Allied Irish Bank
Annual Report 2016

Plain-text annual report

Annual Financial Report 2016 For the financial year ended31 December 2016Allied Irish Banks, p.l.c AIB Description AIB is a financial services group operating mainly in the Republic of Ireland and the UK. We provide a broad 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. Our business has been restructured in recent years and is now a customer focused, profitable and lower risk institution. We are well positioned to continue to support the Irish economy while generating sustainable shareholder returns. Contents 2016 Financial Summary Chairman’s statement Chief Executive’s review Governance at a glance Sustainable Banking Business review Operating and financial review Capital management Risk management Principal risks and uncertainties Framework Individual risk types Governance and oversight The Board The Leadership Team Group Directors’ Report Schedule to Group Directors’ report Corporate Governance report Report of the Board Audit Committee Report of the Board Risk Committee Report of the Nomination and Corporate Governance Committee Report of the Remuneration Committee Corporate Governance Remuneration statement Viability statement Internal Controls Other governance information Supervision and Regulation Financial statements Statement of Directors’ responsibilities Independent Auditors’ Report Consolidated financial statements Notes to the consolidated financial statements Parent company financial statements Notes to the parent company financial statements General information Shareholder information New operating segments Glossary of terms Principal addresses Index Page 3 4 6 14 16 24 43 50 59 62 172 177 180 182 185 190 194 198 201 203 208 208 210 211 213 214 221 227 355 360 415 416 433 439 440 1 Annual Financial Report 2016 Forward Looking Statements 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 risks and uncertainties on pages 50 to 58 in the 2016 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 50 to 58 of the 2016 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 2016 Financial Highlights 2015 Financial Highlights Profitable and Efficient Franchise Growth Net interest margin(1) 2.25% 1.97% Cost income ratio(2) 52% 49% Profit before tax € 1,682m € 1,914m Return on equity(3) 11.1% 12.4% Continued positive NIM expansion as the spread widens between yields on assets and liabilities, in particular redemption of legacy instruments. In line with the Group’s expectation to achieve a cost income ratio of below 50% in the medium term. Sustainable underlying profit before tax in the year enhanced by net credit provision writebacks of € 294 million and exceptional items of € 207 million. Reduction due to increase in ordinary shareholders’ equity following the partial conversion of the 2009 preference shares in December 2015. New lending(4) € 8.7bn € 8.5bn Growth from strong momentum in all key sectors in Ireland and through syndicated lending in Europe and the US. UK new lending negatively impacted by uncertainty around a UK exit from the EU. Mortgage market share 36% 34% Net promoter score(5) 45 36 CET1 transitional 19.0% 15.9% fully loaded 15.3% 13.0% No 1 position in Mortgage Market Share for new lending in Ireland. Transactional NPS has increased reflecting the continued enhancement of the customer experience. Robust capital position, post proposed ordinary dividend of € 250 million, with organic capital accretion through positive effect of profits generated in the year and reduced risk weighted assets. Increase in earning loans € 0.6 billion, excluding FX impact, with new lending and loans upgraded to earning higher than redemptions and new to impaired over the year. Reduction in impaired loans reflects the continued implementation of sustainable restructure solutions for customers and improved economic conditions. Strong Balance Sheet Earning loans € 56.1bn € 57.0bn Impaired loans € 9.1bn € 13.1bn Customer accounts € 63.5bn € 63.4bn Robust funding structure underpinned by low cost deposit base. Further reduction in term deposits as current accounts continued to increase in 2016. (1)Net interest margin (“NIM”) excluding eligible liabilities guarantee (“ELG”) charge. NIM including ELG 2.23% in 2016 (2015: 1.94%). (2)Before bank levies, regulatory fees and exceptional items. Cost income ratio including these items was 54% in 2016 (2015: 64%). Exceptional items are detailed on page 30. (3)Return on average ordinary shareholders’ equity. (4)New lending for 2015 has been restated by € 0.2 billion to exclude revolving credit. (5)The Net Promoter Score or NPS is a measurement program that tracks customers’ loyalty and advocacy and ranges from -100 to 100 (Q4 2016 v Q4 2015). 3 Annual Financial Report 2016It is with great pleasure that the Board can now propose to declare a modest dividend. This is the clearest possible demonstration of the financial recovery of the bank. The dividend has been set at a level which the Board feels is sustainable and offers prospects for growth. Chairman’s Statement Richard Pym Chairman Chairing a banking institution is a challenging role, however, introducing an annual report which shows as much progress as this report does is one of the better moments. I don’t want to hide from what went before, but the recovery story is a good one. It is thus with great pleasure that the Board can now propose to declare a modest dividend for the financial year ending December 2016. Once the accounts are received at the AGM in April and subject to shareholder approval, a dividend of €250 million will be paid on 9 May to shareholders on the register on the record date of 24 March. This is the clearest possible demonstration of the financial recovery of the bank. The dividend has been set at a level which the Board feels is sustainable and offers prospects for growth. However, the Board will be very prudent and recognises the inherent financial risks in the business, particularly the continued high level of impaired loan balances. 4 These have fallen from €29 billion in 2013 to €9 billion today, but are still high compared to other major European banks. Addressing this disparity is an objective for the next few years and there are no easy solutions given the depth of the previous financial crisis and the challenges of navigating through the legal system when we need to exercise security. The results for 2016 show a profit before tax of €1.7 billion, compared to €1.9 billion the previous year reflecting strong business performance and reduced loan loss provision writebacks. Common equity tier one capital on a ‘fully loaded’ basis is 15.3%, up from 13.0% the previous year and it is this improvement which provided the opportunity for the Board to consider the dividend. The bank has undertaken a major remediation review of tracker mortgage customers for which provision was made in the accounts in 2015. The remediation process, which has made significant progress, is putting customers back on trackers and compensating them for the associated loss. We are adhering fully to the resolution framework put in place by the Central Bank of Ireland, identifying and resolving all instances of incorrect charges. I would like to apologise to those customers we have failed. We are putting it right, and if other failures come to light we will put those right too. Chairman’s statementThere are two really tough postings on a bank board, that is in chairing the audit and the risk committees, and I appreciate the very hard work that Catherine Woods and Peter Hagan have put into these roles. The remuneration committee is chaired very effectively by Jim O’Hara even though the role of the committee is restricted in the things it can do. I would also like to thank our two executive directors Bernard Byrne, CEO, and Mark Bourke, CFO, for their efforts and success during the year. They are hugely dedicated and professional, and excellent colleagues to work with. Looking forward, we note that the Minister for Finance has appointed a syndicate of banks to prepare for the potential sale of some of the State’s shareholding in AIB which might occur in 2017. This will be dependent on the state of the financial markets and the Minister will want to ensure good value for taxpayers. Following the proposed payment of the ordinary share dividend of €250 million, we will have returned €6.8 billion to the government by way of dividend, capital, fees and coupons. The Board has an objective to enable taxpayers to recover in full their investment of €20.8 billion over time and a share listing and sale would be another step in that direction. The decision is in the hands of the Minister, but the bank will be ready when he decides and a successful conclusion would be another important step in the full rehabilitation of AIB. Richard Pym Chairman 1 March 2017 The principal risks which the bank considers are shown later in this report and I would encourage current and prospective investors to consider these carefully. In this section I have already highlighted the continued high level of impaired loan balances, the legal complexities of resolving them and also the complexities of historically sold products, but banking is an inherently very risky business and there are lots more risks to consider. In terms of economic risk, Ireland is exposed to the United Kingdom, its major trading partner, leaving the European Union. This introduces short term economic risk but it also opens up long term opportunities if firms currently located in the UK wish to retain an operational base in the EU, particularly in an English speaking one with similarities in the legal system. There are indications of such firms wanting to move and we welcome them joining us here. Ireland is a great place for international businesses to locate. However, on the downside, they will inevitably look to the local financial firms in Ireland to hire staff from and this increases the risk of loss of key staff from across the bank. We are delighted to have assembled a very high quality leadership and senior management team and they have shown huge commitment and loyalty to the bank. I would like to thank colleagues throughout the bank who have worked so hard to make these results happen and cope with all the projects and change we have thrown at them. Developing and nurturing the talent in the bank is a key board objective again for 2017. We were delighted to welcome Carolan Lennon and Brendan McDonagh who joined the Board team in 2016. They bring additional skills and experience of technology and banking to the board table. I would like to thank all the directors for their efforts on behalf of the bank. Later this year we will be publishing for the first time a sustainability report, which is commonly called a social impact report. It is not sufficient for a bank to produce good financial results if it is not also making a positive contribution to society as a whole and we have started thinking about how we can report on these issues in this new publication. I would like to thank our non-executive director Helen Normoyle who is supervising our work in this area in her role of chairing our new sustainability committee. 5 Annual Financial Report 2016Chief Executive’s Review The Group’s financial performance and current market shares demonstrate that AIB is the leading banking franchise in a growing Irish economy. AIB is now in a position to pay an ordinary dividend and I am pleased that the bank is proposing a dividend payment for the full year 2016 of €250 million. Including this dividend, AIB will have paid c. €6.8 billion in capital, fees, dividends, coupons and levies to the State. Chief Executive’s Review Bernard Byrne Chief Executive Officer Introduction I am delighted to present the 2016 results which show another year of significant progress. The Group’s financial performance and current market shares demonstrate that AIB is the leading banking franchise in a growing Irish economy. We run our business with the objective of achieving significant progress, every year, on each of our four strategic priorities: • Customer First Simple and Efficient Risk and Capital Management Talent and Culture • • • 6 Our 2016 performance confirms that this has occurred. • Our customers are more satisfied and choose us more frequently to help them achieve their financial ambitions; • Our continued progress on digital enablement has made the bank simpler and easier to operate for customers and colleagues; • Our strong profitability, with profit before tax at c. €1.7 billion in the year, has strengthened our capital base and the reduction of c. €4 billion in impaired loans has improved our risk profile; and • Our employees are more engaged and positive about the bank they work in as is clearly demonstrated by the continuing improvement in our employee engagement scores. All of this progress is driving a better outcome for our key stakeholders; our shareholders, our customers, our staff and our regulators. The highlights outlined on the following pages demonstrate the progress made in 2016 in becoming the bank we can all believe in. A further significant step on that journey has been achieved with the announcement of the intention to pay a full year dividend, for 2016, of €250 million. Financial performance In the year, our profit before tax was c. €1.7 billion. Our results continue to show strong underlying sustainable profitability of c. €1 billion. There are also some significant one-off credits, arising in the main from provision write backs as we continue to resolve the legacy impaired loan portfolios and a one-off credit from the disposal of our equity interest in Visa Europe. Our net interest margin (NIM) at 2.25% (exit Quarter 4 NIM of 2.42%) is 28bps favourable to the prior year. Combined with the strengthening and simplification of our capital we are well positioned for the future, with a robust fully loaded CET1 ratio of 15.3% (transitional 19.0%). This sound capital base, comfortably above minimum regulatory requirements, gives us the ability to support our customers, to grow our business and to reward our shareholders. We have a stable funding model and an improving credit profile. This enabled us, in 2016, to deliver good financial returns and capital repayments to our shareholder. In July, on the maturity of our Contingent Capital Notes, we made a further significant capital repayment of €1.6 billion, together with a coupon payment of €160 million, to the State. AIB is now in a position to pay an ordinary dividend and I am pleased that the bank is proposing a dividend payment for the full year 2016 of €250 million. Including this dividend, AIB will have paid c. €6.8 billion in capital, fees, dividends, coupons and levies to the State. Impaired loan balances reduced by €4 billion year on year to €9.1 billion and by c. €20 billion since 2013. The impaired loan balances are €5 billion net of specific provision cover of 44%. We have made significant progress but need to move these balances to more normalised European peer levels and this remains an area of continued focus. We maintain good momentum in the resolution of these difficult cases and our restructuring activity supports the adequacy of our provision levels. We continue to work hard to achieve satisfactory outcomes for our customers and the bank. Total costs for the year, at €1.377 billion, represent an €85 million increase on 2015 levels but a c. €360 million reduction on 2012 levels. We are focused on maintaining cost discipline as we continue to invest in the business through our three year, €870 million investment program which is delivering resilience, agility and a simple and efficient operating model focused on improving customer experience. In 2016 we saw growth in new lending in our core customer markets. There are a number of internal initiatives and external variables which have contributed to this, including the ongoing recovery of the Irish economy. We approved €12.9 billion in new lending during 2016, with actual customer drawdowns at €8.7 billion. In Ireland, mortgages were up 22%, personal lending was up 36%, business lending was up 9% and corporate lending was up 8%. Group and International (includes syndicate and international lending in the US and Europe) was up 16%. In our UK business, we saw new lending negatively impacted around the time of the UK referendum and, while lending has now returned to more normalised levels, overall drawdowns were down 20% (excluding the impact of currency movements). In summary, we have a business that is well capitalised, growing its profitability within agreed risk appetite parameters, managing its costs efficiently, investing in its future and successfully addressing significant legacy issues. All of this is being achieved by putting the customer at the heart of what we do whilst managing financial, operational and regulatory requirements. Strategic Priorities There are four strategic priorities that determine how we run our business and drive our investment programme. These priorities and the progress made on each in 2016 are set out below. 1. Customer First We put the needs of our customers at the heart of what we do. Our purpose is to help our customers achieve their financial ambition and we do that by earning their trust over time by our actions. We know that we cannot be all things to all people and thus we focus on improving the things that matter to our core customers. Here we set out our achievements on these items. Personal Customers Servicing our customers’ needs How our customers interact with us on a daily basis has changed significantly over recent years and we continue to adapt our services and how we organise ourselves to meet this change. Customers expect banking to be easy. This is mainly driven 7 Annual Financial Report 2016Chief Executive’s Review by technology because it is transforming the way banks and customers engage and now, more than ever, customers connect with us when they are ‘on the go’ – through smartphones, laptops and other mobile devices. We see this as an opportunity and we are continuing to invest heavily in technology, delivering resilience, agility and a simple and efficient operating model focused, ultimately, on delivering for our customers. It’s not all about digital interaction. We know that when it comes to making major financial decisions, either personally or for their business, customers want to discuss their needs with a professional and understand what options are available. So we continue to invest in the improvement of our branch infrastructure, with a total of 134 branches refurbished by the end of 2016, covering c. 75% of our customer base. We have the number one physical distribution network in Ireland with over 270 branches between AIB and EBS, 20 business centres and a partnership with An Post which sees banking facilities available at c. 1,100 An Post locations. We are continually adapting our distribution model to ensure it is meeting our customers’ needs. In 2016, we announced a new Local Markets structure, reorganising into 19 Local Markets to provide singular accountability and focus to achieve the goal of being ‘best bank in the community’. More and more, people need to bank outside of normal working hours so we have extended opening hours in many of our branch locations and also provide out of hour services through our banking lobbies. In 2016 we launched a partnership with Musgrave Group to offer Ireland’s only in-store banking outlet in the SuperValu flagship store in Lucan, Co. Dublin. Propositions that meet our customers’ needs It’s not just about better service. Through understanding customer needs, we know it’s also about being fair and delivering value. In 2016, we continued to share the reduction in our funding costs, demonstrating our commitment to keeping mortgage rates under review as we announced further reductions in our Standard Variable Rates (SVRs) for AIB and Haven mortgage customers. This has resulted in an overall cut of 1% in SVRs for those customers in an 18 month period. To make it easier for non-AIB customers to switch to AIB, we have introduced a proposition whereby mortgage holders can avail of up to €2,000 towards the cost of fees incurred when switching mortgage provider. We know that customers want choice and that different propositions appeal to different customers 8 and this is driving our multi brand mortgage strategy. For our EBS customers, we introduced our ‘anytime anywhere’ mortgage proposition in 2015 and in 2016 we launched a 2% back in cash offer. We did this because we know that some customers have a strong appetite for cash offers and this strategy enables them to avail of this type of offer through our EBS brand. In 2016, we also took on board customer feedback in relation to personal loan pricing. Our offering is now more competitive and our pricing more easily understood. We implemented a reduction in our personal loan pricing, including a reduction of 4% APR on personal loans up to €10,000. In making these changes we have again demonstrated our commitment to