i m u d e m d n a s d n o B e u s s i n i s e i t i r u c e s t b e D e s a h c r u p e r o t e u s s i n i s e i t i r u c e s t b e d r e h t O t r e h o d n a s e i t i l i b a i l i d e t a n d r o b u S s t n e m u r t s n i l a t i p a c s e i t i l i b a i l l i a c n a n i f r e h t O Allied Irish Banks, p.l.c. Annual Financial Report 2014 Notes to the consolidated financial statements 47 Fair value of financial instruments (continued) Significant transfers between Level 1 and Level 2 of the fair value hierarchy The following table shows significant transfers between Level 1 and Level 2 of the fair value hierarchy for the years ended 31 December 2014 and 31 December 2013: Group Transfer into Level 1 from Level 2 Transfer into Level 2 from Level 1 Financial assets Trading portfolio € m Debt securities € m – – – 1 2014 Total € m – 1 Financial assets Trading portfolio € m Debt securities € m – – 13 3 2013 Total € m 13 3 Transfers into Level 1 from Level 2 occurred due to increased availability of reliable quoted market prices which were not previously available. Transfers into Level 2 from Level 1 occurred due to reduced availability of reliable quoted market prices. Reconciliation of balances in Level 3 of the fair value hierarchy The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements in Level 3 of the fair value hierarchy for 2014 and 2013: Financial assets Financial liabilities 2014 Derivatives Available for sale Total Derivatives Total Group At 1 January 2014 Transfers into Level 3(1) Total gains or (losses) in: Profit or loss – Net trading gain Other comprehensive income – Net change in fair value of financial investments available for sale – Net change in fair value of cash flow hedges Purchases Sales At 31 December 2014 € m 419 114 107 – 2 2 – – 642 Debt securities € m Equity securities € m 12 3 – – – – – (12) 3 104 – € m 535 117 – 107 307 307 – 307 12 (12) 411 2 309 12 (24) € m 125 119 26 – 30 30 – – € m 125 119 26 – 30 30 – – 1,056 300 300 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 301 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 47 Fair value of financial instruments (continued) Financial assets Group Disposal groups and non-current assets held for sale € m At 1 January 2013 Transfers into Level 3(1) Total gains or (losses) in: Profit or loss – Net trading loss – Provisions for impairment on financial investments available for sale – Other operating loss Other comprehensive income – Net change in fair value of financial investments available for sale Purchases Sales At 31 December 2013 196 – (6) – – (6) – – (190) – Derivatives € m – 630 (211) – – (211) – – – 419 12 – – – – – – – – 12 Available for sale Debt securities € m Equity securities € m 84 – 31 December 2013 Financial liabilities Total Derivatives Total € m 292 630 € m 20 161 € m 20 161 – (217) (36) (36) (9) – (9) 27 6 (4) 104 (9) – (226) 27 6 (194) 535 – – (36) – – (20) 125 – – (36) – – (20) 125 (1)Transfers between levels of the fair value hierarchy are recognised at the end of the reporting period during which the change occurred. Transfers into Level 3 arose as a result of the unobservable inputs becoming significant to the fair value measurement of these instruments. Reconciliation of balances in Level 3 of the fair value hierarchy Total gains or losses included in profit or loss that is attributable to the change in unrealised gains or losses relating to those assets and liabilities held at 31 December 2014 and 31 December 2013: Net trading income/( loss) Provisions for impairment on financial investments available for sale Total 2014 € m 193 – 193 2013 € m (34) (9) (43) 302 Allied Irish Banks, p.l.c. Annual Financial Report 2014 47 Fair value of financial instruments (continued) Significant unobservable inputs The table below sets out information about significant unobservable inputs used for the years ended 31 December 2014 and 31 December 2013 in measuring financial instruments categorised as Level 3 in the fair value hierarchy: Fair Value 2014 € m 642 300 2013 € m 419 125 Financial instrument Uncollaterised Asset customer Liability derivatives Valuation technique Significant unobservable input CVA LGD PD Range of estimates 2014 46% – 82% (Base 55%) 0.9% – 1.4% 2013 45% – 80% (Base 59%) 0.8% – 2.0% FVA(2) DVA (Base 1.1% 1 yr PD) (Base 1.5% 1 yr PD) Combination LGD and PD(1) As above with greater As above with greater unfavourable impact unfavourable impact due to combination of due to combination of PD and LGD changes PD and LGD changes Funding spreads (0.3%) – 0.8% n/a PD n/a The PD is shifted from 2.1% to 0.4% in the unfavourable scenario. In the favourable scenario the capping of DVA at CVA level is removed. NAMA Asset 374 73 Discounted NAMA Discount rate of 12% The estimates range subordinated bonds cash flows profitability i.e. applicable to base from: (a) NAMA making ability to generate asset price. The a single payment only cash flow for estimates range from: under the bonds i.e. repayment (a) NAMA making 50% 5.26% of nominal; to of full 5.26% coupon (b) a full repayment of payments; to (b) an the bonds at maturity. early full repayment of coupons plus capital (March 2018) at a reduced discount rate. (1)The fair value measurement sensitivity to unobservable inputs ranges from negative € 53 million to positive € 25 million (2013: negative € 27 million to positive € 21 million). (2)As already noted, FVA incorporates an element of own credit which had been applied through DVA in 2013. A number of other derivatives are subject to valuation methodologies which use unobservable inputs. As the variability of the valuation is not greater that € 1 million in any individual case or collectively, the detail is not disclosed here. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 303 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 47 Fair value of financial instruments (continued) Sensitivity of Level 3 measurements The implementation of valuation techniques involves a considerable degree of judgement. While the Group believes its estimates of fair value are appropriate, the use of different measurements or assumptions could lead to different fair values. The following table sets out the impact of using reasonably possible alternative assumptions in the valuation methodology: Classes of financial assets Derivative financial instruments Financial investments available for sale – equity securities Total Classes of financial liabilities Derivative financial instruments Total Classes of financial assets Derivative financial instruments Financial investments available for sale – equity securities Total Classes of financial liabilities Derivative financial instruments Total Level 3 2014 Effect on income statement Favourable Unfavourable € m € m Effect on other comprehensive income Favourable Unfavourable € m € m 61 – 61 10 10 (77) – (77) (37) (37) – 59 59 – – – (56) (56) – – 2013 Level 3 Effect on income statement Favourable Unfavourable € m € m Effect on other comprehensive income Favourable Unfavourable € m € m 23 – 23 17 17 (39) (48) (87) (9) (9) – 111 111 – – – – – – – Day 1 gain or loss: No difference existed between the fair value at initial recognition of financial instruments and the amount that was determined at that date using a valuation technique incorporating significant unobservable data. 304 Allied Irish Banks, p.l.c. Annual Financial Report 2014 48 Interest rate sensitivity The net interest rate sensitivity of the Group at 31 December 2014 and 31 December 2013 is illustrated in the following tables. The tables set out details of those assets and liabilities whose values are subject to change as interest rates change within each contractual repricing time period. Details regarding assets and liabilities which are not sensitive to interest rate movements are included within non-interest bearing or trading captions. The tables show the sensitivity of the statement of financial position 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 fair value of derivative financial instruments is included within other assets and other liabilities as interest rate insensitive. However, some derivative instruments are derived from interest sensitive financial instruments, and are shown separately below in each year’s table. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 305 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements m € m € m € g n i r a e b m € l a t o T i g n d a r T t s e r e t n i - n o N + s r a e y 5 5 < 4 m € s r a e Y 4 < 3 m € s r a e Y 3 < 2 m € s r a e Y 2 < 1 m € s r a e Y m € 2 1 < 3 s h t n o M 3 < 1 m € s h t n o M 1 < 0 m € h t n o M 4 1 0 2 ) d e u n i t n o c ( y t i v i t i s n e s e t a r t s e r e t n I 8 4 306 5 5 4 , 7 0 1 5 2 0 , 1 ) 1 2 8 , 4 ( 8 6 7 , 6 1 8 1 0 , 4 6 1 6 8 , 7 1 5 4 , 1 5 8 7 , 5 – – – – 0 5 1 , 1 2 7 5 , 1 1 – 5 5 4 , 7 0 1 0 5 1 , 1 – – ) 5 2 1 ( m € ) 4 1 1 ( 3 8 5 , 1 m $ ) 1 1 ( 4 2 6 m £ ) 7 ( ) 6 0 7 , 2 ( – – 4 4 0 6 2 , 8 1 – 5 3 6 , 4 2 7 5 , 1 1 1 1 5 , 4 3 ) 2 3 3 , 9 3 ( 5 2 1 m € 7 9 6 , 1 ) 4 7 4 , 1 3 ( m $ ) 4 5 5 ( 5 3 6 m £ ) 3 0 8 , 7 ( ) 9 9 6 , 2 ( 4 2 0 , 1 2 0 7 , 6 1 4 1 5 6 8 , 1 2 6 3 , 3 6 3 2 4 , 9 5 8 1 , 0 2 5 0 6 , 2 1 – 1 – – – – – 5 1 4 – 4 1 4 5 4 – – – ) 6 0 4 , 2 1 ( 0 8 3 , 1 – – 9 2 3 , 7 9 0 7 , 8 – 1 5 2 5 – – 0 4 6 6 5 – – – – 4 3 4 – – – – 4 1 2 – – 2 9 1 , 4 3 9 6 , 2 6 2 6 , 4 7 0 9 , 2 – 3 1 1 5 6 5 – – – – 1 0 6 0 0 5 – – – – – – – 1 9 6 – 7 4 7 , 2 8 3 4 , 3 1 9 5 5 , 1 5 7 6 , 1 – – – 8 7 6 1 0 1 , 1 5 3 2 , 3 ) 2 0 9 , 1 ( 9 7 1 , 1 ) 0 0 8 ( ) 1 0 6 , 2 ( 5 4 0 , 0 1 7 5 4 , 9 3 m € 6 1 1 , 0 1 1 7 1 , 3 3 m $ ) 1 4 ( 9 6 7 , 2 2 1 4 , 9 2 6 0 6 , 2 3 4 6 , 6 2 m € m € 9 0 7 , 2 5 5 0 , 3 2 3 5 5 , 2 6 4 3 , 0 2 ) 6 ( m $ – m $ 4 0 8 , 2 7 3 0 , 4 2 m € 7 6 7 , 2 3 9 7 , 7 1 4 m $ 9 8 1 , 1 0 3 2 , 1 6 3 2 , 1 6 3 2 , 1 m £ ) 0 3 ( m £ 6 6 m £ 3 5 m £ 3 3 4 0 1 , 5 4 3 1 , 5 8 6 0 , 5 5 1 0 , 5 – – 3 – 7 4 9 – 0 5 3 , 1 0 0 3 , 2 0 0 9 , 1 7 8 3 , 2 0 0 0 , 1 1 1 4 , 1 – – 9 4 6 8 9 6 , 6 ) 7 4 0 , 5 ( 3 3 2 , 1 2 m € m € ) 9 4 9 , 4 ( 6 2 0 , 5 1 ) 5 9 4 , 6 ( 5 7 9 , 9 1 2 m $ m £ 2 3 2 , 1 ) 0 0 1 ( 2 8 9 , 4 m $ 1 2 m £ 0 3 2 , 1 ) 1 4 6 ( 2 8 0 , 5 2 5 7 , 9 1 8 3 , 3 3 m € 3 8 3 , 7 0 7 4 , 6 2 m $ 2 6 7 m £ 9 0 2 , 1 8 0 6 , 1 3 2 7 , 5 ) 1 0 1 , 7 ( 0 8 2 , 6 2 – 1 2 5 0 0 9 , 0 1 4 1 7 , 4 5 8 5 , 4 0 7 4 , 2 – – – – – – 1 2 4 , 1 1 9 6 7 , 1 1 ) 6 2 1 , 2 ( ) 9 5 6 , 4 ( 5 0 6 9 0 1 0 1 , 2 1 6 5 2 , – – – 6 2 3 6 3 , 0 6 2 0 1 , 9 2 6 3 2 , 9 2 6 3 2 , m € 7 8 0 9 1 , 7 8 0 9 1 , m $ 7 4 4 7 4 4 m £ 5 1 1 4 , 5 1 1 4 , – – – – – 6 9 2 8 9 8 , 1 – – 8 6 0 8 , 6 3 2 4 , 9 – 5 2 6 – – 0 0 4 , 1 8 9 3 3 6 , – 8 3 5 9 7 8 4 , 4 9 1 , 2 2 6 8 , 6 1 5 1 2 , 0 7 s t e s s a t n e r r u c - n o n d n a s p u o r g l a s o p s D i s t e s s a l i a c n a n i f o i l o f t r o p i g n d a r T l e a s r o f l d e h s t e s s A s r e m o t s u c o t s k n a b o t l i s e b a v e c e r d n a s n a o L l i s e b a v e c e r d n a s n a o L s k n a b d n a s k n a b l a r t n e c y b s t i s o p e D s t n e m u r t s n i l a t i p a c r e h t o d n a y t i u q e ’ l s r e d o h e r a h S s e i t i l i b a i l r e h t O e u s s i n i s e i t i r u c e s t b e D s e i t i l i b a i l i d e t a n d r o b u S s t n u o c c a r e m o t s u C y t i v i t i s n e s e a r t t s e r e n t i g n i t c e f f a s e v i t a v i r e D y t i u q e ’ l s r e d o h e r a h s d n a s e i t i l i b a i l l t a o T p a g y t i v i t i s n e s t s e r e t n i l e v i t a u m u C p a g y t i v i t i s n e s t s e r e t n I p a g y t i v i t i s n e s t s e r e t n i l e v i t a u m u C ) s t n u o m a y c n e r r u c o r u E ( p a g y t i v i t i s n e s t s e r e t n I s t e s s a r e h O t s t e s s a l a t o T s e i t i l i b a L i l e a s r o f l e b a l i a v a s t n e m t s e v n i l i a c n a n F i i s d n o b r o n e s A M A N p a g y t i v i t i s n e s t s e r e t n i l e v i t a u m u C p a g y t i v i t i s n e s t s e r e t n I i l ) s t n e a v u q e o r u e n i £ ( p a g y t i v i t i s n e s t s e r e t n i l e v i t a u m u C p a g y t i v i t i s n e s t s e r e t n I l i ) s t n e a v u q e o r u e n i $ ( m r e h t O m r e h t O m r e h t O m r e h t O m r e h t O m r e h t O m r e h t O m r e h t O m r e h t O m r e h t O l i ) s t n e a v u q e o r u e n i i s e c n e r r u c r e h t O ( 7 9 9 4 9 9 4 2 9 4 – ) 7 ( – ) 7 ( – ) 7 ( – ) 7 ( – ) 7 ( ) 7 ( 4 1 ) 1 ( ) 1 2 ( ) 0 2 ( ) 0 2 ( p a g y t i v i t i s n e s t s e r e t n i l e v i t a u m u C p a g y t i v i t i s n e s t s e r e t n I Allied Irish Banks, p.l.c. Annual Financial Report 2014 3 1 0 2 m € m € m € g n i r a e b m € l a t o T i g n d a r T t s e r e t n i - n o N + s r a e y 5 2 2 8 7 , 2 8 4 0 , 2 3 1 7 , 5 6 8 9 5 , 5 1 8 6 3 , 0 2 3 2 2 , 1 1 – 2 – – – – 1 0 0 , 1 – 5 2 4 4 5 7 , 2 – – – ) 3 8 0 , 7 1 ( 1 5 3 , 3 – 7 0 1 3 5 7 , 6 – – 1 1 9 , 6 4 3 7 , 7 1 1 3 0 0 , 1 ) 4 4 0 , 7 ( 2 6 2 , 0 1 1 2 1 , 3 2 7 6 6 , 5 6 9 5 7 , 8 2 5 3 , 1 1 4 3 , 8 – – – – 3 2 9 4 9 4 , 0 1 – 4 3 7 , 7 1 1 3 2 9 – – – 0 8 m € 1 6 6 6 7 , 4 m $ 2 0 7 2 m £ 7 1 ) 5 6 5 , 5 ( – – 6 4 8 3 , 5 1 – 8 1 4 , 7 4 9 4 , 0 1 2 0 3 , 3 3 ) 0 8 ( ) 6 4 3 , 0 4 ( m € 5 0 7 , 4 ) 7 8 3 , 9 2 ( m $ ) 1 2 5 ( 8 6 2 m £ – 2 0 9 – – 6 3 8 2 1 0 7 6 4 6 4 , 9 6 6 2 , 0 4 m € 5 1 2 , 7 2 9 0 , 4 3 m $ – 9 8 7 m £ ) 2 8 5 , 5 ( ) 3 7 9 , 0 1 ( 9 4 2 , 2 1 9 3 , 5 m € 5 < 4 s r a e Y – – – – 9 7 2 – 2 6 4 , 2 1 4 7 , 2 – 1 9 2 0 0 5 – – – 1 9 7 2 6 2 , 1 8 8 6 m € 4 < 3 s r a e Y – – – – 7 6 3 – 7 9 7 , 2 4 6 1 , 3 – 2 5 0 , 1 5 7 6 , 1 – – – 3 1 3 4 2 1 7 2 7 , 2 2 0 8 , 0 3 4 1 1 , 0 3 m € 3 < 2 s r a e Y – – – – – 0 9 8 1 1 6 , 2 1 0 5 , 3 0 0 5 6 3 2 , 1 0 0 0 , 1 6 1 3 , 1 – – 2 5 0 , 4 ) 7 5 1 , 1 ( 6 0 6 0 9 9 , 9 2 m € 2 < 1 s r a e Y – – – – 0 5 1 , 1 – 9 4 7 , 2 9 9 8 , 3 – 6 7 6 , 1 6 0 4 , 3 – – – m € 2 1 < 3 s h t n o M m € 3 < 1 s h t n o M m € 1 < 0 h t n o M – 2 8 2 – – 8 9 7 7 7 8 , 1 – – 5 – 7 4 9 6 1 7 , 6 8 9 5 , 5 1 – – 6 1 6 , 1 6 6 1 8 6 , – 6 8 9 9 6 4 , 3 5 0 7 , 2 6 6 2 , 3 2 7 3 2 , 4 7 – – – 3 4 4 7 7 8 9 4 , 9 – – – 0 9 3 , 3 6 0 4 , 8 6 0 4 – – – 8 0 9 2 8 1 , 9 1 2 2 1 8 2 , s t e s s a t n e r r u c - n o n d n a s p u o r g l a s o p s D i s t e s s a l i a c n a n i f o i l o f t r o p i g n d a r T l e a s r o f l d e h s t e s s A l e a s r o f l e b a l i a v a s t n e m t s e v n i l i a c n a n F i i s d n o b r o n e s A M A N s k n a b d n a s k n a b l a r t n e c y b s t i s o p e D s t n e m u r t s n i l a t i p a c r e h t o d n a y t i u q e ’ l s r e d o h e r a h S s e i t i l i b a i l r e h O t e u s s i n i s e i t i r u c e s t b e D s e i t i l i b a i l i d e t a n d r o b u S s t n u o c c a r e m o t s u C s t e s s a r e h t O s t e s s a l a t o T s e i t i l i b a L i s r e m o t s u c o t s k n a b o t i l s e b a v e c e r d n a s n a o L l i s e b a v e c e r d n a s n a o L 2 8 0 , 5 5 1 3 , 0 1 2 0 2 , 2 1 2 1 2 8 4 , y t i u q e ’ l s r e d o h e r a h s d n a s e i t i l i b a i l l t a o T ) 1 0 9 , 2 ( ) 0 4 0 , 2 1 ( 1 3 7 , 7 2 2 1 6 , y t i v i t i s n e s e a r t t s e r e n t i g n i t c e f f a s e v i t a v i r e D 8 1 7 , 1 4 8 3 , 9 2 0 3 4 , 4 6 6 6 , 7 2 3 3 3 , 3 6 3 2 , 3 2 3 0 9 9 1 , 3 0 9 9 1 , p a g y t i v i t i s n e s t s e r e t n i l e v i t a u m u C p a g y t i v i t i s n e s t s e r e t n I ) d e u n i t n o c ( y t i v i t i s n e s e t a r t s e r e t n I 8 4 m € 3 2 6 m € 2 3 m € 4 8 4 7 7 8 , 6 2 4 5 2 , 6 2 2 2 2 , 6 2 m $ – 9 8 7 m £ 5 6 m $ – 9 8 7 m £ 2 9 m $ – 9 8 7 m £ 2 2 1 m € 5 6 3 , 1 8 3 7 , 5 2 m $ – 9 8 7 m £ 3 5 3 2 4 1 , 3 7 7 0 , 3 5 8 9 , 2 3 6 8 , 2 m € 7 9 0 , 3 3 7 3 , 4 2 m $ ) 1 5 ( 9 8 7 m £ 7 2 3 , 1 0 1 5 , 2 m € 4 9 6 , 1 6 7 2 , 1 2 m $ 2 3 4 0 4 8 m £ 7 0 2 , 1 3 8 1 , 1 m $ 8 0 4 8 0 4 m £ ) 4 2 ( ) 4 2 ( m € 2 8 5 9 1 , 2 8 5 9 1 , p a g y t i v i t i s n e s t s e r e t n i l e v i t a u m u C ) s t n u o m a y c n e r r u c o r u E ( p a g y t i v i t i s n e s t s e r e t n I p a g y t i v i t i s n e s t s e r e t n i l e v i t a u m u C p a g y t i v i t i s n e s t s e r e t n I i l ) s t n e a v u q e o r u e n i £ ( p a g y t i v i t i s n e s t s e r e t n i l e v i t a u m u C p a g y t i v i t i s n e s t s e r e t n I i l ) s t n e a v u q e o r u e n i $ ( i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G – 9 2 5 5 3 5 9 2 5 – ) 6 ( – ) 6 ( – ) 6 ( – ) 6 ( – ) 6 ( ) 6 ( 7 5 – ) 3 6 ( ) 3 6 ( ) 3 6 ( p a g y t i v i t i s n e s t s e r e t n i l e v i t a u m u C p a g y t i v i t i s n e s t s e r e t n I m r e h t O m r e h t O m r e h t O m r e h t O m r e h t O m r e h t O m r e h t O m r e h t O m r e h t O m r e h O t l i ) s t n e a v u q e o r u e n i i s e c n e r r u c r e h t O ( Allied Irish Banks, p.l.c. Annual Financial Report 2014 307 Notes to the consolidated financial statements 49 Statement of cash flows Analysis of cash and cash equivalents For the purpose of the statement of cash flows, cash equivalents comprise the following balances with less than three months maturity from the date of acquisition: Cash and balances at central banks Loans and receivables to banks 2014 € m 5,393 991 6,384 2013 € m 4,132 1,598 5,730 2012 € m 4,047 1,879 5,926 The Group is required to maintain balances with the Central Bank of Ireland which at 31 December 2014 amounted to € 120 million (2013: € 115 million; 2012: € 107 million). The Group is required by law to maintain reserve balances with the Bank of England. At 31 December 2014, these amounted to € 544 million (2013: € 542 million; 2012: € 586 million). There are certain regulatory restrictions on the ability of subsidiaries to transfer funds to the parent company in the form of cash dividends, loans or advances. The impact of such restrictions is not expected to have a material effect on the Group’s ability to meet its cash obligations. 308 Allied Irish Banks, p.l.c. Annual Financial Report 2014 50 Related party transactions Related parties of the Group and Allied Irish Banks, p.l.c. (“AIB”) include subsidiary undertakings, associate undertakings and joint arrangements, post-employment benefits, Key Management Personnel and connected parties. The Irish Government is also considered a related party by virtue of its effective control of AIB. (a) Transactions with subsidiary undertakings AIB is the ultimate parent company of the Group. Banking transactions are entered into by AIB with its subsidiaries in the normal course of business. These include loans, deposits, provision of derivative contracts, foreign currency transactions and the provision of guarantees on an ‘arms length’ basis. Balances between AIB and its subsidiaries are detailed in notes f, g, j, l, p and q to the parent company financial statements. In accordance with IFRS10 Consolidated Financial Statements, transactions with subsidiaries have been eliminated on consolidation. (b) Associated undertakings and joint arrangements From time to time, the Group provides certain banking and financial services for associated undertakings. These transactions are made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectability or present other unfavourable features. Details of loans to associates are set out in note g to the parent company financial statements, while deposits from associates are set out in note q. (c) Provision of banking and related services and funding to Group Pension schemes The Group provides certain banking and financial services including money transmission services for the AIB Group Pension schemes. Such services are provided in the ordinary course of business, on substantially the same terms, including interest rates, as those prevailing at the time for comparable transactions with other persons. During 2013, the Group established a pension funding partnership, AIB PFP Scottish Limited Partnership (“SLP”) in the UK. Following this, a subsidiary of AIB transferred loans to the SLP for the purpose of ring-fencing the repayments of these loans to fund future deficit payments of the AIB UK Defined Benefit Pension Scheme (note 46). During 2012, AIB agreed to make certain contributions to the pension scheme which were settled through the transfer to the AIB Group Irish Pension Scheme of interests in a Special Purpose Vehicle (“SPV”) owning loans and receivables previously transferred at fair value from the Group. A subsidiary of AIB was appointed as a service provider for the loans and receivables transferred in return for a servicing fee at a market rate (note 46). (d) Compensation of Key Management Personnel The following disclosures are made in accordance with the provisions of IAS 24 Related Party Disclosures, in respect of the compensation of Key Management Personnel. Under IAS 24, Key Management Personnel are defined as comprising Executive and Non-Executive Directors together with Senior Executive Officers, namely, the members of the Leadership Team (see pages 158 to 160). The figures shown below include the figures separately reported in respect of Directors’ remuneration in the Remuneration report on pages 179 to 184. Short-term compensation(1) Post-employment benefits(2) Termination benefits Total 2014 € m 6.6 0.7 – 7.3 Group 2013 € m Allied Irish Banks, p.l.c. 2013 € m 2014 € m 5.8 0.5 0.4 6.7 6.0 0.7 – 6.7 5.5 0.5 0.4 6.4 (1)Comprises (a) in the case of Executive Directors and Senior Executive Officers: salary and a non-pensionable cash allowance in lieu of company car, medical insurance and other contractual benefits following the internal review of pay and benefits in 2012 and (b) in the case of Non-Executive Directors: Directors’ fees and travel and subsistence expenses incurred in the performance of the duties of their office, which are paid by the Company. (2)Comprises payments to defined benefit or defined contribution pension schemes, in accordance with actuarial advice, to provide post-retirement pensions. The defined benefit schemes closed for future accrual with effect from 31 December 2013 and all future employee pension benefits now accrue under the defined contribution scheme. Allied Irish Banks, p.l.c. Annual Financial Report 2014 309 309 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G 50 Related party transactions (continued) (e) Transactions with Key Management Personnel At 31 December 2014, deposit and other credit balances held by Key Management Personnel, namely Executive and Non-Executive Directors and Senior Executive Officers, in office during the year amounted to € 4.56 million (2013: € 5.04 million). Loans to Key Management Personnel are made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons of similar standing not connected with the Group, and do not involve more than the normal risk of collectability or present other unfavourable features. Loans to Executive Directors and Senior Executive Officers are also made in the ordinary course of business, on terms available to other employees in the Group generally, in accordance with established policy, within limits set on a case by case basis. Details of transactions with Key Management Personnel, and connected parties where indicated, for the years ended 31 December 2014 and 2013 are as follows: (i) Current Directors Mark Bourke: Loans Overdraft/Credit card Total Interest charged during 2014 Maximum debit balance during 2014* David Duffy: Loans Overdraft/Credit card Total Interest charged during 2014 Maximum debit balance during 2014* Tom Foley: Loans Overdraft/Credit card Total Interest charged during 2014 Maximum debit balance during 2014* Jim O’Hara: Loans Overdraft/Credit card Total Interest charged during 2014 Maximum debit balance during 2014* Dr Michael Somers: Loans Overdraft/Credit card Total Interest charged during 2014 Maximum debit balance during 2014* Balance at 31 December 2013 € 000 2014 Balance at 31 December 2014 € 000 622 – 622 1,261 12 1,273 – – – – – – – – – 611 – 611 8 622 1,171 4 1,175 10 1,301 – – – – 1 – – – – 13 – 3 3 – 6 *The maximum debit balance is calculated by aggregating the maximum debit balance drawn on each facility during the year, 310 Allied Irish Banks, p.l.c. Annual Financial Report 2014 50 Related party transactions (continued) (e) Transactions with Key Management Personnel (i) Current Directors Catherine Woods: Loans Overdraft/Credit card Total Interest charged during 2014 Maximum debit balance during 2014* Balance at 31 December 2013 € 000 2014 Balance at 31 December 2014 € 000 88 – 88 79 – 79 1 88 As at 31 December 2014, guarantees entered into by Catherine Woods in favour of the Group amounted to € 0.1 million. Simon Ball, Bernard Byrne and Peter Hagan had no facilities with the Group during 2014. (ii) Former Directors who were in office during the year Dick Spring: Loans Overdraft/Credit card Total Interest charged during 2014 Maximum debit balance during 2014* David Hodgkinson and Tom Wacker had no facilities with the Group during 2014. (iii) Senior Executive Officers in office during the year (Aggregate of 7 persons (2013: 7)): Loans Overdraft/Credit card Total Interest charged during 2014 Maximum debit balance during 2014* (iv) Aggregate amounts outstanding at year-end Balance at 31 December 2013 € 000 2014 Balance at 31 December 2014 € 000 – 4 4 – 5 5 – 12 Balance at 31 December 2013 € 000 2014 Balance at 31 December 2014 € 000 1,399 13 1,412 1,343 5 1,348 42 1,431 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Loans, overdrafts/credit cards 31 December 2013 € 000 31 December 2014 € 000 Directors (2014:7 persons; 2013: 6 persons) Senior Executive Officers (2014:7 persons; 2013: 7 persons) 1,988 1,412 3,400 As at 31 December 2014, guarantees entered into by 1 Director in favour of the Group amounted to € 0.1 million in aggregate (2013: € 0.72 million by 1 Director and 1 Senior Executive Officer). As at 31 December 2014, no Senior Executive Officer held guarantees in favour of the Group. *The maximum debit balance is calculated by aggregating the maximum debit balance drawn on each facility during the year. Allied Irish Banks, p.l.c. Annual Financial Report 2014 1,873 1,348 3,221 311 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 50 Related party transactions (continued) (e) Transactions with Key Management Personnel (v) Connected persons The aggregate of loans to connected persons of Directors in office as at 31 December 2014, as defined in Section 26 of the Companies Act 1990, are as follows (aggregate of 19 persons; 2013: 18 persons): Loans Overdraft/Credit card Total Interest charged during 2014 Maximum debit balance during 2014* Balance at 31 December 2013 € 000 2014 Balance at 31 December 2014 € 000 1,957 86 2,043 1,608 52 1,660 40 2,265 No impairment charges or provisions have been recognised during the year in respect of any of the above loans or facilities detailed in (i) to (v) and all interest that has fallen due on all of these loans or facilities has been paid. (i) Directors in office during 2013 David Duffy: Loans Overdraft/Credit card Total Interest charged during 2013 Maximum debit balance during 2013* Tom