putting our customers first. When it comes to the provision of non-core banking products, for example, general insurance and bancasssurance, we typically partner with market leaders. Specifically on bancassurance, AIB partners with Irish Life. In 2016, AIB became the leading bancassurance provider in Ireland, with a combined AIB/ EBS bancassurance income market share of c.44% and a new business market share of c.37%. The benefits of focusing on the real needs of customers are clear. In 2016, AIB was the leading mortgage provider in Ireland by market share in volume and value. We saw a total increase of 27% in mortgage applications, with strong increases across all three brands. Our personal lending drawdowns increased by 36% on 2015 levels. Business and corporate customers We continue to support our business customers by providing a large range of business products and a sector specialist approach. Our 48 hour decision for SME loans less than €30,000 and extended opening hours, in addition to our partnering with the Strategic Banking Corporation of Ireland (SBCI) continue to benefit our customers. Through this SBCI partnership we have launched a total of €400 million in funds to SMEs at a market leading rate of 4.5%, representing a 2% reduction on the standard business loan rate, the cost of the reduction being shared between AIB and the SBCI. AIB is also committed to supporting and nurturing small businesses that are at the critical start-up phase. In 2016 we launched an enhanced start-up proposition and programme of supports including offering free access to internet banking to all our business customers. We also broadened the reach of the AIB Start-up Academy to offer access to training and mentoring. In light of the challenging cashflow difficulties experienced by the dairy sector in the earlier part of 2016, AIB partnered with a number of Co-Ops to provide a financial support package for their milk supplier members. The package was designed to address short term working capital needs, term solutions for farm investment needs and ongoing support and flexibility. In more recent weeks, through a risk sharing and interest subsidy agreement with the SBCI, we launched a €60 million Agri cash flow support loan fund, offering eligible customers loan facilities at a low rate of 2.95%. In 2016, we launched a next generation portable card payments terminal that allows businesses to accept card payments in a more convenient manner, ultimately benefitting our business customers in running their business and improving the experience of their customers. This year we also launched our award winning partnership with Business Centric Services Group Limited (BCSG), offering eligible SME customers the ‘mybusiness toolkit’ solution. This solution allows business customers to use a package of five apps, enabling the creation of business plans, building of a business website, efficient management of business accounts and payroll, easy recording of expenses and protection of business information. All of these tools are available ‘on the go’ from smart phone, tablet or a computer terminal. Our Corporate Banking team, structured along specialist sector lines, provides premium relationship focused service supporting large SMEs, mid-sized and institutional corporates in Ireland. A strong performance in 2016, with new lending up 8% on prior year, is reflective of increased business activity in an improving Irish economy. We remain the No. 1 bank for Foreign Direct Investment (FDI) in Ireland with a 49% market share of Irish-banked new projects announced by the IDA in 2016. AIB UK customers The decision by the UK to vote in favour of exiting the EU and the increasing likelihood of a ‘hard’ Brexit have had an impact on customer sentiment in the short term and has created some instability. The practical implications for Ireland, the UK and AIB in the longer term, as yet, are not fully known. In terms of our business, we are prepared for this period of uncertainty and we are well positioned to deal with those matters that may arise. Most importantly, we are supporting our customers whose businesses may be affected and we continue to monitor events in the UK and the international markets as they unfold from the perspective of our business and our customers. Our UK business is a separately regulated subsidiary. We continue to provide specialist industry and sectoral expertise to business banking customers, including Owner Managed Businesses (OMBs) and the corporate sector. In First Trust Bank (FTB), we service our customers through our focused challenger bank strategy, lending to niche SME sectors, providing sectoral expertise and offering a full banking service, in branch, online and through mobile. We are continuing to work to improve the operating efficiency of both businesses by investing in new capability but also reducing the cost base of the distribution network. As this work concludes this year we will have a stronger, more efficient base to grow from. Tracking our progress We want to know how our customers feel about the services we provide, so we ask them, on an ongoing basis, for their feedback. Through regular and rigorous review of this feedback, we are identifying what we do well, where we need to improve and how we must invest to make customers’ interactions simpler, more intuitive and more personalised. While we don’t always get it right, the good news is that we are making real progress and we are delivering better and more convenient services to our customers all the time. Our Transactional Net Promoter Score (NPS)* has increased by 29 points, to +45, since Quarter 4 2014. Within this overall NPS score, we track, on an ongoing basis, specific customer engagement journeys. Examples of great performance are Personal Loan Successful (+75 NPS) across branch, phone and online channels, SME Loan Successful (+60 NPS), Personal New Current Account (+58 *The Net Promoter Score or NPS is a measurement program that tracks customers’ loyalty and advocacy and ranges from -100 to +100. Transactional NPS is an average NPS for 17 key customer journeys. 9 Annual Financial Report 2016Chief Executive’s Review NPS) and Card Replacement (+58 NPS). We are encouraged by the results for these engagement journeys because we can see a correlation between them and specific initiatives we are working on. Our NPS scores also tell us where we need to do better for our customers, such as handling complaints, and this is something we are focused on. Transactional NPS 45 The overall process, as defined under the CBI framework, which includes a full independent third party review and an appeals process, will take some time to conclude. We continue to engage with our affected customers and work through this process as set out in the CBI framework. The total provision recognised in respect of this matter in the 2015 year end accounts is still considered to be adequate to address this issue. 40 39 38 2. Simple and Efficient At the start of 2015, we commenced a three year €870 million investment program, to improve our system resilience and to deliver better experiences for our customers. Two years on, we have spent over €600 million on investment in our operating platform, customer engagement channels, data and analytics. Post 2017, our focus will be on harvesting the on-going benefits from this program. Our market leading digital offerings enable our customers to bank with us how and when they wish. We now have over 1.2 million active digital customers, with 650,000 customers active on mobile banking, an increase of 23% on prior year. 72% of our personal loans are now applied for online and 53% of key products are now purchased via online channels. Customers can now apply for personal loans, mortgages and credit cards online. As mobile is our busiest channel, we regularly seek feedback from our customers as to how we can improve our market leading mobile banking app. We use this feedback to enhance this proposition – some examples of enhancements made during 2016 were credit card applications, eStatements, push notifications and open payments. Customer responses to these initiatives have exceeded our expectations. Average monthly customer interactions on mobile have risen from 23 to almost 30 in 2016, with the app being accessed almost 20 million times in the month of December. In Quarter 4 2016, we launched Android pay, offering personal and business customers the latest technology in payments. Android Pay is part of our digital enablement strategy and is another way we’re making banking more convenient and secure for our customers. It is a simple and quicker way to pay using just your mobile phone. Innovative digital offerings supporting our core customer propositions will be an area of continued focus and investment into the future. 36 33 30 26 16 13 10 11 7 1 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2013 2014 2015 2016 Legacy challenges Challenges may continue to arise as a result of legacy issues. We are committed to dealing with and resolving these as and when they emerge in a fair and equitable way for our customers. In December 2015, the Central Bank of Ireland (CBI) launched an industry wide tracker mortgage examination. As we had already mobilised a project to start to address this legacy issue, our internal review was subsumed into the wider examination and the internal work already undertaken was leveraged where appropriate. Completing this review is a key priority for AIB and we want to be sure that we deliver a fair outcome for all affected customers who were incorrectly treated. We have completed a significant amount of work and made material progress throughout 2016 on this program. Our review has found that, in some instances, we were not sufficiently clear with customers or we failed to honour contractual commitments. On behalf of the bank I apologise to customers for these failures which should not have happened and which we are now putting right. We have engaged with and paid redress and compensation, where applicable, to c. 2,600 customer accounts identified to date. 10 We also continue to simplify and automate our processes. Another good example of this is in relation to AIB’s new car finance process. We have reinvented our proposition for car finance intermediaries and brought it into the digital age. Dealerships now have a system to enable customers to apply, get a decision and get the funds to purchase new and used cars – all through an AIB digital process which is quick and highly automated. These key fundamentals underpin the AIB car finance digital proposition across 300 dealerships in Ireland. 3. Risk and Capital Management Our strong risk management framework and credit underwriting standards are delivering improved asset quality, further reductions in impaired loans and progress in relation to legacy customer challenges. The capital reorganisation and share consolidation in December 2015 resulted in the normalisation of our capital structure. Over the last couple of years, we have made significant capital repayments to the State and, including the proposed dividend, we will have paid a total of €6.8 billion in capital, fees, dividends, coupons and levies to the State. Positioning the bank to allow the repayment, in full, of the funds invested by the State in AIB continues to be a priority. Maintaining appropriately strong capital ratios is also a priority and we have achieved this while still delivering a strong financial performance, value for our customers and returning material amounts of capital. I am pleased that we continue to move forward with today’s announcement of a 2016 full year dividend payment. The bank’s liquidity position has continued to normalise throughout 2016. All of our liquidity metrics are comfortably above regulatory minimums through our focus on growing customer deposits as well as rebuilding our wholesale presence in secured, unsecured and hybrid markets. Five years ago, AIB had limited access to international markets and was borrowing €31 billion from the ECB to fund its balance sheet. As at December 2016, this borrowing was normalised at €1.9 billion. One area of volatility over the past few years has been the movement in the accounting estimate of the deficit on our defined benefit (DB) pension schemes. While movements in long term discount rates and inflation assumptions are important in this regard, so too is the assumption around long term increases in pensions in payment. In 2012 the Board instigated a five year moratorium on any increases to pensions arising under the DB scheme. As this arrangement expires, the Board has now put in place a formal annual process that allows it to consider, every year, what discretionary increase in pensions in payment it should fund for that year. For 2017 this remains at zero and this will be reviewed again by the Board in 2018 and then again every year thereafter. Our Risk Weighted Assets (“RWAs”) are primarily driven by volume and quality of credit exposures. In 2016, gross impaired loans fell by €4 billion (net of provisions €1.9 billion), and overall net customer loan balances reduced by €2.6 billion (partly impacted by the sterling foreign exchange rate). In addition, the continued improvement in the economy was reflected in the improvement in credit quality of the customer loan portfolio. The combined impact was a reduction in credit RWAs of €4.8 billion. The Group uses Risk Adjusted Return on Capital (“RAROC”) for capital allocation purposes and as a behavioural driver of sound risk management. The methodology and models continue to be improved. The usage of RAROC for portfolio management and in lending decisions has increased in the last year and is a key consideration for pricing of all lending products, both at portfolio level and individually for large transactions. 4. Talent and Culture We are a services business and our people are our most important asset because through their daily interactions with customers, they determine how our customers feel about our brand. Our people, coupled with our values, are the cornerstones on which our culture and continued success are built. Having the right culture throughout the entire organisation is critical, and together, we are working to achieve that. At a Leadership Team level, we have a diversified group of highly skilled senior executives. Some have long standing experience of financial services, the banking industry and AIB, whilst others bring a depth and breadth of non-banking related knowledge. This mix of skillsets complement each other and ensure that diverse views are aired and considered when decisions are being made. Since the crisis of 2008 and its aftermath, the banking sector has, at times, been a challenging environment to work in and has demanded personal and professional investment, by our people, of significant time, effort and emotional resilience. Over the last four years, we have seen a material change in our workforce – a net decrease of c. 3,000 employees with 7,400 colleagues leaving the organisation and 4,400 new colleagues joining. That’s a significant amount of change. 11 Annual Financial Report 2016Chief Executive’s Review Against this backdrop, AIB has transformed for the better and that is down to our people. Their dedication and resolve has been central to our transformation and I take pride in leading this bank and by extension the people who work within it. I was pleased to see our employee engagement scores, through our iConnect employee survey, continue on a positive trajectory this year. A key measure of our progress is how we rank against other organisations. For this, we track our average score on the questions that measure employee engagement. That score rose to 4.08 (out of a maximum of 5) in 2016. This is up from 3.96 in 2015, putting us on the 52nd percentile of organisations. When we started our engagement journey in 2013, we were on the 5th percentile of the Gallup database, which meant that 95% of companies were doing better than us. Today we are in the top half of companies and the results confirm the real progress we are making on our people agenda despite the challenges and change we have faced. In 2016, it was good to see a continued return to more normalised reward through agreement with the Financial Services Union (FSU) on improving pay arrangements for employees. This outcome takes account of our profitability and the outstanding debt we owe to the State, as well as wider reward trends in the industry. It’s great to see all of the hard work continuing to pay off as is evidenced in these strong financial results and our improving customer satisfaction levels. I would like to acknowledge and thank my colleagues for their ongoing dedication and commitment as we continue to respond to our customers’ needs and in so doing, evolve this business. We hold key leading market shares across personal and business lines as follows: Strong market share positions in retail and business banking - stock #1 Mortgages #1 Personal Main Current Accounts #1 Personal Loans #1 Personal Credit Cards(1) #1 Business Main Current Accounts #2 Business Main Loans #1 Business Main Leasing #2 Business Credit Cards Our market position 44% When we think about how strong our market position is, we consider a significant number of factors. For example, how clearly defined is the market, how many customers do we have in that market and how active are these customers? When it comes to considering credit we think about the size of our current lending to each sector in the market and our share of the flow of new business. We measure the level of approvals and drawdowns but focus on the movements in balance sheet and the size of the overall commitment. Thus when it comes to personal, business and corporate markets in Ireland we are satisfied that we are the number one bank. This is because we have more customers and more balance sheet commitment in Ireland than any other provider in the marketplace. 12 37% 36% 36% 22% 26% Personal Current Accounts(2) Personal Loans(3) Mortgages(2) Leasing(4) Business Current Accounts Main Business Loans Source: Ipsos MRBI AIB Personal Tracker 2016; AIB SME Financial Monitor 2016, BPFI - 2016 (1) Joint number 1 position (2) New lending flow 2016 (3) Amongst banks; excludes car finance (4) Main business leasing agreement of Global Coordinators as a positive development. Clearly, the timing of any IPO is a matter for the Government. We are ready to play our part in the execution of any transaction and, in the normal course of business, we continue to actively engage with the market and potential investors. Our ambition is to be at the heart of our customers’ financial lives by always being useful, always informing and always providing an exceptional customer experience. We will deliver a bank with compelling, sustainable capital returns and a considered, transparent and controlled risk profile. To help us achieve this we have worked hard to enhance our strategy and prioritise the key areas of focus where we will differentiate ourselves. It’s all about the customer, keeping things simple, managing risk well, having great people working in the bank and maintaining focus on the areas that we believe will deliver real growth. These items are determining the initiatives we commit to. 2016 has been another good year for AIB. Our business has performed well and we have started 2017 in a positive manner. I am proud of what we continue to deliver and the significant progress we are making. I want to thank my many colleagues, our Chairman and fellow Board members and the Leadership Team for the ongoing support that I receive in fulfilling my role as CEO. Together, we are confident that we are delivering a better bank. A bank that our employees, customers and stakeholders can really believe in. Bernard Byrne Chief Executive Officer 1 March 2017 Outlook and priorities for 2017 On the domestic front, Ireland is a growing economy with continuing attractive banking market dynamics. GDP growth in Ireland, taking into consideration the possible implications of Brexit, is currently forecast to be between 3% and 4%, per annum over the next three years. This is above the growth forecast for the Eurozone of c. 1.5% per annum. In terms of national employment, total employment levels continue to rise, with unemployment below 7%, back to pre-crisis levels. All of this continues to provide a positive domestic environment for the bank to operate in and the strength of our franchise affords opportunities to grow profitability as the economy develops. Whilst housing completions in Ireland continue to be well below the required demand level, we are seeing an increase in activity, albeit at a slow pace and off a low base. The Government has recently introduced some initiatives in this regard and AIB is supporting these initiatives whilst also focusing on what more we can do to meet customer and larger infrastructure needs within this area. SMEs are the backbone on which this economy is built and the SME credit market is forecast to return to growth in the coming years. We are well positioned to continue to support SMEs as this happens. Against these positives there are plenty of challenges. There are macro uncertainties which we face. The aftermath and implications of a UK exit from the EU has led to economic uncertainty. Globally there is significant political change and uncertainty. In recent weeks, there has also been increased political instability in Ireland. The impact of the evolving regulatory framework on the operating model of banks is continuing. In general it does and will continue to increase the cost of operating, the cost of lending and the levels of capital required. And there are new nimble competitors emerging all the time. The return of AIB to private ownership over time is something we believe will benefit the business as we face into these challenges. It will, of course, also aid in ensuring further significant repayments to the State. There has been increased commentary on the topic of an Initial Public Offering (IPO) in recent months and we view the recent State appointment 13 Annual Financial Report 2016 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 Chief Executive Officer and Executive Leadership Team comprising strong and diverse management capability Strong and independent internal and external audit functions Effective structures and processes to identify, manage, monitor and report risk Clear organisational structure with well defined and transparent lines of accountability and responsibility Robust internal control mechanisms including sound administrative, accounting and IT systems, procedures and controls Comprehensive, coherent suite of policies, standards and procedures Well documented and executed delegation of authority framework 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. 