Foley: Loans Overdraft/Credit card Total Interest charged during 2013 Maximum debit balance during 2013* Jim O’Hara: Loans Overdraft/Credit card Total Interest charged during 2013 Maximum debit balance during 2013* Dr Michael Somers: Loans Overdraft/Credit card Total Interest charged during 2013 Maximum debit balance during 2013* Dick Spring: Loans Overdraft/Credit card Total Interest charged during 2013 Maximum debit balance during 2013* Balance at 31 December 2012 € 000 2013 Balance at 31 December 2013 € 000 1,348 3 1,351 1,261 12 1,273 16 1,382 – – – – – – – 1 1 – 9 9 – – – – 6 – – – – 12 – – – – 4 – 4 4 – 17 *The maximum debit balance is calculated by aggregating the maximum debit balance drawn on each facility during the year. 312 Allied Irish Banks, p.l.c. Annual Financial Report 2014 50 Related party transactions (continued) (e) Transactions with Key Management Personnel (i) Directors in office during 2013 Catherine Woods: Loans Overdraft/Credit card Total Interest charged during 2013 Maximum debit balance during 2013* Balance at 31 December 2012 € 000 2013 Balance at 31 December 2013 € 000 97 – 97 88 – 88 1 97 As at 31 December 2013, guarantees entered into by Catherine Woods in favour of the Group amounted to € 0.1 million. Simon Ball, Bernard Byrne, Peter Hagan, David Hodgkinson and Tom Wacker had no facilities with the Group during 2013. (ii) Former Directors who were in office during 2013 There were no changes to the Board during the year (iii) Senior Executive Officers in office during 2013 (Aggregate of 7 persons (2012: 14)): Loans Overdraft/Credit card Total Interest charged during 2013 Maximum debit balance during 2013* (iv) Aggregate amounts outstanding at year-end Directors (2013: 6 persons; 2012: 6 persons) Senior Executive Officers (2013: 7; 2012: 9 persons) Balance at 31 December 2012 € 000 2013 Balance at 31 December 2013 € 000 1,841 17 1,858 1,604 27 1,631 51 1,885 Loans, overdrafts/credit cards 31 December 2012 € 000 31 December 2013 € 000 1,458 1,858 3,316 1,365 1,631 2,996 As at 31 December 2013, guarantees entered into by 1 Director and 1 Senior Executive Officer in favour of the Group amounted to € 0.7 million in aggregate (2012: € 1.4 million by 1 Director and 2 Senior Executive Officers). (v) Connected persons The aggregate of loans to connected persons of Directors in office as at 31 December 2013, as defined in Section 26 of the Companies Act 1990, are as follows (aggregate of 18 persons): Loans Overdraft/Credit card Total Interest charged during 2013 Maximum debit balance during 2013* Balance at 31 December 2012 € 000 2013 Balance at 31 December 2013 € 000 831 22 853 836 62 898 33 981 No impairment charges or provisions have been recognised during the year in respect of any of the above loans or facilities detailed in (i) to (v) and all interest that has fallen due on all of these loans or facilities has been paid. *The maximum debit balance is calculated by aggregating the maximum debit balance drawn on each facility during the year. Allied Irish Banks, p.l.c. Annual Financial Report 2014 313 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 50 Related party transactions (continued) (f) Summary of relationship with the Irish Government The Irish Government, as a result of both its investment in AIB’s 2009 Preference shares and AIB’s participation in Government guarantee schemes, became a related party of AIB in 2009. Following the various ordinary/CNV share issues to NPRFC(1) during 2010 and 2011, AIB is under the control of the Irish Government. AIB enters into normal banking transactions with the Irish Government and many of its controlled bodies on an arm’s length basis. In addition, other transactions include the payment of taxes, pay related social insurance, local authority rates, and the payment of regulatory fees, as appropriate. Following the crisis in the Irish banking sector and the stabilisation measures adopted since 2008, the involvement of the Irish Government in AIB and in other Irish banks has been and continues to be considerable. This involvement is outlined below. Rights and powers of the Irish Government and the Central Bank of Ireland The Irish Minister for Finance (‘the Minister’) and the Central Bank of Ireland (“the Central Bank”) have significant rights and powers over the operations of AIB (and other financial institutions) arising from the various stabilisation measures. These rights and powers relate to, inter alia: – The acquisition of shares in other institutions; – Maintenance of solvency ratios and compliance with any liquidity and capital ratios that the Central Bank, following consultation with the Minister, may direct; – The appointment of non-executive directors and board changes; – The appointment of persons to attend meetings of various committees; – Restructuring of executive management responsibilities, strengthening of management capacity and improvement of governance; – Declaration and payment of dividends; – Restrictions on various types of remuneration; – Buy-backs or redemptions by the Group of its shares; – The manner in which the Group extends credit to certain customer groups; and – Conditions regulating the commercial conduct of AIB, having regard to capital ratios, market share and the Group’s balance sheet growth. In addition, various other initiatives such as strategies/codes of conduct for dealing with mortgage and other consumer/business loan arrears are set out in the Risk section of this report. The relationship of the Irish Government with AIB is outlined under the following headings: – Capital investments; – Guarantee schemes; – NAMA; – Funding support; – PCAR/PLAR; – Credit Institutions (Stabilisation) Act 2010: (i) Direction Order; (ii) Transfer Order; (iii) Subordinated Liabilities Order; – Central Bank and Credit Institutions (Resolution) Act 2011; and – Relationship framework which was signed in March 2012. In addition, the European Commission, in approving AIB’s restructuring plan on 7 May 2014, found that restructuring aid granted by Ireland to AIB is in line with EU state aid rules. (1)National Treasury Management Agency as controller and manager of the Ireland Strategic Investment Fund (NTMA / ISIF with effect 22 December 2014). 314 Allied Irish Banks, p.l.c. Annual Financial Report 2014 50 Related party transactions (continued) (f) Summary of relationship with the Irish Government – Capital investments National Treasury Management Agency (“NTMA”) The Ireland Strategic Investment Fund (the “ISIF”) was established on 22 December 2014 by the National Treasury Management (Amendment) Act 2014. The ISIF is controlled and managed by the NTMA. Pursuant to this Act, all property held by the National Pensions Reserve Fund Commission ( the “NPRFC”), including its holding of ordinary shares and the 2009 Preference Shares in AIB transferred to the NTMA on 22 December 2014. Ordinary shares At 31 December 2014, the Irish Government, through the NTMA, held 522.6 billion (31 December 2013: 520.4 billion) ordinary shares in AIB representing 99.8% of the issued ordinary share capital (2013: 99.8%). During 2014, the number of ordinary shares held by the NPRFC increased by 2.2 billion following the non-payment of the cash dividend on the 2009 Preference Shares as noted below. See note 39 for details of the Government’s investment in the ordinary shares of AIB. 2009 Preference Shares At 31 December 2014, the Irish Government, through the NTMA, held € 3.5 billion capital (2013: € 3.5 billion) in the form of non-cumulative preference shares (“2009 Preference Shares”). The annual cash dividend amounting to € 280 million was not paid in either 2014 or 2013, however, the dividend entitlement was satisfied by way of a bonus issue of 2.2 billion ordinary shares (2013: 4.1 billion). The terms and conditions attaching to the 2009 Preference Shares are outlined in note 39. Contingent capital notes On 27 July 2011, AIB issued € 1.6 billion of contingent capital notes at par to the Minister. Details of this transaction are set out in note 38. Capital contributions On 28 July 2011, capital contributions totalling € 6.054 billion were made by the Irish State to AIB for nil consideration. For further details, see note 42. – Guarantee schemes The European Communities (Deposit Guarantee Schemes) Regulations 1995 have been in operation since 1995. These regulations guarantee certain retail deposits up to a maximum of € 100,000. In addition, since September 2008, the Irish Government has guaranteed relevant deposits and debt securities of AIB through the Credit Institutions (Financial Support) Scheme 2008 (“the CIFS scheme”) which expired in September 2010 and the Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 (“ELG Scheme”) which expired on 28 March 2013 for all new liabilities. In January 2010, Allied Irish Banks, p.l.c., and certain of its subsidiaries, became participating institutions for the purposes of the ELG Scheme. The total liabilities guaranteed under the ELG Scheme at 31 December 2014 amounted to € 4.6 billion (31 December 2013: € 7.8 billion). Participating institutions must pay a fee to the Minister in respect of each liability guaranteed under the ELG Scheme. Details of the total charge for 2014, 2013 and 2012 are set out in note 3. Participating institutions are also required to indemnify the Minister for any costs and expenses of the Minister and for any payments made by the Minister under the ELG Scheme which relate to the participating institution’s guarantee under the ELG Scheme. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 315 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 50 Related party transactions (continued) (f) Summary of relationship with the Irish Government – NAMA AIB was designated a participating institution under the NAMA Act in February 2010. Under this Act, AIB transferred financial assets to NAMA for which it received consideration from NAMA in the form of NAMA senior bonds and NAMA subordinated bonds which are detailed in notes 7, 27 and 28. In addition, AIB acquired NAMA senior bonds in 2011 as part of the Anglo transaction (€ 11,854 million fair value at acquisition date) and the EBS transaction (€ 301 million carrying value at acquisition date). AIB also acquired € 6 million in subordinated NAMA bonds, as part of the EBS transaction. The NAMA senior bonds are guaranteed by the Irish Government. Following on the transfer of financial assets to NAMA, a contingent liability/contingent asset arises in relation to: – – – Details of the contingent liability/asset are set out in note 44. final settlement amounts with NAMA on assets transferred; a series of indemnities which AIB has provided to NAMA on transferred assets; a possible requirement for AIB to share NAMA losses on dissolution of NAMA. Investment in National Asset Management Agency Investment Ltd (“NAMAIL”) In March 2010, a then subsidiary of Allied Irish Banks, p.l.c. made an equity investment in 17 million “B” shares of NAMAIL, a special purpose entity established by NAMA. The total investment amounted to € 17 million, of which € 12 million was invested on behalf of the AIB Group pension scheme (fair value at 31 December 2014 of € 10 million), with the remainder invested on behalf of clients. – Funding support Throughout the financial crisis, the Irish Government provided guarantees under the CIFS (expired September 2010) and ELG schemes as outlined above. In addition, through the Central Bank, the Irish Government provided direct funding as follows: – AIB has borrowings from the Central Bank as part of Eurosystem. These borrowings are under ECB Monetary Policy Operation Sale and Repurchase Agreements and amount to € 3.4 billion (2013: € 12.7 billion). At 31 December 2014, AIB had no borrowings from the Central Bank under non-standard liquidity facilities (2013: Nil). The interest rate on the facilities above is set by the Central Bank and advised to AIB on each rollover date and at 31 December 2014 was 0.05 %, being the current ECB refinancing rate. The facilities were for maturities of between 7 days and 3 months, apart from the € 1.9 billion (2013: € 11.25 billion in Long Term Refinancing Operation) in the Targeted Long Term Refinancing Operation (note 33) which will mature between September 2016 and September 2018 depending on eligible lending activities in excess of specific benchmarks. At 31 December 2014, the amounts outstanding, totalling € 3.4 billion (2013: € 12.7 billion) are included within Deposits by central banks and banks in the table below. See note 33 for details of collateral. These facilities, together with other assets and liabilities with Irish Government entity counterparties, are set out below. – PCAR/PLAR On 31 March 2011, the Central Bank published the ‘Financial Measures Programme Report’ which detailed the outcome of its review of the capital (PCAR) and funding requirements (PLAR) of the domestic Irish banks. The PCAR/PLAR assessments followed the announcement of the EU-IMF Programme for Ireland in November 2010, in which the provision of an overall amount of € 85 billion in financial support for the sovereign was agreed in principle. Up to € 35 billion of this support was earmarked for the banking system, € 10 billion of which was for immediate recapitalisation of the banks with the remaining € 25 billion to be provided on a contingency basis. Arising from the 2011 PCAR and PLAR assessments, AIB, including EBS, was required to raise € 14.8 billion in total capital (including €1.6 billion in contingent capital), all of which was subsequently raised. 316 Allied Irish Banks, p.l.c. Annual Financial Report 2014 50 Related party transactions (continued) (f) Summary of relationship with the Irish Government – Credit Institutions (Stabilisation) Act 2010 The Credit Institutions (Stabilisation) Act 2010, which was enacted in December 2010, ceased to have effect on 31 December 2014. During the period when the Act was effective, the Minister invoked certain of his powers under the Act in relation to AIB as follows: – – – a Direction Order in December 2010; a Transfer Order in February 2011; a Subordinated Liabilities Order in April 2011; and – Acquisition of EBS Limited (“EBS”). On 31 March 2011, the Minister proposed the combination of AIB and EBS (formerly EBS Building Society) to form one of the two Pillar banks. On 26 May 2011, AIB entered into an agreement with EBS, the Minister and the NTMA to acquire EBS for a consideration of € 1 (one euro). The acquisition was effective from 1 July 2011. – Central Bank and Credit Institutions (Resolution) Act 2011 The Central Bank and Credit Institutions (Resolution) Act 2011 became effective on 28 October 2011. This legislation provides the Central Bank with additional powers to achieve an effective and efficient resolution regime for credit institutions that are failing or likely to fail and that is effective in protecting the Exchequer and the stability of the financial system and the economy. The Act gives the Central Bank power to take control of banks, appoint managers to run them and remove directors, staff and consultants, and to move their deposits and loans to other banks. On 28 September 2012, the Minister made the Credit institutions Resolution Fund Levy Regulations, 2012 providing for contributions, by authorised credit institutions, to a Credit Institutions Resolution Fund pursuant to Section 15 of the Central Bank and Credit Institutions (Resolution) Act 2011. This Resolution Fund has been designed to provide a source of funding for the resolution of financial instability in, or of an imminent serious threat to the financial stability of an authorised credit institution. The Act provides for the establishment of “Bridge-Banks” for the purpose of holding assets or liabilities which have been transferred under a transfer order. Bridge-Banks are only intended to hold such assets or liabilities on a temporary basis pending onward transfer as soon as possible. The Central Bank is empowered to make special management orders in relation to an authorised credit institution, or in relation to a subsidiary or holding company of the authorised credit institution in certain circumstances. The Act also provides powers to the Central Bank regarding the liquidation of authorised credit institutions. Authorised credit institutions may also be directed to prepare a recovery plan setting out actions that could be taken to facilitate the continuation or secure the business or part of the business of that institution. – Relationship Framework In order to comply with contractual commitments imposed on AIB in connection with its recapitalisation by the Irish State and with the requirements of EU state aid applicable in respect of that recapitalisation, a Relationship Framework was entered into between the Minister and AIB in March 2012. This provides the framework under which the relationship between the Minister and AIB is governed. Under the Relationship Framework, the authority and responsibility for strategy and commercial policies (including business plans and budgets) and conducting AIB's day-to-day operations rest with the Board of AIB and its management team. However, the Board is required to obtain the prior written consent of the Minister, or to consult with the Minister, in respect of certain material matters, such as material disposals. – Approval of AIB Restructuring Plan On 7 May 2014, the European Commission approved under state aid rules AIB’s Restructuring Plan. In arriving at its final decision, the European Commission acknowledged the significant number of restructuring measures previously implemented by AIB, comprising business divestments, asset deleveraging, Liability Management exercises and significant cost reduction actions. The Commission concluded that the Restructuring Plan sets out the path to restoring long term viability. The plan covers the period from 2014 to 2017. – Restructuring Plan commitments AIB has committed to a range of measures relating to customers in difficulty: cost caps and reductions; acquisitions and exposures; coupon payments; promoting competition; and the repayment of aid to the State. All of the commitments are aligned to AIB’s operational plans and are supportive of AIB’s return to viability. Allied Irish Banks, p.l.c. Annual Financial Report 2014 317 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 50 Related party transactions (continued) (f) Summary of relationship with the Irish Government Balances held with the Irish Government and related entities The following table outlines the balances held with Irish Government entities(1) at 31 December 2014 and 31 December 2013, together with the highest balances held at any point during the year. Assets Cash and balances at central banks Derivative financial instruments Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments available for sale Total assets Liabilities Deposits by central banks and banks Customer accounts Derivative financial instruments Subordinated liabilities and other capital instruments Total liabilities a b c d e f g Balance 2014 Highest(2) Balance Note balance held € m € m 2013 Highest(2) balance held € m 2,143 111 116 31 17,406 10,660 € m 258 10 115 29 15,598 10,401 26,411 560 3 120 73 9,423 9,481 19,660 2,496 10 122 86 15,605 10,715 Balance 2014 Highest(2) balance held € m € m Balance 2013 Highest(2) balance held € m € m 3,400 3,349 93 1,411 8,253 13,480 8,993 93 1,411 12,725 6,818 34 1,316 20,893 23,230 6,884 34 1,316 (1)Includes all departments of the Irish Government located in the State and embassies, consulates and other institutions of the Irish Government located outside the State. The Post Office Savings Bank (“POSB”) and the National Treasury Management Agency (“NTMA”) are included. (2)The highest balance during the year, together with the outstanding balance at the end of each year, is considered the most meaningful way of representing the amount of transactions that have occurred between AIB and the Irish Government. Substantially all of the above balances relate to Allied Irish Banks, p.l.c.. a Cash and balances at the central banks represent the minimum reserve requirements which AIB is required to hold with the Central Bank. Balances on this account can fluctuate significantly due to the reserve requirement being determined on the basis of the institution’s average daily reserve holdings over a one month maintenance period. The Group is required to maintain a monthly average Primary Liquidity balance which at 31 December 2014 was € 511 million (31 December 2013: € 515 million). b The balances on loans and receivables to banks include statutory balances with the Central Bank as well as overnight funds placed. c NAMA senior bonds were received as consideration for loans transferred to NAMA and as part of the Anglo and EBS transactions. d Financial investments available for sale comprise € 9,107 million (2013: € 10,328 million) in Irish Government securities held in the normal course of business and NAMA subordinated bonds which have a fair value at 31 December 2014 of € 374 million (31 December 2013: € 73 million) detailed above under ‘NAMA’. e f This relates to funding received from the Central Bank which is detailed under ‘Funding Support’ above. Includes € 1,575 million (2013: € 5,117 million) received from an Irish Government body under a repurchase agreement (note 34). The Group has pledged Irish Government securities with a fair value of € 1,619 million (2013: € 5,405 million) for this borrowing. g On 27 July 2011, AIB issued € 1.6 billion of contingent capital notes at par to the Minister for Finance, the fair value of these notes at initial recognition was € 1,153 million (note 38). All other balances, both assets and liabilities are carried out in the ordinary course of banking business on normal terms and conditions. 318 Allied Irish Banks, p.l.c. Annual Financial Report 2014 50 Related party transactions (continued) (f) Summary of relationship with the Irish Government Local government(1) During 2014 and 2013, AIB entered into banking transactions in the normal course of business with local government bodies. These transactions include the granting of loans and the acceptance of deposits, and clearing transactions. Commercial semi-state bodies(2) During 2014 and 2013, AIB entered into banking transactions in the normal course of business with semi-state bodies. These transactions principally include the granting of loans and the acceptance of deposits as well as derivative transactions and clearing transactions. (1)This category includes local authorities, borough corporations, county borough councils, county councils, boards of town commissioners, urban district councils, non-commercial public sector entities, public voluntary hospitals and schools. (2)Semi-state bodies is the name given to organisations within the public sector operating with some autonomy. They include commercial organisations or companies in which the State is the sole or main shareholder. Financial institutions under Irish Government control/significant influence Certain financial institutions are related parties to AIB by virtue of the Government either controlling or having a significant influence over these institutions. The following institution is controlled by the Irish Government: – Permanent tsb plc The Government controlled entity, Irish Bank Resolution Corporation Limited (In Special Liquidation) which went into special liquidation during 2013, remains a related party for the purpose of this disclosure. In addition, the Irish Government is deemed to have significant influence over Bank of Ireland. Transactions with these institutions are normal banking transactions entered into in the ordinary course of cash management business under normal business terms. The transactions constitute the short-term placing and acceptance of deposits, derivative transactions, investment in available for sale debt securities and repurchase agreements. At 31 December 2014 and 31 December 2013, the following balances were outstanding in total to these financial institutions: Assets Derivative financial instruments Loans and receivables to banks(1) Financial investments available for sale Liabilities Deposits by central banks and banks(2) Derivative financial instruments Customer deposits(3) 2014 Balance € m 2013 Balance € m 20 4 267 9 17 19 48 – 413 172 23 39 (1)The highest balance in loans and receivables to banks amounted to € 108 million in respect of funds placed during the year (2013: € 77 million). (2)The highest balance in deposits by central banks and banks amounted to € 509 million in respect of funds received during the year (2013: € 872 million). (3)The highest balance in customer deposits amounted to € 48 million in respect of funds received during the year (2013: € 331 million). In connection with the acquisition by AIB Group of certain assets and liabilities of the former Anglo Irish Bank Corporation Limited (now Irish Bank Resolution Corporation Limited (in Special Liquidation)) “IBRC”, IBRC had indemnified AIB Group for certain liabilities pursuant to a Transfer Support Agreement dated 23 February 2011. AIB Group had made a number of claims on IBRC pursuant to the indemnity prior to IBRC’s Special Liquidation on 7 February 2013. AIB Group has since served notice of claim and set-off on the Joint Special Liquidators of IBRC in relation to the amounts claimed pursuant to the indemnity and certain other amounts that were owing to AIB by IBRC as at the date of the Special Liquidation (c. € 81.3 million in aggregate). Given AIB’s aggregate liability to IBRC at the date of Special Liquidation exceeded these claims, no financial loss is expected to occur. Allied Irish Banks, p.l.c. Annual Financial Report 2014 319 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 50 Related party transactions (continued) (g) Indemnities Allied Irish Banks, p.l.c. has indemnified the Directors of Allied Irish Banks Pensions Limited and AIB DC Pensions (Ireland) Limited, the trustees of the Group’s Republic of Ireland defined benefit pension scheme and defined contribution pension scheme, respectively, against any actions, claims or demands arising out of their actions as Directors of the trustee companies, other than by reason of wilful default. 51 Commitments Capital expenditure Estimated outstanding commitments for capital expenditure not provided for in the financial statements Capital expenditure authorised but not yet contracted for 2014 € m 17 35 Operating lease rentals The total of future minimum lease payments under non-cancellable operating leases are set out in the following table: One year One to two years Two to three years Three to four years Four to five years Over five years Total 2014 € m 57 61 58 56 55 394 681 2013 € m 25 26 2013 € m 66 62 61 58 60 451 758 The Group holds a number of significant operating lease arrangements in respect of branches and the headquarter locations. AIB Group leases the Bankcentre campus in Ballsbridge, Dublin 4 under two separate lease arrangements. The minimum lease terms remaining on the most significant leases vary from 1 year to 15 years. The average lease length outstanding until a break clause in the lease arrangements is approximately 7 years with the final contractual remaining terms ranging from 1 year to 23 years. There are no contingent rents payable and all lease payments are at market rates. The total of future minimum sublease payments expected to be received under non-cancellable subleases at the reporting date were € 2 million (2013: € 3 million). Operating lease payments recognised as an expense for the year were € 67 million (2013: € 80 million). Sublease income amounted to € 4 million (2013: € 4 million). 320 Allied Irish Banks, p.l.c. Annual Financial Report 2014 52 Employees The following table shows the geographical analysis of average employees for 2014 and 2013 as follows: Republic of Ireland United Kingdom United States of America Total Analysed by segment as follows: DCB AIB UK FSG Group Total 2014 9,689 1,641 54 11,384 2014 5,339 1,266 1,534 3,245 2013 10,559 2,034 55 12,648 2013 6,085 1,490 1,512 3,561 11,384 12,648 The average number of employees by segment for 2014 and 2013 is set out above (excluding employees on career breaks and other unpaid long term leaves and Ark Life(1) employees). The figures for Group segment include the following centralised functions: Chief Financial Office; Chief Risk Office; Corporate Affairs and Strategy; Office of the Group General Counsel; Office of Group Internal Audit; and Operations and Technology. The 12 month average of 11,384 employees is lower than the average figure for 2013 of 12,648 due to the impact of voluntary severance and early retirements. Actual FTEs fell to the 31 December 2014 level of 11,047 from 11,431 at 31 December 2013, reflecting the impact of voluntary severance and selective outsourcing of some back-office and support functions in the period. (1)Acquired in 2013 with a view to its subsequent disposal. The sale was completed in May 2014 (note 17). 53 Regulatory compliance During 2014, AIB Group, and Allied Irish Banks, p.l.c. and its regulated subsidiaries complied with their externally imposed capital ratios. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 321 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 54 Financial and other information Operating ratios Operating expenses/operating income Operating expenses/operating income before exceptional items Other income/(loss)/operating income Other income/operating income before exceptional items Performance measures Return on average total assets Return on average ordinary shareholders’ equity 2014 2013 2012 64.7% 55.5% 33.4% 33.3% 86.7% 76.4% 21.2% 30.1% 295.7% 122.8% (78.1%) 22.3% 0.8% 8.0%(1) (1.3%) (21.8%) (2.7%) (36.0%) (1)Profit attributable to ordinary shareholders after deduction of the annual dividend on the 2009 Preference Shares as a percentage of average ordinary shareholders’ equity which excludes the € 3.5 billion in 2009 Preference Shares. Rates of exchange € /$* Closing Average € /£* Closing Average *Throughout this report, Pound sterling is denoted by £ and US dollar by $. Currency information Euro Other 1.2141 1.3286 0.7789 0.8062 Assets 2013 € m 97,292 20,442 1.3791 1.3282 0.8337 0.8494 1.3194 1.2850 0.8161 0.8110 Liabilities and equity 2013 € m 2014 € m 88,395 19,060 99,597 18,137 2014 € m 86,771 20,684 107,455 117,734 107,455 117,734 322 Allied Irish Banks, p.l.c. Annual Financial Report 2014 55 Average balance sheets and interest rates(1) The following table shows interest rates prevailing at 31 December 2014 and 31 December 2013 together with average prevailing interest rates, gross yields, spreads and margins for the years ended 31 December 2014, 2013 and 2012: Interest rates Ireland AIB Group’s prime lending rate European inter-bank offered rate One month euro Three month euro United Kingdom AIB Group’s base lending rate London inter-bank offered rate One month sterling Three month sterling Gross yields, spreads and margins(2) Gross yields(3) Interest rate spread(4) Net interest margin(5) As at 31 December 2013 2014 % % Average interest rates for years ended 31 December 2013 % 2014 % 2012 % 0.50 0.02 0.08 0.50 0.50 0.56 0.75 0.23 0.29 0.50 0.49 0.53 0.64 0.13 0.21 0.50 0.49 0.54 2.81 1.13 1.63 0.63 0.13 0.22 0.50 0.49 0.51 2.82 0.75 1.21 0.85 0.33 0.58 0.50 0.62 0.83 2.98 0.25 0.91 (1)The average balance sheet and gross yields, spreads and margins are presented on a continuing operations basis. (2)The gross yields, spreads and margins presented in this table are extracted from the average balance sheets and interest rates on the following page. (3)Gross yield represents the average interest rate earned on interest earning assets. (4)Interest rate spread represents the difference between the average interest rate earned on interest earning assets and the average interest rate paid on interest bearing liabilities. (5)Net interest margin represents net interest income as a percentage of average interest earning assets. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 323 n o i t a m r o n f i l a r e n e G Notes to the consolidated financial statements 55 Average balance sheets and interest rates (continued) The following tables show the average balances and interest rates of interest earning assets and interest bearing liabilities for the years ended 31 December 2014, 2013 and 2012. 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 Trading portfolio financial assets Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments available for sale Average balance € m – 5,966 65,391 12,569 19,444 – 22 2,237 80 567 Average interest earning assets Net interest on swaps 103,370 2,906 91 Year ended 31 December 2014 Interest Average rate % € m Year ended 31 December 2013 Year ended 31 December 2012 Average Interest Average Average Interest Average rate balance % € m rate % € m € m € m 1.4 0.4 3.4 0.6 2.9 2.8 14 5,724 – 19 70,018 2,329 16,743 18,621 130 652 111,120 3,130 36 2.9 0.3 3.3 0.8 3.5 2.8 37 7,693 1 31 81,003 2,701 18,957 14,510 329 579 122,200 3,641 130 2.7 0.4 3.3 1.7 4.0 3.0 Total average interest earning assets Non-interest earning assets 103,370 2,997 2.9 111,120 3,166 2.9 122,200 3,771 3.1 8,237 9,635 9,767 Total average assets 111,607 2,997 2.7 120,755 3,166 2.6 131,967 3,771 2.9 Liabilities and shareholders’ equity Due to central banks and banks Due to customers Other debt issued Subordinated liabilities Average interest earning liabilities Non-interest earning liabilities Total average liabilities Shareholders’ equity Total average liabilities and 18,515 48,944 8,921 1,401 77,781 22,426 46 673 335 256 1,310 0.3 1.4 3.8 18.3 1.7 26,242 123 51,728 1,110 8,623 1,311 344 241 0.5 2.1 4.0 18.4 33,522 252 50,634 1,678 12,294 1,240 512 223 87,904 1,818 2.1 97,690 2,665 22,031 20,899 0.8 3.3 4.2 18.0 2.7 100,207 1,310 1.3 109,935 1,818 1.7 118,589 2,665 2.2 11,400 10,820 13,378 shareholders’ equity 111,607 1,310 1.2 120,755 1,818 1.5 131,967 2,665 2.0 324 Allied Irish Banks, p.l.c. Annual Financial Report 2014 56 Non-adjusting events after the reporting period On 4 March 2015, the Board approved that the annual dividend on the 2009 Preference Shares be paid in cash. This payment, amounting to € 280 million, will be made on 13 May 2015. 57 Dividends No final dividend on ordinary shares will be paid in respect of the year ended 31 December 2014. 58 Approval of financial statements The financial statements were approved by the Board of Directors on 4 March 2015. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 325 n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Parent company financial statements and notes Parent company statement of financial position Parent company statement of cash flows Parent company statement of changes in equity Accounting policies Note a b c d e f g h i j k l Administrative expenses Retirement benefits Disposal groups and non-current assets held for sale Trading portfolio financial assets Derivative financial instruments Loans and receivables to banks Loans and receivables to customers Amounts receivable under finance leases and hire purchase contracts Provisions for impairment on loans and receivables NAMA senior bonds Financial investments available for sale Investments in Group undertakings m Intangible assets n o p q r s t u v w x y z aa ab ac Property, plant and equipment Deferred taxation Deposits by central banks and banks Customer accounts Debt securities in issue Other liabilities Provisions for liabilities and commitments Subordinated liabilities and other capital instruments Share capital Capital reserves and capital redemption reserves Capital contributions Offsetting financial assets and financial liabilities Memorandum items: Contingent liabilities and commitments, and contingent assets Transferred financial assets Fair value of financial instruments Statement of cash flows ad Related party transactions ae Commitments af ag Credit risk information Liquidity risk information ah Market risk information Page 327 328 330 332 332 333 335 335 336 339 339 340 341 342 342 344 349 350 351 352 353 353 353 354 354 355 355 355 356 359 360 361 370 370 370 371 379 380 326 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Parent company statement of financial position as at 31 December 2014 Assets Cash and balances at central banks Items in course of collection Disposal groups and non-current assets held for sale Trading portfolio financial assets Derivative financial instruments Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments available for sale Interests in associated undertakings Investments in Group undertakings Intangible assets Property, plant and equipment Other assets Current taxation Deferred taxation Prepayments and accrued income Total assets Liabilities Deposits by central banks and banks Customer accounts Derivative financial instruments Debt securities in issue Current taxation Other liabilities Accruals and deferred income Retirement benefit liabilities Provisions for liabilities and commitments Subordinated liabilities and other capital instruments Total liabilities Shareholders’ equity Share capital Share premium Reserves Total shareholders’ equity Total liabilities and shareholders’ equity Notes ac c d e f g j k l m n o p q e r s b t u v v 2014 € m 1,396 66 13 1 2,062 23,111 29,658 9,423 20,980 3 5,106 158 248 152 2 2,756 450 95,585 23,137 50,169 2,686 2,622 17 317 468 1,143 222 1,451 82,232 1,344 1,752 10,257 13,353 95,585 2013 € m 1,215 79 336 2 1,653 23,856 31,603 15,598 20,129 3 4,859 159 252 145 1 2,839 533 103,262 29,112 53,112 2,404 3,271 17 380 635 141 215 1,352 90,639 5,248 2,848 4,527 12,623 103,262 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Richard Pym Chairman 4 March 2015 David Duffy Chief Executive Officer Catherine Woods Director David O’Callaghan Company Secretary Allied Irish Banks, p.l.c. Annual Financial Report 2014 327 327 n o i t a m r o n f i l a r e n e G Parent company statement of cash flows for the year ended 31 December 2014 Notes 2014 € m 2013 € m 2012 € m Reconciliation of profit/(loss) before taxation to net cash outflow from operating activities Profit/(loss) for the year before taxation from continuing operations Adjustments for: Profit on disposal of businesses Profit on disposal of property, plant and equipment (Profit)/loss on disposal/transfer of loans and receivables Dividends received from associated undertakings, subsidiaries and equity securities Associated undertakings income Writeback of impairment of subsidiary undertakings Gain on designation of associate as an equity investment at fair value through profit or loss (Writeback)/provisions for impairment on loans and receivables (Writeback)/provisions for liabilities and commitments Provisions/(writeback) for impairment on financial investments available for sale Change in other provisions Retirement benefits – defined benefit expense/(credit) Termination benefits Contributions to defined benefit pension schemes Depreciation, amortisation and impairment Interest on subordinated liabilities and other capital instruments Net loss on buy back of debt securities in issue (Profit)/loss on disposal of financial investments available for sale Loss on termination of fair value hedging swaps Remeasurement of NAMA senior bonds Amortisation of premiums and discounts Change in prepayments and accrued income Change in accruals and deferred income Net cash inflow/(outflow) from operating activities before changes l i b b in operating assets and liabilities Change in deposits by central banks and banks Change in customer accounts Change in loans and receivables to customers(1) Change in NAMA senior bonds Change in loans and receivables to banks Change in trading portfolio financial assets/liabilities Change in derivative financial instruments Change in items in course of collection Change in debt securities in issue Change in other assets Change in other liabilities Dividends received from equity securities Effect of exchange translation and other adjustments Net cash (outflow)/inflow from operating assets and liabilities Net cash (outflow)/inflow from operating activities before taxation Taxation refund Net cash (outflow)/inflow from operating activities Investing activities (note a) Financing activities (note b) Change in cash and cash equivalents Opening cash and cash equivalents Effect of exchange translation adjustments Closing cash and cash equivalents 745 – (3) (52) (30) – (292) – (149) (4) 8 28 6 (3) (84) 97 256 9 (352) 208 (132) 38 85 (170) 209 (6,388) (3,420) 3,038 6,343 1,069 1 (305) 13 (649) (6) (83) 24 (53) (416) (207) – (207) 537 (205) 125 2,066 51 2,242 497 – (1) 197 (9) 2 (1,351) – 1,005 17 (18) 5 (98) (2) (194) 104 241 – (38) 10 (62) (48) (65) (192) – (10,067) 4,547 4,450 1,611 6,740 21 247 16 (1,846) (35) (186) – 71 5,569 5,569 21 5,590 (5,773) (160) (343) 2,434 (25) 2,066 (1,590) (1) (2) 209 (280) 5 (136) (184) 1,353 9 79 88 (137) 94 (187) 95 223 – 74 7 – (125) 103 81 (222) (6,993) 1,871 4,224 2,395 4,707 33 (662) 4 (4,765) 186 (49) – (651) 300 78 42 120 (617) (160) (657) 3,092 (1) 2,434 (1)Includes loans and receivables to customers within disposal groups and non-current assets held for sale. 328 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Parent company statement of cash flows (continued) for the year ended 31 December 2014 Notes k k n m l (a) Investing activities Net cash outflow on acquisition of business combinations Purchase of financial investments available for sale Proceeds from sales and maturity of financial investments available for sale Additions to property, plant and equipment Disposal of property, plant and equipment Additions to intangible assets Disposal of investment in associated undertakings Investment in Group undertakings Dividends received from subsidiary companies Disposal/redemption of investment in businesses and subsidiaries Dividends received from associated undertakings Cash flows from investing activities (b) Financing activities Repayment of preference shares Interest paid on subordinated liabilities and other capital instruments Cash flows from financing activities 2014 € m – (8,474) 2013 € m (325) (7,367) 2012 € m – (4,522) 8,771 2,556 4,320 (45) 1 (58) – – 1 336 5 537 (45) (160) (205) (30) 15 (57) 10 (773) 6 190 2 (5,773) – (160) (160) (32) 2 (68) – (600) 264 10 9 (617) – (160) (160) i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 329 n o i t a m r o n f i l a r e n e G m € 3 2 6 , 2 1 m € 6 2 m € ) 9 4 5 ( 2 3 8 9 6 0 3 7 – – – – – – 3 5 3 , 3 1 – – – – – – – ) 8 ( ) 8 ( 8 1 – – – – – – – – – m € ) 3 7 ( – ) 8 ( ) 8 ( – – – – – – ) 9 4 5 ( ) 1 8 ( m € 3 4 8 , 2 8 9 6 ) 2 4 9 ( ) 4 4 2 ( 4 6 5 – – 8 0 0 0 , 5 2 7 5 , 5 1 7 1 , 8 m € ) 1 3 ( – 8 5 3 8 5 3 – – – – – – m € 4 5 7 – 5 2 6 5 2 6 – – – – – – 7 2 3 9 7 3 , 1 2 1 m € – ) 1 ( ) 1 ( – – – – – – 1 1 – – – – – – m € – – – 6 2 9 , 3 ) 6 2 9 , 3 ( l a t o T e r a h S d e s a b s e v r e s e r s t n e m y a p s e r a h s y r u s a e r T n g i e r o F y c n e r r u c s e v r e s e r n o i t a l s n a r t e u n e v e R s e v r e s e r w o l f h s a C e l b a l i a v A n o i t a u l a v e R l a t i p a C i g n g d e h s e v r e s e r e l a s r o f s e v r e s e r s e i t i r u c e s s e v r e s e r s e v r e s e r n o i t p m e d e r l a t i p a C s e v r e s e r e r a h S i m u m e r p e r a h S l a t i p a c m € 5 4 5 , 1 m € m € 8 4 8 , 2 8 4 2 , 5 – – – ) 4 6 5 ( – – – – – – – – – – – – ) 2 2 ( 2 2 – ) 4 7 0 , 1 ( – – – ) 6 2 9 3 ( , ) 4 6 5 ( 1 8 9 ) 6 9 0 , 1 ( ) 4 0 9 3 ( , 2 5 7 , 1 4 4 3 1 , r a e y e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T e m o c n i i e v s n e h e r p m o c r e h t O r a e y e h t r o f t i f o r P r a e y e h t r o f e m o c n i i e v s n e h e r p m o c l a t o T 4 1 0 2 y r a u n a J 1 t A s r e n w o o t s n o i t i u b i r t s d d n a y b s n o i t u b i r t n o C y t i u q e n i y l t c e r i d d e d r o c e r , s r e n w o h t i w s n o i t c a s n a r T ) x e o n ( t s n o i t u b i r t n o c l a t i p a C u e i l n i d e u s s i s e r a h s y r a n d r O i ) w d n a v t s e o n ( l a t i p a c f o n o i t c u d e R s e r a h s d e r r e e d f o n o i t a f l l e c n a C ) w d n a v s e t o n ( s r e n w o o t s n o i t u b i r t s d i d n a y b s n o i t u b i r t n o c l t a o T s t n e m y a p d e s a b e r a h S 4 1 0 2 r e b m e c e D 1 3 t A t ) v e o n ( d n e d v d f o i i y t i u q e n i s e g n a h c f o t n e m e a t s t y n a p m o c t n e r a P 4 1 0 2 r e b m e c e D 1 3 d e d n e r a e y e h t r o f 330 Allied Irish Banks, p.l.c. Annual Financial Report 2014 l a t o T m € 8 8 3 2 3 , 1 1 1 1 4 , 1 1 9 2 5 3 8 6 2 1 2 , 1 – – – – 3 2 6 , 2 1 – 6 3 6 3 – – – – – ) 0 1 ( ) 0 1 ( 6 2 e r a h S d e s a b m € s e v r e s e r s t n e m y a p s e r a h s y r u s a e r T i n g e r o F y c n e r r u c s e v r e s e r l n o i t a s n a r t e u n e v e R s e v r e s e r i g n g d e h s e v r e s e r w o l f h s a C l e a s r o f l e b a l i a v A s e v r e s e r s e i t i r u c e s s e v r e s e r n o i t a u a v e R l l a t i p a C s e v r e s e r e r a h S i m u m e r p e r a h S l a t i p a c m € ) 9 4 5 ( – ) 9 4 5 ( – – – – – – – m € – ) 0 7 ( ) 0 7 ( – ) 3 ( ) 3 ( – – – – ) 9 4 5 ( ) 3 7 ( m € 8 8 9 9 7 , 1 7 8 8 , 1 9 2 5 8 9 1 7 2 7 9 1 2 – 0 1 9 2 2 3 4 8 , 2 – ) 5 3 ( ) 5 3 ( m € – 4 4 – – – – – m € 9 6 2 9 6 2 – 5 8 4 5 8 4 – – – – – 3 1 3 1 m € – ) 1 ( ) 1 ( – – – – ) 1 3 ( 4 5 7 2 1 – m € 4 6 7 , 1 4 6 7 , 1 – – – – – ) 9 1 2 ( ) 9 1 2 ( 5 4 5 , 1 – m € 0 9 8 , 2 – m € 6 0 2 , 5 0 9 8 , 2 6 0 2 , 5 – – – – – ) 2 4 ( ) 2 4 ( – – – – – 2 4 2 4 8 4 8 , 2 8 4 2 , 5 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l r a e y e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T e m o c n i i e v s n e h e r p m o c r e h t O r a e y e h t r o f t i f o r P r a e y e h t r o f e m o c n i i e v s n e h e r p m o c l t a o T s r e n w o o t s n o i t i u b i r t s d d n a y b s n o i t u b i r t n o C y t i u q e n i y l t c e r i d d e d r o c e r , s r e n w o h t i w s n o i t c a s n a r T ) x e o n ( t s n o i t u b i r t n o c l a t i p a C u e i l n i d e u s s i s e r a h s y r a n d r O i d e t r o p e r s a 3 1 0 2 y r a u n a J 1 t A y c i l o p g n i t n u o c c a n i e g n a h C d e t a t s e r s A ) v e o n ( t i d n e d v d f o i i a c n a n F i s t n e m y a p d e s a b e r a h S s r e n w o o t s n o i t u b i r t s d i d n a y b s n o i t u b i r t n o c l t a o T 3 1 0 2 r e b m e c e D 1 3 t A n o i t a m r o n f i l a r e n e G y t i u q e n i s e g n a h c f o t n e m e a t s t y n a p m o c t n e r a P 3 1 0 2 r e b m e c e D 1 3 d e d n e r a e y e h t r o f Allied Irish Banks, p.l.c. Annual Financial Report 2014 331 Notes to the parent company financial statements Accounting policies Where applicable, the accounting policies adopted by Allied Irish Banks, p.l.c. are the same as those of AIB Group as set out on pages 194 to 217. a Administrative expenses Personnel expenses: Wages and salaries Termination benefits(1) Retirement benefits(2) Social security costs Other personnel expenses Total personnel expenses General and administrative expenses: Irish banking levy Other general and administrative expenses Total general and administrative expenses 2014 € m 2013 € m 515 19 85 56 (80) 595 45 443 488 1,083 535 65 (85) 58 (57) 516 – 381 381 897 2012 € m 630 129 (123) 68 7 711 – 424 424 1,135 (1)At 31 December 2014, a charge of € 19 million (2013: € 65 million) has been recognised in the income statement in respect of termination benefits arising from the voluntary severance programme. This amount comprises Nil (2013: € 20 million) in respect of past service costs relating to the early retirement scheme, € 19 million (2013: € 69 million) relating to the voluntary severance scheme (notes b and t) and Nil (2013: a credit of € 24 million) in respect of a pension curtailment gain. (2)Comprises a charge of € 6 million relating to defined benefit expense (2013: a credit of € 98 million; 2012: a credit of € 137 million), a defined contribution expense of € 71 million (2013: € 7 million; 2012: € 7 million) and a long term disability payments expense of € 8 million (2013: € 6 million; 2012: € 7 million) (see note b). 332 Allied Irish Banks, p.l.c. Annual Financial Report 2014 b Retirement benefits Allied Irish Banks, p.l.c. operates a number of defined contribution and defined benefit schemes for employees. All defined benefit schemes are closed to future accrual. Defined contribution schemes Allied Irish Banks, p.l.c. operates a defined contribution (“DC”) scheme, further details of which are provided in the Group’s retirement benefits note (note 11). The total cost in respect of the DC scheme for 2014 was € 71 million (2013: € 7 million; 2012: € 7 million). The cost in respect of defined contributions is included in administrative expenses (note a). Defined benefit schemes The most significant defined benefit scheme operated by Allied Irish Banks, p.l.c. is the AIB Group Irish Pension Scheme (‘the Irish scheme’), further details of which are provided in the Group’s retirement benefits note (note 11). Financial and mortality assumptions The financial and mortality assumptions adopted in the preparation of these financial statements are the same as those adopted in the preparation of the Group’s financial statements. See note 11 for further details. Sensitivity analysis for principal assumptions used to measure scheme liabilities There are inherent uncertainties surrounding the financial assumptions adopted in calculating the actuarial valuation of the Allied Irish Banks, p.l.c. pension schemes. A sensitivity analysis of the key assumptions for the Irish scheme is set out in the Group’s retirement benefits note (note 11). Movement in defined benefit obligation and scheme assets The following table sets out the movement in the defined benefit obligation and scheme assets during 2014 and 2013: Defined Fair value benefit of scheme obligation € m 2014 Net defined benefit assets liability (asset) € m € m Defined Fair value benefit of scheme obligation € m 2013 Net defined benefit assets liability (asset) € m € m 4,071 (3,930) 141 4,179 (3,512) – – 3 156 159 (21) – 1,392 – 4 1,375 – – (132) (132) – – – (153) (153) – – – (293) (2) (295) (84) – 132 48 – – 3 3 6 (21) – 1,392 (293) 2 1,080 (84) – – (84) 64 (4) (184) 164 40 54 (115) 79 – (1) 17 – 14 (179) (165) – – – (142) (142) – – – (247) 1 (246) (194) (14) 178 (30) 5,473 (4,330) 1,143 4,071 (3,930) At 1 January Included in profit or loss Current service cost Past service cost: – Termination benefits – Other Interest cost (income) Included in other comprehensive income Remeasurements loss (gain): – Actuarial loss (gain) arising from: – Experience adjustments – Changes in demographic assumptions – Changes in financial assumptions – Return on scheme assets excluding interest income(1) Translation adjustment on non-euro schemes Other Contributions by employer Contributions by employees Benefits paid At 31 December (1)Includes payment of pension levy. Allied Irish Banks, p.l.c. Annual Financial Report 2014 667 64 (4) (184) 22 (102) 54 (115) 79 (247) – (229) (194) – (1) (195) 141 333 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements b Retirement benefits (continued) Scheme assets The following table sets out an analysis of the schemes assets at 31 December 2014 and 2013: Cash and cash equivalents Equity instruments Quoted equity instruments: Basic materials Consumer goods Consumer services Energy Financials Healthcare Industrials Technology Telecoms Utilities Total quoted equity instruments Unquoted equity instruments Total equity instruments Debt instruments Quoted debt instruments Corporate bonds Government bonds Total quoted debt instruments Unquoted debt instruments Corporate bonds Government bonds Total unquoted debt instruments Total debt instruments Real estate(1)(2) Derivatives(2) Investment funds Quoted investment funds Bonds Equity Fixed interest Forestry Multi asset Total quoted investment funds Unquoted investment funds Total investment funds Mortgage backed securities(2) Fair value of schemes assets at 31 December (1)Located in Europe. (2)A quoted market price in an active market is not available. 2014 € m 175 70 180 148 106 312 147 169 150 49 48 1,379 10 1,389 169 869 1,038 49 28 77 1,115 230 5 420 44 10 34 422 930 – 930 486 2013 € m 257 81 181 144 125 306 128 172 134 55 44 1,370 6 1,376 152 541 693 49 28 77 770 187 7 288 159 – 33 320 800 5 805 528 4,330 3,930 Long-term disability payments Allied Irish Banks, p.l.c. provides an additional benefit to employees who suffer prolonged periods of sickness, subject to qualifying terms of the insurer. It provides for the partial replacement of income in event of illness or injury resulting in the employee’s long term absence from work. In 2014, Allied Irish Banks, p.l.c. contributed € 8 million (2013: € 6 million; 2012: € 7 million) towards insuring this benefit. This amount is included in administrative expenses (note a). 