14 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 Quality and integrity of accounting policies, financial reporting and disclosure, internal control framework and audit Risk management and compliance frameworks, risk appetite profile, concentrations and trends Board Remuneration Committee Remuneration policies and practices, remuneration of Chairman, CEO, Executive Directors and Leadership Team Board Nomination and Corporate Governance Committee Board composition, committee membership, and corporate governance policies and practices Chief Executive Officer to whom the Board has delegated responsibility for the day-to-day running and performance of the Group During 2016, the Board set up a Sustainable Business Advisory Committee, comprised of non-executive directors and senior executive management members, to support the bank with its sustainable business strategy. This includes the development and safeguarding of the bank’s ‘social license to operate’, such that AIB plays its part in helping its customers prosper. 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 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. 15 Annual Financial Report 2016Sustainable Banking Sustainable Banking Our aim from the start of AIB’s transformation programme has been to build a bank that everyone can believe in; a bank that is useful to our customers, focusing on meeting their needs and delivering services as simply and efficiently as possible. This, we believe, will result in a sustainable bank, one where all stakeholders can have enduring confidence in our operations, our practices and our strategy. Central to it is our reputation and the issue of trust. For too long there were instances where banks, including AIB, have fallen short of the standards that should be expected of them. In the immediate years following the financial crash AIB focused on bringing the bank’s finances to a stable position once again. The announcement of a full-year dividend this year – our first since 2008 – confirms this accomplishment. In recent years we have also focused on our services, investing €870 million in our business services, including our digital services, in order to make banking with AIB a simple and convenient experience. Now, to rebuild trust with all our stakeholders, we firmly commit to incorporating social and environmental considerations into our everyday decision-making. Our aim is to make AIB a recognised leader in sustainability, understanding the responsibility we hold as a financial institution operating at the heart of communities around Ireland and in our other markets. We are purposefully aiming high, and there are many areas we will address. 2016 was the 50th anniversary of the formation of AIB – an amalgamation of three constituent banks, the oldest of which was founded in 1825. Such a landmark event offered us the opportunity to reflect on our history while considering our role in the current rapidly changing, and at times volatile, economic and social environment. The pace of change – climate, politics, technology, and more – is both swift and unpredictable, and at AIB we will adapt intelligently in order to best serve our customers in the years ahead. We believe we are now well positioned to accept the challenges that lie ahead, and it is time to create the right platform from which we can rebuild trust in AIB. 16 2016: A Foundation Year As part of the Annual Financial Report 2015, AIB committed to progressing our sustainability strategy; one that is an integral part of our bank-wide commitment to put our customers first. As such, 2016 was a foundation year in the creation of a more sustainable approach to banking. Through the establishment of both AIB’s first Sustainable Business Advisory Committee (SBAC) and corresponding Office of Sustainable Business (OSB), we reached out to our stakeholders in order to identify the sustainability issues of most importance to them. This materiality exercise was undertaken in line with the most recognised standard of sustainability reporting: the Global Reporting Initiative. This exercise identified 32 material issues – the issues most pertinent to AIB’s stakeholders, and therefore to AIB itself – and it is these issues that the bank will investigate, improve, and report on in the coming years. Sustainability at the Heart of Governance Sustainable Business Advisory Committee In order to give our sustainability efforts a proper focus, the Board approved the establishment of the Sustainable Business Advisory Committee (SBAC). The SBAC is chaired by Helen Normoyle, an independent non-executive AIB Board member. The SBAC advises the Board of Directors on sustainability issues, supervising the execution of the bank’s sustainable business strategy in accordance with the approved Group Strategic and Financial Plan. The strategy includes the development and safeguarding of the bank’s ‘social licence to operate’ to help our customers prosper. In particular, the SBAC considers and advises on: Customers and Conduct; Communities/Local Markets; Employees; Environment; Reputation and Trust; and External Reporting. With a commitment to meet at least four times a year, the SBAC has met formally three times since its formation in April 2016. In addition, there have been many informal meetings along with a number of site visits to companies that are recognised leaders in sustainability. Office of Sustainable Business The Office of Sustainable Business (OSB) was established in January 2016 to advise and support AIB’s Leadership Team and the SBAC on sustainability issues. It provides guidance to policy and framework owners on aligning to sustainability standards and in 2016 it developed the bank’s first materiality evaluation of key sustainability issues. Board Board Risk Committee Board Audit Committee Board Remuneration Committee Board Nomination and Corporate Governance Committee Sustainable Business Advisory Committee Group Conduct Committee Talent and Culture Forum Sustainable Business Working Group Helen Normoyle: Chairperson of the Sustainable Business Advisory Committee Bobbie Bergin: H Tom Kinsella: Jim O’Hara: Our materiality index Chie Board Member To devise and implement a successful sustainability strategy, we sought to understand the environmental, social and governmental issues of most concern to our stakeholders. In 2016 we developed our first materiality evaluation of key sustainability issues. We identified 32 material issues, and prioritised and validated them with a representative group of 1,100 individuals, including consumers, AIB employees, not-for-profit organisations, and environmental, investor and industry groups. We conducted this materiality exercise in accordance with independent advisors KPMG and the core approach of the Global Reporting Initiative (GRI), an international leader in sustainability reporting. GRI provides the world’s most widely used standards on sustainability reporting and disclosure, helping organisations communicate the impact of their business on critical sustainability issues ranging from climate change to corruption. We chose to conduct the exercise to the standards of GRI, with the ultimate aim in mind of producing a first sustainability report. We aim to join other large organisations worldwide that report on their sustainability efforts, as part of our intention to operate fairly and transparently with the best interests of our customers at heart. 17 Annual Financial Report 2016Sustainable Banking Group Most material issues • Tailored and flexible products • Regaining trust Customer First • Pricing of products and services • Customer led innovation • Responsible products and services • Product and service transparency E Employees • Diversity and equality • Talent retention • Health and safety • Employee pay • Employee engagement • Executive pay G Governance & Stability B Business Leadership • Service and product accessibility • Financial inclusion • Sustainable supply chain • Profitability and financial stability • Tax policy and fair tax payments • Organisational governance • Business ethics • Effective risk management • Environment, society and governance (ESG) integration into lending • Stable IT systems and platforms • Customer privacy, data security • Financial literacy • Compliance with law • Influence on communities • Environmental footprint • Climate risk analysis • Stimulating economic growth • Investment in climate resilient solutions • Leadership and vision • Lending to SMEs Drawing on the 32 issues above that were identified through our materiality exercise, the below sample of figures offers further insight into the topics of most concern to consumers – both sustainability factors important to them and business practices they consider critical for banks. Sustainability Factors Important to Consumers 85% Customer privacy and data security 76% Transparency of services and products 69% Transparency of banking operations and governance 65% Pricing of products and services 61% Providing responsible services and products 56% Accessibility of services Business Practices Consumers Consider Critical for Banks 76% Regaining trust 75% Compliance with regulation and developing regulation 73% Business ethics 61% Communicating with their customers, suppliers etc 60% Stability of their IT systems and platforms 51% Risk management 18 Setting Goals and Operating Transparently The establishment of the SBAC and OSB has allowed us to bring more focus to sustainability. A key objective of our work is to bring a greater degree of transparency to what we do as a bank. We are now developing a set of leading measures around the key issues of concern identified through the materiality exercise, which we will track and report publicly over the long-term. As such, the next step in our sustainability journey is to produce a full sustainability report later this year, published in accordance with the GRI standard. Going one step further, we will then use our key performance indicators (KPIs) to measure our progress, benchmarking our goals against ISO 26000, the international standard developed to help organisations effectively assess their social responsibilities. Below is a snapshot of activities across different areas of sustainability that we are proud to have progressed in 2016. Customers Backing homes AIB is the largest provider of mortgages in the Irish market, with a 36% share of the market by drawdowns. Having implemented four mortgage rate cuts in 2016, our standard variable rate (SVR) is now a market-leading 3.4% and loan to value rates start as low as 3.1%. In keeping with our customer first agenda these rate cuts were applied to both new and existing mortgage customers, impacting 156,000 customers in 2016. We are also active in the national mission to address the housing crisis. Firstly, we are committed to financing social housing schemes in partnerships with developers, local authorities and housing authorities. And, secondly, we finance residential developments with a 10% mandatory social housing component to them. Backing brave: SMEs and start-ups We believe in the quest to encourage enterprise and entrepreneurship, realising the success of our small to medium business customers across Ireland. In so doing, we are helping to create the industries and jobs of the future. Farming is central to Irish rural society, and in 2016 our team of AIB Agri Advisors visited the main agricultural educational centres throughout the country, delivering presentations on farm finance, applying for finance and maintaining a good banking relationship. We sponsored the AIB/Teagasc All- Ireland Best Farm Business Plan Awards as well as agricultural education initiatives in University College Dublin and Waterford Institute of Technology. We also launched Young Farmer Bytes (YFB), an online information service for young farmers. Backing job creation In 2016, by way of encouraging entrepreneurship, we supported the development of two dedicated working spaces for accelerator programmes, high potential start-ups and entrepreneurs in both Skibbereen and Galway city – the Ludgate Digital Hub and Portershed respectively. These innovation centres will help embed a culture of entrepreneurship in their local communities – and across the country generally – ultimately creating industries and jobs of the future. More broadly, AIB is a significant provider of seed, venture and growth capital funding with commitments totalling €130m to 10 funds with a combined fund size of €728m. The funds have invested €177m in 166 companies, attracting matched international investment and helping create an estimated 3,600 high-quality jobs, approximately 2,200 of which are Irish jobs. 19 Annual Financial Report 2016Sustainable Banking Employees iConnect In our efforts to make AIB an attractive and effective workplace, we have been collaborating with international employee engagement experts Gallup since 2013. In partnership with Gallup, we have created iConnect, an annual survey and programme that seeks to assess levels of engagement generally and, more specifically, identify and address engagement issues among our colleagues. We have made very strong progress to date. After the first wave of iConnect, AIB’s engagement levels were in the 5th percentile; in 2016, our levels reached the 52nd percentile. This is one of the highest jumps that Gallup has witnessed. Engaged employees in AIB now significantly outnumber the actively disengaged at a ratio of 6.3:1. Towards a more diverse workplace We value the contribution that all our employees can make and we embrace that within iMatter, our Diversity & Inclusion programme. In 2016 we continued our focus on four key themes: raising awareness on the value of inclusive leadership; improving our female talent pipeline for senior roles; improving our workplace to reflect a more agile environment; and ensuring our HR policies help us ‘mind the gap’ between family leave and careers. In 2016 we delivered on our Board target of 25% female representation and became signatories to the Diversity Ireland and HM Treasury UK Women in Finance charters. Governance & Stability Profitability With the strong financial results reported in this document, we are now confident that the bank is on firm footing. We have strengthened our capital base, producing a profit before tax of €1.7 billion in 2016 allowing us to propose a dividend of €250 million. Inclusive finance AIB is committed to leading in the area of digital banking, and currently 95% of customer transactions are automated. Our €870 million investment in services included major work on our digital channels, which has resulted in more easeful and convenient interactions with our customers across the range of products. In the area of inclusive finance, AIB opened over 7,600 Basic Bank Accounts in 2016 as part of an EU-wide initiative to bring unbanked customers into the financial system and to provide access to basic payment services for financially vulnerable customers. IT stability In order to continually offer the best and most secure service to our customers, AIB is enhancing the resilience of our core systems by way of our €870 million strategic investment plan. Projects developed during the course of 2016 include: our Payments Platform Infrastructure, the replacement of the Internet Business Banking Platform, and the installation of a new Treasury platform. Our supplier impact AIB has over 2,700 active suppliers, 60% of which are based in our domestic market in the Republic of Ireland. We understand that our purchasing activity provides a cascade effect throughout an extended secondary supply chain, supporting multiple suppliers and communities located in our operating jurisdictions. Our total supplier spend in 2016 reached almost €880 million, 71% of which was in our domestic market. Number of suppliers per region (2016) Ireland 1,673 UK 867 Rest of the world 257 Value of supplier contracts Ireland €625m UK €175m Rest of the world €80m 20 Business Leadership Our local markets In 2016, AIB reorganised our business around our communities, creating 19 Local Markets across Ireland. This approach is designed to give our business and retail banking a local community focus. Each of our 19 Local Market teams have a local “owner” and are tasked with delivering exceptional customer experience in their communities. Backing our communities Time and again, staff across our 19 Local Markets put their heads together to come up with a whole host of events and initiatives to raise much-needed funds for charities close to their hearts – and the response from our customers never ceases to amaze us. From a breakfast in aid of Dogs for the Disabled in Blarney to taking part in a mini-marathon for the Gavin Glynn Foundation in Greystones, we are happy to report that the spirit of community is alive and well in AIB. Dogs for the Disabled in Blarney Mini-marathon runners in Greystones AIB has a long-standing relationship with the GAA. This is not just about our official sponsorship. In a recent AIB staff survey, 65% of the respondents either played or had children playing at club level, while over 50% had been active in their club as coaches, managers or selectors. In 2016, our sponsorship campaign, The Toughest, gave us the opportunity to engage with over 1,600 GAA clubs. Social and educational responsibility AIB also supports initiatives at a national level. For example, in 2016 we funded ‘Way of the Warrior’, a programme run by Soar, which tackles mental health in young men aged 13-17. We hope that by the end of 2018, this programme will have reached 7,500 young people across the country. We are particularly conscious of our role in education. The Build a Bank Challenge asks transition and fifth year students to set up and run a bank in their school, culminating in competitions at regional and national levels. We have a long-standing relationship with Junior Achievement Ireland (JAI), which helps children of all ages understand the benefits of staying in education. And we enjoy successful partnerships with a variety of third-level institutions. In 2016 we supported Dublin City University, University College Dublin, and Queen’s University Belfast enabling research and learning in areas of behavioural economics, data analytics and corporate leadership. Working with the environment In 2016, AIB achieved an A- rating for the first time for our efforts to tackle carbon emissions as measured by the CDP (formerly Carbon Disclosure Project). We rank fourth in the country for emissions reporting, and have experienced significant monetary savings through the adoption of our energy saving programme. This plan includes investing in a combined heat and power plant, procuring 100% green electricity wherever feasible and engaging a single supplier of gas and electricity. We have also achieved a reduction in energy by using thin-client technology to replace the traditional PC workstation. Having achieved ISO50001 (energy management) and ISO14001 (environmental management) certifications, we developed an online and interactive energy awareness course to make staff more aware of their environmental impact. This course was so successful that we have partnered with Skillnet who will provide the course to other organisations. AIB will be acknowledged on Skillnet’s sustainability website. 