334 Allied Irish Banks, p.l.c. Annual Financial Report 2014 c Disposal groups and non-current assets held for sale At 31 December 2014, disposal groups and non-current assets held for sale include property surplus to requirements. Disposal groups and non-current assets/liabilities are shown as single line items in the statement of financial position with no re-presentation of comparatives. An analysis of the components of these single line items is set out below: Loans and receivables to customers Other Discontinued operations: Ark Life Total disposal groups and non-current assets held for sale Assets € m 2014 Liabilities € m – 13 – 13 – – – – Assets € m 28(1): 6 302(2) 336 2013 Liabilities € m – – – – (1)Loans and receivables held for sale are net of provisions of Nil (note i). (2) Ark Life which had been classified as held for sale as a discontinued operation at 31 December 2013, was disposed of in May 2014 (note 17 to the consolidated financial statements). d Trading portfolio financial assets Debt securities Equity securities Of which listed: Debt securities Of which unlisted: Equity securities 2014 € m – 1 1 2014 € m – 1 1 2013 € m 1 1 2 2013 € m 1 1 2 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 335 n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements e Derivative financial instruments Details of derivative transactions entered into and their purpose are described in note 22 to the consolidated financial statements. The following table presents the notional principal amount together with the positive and negative fair values attaching to those contracts: Interest rate contracts(1) Notional principal amount Positive fair value Negative fair value Exchange rate contracts(1) Notional principal amount Positive fair value Negative fair value Equity contracts(1) Notional principal amount Positive fair value Negative fair value Credit derivatives(1) Notional principal amount Positive fair value Negative fair value Total notional principal amount Positive fair value Negative fair value 2014 € m 2013 € m 104,693 1,876 (2,487) 137,851 1,447 (2,195) 4,834 48 (74) 3,010 138 (117) 340 – (8) 4,328 35 (35) 3,611 171 (174) – – – 112,877 145,790 2,062 (2,686) 1,653 (2,404) (1)Interest rate, exchange rate and credit derivative contracts are entered into for both hedging and trading purposes. Equity contracts are entered into for trading purposes only. The following table analyses the notional principal amount and positive fair value of interest rate, exchange rate, equity and credit derivative contracts by residual maturity together with the positive fair value attaching to these contracts where relevant: < 1 year 1 < 5 years € m € m 5 years + € m 2014 Total € m < 1 year € m 1 < 5 years € m 5 years + € m 2013 Total € m Residual maturity Notional principal amount Positive fair value 35,196 38,737 125 837 38,944 1,100 112,877 2,062 57,300 52,679 35,811 145,790 218 945 490 1,653 Allied Irish Banks, p.l.c. has the following concentration of exposures in respect of notional principal amount and positive fair value of interest rate, exchange rate, equity and credit derivative contracts. The concentrations are based primarily on the location of the office recording the transaction. Republic of Ireland United Kingdom United States of America Notional principal amount Positive fair value 2014 € m 2013 € m 110,487 143,795 1,915 475 1,609 386 112,877 145,790 2014 € m 1,714 321 27 2,062 2013 € m 1,399 236 18 1,653 336 Allied Irish Banks, p.l.c. Annual Financial Report 2014 e Derivative financial instruments (continued) The following table shows the notional principal amount and the fair value of derivative financial instruments analysed by product and purpose as at 31 December 2014 and 31 December 2013. A description of how the fair values of derivatives are determined is set out in note 47 to the consolidated financial statements. Notional principal amount € m 2014 Fair values Assets Liabilities € m € m Notional principal amount € m 2013 Fair values Assets Liabilities € m € m Derivatives held for trading Interest rate derivatives – over the counter (“OTC”) Interest rate swaps Cross-currency interest rate swaps Interest rate options 46,657 1,134 (1,225) 44,194 1,047 (1,089) 629 692 46 3 (42) (4) 720 800 47 6 (43) (6) Total interest rate derivatives – OTC 47,978 1,183 (1,271) 45,714 1,100 (1,138) Interest rate derivatives – exchange trade Interest rate futures Total interest rate derivatives -exchange traded 1,706 1,706 – – – – 121 121 – – – – Total interest rate derivatives 49,684 1,183 (1,271) 45,835 1,100 (1,138) Foreign exchange derivatives – OTC Foreign exchange contracts Currency options bought and sold Total foreign exchange derivatives Equity derivatives – OTC Equity warrants Equity index options Total equity derivatives Credit derivatives – OTC Credit derivatives Total credit derivatives 4,668 166 4,834 23 2,987 3,010 340 340 46 2 48 23 115 138 – – (71) (3) (74) – (117) (117) (8) (8) 4,143 185 4,328 – 3,611 3,611 – – 32 3 35 – 171 171 – – (33) (2) (35) – (174) (174) – – Total derivatives held for trading 57,868 1,369 (1,470) 53,774 1,306 (1,347) Derivatives held for hedging Derivatives designated as fair value hedges – OTC Interest rate swaps 12,724 Total derivatives designated as fair value hedges 12,724 Derivatives designated as cash flow hedges – OTC Interest rate swaps Cross currency interest rate swaps 39,171 3,114 Total derivatives designated as cash flow hedges 42,285 Total derivatives held for hedging Total derivative financial instruments 55,009 112,877 151 151 539 3 542 693 (587) (587) (412) (217) (629) (1,216) 13,110 13,110 75,751 3,155 78,906 92,016 222 222 110 15 125 347 (588) (588) (389) (80) (469) (1,057) 2,062(1) (2,686)(2) 145,790 1,653(1) (2,404)(2) (1)Includes exposure to subsidiary undertakings of € 202 million (2013: € 163 million). (2)Includes amounts due to subsidiary undertakings of € 388 million (2013: € 403 million) i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 337 n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements e Derivative financial instruments (continued) Cash flow hedges The table below sets out the hedged cash flows which are expected to occur in the following periods: Forecast receivable cash flows Forecast payable cash flows Forecast receivable cash flows Forecast payable cash flows Within 1 year € m 27 9 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 17 11 85 53 117 80 Within 1 year € m 91 31 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 73 38 232 95 240 111 2014 Total € m 246 153 2013 Total € m 636 275 The table below sets out the hedged cash flows, including amortisation of terminated cashflow hedges, which are expected to impact the income statement in the following periods: Forecast receivable cash flows Forecast payable cash flows Forecast receivable cash flows Forecast payable cash flows Within 1 year € m 27 34 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 17 32 85 98 117 99 Within 1 year € m 91 56 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 73 56 232 134 240 116 2014 Total € m 246 263 2013 Total € m 636 362 338 Allied Irish Banks, p.l.c. Annual Financial Report 2014 f Loans and receivables to banks Funds placed with central banks Funds placed with other banks Provision for impairment (note i) Of which: Due from third parties Due from subsidiary undertakings(1) Amounts include: Reverse repurchase agreements Loans and receivables to banks by geographical area(2) Republic of Ireland United Kingdom United States of America 2014 € m 101 23,010 – 23,111 950 22,161 23,111 2013 € m 95 23,768 (7) 23,856 1,008 22,848 23,856 3,376 16 2014 € m 22,238 871 2 2013 € m 22,949 903 4 23,111 23,856 (1)Amounts due from subsidiary undertakings may include repurchase agreements. (2)The classification of loans and receivables to banks by geographical area is based primarily on the location of the office recording the transaction. Loans and receivables to banks include cash collateral of € 1,206 million (2013: € 795 million) placed with derivative counterparties in relation to net derivative positions (note e). Under reverse repurchase agreements with external and subsidiary counterparties, AIB has accepted collateral that it is permitted to sell or repledge in the absence of default by the owner of the collateral. The collateral received consisted exclusively of non-government securities (bank bonds) with a fair value of € 3,494 million (2013: € 16 million). The fair value of collateral sold or repledged amounted to € 3,192 million (2013: € 15 million). These transactions were conducted under terms that are usual and customary to standard reverse repurchase agreements. g Loans and receivables to customers Loans and receivables to customers Reverse repurchase agreements Amounts receivable under finance leases and hire purchase contracts (note h) Unquoted debt securities Provisions for impairment (note i) Of which: Due from third parties Due from subsidiary undertakings(1) Of which repayable on demand or at short notice Amounts include: Due from associated undertakings 2014 € m 36,558 110 423 131 (7,564) 29,658 19,880 9,778 29,658 23,273 2013 € m 42,292 – 438 137 (11,264) 31,603 21,428 10,175 31,603 29,126 – – i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i (1)Amounts due from subsidiary undertakings may include repurchase agreements. Under reverse repurchase agreements, AIB has accepted collateral with a fair value of € 107 million (2013: Nil) that it is permitted to sell or repledge in the absence of default by the owner of the collateral. n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 339 Notes to the parent company financial statements h Amounts receivable under finance leases and hire purchase contracts The following balances principally comprise of leasing arrangements involving vehicles, plant, machinery and equipment. Gross receivables Not later than 1 year Later than one year and not later than 5 years Later than 5 years Unearned future finance income Deferred costs incurred on origination Total Present value of minimum payments analysed by residual maturity Not later than 1 year Later than one year and not later than 5 years Later than 5 years Present value of minimum payments Provision for uncollectible minimum payments receivable(1) Net investment in new business (1)Included in the provisions for impairment on loans and receivables to customers (note i). 2014 € m 2013 € m 123 334 12 469 (49) 3 423 123 291 9 423 45 219 133 336 11 480 (45) 3 438 133 296 9 438 98 182 340 Allied Irish Banks, p.l.c. Annual Financial Report 2014 i Provisions for impairment on loans and receivables The following table shows provisions for impairment on loans and receivables (both to banks and customers) and also includes loans and receivables within disposal groups and non-current assets held for sale. The classification of loans and receivables below aligns to the asset classes disclosed in the ‘Risk management’ section. At 1 January 2014 Exchange translation adjustments (Credit to)/charge against income statement – customers Credit to income statements – banks Amounts written off Recoveries of amounts written off in previous years At 31 December 2014 Total provisions are split as follows: Specific IBNR Amounts include: Loans and receivables to customers (note g) Residential mortgages € m Other Property and construction € m personal € m SME/Other commercial € m 221 1,089 – 3 – 1 7 – (26) (384) – 198 173 25 198 – 713 663 50 713 6,943 25 (257) – (2,253) – 4,458 4,331 127 4,458 2,711 – 59 (7) (819) – 1,944 1,709 235 1,944 At 1 January 2013 146 1,066 6,534 2,811 Residential mortgages € m Other personal € m Property and construction € m SME/Other commercial € m Exchange translation adjustments Transfers(1) Charge against income statement – customers Charge against income statement – banks Amounts written off Disposals Recoveries of amounts written off in previous years At 31 December 2013 Total provisions are split as follows: Specific IBNR Amounts include: Loans and receivables to banks (note f) Loans and receivables to customers (note g) – – 84 – (9) – – (3) – 134 – (109) – 1 221 1,089 194 27 221 1,038 51 1,089 (4) (33) 545 – (92) (7) – 6,943 6,751 192 6,943 (12) – 209 3 (300) – – 2,711 2,626 85 2,711 (1)Includes transfers (to)/from provisions for liabilities and commitments. Corporate € m 307 10 46 – 2014 Total € m 11,271 36 (142) (7) (114) (3,596) 2 251 190 61 251 Corporate € m 574 (5) – 30 – (172) (120) – 307 228 79 307 2 7,564 7,066 498 7,564 7,564 2013 Total € m 11,131 (24) (33) 1,002 3 (682) (127) 1 11,271 10,837 434 11,271 7 11,264 11,271 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 341 n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements j NAMA senior bonds During 2010 and 2011, AIB received NAMA senior bonds and NAMA subordinated bonds as consideration for loans and receivables transferred to NAMA. The following table provides a movement analysis of the NAMA senior bonds: At 1 January Additions(1) Amortisation of discount Repayments Effect of re-estimating the timing of cash flows At 31 December (1)Acquired from a subsidiary company. 2014 € m 15,598 – 36 (6,343) 132 9,423 2013 € m 17,082 279 65 (1,890) 62 15,598 k Financial investments available for sale The following table sets out at 31 December 2014 and 31 December 2013, the carrying value (fair value) of financial investments available for sale by major classifications together with the unrealised gains and losses: Unrealised gross gains € m Unrealised Net unrealised gains/(losses) € m gross losses € m Tax effect € m 2014 Net after tax € m Debt securities Irish Government securities Euro government securities Non Euro government securities Supranational banks and government agencies Collateralised mortgage obligations Other asset backed securities Euro bank securities Non Euro corporate securities Fair value € m 8,870 3,631 182 2,852 99 1 4,982(1) 3 1,291 170 9 119 – – 105 – Total debt securities 20,620 1,694 Equity securities Equity securities – NAMA subordinated bonds Equity securities – other Total equity securities Total financial investments available for sale 358 2 360 313 1 314 – – – – (1) – (66) (1) (68) – – – 1,291 (161) 1,130 170 9 119 (1) – 39 (1) (21) (1) (15) – – (5) – 149 8 104 (1) – 34 (1) 1,626 (203) 1,423 313 1 314 (39) – (39) 274 1 275 20,980 2,008 (68) 1,940 (242) 1,698 (1)Includes € 1,085 million in respect of subsidiary undertakings. 342 Allied Irish Banks, p.l.c. Annual Financial Report 2014 k Financial investments available for sale (continued) Debt securities Irish Government securities Euro government securities Non Euro government securities Supranational banks and government agencies Other asset backed securities Euro bank securities Non Euro bank securities Non Euro corporate securities Other investments Total debt securities Equity securities Equity securities – NAMA subordinated bonds Equity securities – other Total equity securities Total financial investments available for sale Fair value € m 10,114 1,968 608 3,092 535 3,683 34 3 12 Unrealised gross gains € m Unrealised gross losses € m Net unrealised gains/(losses) € m 902 110 54 29 1 42 – – – – (1) – (6) (54) (10) – – – 902 109 54 23 (53) 32 – – – Tax effect € m (113) (14) (6) (3) 7 (4) – – – 2013 Net after tax € m 789 95 48 20 (46) 28 – – – 20,049 1,138 (71) 1,067 (133) 934 70 10 80 25 1 26 – (7) (7) 25 (6) 19 (3) 2 (1) 22 (4) 18 20,129 1,164 (78) 1,086 (134) 952 Available for sale financial investments with unrealised losses have been assessed for impairment based on the credit risk profile of the counterparties involved. Impairment losses on debt securities of € 1 million (2013: Nil) and € 7 million (2013: Nil) on equity securities have been recognised. Analysis of movements in financial investments available for sale At 1 January Exchange translation adjustments Purchases Sales Maturities (Provisions)/writeback for impairment Amortisation of discounts net of premiums Movement in unrealised gains At 31 December Of which: Listed Unlisted Debt securities € m Equity securities € m 20,049 14 8,474 (8,035) (721) (1) (74) 914 20,620 20,620 – 20,620 80 – – (15) – (7) – 302 360 – 360 360 2014 Total € m 20,129 14 8,474 (8,050) (721) (8) (74) 1,216 20,980 20,620 360 20,980 Debt securities € m Equity securities € m 14,829 (44) 7,346 (1,758) (681) 18 (17) 356 20,049 20,037 12 20,049 101 (1) 21 (75) – – – 34 80 7 73 80 Debt securities analysed by remaining contractual maturity Due within one year After one year, but within five years After five years, but within ten years After ten years Allied Irish Banks, p.l.c. Annual Financial Report 2014 2014 € m 507 12,150 7,531 432 20,620 2013 Total € m 14,930 (45) 7,367 (1,833) (681) 18 (17) 390 20,129 20,044 85 20,129 2013 € m 1,186 11,357 6,606 900 20,049 343 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements l Investments in Group undertakings Equity At 1 January Additions Liquidations Reversal of impairment At 31 December Subordinated debt At 1 January and 31 December Total Of which: Credit institutions Other Total – all unquoted 2014 € m 4,559 – (45)(2) 292 4,806 300 5,106 4,397 709 5,106 2013 € m 2,435 773(1) – 1,351 4,559 300 4,859 4,105 754 4,859 (1)Additions in 2013 include € 330 million investment in EBS Limited; € 200 million in AIB Mortgage Bank and € 243 million in AIB Holdings (N.I.) Limited. (2)AIB International Finance preference shares € 45 million were fully repaid during 2014. The investments in Group undertakings are included in the financial statements on an historical cost basis. Principal subsidiary undertakings incorporated in the Republic of Ireland AIB Mortgage Bank* EBS Limited* *Group interest is held directly by Allied Irish Banks, p.l.c. Nature of business Issue of Mortgage Covered Securities Mortgages and savings 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. All regulated banking entities are subject to regulations which require them to maintain capital ratios at agreed levels and so govern the availability of funds available for distribution. AIB Mortgage Bank AIB Mortgage Bank is a wholly owned subsidiary of Allied Irish Banks, p.l.c. regulated by the Central Bank of Ireland/Single Supervisory Mechanism. AIB Mortgage Bank is a designated mortgage credit institution for the purposes of the Asset Covered Securities Acts 2001 and 2007 (as amended) and holds a banking authorisation. Its principal purpose is to issue mortgage covered securities for the purpose of financing loans secured on residential property in accordance with the Asset Covered Securities Acts 2001 and 2007. On 13 February 2006, Allied Irish Banks, p.l.c. transferred to AIB Mortgage Bank its Irish branch originated residential mortgage business, amounting to € 13.6 billion in mortgage loans. In March 2006, AIB Mortgage Bank launched a € 15 billion Mortgage Covered Securities Programme. The Programme was subsequently increased to € 20 billion in 2009. On 25 February 2011, Allied Irish Banks, p.l.c. transferred substantially all of its mortgage intermediary originated Irish residential loans, related security and related business of approximately € 4.2 billion to AIB Mortgage Bank. The transfer was effected pursuant to the statutory transfer mechanism provided for in the Asset Covered Securities Acts. Under an Outsourcing and Agency Agreement dated 8 February 2006, Allied Irish Banks, p.l.c., as Service Agent for AIB Mortgage Bank, originates residential mortgage loans through its retail branch network and intermediary channels in the Republic of Ireland, services the mortgage loans and provides treasury services in connection with financing, as well as a range of other support services. As at 31 December 2014, the total amount of principal outstanding in respect of mortgage covered securities issued by AIB Mortgage Bank was € 7.7 billion (2013: € 8.0 billion) of which € 3.8 billion was held by external debt investors (2013: € 3.3 billion), € 1.1 billion by Allied Irish Banks, p.l.c. (2013: Nil) and € 2.8 billion was self-issued to AIB Mortgage Bank (2013: € 4.8 billion). The mortgage covered securities issued to Allied Irish Banks, p.l.c. and to AIB Mortgage Bank were held by the Central Bank of Ireland under sale and repurchase agreements. As at 31 December 2014, the total amount of principal outstanding of mortgage loans (mortgage credit assets) and cash comprised in AIB Mortgage Bank’s cover assets pool was € 15.1 billion (2013: € 15.7 billion). 344 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Investments in Group undertakings (continued) l Principal subsidiary undertakings incorporated in the Republic of Ireland (continued) EBS Limited (“EBS”) EBS (previously EBS Building Society), which is regulated by the Central Bank of Ireland/Single Supervisory Mechanism, became a wholly owned subsidiary of Allied Irish Banks, p.l.c. on 1 July 2011. AIB operates EBS as a standalone, separately branded subsidiary with its own branch network which continues to offer mortgage and savings products. EBS Group had consolidated total assets of € 14 billion as at 31 December 2014. EBS operates in the Republic of Ireland and has a countrywide network of 71 offices and a direct telephone based distribution division, EBS Direct. EBS offers residential mortgages and savings products, together with life and property insurance on an agency basis. EBS also distributes mortgages through Haven Mortgages Limited (‘Haven’), a wholly owned subsidiary, to independent mortgage intermediaries. At 31 December 2014, the CET 1 ratio and total capital ratio for EBS were 13.0% and 13.9%, respectively. In December 2007, EBS established Haven, a wholly owned subsidiary focused on mortgage distribution through the intermediary market which, prior to 2005, had not been part of its target market. Haven is authorised by the Central Bank of Ireland/Single Supervisory Mechanism as a retail credit firm under Part V of the Central Bank Act 1997 (as amended). Haven has its own board of di- rectors and the autonomy to grow and establish its business around the needs of its customer (the intermediary). Haven offers a full range of prime mortgages. In December 2008, EBS established EBS Mortgage Finance, a wholly owned subsidiary which is regulated by the Central Bank of Ireland/Single Supervisory Mechanism. EBS Mortgage Finance is a designated mortgage credit institution for the purposes of the Asset Covered Securities Acts, 2001 and 2007 (as amended) and also holds a banking authorisation. Its purpose is to issue Mortgage Covered Securities for the financing of loans secured on residential property in accordance with the Asset Covered Securities legislation. Such loans may be made directly by EBS Mortgage Finance or may be purchased from EBS and other members of the EBS Group or third parties. On 1 December 2008, 1 June 2009, 1 May 2010 and 1 November 2011, EBS transferred to EBS Mortgage Finance certain Irish residential loans and related security held by it and certain of its Irish residential loan business related to such loans and security. The aggregate book value of the Irish residential loans transferred was approximately € 3.41 billion in respect of the transfer on 1 December 2008; € 1.74 billion in respect of the transfer on 1 June 2009; € 803 million in respect of the transfer on 1 May 2010; and € 2.49 billion in respect of the transfer on 1 November 2011. As at 31 December 2014, the total amount of principal outstanding of mortgage loans (mortgage credit assets) and cash comprised in EBS Mortgage Finance’s cover assets pool was € 4.7 billion (2013: € 5.4 billion). In December 2008, EBS Mortgage Finance launched a € 6 billion Mortgage Covered Securities Programme. As at 31 December 2014, the total amount of principal outstanding in respect of mortgage covered securities issued by EBS Mortgage Finance was € 1.85 billion (2013: € 2.8 billion) of which Nil (2013: € 0.05 billion) was held by external debt investors. EBS held € 1.85 billion (2013: € 2.75 billion). EBS had set up a number of special purpose entities (“SPEs”) prior to its acquisition by AIB, namely, Emerald Mortgages No. 4 Public Limited Company; Emerald Mortgages No. 5 Limited; and Mespil 1 RMBS Limited. Loans and receivables which were transferred to these securitisation entities are included in the Group’s consolidated loans and receivables and amount to € 3,120 million (2013: € 3,434 million). For further details on these SPEs, see note 46 to the consolidated financial statements. Principal subsidiary undertaking incorporated outside the Republic of Ireland 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: 92 Ann Street, Belfast BT1 3AY Nature of business Banking and financial services i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i The above subsidiary undertaking is a wholly-owned subsidiary of Allied Irish Banks, p.l.c.. The registered office is located in the principal country of operation. The issued share capital is denominated in ordinary shares. AIB Group (UK) p.l.c., a bank registered in the UK and regulated by the Financial Conduct Authority and the Prudential Regulation Authority had consolidated total assets of £13.7 billion at 31 December 2014. It operates in two distinct markets, Great Britain (GB) and Northern Ireland (NI), each with different economies and operating environments. It is the primary legal entity within the segment AIB UK. n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 345 Notes to the parent company financial statements Investments in Group undertakings (continued) l Principal subsidiary undertaking incorporated outside the Republic of Ireland Great Britain (GB) In this market, the segment operates under the trading name Allied Irish Bank (GB) from 16 locations in major business centres in GB. The head office is located in Central London with a processing centre based in Belfast. A full banking service is offered to business customers (primarily owner managed businesses and professional services firms) and associated high net worth individuals with a strong focus placed on supporting British Irish trade. Northern Ireland (NI) In this market, the segment operates under the trading name First Trust Bank from 30 branches and outlets throughout NI. The First Trust Bank head office is located in Belfast, together with a processing centre. A full service, including online, mobile and telephone banking is offered to business and personal customers across the range of customer segments, including professionals, high net worth individuals, SMEs, as well as the public and corporate sectors. Guarantees given to subsidiaries by Allied Irish Banks, p.l.c. Each of the companies listed below, and consolidated into AIB Group’s financial statements, have availed of the exemption from filing its individual accounts as set out in Section 17 of the Companies (Amendment) Act, 1986. In accordance with the Act, Allied Irish Banks, p.l.c. has irrevocably guaranteed the liabilities of these subsidiaries. AIB Capital Markets plc AIB Corporate Banking Limited AIB Corporate Finance Limited AIB Holdings (Ireland) Limited AIB Finance Limited Allied Irish Leasing Limited AIB International Leasing Limited AIB Leasing Limited AIB Services Limited Skonac Skobar Skodell Skovale Skopek Wallkav Limited Marro Properties Limited Ammonite Limited AIB Capital Exchange Offering 2009 Limited Allied Irish Banks (Holdings & Investments) Limited AIB European Investments Limited Allied Irish Finance Limited Allied Irish Nominees Limited Eyke Limited Hengram Limited The Hire Purchase Company of Ireland Limited Blogram Limited Sanditon Limited S. & M. (Limerick) Limited AIB International Finance General Estates and Trust Company Limited AIB Limited Commdec Limited Dohcar Limited Dohhen Limited Kavwall Limited Traprop Limited Jonent Downs Limited P B Nominees Limited Alibank Nominees Limited AIB Combined Leasing Limited Radstock Limited Rushwood Holdings Limited The Royal Bank of Ireland Limited The Munster and Leinster Bank Limited Mezzanine Management Limited Fullplex Management Company Limited AIB Investment Services Limited AIB Financial Services Limited AIB Insurance Services Limited AIB 24 Hour Services Limited AIB Telephone Services Limited AIB Commercial Finance Limited AIB Debt Management Limited 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. 346 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Investments in Group undertakings (continued) l Letters of financial support given to subsidiaries by Allied Irish Banks, p.l.c. Allied Irish Banks, p.l.c. has provided letters of financial support to the Board of Directors of the following subsidiaries: AIB Mortgage Bank; AIB Group (UK) p.l.c.; AIB UK Loan Management Limited. EBS Limited; AIB Holdings (NI) Limited and Impairment losses reversed in Group undertakings Allied Irish Banks, p.l.c.’s (‘the parent company’) investments in Group undertakings are reviewed for impairment at the end of each reporting period if there are indications that impairment may have occurred. In addition, an assessment is carried out where there are indications that impairment losses recognised in prior periods may no longer exist or may have decreased. The impairment testing for possible impairment involves comparing the recoverable amount of the individual investments with their carrying amount. Where the recoverable amount is less than the carrying amount, the difference is recognised as an impairment charge in the parent company’s financial statements. For previously impaired investments, where the assessment indicates an increase in the recoverable amount, the impairment loss recognised in earlier periods is reversed. However, the carrying amount will only be increased up to the amount that it would have been had the original impairment not been recognised. At 31 December 2014, the carrying value of investments in the following subsidiary undertakings of the parent company were reviewed for impairment/reversal of impairment: – EBS Limited; – AIB Holdings (N.I.) Limited; and – AIB UK Loan Management Limited. In respect of each of the subsidiaries, an impairment reversal/impairment loss was calculated by comparing its carrying value to the recoverable amount based on value-in-use calculations. Each subsidiary was determined to be a cash generating unit. In determining value-in-use, the expected pre-tax cash flows are discounted at an appropriate risk adjusted interest rate, both of which require the exercise of judgement. The discounted cash flows model calculates the present value of estimated future earnings attributable to Allied Irish Banks, p.l.c. as the shareholder. The estimation of pre-tax cash flows is sensitive to the periods for which forecasts are available and to assumptions as to long term growth rates. In recent years, AIB Group undertook a number of initiatives to improve its funding costs which had a direct impact on the profit projections of certain subsidiaries. In addition, the cost of retail deposits in Ireland reduced significantly. Furthermore, the expectations as regards future loan impairments in these subsidiaries also improved. Following the most recent planning exercise approved by the Board in December 2014, forecasts for certain AIB’s principal subsidiaries indicated higher levels of profitability. Given that there were indications that the previous impairment provisions may have reversed, a review was undertaken at 31 December 2014 of the assumptions underpinning the previous impairment and to determine the recoverable amount of these subsidiaries. Following this review, the remaining impairment provision of € 292 million on the EBS investment was written back. The basis used for determining any impairment writeback is set out below: EBS Limited (“EBS”) AIB carried out an impairment reversal assessment of its investment in EBS at 31 December 2014. Prior to this assessment, the investment was carried at € 1,480 million. In 2013, € 600 million in impairment provisions were written back following an impairment reversal assessment leaving an impairment provision of € 292 million on this investment. Following the recent planning exercise covering the period 2015 to 2017, the forecast profits for EBS increased in line with the improved outlook for both AIB Group and the Irish economy. The key drivers for EBS’s forecast improved profitability were: reduced margins on funding; impairment provision writebacks; and increased mortgage income. Arising from the recent actual performance and the planning outturn of EBS, AIB reviewed its investment given that there were strong indications that the previous impairment had reversed in full. The recoverable amount of the investment was determined using cash flow projections based on financial plans approved by the Board and covering the period 2015 to 2017 and a growth rate of 2% from 2018 into perpetuity. The forecast cash flows were discounted at a rate of 10%. Based on these assumptions, the net present value of the investment was determined to be in excess of the carrying value of € 1,480 million. Accordingly, it was considered that a reversal of the impairment provision was appropriate. Allied Irish Banks, p.l.c. Annual Financial Report 2014 347 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements l Investments in Group undertakings (continued) Impairment losses reversed in Group undertakings EBS Limited (“EBS”) However, in accordance with IAS 36 Impairment of Assets, the impairment reversal was limited to the previous impairment amount of € 292 million. The resultant carrying value at € 1,772 million is approximately 23% lower than the value-in-use valuation. The results of this value-in-use valuation are sensitive to changes in the growth and discount rates. Increasing the discount rate to 12% and reducing the growth rate to 1% from 2018 into perpetuity would reduce the impairment reversal by € 43 million. AIB Holdings (N.I.) Limited The investment by Allied Irish Banks, p.l.c. in AIB Holdings (N.I.) Limited amounting to € 767 million was written down to Nil in 2011, driven by the negative asset value in this subsidiary. There was no change to the carrying value arising from the impairment review in 2012. In 2013, AIB provided a further capital injection of € 243 million (£ 205 million) to AIB Holdings (N.I.) Limited and at 31 December 2013 this was fully impaired following an impairment assessment as there remains significant negative shareholder reserves in this company. Following an impairment reversal review in 2014, it was considered that there were not sufficient grounds for reversing previous impairment amounts. AIB UK Loan Management Limited The carrying value of the investment in AIB UK Loan Management Limited was written down to Nil in 2011 as it was expected that all assets would be disposed of at a loss and the business would cease, with no residual value. However, the full planned deleveraging did not transpire and the remaining assets continue to run down in line with their repayment profile. Against this backdrop, an impairment reversal review at 31 December 2014, was carried out. However, it was considered that there was uncertainty with regard to sufficient indicators that the impairment loss previously recognised may no longer exist. Accordingly, this investment continues to be carried at Nil value. 348 Allied Irish Banks, p.l.c. Annual Financial Report 2014 m Intangible assets Cost At 1 January Additions – internally generated – externally purchased Amounts written off(1) At 31 December Amortisation/impairment At 1 January Amortisation for the year Impairment for the year Amounts written off(1) At 31 December Net book value at 31 December Software € m Other € m 656 46 12 – 714 497 43 16 – 556 158 3 – – – 3 3 – – – 3 – 2014 Total € m 659 46 12 – 717 500 43 16 – 559 158 Software € m Other € m 600 47 10 (1) 656 432 51 15 (1) 497 159 3 – – – 3 3 – – – 3 – 2013 Total € m 603 47 10 (1) 659 435 51 15 (1) 500 159 (1)Relates to assets which are no longer in use with a nil carrying value. Internally generated intangible assets under construction amounted to: € 40 million (31 December 2013: € 32 million). The cost of internally generated software amounted to: € 396 million (31 December 2013: € 357 million). i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 349 n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements n Property, plant and equipment Cost At 1 January 2014 Reclassification to disposal groups and non-current assets held for sale Additions Disposals Amounts written off At 31 December 2014 Depreciation/impairment At 1 January 2014 Depreciation charge for the year Impairment charge for the year Reversal of impairment Disposals Amounts written off At 31 December 2014 Net book value at 31 December 2014 Cost At 1 January 2013 Additions Disposals At 31 December 2013 Depreciation/impairment At 1 January 2013 Depreciation charge for the year Impairment charge for the year Disposals At 31 December 2013 Net book value at 31 December 2013 Property Long leasehold € m Leasehold under 50 years € m 81 (8) 1 – (1) 73 23 3 1 (2) – (1) 24 49 93 – 8 – (9) 92 50 6 3 – – (9) 50 42 Equipment 2014 Total € m 421 – 27 (3) (11) 434 348 20 3 – (2) (11) 358 76 € m 709 (10) 45 (3) (21) 720 457 32 8 (2) (2) (21) 472 248 Property Long leasehold € m Leasehold under 50 years € m 84 – (3) 81 22 1 1 (1) 23 58 81 13 (1) 93 46 3 2 (1) 50 43 Equipment 2013 Total € m 415 16 (10) 421 334 20 – (6) 348 73 € m 706 30 (27) 709 439 27 4 (13) 457 252 Freehold € m 114 (2) 9 – – 121 36 3 1 – – – 40 81 Freehold € m 126 1 (13) 114 37 3 1 (5) 36 78 The net book value of property occupied by Allied Irish Banks, p.l.c. for its own activities was € 162 million (2013: € 166 million). Property and equipment includes € 7 million for items in the course of construction (2013: € 10 million). 350 Allied Irish Banks, p.l.c. Annual Financial Report 2014 o Deferred taxation Deferred tax assets: Provision for impairment on loans and receivables Retirement benefits Cash flow hedges Unutilised tax losses Assets leased to customers Other Total gross deferred tax assets Deferred tax liabilities: Cash flow hedges Assets used in business Available for sale securities Total gross deferred tax liabilities Net deferred tax assets Represented on the balance sheet as follows: Deferred tax assets 2014 € m – 149 – 2,807 – 54 3,010 (44) (13) (197) (254) 2013 € m 1 21 6 2,848 2 81 2,959 – (15) (105) (120) 2,756 2,839 2,756 2,839 For each of the years ended 31 December 2014 and 2013, full provision has been made for capital allowances and other temporary differences. Analysis of movements in deferred taxation At 1 January Exchange translation and other adjustments Deferred tax through other comprehensive income Income statement At 31 December 2014 € m 2,839 1 (4) (80) 2013 € m 2,919 – (96) 16 2,756 2,839 Comments on the basis of recognition of deferred tax assets on unused tax losses are included in ‘Critical accounting judgements and estimates’ on pages 218 to 222. Information on the regulatory capital treatment of deferred tax assets is included in ‘Principal risks and uncertainties’ on page 55. At 31 December 2014, recognised deferred tax assets on tax losses and other temporary differences, net of deferred tax liabilities, totalled € 2,756 million (2013: € 2,839 million). The most significant tax losses arise in the Irish tax jurisdiction and their utilisation is dependent on future taxable profits. Temporary differences recognised in other comprehensive income consist of deferred tax on available for sale securities, cash flow hedges and actuarial gains/losses on retirement benefit schemes. Temporary differences recognised in the income statement consist of provision for impairment on loans and receivables, amortised income, assets leased to customers, and assets used in the course of business. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 351 n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements p Deposits by central banks and banks Central banks Securities sold under agreements to repurchase Other borrowings Banks Securities sold under agreements to repurchase Other borrowings Of which: Due to third parties Due to subsidiary undertakings(1) Amounts include: Due to related party 2014 € m 3,400 – 3,400 12,733 7,004 19,737 23,137 16,560 6,577 23,137 2013 € m 11,750 – 11,750 9,136 8,226 17,362 29,112 21,640 7,472 29,112 – – (1)Amounts due to subsidiary undertakings may include repurchase agreements. Details of AIB’s sale and repurchase activity are set out in note 46 to the consolidated financial statements. Allied Irish Banks, p.l.c. has granted a floating charge over certain residential mortgage pools, the drawings against which were Nil at 31 December 2014 (2013: Nil). Financial assets pledged under existing agreements to repurchase, and providing access to future funding facilities with central banks and banks are detailed in the following table: Total carrying value of financial assets pledged 5,257 13,937 19,194 13,523 9,938 23,461 Central banks € m Banks € m 2014 Total € m Central banks € m Banks € m 2013 Total € m Of which: Government securities(1) Other securities (1)Includes NAMA senior bonds. 1,004 4,253 9,559 4,378 10,563 8,631 11,980 1,543 6,441 3,497 18,421 5,040 352 Allied Irish Banks, p.l.c. Annual Financial Report 2014 q Customer accounts Current accounts Demand deposits Time deposits Securities sold under agreements to repurchase(1) Of which: Non-interest bearing current accounts Interest bearing deposits, current accounts and short-term borrowings Of which: Due to third parties Due to subsidiary undertakings(2) Amounts include: Due to associated undertakings 2014 € m 16,191 6,589 25,198 2,191 50,169 15,847 34,322 50,169 45,562 4,607 50,169 2013 € m 13,674 6,230 27,425 5,783 53,112 13,375 39,737 53,112 47,456 5,656 53,112 75 150 (1)AIB pledged government available for sale securities with a fair value of € 2,941 million (2013: € 5,814 million) and non-government available for sale securities with a fair value of € 53 million (2013: € 284 million) as collateral for these facilities and providing access to future funding facilities. (2)Amounts due to subsidiary undertakings may include repurchase agreements. r Debt securities in issue Bonds and medium term notes European medium term note programme Other debt securities in issue Commercial paper 2014 € m 2013 € m 2,572 3,192 50 2,622 79 3,271 Debt securities issued during the year amounted to € 2,697 million (31 December 2013: € 2,510 million) of which € 500 million relates to an EMTN issuance (31 December 2013: € 500 million) with the balance relating to issuances under the short-term commercial paper programme. Debt securities matured or repurchased amounted to € 3,348 million (31 December 2013: € 4,390 million) of which € 370 million (31 December 2013: Nil) related to securities repurchased as part of a debt buyback programme. s Other liabilities Items in transit Creditors Fair value of hedged liability positions Other Allied Irish Banks, p.l.c. Annual Financial Report 2014 2014 € m 9 7 55 246 317 2013 € m 49 7 86 238 380 353 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements t Provisions for liabilities and commitments At 1 January Exchange translation adjustments Amounts charged to income statement Amounts released to income statement Provisions utilised At 31 December At 1 January Transfers in Transfers out Exchange translation adjustments Amounts charged to income statement Amounts released to income statement Provisions utilised At 31 December Liabilities and charges € m 72 (1) 1(4) (5)(4) (7) 60 Liabilities and charges € m 21 34 – – 28(4) (11)(4) – 72 NAMA(1) provisions Onerous(2) contracts Legal claims € m 35 – 6(1) (8)(1) – 33 € m 22 – 3 (4) (5) 16 € m 5 – 20 (1) (1) 23 provisions Other(3) Voluntary severance scheme € m € m 78 5 12 (2) (3) 90(5) 3 – – – (3) – NAMA(1) provisions Onerous(2) contracts Legal claims Other(3) provisions € m 21 – – – 18(1) (4)(1) – 35 € m € m 10 – (2) – 18 – (4) 22 5 – – – 2 (2) – 5 € m 142 1 – (4) 8 (24) (45) 78(5) Voluntary severance scheme* € m – – – – 3 – – 3 2014 Total € m 215 4 42 (20) (19) 222 2013 Total € m 199 35 (2) (4) 77 (41) (49) 215 (1)NAMA income statement charge/(credit) relates to valuation adjustments in relation to loans previously transferred to NAMA. (2)Provisions for the unavoidable costs expected to arise from the closure of properties surplus to requirements. (3)Includes provisions for refunds to customers in respect of payment protection insurance, restructuring and reorganisation costs. (4)Included in charge/(writeback) of provisions for liabilities and commitments in income statement. (5)Includes € 76 million (2013: € 72 million) due to a subsidiary undertaking. The total provisions for liabilities and commitments expected to be settled within one year amount to € 72 million (31 December 2013: € 92 million). u Subordinated liabilities and other capital instruments All outstanding subordinated liabilities and other capital instruments of AIB Group are issued by Allied Irish Banks, p.l.c. and are detailed in note 38 to the consolidated financial statements. 354 Allied Irish Banks, p.l.c. Annual Financial Report 2014 v Share capital The share capital and share premium of Allied Irish Banks, p.l.c. are detailed in note 39 to the consolidated financial statements, all of which relates to Allied Irish Banks, p.l.c.. w Capital reserves and capital redemption reserves Capital reserves At 1 January Transfer to revenue reserves: Anglo business transfer CCNs issuance (note v) At 31 December Capital contribution reserves € m Other capital reserves € m 1,389 156 (470) (94) (564) 825 – – – 156 2014 Total € m 1,545 (470) (94) (564) 981 Capital contribution reserves € m Other capital reserves € m 2013 Total € m 1,608 156 1,764 (140) (79) (219) 1,389 – – – (140) (79) (219) 156 1,545 The capital contributions were initially non-distributable but may become distributable as outlined in accounting policy number 28. The transfers to revenue reserves relate to the capital contributions being deemed distributable. Capital redemption reserves All capital redemption reserves are held in Allied Irish Banks p.l.c. and are detailed in note 41 to the consolidated financial statements. x Capital contributions Capital contributions from the Minister for Finance and the NPRFC(1) to Allied Irish Banks p.l.c. are detailed in note 42 to the consolidated financial statements. (1)National Treasury Management Agency as controller and manager of the Ireland Strategic Investment Fund (NTMA / ISIF with effect 22 December 2014). i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 355 n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements y Offsetting financial assets and financial liabilities The disclosures set out in the tables below include financial assets and financial liabilities that: – – are offset in Allied Irish Banks, p.l.c.’s statement of financial position; or are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments, irrespective of whether they are offset in the statement of financial position. Details of these transactions are set out in note 43 to the consolidated financial statements and apply equally to Allied Irish Banks, p.l.c.. The following tables show financial assets and financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements at 31 December 2014: 2014 Net amount € m (118) 3 (121) 2014 Net amount € m Gross Net amounts of amounts of financial recognised financial assets presented liabilities amounts of offset in the in the statement statement recognised financial of financial of financial position € m assets € m Gross Related amounts not offset in the statement of financial position Financial collateral (including cash collateral) received € m Financial position instruments € m € m 1,665 (1,221) (450) (6) 1,665 3,376 110 5,151 – – – – 3,376 (3,494) 110 5,151 (107) (4,822) – – (450) Gross Net amounts of amounts of financial recognised liabilities financial presented assets amounts of offset in the in the statement statement recognised financial of financial of financial position liabilities € m € m Gross € m Related amounts not offset in the statement of financial position Financial collateral (including cash collateral) pledged € m Financial position instruments € m 16,133 2,191 2,475 20,799 – – – – 16,133 (16,942) 51 (758) 2,191 2,475 (2,259) (1,221) 20,799 (20,422) 2 (1,276) (1,223) (66) (22) (846) Financial assets Derivative financial instruments Loans and receivables to banks – Reverse repurchase agreements Loans and receivables to customers – Reverse repurchase agreements Note e f g Total Financial liabilities Deposits by central banks and banks – Note Securities sold under agreements to repurchase Customer accounts – Securities sold under agreements to repurchase Derivative financial instruments p q e Total 356 Allied Irish Banks, p.l.c. Annual Financial Report 2014 y Offsetting financial assets and financial liabilities (continued) The following tables show financial assets and financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements at 31 December 2013: Gross amounts of recognised financial liabilities offset in the statement of financial position € m – – – Net amounts of financial assets presented in the statement of financial position € m Related amounts not offset in the statement of financial position Financial collateral (including cash collateral) received € m Financial instruments € m 1,177 (957) (188) 16 1,193 (16) (973) – (188) Gross amounts of recognised financial assets € m 1,177 16 1,193 Financial assets Derivative financial instruments Loans and receivables to banks – Reverse repurchase agreements Note e f Total Financial liabilities Deposits by central banks and banks – Note Securities sold under agreements to repurchase Customer accounts – Securities sold under agreements to repurchase Derivative financial instruments p q e Total Gross amounts of recognised financial liabilities € m 20,886 5,783 1,819 28,488 Gross amounts of recognised financial assets offset in the statement of financial position € m Net amounts of financial liabilities presented in the statement of financial position € m Related amounts not offset in the statement of financial position Financial collateral (including cash collateral) pledged € m Financial instruments € m – – – – 20,886 (21,711) 8 (817) 5,783 1,819 (6,098) (957) 28,488 (28,766) (1) (820) (813) (316) 42 (1,091) The gross amounts of financial assets and financial liabilities and their net amounts as presented in the statement of financial position that are disclosed in the above tables are measured on the following bases: – – – – – derivative assets and liabilities – fair value; loans and receivables to banks – amortised cost; loans and receivables to customers – amortised cost; deposits by central banks and banks – amortised cost; and customer accounts – amortised cost. The amounts in the above tables that are offset in the statement of financial position are measured on the same basis. 