21 Annual Financial Report 2016Sustainable Banking Our footprint per employee Water Consumption Energy Consumption Waste Production Greenhouse Gas Emissions (Scope 1, 2 & 3) 20.5 Cubic metres 5861 kWh .315 tonnes 2.27 tCO2eq* *1 tCO2eq is equal to one tonne of carbon dioxide By the end of 2016 AIB’s electricity purchase was 100% from renewables in both the UK and Ireland. In 2020, AIB will use 33% less energy per employee compared with 2009. Promoting renewable energy Our Next Steps to Sustainable Banking Finance sanctioned for green projects in 2016 will benefit our national renewable energy targets and AIB will continue to work with companies from across the value chain, big and small, to transition Ireland away from fossil fuels. In a similar vein, AIB sponsors the Sustainable Energy Authority of Ireland (SEAI) ‘One Good Idea’ competition for primary and secondary schools, which aims to increase students’ understanding of energy efficiency and climate change by encouraging them to take individual and collective responsibility for tackling these important issues. Contestants must come up with creative ideas for an energy awareness campaign to change behaviour and improve energy efficiency in their homes, schools and communities. During 2016 we put in place the building blocks necessary to embed sustainability within AIB’s strategy, our culture and our business. We have identified 32 of the most pertinent issues to our stakeholders and the international standard by which we will benchmark our progress in the relevant areas. Our next step will be to define the leading measures and goals towards which we will progress, and we look forward to producing our first sustainability report later this year. The foundations have been laid for 2017 – and beyond. 22 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 9 Business review 1. Operating and financial review 2. Capital management Page 24 43 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 2016 23 n o i t a m r o n f i l a r e n e G Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 10 Business review - 1. Operating and financial review Basis of presentation The following operating and financial review is prepared in line with how the Group’s performance is reported to management and the Board. Profit from continuing operations before exceptional items excludes exceptional items that management believe obscure the underlying performance trends in the business. Exceptional items are presented separately and a reconciliation of the items classified as exceptional is included below. Percentages presented throughout this report are calculated on the absolute figures and therefore may differ from the percentages based on the rounded numbers. Summary income statement(1) Net interest income Business income Other items Other income Total operating income Personnel expenses General and administrative expenses Depreciation, impairment and amortisation Total operating expenses Operating profit before bank levies, regulatory fees and provisions Bank levies and regulatory fees Writeback of provisions for impairment on loans and receivables Writeback/(provisions) for liabilities and commitments Writeback of provisions for impairment on financial investments available for sale Total writeback of provisions Operating profit Associated undertakings Profit on disposal of property Profit on disposal of business Profit from continuing operations before exceptional items Restitution and restructuring expenses Gain on transfer of financial instruments Profit on disposal of Visa Europe Termination benefits Other exceptional items Total exceptional items Profit before taxation from continuing operations Income tax charge from continuing operations Profit for the year 2016 € m 2,013 493 124 617 2,630 (717) (566) (94) (1,377) 1,253 (112) 294 2 2 298 1,439 35 - 1 1,475 (58) 17 272 (24) - 207 1,682 (326) 1,356 2015 € m 1,927 533 163 696 2,623 (725) (493) (2) (74) (1,292) 1,331 (71) (2) 925 (2) - 923 2,183 25 3 - 2,211 (250) 5 - (37) (15) (2) (297) 1,914 (534) 1,380 % change 4 -8 -24 -11 - -1 15 27 7 -6 58 -68 - - -68 -34 40 - - -33 - - - - - - -12 -39 -2 Operating contribution before bank levies, regulatory fees and provisions by segment € m AIB Ireland AIB UK Group & International Operating profit before bank levies, regulatory fees and provisions 1,096 171 (14) 1,253 € m 1,048 177 106 1,331 % change 5 -3 - -6 (1)The impact of currency movements is calculated by comparing the results for the current reporting period to results for the comparative period retranslated at exchange rates for the current reporting period. This impact is set out in the following pages. (2)Other regulatory fees previously presented within general and administrative expenses and exceptional items of € 3 million have been represented as bank levies and regulatory fees for 2015. 24 Allied Irish Banks, p.l.c. Annual Financial Report 2016 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 11 Overview of results Net interest income €2,013m €1,927m Other income €617m €696m Operating expenses €1,377m €1,292m 2016 Performance Net interest income rose by 4% driven by an increase of 28bps in NIM(1) to 2.25% as spread between assets and liabilities widened, in particular from redemption of legacy instruments, and the improved profile of average customer loans. Net fee and commission income is in line with the previous year reflecting the stable nature of this income stream. Movements in longer term customer derivative positions resulted in lower net trading income. Lower profits on AFS disposals were partly offset by higher income from the realisation/re-estimation of cashflows on loans and receivables previously restructured. Operating expenses are in line with expectations. Factors impacting costs include outsourcing for future resilience, salary inflation, business initiatives for growth and efficiency, continued investment in loan restructuring operations and impact of increased regulatory compliance. Bank levies and regulatory fees €112m €71m Bank levies and regulatory fees in 2016 of € 112 million relating to the Irish bank levy of € 60 million, the Deposit Guarantee Scheme (“DGS”) of € 35 million (€ 8 million relates to DGS legacy fund) and the Single Resolution Fund (“SRF”) of € 18 million. Outlook Positive NIM(1) trajectory to continue with Q4 2016 exit NIM of 2.42%. Continued stability of net fee and commission income is expected, with net trading income dependent on future market volatility and interest rate movements, and other items dependent on once off activity. Investment programme of € 870 million from 2015 - 2017 is expected to deliver additional efficiencies and productivity enhancements from further simplification and digitalisation. Continued focus achieving a sustainable cost income ratio of below 50% in the medium term. The Irish bank levy is expected to be lower by € 12 million in 2017 due to revised legislation. Writeback of provisions for impairment on loans and receivables €294m €925m Total exceptional items €207m (€297m) The Group continues to make good progress on case by case restructuring of customers in difficulty. Net credit writeback for the year included a new to impaired charge of € 281 million. Pace and quantum of writebacks are moderating as the primary restructuring period is concluding, with higher number of complex cases at lower value. Total exceptional items in 2016 were a net credit of € 207 million compared to a net charge of € 297 million in 2015. The increase was mainly due to a profit on the disposal of the equity interest in Visa Europe of € 272 million in H1 2016. For further detail on exceptional items see page 30. 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 Profit before tax €1,682m €1,914m The Group performed strongly in 2016, with a profit before tax of € 1,682 million, benefitting from net credit provision writebacks of € 294 million (€ 925 million net writeback in 2015). Organic capital accretion from proven sustainable profit supporting growth. (1)Net interest margin (“NIM”) excluding eligible liabilities guarantee (“ELG”) charge. Allied Irish Banks, p.l.c. Annual Financial Report 2016 n o i t a m r o n f i l a r e n e G 25 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 12 Business review - 1. Operating and financial review Net interest income Net interest income €2,013m €1,927m Net interest margin excluding ELG 2.25% 1.97% strategic focus on customers. Yields on financial investments available for sale reduced through the mix of sales, maturities and purchases and the lower market rate environment. NAMA senior bonds yields, linked to market interest rates, reduced year on year. Net interest income 2016 € m Net interest income 2,013 Average interest earning assets 90,181 NIM excluding ELG NIM % 2.25 2.23 2015 % € m change 1,927 99,272 4 -9 % change 1.97 1.94 0.28 0.29 Lower average interest earning assets Average interest earning assets of € 90.2 billion in 2016 reduced from € 99.3 billion in 2015 mainly due to redemptions of NAMA senior bonds of € 4.0 billion and lower loans and receivables to customers of € 2.8 billion driven by restructuring activity on impaired loans. Further decreases were from reduction in financial investments of € 1.3 billion to align with liquidity requirements and lower other interest earning assets of € 1.1 billion due to a reduction in loans and receivables to banks. Net interest income €2,013m €1,927m excluding the impact of currency movements underlying net interest € 86 million (+4%) compared to 2015, Net interest income increased by income increased by € 117 million. Drivers of net interest margin(1) 2.84 2.85 2.87 2.88 Significant reductions in funding costs. €560m €864m The reduction in cost of funds was driven by a lower funding requirement from lower assets and lower average yields. The 2016 average yield of 97 bps reduced from 126 bps in 2015 as a result of the redemption of Contingent Capital Notes in July 2016, the continued downward deposit pricing actions and the positive mix impact from a reduction in high interest bearing corporate and treasury deposits to an increase in non interest bearing retail current accounts. The European Central Bank (“ECB”) moved the main refinancing operations rate to nil and short term Euribor rates moved further into negative territory 1.53 1.64 1.68 2.15 during 2016 positively impacting funding costs. 1.31 1.21 1.19 0.73 H1 2015 H2 2015 H1 2016 H2 2016 Asset yield Cost of funds (excluding ELG) Reduction in ELG charge €17m €30m The ELG charge reduced by € 13 million compared to 2015. As existing liabilities that are covered by the scheme mature, the ELG charges will reduce. The total liabilities guaranteed under the ELG scheme at 31 December 2016 amounted to € 1.1 billion (€ 1.8 billion at 31 December 2015). % 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Net interest income increase was driven by a significant reduction in the cost of funds while marginally growing the average asset yield. The yield gap between assets and liabilities has widened by 62 bps from half year ending June 2015 to half year ending December 2016. Growth in average asset yield combined with a reduction in average interest earning assets €2,590m €2,821m Net increase of average asset yield The 2016 average asset yield of 287 bps was 3 bps higher than 2015. Although individual interest yields decreased in 2016 compared to 2015, the mix of assets changed to a higher percentage in customer loans with the reduction of lower yielding NAMA senior bonds. Yields on loans and receivables to customers remained stable with mortgage rate reductions offset by the run off of lower yielding tracker loans (average volume € 1.3 billion lower than 2015). The mortgage rate reductions were part of the multi-proposition mortgage approach, underpinning the Group’s € m 1,500 1,200 900 600 300 0 (300) (600) Net interest income(1) 1,415 1,406 940 987 1,313 945 1,277 1,068 H1 2015 H2 2015 H1 2016 H2 2016 (475) (419) (368) (209) Net interest income Interest on assets Interest on liabilities (including ELG) (1)Represents interest income or expense recognised net of interest on derivatives which are in a hedge relationship with the relevant asset or liability. 26 Allied Irish Banks, p.l.c. Annual Financial Report 2016 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 13 Net interest margin (“NIM”) Net interest margin excluding ELG 2.25% 1.97% The Group NIM has continued in a positive trajectory throughout 2016. Structural factors impacting 2016 NIM: Contingent capital notes: • Fully redeemed in July 2016 • 30 bps positive impact on Q4 2016 exit NIM of 2.42%. NAMA senior bonds: • Low yielding assets continued to be redeemed. • These bonds are expected to be fully redeemed by the end of 2017. • 2016 NIM excluding ELG and NAMA senior bonds was 2.33%. The table below provides a summary of the Group’s average balance sheet, volumes and yields. Average balance sheet(1) € bn 150.0 100.0 50.0 0.0 Net interest margin trend 2.01% 2.08% 2.42% 97.9 92.1 88.3 1.92% 100.6 H1 2015 H2 2015 H1 2016 H2 2016 Average interest earning assets NIM excluding ELG Assets Loans and receivables to customers NAMA senior bonds Financial investments available for sale Financial investments held to maturity Other interest earning assets Average interest earning assets Non interest earning assets Total assets Liabilities & equity Deposits by banks Customer accounts Subordinated liabilities Other debt issued Average interest earning liabilities Non interest earning liabilities Equity Total liabilities & equity Net interest income excluding ELG Eligible liabilities guarantee (“ELG”) Net interest income including ELG Year ended 31 December 2016 Interest(2) Average rate % € m 2,248 11 182 131 18 2,590 3.62 0.30 1.22 3.83 0.30 2.87 Average balance € m 62,116 3,644 14,925 3,419 6,077 90,181 8,005 Year ended 31 December 2015 Average balance € m Interest(2) Average rate % € m 64,868 7,614 19,503 106 7,181 99,272 7,557 2,363 31 398 4 25 2,821 3.64 0.41 2.04 3.76 0.36 2.84 98,186 2,590 106,829 2,821 9,728 38,894 1,629 7,474 57,725 28,056 12,405 98,186 (13) (0.13) 0.83 12.22 0.67 0.97 324 199 50 560 560 2,030 (17) 2,013 2.25 (0.02) 2.23 4 490 278 92 864 0.03 1.12 17.10 1.23 1.26 15,734 43,777 1,625 7,475 68,611 25,985 12,233 106,829 864 1,957 1.97 (30) (0.03) 1,927 1.94 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)Differences on the Average balance sheet to note 56 of the consolidated financial statements include: a) the cost of ELG in interest within liabilities and equity. b) other interest earning assets are split into Trading portfolio financial assets less liabilities and Loans and receivables to banks. (2)Interest on any assets or liabilities in hedge relationships include the net interest on the related derivatives. Please note 2015 comparative has been restated to reflect the same. Allied Irish Banks, p.l.c. Annual Financial Report 2016 n o i t a m r o n f i l a r e n e G 27 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 14 Business review - 1. Operating and financial review Other income Other income €617m €696m Business income €493m €533m Other items €124m €163m Other income Net fee and commission income Dividend income Net trading income Miscellaneous business income Business income Net profit on disposal of AFS securities Effect of acceleration of the timing of cash flows on NAMA senior bonds Settlements and other gains Other items Other income 2016 € m 395 26 68 4 493 31 10 83 124 617 2015 % € m change 405 26 87 15 533 85 6 72 163 696 -2 - -22 -73 -8 -64 67 15 -24 -11 Card spend increased by 9% year on year with the corresponding transaction activity increasing by 17%. This reflects the rise in smaller value transactions completed through point of sale and contactless. Dividend income €26m €26m Dividend income of € 26 million was in line with 2015. € 25 million was received on NAMA subordinated bonds in both years. Net trading income €68m €87m The reduction in net trading income was mainly due to movement in valuations on the Group’s long term customer derivative positions. Following fluctuation in long term sterling interest rates and interest rate volatility throughout 2016, the position reversed by the year end, with a net positive movement of € 1 million overall. This compares to a positive movement in 2015 of € 17 million. The customer foreign exchange business income was flat in 2016 compared to 2015, notwithstanding the negative impact on this activity related to the UK referendum to exit the European Union. Other items €124m €163m Net profit on disposal of AFS securities €31m €85m Net profit of € 31 million in 2016 from the disposal of available for sale securities. Sales and purchases of AFS are Other income €617m €696m Other income reduced by € 79 million managed in line with liquidity requirements. (-11%) compared to 2015, excluding the impact of currency movements underlying other income reduced by € 71 million. Acceleration of the timing of cash flows on NAMA senior bonds €10m €6m A gain of € 10 million was recognised on NAMA senior bonds reflecting accelerated repayments following Decline in other income was driven by reduced levels of AFS redemptions of € 3.8 billion in 2016. disposals and movement of valuations on long-term derivatives as net fee and commission income remained stable. Settlements and other gains Business income €493m €533m Net fee and commission income 405 51 48 85 221 395 44 51 83 217 € m 500 375 250 125 0 Settlements and other gains Effect of realisation/re-estimation of cash flows on loans and receivables previously restructured(1) Fair value gain on equity warrants Net gain on buyback of debt securities in issue Income on settlement of claims Loss on disposal of loans Settlements and other gains 2016 € m 85 3 1 - (6) 83 2015 € m 45 8 8 38 (27) 72 2015 2016 Customer accounts Card Lending related fees Other fees and commissions €83m €72m The realisation/re-estimation of cash flows on loans and receivables previously restructured resulted in income received of € 85 million in 2016. Net fee and commission income €395m €405m Net fee and commission income of € 395 million in 2016 was stable excluding the impact of currency movements. The loss on disposal of loans of € 6 million mainly related to the completion of loan disposals in the UK, process began in 2015 with a reported loss of € 39 million. 2015 also included profit of The reduced card income in 2016 from the impact of the changes in € 12 million on disposal of corporate loans. EU fee regulation on interchange rates was somewhat offset by increase in card spend and lending related fees. (1)For further detail please see pages 143 to 144. 28 Allied Irish Banks, p.l.c. Annual Financial Report 2016 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 15 Total operating expenses Total operating expenses(1) €1,377m €1,292m Cost income ratio(1) 52% 49% Personnel expenses €717m €725m Personnel expenses decreased by € 8 million compared to 2015 due to lower average staff numbers offset by salary increases based on the recommendation of the Workplace Relations Commission. Operating expenses Personnel expenses General and administrative expenses Depreciation, impairment and amortisation Total operating expenses before exceptional items 2016 € m 717 566 94 725 493 74 1,377 1,292 Staff numbers at period end (FTE)(2) 10,376 Average staff numbers (FTE)(2) 10,226 10,204 10,663 Total operating expenses(1) €1,377m €1,292m Total operating expenses increased by € 85 million (+7%) compared to 2015, excluding the impact of currency movements underlying operating expenses increased by € 105 million. 