2013 Net amount € m 32 – 32 2013 Net amount € m i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 357 n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements y Offsetting financial assets and financial liabilities (continued) The following tables reconcile the ‘Net amounts of financial assets and financial liabilities presented in the statement of financial position’, as set out in the previous pages, to the line items presented in the statement of financial position at 31 December 2014 and 31 December 2013: Net amounts of financial assets presented in the statement of financial position € m Line item in statement of financial position Carrying amount in statement of financial position € m 2014 Financial assets not in scope of offsetting disclosures € m 1,665 Derivative financial instruments 2,062 397 Financial assets Derivative financial instruments Loans and receivables to banks – Reverse repurchase agreements 3,376 Loans and receivables to banks 23,111 19,735 Loans and receivables to customers – Reverse repurchase agreements 110 Loans and receivables to customers 29,658 29,548 Net amounts of financial liabilities presented in the statement of financial position € m Line item in statement of financial position Carrying amount in statement of financial position € m 2014 Financial liabilities not in scope of offsetting disclosures € m 16,133 Deposits by central banks and banks 23,137 7,004 2,191 2,475 Customer accounts Derivative financial instruments 50,169 2,686 47,978 211 Net amounts of financial assets presented in the statement of financial position € m Line item in statement of financial position Carrying amount in statement of financial position € m 2013 Financial assets not in scope of offsetting disclosures € m 1,177 Derivative financial instruments 1,653 476 Financial liabilities Deposits by central banks and banks – Securities sold under agreements to repurchase Customer accounts – Securities sold under agreements to repurchase Derivative financial instruments Financial assets Derivative financial instruments Loans and receivables to banks – Reverse repurchase agreements 16 Loans and receivables to banks 23,856 23,840 Net amounts of financial liabilities presented in the statement of financial position € m Line item in statement of financial position Carrying amount in statement of financial position € m 2013 Financial liabilities not in scope of offsetting disclosures € m 20,886 Deposits by central banks and banks 29,112 8,226 5,783 1,819 Customer accounts Derivative financial instruments 53,112 2,404 47,329 585 Financial liabilities Deposits by central banks and banks – Securities sold under agreements to repurchase Customer accounts – Securities sold under agreements to repurchase Derivative financial instruments 358 Allied Irish Banks, p.l.c. Annual Financial Report 2014 z Memorandum items: contingent liabilities and commitments, and contingent assets Allied Irish Banks, p.l.c. has given guarantees in respect of the liabilities of certain of its subsidiaries and has also given guarantees to 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 (note l). Details of contingent liabilities and commitments entered into by AIB Group are set out in note 44 to the consolidated financial statements. The commentary on Legal proceedings, Contingent liability/contingent assets and Participation in TARGET 2 – Ireland, as set out in note 44 to the consolidated financial statements, applies also to Allied Irish Banks, p.l.c.. The following tables give the nominal or contract amounts of contingent liabilities and commitments for Allied Irish Banks, p.l.c.: Contingent liabilities - credit related Guarantees and assets pledged as collateral security: Guarantees and irrevocable letters of credit Other contingent liabilities Commitments Documentary credits and short-term trade-related transactions Undrawn formal standby facilities, credit lines and other commitments to lend: Less than 1 year(1) 1 year and over(2) (1)An original maturity of up to and including 1 year or which may be cancelled at any time without notice. (2)With an original maturity of more than 1 year. (3)Included in exposures are amounts relating to Group subsidiaries of € 265 million (2013: Nil). Contract amount 2013 € m 2014 € m 475 292 767 11 6,023 1,210 7,244 8,011(3) 567 357 924 15 5,907 1,232 7,154 8,078 Concentration of exposure Republic of Ireland United Kingdom United States of America Total Contingent liabilities 2013 € m 2014 € m Commitments 2013 € m 2014 € m 629 1 137 767 745 – 179 924 7,160 62 22 7,244 7,011 116 27 7,154 Credit ratings The credit ratings of contingent liabilities and commitments as at 31 December 2014 and 31 December 2013 are set out in the following i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i table. Good upper Good lower Watch Vulnerable Impaired Unrated Total 2014 € m 3,150 3,635 134 161 422 509 2013 € m 2,427 3,916 121 233 659 722 8,011 8,078 n o i t a m r o n f i l a r e n e G Allied Irish Banks, p.l.c. Annual Financial Report 2014 359 Notes to the parent company financial statements aa Transferred financial assets Allied Irish Banks, p.l.c. enters into transactions in the normal course of business in which it transfers previously recognised financial assets. Transferred financial assets may, in accordance with IAS 39 Financial Instruments: Recognition and Measurement: (i) continue to be recognised in their entirety; or (ii) be derecognised in their entirety but Allied Irish Banks, p.l.c. retains some continuing involvement. The most common transactions where the transferred assets are not derecognised in their entirety are sale and repurchase agreements and securitisations. Details of these transactions are set out in note 46 to the consolidated financial statements and apply equally to Allied Irish Banks, p.l.c.. (i) Transferred financial assets not derecognised in their entirety The following table sets out the carrying value of financial assets which did not qualify for derecognition and their associated financial liabilities: Carrying amount of transferred assets Carrying amount of associated liabilities held by third parties Sale and repurchase agreements 22,188 Securitisations: € m € m 18,324(1) Credit card receivables 297 200 Carrying amount of associated liabilities held by Group companies € m – 97 Fair value of transferred assets Fair value of associated liabilities held by third parties € m 22,199 € m 18,324 297 200 Fair value of associated liabilities held by Group companies € m – 97 Carrying amount of transferred assets € m Sale and repurchase agreements 29,559 Securitisations: Carrying amount of associated liabilities held by third parties € m 26,669(1) Credit card receivables 675 500 (1)See notes p and q. Carrying amount of associated liabilities held by Group companies € m – 175 Fair value of transferred assets Fair value of associated liabilities held by third parties € m 29,694 € m 26,669 675 500 Fair value of associated liabilities held by Group companies € m – 175 2014 Net fair value position € m 3,875 – 2013 Net fair value position € m 3,025 – (ii) Transferred financial assets derecognised in their entirety but Allied Irish Banks, p.l.c. retains some continuing involvement Allied Irish Banks, p.l.c. has a continuing involvement in transferred financial assets where it retains any of the risks and rewards of ownership of the transferred financial assets. Set out below are transactions in which Allied Irish Banks p.l.c. has a continuing involvement in financial assets transferred. NAMA Details in relation to the continuing involvement of assets transferred to NAMA by Allied Irish Banks, p.l.c. are set out in note 46 to the consolidated financial statements. The carrying value of assets transferred during 2010 and 2011 amounted to € 13,483 million, all of which were derecognised. In 2014, Allied Irish Banks, p.l.c. recognised € 16 million (cumulative € 69 million) (2013: € 16 million (cumulative € 53 million)) in the income statement for the servicing of all financial assets transferred to NAMA by the Group. AIB Mortgage Bank In 2011, Allied Irish Banks, p.l.c. transferred substantially all of its mortgage intermediary originated Irish residential loans, related security and related business of approximately € 4.2 billion to AIB Mortgage Bank. Under an Outsourcing and Agency Agreement dated 8 February 2006, Allied Irish Banks, p.l.c., as Service Agent for AIB Mortgage Bank, originates residential mortgage loans through its retail branch network and intermediary channels in the Republic of Ireland, services the mortgage loans and provides treasury services in connection with financing, as well as a range of other support services. In 2014, Allied Irish Banks, p.l.c. recognised € 58 million (cumulative € 396 million) (2013: € 58 million (cumulative € 338 million)) in the income statement for the provision of services under this agreement. 360 Allied Irish Banks, p.l.c. Annual Financial Report 2014 ab Fair value of financial instruments The tables on the following pages set out the carrying amount in the statement of financial position of financial assets and financial liabilities distinguishing between those measured at fair value and those measured at amortised cost. In addition, the fair value of all financial assets and financial liabilities is shown setting out the fair value hierarchy as described below into which the fair value measurement is categorised: Level 1 – financial assets and liabilities measured using quoted market prices from an active market (unadjusted). Level 2 – financial assets and liabilities measured using valuation techniques which use quoted market prices from an active market or measured using quoted market prices unadjusted from an inactive market. Level 3 – financial assets and liabilities measured using valuation techniques which use unobservable market data. Readers of these financial statements are advised to use caution when using the data in the following tables to evaluate the financial position of Allied Irish Banks, p.l.c. or to make comparisons with other institutions. Fair value information is not provided for items that do not meet the definition of a financial instrument. These items include 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 Company as a going concern at 31 December 2014. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 361 n o i t a m r o n f i l a r e n e G 1 8 4 8 3 1 6 7 8 , 1 3 8 6 , 2 1 0 0 1 2 5 8 , 2 2 8 9 , 4 3 – 0 6 3 3 4 0 , 3 2 6 6 6 9 3 , 1 1 1 1 , 3 2 6 8 5 , 9 2 9 7 4 , 9 2 1 4 0 5 0 , 4 6 – – 5 8 5 7 3 – – – – 3 – 9 5 3 2 2 8 – 6 6 0 1 0 , 3 2 6 8 5 , 9 2 9 7 4 , 9 2 1 4 3 5 5 , 2 6 m € m € m € m € m € m € m € l a t o T 3 l e v e L 2 l e v e L 1 l e v e L r e h t O d n a s n a o L s e l b a v i e c e r m € e l a s r o f e l b a l i a v A s e i t i r u c e s m € e g d e h w o l f h s a C s e v i t a v i r e d m € e g d e h e u l a v r i a F s e v i t a v i r e d 4 1 0 2 y h c r a r e i h e u l a v r i a F n o i t i s o p l a i c n a n i f f o t n e m e t a t s n i t n u o m a g n i y r r a C l a t o T t s o c d e s i t r o m a t A h g u o r h t e u l a v y t i u q e r i a f t A h g u o r h t e u a v l r i a f t A s s o l d n a t i f o r p ) d e u n i t n o c ( s t n e m u r t s n i l a i c n a n i f f o e u l a v r i a F b a 1 8 4 3 5 1 0 5 , 1 – – – – 1 8 4 8 3 1 6 7 8 , 1 6 4 1 7 3 5 , 2 1 3 8 6 , 2 1 – – 1 – 1 4 8 0 , 1 – – – 9 9 2 5 8 , 2 8 9 8 , 3 3 0 0 1 2 5 8 , 2 2 8 9 , 4 0 6 3 3 8 6 , 2 1 3 0 0 1 2 5 8 , 2 2 8 9 , 4 0 6 3 2 4 5 1 5 1 i g n d a r t r o f d e H l m € 1 8 4 8 3 1 3 8 1 , 1 l e u a v r i a f t a d e r u s a e m s t e s s a l a i c n a n i F s t e s s a l i a c n a n i f o i l o f t r o p i g n d a r T ) 1 ( s t n e m u r t s n i l i a c n a n i f e v i t a v i r e D s e i t i r u c e s y t i u q E s e v i t a v i r e d e t a r e g n a h c x E s e v i t a v i r e d e t a r t s e r e t n I s e v i t a v i r e d y t i u q E l e a s r o f l e b a l i a v a s t n e m t s e v n i l i a c n a n F i i s e c n e g a t n e m n r e v o g d n a s k n a b l a n o i t a n a r p u S s e i t i r u c e s t n e m n r e v o G s e i t i r u c e s d e k c a b t e s s A s e i t i r u c e s e t a r o p r o C s t n e m t s e v n i r e h t O s e i t i r u c e s y t i u q E s e i t i r u c e s k n a B 5 3 8 , 2 6 8 3 , 9 1 3 4 0 , 3 2 0 8 9 , 0 2 2 4 5 1 5 1 0 7 3 1 , 8 2 9 – 1 0 1 – – – – – – – – 8 6 4 9 2 0 , 1 8 6 4 6 6 6 9 3 , 1 1 1 1 , 3 2 8 5 6 , 9 2 3 2 4 , 9 2 1 4 6 6 0 , 4 6 ) 2 ( 8 6 4 2 1 4 0 8 8 6 6 8 2 9 1 1 1 , 3 2 8 5 6 , 9 2 3 2 4 , 9 6 8 1 , 3 6 e u a v l r i a f t a d e r u s a e m t o n s t e s s a l a i c n a n F i s k n a b l a r t n e c t l a s e c n a a b d n a h s a C n o i t c e l l o c f o e s r u o c e h t n i s m e t I ) 4 ( s r e m o t s u c o t ) 3 ( s k n a b o t l i s e b a v e c e r d n a s n a o L i l s e b a v e c e r d n a s n a o L s t e s s a l i a c n a n i f r e h t O i s d n o b r o n e s A M A N 362 Allied Irish Banks, p.l.c. Annual Financial Report 2014 4 1 0 2 y h c r a r e i h e u l a v r i a F n o i t i s o p l a i c n a n i f f o t n e m e t a t s n i t n u o m a g n i y r r a C ) d e u n i t n o c ( s t n e m u r t s n i l a i c n a n i f f o e u l a v r i a F b a l a t o T t s o c d e s i t r o m a t A h g u o r h t e u l a v y t i u q e r i a f t A t i f o r p h g u o r h t e u a v l s s o l d n a r i a f t A l a t o T 3 l e v e L 2 l e v e L 1 l e v e L 8 4 7 7 1 1 7 8 4 , 2 6 8 6 , 2 – 1 6 – 0 1 2 1 7 2 4 7 6 5 8 7 7 2 , 2 5 1 4 , 2 4 0 0 , 7 4 0 0 , 7 – 3 3 1 , 6 1 3 3 7 , 2 1 0 0 4 , 3 9 8 5 , 6 1 9 1 , 6 1 2 1 4 , 5 2 9 8 5 , 6 1 9 1 , 6 1 2 1 4 , 5 2 1 9 1 , 2 1 9 1 , 2 0 5 4 2 6 , 2 4 4 2 1 3 8 , 1 – – – 4 4 2 9 6 2 , 8 7 4 6 3 , 0 7 – – – – 4 2 0 5 – 1 3 8 , 1 5 0 3 , 5 – – – – – – – – – – – – – – 0 0 6 , 2 0 0 6 , 2 . n o i l l i m € 8 4 7 7 1 1 7 8 4 , 2 6 8 6 , 2 r e h t O m € 4 0 0 , 7 4 0 0 , 7 3 3 1 , 6 1 3 3 1 , 6 1 9 8 5 , 6 1 9 1 , 6 1 8 9 1 , 5 2 1 9 1 , 2 0 5 2 7 5 , 2 4 4 2 1 5 4 , 1 3 2 6 , 7 7 9 8 5 , 6 1 9 1 , 6 1 8 9 1 , 5 2 1 9 1 , 2 0 5 2 7 5 , 2 4 4 2 1 5 4 , 1 3 2 6 , 7 7 9 2 6 7 8 5 9 2 6 7 8 5 m € e g d e h w o l f h s a C s e v i t a v i r e d m € e g d e h e u l a v r i a F s e v i t a v i r e d . n o i l l i . n o i l l i i i m 7 7 5 , 6 € f o s g n k a t r e d n u y r a d s b u s o t e u d s t n u o m a s e d u c n I i l i i m 7 0 6 , 4 € f o s g n k a t r e d n u y r a d s b u s o t e u d s t n u o m a s e d u c n I i l . l i N i i i f o s g n k a t r e d n u y r a d s b u s o t e u d s t n u o m a s e d u c n I l i i i m 8 8 3 € f o s g n k a t r e d n u y r a d s b u s o t e u d s t n u o m a s e d u c n I l ) 5 ( ) 6 ( ) 7 ( ) 8 ( i g n d a r t r o f d e H l m € 8 4 7 7 1 1 1 7 2 1 , 0 7 4 1 , l e u a v r i a f t a d e r u s a e m s e i t i l i b a i l l a i c n a n i F ) 5 ( s t n e m u r t s n i l i a c n a n i f e v i t a v i r e D s e v i t a v i r e d e t a r e g n a h c x E s e v i t a v i r e d e t a r t s e r e t n I s e v i t a v i r e d y t i u q E s e v i t a v i r e d t i d e r C l e u a v r i a f t a d e r u s a e m t o n s e i t i l i b a i l l a i c n a n i F ) 6 ( s k n a b d n a s k n a b l a r t n e c y b s t i s o p e D s t n e m e e r g a r e d n u d o s l s e i t i r u c e S i s g n w o r r o b r e h t O s t n e m e e r g a r e d n u d o s l s e i t i r u c e S ) 8 ( e u s s i n i s e i t i r u c e s t b e D e s a h c r u p e r o t s t n u o c c a t n e r r u C s t i s o p e d d n a m e D s t i s o p e d e m T i e s a h c r u p e r o t ) 7 ( s t n u o c c a r e m o t s u C t s e o n m r e t i m u d e m d n a s d n o B e u s s i n i s e i t i r u c e s t b e d r e h t O t r e h o d n a s e i t i l i b a i l i d e t a n d r o b u S s t n e m u r t s n i l a t i p a c s e i t i l i b a i l l i a c n a n i f r e h t O . n o i l l i i m 1 6 1 , 2 2 € f o s g n k a t r e d n u y r a d s b u s o t e r u s o p x e s e d u c n l i i I ) 3 ( . d n a h n o h s a c s e s i r p m o C ) 2 ( . n o i l l i i m 2 0 2 € f o s g n k a t r e d n u y r a d s b u s o t e r u s o p x e s e d u c n i i l I ) 1 ( . n o i l l i i m 8 7 7 , 9 € f o s g n k a t r e d n u y r a d s b u s o t e r u s o p x e s e d u c n i l i I ) 4 ( Allied Irish Banks, p.l.c. Annual Financial Report 2014 363 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G 1 1 5 3 1 7 1 7 4 4 , 1 0 9 6 , 2 1 5 3 5 2 9 0 , 3 7 1 7 , 3 3 2 1 0 8 4 8 7 , 1 2 9 7 5 1 2 , 1 8 2 6 5 8 , 3 2 7 8 3 , 1 3 7 6 7 , 5 1 3 7 4 5 0 8 , 2 7 – – 9 7 2 – – – – – – – 2 1 0 7 1 6 3 – 9 7 8 2 1 6 7 , 3 2 7 8 3 , 1 3 7 6 7 , 5 1 3 7 4 5 9 4 , 1 7 m € m € m € m € m € m € m € l a t o T 3 l e v e L 2 l e v e L 1 l e v e L r e h t O d n a s n a o L l s e b a v e c e r i l a t o T t s o c d e s i t r o m a t A m € l e b a l e a s r o f l i a v A s e i t i r u c e s m € e g d e h w o l f h s a C s e v i t a v i r e d m € e g d e h e u a v l r i a F s e v i t a v i r e d h g u o r h t e u a v l y t i u q e r i a f t A h g u o r h t s s o l e u a v l d n a t i f r i a f o r p t A y h c r a r e h e u a v i l r i a F n o i t i s o p l i a c n a n i f f o t n e m e t a t s n i t n u o m a g n y r r a C i 3 1 0 2 ) d e u n i t n o c ( s t n e m u r t s n i l a i c n a n i f f o e u l a v r i a F b a 364 – 1 5 3 1 7 1 8 6 1 , 1 – – – – 3 – 3 1 – – – – 1 1 5 3 1 7 1 7 4 4 , 1 0 9 6 , 2 1 0 9 6 , 2 1 – – 7 5 3 5 2 9 0 , 3 7 1 7 , 3 5 3 5 2 9 0 , 3 7 1 7 , 3 3 2 1 0 8 0 9 6 , 2 1 5 3 5 2 9 0 , 3 7 1 7 , 3 3 2 1 0 8 – – 5 2 1 – – 2 2 2 i g n d a r t r o f l d e H m € 1 1 5 3 1 7 1 0 0 1 , 1 l e u a v r i a f t a d e r u s a e m s t e s s a l a i c n a n i F s t e s s a l i a c n a n i f o i l o f t r o p i g n d a r T ) 1 ( s t n e m u r t s n i l i a c n a n i f e v i t a v i r e D s e v i t a v i r e d e t a r e g n a h c x E s e v i t a v i r e d e t a r t s e r e t n I s e v i t a v i r e d y t i u q E s e i t i r u c e s y t i u q E s e i t i r u c e s t b e D l e a s r o f l e b a l i a v a s t n e m t s e v n i l i a c n a n F i i s e c n e g a t n e m n r e v o g d n a s k n a b l a n o i t a n a r p u S s e i t i r u c e s t n e m n r e v o G s e i t i r u c e s d e k c a b t e s s A s e i t i r u c e s e t a r o p r o C s t n e m t s e v n i r e h t O s e i t i r u c e s y t i u q E s e i t i r u c e s k n a B 1 8 3 , 1 2 4 0 , 0 2 4 8 7 , 1 2 9 2 1 , 0 2 5 2 1 2 2 2 8 0 3 1 , – 9 5 6 – 5 9 – – – – – – – – – 6 5 5 4 5 7 6 5 5 9 7 5 1 2 , 1 8 2 6 5 8 , 3 2 3 0 6 , 1 3 8 9 5 , 5 1 3 7 4 2 5 8 , 2 7 ) 2 ( 6 5 5 3 7 4 9 2 0 , 1 9 7 9 5 6 8 2 6 5 8 , 3 2 3 0 6 , 1 3 8 9 5 , 5 1 3 2 8 , 1 7 e u a v l r i a f t a d e r u s a e m t o n s t e s s a l a i c n a n F i s k n a b l a r t n e c t l a s e c n a a b d n a h s a C t n e r r u c - n o n d n a s p u o r g l a s o p s D i n o i t c e l l o c f o e s r u o c e h t n i s m e t I l e a s l r o f d e h s t e s s a i l s e b a v e c e r d n a s n a o L ) 4 ( s r e m o t s u c o t ) 3 ( s k n a b o t l i s e b a v e c e r d n a s n a o L i l s e b a v e c e r d n a s n a o L s t e s s a l i a c n a n i f r e h t O i s d n o b r o n e s A M A N Allied Irish Banks, p.l.c. Annual Financial Report 2014 y h c r a r e h e u a v l i r i a F n o i t i s o p l i a c n a n i f f o t n e m e t a t s n i t n u o m a g n y r r a C i 3 1 0 2 ) d e u n i t n o c ( s t n e m u r t s n i l a i c n a n i f f o e u l a v r i a F b a l a t o T 3 l e v e L 2 l e v e L 1 l e v e L 5 3 4 7 1 5 9 1 , 2 4 0 4 , 2 – – 4 8 4 8 5 3 4 7 1 1 1 1 , 2 0 2 3 , 2 6 2 2 , 8 6 2 2 , 8 – 6 8 8 , 0 2 6 3 1 , 9 0 5 7 , 1 1 0 3 2 , 6 4 7 6 , 3 1 6 7 6 , 7 2 0 3 2 , 6 4 7 6 , 3 1 6 7 6 , 7 2 4 3 0 , 6 4 3 0 , 6 9 7 3 8 2 , 3 9 7 2 5 7 7 , 1 – – – 9 7 2 – – – – – – – 5 7 7 , 1 – – – – – – – – – – – – 9 7 3 8 2 , 3 2 4 1 , 8 8 5 5 2 , 1 7 5 2 5 , 3 1 2 6 3 , 3 . n o i l l i m € 5 3 4 7 1 5 9 1 , 2 4 0 4 , 2 r e h t O m € l a t o T t s o c d e s i t r o m a t A 6 2 2 . 8 6 2 2 , 8 6 8 8 , 0 2 6 8 8 , 0 2 0 3 2 , 6 4 7 6 , 3 1 5 2 4 , 7 2 3 8 7 , 5 9 7 2 9 1 , 3 9 7 2 2 5 3 , 1 6 2 1 , 7 8 0 3 2 , 6 4 7 6 , 3 1 5 2 4 , 7 2 3 8 7 , 5 9 7 2 9 1 , 3 9 7 2 2 5 3 , 1 6 2 1 , 7 8 h g u o r h t e u a v l y t i u q e r i a f t A t i f o r p h g u o r h t e u a v l r i a f t A s s o l d n a – – 9 6 4 9 6 4 – – 8 8 5 8 8 5 m € e g d e h w o l f h s a C s e v i t a v i r e d m € e g d e h e u a v l r i a F s e v i t a v i r e d i g n d a r t r o f l d e H m € 5 3 4 7 1 8 3 1 1 , 7 4 3 , 1 l e u a v r i a f t a d e r u s a e m s e i t i l i b a i l l a i c n a n i F ) 5 ( s t n e m u r t s n i l i a c n a n i f e v i t a v i r e D s e v i t a v i r e d e t a r e g n a h c x E s e v i t a v i r e d e t a r t s e r e t n I s e v i t a v i r e d y t i u q E l e u a v r i a f t a d e r u s a e m t o n s e i t i l i b a i l l a i c n a n i F ) 6 ( s k n a b d n a s k n a b l a r t n e c y b s t i s o p e D s t n e m e e r g a r e d n u d o s l s e i t i r u c e S i s g n w o r r o b r e h t O s t n e m e e r g a r e d n u d o s l s e i t i r u c e S ) 8 ( e u s s i n i s e i t i r u c e s t b e D e s a h c r u p e r o t s t n u o c c a t n e r r u C s t i s o p e d d n a m e D s t i s o p e d e m T i e s a h c r u p e r o t ) 7 ( s t n u o c c a r e m o t s u C t s e o n m r e t i m u d e m d n a s d n o B e u s s i n i s e i t i r u c e s t b e d r e h t O t r e h o d n a s e i t i l i b a i l i d e t a n d r o b u S s t n e m u r t s n i l a t i p a c s e i t i l i b a i l l i a c n a n i f r e h t O i i i m 3 0 4 € f o s g n k a t r e d n u y r a d s b u s o t e u d s t n u o m a s e d u c n I l ) 5 ( . n o i l l i i m 3 6 1 € f o s g n k a t r e d n u y r a d s b u s o t e r u s o p x e s e d u c n i i l I ) 1 ( i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G . n o i l l i . n o i l l i i i m 2 7 4 , 7 € f o s g n k a t r e d n u y r a d s b u s o t e u d s t n u o m a s e d u c n I l i ) 6 ( . d n a h n o h s a c s e s i r p m o C ) 2 ( i i m 6 5 6 , 5 € f o s g n k a t r e d n u y r a d s b u s o t e u d s t n u o m a s e d u c n I l i ) 7 ( . l i N i i i f o s g n k a t r e d n u y r a d s b u s o t e u d s t n u o m a s e d u c n I l ) 8 ( . n o i l l i . n o i l l i i m 8 4 8 , 2 2 € f o s g n k a t r e d n u y r a d s b u s o t e r u s o p x e s e d u c n i i l I ) 3 ( i m 5 7 1 , 0 1 € f o s g n k a t r e d n u y r a d s b u s o t e r u s o p x e s e d u c n i l i I ) 4 ( Allied Irish Banks, p.l.c. Annual Financial Report 2014 365 Notes to the parent company financial statements ab Fair value of financial instruments (continued) Significant transfers between Level 1 and Level 2 of the fair value hierarchy The following table shows significant transfers between Level 1 and Level 2 of the fair value hierarchy for the years ended 31 December 2014 and 31 December 2013: Financial assets Transfer into Level 1 from Level 2 Transfer into Level 2 from Level 1 Trading portfolio € m Debt securities € m – – – 1 2014 Total € m – 1 Trading portfolio € m Debt securities € m – – 13 3 2013 Total € m 13 3 Transfers into Level 1 from Level 2 occurred due to increased availability of reliable quoted market prices which were not previously available. Transfers into Level 2 from Level 1 occurred due to reduced availability of reliable quoted market prices. 366 Allied Irish Banks, p.l.c. Annual Financial Report 2014 ab Fair value of financial instruments (continued) Reconciliation of balances in Level 3 of the fair value hierarchy The following tables show a reconciliation from the beginning balances to the ending balances for fair value measurements in Level 3 of the fair value hierarchy for 2014 and 2013: Financial assets Financial liabilities 2014 Derivatives Available for sale Total Derivatives Total At 1 January 2014 Transfers into Level 3(1) Total gains or (losses) in: Profit or loss – Net trading gain Other comprehensive income – Net change in fair value of financial investments available for sale – Net change in fair value of cashflow hedges Sales At 31 December 2014 At 1 January 2013 Transfers into Level 3(1) Total gains or (losses) in: Profit or loss – Net trading loss Other comprehensive income – Net change in fair value of financial investments available for sale Sales At 31 December 2013 Debt securities € m Equity securities € m 12 3 – – – (12) 3 70 – – 294 – (5) 359 € m 279 104 75 – 2 – 460 Financial assets Derivatives € m – 460 (181) – – 279 Available for sale Debt securities € m Equity securities € m 12 – – – – 12 243 – – 24 (197) 70 € m 361 107 € m 84 119 € m 84 119 75 38 38 294 2 (17) 822 – 30 – 271 – 30 – 271 2013 Financial liabilities Total Derivatives Total € m 255 460 € m 20 116 € m 20 116 (181) (32) (32) 24 (197) 361 – (20) 84 – (20) 84 (1)Transfers between levels of the fair value hierarchy are recognised at the end of the reporting period during which the change occurred. Transfers out of Level 3 occurred because of increased observability in the market prices of these instruments. Transfers into Level 3 arose as a result of the unobservable inputs becoming significant to the fair value measurement of these instruments. Reconciliation of balances in Level 3 of the fair value hierarchy Total gains or losses included in profit or loss that is attributable to the change in unrealised gains or losses relating to those i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i assets and liabilities held at 31 December 2014 and 31 December 2013: Net trading income/(loss) Provisions for impairment on financial investments available for sale Total Allied Irish Banks, p.l.c. Annual Financial Report 2014 2014 € m 124 – 124 2013 € m (25) – (25) 367 n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements ab Fair value of financial instruments (continued) Significant unobservable inputs The table below sets out information about significant unobservable inputs used at the year ended 31 December 2014 and 31 December 2013 in measuring financial instruments categorised as Level 3 in the fair value hierarchy: Fair Value 2014 € m 460 271 2013 € m 279 84 Financial instrument Uncollaterised Asset customer Liability derivatives Valuation technique Significant unobservable input CVA LGD PD Range of estimates 2014 46% – 73% (Base 55%) 0.9% – 1.4% 2013 45% – 80% (Base 59%) 0.8% – 2.0% FVA(2) DVA (Base 1.1% 1 yr PD) (Base 1.5% 1 yr PD) Combination LGD and PD(1) As above with greater As above with greater unfavourable impact unfavourable impact due to combination of due to combination of PD and LGD changes PD and LGD changes Funding spreads (0.3%) – 0.8% n/a PD n/a The PD is shifted from 2.1% to 0.4% in the unfavourable scenario. In the favourable scenario the capping of DVA at CVA level is removed. NAMA Asset 358 70 Discounted NAMA Discount rate of 12% The estimates range subordinated bonds cash flows profitability i.e. applicable to base from: (a) NAMA making ability to generate asset price. The a single payment only cash flow for estimates range from: under the bonds i.e. repayment (a) NAMA making 50% 5.26% of nominal; to of full 5.26% coupon (b) repayment of the payments; to (b) an bonds at maturity. early full repayment of coupons plus capital (March 2018) at a reduced discount rate. (1)The fair value measurement sensitivity to unobservable inputs ranges from negative € 37 million to positive € 21 million (2013: negative € 20 million to positive € 19 million). (2)As detailed in note 47 to the consolidated financial statements, FVA incorporates an element of own credit which had been applied through DVA in 2013. A number of other derivatives are subject to valuation methodologies which use unobservable inputs. As the variability of the valuation is not greater that € 1 million in any individual case or collectively, the detail is not disclosed here. 368 Allied Irish Banks, p.l.c. Annual Financial Report 2014 ab Fair value of financial instruments (continued) Sensitivity of Level 3 measurements The implementation of valuation techniques involves a considerable degree of judgement. While the Company believes its estimates of fair value are appropriate, the use of different measurements or assumptions could lead to different fair values. The following table sets out the impact of using reasonably possible alternative assumptions in the valuation methodology: Level 3 2014 Effect on income statement Favourable Unfavourable € m € m Effect on other comprehensive income Favourable Unfavourable € m € m Classes of financial assets Derivative financial instruments Financial investments available for sale – equity securities Total Classes of financial liabilities Derivative financial instruments Total 25 – 25 2 2 (46) – (46) (7) (7) – 57 57 – – – (53) (53) – – 2013 Classes of financial assets Derivative financial instruments Financial investments available for sale – equity securities Total Classes of financial liabilities Derivative financial instruments Total Level 3 Effect on income statement Favourable Unfavourable € m € m Effect on other comprehensive income Favourable Unfavourable € m € m 14 – 14 5 5 (22) (46) (68) (2) (2) – 106 106 – – – – – – – Day 1 gain or loss: No difference existed between the fair value at initial recognition of financial instruments and the amount that was determined at that date using a valuation technique incorporating significant unobservable data. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 369 n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements ac Statement of cash flows Analysis of cash and cash equivalents For the purpose of the statement of cash flows, cash equivalents comprise the following balances with less than three months maturity from the date of acquisition: Cash and balances at central banks Loans and receivables to banks 2014 € m 1,396 846 2,242 2013 € m 1,215 851 2,066 2012 € m 1,076 1,358 2,434 ad Related party transactions Related parties of Allied Irish Banks, p.l.c. (“AIB”) include subsidiary undertakings, associate undertakings and joint undertakings, post-employment benefits, Key Management Personnel and connected parties. The Irish Government is also considered a related party by virtue of its effective control of AIB. Related party transactions are detailed in note 50 to the consolidated financial statements. ae Commitments Capital expenditure Estimated outstanding commitments for capital expenditure not provided for in the financial statements Capital expenditure authorised but not yet contracted for 2014 € m 16 33 Operating lease rentals The total of future minimum lease payments under non-cancellable operating leases are set out in the following table. One year One to two years Two to three years Three to four years Four to five years Over five years Total 2014 € m 49 45 31 17 16 130 288 2013 € m 25 26 2013 € m 62 58 52 34 16 140 362 Operating lease payments recognised as an expense for the year were € 46 million (2013: € 62 million). Sublease income amounted to Nil (2013: Nil). Included in the lease payments to other Group subsidiaries is € 35 million (2013: € 37 million). Future minimum lease payments due to subsidiaries of Allied Irish Banks, p.l.c. amount to € 77 million excluding VAT (2013: € 137 million excluding VAT) and are included in the total of € 288 million in 2014 (2013: € 362 million). 370 Allied Irish Banks, p.l.c. Annual Financial Report 2014 af Credit risk information The following table sets out the maximum exposure to credit risk that arises within Allied Irish Banks, p.l.c. and distinguishes between those assets that are carried in the statement of financial position at amortised cost and those carried at fair value at 31 December 2014 and 31 December 2013: Maximum exposure to credit risk Balances at central banks(1) Items in course of collection Disposal groups and non-current assets held for sale(2) Trading portfolio financial assets(4) Derivative financial instruments(5) Loans and receivables to banks(6) Loans and receivables to customers(7) NAMA senior bonds Financial investments available for sale(8) Other assets: Trade receivables Accrued interest(9) Financial guarantees Loan commitments and other credit related commitments Total Amortised cost(10) € m Fair value(11) € m 928 66 – – – 23,111 29,658 9,423 – – – – 2,062 – – – 2014 Total € m 928 66 – – 2,062 23,111 29,658 9,423 Amortised cost(10) € m Fair value(11) € m 659 79 28(3) – – 23,856 31,603 15,598 – – – 1 1,653 – – – – 20,620 20,620 – 20,049 2013 Total € m 659 79 28 1 1,653 23,856 31,603 15,598 20,049 46 366 – – 46 366 23 450 – – 23 450 63,598 22,682 86,280 72,296 21,703 93,999 767 7,244 8,011 – – – 767 924 7,244 8,011 7,154 8,078 – – – 924 7,154 8,078 71,609 22,682 94,291 80,374 21,703 102,077 (1)Included within cash and balances at central banks of € 1,396 million (2013: € 1,215 million). (2)Non-financial assets and equity investments within disposal groups and non-current assets held for sale are not included above (note c). (3)Comprises loans and receivables to banks and customers measured at amortised cost (note c). (4)Excluding equity shares of € 1 million (2013: € 1 million). (5)Exposures to subsidiary undertakings of € 202 million (2013: € 163 million) have been included. (6)Exposures to subsidiary undertakings of € 22,161 million (2013: € 22,848 million) have been included. (7)Exposures to subsidiary undertakings of € 9,778 million (2013: € 10,175 million) have been included. (8)Excluding equity shares of € 360 million (2013: € 80 million). (9)Exposures to subsidiary undertakings of € 8 million (2013: € 8 million) have been included. (10)All amortised cost items are ‘loans and receivables’ per IAS 39 Financial Instruments: Recognition and Measurement definitions. (11)All items measured at fair value except financial investments available for sale and cash flow hedging derivatives are classified as ‘fair value through profit or loss’. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 371 n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements af Credit risk information (continued) Collateral Allied Irish Banks, p.l.c. takes collateral as a secondary source of repayment in the event of a borrower’s default. The nature of collateral taken is set out on page 66. Set out below is the fair value of collateral accepted by Allied Irish Banks p.l.c. at 31 December 2014 and 31 December 2013 in relation to financial assets detailed in the maximum exposure to credit risk table on page 371: Loans and receivables to banks Interbank placings, including central banks, are largely carried out on an unsecured basis apart from reverse repurchase agreements. At 31 December 2014, Allied Irish Banks p.l.c. had received collateral with a fair value of Nil on loans with a carrying value of Nil (2013: € 16 million and € 16 million respectively). Loans and receivables to customers The following table shows the fair value of collateral held for residential mortgages at 31 December 2014 and 31 December 2013: Neither past due nor impaired € m Past due but not impaired € m Impaired 2014 Total € m € m Neither past due nor impaired € m Past due but not impaired € m Impaired 2013 Total € m € m Fully collateralised(1) Loan-to-value ratio: Less than 50% 50% - 70% 71% - 80% 81% - 90% 91% - 100% Partially collateralised Collateral value relating to loans over 100% loan-to-value Total collateral value Gross residential mortgages Statement of financial position specific provisions Statement of financial position IBNR provisions Net residential mortgages 167 165 92 121 138 683 540 1,223 1,357 7 5 3 3 11 29 16 45 47 11 18 21 29 88 167 172 339 397 185 188 116 153 237 879 728 1,607 1,801 (173) (173) (25) 224 1,603 132 122 85 88 109 536 688 1,224 1,455 4 6 3 2 7 9 14 13 13 69 22 118 145 142 101 103 185 676 20 42 50 247 365 447 955 1,631 1,952 (194) (194) (28) 253 1,730 (1)The fair value of collateral held for residential mortgages which are fully collateralised has been capped at the carrying value of the loans outstanding at each year end. For residential mortgages, the Group takes collateral in support of lending transactions for the purchase of residential property. Collateral valuations are required at the time of origination of each residential mortgage. The Group adjusts open market property values to take account of the costs of realisation and any discount associated with the realisation of collateral. The fair value at 31 December 2014 is based on property values at origination or date of latest valuation and applying the CSO (Ireland) index to these values to take account of price movements in the interim. Non-mortgage portfolios Details of collateral in relation to the non-mortgage portfolio are set out on page 68.. NAMA senior bonds Allied Irish Banks p.l.c. holds a guarantee from the Irish Government in respect of NAMA senior bonds which at 31 December 2014 have a carrying value of € 9,423 million (2013: € 15,598 million). Financial investments available for sale At 31 December 2014, government guaranteed senior bank debt amounting to € 120 million (2013: € 381 million) was held within the available for sale portfolio. 372 Allied Irish Banks, p.l.c. Annual Financial Report 2014 af Credit risk information (continued) The information contained in this note relates only to third party exposures arising within Allied Irish Banks, p.l.c.. Loans and receivables to customers by geographic location and industry sector at 31 December 2014 and 31 December 2013 2014 Included on statement of financial position as Republic of Ireland United Kingdom Rest of the World Total Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal Residential mortgages Other Unearned income Deferred costs Provisions Total Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal Residential mortgages Other Unearned income Deferred costs Provisions Total € m 1,700 203 740 10,943 4,708 538 514 2,343 1,801 3,423 26,913 (84) 3 (7,453) 19,379 € m – 17 19 224 116 36 91 66 – – 569 (3) – (111) 455 € m – 1 – – – – 3 43 – – 47 (1) – – 46 € m 1,739 236 859 14,325 5,068 645 432 2,483 1,952 3,858 31,597 (68) 2 (11,111) 20,420 € m – 18 61 359 344 64 21 222 – – 1,089 (7) – (143) 939 € m – 5 – – – – 4 99 – – 108 (1) – (10) 97 Republic of Ireland United Kingdom Rest of the World Total Loans and receivables to customers € m 1,700 221 759 11,167 4,824 574 608 2,452 1,801 3,423 € m 1,700 221 759 11,167 4,824 574 608 2,452 1,801 3,423 27,529 27,529 (88) 3 (7,564) 19,880 (88) 3 (7,564) 19,880(1) Disposal groups and non-current assets held for sale € m – – – – – – – – – – – – – – – 2013 Included on statement of financial position as Loans and receivables to customers € m 1,739 231 920 14,684 5,412 709 457 2,804 1,952 3,858 € m 1,739 259 920 14,684 5,412 709 457 2,804 1,952 3,858 32,794 32,766 (76) 2 (76) 2 (11,264) (11,264) 21,456 21,428(1) Disposal groups and non-current assets held for sale € m – 28 – – – – – – – – 28 – – – 28 373 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G (1) Excludes intercompany balances of € 9,778 million (2013: € 10,175 million). Allied Irish Banks, p.l.c. Annual Financial Report 2014 Notes to the parent company financial statements af Credit risk information (continued) Internal credit ratings Internal credit ratings of loans and receivables to customers The internal credit ratings profile of loans and receivables to customers by asset class at 31 December 2014 and 31 December 2013 is as follows: Neither past due nor impaired Good upper Good lower Watch Vulnerable Total Past due but not impaired Good upper Good lower Watch Vulnerable Total Total impaired Total gross loans and receivables Unearned income Deferred costs Impairment provisions Total Neither past due nor impaired Good upper Good lower Watch Vulnerable Total Past due but not impaired Good upper Good lower Watch Vulnerable Total Total impaired Total gross loans and receivables Unearned income Deferred costs Impairment provisions Total Residential mortgages € m Other Property and construction € m personal € m SME/other commercial € m 569 537 127 124 1,357 – 3 6 38 47 397 1,801 181 1,733 148 195 2,257 1 51 29 112 193 973 3,423 79 2,141 460 1,184 3,864 – 43 37 287 367 6,936 11,167 46 3,205 630 778 4,659 8 104 66 268 446 2,805 7,910 Residential mortgages € m Other personal € m Property and construction € m SME/other commercial € m 582 582 147 144 1,455 1 3 10 36 50 447 1,952 190 1,667 165 190 2,212 2 106 45 148 301 1,345 3,858 82 2,072 767 449 3,370 – 92 71 319 482 10,832 14,684 83 3,127 749 600 4,559 1 116 87 281 485 3,923 8,967 Corporate € m 640 2,096 77 17 2014 Total € m 1,515 9,712 1,442 2,298 2,830 14,967 2 16 – 2 20 378 3,228 Corporate € m 579 1,954 87 197 11 217 138 707 1,073 11,489 27,529 (88) 3 (7,564) 19,880 2013 Total € m 1,516 9,402 1,915 1,580 2,817 14,413 2 20 – 18 40 476 3,333 6 337 213 802 1,358 17,023 32,794 (76) 2 (11,264) 21,456 Details of the rating profiles and lending classifications are set out on page 123. 374 Allied Irish Banks, p.l.c. Annual Financial Report 2014 af Credit risk information (continued) Impaired loans by geographic location and industry sector The following table presents an analysis of impaired loans and receivables to customers for Allied Irish Banks, p.l.c. at 31 December 2014 and 31 December 2013. 2014 Included on statement of financial position as Republic of Ireland United Kingdom Rest of the World Total Loans and receivables to customers € m € m € m 291 80 176 6,795 1,816 66 168 562 397 973 – – – 141 – 24 – – – – 11,324 165 Disposal groups and non-current assets held for sale € m – – – – – – – – – – – € m 291 80 176 6,936 1,816 90 168 562 397 973 € m 291 80 176 6,936 1,816 90 168 562 397 973 11,489 11,489 – – – – – – – – – – – 2013 Included on statement of financial position as Loans and receivables to customers € m 327 66 263 10,832 2,617 154 211 761 447 1,345 € m 327 66 263 10,832 2,617 154 211 761 447 1,345 17,023 17,023 Disposal groups and non-current assets held for sale € m – – – – – – – – – – – Republic of Ireland United Kingdom Rest of the World Total € m 327 62 261 10,577 2,611 154 211 722 447 1,345 16,717 € m € m – – 2 255 6 – – 27 – – 290 – 4 – – – – – 12 – – 16 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal: Residential mortgages Other Total Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal: Residential mortgages Other Total Allied Irish Banks, p.l.c. Annual Financial Report 2014 375 n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements af Credit risk information (continued) Aged analysis of contractually past due but not impaired gross loans The following table presents by industry sector an aged analysis of contractually past due but not impaired loans and receivables to customers for Allied Irish Banks, p.l.c. at 31 December 2014 and 31 December 2013: 1 – 30 days € m 31 – 60 days € m 61 – 90 days € m 91 – 180 days € m 181 – 365 days € m > 365 days € m Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal: Residential mortgages Credit cards Other Total As a percentage of total loans(1) 48 – 19 84 55 5 2 58 11 29 44 8 – 4 22 16 1 – 24 6 7 14 355 1.3% 102 0.4% 3 – – 19 7 – – 3 8 4 12 56 9 – 1 43 27 – – 10 7 3 17 117 0.2% 0.4% 15 – 1 52 31 – – 11 9 1 14 40 3 8 147 30 3 – 24 6 – 48 134 0.5% 309 1.1% 1,073 3.9% 1 – 30 days € m 31 – 60 days € m 61 – 90 days € m 91 – 180 days € m 181 – 365 days € m > 365 days € m Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal: Residential mortgages Credit cards Other Total 61 1 18 133 58 6 1 69 19 32 109 507 13 1 4 37 11 1 1 10 7 9 21 115 17 – 1 21 12 – – 11 6 6 17 91 15 1 5 45 19 2 1 13 7 4 30 9 – 4 108 36 1 – 12 7 1 26 34 1 20 138 32 3 1 20 4 – 46 142 204 299 1,358 As a percentage of total loans(1) 1.55% 0.35% 0.28% 0.43% 0.62% 0.91% 4.14% (1)Total loans (excluding intercompany) are gross of impairment provisions and unearned income. 376 Allied Irish Banks, p.l.c. Annual Financial Report 2014 2014 Total € m 123 3 33 367 166 9 2 130 47 44 149 2013 Total € m 149 4 52 482 168 13 4 135 50 52 249 af Credit risk information (continued) Provisions for impairment by geographic location and industry sector The following table presents an analysis of provisions for impairment on loans and receivables to customers for Allied Irish Banks, p.l.c. at 31 December 2014 and 31 December 2013. 2014 Included on statement of financial position as Republic of Ireland United Kingdom Rest of the World Total Loans and receivables to customers € m 176 37 108 4,243 1,058 39 90 368 173 663 6,955 498 7,453 € m € m – – – 88 – 23 – – – – 111 – 111 – – – – – – – – – – – – – € m 176 37 108 4,331 1,058 62 90 368 173 663 7,066 498 7,564 € m 176 37 108 4,331 1,058 62 90 368 173 663 7,066 498 7,564 Disposal groups and non-current assets held for sale € m – – – – – – – – – – – – – Republic of Ireland United Kingdom Rest of the World Total € m 241 35 189 6,640 1,614 108 123 518 194 1,038 10,700 411 11,111 € m – – – 111 6 – – 5 – – 122 21 143 € m – – – – – – – 9 – – 9 1 10 € m 241 35 189 6,751 1,620 108 123 532 194 1,038 10,831 433 11,264 2013 Included on statement of financial position as Loans and receivables to customers € m 241 35 189 6,751 1,620 108 123 532 194 1,038 10,831 433 11,264 Disposal groups and non-current assets held for sale € m – – – – – – – – – – – – – Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal: Residential mortgages Other Specific IBNR Total Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal: Residential mortgages Other Specific IBNR Total i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 377 n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements af Credit risk information (continued) External credit ratings of financial assets The external credit ratings profile of loans and receivables to banks, NAMA senior bonds, trading portfolio financial assets (excluding equity securities) and financial investments available for sale (excluding equity shares) for Allied Irish Banks, p.l.c. at 31 December 2014 and 31 December 2013 is as follows: AAA/AA A/A- BBB+/BBB/BBB- Sub investment Unrated Total AAA/AA A BBB+/BBB/BBB- Sub investment Unrated Total Bank(1) € m Corporate € m Sovereign € m Other € m 3,632 1,059 7 149 – 4,847 – – – – 3 3 4,114 18,382(2) 2,462 – – 99 – – 1 – 24,958(3) 100 29,908 2014 Total € m 7,845 19,441 2,469 150 3 Bank(1) € m Corporate € m Sovereign € m 2,861 1,091 710 – 63 4,725 – – 14 – 1 15 5,417 – 25,957(2) 6 – 31,380(3) Other € m 304 133 85 14 – 536 2013 Total € m 8,582 1,224 26,766 20 64 36,656 (1)Excludes balances with subsidiaries of € 23,246 million (2013: € 22,848 million). (2)Includes NAMA senior bonds which do not have an external credit rating and to which the Group has attributed a rating of A- (2013: BBB+) i.e. the external rating of the Sovereign. (3)Includes supranational banks and government agencies. 378 Allied Irish Banks, p.l.c. Annual Financial Report 2014 ag Liquidity risk information Financial assets and financial liabilities by contractual residual maturity Repayable on demand but not repayable on demand € m 3 months or less 1 year or less 5 years or less but over 1 year € m but over 3 months € m € m 2014 Total Over 5 years € m € m Financial assets Derivative financial instruments(2) Loans and receivables to banks(3) Loans and receivables to customers(3) NAMA senior bonds(4) Financial investments available for sale(1) Other financial assets – 23,100 23,273 – 3 – 50 11 552 9,423 226 412 75 – 837 – 1,100 – 2,585 5,462 5,435 – 278 – – – 12,150 7,963 – – 2,062 23,111 37,307 9,423 20,620 412 Financial liabilities Deposits by central banks and banks Customer accounts Derivative financial instruments(2) Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities 46,376 10,674 2,938 18,449 14,498 92,935 6,931 27,331 – – – 244 34,506 14,155 13,885 153 1,599 – – – 6,927 159 24 – – 2,051 2,025 1,121 999 1,411 – – 1 1,253 – 40 – 23,137 50,169 2,686 2,622 1,451 244 29,792 7,110 7,607 1,294 80,309 Repayable on demand € m 3 months or less but not repayable on demand € m 1 year or less 5 years or less but over 1 year € m but over 3 months € m 2013 Total Over 5 years € m € m Financial assets Financial assets of disposal groups(1)(3) Trading portfolio financial assets(1) Derivative financial instruments(2) Loans and receivables to banks(3) Loans and receivables to customers(3) NAMA senior bonds(4) Financial investments available for sale(1) Other financial assets – – – 23,841 29,126 – 3 – – – 63 20 531 15,598 246 473 – – 155 2 2,590 – 937 – – – 945 – 28 1 490 – 4,818 5,876 – – 11,357 7,506 – – 28 1 1,653 23,863 42,941 15,598 20,049 473 Financial liabilities Deposits by central banks and banks Customer accounts Derivative financial instruments(2) Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities 52,970 16,931 3,684 17,120 13,901 104,606 7,683 25,593 – – – 279 33,555 10,486 18,870 139 75 – – 143 6,157 148 753 – – 10,800 2,490 1,031 2,443 1,316 – – 2 1,086 – 36 – 29,112 53,112 2,404 3,271 1,352 279 29,570 7,201 18,080 1,124 89,530 (1)Excluding equity shares. (2)Shown by maturity date of contract. (3)Shown gross of provisions for impairment and unearned income. (4))New notes will be issued at each maturity date, with the next maturity date being 2 March 2015. Upon maturity, the issuer has the option to settle in cash or issue new notes and to date has issued new notes. The balances shown above include exposures to/by subsidiary undertakings. Allied Irish Banks, p.l.c. Annual Financial Report 2014 379 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Notes to the parent company financial statements ag Liquidity risk information (continued) Financial liabilities by undiscounted contractual maturity – contingent liabilities and commitments The undiscounted cash flows potentially payable under guarantees and similar contracts, included below within contingent liabilities, are classified on the basis of the earliest date they can be called. The Company is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. The Company expects that most guarantees it provides will expire unused. The Company has given commitments to provide funds to customers under undrawn facilities. The undiscounted cash flows have been classified on the basis of the earliest date that the facility can be drawn. The Company does not expect all facilities to be drawn, and some may lapse before drawdown. Contingent liabilities Commitments Contingent liabilities(1) Commitments Payable on demand € m 767 7,244 8,011(1) Payable on demand € m 924 7,154 8,078(1) 3 months or less but not repayable on demand € m 1 year or less but over 3 months € m 5 years or less but over 1 year € m Over 5 years € m – – – – – – – – – – – – 3 months or less but not repayable on demand € m 1 year or less but over 3 months € m 5 years or less but over 1 year € m Over 5 years € m – – – – – – – – – – – – 2014 Total € m 767 7,244 8,011 2013 Total € m 924 7,154 8,078 (1)Includes € 265 million (2013: Nil) relating to Group subsidiaries. ah Market risk information Market risk profile The following table sets out the VaR for Allied Irish Banks, p.l.c. at 31 December 2014 and 31 December 2013: Interest rate risk 1 day holding period: Average High Low 31 December VaR (trading book) 2013 € m 2014 € m VaR (banking book) 2013 € m 2014 € m Total VaR 2014 € m 2013 € m 0.1 0.5 – 0.1 0.1 0.6 – 0.2 3.5 5.6 1.2 1.5 1.4 3.8 1.0 2.9 3.5 5.6 1.2 1.5 1.4 3.8 0.9 2.7 The following table sets out the VaR for foreign exchange rate and equity risk for the years ended 31 December 2014 and 31 December 2013: 1 day holding period: Average High Low 31 December Foreign exchange rate risk VaR (trading book) 2013 € m 2014 € m – 0.1 – – – 0.3 – – Equity risk VaR (trading book) 2014 € m 0.1 0.1 – – 2013 € m 0.4 0.7 – – 380 Allied Irish Banks, p.l.c. Annual Financial Report 2014 General information Shareholder information Internet-based Shareholder Services Ordinary Shareholders with access to the internet may: – – – – – register for electronic communications on the following link, www.computershare.com/register/ie; check their shareholdings on the Company’s Share Register; check past dividend payment details; update your information online on the following link: www.investorcentre.com/ie/changeaddress; 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 Investor Relations, Shareholder Information and Personal Shareholder Details 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. These services may also be accessed via the Registrar’s website at www.computershare.com. Shareholders may also use AIB’s website to access the Company’s Annual Financial Report. Stock Exchange Listings Allied Irish Banks, p.l.c. is an Irish-registered company. Its ordinary shares are traded on the Enterprise Securities Market (“ESM”) of the Irish Stock Exchange. AIB had previously listed its ordinary shares, in the form of American Depository Shares (“ADS”), evidenced by an American Depository Receipt (“ADR”) on the New York Stock Exchange (“NYSE”). Following the decision in 2011 to delist, ADSs were no longer traded on the NYSE. The ADR Depository, The Bank of New York Mellon, advised that the sale of ordinary shares underlying the ADSs, commenced in 2012, had been completed in 2014 and they had initiated the process of remitting the cash from the proceeds to the ADS holders. AIB filed a Form 15F with the United States Securities and Exchange Commission (“SEC”) on 9 December 2014 to terminate the registration of AIB’s Securities and to cease its reporting requirements. Registrar The Company’s Registrar is: Computershare Investor Services (Ireland) Ltd., Heron House, Corrig Road, Sandyford Industrial Estate, Dublin 18. Telephone: +353-1-247 5411. Facsimile: +353-1-216 3151. Website: www.computershare.com or www.investorcentre.com/ie/contactus Shareholding analysis The National Pensions Reserve Fund Commission(1) hold 522,558,712,910 ordinary shares of € 0.0025 each in the share capital of Allied Irish Banks, p.l.c.. Financial calendar Annual General Meeting: 28 April 2015, at the Company’s Head office at Bankcentre, Ballsbridge, Dublin 4. Interim results The unaudited Half-Yearly Financial Report 2015 will be announced towards the end of July/early August 2015 and will be available on the Company’s website – www.aibgroup.com. Shareholder’s enquires regarding Ordinary Shares should be addressed to: Computershare Investor Services (Ireland) Ltd., Heron House, Corrig Road, Sandyford Industrial Estate, Dublin 18, Ireland. Telephone: +353 1 247 5411 Facsimile: +353 1 216 3151 Website: www.computershare.com or www.investorcentre.com/ie/contactus or www.aibgroup.com (1)National Treasury Management Agency as controller and manager of the Ireland Strategic Investment Fund (NTMA / ISIF with effect 22 December 2014). Allied Irish Banks, p.l.c. Annual Financial Report 2014 381 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Glossary of terms ABS Asset backed securities are securities that represent an interest in an underlying pool of referenced assets. They are typically structured in tranches of differing credit qualities. Some common types of asset backed securities are those backed by credit card receivables, home equity loans and car loans. Within this report, ABS which are backed by an underlying pool of residential mortgage loans are referred to as “RMBS” – see below. Arrears Arrears relates to any interest or principal on a loan which was due for payment, but where payment has not been received. Customers are said to be in arrears when they are behind in fulfilling their obligations with the result that an outstanding loan is unpaid or overdue. Banking book A regulatory classification to support the regulatory capital treatment that applies to all exposures which are not in the trading book. Banking book positions tend to be structural in nature and, typically, arise as a consequence of the size and composition of a bank's balance sheet. Examples include the need to manage the interest rate risk on fixed rate mortgages or rate insensitive current account balances. The banking book portfolio will also include all transactions/positions which are accounted for on an interest accruals basis or, in the case of financial instruments, on an available for sale or hold to maturity basis (e.g. AFS Securities portfolios). Basis point Basis risk Buy-to-let CBOs/CDOs CET 1 ratio Collectively assessed impairment Commercial paper Commercial property Concentration risk Contractual maturity Core tier 1 capital CRD Credit default swaps Credit derivatives 382 One hundredth of a per cent (0.01%), so 100 basis points is 1%. Used in quoting movements in interest rates or yields on securities. A type of market risk that refers to the possibility that the change in the price of an instrument (e.g. asset, liability, derivative, etc) may not match the change in price of the associated hedge, resulting in losses arising in the Group's portfolio of financial instruments. A residential mortgage loan approved for the purpose of purchasing a residential investment property to rent out. A collateralised bond obligation (“CBO”)/collateralised debt obligation (“CDO”) is an investment vehicle (generally an SPE) which allows third party investors to make debt and/or equity investments in a vehicle containing a portfolio of loans and bonds with certain common features. In the case of synthetic CBOs/CDOs, the risk is backed by credit derivatives instead of the sale of assets (cash CBOs/CDOs). Common equity tier 1 – A measurement of a bank’s core equity capital compared with its total risk-weighted assets. Impairment assessment on a collective basis for portfolios of impaired loans that are not considered individually significant for specific provisioning. In addition, portfolios of performing loans are assessed on a collective basis to estimate the amount of losses incurred, but which