2015 % € m change Average staff numbers of 10,226 reduced by 437 (-4%) mainly due to the severance scheme in 2015 and 2016 and continued -1 15 27 7 2 -4 selective outsourcing. Staff numbers throughout 2016 increased as the Group continued to invest in its loan restructuring operations and responded to increasing regulatory compliance requirements. General and administrative expenses €566m €493m The increase of € 73 million (+15%) compared to 2015 was mainly due to increased costs relating to selective outsourcing, marketing and spend on the investment programme. Depreciation, impairment and amortisation €94m €74m The charge increased by € 20 million (+27%) compared to 2015 due to asset investments now in use in the business. Cost income ratio(1) 52% 49% Costs of € 1,377 million and income € 2,630 million resulted in a ratio(1) of From 2012 to 2015 the Group underwent a structured cost reduction 52% in 2016 compared to 49% in 2015 driven by the increase in programme and achieved a 26% (€ 450 million) reduction in the period. The increased cost base in 2016 compared to 2015 was due to selective outsourcing and the impact of the € 870 million investment programme. Outsourcing partnerships increase reliability, resilience and quality of IT infrastructures and other enterprise services. This strategic resourcing model has enabled the Group to focus and invest in its core banking activities. The investment programme is primarily focused on transforming the customer experience, simplifying internal processes and improving efficiency. The programme also includes investment on regulatory requirements and the sustainment and maintenance of legacy costs in 2016. The cost income ratio of 52% is in line with the Group’s expectations, it is on track to achieve a sustainable cost income ratio of less than 50% in the medium term. € m 2,000 1,500 1,000 48% 1,349 99 310 940 Cost income ratio 51% 55% 1,274 64 223 987 1,240 72 223 945 50% 1,390 52 270 1,068 500 646 646 677 700 systems. € m 1,000 800 600 400 200 0 Cost & FTE trend 0 10,599 10,204 10,095 10,376 646 290 356 646 277 369 677 318 700 342 359 358 H1 2015 H2 2015 H1 2016 H2 2016 H1 2015 H2 2015 H1 2016 H2 2016 Costs Other items Net interest income Cost income ratio Business income Strategic investment programme The Group continues to invest in line with the strategic agenda and is delivering on growth, efficiencies and customer satisfaction. To date the Group has invested € 606 million(3) (€ 313 million in 2015 and € 293 million in 2016), of which 78% is asset creation. Proven return from the investment to date has been captured in improved Transactional Net Promoter Scores of 45 (+29 v Q4 2014), increased market share (Mortgage Market Share for new Personnel expenses Other costs FTEs (period end) lending 36%, + 3% v 2014), enhanced offerings and services through technology and increased customer interaction and digital engagement. (1)Before bank levies, regulatory fees and exceptional items. Cost income ratio including these items was 54% in 2016 (2015: 64%). (2)Staff numbers quoted in the commentary above are on a full time equivalent (“FTE”) basis. (3)Income statement impact of this investment spend is reflected in operating expenses and in exceptional items for strategic elements. Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 16 Business review - 1. Operating and financial review Net credit provision writeback €294m €925m The overall net credit provision writeback of € 294 million in 2016 compared to an overall net credit provision Income tax €326m €534m The effective rate was 19% compared with 28% (or 14% in 2016 compared with 15% in 2015 if the impact of writeback of € 925 million in 2015. Specific net writeback changes in UK legislation restricting the use of tax losses is excluded – the impact was UK deferred tax expense of € 92 million and € 242 million respectively). The effective tax rate Income statement specific provisions net writeback of € 171 million: is influenced by the geographic mix of profits which are taxed at • € 281 million new to impaired charge in line with 2015. accumulated tax losses continue to be recognised in full on the different rates. Deferred Tax Assets (“DTA”) in respect of • € 452 million writeback of provisions (net of top-ups) which against future profit, subject to specific exceptions e.g. AIB Group amounted to 3.5% of the opening impaired loan balance. Key (UK) p.l.c. These exceptions are set out in note 32 to the drivers of the writeback include: consolidated financial statements. basis that it is expected that tax losses will be utilised in full • increased security values and improved cashflows due to the stronger economic environment, • cases cured from impairment, and • execution of additional security at fulfilment. As the primary restructuring period concludes net writebacks reduced from € 789 million in 2015. The impairment provisions remain dependent on significant levels of future collateral realisations. IBNR net writeback The overall net credit provision IBNR writeback of € 123 million in 2016 compared to an overall net credit provision IBNR writeback of € 417 million in 2015. The release primarily reflects the improved earning portfolio and associated probability of default as a result of observed trends in the improved economic environment. See the Risk management section on page 98 for more detail. Bank levies and regulatory fees €112m €71m Bank levies and regulatory fees Irish bank levy Deposit Guarantee Scheme Single Resolution Fund/BRRD Other regulatory fees Bank levies and regulatory fees 2016 € m (60) (35) (18) 1 (112) 2015 € m (60) 1 (8) (4) (71) Irish bank levy € 60 million in line with 2015. Deposit Guarantee Scheme (“DGS”) was newly established in 2016. Fee includes claim on the DGS legacy fund of € 8 million (2015: credit € 1 million). Single Resolution Fund (“SRF”) contribution of € 18 million in 2016. A contribution of € 8 million under the Bank Recovery and Resolution Directive was paid in 2015. Associated undertakings €35m €25m Income from associated undertakings increased by € 10 million compared to 2015, mainly due to a reversal of an impairment in, and share of income from, AIB’s share in associate Aviva Health(1) totalling € 9millio n and higher income from AIB Merchant Services of € 1 million. Total exceptional items €207m (€297m) Total exceptional items net credit of € 207 million in 2016 compared to a net charge of € 297 million in 2015. Total exceptional items Restitution and restructuring expenses Gain on transfer of financial instruments Profit on disposal of Visa Europe Termination benefits Other exceptional items Total exceptional items 2016 € m (58) 17 272 (24) - 207 2015 € m (250) 5 - (37) (15) (297) Restitution and restructuring expenses include costs associated with restitution, transformation, reorganisation, certain provisions for liabilities and write off of intangible assets. No further provision was required in 2016 for customer redress in relation to the examination of tracker mortgage related issues as requested by the Central Bank of Ireland in 2015 (2015 € 190 million). Gain on transfer of financial instruments: valuation adjustments on previous transfers of financial assets to NAMA. Profit on disposal of Visa Europe resulted from the acquisition of Visa Europe by Visa Inc. Termination benefits: the cost of the voluntary severance programme. Other exceptional items: capital reorganisation costs and other related items. Return on average ordinary shareholders’ equity 11.1% 12.4% Profit attributable to ordinary shareholders increased to € 1.3 billion in 2016 from € 1.1 billion (2015 is after the deduction of dividends on the 2009 preference shares) while average ordinary shareholders’ equity increased from € 8.9 billion in 2015 to € 11.9 billion in 2016 driven by the partial conversion of 2009 preference shares in December 15 and increase in retained profit. (1)Aviva Undershaft Five Limited previously known as Aviva Health Group Ireland Limited. 30 Allied Irish Banks, p.l.c. Annual Financial Report 2016 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 17 Assets Earning loans €56.1bn €57.0bn New lending €8.7bn €8.5bn Assets Gross loans to customers Provisions Net loans to customers 60.6 Financial investments available for sale 15.4 Financial investments held to maturity 3.4 NAMA senior bonds Other assets Total assets Impaired loans €9.1bn €13.1bn Provisions €4.6bn €6.9bn 31 Dec 31 Dec % 2015 € bn change 2016 € bn 65.2 (4.6) 1.8 14.4 70.1 (6.9) 63.2 16.5 3.5 5.6 14.3 95.6 103.1 -7 -33 -4 -7 -3 -68 1 -7 New lending €8.7bn €8.5bn New lending of € 8.7 billion in 2016, € 0.2 billion higher (+2%) compared to 2015, € 0.5 billion higher excluding the impact of currency movement. Strong momentum across key sectors and increase in market share led to new lending in AIB Ireland of € 5.5 billion up 16%, including mortgage lending up 22% (mortgage market share up 2% to 36%) and other lending up 13%. AIB UK was down 29% at € 1.9 billion (down 20% excluding the impact of currency movements). Uncertainty around the outcome of the UK referendum and the impact of its subsequent decision to exit the European Union has had a negative impact on the level of new business activity in the market in 2016. Group & International was up 16% at € 1.3 billion compared to 2015 which includes syndicated and international lending in the US and Europe. New lending 2016 by sector Earning and impaired loans trend 57.0 56.1 17% 9% 24% 50% Services 18% Distribution 12% Manufacturing 8% Agriculture 5% Transport 5% Other 2% 13.1 9.1 Non-property business Personal Mortgages Property and construction € bn 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Earning loans Impaired loans Dec 2015 Dec 2016 The chart above represents the split of new lending by sector for 2016. Earning loans €56.1bn €57.0bn Earning loans, excluding the reduction of € 1.5 billion due to the impact of currency movements, increased € 0.6 billion compared to Impaired loans €9.1bn €13.1bn Impaired loans, excluding the reduction of € 0.2 billion due to the December 2015. High quality new lending of € 8.7 billion has led the impact of currency movements, have reduced by € 3.8 billion to growth in the earning book. The movement also includes € 9.1 billion since 31 December 2015 and down € 20.3 billion from € 1.5 billion of loans upgraded to earning in the period. This growth 31 December 2012. This reduction reflects the continued is offset by redemptions of € 9.1 billion and new to impaired of € 0.8 billion. Redemptions of € 9.1 billion were consistent with rate of redemptions in 2015, when compared to opening stock. implementation of sustainable restructure solutions for customers and improved economic conditions. New to impaired loans in 2016 were € 0.8 billion. 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 € bn 6.0 5.0 4.0 3.0 2.0 1.0 0.0 New lending trend 5.5 4.8 2.6 1.9 AIB Ireland AIB UK 2015 2016 1.1 1.3 Group & International Restructuring Restructuring loans of customers in difficulty continues to be a key focus for the Group. Treatment strategies, as described on pages 73 to 75 of this report, are in place for customers who are experiencing financial difficulties. The approach is one of structured engagement with customers to assess their long term levels of sustainable debt. This restructuring engagement with customers resulted in c. € 1.5 billion of loans restructured out of impairment during the year with a further € 1.8 billion of impaired loans written off (including non-contracted write-offs). 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 2016 31 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 18 Business review - 1. Operating and financial review Assets (continued) There are c. € 0.7 billion of impaired mortgages that are in forbearance which are currently performing in accordance with agreed forbearance sustainable solutions and continued compliance to terms over a period of 12 months will result in an upgrade out of impairment. While there is a continued focus on the restructuring of loans of customers in difficulty the primary restructuring period is concluding. Provisions €4.6bn €6.9bn Balance sheet provisions have reduced by € 2.3 billion mainly due to the utilisation of provisions as part of sustainable restructure solutions for customers. Specific impairment provisions as a percentage of impaired loans reduced to 44% at 31 December 2016 compared to 47% at 31 December 2015. The reduction primarily occurred in individually assessed loans, with cover reducing from 51% at 31 December 2015 to 47% at 31 December 2016 driven by restructures, writebacks, and write-offs of loans. IBNR provisions of € bn 8.0 6.0 4.0 2.0 0.0 Provisions & coverage ratio 47% 6.2 44% 4.1 0.7 0.5 Dec 2015 Dec 2016 Specific provision IBNR Provision coverage ratio € 0.5 billion were held at 31 December 2016 compared to The table below sets out the asset quality by sector for a range of € 0.7 billion at 31 December 2015. The level of IBNR continues to credit metrics. Further details of the risk profile of the Group and reflect a conservative estimate of unidentified incurred loss within non performing disclosures are available in the Risk management the portfolio. section on pages 83 to 126. Loan book sectoral profile 31 December 2016 Loans and receivables to customers(1) Of which: Impaired Balance sheet provisions (specific + IBNR) Specific provisions / Impaired loans (%) Total provisions / Total loans (%) 12 months to 31 December 2016 Specific impairment (credit)/charge Total impairment (credit)/charge 31 December 2015 Loans and receivables to customers(1) Of which: Impaired Balance sheet provisions (specific + IBNR) Specific provisions / Impaired loans (%) Total provisions / Total loans (%) 12 months to 31 December 2015 Specific impairment (credit)/charge Total impairment (credit)/charge Residential Other personal mortgages € bn € bn Property and construction € bn Non-property business € bn 35.2 4.6 2.0 38% 6% € m (110) (111) € bn 36.8 6.0 2.3 34% 6% € m (204) (478) 3.1 0.4 0.3 58% 9% € m (11) (22) € bn 3.5 0.7 0.5 70% 15% € m (5) (8) 9.4 2.7 1.5 50% 15% € m (74) (145) € bn 11.5 4.3 2.7 57% 23% € m (216) (214) 17.5 1.4 0.8 51% 5% € m 24 (16) € bn 18.3 2.1 1.3 55% 7% € m (83) (225) Total € bn 65.2 9.1 4.6 44% 7% € m (171) (294) € bn 70.1 13.1 6.9 47% 10% € m (508) (925) (1)The table above has been extracted from the Credit Risk tables in the Risk management section. Loans and receivables to customers include unearned income and deferred costs. 32 Allied Irish Banks, p.l.c. Annual Financial Report 2016 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 19 Assets (continued) Net loans to customers €60.6bn €63.2bn Net loans of € 60.6 billion, excluding the impact of currency movements, reduced by € 1.0 billion due to reduction in net impaired loans of € 1.8 billion driven by restructuring activity and redemptions partly offset by € 0.8 billion increase in net earning loans. Summary of movement in Loans to customers The table below sets out the movement in loans to customers from 1 January 2016 to 31 December 2016. Loans to customers Opening balance (1 January 2016) New lending volumes New impaired loans(1) Restructures, write-offs and disposals Redemptions of existing loans Foreign exchange movements Other movements Closing balance (31 December 2016) Earning loans € bn Impaired loans € bn Gross loans € bn Specific provisions € bn IBNR provisions € bn 57.0 8.7 (0.8) 1.5 (9.1) (1.5) 0.3 56.1 13.1 - 0.8 (3.3) (0.9) (0.2) (0.4) 9.1 70.1 8.7 - (1.8) (10.0) (1.7) (0.1) 65.2 (6.2) - (0.3) 2.1 - 0.1 0.2 (4.1) (0.7) - - - - - 0.2 (0.5) Net loans € bn 63.2 8.7 (0.3) 0.3 (10.0) (1.6) 0.3 60.6 Financial investments Available for Sale (“AFS”) €15.4bn €16.5bn AFS assets which are held for liquidity and investment purposes have reduced by € 1.1 billion during 2016, consistent with plans to reduce overall AFS holdings in line with liquidity requirements. Debt securities reduced by € 0.9 billion mainly due to sales, maturities and redemptions of € 3.1 billion offset by purchases of € 2.5 billion. Equity securities reduced by € 0.2 billion following disposal of the equity interest in Visa Europe. As part of the proceeds the Group now holds preferred stock at a fair value of € 70 million in Visa Inc. as at 31 December 2016. Other assets €14.4bn €14.3bn Other assets of € 14.4 billion comprised: • cash and loans to banks of € 7.9 billion were € 0.6 billion higher than December 2015. 2016 includes cash and balances with Central Banks at € 6.5 billion, and loans and receivables to banks at € 1.4 billion. • deferred taxation of € 2.8 billion, reduced by € 0.1 billion from December 2015. • derivative financial instruments of € 1.8 billion, € 0.1 billion higher than December 2015. • the remaining assets of € 1.9 billion down 21% from € 2.4 billion at December 2015 mainly due to the receipt of proceeds from disposal in 2015 of a UK loan portfolio. Further detail in respect of AFS is available in note 27 to the consolidated financial statements. Financial investments Held to Maturity (“HTM”) €3.4bn €3.5bn AFS assets were reclassified to financial investments held to maturity during 2015 following a review of strategy in relation to securities holdings and a commitment to long term (to maturity) investment in selected Irish Government Bonds. There have been no further additions to the held to maturity category during 2016. NAMA senior bonds €1.8bn €5.6bn NAMA senior bonds have reduced by € 3.8 billion since 31 December 2015 following redemptions in the period. Redemptions of low yielding NAMA senior bonds have improved the Group’s overall net interest margin. NAMA senior bonds are expected to be fully redeemed by the end of 2017. (1)New to impaired includes re impaired loans. Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 33 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 20 Business review - 1. Operating and financial review Liabilities & equity Customer accounts €63.5bn €63.4bn Equity €13.1bn €12.1bn Other market funding €5.8bn €11.0bn Other market funding reduced by € 5.2 billion (-47%) to December 2016 due to reduced funding requirement following NAMA senior bond repayments and a reduction in available for sale securities and customer loans. This was mainly done through a € 5.2 billion reduction in repos. Debt securities in issue €6.9bn €7.0bn € 1.0 billion Asset Covered Securities (“ACS”) issuance in January 2016 offset by € 1.0 billion in ACS and senior debt maturities (€ 0.5 billion each). Other liabilities €4.4bn €6.7bn Other liabilities of € 4.4 billion comprised: • Subordinated liabilities €0.8bn €2.3bn Subordinated liabilities of € 0.8 billion reduced 65% from € 2.3 billion in 2015 due to maturity of € 1.6 billion contingent capital notes in July 2016. • Derivative financial instruments €1.6bn €1.8bn Derivative financial instruments of € 1.6 billion decreased 11% from € 1.8 billion in 2015. • Retirement benefit liabilities €0.2bn €0.4bn For detail on movement on retirement benefit see note 12 page 272 of this report. 31 Dec 31 Dec 2015 % € bn change 2016 € bn 63.5 1.9 5.8 6.9 4.4 82.5 13.1 95.6 % 95 63.4 2.9 11.0 7.0 6.7 91.0 12.1 103.1 - -34 -47 -1 -34 -9 8 -9 % change 100 -5 Liabilities & equity Customer accounts Monetary authority funding Other market funding Debt securities in issue Other liabilities Total liabilities Equity Total liabilities & equity Loan to deposit ratio Customer accounts €63.5bn €63.4bn Customer accounts increased by • Remaining liabilities € 0.1 billion to € 63.5 billion. Excluding the reduction of € 1.8 billion due to the impact of currency movements, customer accounts increased € 1.9 billion. The mix profile continued to change in 2016 with an increase of € 4.7 billion in current accounts partly offset by a reduction of € 2.5 billion in corporate and treasury deposits (including repos) and a reduction of €1.8bn €2.3bn Remaining liabilities of € 1.8 billion were 22% lower compared to December 2015. Equity €13.1bn €12.1bn Equity of € 13.1 billion as at 31 December 2016 increased by € 0.3 billion in retail deposits. The loan to deposit ratio remained € 1.0 billion compared to € 12.1 billion as at 31 December 2015. strong at 95% at 31 December 2016. The table below sets out the movements in the year. Customer franchise funding profile Equity 100% 99% 100% 95% 65.7 65.7 63.4 64.0 63.2 63.4 63.5 60.6 Opening balance (1 January 2016) Profit for the period Other comprehensive income: Retirement benefit schemes Cash flow hedging reserves Available for sale securities reserves Other Closing balance (31 December 2016) € bn 12.1 1.4 0.1 0.1 (0.4) (0.2) 13.1 € bn 80.0 60.0 40.0 20.0 0.0 Dec 2013 Dec 2014 Dec 2015 Dec 2016 Net loans Customer accounts Loan to deposit ratio Monetary authority funding €1.9bn €2.9bn Monetary authority funding of € 1.9 billion at 31 December 2016 reduced by € 1.0 billion (-34%) since 31 December 2015 as the overall funding requirement reduced. In 2016 the existing € 1.9 billion Targeted Long Term Refinancing Operation (“TLTRO”) was replaced with TLTRO II facility, extending the term of the funding out to 4 years with an option to redeem after 2 years. 34 Allied Irish Banks, p.l.c. Annual Financial Report 2016 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 21 Liabilities & equity (continued) Funding Total funding 98.7 Customer accounts 92.0 64% 63.4 63.5 69% Other market funding Debt securities in issue Monetary authority funding Capital 11% 11.0 7% 3% 15% 5.4 1.6 2.9 2.3 12.1 6% 8% 2% 15% 5.8 5.9 1.0 1.9 0.8 13.1 Dec 2016 Dec 2015 Equity Senior debt Customer accounts Subordinated liabilities Monetary authority funding ACS / ABS / CP(1) Other market funding The Group has a robust funding structure underpinned by a stable low cost customer deposit base. The total funding was € 92.0 billion at 31 December 2016, details of split in above. Qualifying liquid assets At 31 December 2016, the Group held € 30 billion (2015: € 34 billion) in qualifying liquid assets/contingent funding of which € 12 billion was not available due to repurchase, secured loan and other restrictions. The available Group liquidity pool comprises the remainder and is held to cover contractual and stress outflows. As at 31 December 2016, the Group liquidity pool was € 18 billion (2015: € 16 billion). During 2016, the liquidity pool ranged from € 16 billion to € 20 billion and the average balance was € 18 billion. For further detail on funding see pages 146 to 158. 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)Asset covered securities (“ACS”), asset backed securities (“ABS”) and commercial paper (“CP”). Allied Irish Banks, p.l.c. Annual Financial Report 2016 35 n o i t a m r o n f i l a r e n e G Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 22 Business review - 1. Operating and financial review Segment reporting – Segment overview – AIB Ireland – AIB UK – Group & International Page 37 38 40 42 36 Allied Irish Banks, p.l.c. Annual Financial Report 2016 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 23 Segment overview In 2016, the Group reported through the following key segments: AIB Ireland, AIB UK, and Group & International. This reflected a customer focused, profitable and low risk enterprise that was well positioned to support the economic recovery in Ireland while seeking to generate sustainable shareholder returns. The segments were originally formed to combine customer groups with similar needs into geographical franchises able to deliver co-ordinated services. From the 1st of January 2017, following realignment of Leadership Team responsibilities the Group will be managed going forward through the following business segments: Retail &Commercial Banking (‘RCB’), Wholesale, Institutional & Corporate Banking (“WIB”), AIB UK and Group. For business overview through this lens see pages 416 to 432. Segment allocations 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 Group & International. 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 attributable to capital is allocated to segments based on each segment’s capital requirement. In 2016, the funding and liquidity allocation methodology has been refined to more accurately reflect each segment’s funding profile. The performance in 2015 has been presented on this revised allocation methodology. AIB Ireland Financial metrics % of Group(1) % of segment income Net loans by sector Total operating income €1,924m Net loans New lending €48.9bn €5.5bn Total operating expenses €828m 73% 81% 63% 60% Corporate 15% Business 25% Personal 60% Personal Mortgages Property & construction Non-property business 5% 63% 13% 19% AIB UK Financial metrics % of Group(1) % of segment income Net loans by sector Total operating income Net loans New lending £255m £7.5bn £1.5bn Total operating expenses £115m 12% 15% 22% 10% FTB 42% Personal Mortgages AIB GB 58% Property & construction Non-property business Group & International Financial metrics % of Group(1) % of segment income Net loans by sector Total operating income Net loans New lending €396m €2.9bn €1.3bn Total operating expenses €410m 15% 4% 15% 30% Syndicated & international 17% Personal Mortgages Group & Treasury 83% Property & construction Non-property business 2% 19% 27% 52% - - 1% 99% (1)Percentages calculated using the euro equivalent balances for each financial metric. Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 24 Business review - 1. Operating and financial review AIB Ireland AIB Ireland comprises Personal, Business and Corporate Banking. Financial performance It is the leading franchise bank across key segments and products in the domestic market and is well positioned for growth. AIB Ireland contribution statement Personal offers a comprehensive suite of personal lending, mortgages, savings, deposit, credit card, insurance and financial planning products via the branch network, online, mobile and direct channels. Our multi-brand approach via AIB, EBS and Haven offers choice to mortgage customers and allows us to tailor propositions. Net interest income Other income Total operating income Total operating expenses Business is committed to actively supporting entrepreneurs, early Operating contribution before bank levies, regulatory fees and provisions start-ups and established SMEs via a sector-led approach, flexible Total net writeback of provisions customer segment, Personal, Business and Corporate. AIB Ireland contribution statement 2016 € m 1,458 466 1,924 2015 % € m change 1,360 443 1,803 7 5 7 (828) (755) 10 1,096 279 1,375 31 1,048 901 1,949 21 1,970 3 5 -69 -29 48 -29 - -29 € m 691 209 196 % € m change 694 211 143 - -1 37 Operating contribution Associated undertakings Contribution before disposal of property 1,406 Profit on disposal of property - Contribution before exceptional items 1,406 1,973 Personal Business Corporate Operating contribution before bank levies, regulatory fees and provisions 1,096 1,048 5 Net interest income €1,458m €1,360m Net interest income increased by € 98 million (+7%) compared to 2015 due to continued reductions in the cost of funds partly offset by mortgage rate reductions. Net average loans balances also reduced on the period as net impaired loans reduced by € 2.8 billion partly offset by increase in earning balances of €1.1 billion. Other income €466m €443m Other income increased by € 23 million (5%) compared to 2015. Net fee and commission income remained stable excluding the impact of the card interchange while the increase was attributable to higher gains on the realisation/ re-estimation of cashflows on loans previously restructured. Total operating expenses €828m €755m Costs have increased due to increased average salary costs, cost of regulatory compliance, marketing and spend on investment programme, including depreciation on assets now in use. AIB Ireland also includes the costs for the workout unit for loan restructuring as sustainable customer solutions are worked through. Total net writeback of provisions €279m €901m Further progress has been made on case by case restructuring of customers in difficulty. Lower writebacks in 2016 as the pace and quantum of writebacks moderate, and the primary restructuring period is concluding. Allied Irish Banks, p.l.c. Annual Financial Report 2016 digital and self-service channels, and timely credit decisions. Corporate develops strong relationships with corporate customers by providing sectoral expertise, tailored financial solutions and a premium customer service. This includes property lending. AIB Ireland’s loan restructuring activity is managed through a workout unit. These loans are reported through their respective AIB Ireland at a glance 2.3m Ireland’s leading financial services group with over 2.3 million customers. 45 Transactional NPS has increased by 29 points, to 45 at Q4 2016, since Q4 2014 reflecting the continued enhancement of the customer experience. 1.1m Ireland’s largest internet bank with over 1.1 million active users. 652,000 Ireland’s largest mobile bank with more than 652,000 active customers. 297 Ireland’s leading distribution network through 297 locations and a further c. 1,100 locations through the An Post network. 36% Ireland’s largest provider of new mortgage lending drawdowns in 2016. Gaining a further 2% of the market with a market share of 36%. €1,096m €828m Operating contribution before bank levies, regulatory fees and provisions of € 1,096 million in 2016 (up 5% compared to 2015). Operating expenses of € 828 million in 2016 up 10% compared to 2015. Costs are in line with expectations and reflect spend on business investment. €5.5bn New lending of € 5.5 billion in 2016 (up 16% compared to 2015). Mortgages € 2.0 billion (up 22%), Other Personal € 0.7 billion (up 36%), Corporate € 1.6 billion (up 8%). Business € 1.2 billion (up 9%). 38 €279m Total net provision writeback of € 279 million in 2016, reduced compared to € 901 million in 2015, as the primary restructuring period is concluding. Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 25 AIB Ireland (continued) AIB Ireland balance sheet metrics 31 Dec 2016 € bn 31 Dec % 2015 € bn change Personal Business Corporate Gross loans Personal Business Corporate Net loans Personal Business Corporate Customer accounts Personal Business Corporate Loan to deposit ratio 36.2 9.3 7.4 52.9 34.0 7.7 7.2 48.9 28.8 13.9 9.4 52.1 % 118 55 77 94 37.4 10.3 8.1 55.8 34.5 7.9 7.7 50.1 27.8 12.4 10.0 50.2 -3 -10 -9 -5 -1 -3 -6 -2 4 12 -6 4 % change 124 64 77 100 -6 -9 - -6 2.0 1.7 € bn 2.5 2.0 1.5 1.0 0.5 0.0 New lending trend 1.6 1.5 1.1 1.2 0.7 0.5 Mortgages Other personal Business Corporate 2015 2016 New lending €5.5bn €4.8bn New lending was up € 0.7 billion (+16%) compared to 2015. Strong mortgage lending of € 2.0 billion was up 22%, with a gain in market share to 36% (2% higher than 34% in 2015). Personal lending was up € 0.2 billion (+36%) compared to 2015 and other lending was also up 8% as demand for credit increased. New lending 2016 by sector Gross loans €52.9bn €55.8bn Gross loans in AIB Ireland of € 52.9 billion reduced by € 2.9 billion (-5%) since 31 December 2015 as new 13% lending of € 5.5 billion was offset by redemptions/other of € 6.9 billion and the impact of loan restructuring of € 1.5 billion. 17% 37% Distribution 9% Services 8% Agriculture 6% Manufacturing 4% Transport 4% Other 2% 33% € bn 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Gross loans movement 5.5 (1.5) (6.9) 55.8 11.4 44.4 Non-property business Personal Mortgages Property and construction 52.9 8.1 44.8 The chart above represents the split of new lending by sector for 2016. Business and corporate lending are split between property and construction and non-property business. Impaired loans €8.1bn €11.4bn Impaired loans have reduced from € 11.4 billion to € 8.1 billion at 31 December 2016 as AIB Ireland Dec 2015 New lending Restructuring Redemptions/ Other Dec 2016 has made further progress in restructuring customers in financial difficulty, notwithstanding new to impaired loans of € 0.7 billion in Earning loans Impaired loans the same period. There is a specific provision coverage ratio of Earning loans €44.8bn €44.4bn Earning loans of € 44.8 billion increased € 0.4 billion since 31 December 2015 as new lending and loans upgraded to earning were ahead of repayments/other in each customer segment. Earning loans represents 85% of gross loans at 31 December 2016, up from 80% as at 31 December 2015 as the quality of the book continues to improve. 43% on the impaired loans of € 8.1 billion as at 31 December 2016. Customer accounts €52.1bn €50.2bn Customer accounts increased by € 1.9 billion (+4%) since 31 December 2015 with growth in current accounts across all business segments of € 3.9 billion offset by a reduction in deposits of € 2.0 billion. Allied Irish Banks, p.l.c. Annual Financial Report 2016 39 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 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 26 Business review - 1. Operating and financial review AIB UK AIB UK comprises of two trading entities operating in two distinct Financial performance markets with different economies and operating environments: Allied Irish Bank (GB) ("AIB GB") which offers full banking services to predominantly business customers across Great Britain; and First AIB UK contribution statement Trust Bank ("FTB") which offers full banking services to business and personal customers across Northern Ireland. Both entities are Net interest income Other income supported by a single operations function. AIB GB is a long established specialist Business Bank, supporting businesses in Great Britain for over 40 years. It operates out of 15 business centres in key cities across Great Britain, providing a full clearing and day-to-day transactional banking service to customers. First Trust Bank is a long established bank in Northern Ireland, providing a full banking service, including online, mobile and telephone banking to business and personal customers. AIB UK at a glance 363,000 AIB UK services over 363,000 customers in Northern Ireland and Great Britain. 50(1) A distribution network of 50 locations throughout Northern Ireland (30 branches and 5 business offices) and Great Britain (15 business centres). 86,000 Over 86,000 active internet banking users. 50,000 More than 50,000 active customers using the mobile banking app. £140m Operating contribution before bank levies, regulatory fees and provisions of £ 140 million in 2016 (up 9% compared to 2015). £115m Operating expenses of £ 115 million in 2016 (broadly in line with 2015). £1.5bn New lending of £1.5 billion in 2016 (down 20% compared to 2015). AIB GB £ 1.3 billion down 19% and FTB £ 0.2 billion down 33%. £30m Total net provision writeback of £ 30 million in 2016, as a result of continued restructuring activity. Total operating income Total operating expenses Operating contribution before bank levies, regulatory fees and provisions Bank levies and regulatory fees Total net writeback of provisions Operating contribution Associated undertakings Contribution before disposal of business 174 Profit on disposal of business 1 Contribution before exceptional items 175 Contribution before exceptional items €m 214 AIB UK contribution statement AIB GB First Trust Bank £ m 86 54 2015 % £ m change (115) (114) 2016 £ m 201 54 255 140 1 30 171 3 207 36 243 129 (3) 32 158 3 161 - 161 220 82 47 -3 50 5 1 9 - -6 8 - 8 - 9 -3 5 15 9 % £ m change Operating contribution before bank levies, regulatory fees and provisions 140 129 Net interest income £201m £207m Net interest income decreased by £ 6 million (-3%) compared to 2015 due to the disposal of a loan portfolio of £ 0.5 billion in the second half of 2015 and the impact of a reduction in the Bank of England Base Rate in August 2016. Other income £54m £36m Net fee and commission income was in line with 2015, with an increase in lending fees, partly offset by reduced transaction fees. Other items in 2016 included a loss of £ 3 million relating to the final settlement of UK loan disposals at the end of 2015 (loss of £ 29 million in 2015). Total operating expenses £115m £114m Total operating expenses of £ 115 million in 2016, broadly in line with 2015. Total net writeback of provisions £30m £32m Total net writeback of provisions of £ 30 million in 2016 compared to £ 32 million for 2015 as a result of continued restructuring activity. (1)FTB is transitioning to a network of 15 branches and 6 business centres in 2017. This will be complemented by a new partnership agreement with the Post Office in Northern Ireland. 40 Allied Irish Banks, p.l.c. Annual Financial Report 2016 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 27 AIB UK (continued) AIB UK balance sheet metrics 31 Dec 2016 £ bn 31 Dec % 2015 £ bn change AIB GB FTB Gross loans AIB GB FTB Net loans AIB GB FTB Customer accounts AIB GB FTB Loan to deposit ratio 5.2 2.8 8.0 5.1 2.4 7.5 4.7 4.2 8.9 % 109 57 84 5.3 3.1 8.4 5.1 2.5 7.6 4.8 3.8 8.6 -2 -10 -5 - -4 -1 -2 11 3 % change 106 66 88 3 -9 -4 Gross loans £8.0bn £8.4bn Gross loans in AIB UK of £ 8.0 billion reduced by £ 0.4 billion (-5%) since 31 December 2015 as new lending of £ 1.5 billion was offset by redemptions/other of £ 1.7 billion and the impact of loan restructuring of £ 0.2 billion. £ bn 1.50 1.25 1.00 0.75 0.50 0.25 0.00 New lending trend 1.33 0.98 0.50 0.53 0.04 0.03 0.02 0.03 Mortgages Other personal Business Corporate 2015 2016 New lending £1.5bn £1.9bn New lending of £ 1.5 billion in 2016, AIB GB at £ 1.3 billion and FTB at £ 0.2 billion, was £ 0.4 billion lower than 2015 due to reduction of £ 0.4 billion in corporate lending. New lending 2016 by sector 26% 3% 2% Services 24% Distribution 20% Manufacturing 10% Agriculture 6% Transport 5% Other 4% 69% Gross loans movement 1.5 (0.2) (1.7) 8.4 1.2 7.2 Non-property business Personal Mortgages Property and construction 8.0 0.8 7.2 Business and corporate lending are split between property and construction and non-property business in the chart above. Non-property business lending contributed to 69% of all new lending in AIB UK in 2016. £ bn 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Dec 2015 New lending Restructuring Redemptions/ Other Dec 2016 Earning loans Impaired loans Earning loans £7.2bn £7.2bn Earning loans of £ 7.2 billion were in line with 31 December 2015 as new lending was offset by redemptions. Earning loans represents 90% of gross loans at 31 December 2016, up from 85% as at 31 December 2015 as the quality of the book improves. New business was written across a range of key sectors in both AIB GB and FTB and the developing sector strategies will build on the momentum developed through 2016. Impaired loans £0.8bn £1.2bn Impaired loans of £ 0.8 billion at 31 December 2016 have reduced from £ 1.2 billion at 31 December 2015 due to repayments and write-offs in the period. Customer accounts £8.9bn £8.6bn Customer accounts were £ 8.9 billion at 31 December 2016 and increased by £ 0.3 billion since 31 December 2015 with an increase in current accounts partly offset by a reduction in deposits. Allied Irish Banks, p.l.c. Annual Financial Report 2016 41 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 Op Review (Q7.5) Dec 16:Layout 1 01/03/2017 23:15 Page 28 Business review - 1. Operating and financial review Group & International Group & International includes syndicated and international lending in the United States of America and Europe. It also includes wholesale treasury activities, central control and support functions Total operating expenses €410m €379m Total operating expenses increased by € 31 million (+8%) compared to 2015 reflecting the impact of (business and customer services, risk, audit, finance, general salary inflation and costs relating to outsourcing initiatives partly counsel, human resources and corporate affairs). Certain offset by reduced staff numbers. This is also impacted by overheads related to these activities are managed and reported in investment in business initiatives which are ongoing, including the Group & International segment. depreciation on assets now live. Financial performance Group & International contribution statement Net interest income Other income Total operating income Total operating expenses 2016 € m 310 86 396 2015 % € m change 282 203 485 (410) (379) Operating contribution before bank levies, regulatory fees and provisions Bank levies and regulatory fees Total provisions Operating contribution Associated undertakings (14) (113) (18) (145) - Contribution before exceptional items (145) 106 (67) (22) 17 1 18 Bank levies and regulatory fees €113m €67m Bank levies and regulatory fees of € 113 million for 2016 related to the Irish bank levy € 60 million, Deposit Guarantee Scheme (“DGS”) € 35 million (fee includes claim on the DGS legacy fund of € 8 million) and € 18 million for the Single Resolution Fund. Group & International balance sheet metrics Gross loans 31 Dec 2016 € bn 3.0 Net loans 2.9 Financial investments available for sale 15.4 Financial investments held to maturity 3.4 NAMA senior bonds Customer accounts 1.8 1.0 31 Dec 2015 % € bn change 2.8 2.8 16.5 3.5 5.6 1.5 7 4 -7 -3 -68 -33 10 -58 -18 8 - 69 -18 - - - Net interest income €310m €282m Net interest income of € 310 million in 2015 was € 28 million (+10%) higher than 2015 due to lower funding costs and growth in the syndicated and international portfolio new lending volumes. These positive impacts were partly offset by lower income on NAMA senior bonds due to ongoing repayments of the portfolio and lower income from the securities portfolio due to the sale and maturity of legacy high yielding assets. Other income €86m €203m The decrease in other income was due to a reduction in business income of € 21 million and other items of € 94 million. Business income reduced mainly due to the movement in valuations on the Group’s sterling derivative positions. Other items Net profit on disposal of AFS securities Effect of acceleration / re-estimation of the timing of cash flows on NAMA senior bonds Settlements and other gains Other items 2016 € m 31 10 (1) 40 2015 € m 77 6 51 134 Other items are set out in the table above. Settlements and other gains included € 38 million income on settlement of claims in 2015. Gross loans €3.0bn €2.8bn Gross loans of € 3.0 billion increased by € 0.2 billion (7%) since 31 December 2015 due to new lending of € 1.3 billion partly offset by repayments. Syndicated and international lending delivers strong returns including a low cost income ratio. Financial investments available for sale €15.4bn €16.5bn AFS assets which are held for liquidity and investment purposes, were € 15.4 billion at 31 December 2016 and have decreased from € 16.5 billion during 2016 mainly due to sales/maturities of € 3.5 billion partly offset by purchases of € 2.5 billion, consistent with plans to reduce overall AFS holdings in line with liquidity requirements. NAMA senior bonds €1.8bn €5.6bn NAMA senior bonds reduced by € 3.8 billion during the year due to redemptions. NAMA senior bonds are expected to be fully redeemed by the end of 2017. Customer accounts €1.0bn €1.5bn Customer accounts of € 1.0 billion reduced by € 0.5 billion (-33%) since 31 December 2015 of which € 0.3 billion related to a reduction in repos and € 0.2 billion in treasury deposits. 