have yet to be individually identified (IBNR provisions). Commercial paper is similar to a deposit and is a relatively low-risk, short-term, unsecured promissory note traded on money markets issued by companies or other entities to finance their short-term expenses. In the USA, commercial paper matures within 270 days maximum, while in Europe, it may have a maturity period of up to 365 days; although maturity is commonly 30 days in the USA and 90 days in Europe. Commercial property lending focuses primarily on the following property segments: a) Apartment complexes; b) Develop to sell; c) Office projects; d) Retail projects; e) Hotels; and f) Selective mixed-use projects and special purpose properties. Concentration risk is the risk of loss from lack of diversification, investing too heavily in one industry, one geographic area or one type of security. The period when a scheduled payment is due and payable in accordance with the terms of a financial instrument. Called-up share capital, share premium and eligible reserves plus equity non-controlling interests, less goodwill, intangible assets and supervisory deductions as specified by the Central Bank of Ireland. Capital requirements directives (‘CRD’): Capital adequacy legislation implemented by the European Union and adopted by member states. They are designed to ensure the financial soundness of credit institutions and certain investment firms. An agreement between two parties whereby one party pays the other a fixed coupon over a specified term. The other party makes no payment unless a specified credit event, such as a default, occurs, at which time a payment is made and the swap terminates. Credit default swaps are typically used by the purchaser to provide credit protection in the event of default by a counterparty. Financial instruments where credit risk connected with loans, bonds or other risk-weighted assets or market risk positions is transferred to counterparties providing credit protection. The credit risk might be the exposure inherent in a financial asset such as a loan or might be generic credit risk such as the bankruptcy risk of an entity. Allied Irish Banks, p.l.c. Annual Financial Report 2014 Credit risk Credit risk mitigation Credit risk spread The risk that one party to a financial instrument will cause a financial loss to the other party by failing to discharge an obligation. Techniques by lenders used to reduce the credit risk associated with an exposure by the application of credit risk mitigants. Examples include: collateral; guarantee; and credit protection. Credit spread can be defined as the difference in yield between a given security and a comparable benchmark government security, or the difference in value of two securities with comparable maturity and yield but different credit qualities. It gives an indication of the issuer’s or borrower’s credit quality. Criticised loans Loans requiring additional management attention over and above that normally required for the loan type. Customer accounts Debt restructuring A liability of the Group where the counterparty to the financial contract is typically a personal customer, a corporation (other than a financial institution) or the government. This caption includes various types of deposits and credit current accounts, all of which are unsecured. This is the process whereby customers in arrears, facing cash flow or financial distress, renegotiate the terms of their loan agreements in order to improve the likelihood of repayment. Restructuring may involve altering the terms of a loan agreement including a partial write down of the balance. In certain circumstances, the loan balance may be swapped for equity in the counterparty. Debt securities Assets on the Group’s balance sheet representing certificates of indebtedness of credit institutions, public bodies and other undertakings. Debt securities Liabilities of the Group which are represented by transferable certificates of indebtedness of the Group to the bearer of the in issue Default Economic capital certificates. When a customer breaches a term and/or condition of a loan agreement, a loan is deemed to be in default for case management purposes. Depending on the materiality of the default, if left unmanaged it can lead to loan impairment. Default is also used in Basel II context when a loan is either 91+ days past due or impaired, and may require additional capital to be set aside. The amount of capital which the Group needs to protect against extreme losses from a material risk it is running (e.g. credit risk, market risk). It is based on internally developed calculation methodologies and estimates, as opposed to regulatory capital, which uses a methodology determined by the Basel Accord and imposed by the Regulator. Eurozone The eurozone consists of the following eighteen European Union countries that have adopted the euro as their common currency: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain. In addition, Lithuania became a member of the Eurozone on 1 January 2015. Exposure at default First/second lien Forbearance Funded/ unfunded exposures Guarantee Home loan ICAAP Exposure at default (“EAD”) is the expected or actual amount of exposure to the borrower at the time of default. Where a property or other security is taken as collateral for a loan, first lien holders are paid before all other claims on the property. Second lien holders are subordinate to the rights of first lien holders to a property security. Forbearance is the term that is used when repayment terms of a loan contract have been renegotiated in order to make repayment terms more manageable for borrowers. Forbearance techniques have the common characteristic of rescheduling principal or interest repayments, rather than reducing them. Standard forbearance techniques employed by the Group include: - interest only; a reduction in the payment amount; a temporary deferral of payment (a moratorium); extending the term of the mortgage; and capitalising arrears amounts and related interest. Funded: Loans, advances and debt securities where funds have been given to a debtor with an obligation to repay at some future date and on specific terms. Unfunded: Unfunded exposures are those where funds have not yet been advanced to a debtor, but where a commitment exists to do so at a future date or event. An undertaking by the Group/other party to pay a creditor should a debtor fail to do so. A loan secured by a mortgage on the primary residence or second home of a borrower. Internal Capital Adequacy Assessment Process (“ICAAP”): The Group’s own assessment, through an examination of its risk profile from regulatory and economic capital perspectives, of the levels of capital that it needs to hold. Allied Irish Banks, p.l.c. Annual Financial Report 2014 383 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i n o i t a m r o n f i l a r e n e G Glossary of terms Impaired loans Loans are typically reported as impaired when interest thereon is 91 days or more past due or where a provision exists in anticipation of loss, except: (i) where there is sufficient evidence that repayment in full, including all interest up to the time of repayment (including costs) will be made within a reasonable and identifiable time period, either from realisation of security, refinancing commitment or other sources; or (ii) where there is independent evidence that the balance due, including interest, is adequately secured. Upon impairment the accrual of interest income based on the original terms of the claim is discontinued but the increase of the present value of impaired claims due to the passage of time is reported as interest income. IRBA The Internal Ratings Based Approach (“IRBA”) allows banks, subject to regulatory approval, to use their own estimates of certain risk components to derive regulatory capital requirements for credit risk across different asset classes. The relevant risk components are: Probability of Default (“PD”); Loss Given Default (“LGD”); and Exposure at Default (“EAD”). ISDA Master Agreements LCR Leveraged lending Leverage ratio Standardised contracts, developed by the International Swaps and Derivatives Association (“ISDA”), used as an umbrella under which bilateral derivatives contracts are entered into. Liquidity Coverage Ratio: The ratio of the stock of high quality liquid assets to expected net cash outflows over the next 30 days under a stress scenario. CRD IV requires that this ratio exceed 60% on 1 January 2015 and 100% on 1 January 2018. Leveraged lending involves lending to entities by leveraging off their equity structures having considered the cash generating capacity of the business and its capacity to repay any associated debt. Leveraging structures are typically used in management and private equity buy-outs, mergers and acquisitions. Leverage lending typically is to non-investment grade borrowers and carries commensurate rates of return. To prevent an excessive build-up of leverage on institutions’ balance sheets, Basel III introduces a non-risk-based leverage ratio to supplement the risk-based capital framework of Basel II. It is defined as the ratio of tier 1 capital to total exposures. Total exposures include on-balance sheet items, off-balance sheet items and derivatives, and should generally follow the accounting measure of exposure. LGD Loss Given Default (“LGD”) is the expected or actual loss in the event of default, expressed as a percentage of ‘exposure at default’. Liquidity risk The risk that Group does not have sufficient financial resources to meet its obligations as they fall due, or will have to do so at an excessive cost. This risk arises from mismatches in the timing of cash flows. Loans past due When a borrower fails to make a contractually due payment, a loan is deemed to be past due. ‘Past due days’ is a term used to describe the cumulative number of days that a missed payment is overdue. Past due days commence from the close of business on the day on which a payment is due but not received. In the case of overdrafts, past due days are counted once a borrower: – has breached an advised limit; – has been advised of a limit lower than the then current amount outstanding; or – has drawn credit without authorisation. When a borrower is past due, the entire exposure is reported as past due, rather than the amount of any excess or arrears. This is the ratio of loans and receivables compared to customer accounts as presented in the statement of financial position. Loan to deposit ratio Loan workout Loan workout is the process whereby once a loan is deemed to be criticised (i.e. ‘Watch’, ‘Vulnerable’ or ‘Impaired’), the Group monitors and reviews it regularly with the objective of working with the customer to resolve their financial difficulties, which may include restructuring, in order to maximise the level of recovery by the Group. LTV Loan to value (“LTV”) is an arithmetic calculation that expresses the amount of the loan as a percentage of the value of security/collateral. A high LTV indicates that there is less of a cushion to protect the lender against collateral price decreases or increases in the loan carrying amount if repayments are not made and interest is capitalised onto the outstanding loan balance. Medium term Medium term notes (“MTNs”) are notes issued by the Group across a range of maturities under the European Medium Term Note notes NAMA Net interest income Net interest margin Programme. National Asset Management Agency (“NAMA”) was established in 2009 as one of a number of initiatives taken by the Irish Government to address the serious problems which arose in Ireland’s banking sector as the result of excessive property lending. The amount of interest received or receivable on assets net of interest paid or payable on liabilities. Net interest margin (“NIM”) is a measure of the difference between the interest income generated on average interest earning financial assets (lendings) and the amount of interest paid on average interest bearing financial liabilities (borrowings) relative to the amount of interest-earning assets. NSFR Net Stable Funding Ratio: The ratio of available stable funding to required stable funding over a 1 year time horizon. 384 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Optionality risk A type of market risk associated with option features that are embedded within assets and liabilities on the Group's balance sheet. The embedded option features can significantly change the cash flows (and/or redemption) of the contract and can, therefore, effect its duration, yield and pricing. Examples include bonds with early call provisions or prepayment risk on a mortgage portfolio. Where these risks are left unhedged, it can result in losses arising in the Group's portfolio. OUBBs PCA Own-use bank bonds (“OUBBs”): Banks issue government-guaranteed bonds to themselves and use these bonds as collateral to procure funding from the European Central Bank. Principal components analysis (“PCA”) is a tool used to analyse the behaviour of correlated random variables. It is especially useful in explaining the behaviour of yield curves. Principal components are linear combinations of the original random variables, chosen so that they explain the behaviour of the original random variables, and so that they are independent of each other. Principal components can, therefore, be thought of as just unobservable random variables. For yield curve analysis, it is usual to perform PCA on arithmetic or logarithmic changes in interest rates. Often the data is “de-meaned”; adjusted by subtracting the mean to produce a series of zero mean random variables. When PCA is applied to yield curves, it is usually the case that the majority (> 95%) of yield curve movements can be explained using just three principal components (i.e. a parallel change, a rotation and a change of the curvature). PCA is a very useful tool in reducing the dimensionality of a yield curve analysis problem and, in particular, in projecting stressed rate scenarios. PD Probability of Default (“PD”) is the likelihood that a borrower will default on an obligation to repay. Prime loan A loan in which both the criteria used to grant the loan (loan-to-value, debt-to-income, etc.) and to assess the borrower’s history (no past due reimbursements of loans, no bankruptcy, etc.) are sufficiently conservative to rank the loan as high quality and low-risk. Re-pricing risk Re-pricing risk is a form of interest rate risk (i.e. a type of market risk) that occurs when asset and liability positions are mismatched in terms of re-pricing (as opposed to final contractual) maturity. Where these interest rate gaps are left unhedged, it can result in losses arising in the Group’s portfolio of financial instruments. Repo Repurchase Agreement (“Repo”) is a short-term funding agreement that allows a borrower to create a collateralised loan by selling a financial asset to a lender. As part of the agreement, the borrower commits to repurchase the security at a date in the future repaying the proceeds of the loan. For the counterparty to the transaction, it is termed a reverse repurchase agreement or a reverse repo. RWAs Risk weighted assets (“RWAs”) are a measure of assets (including off-balance sheet items converted into asset equivalents e.g. credit lines) which are weighted in accordance with prescribed rules and formulas as defined in the Basel Accord to reflect the risks inherent in those assets. RMBS Residential mortgage-backed securities (“RMBS”) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. Securitisation Securitisation is the process of aggregation and repackaging of non-tradable financial instruments such as loans and receivables, or company cash flow into securities that can be issued and traded in the capital markets. SLO SSM On 14 April 2011, following an application by the Irish Minister for Finance under section 29 of the Credit Institutions (Stabilisation) Act 2010, the Irish High Court issued a Subordinated Liabilities Order (the “SLO”) in relation to all outstanding subordinated liabilities and other capital instruments, with the consent of AIB. The Irish High Court declared the SLO effective as of 22 April 2011. The effect of the SLO was to amend the terms of cetain subordinated liabilities and other capital instruments. The Single Supervisory Mechanism ("SSM") is a system of financial supervision comprising the European Central Bank ("ECB") and the national competent authorities of participating EU countries whichin Ireland is the Central Bank of Ireland ("CBI"). The main aims of the SSM are to ensure the safety and soundness of the European banking system and to increase financial integration and stability in Europe. i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 385 n o i t a m r o n f i l a r e n e G Glossary of terms SME SPE/SPV Small and medium enterprises Special purpose entity (“SPE”) is a legal entity which can be a limited company or a limited partnership created to fulfil narrow or specific objectives. A company will transfer assets to the SPE for management or use by the SPE to finance a large project thereby achieving a narrow set of goals without putting the entire firm at risk. This term is used interchangeably with SPV (special purpose vehicle). Structured securities This involves non-standard lending arrangements through the structuring of assets or debt issues in accordance with customer and/or market requirements. The requirements may be concerned with funding, liquidity, risk transfer or other needs that cannot be met by an existing off the shelf product or instrument. To meet this requirement, existing products and techniques must be engineered into a tailor-made product or process. Sub-prime Extension of credit to borrowers who, at the time of the loans’ origination, exhibit characteristics indicating a significantly higher risk of default than traditional bank lending customers. Tier 1 capital A measure of a bank’s financial strength defined by the Basel Accord. It captures core tier 1 capital plus other tier 1 securities in issue, but is subject to deductions relating to the excess of expected loss on the IRBA portfolios over the IFRS provision on the IRBA portfolios, securitisation positions and material holdings in financial companies. Tier 2 capital Broadly includes qualifying subordinated debt and other tier 2 securities in issue, eligible collective impairment provisions, unrealised available for sale equity gains and revaluation reserves. It is subject to deductions relating to the excess of expected loss on the IRBA portfolios over the accounting impairment provisions on the IRBA portfolios, securitisation positions and material holdings in financial companies. Tracker mortgage A mortgage with a variable interest rate which tracks the European Central Bank (“ECB”) rate, at an agreed margin above the ECB rate and will increase or decrease within five days of an ECB rate movement. VaR The Group’s core risk measurement methodology is based on an historical simulation application of the industry standard Value at Risk (“VaR”) technique. The methodology incorporates the portfolio diversification effect within each standard risk factor (interest rate, credit spread, foreign exchange, equity, as applicable). The resulting VaR figures, calculated at the close of business each day, are an estimate of the probable maximum loss in fair value over a one day holding period that would arise from an adverse movement in market rates. This VaR metric is derived from an observation of historical prices over a period of one year and assessed at a 95% statistical confidence level (i.e. the VaR metric may be exceeded at least 5% of the time). Vulnerable loans Loans where repayment is in jeopardy from normal cash flow and may be dependent on other sources for repayment. Watch loan Loans exhibiting weakness but with the expectation that existing debt can be fully repaid from normal cash flow. Yield curve risk A type of market risk that refers to the possibility that an interest rate yield curve changes its shape unexpectedly (e.g. flattening, steepening, non-parallel shift), resulting in losses arising in the Group's portfolio of interest rate instruments. 386 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Principal addresses Ireland & Britain Group Headquarters Bankcentre, PO Box 452, Ballsbridge, Dublin 4. Telephone: + 353 1 660 0311 Website: group.aib.ie AIB Bank – Corporate & Institutional Banking, Bankcentre, Ballsbridge, Dublin 4. Telephone: + 353 1 660 0311 Facsimile: + 353 1 660 6575 AIB – Retail & Business Banking Bankcentre, Ballsbridge, Dublin 4. Telephone: + 353 1 660 0311 Facsimile: + 353 1 660 3063 First Trust Bank First Trust Centre, 92 Ann Street, Belfast BT1 3HH. Telephone: + 44 28 9032 5599 From RoI: 048 9032 5599 Allied Irish Bank (GB) St Helen’s, 1 Undershaft, London EC3A 8AB. Telephone: + 44 20 7647 3300 Facsimile: + 44 20 7629 2376 AIB Finance and Leasing Bankcentre, Ballsbridge, Dublin 4. Telephone: + 353 1 660 0311 Facsimile: + 353 1 641 6529 AIB Customer Treasury Services Bankcentre, Ballsbridge, Dublin 4. Telephone: + 353 1 660 0311 Facsimile: + 353 1 660 6575 AIB Commercial Finance Limited Bankcentre, Ballsbridge, USA AIB Corporate Banking North America 1345 Avenue of the Americas, 10th Floor, New York, New York 10105. Telephone: + 1 212 339 8000 AIB Customer Treasury Services 1345 Avenue of the Americas, 10th Floor, New York, New York 10105. Telephone: + 1 212 339 8000 Dublin 4. Telephone: + 353 1 667 0233 Facsimile: + 353 1 667 0250 AIB Corporate Banking Britain St Helen’s, 1 Undershaft, London EC3A 8AB. Telephone: + 44 207 090 7130 Facsimile: + 44 207 090 7100 EBS Limited The EBS Building, 2 Burlington Road, Dublin 4. Telephone: + 353 1 665 9000 Facsimile: + 353 1 874 7416 AIB Financial Solutions Group Bankcentre, PO Box 452, Ballsbridge, Dublin 4. Telephone: + 353 1 660 0311 AIB Arrears Support Unit Bankcentre, PO Box 452, Ballsbridge, Dublin 4. Telephone: + 353 1 660 0311 AIB Third Party Servicing Bankcentre, PO Box 452, Ballsbridge, Dublin 4. Telephone: + 353 1 660 0311 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i 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). Allied Irish Banks, p.l.c. Annual Financial Report 2014 387 n o i t a m r o n f i l a r e n e G E Earnings per share Employees Exchange rates M Market risk 252 321 322 F Fair value of financial instruments N NAMA senior bonds NAMA subordinated bond 294 Net fee and commission income Finance leases and hire purchase Net trading income contracts Financial and other information Financial assets and financial liabilities by contractual residual maturity Financial calendar Financial investments 261 322 147 381 available for sale 127 and 263 Financial liabilities by undiscounted contractual maturity Financial statements Forbearance Foreign exchange risk Forward looking information G Glossary Going concern Governance and oversight Group Internal Audit I Income statement Independent auditor’s report Intangible assets Interest income Interest expense Interest rate risk (non-trading) Interest rate sensitivity Investments in Group undertakings Irish Government L Liquidity risk Loans and receivables to banks Loans and receivables to customers 148 188 130 156 2 382 195 157 172 223 190 268 237 237 150 305 344 314 139 260 260 Nomination and Corporate Governance Committee Non-adjusting events after the reporting period Notes to the financial statements O Off balance sheet arrangements Offsetting financial assets and financial liabilities Operating and financial review Operational risk Other liabilities Other operating income Own shares P Parent company risk information Pension risk Principal addresses Profit on disposal of property Profit/(loss) on disposal/transfer of loans and receivables Property, plant and equipment Prospective accounting changes Provision for impairment on financial investments available for sale Provisions for impairment on loans and receivables Provisions for liabilities and commitments 150 262 263 237 238 174 325 230 290 281 28 154 274 239 279 371 156 387 247 238 269 215 247 261 275 Index A Accounting policies Administrative expenses Annual General Meeting Allied Irish Banks, p.l.c. (Parent company) financial statements and notes Approval of financial statements Associated undertakings Audit Committee Auditor’s fees Average balance sheets and interest rates B Board Committees Board and Executive Officers C Capital adequacy information Capital management Capital reserves Capital redemption reserves Chairman’s statement Chief Executive’s review Commitments Company secretary Contingent liabilities and commitments Capital contributions Corporate Governance Statement Corporate Social Responsibility Credit ratings Credit risk Critical accounting judgements and estimates Currency information Customer accounts D Debt securities in issue Deferred taxation Deposits by central banks and banks Derivative financial instruments Directors Directors’ interests Directors’ remuneration Discontinued operations Disposal groups and non-current assets held for sale Disposal of businesses Distributions on equity shares Dividend income Dividends 193 239 381 326 325 266 171 248 323 171 158 47 45 280 280 4 6 320 169 285 280 167 24 123 60 218 322 274 274 270 273 255 158 183 180 251 253 247 253 237 325 388 Allied Irish Banks, p.l.c. Annual Financial Report 2014 Index (continued) R Regulatory compliance Regulatory compliance risk Related party transactions Remuneration report Report of the Directors Retirement benefits Risk appetite Risk framework Risk governance structure Risk identification and assessment process Risk management Risk management and internal controls S Schedule to Report of the Directors Segmental information Share-based compensation schemes Share capital Statement of cash flows Statement of comprehensive income Statements of changes in equity Statement of Directors’ responsibilities Statement of financial position Stock exchange listings Subordinated liabilities and other capital instruments Subsidiaries and consolidated structured entities Supervision and regulation T Taxation Trading portfolio financial assets Transferred financial assets W Website 321 155 309 179 161 241 57 57 58 59 50 177 163 231 240 277 226 224 228 189 225 381 276 288 185 249 254 290 381 i w e v e r s s e n s u B i t n e m e g a n a m k s R i i t h g s r e v o d n a e c n a n r e v o G s t n e m e t a t s l i a c n a n F i Allied Irish Banks, p.l.c. Annual Financial Report 2014 389 n o i t a m r o n f i l a r e n e G AIB Group, Bankcentre, PO Box 452, Dublin 4, Ireland T: + 353 (1) 660 0311 group.aib.ie © AIB GROUP 2015 Design and print management by Custodian Consultancy, 33 Lower Leeson Street, Dublin 2, Ireland The paper used in this production has been sourced from a sustainably managed forest 

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