42 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A3 Capital AFR 2016 pages 43-48:Layout 1 10/03/2017 19:49 Page 43 Business review - 2. Capital management Objectives* The objectives of the Group’s capital management policy are to at all Performance during 2016 AIB’s capital ratios improved in 2016 primarily due to profit for times comply with regulatory capital requirements and to ensure the period and a reduction in risk weighted assets (“RWAs”). that the Group has sufficient capital to cover the current and future The 2016 ratios are significantly in excess of regulatory risk inherent in its business and to support its future development. requirements. The Group does this through an annual Internal Capital Adequacy Assessment Process (“ICAAP”) and quarterly stress tests, which are both subject to supervisory review and evaluation. These are AIB’s main capital management tools and give 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 reviewed and approved by the Board annually; business strategy is set consistent with risk appetite which underpins the annual financial planning process; performance against plan and risk appetite is monitored monthly; – 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 assess the resilience of the Group and inform capital needs as they arise; and – the final stage of the ICAAP is the creation of base and stressed capital plans over a three year timeframe, comparing the capital requirements to available capital. This is fully integrated with the Group’s financial planning process and ensures that the Group has adequate capital resources in excess of minimum regulatory capital requirements and internal capital requirements. % 24.0 20.0 16.0 12.0 8.0 4.0 0.0 % 20.0 16.0 12.0 8.0 4.0 0.0 Transitional - capital ratios 18.9 2.2 0.8 15.9 21.7 1.8 0.9 19.0 31 Dec 15 31 Dec 16 Common Equity Tier 1 (CET1) Additional Tier 1 (AT1) Tier 2 (T2) Fully loaded - capital ratios 15.5 1.7 0.8 13.0 17.6 1.4 0.9 15.3 31 Dec 15 31 Dec 16 Common Equity Tier 1 (CET1) Additional Tier 1 (AT1) Tier 2 (T2) 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 2016 43 n o i t a m r o n f i l a r e n e G A3 Capital AFR 2016 pages 43-48:Layout 1 10/03/2017 19:49 Page 44 Business review - 2. Capital management Regulatory capital and capital ratios CRD lV transitional basis CRD lV fully loaded basis 31 December 31 December 31 December 31 December 2015 € m 2015 € m 2016 € m 2016 € m Equity Less: Additional Tier 1 Securities Proposed ordinary dividend Regulatory adjustments: Goodwill and intangibles Cash flow hedging reserves Reversal of fair value of contingent capital instrument Available for sale securities reserves Pension Deferred tax Expected loss deduction Other Total common equity tier 1 capital Additional tier 1 capital Additional Tier 1 Securities Expected loss deduction Total additional tier 1 capital Total tier 1 capital Tier 2 capital Subordinated debt Credit provisions Expected loss deduction Other Total tier 2 capital Total capital Risk weighted assets Credit risk Market risk Operational risk Credit valuation adjustment Other Total risk weighted assets Common equity tier 1 ratio Tier 1 ratio Total capital ratio 13,148 12,148 13,148 12,148 (494) (250) (392) (460) – (445) (140) (610) (28) (22) (2,097) 10,307 494 (9) 485 (494) – (292) (354) (46) (1,250) (91) (317) – (19) (2,369) 9,285 494 – 494 (494) (250) (392) (460) – – (126) (3,050) (46) (16) (4,090) 8,314 494 – 494 (494) – (292) (354) – – (153) (3,171) – (9) (3,979) 7,675 494 – 494 10,792 9,779 8,808 8,169 783 200 (9) 6 980 11,772 973 287 – 9 1,269 11,048 783 – – – 783 9,591 973 20 – – 993 9,162 48,843 53,596 49,027 54,105 288 3,874 1,225 5 457 3,139 1,352 5 288 3,874 1,225 5 457 3,139 1,352 5 54,235 58,549 54,419 59,058 % 19.0 19.9 21.7 % 15.9 16.7 18.9 % 15.3 16.2 17.6 % 13.0 13.8 15.5 44 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A3 Capital AFR 2016 pages 43-48:Layout 1 10/03/2017 19:49 Page 45 Capital ratios at 31 December 2016 Transitional ratio The Common Equity Tier 1 (CET1) transitional ratio increased to the period, € 634 million related to AFS debt securities primarily due to the removal of this derogation with the remainder relating to AFS equity securities. This has been partially offset by 19.0% at 31 December 2016 from 15.9% at 31 December 2015. (i) the deduction of the deferred tax asset (“DTA”) relating to The increase in the CET1 ratio was broadly driven by profit unutilised tax losses increasing by € 293 million as the phase-in retained and a reduction in risk weighted assets (“RWAs”), partially offset by a proposed ordinary dividend payment of € 250 million. rate increases from 10% to 20% in 2016, (ii) an increase of € 49 million in the pension deduction, (iii) an increase of € 100 million in intangible assets and (iv) the removal of an CET1 capital increased by € 1,022 million to € 10,307 million at additional € 106 million in relation to the cash flow hedge reserve. 31 December 2016. This consisted of an increase in shareholders’ equity of € 1,000 million and positive regulatory The CET1 transitional ratio, at 19.0%, is significantly in excess adjustments of € 272 million partially offset by a proposed of the Single Supervisory Mechanism’s minimum CET1 ordinary dividend payment of € 250 million. regulatory requirement of 9.0%. The increase in shareholders’ equity of € 1,000 million consisted The transitional tier 1 capital ratio increased to 19.9% at of profit for the period of € 1,356 million offset by negative other 31 December 2016 from 16.7% at 31 December 2015. The comprehensive income of € 319 million and a distribution paid on increase in the ratio is driven by the CET1 and RWAs the Additional Tier 1 instrument of € 37 million. movements outlined above. Negative other comprehensive income was driven by a reduction There was a decrease in transitional tier 2 capital of in available for sale securities reserves of € 359 million during € 289 million which was driven by the redemption of the the year (€ 195 million of which related to the realisation of the contingent capital instrument in July 2016 and the reduction in unrealised gain at 31 December 2015 in Visa Europe). There adjustments for credit provisions. was also a revaluation of foreign exchange reserves in the Group, held primarily as a structural hedge for the capital ratio, The transitional capital ratio increased from 18.9% at resulting in a net reduction in foreign currency translation December 2015 to 21.7% at 31 December 2016. reserves of € 168 million. This was partially offset by a net actuarial gain of € 103 million in retirement benefit schemes and an increase in the cash flow hedge reserve of € 106 million. The Risk weighted assets RWAs reduced by € 4.3 billion during 2016. Credit risk RWAs net actuarial gain arises through a combination of a) the gain reduced by € 4.8 billion, while market risk and credit valuation arising from a change to the actuarial assumption of the nature adjustment (“CVA”) RWAs decreased by € 0.2 billion and and extent of any obligation to fund discretionary increases in € 0.1 billion respectively. These decreases have been partially pensions in payment in the Group’s main Irish schemes which offset by increases in operational risk RWAs of € 0.7 billion has been assessed following a review by the Board, including (reflecting the increased levels of income in the annual actuarial and external legal advice; b) the strong return on schemes’ assets; c) the actuarial losses arising from significant reduction in discount rates; and d) the asset ceiling/minimum calculation). The reduction in credit risk RWAs was partly driven by funding restrictions applying to certain Irish schemes. See page foreign exchange movements of € 1.7 billion. Positive grade 272 for further details. migration in portfolios, where AIB uses its own credit models to Regulatory adjustments increased by € 272 million. On 1 October measure RWAs, drove a decrease of € 1.4 billion with loan 2016, Regulation (EU) 2016/445 removed a national derogation to exclude unrealised gains or losses on sovereign portfolios classified redemptions, asset sales and other balance sheet reductions driving a decrease of € 8.3 billion. These were partially offset as available for sale (“AFS”) in transitional CET1 capital. Of the positive regulatory adjustment in relation to AFS of € 805 million in by new drawdowns which accounted for an increase in RWAs of € 6.6 billion. Transitional CET1 - capital movements Risk weighted assets (transitional) - movements 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 € bn 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1.4 0.1 0.4 (0.3) (0.3) (0.3) 10.3 9.3 31 Dec 15 Profit in the Pension AFS DTA Dividend Other 31 Dec 16 period € bn 65.0 60.0 55.0 50.0 45.0 40.0 35.0 30.0 (4.8) 58.5 0.7 (0.3) 54.2 31 Dec 15 Credit risk Operational risk CVA / market risk 31 Dec 16 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 2016 45 A3 Capital AFR 2016 pages 43-48:Layout 1 10/03/2017 19:49 Page 46 Business review - 2. Capital management Fully loaded ratio The fully loaded CET1 ratio increased to 15.3% at 31 December There was a decrease in fully loaded tier 2 capital of € 210 million which was driven by the redemption of the 2016 from 13.0% at 31 December 2015. The increase in the Contingent Capital Notes in July 2016 and the reduction in CET1 ratio was broadly driven by profit retained and a reduction adjustments for credit provisions. in RWAs, partially offset by a proposed ordinary dividend payment of €250 million. CET1 capital increased by €639 million to €8,314 million at The fully loaded total capital ratio increased to 17.6% at 31 December 2016 from 15.5% at 31 December 2015. 31 December 2016. This was primarily driven by: The fully loaded CET1 ratio of 15.3% compares to 19.0% on a – – – profit for the period of €1,356 million; transitional basis at 31 December 2016. This reflects a a net actuarial gain in retirement benefit schemes for the difference of € 1,993 million in the amounts qualifying as CET1. period of € 103 million as previously described; The main drivers of this difference are: the reduction in the available for sale securities reserves of – the full deduction of the DTA for unutilised tax losses of € 359 million (€ 195 million relating to the realisation of the € 3,050 million. Under transitional rules, the phasing in unrealised gain at 31 December 2015 in Visa Europe); deduction of the DTA increased to 20% in 2016 amounted – revaluation of foreign exchange reserves in the Group, held to € 610 million; and primarily as a structural hedge for the capital ratio, resulted in – the AFS reserves of € 1,113 million comprising unrealised a net reduction in the foreign currency translation reserves of gains in sovereign debt securities and equity securities are € 168 million; and included in the fully loaded position, while € 668 million is – the proposed payment of an ordinary dividend of included on a transitional basis at 31 December 2016. Leverage ratio The leverage ratio is defined as tier 1 capital divided by a leverage ratio exposure. Based on full implementation of CRD IV, the leverage ratio, under the Delegated Act implemented in January 2015, was 9.2% at 31 December 2016 (7.9% at € 250 million and a distribution paid on the Additional Tier 1 instrument of € 37 million. Fully loaded CET1 - capital movements € bn 10.0 8.0 6.0 4.0 2.0 0.0 1.4 0.2 (0.4) (0.3) (0.3) 31 December 2015). 7.7 8.3 31 Dec 15 Profit in the period Pension AFS Dividend Other 31 Dec 16 46 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A3 Capital AFR 2016 pages 43-48:Layout 1 10/03/2017 19:49 Page 47 Supervisory review and evaluation process On an annual basis, AIB Group submits extensive documentation Dividends The Board proposes to pay an ordinary dividend of on the ICAAP to its regulator as prescribed in the CRD IV € 250 million out of full year 2016 profits. This is subject to the frameworks. This documentation includes a description of AIB’s approval of shareholders at the Annual General Meeting in internal capital models, its risk appetite framework, an asset April 2017. quality analysis and capital planning, both under normal circumstances and in certain stressed scenarios. This documentation is an important input for the European Central Repayment of capital to the Irish State AIB paid € 1.76 billion to the Irish Government in July 2016 in Bank’s (“ECB”) Supervisory Review and Evaluation Process relation to the Contingent Capital Notes (€ 1.6 billion principal (“SREP”) the outcome of which is communicated to AIB plus € 160 million coupon). management. AIB’s minimum requirement set by the ECB for the transitional Ratings In September 2016, Moody’s upgraded AIB’s long-term rating CET1 ratio is 9.0% and the minimum requirement for the to Baa3 (investment grade) from Ba1 both with a positive transitional total capital ratio is 12.5% for 2017. This requirement outlook. The ratings action was driven by an improving excludes Pillar 2 guidance (“P2G”) that is not publicly disclosed. operating environment, which led to an increase in the macro The transitional CET1 and total capital ratios at 31 December profile of Ireland under Moody’s banking methodology, as well 2016 were 19.0% and 21.7% respectively. Based on these ratios, as favourable developments in other credit fundamentals, AIB has a very significant buffer over maximum distributable notably asset quality. amount(1) (“MDA”) trigger levels. 2017 - SREP composition 9.0% 1.25% 3.25% 4.50% CET1 12.5% 1.25% 3.25% 2.00% 1.50% 4.50% Total capital CET1 - Pillar 1 CCB3 - (CET1) AT1 - Pillar 1 P2R2 - (CET1) Tier 2 - Pillar 1 MDA In August 2016, S&P reaffirmed AIB’s long-term rating at BB+ with a positive outlook. S&P noted that the positive outlook highlighted the potential that S&P could revise upward its anchor for commercial banks in Ireland to reflect the decreasing macroeconomic risks they face in their domestic market. In December 2016, Fitch affirmed AIB’s rating at BB+ with a positive outlook. Fitch noted that this took account of AIB’s strong domestic franchise, strengthened capitalisation, normalised funding and liquidity profiles and improving asset quality. Fitch noted that the UK’s decision to leave the European Union could be a negative for the Irish economy. The extent of this impact, however, will only become clear over time as EU-UK negotiations develop. (1)“MDA trigger level represents the ratio below which restrictions on AIB long-term ratings Moody's paying dividends, inter alia, would be imposed. (2)Capital Conservation Buffer (“CCB”) rises to 2.5% by 2018. (3)Pillar 2 Requirement (“P2R”) is the capital buffer applied by the ECB Long-term Outlook following the SREP. 31 December 2016 S&P BB+ Fitch BB+ Baa3 Positive Positive Positive AIB has been designated as an Other Systemically Important AIB long-term ratings Moody's Institution (“O-SII”). A buffer for O-SII will be applied at 0.5% from 2019, rising to 1.5% by 2021. Long-term Outlook 31 December 2015 S&P BB+ Fitch BB+ Ba1 Positive Positive Positive 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 January 2017, S&P upgraded AIB’s long term rating by one notch to BBB- (investment grade) with a stable outlook. This was driven by what S&P considers brisk economic growth in the Irish economy and the sustained recovery in property prices feeding through to the creditworthiness of AIB. 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 2016 47 A3 Capital AFR 2016 pages 43-48:Layout 1 10/03/2017 19:49 Page 48 Business review - 2. Capital management EBA 2016 stress test The Group was subject to the 2016 EU-wide stress test conducted by the European Banking Authority (“EBA”), in co-operation with the Central Bank of Ireland, the ECB, the European Commission (“EC”) and the European Systemic Risk Board (“ESRB”). The stress test was conducted on a Static Balance Sheet basis where the stress test was based on how the balance sheet as at 31 December 2015 would perform over three years under both baseline and adverse macroeconomic scenarios. Under the stress test, AIB’s projected CET 1 under the adverse scenario was 7.4% on a transitional basis and 4.3% on a fully loaded basis. The stress test does not reflect current or future improved financial performance. The results are incorporated into the Pillar 2 guidance received as part of the SREP. AIB had no required capital actions following the stress test and as noted on page 44, AIB’s capital ratios increased during 2016 on both a fully loaded and transitional basis. 48 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 49 Risk management 1 2 Principal risks and uncertainties Framework 2.1 2.2 2.3 2.4 Risk management framework Risk identification and assessment Risk appetite Risk governance 3 Individual risk types 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 Credit risk(1) Additional credit risk information – Forbearance Restructure execution risk Funding and liquidity risk Capital adequacy risk Market risk Operational risk Regulatory compliance risk and conduct risk Culture risk 3.10 Business risk 3.11 Pension risk 3.12 Model risk Page 50 59 59 60 60 62 131 145 146 158 159 167 167 168 169 170 170 (1)The credit risk disclosures in this section are aligned with the Central Bank of Ireland (‘Central Bank’) guidelines issued in December 2011 and May 2013 respectively. 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 2016 49 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 50 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. Further detail on the overall governance and organisation framework through which the Group manages and seeks to mitigate risk, is described in ‘Risk management – 2. Framework’. More detailed disclosures in respect of the Group’s individual material risks is included in ‘Risk management – 3. Individual risk types’. Although the Group invests substantial time and effort in its risk management strategies and techniques, there is a risk that these may fail to adequately 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 risks; – Regulatory and legal risks; and – 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 deterioration of the Irish economy, the economy of the United Kingdom or the global economy Deterioration in the performance of the Irish economy or in the Expectations regarding geopolitical events and their impact on the global economy remain uncertain in both the short and medium term. In particular, the European sovereign debt crisis which commenced in 2011 and the emergence of significant anti- austerity sentiment in certain Eurozone countries, including, for European Union (“EU”), the United Kingdom (“UK”) and/or other example, Greece and Italy, has contributed to, and may relevant economies has the potential to adversely affect the Group’s overall financial condition and performance. Such continue to contribute to, instability in the European sovereign debt markets and in the eurozone economy generally. If a deterioration could result in reductions in business activity, lower country were to exit the eurozone, it may lead to that country demand for the Group’s products and services, reduced availability of credit, increased funding costs, and decreased asset values. subsequently leaving the EU, which could contribute to the potential break-up of the EU, and otherwise give rise to further uncertainty and adversely impact the overall economic climate. Deterioration in the economic and market conditions in which the The emergence of anti-EU and anti-establishment political Group operates could negatively impact on the Group's income, and may put additional pressure on the Group to more aggressively manage its cost base. This may have negative consequences for the Group to the extent that strategic investments are de-scoped or de-prioritised, and may serve to parties and a rise in protectionist sentiment across the EU may also give rise to further political instability and uncertainty, particularly in light of upcoming elections in France, the Netherlands and Germany in 2017. increase operational risk. Market conditions are also impacted by The UK’s vote to withdraw from the EU has resulted in the competitive environment in which the Group operates. significant volatility within the European political environment, as described in further detail hereunder. The Group's financial planning process evaluates the impact of economic and market conditions on the Group's capital, funding and profitability under both forecast and stress scenarios. Additionally, sensitivity analysis is used to evaluate the impact of individual risk drivers. Performance against the Group’s financial plan is monitored by Management and the Board on a monthly basis. Geopolitical developments, particularly in Europe and the United States, may have a negative impact on global economic growth, disrupt markets and adversely affect the Group Geopolitical developments in recent years have given rise to In addition, Northern Ireland is experiencing significant political uncertainty, which may continue following the elections. If an arrangement cannot be agreed, the current political structures in Northern Ireland may be subject to significant change. The uncertainty resulting from these developments may have an adverse effect on economic conditions in Northern Ireland, which could in turn have an adverse effect on the Group, given its operations there. In the United States of America (“USA”), the implementation of the new administration’s policies, such as trade protectionism and travel restrictions, may in the future have an adverse effect significant market volatility and in certain instances have had an on relations between the USA and the EU and may have an adverse impact on economic growth and performance globally. impact on economic conditions generally. 50 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 51 The aforementioned geopolitical developments as well as any further developments may adversely affect global economic growth, heighten trading tensions and disrupt markets, which could in turn have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.The Group closely monitors global activities and devel- opments particularly in the UK, EU and eurozone. Furthermore, the Group's stress testing framework evaluates its risk profile The Group is subject to credit risks in respect of customers and counterparties, including risks arising due to concentration of exposures across its loan book, and any failure to manage these risks effectively could have a material adverse effect on its business, financial condition, results of operations and prospects Risks arising from changes in credit quality and the recoverability under a range of scenarios. The most severe systemic risks, to- of loans and other amounts due from customers and gether with their associated risk mitigants (where available) are counterparties are inherent in a wide range of the Group’s evaluated as part of the Internal Capital Adequacy Assessment businesses. In addition to the credit exposures arising from loans Process (“ICAAP”). The UK’s exit from the EU could lead to a deterioration in market and economic conditions in the UK and Ireland, which could adversely affect the Group’s business, financial condition, results of operations and prospects In a referendum on the UK’s membership of the EU held on 23 June 2016, a majority voted in favour of the UK’s withdrawal from to individuals, SMEs and corporates, the Group also has exposure to credit risk arising from loans to financial institutions, its trading portfolio, available for sale and held to maturity portfolios, derivatives and from off-balance sheet guarantees and commitments. Due to the nature of its business, the Group has extensive exposure to the Irish property market, both because of its mortgage lending activities and its property and construction loan book. the EU (“Brexit”). Following a vote in parliament in February 2017 Accordingly, any development that adversely affects the Irish approving such a measure, the UK Government is expected to property market could have a disproportionate impact on the trigger the official process for withdrawing from the EU under Group. If the Group is unable to manage its credit risk Article 50 of the Treaty of the European Union, which will lead to effectively, its business, results of operations, financial condition a process of negotiation that will determine the future terms of the and prospects could be materially adversely affected. UK’s relationship with the EU. The impacts of a UK exit from the EU on the UK economy and trade is unknown but may have The Group’s credit risk management operates under a Board negative consequences for the Group both in terms of its UK and approved framework and suite of policies. The Group’s Credit Irish operations and impacts on the UK and Irish economies. Committee (“GCC”) monitors credit risk. The Group’s Credit Risk The legal and regulatory position of the Group’s operations in the framework and monitoring compliance with this framework. The UK may also become uncertain. If UK regulatory capital rules Group internal Audit function provides third line assurance on diverge from those of the EU, as a result of future changes in EU credit risk. function provides second line assurance, defining the credit risk law which are not mirrored by the UK or vice versa, the Group’s regulatory burden may increase, which likely would increase compliance costs. Depending on the nature of the agreement reached between the UK and the EU on migration and immigration (if any), the UK’s exit from the EU could also result in restrictions on mobility of personnel and could create difficulties for the Group in recruiting and retaining qualified employees, both Constraints on the Group’s access to funding, including a loss of confidence by depositors or curtailed access to wholesale funding markets, may result in the Group being required to seek alternative sources of funding Conditions could arise which would constrain funding or liquidity in the UK and Ireland. In addition, financial institutions and other opportunities for the Group. Currently, the Group funds its financial operations currently based in the UK may seek to activities primarily from customer deposits. However, a loss of relocate some operations to Ireland. This may result in confidence by depositors in the Group, the Irish banking heightened competition for suitably qualified employees, which industry or the Irish economy, could lead to losses of funding or could adversely affect the Group’s ability to attract and retain liquidity resources over a short period of time. Concerns around employees. Accordingly, if the UK exits the EU, this could have a debt sustainability and sovereign downgrades in the eurozone material adverse effect on the Group’s business, financial could impact the Group’s deposit base and could impede condition, results of operations and prospects. access to wholesale funding markets, impacting the ability of the Group to issue debt securities to the market. 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 Group closely monitors activities and developments in the UK, EU and eurozone. Furthermore, the Group's stress testing A stable customer deposit base and asset deleveraging have framework evaluates its risk profile under a range of scenarios , allowed the Group to materially reduce its funding from the including the risk of protracted and unfavourable Brexit European Central Bank (“ECB”). This, in turn, has allowed an outcomes. The most severe systemic risks, together with their increase in unencumbered high quality liquid assets. The Group associated risk mitigants (where available) are evaluated as part has also identified certain management and mitigating actions of the Internal Capital Adequacy Assessment Process (“ICAAP”). which could be considered on the occurrence of a liquidity 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 2016 51 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 52 Risk management – 1. Principal risks and uncertainties stress event. However, in the unlikely event that the Group on market risk, defining the market risk control framework and exhausted these sources of liquidity it would be necessary to monitoring adherence to this framework. The Group’s Internal seek alternative sources of funding from monetary authorities. Audit function provides third line assurance on market risk The Group’s funding and liquidity risk management operates under a Board approved framework and policy. The Group’s Asset and Liability Committee (ALCo) reviews the Group’s funding and liquidity risk position and makes decisions on the management of the Group’s assets and liabilities. The Group’s Treasury and Capital & Liquidity functions actively manage Regulatory and legal risks The BRRD and the SRM Regulation provide for resolution tools that may have a material adverse effect on the Group The BRRD establishes a European framework dealing with funding and liquidity risk – proposing and executing funding resolution mechanisms, loss absorbency and bail-in rules. The strategy and managing liquidity risk on a day to day basis. The SRB has been established to exercise a centralised power of Group’s Financial Risk function provides second line assurance resolution in the eurozone and any other participating Member on funding and liquidity risk, defining the funding and liquidity States. From 1 January 2016, the SRB became principally control framework and monitoring adherence to this framework. responsible for determining the Group’s resolution strategy. The Group’s internal Audit function provides third line assurance on funding and liquidity risk. The Group is exposed to market risks The following market risks arise in the normal course of the The BRRD is designed to provide relevant authorities with a credible set of tools to intervene sufficiently early and quickly in an unsound or failing institution so as to ensure the continuity of the institution’s critical financial and economic functions, while Group's banking business; interest rate risk, credit spread risk minimising the impact of an institution’s failure on the economy (including sovereign risk), basis risk and foreign exchange risk. and financial system. The BRRD also equips the resolution The Group's earnings are exposed to interest rate risk including in circumstances where the credit institution is failing or is likely authority with certain resolution powers (the “Resolution Tools”) basis risk i.e. an imperfect correlation in the adjustment of the to fail. rates earned and paid on different products with otherwise similar repricing characteristics. The persistence of exceptionally Amongst other provisions, the BRRD introduces a statutory low interest rates for an extended period could adversely impact write-down and conversion power to write down or to convert the Group’s earnings through the compression of net interest into equity the Group’s capital instruments if certain conditions margin. Widening credit spreads could adversely impact the are met. value of the Group’s available for sale bond positions. Trading book risks predominantly result from supporting client identify any material impediments to the Group's resolvability. businesses with small residual discretionary positions remaining. Where necessary, the SRB may instruct that actions are taken Credit valuation adjustments (“CVA”) and funding valuation to remove such impediments. adjustments (“FVA”) to derivative valuations arising from customer activity have potentially the largest trading book If the SRB is of the view that the measures proposed by the In drawing up the Group's resolution plan, the SRB would derived impact on earnings. Group would not effectively address the impediments to resolvability, the SRB may direct the Group to take alternative Changes in foreign exchange rates, particularly, the euro-sterling measures as outlined in the SRM Regulation. rate, affect the value of assets and liabilities denominated in foreign currency and the reported earnings of the Group’s On 3 February 2017, AIB announced that it had been notified non-Irish subsidiaries. Any failure to manage market risks to by the Single Resolution Board that the preferred resolution which the Group is exposed could have a material adverse effect strategy for AIB consists of a single point of entry bail-in at a on its business, financial conditions and prospects. group holding company level, which would require the establishment of a holding company directly above Allied Irish The Group’s market risk management operates under a Board Banks, p.l.c. Under a single point of entry resolution strategy approved framework and policy. The Group’s Asset and Liability with bail-in at Group holding company level, the holding Committee (ALCo) reviews the Group’s market risk position and company would issue external equity and debt instruments that makes decisions on the management of the Group’s assets and would be expected to be eligible for minimum requirements for liabilities. The Group’s Treasury function actively manages own funds and eligible liabilities (“MREL”) purposes, whereas market risk – proposing and executing market risk strategy and customer accounts would continue to be held in regulated managing market risk on a day to day basis. The Group’s Capital operating companies below the holding company level. and Liquidity function is responsible for making strategic asset and liability management recommendations to ALCo. The The changes to be implemented in respect of the SRM Group’s Financial Risk function provides second line assurance Regulation and the BRRD may have an effect on the Group’s business, financial condition or prospects. Depending on the 52 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 53 specific nature of the requirements and how they are enforced, described above (including the drawing up of resolution such changes could have a significant impact on the Group’s plans and being under the direct supervision of a new operations, structure, costs and/or capital requirements. regulatory body) may place a strain on the Group’s resources, particularly during a period of significant The Group continues to actively engage with the Resolution organisational transformation. Authorities as they develop their resolution plan. The Group is required to comply with a wide range of laws and regulations. If the Group fails to comply with these laws and regulations, it could become subject to regulatory actions The Group must comply with numerous laws, accounting Furthermore, the laws and regulations to which the Group is subject may change, including as a result of changes in interpretation or practice by courts, regulators or other authorities, resulting in higher compliance costs and resource commitments, and/or a failure by the Group to implement the necessary changes to its business within the time period standards and regulations such as detailed and emerging specified. prudential regulatory requirements in the form of CRR/CRD IV, BRRD, EBA and CBI requirements. In addition, differing regulatory regimes across the jurisdictions in which the Group operates, including Ireland, the United – New accounting standards, for example, IFRS 9 Financial Kingdom and the United States, may result in non-compliance Instruments, which will replace IAS 39 Financial Instruments: and/or may entail additional compliance costs. Recognition and Measurement, will change the classification and measurement of certain financial assets, the recognition The Group adopts a systematic approach to the identification, and the financial impact of impairment and hedge assessment, transposition, control and monitoring of new or accounting; changing laws and regulatory requirements. Once implemented, – Contractual obligations may either not be enforceable as a compliance monitoring team tests the adequacy of, and intended or may be enforced against the Group in an adherence to, the control environment. adverse way; – Regulatory actions pose a number of risks to the Group, including substantial monetary damages or fines, the amounts of which are difficult to predict and may exceed the amount of provisions set aside to cover such risks. In addition, the Group may be subject to other penalties and injunctive relief, civil or private litigation arising out of a The Group is subject to anti-money laundering, anti-corruption and sanctions regulations and if it fails to comply with these regulations, it may face administrative sanctions, criminal penalties and/or reputational damage The Group is subject to laws aimed at preventing money regulatory investigation, the potential for criminal laundering, anti-corruption and the financing of terrorism. prosecution in certain circumstances and regulatory Monitoring compliance with anti-money laundering (“AML”) and restrictions on the Group’s business. The Group needs to anti-corruption and sanctions rules can put a significant financial be aware of and comply with new regulation as it emerges burden on banks and other financial institutions and requires and existing regulation as it evolves. All of these issues significant technical capabilities. In recent years, enforcement of could have a negative effect on the Group’s reputation and these laws and regulations against financial institutions has the confidence of its customers in the Group as well as become more intrusive, resulting in several landmark fines taking a significant amount of management time and against financial institutions. In addition, the Group cannot resources away from the implementation of the Group’s predict the nature, scope or effect of future regulatory strategy. requirements to which it might be subject or the way existing – The Group is also subject to substantial and changing laws might be administered or interpreted. Although the Group prudential regulation, including requirements to has policies and procedures that it believes are sufficient to maintain adequate capital resources and liquidity and to comply with applicable anti-money laundering, anti-corruption satisfy specified capital, liquidity and leverage ratios, as and sanctions rules and regulations, it cannot guarantee that well as changes in accounting standards that impact the such policies and procedures completely prevent situations of Group’s capital position, and any perceived or actual money laundering or corruption, including actions by the Group’s shortage of capital or liquidity could result in actions by employees, agents, third party suppliers or other related persons regulatory authorities, including public censure and the for which the Group might be held responsible. Any such events imposition of sanctions. may have severe consequences, including litigation, sanctions, – The Group must meet the cost of all levies that are imposed fines and reputational consequences, which could have a on it in relation to funding the bank resolution fund material adverse effect on the Group’s business, financial established under the SRM or that are imposed on it under condition, results of operations and prospects. any other applicable compensation scheme relating to banks or other financial institutions in financial difficulty. In addition, AIB has established robust control frameworks to identify and the challenge of meeting the degree of regulatory change comply with the AML, sanctions and anti-bribery laws that apply Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 54 Risk management – 1. Principal risks and uncertainties to all of its business operations. Key aspects include The Group has a centralised legal team under the Group comprehensive Group Policies and standards, detailed customer General Counsel and relevant internal and external legal on-boarding and ongoing due diligence requirements, ongoing expertise is retained to mitigate associated risks, as appropriate. transaction monitoring and automated screening of the customer base and payments against relevant official sanctions lists, together with escalation protocols and staff training programmes. The Group’s financial results may be negatively impacted by changes to accounting standards The Group reports its results of operations and financial The Group may be adversely affected by the budgetary and taxation policies of the Irish and UK Governments and by changes in taxation law and policy globally The future budgetary and taxation policy of Ireland and other measures adopted by the Irish Government or the position in accordance with IFRS. Changes to IFRS or UK Government may have an adverse impact on borrowers’ interpretations thereof may cause its future reported results of ability to repay their loans and, as a result, the Group’s operations and financial position to differ from current business. expectations, or historical results to differ from those previously reported due to the adoption of accounting standards on a Furthermore, some measures may directly impact the financial retrospective basis. Such changes may also affect the Group’s performance of the Group through the imposition of measures regulatory capital and ratios by requiring the recognition of such as the bank levy introduced by the Irish Government in additional provisions for loss on certain assets. Budget 2014 and which the Irish Government announced during Budget 2016 would be extended to 2021. The annual The Group monitors potential accounting changes and when levy paid by the Group in 2016 amounted to € 60 million. these are finalised, it determines the potential impact and discloses significant future changes in its financial statements. In addition, the UK Government introduced legislation restricting Currently, there are a number of issued but not yet effective IFRS the proportion of a bank’s taxable profit that can be offset by changes, as well as potential IFRS changes, some of which certain carried forward losses to 50 per cent, effective from 1 could be expected to impact the Group’s reported results of April 2015, resulting in a € 242 million decrease in the Group’s operations, financial position and regulatory capital in the future. deferred tax asset for the year ended 31 December 2015. This For example, IFRS 9 Financial Instruments, which will replace was subsequently further reduced to 25 per cent, effective IAS 39 when adopted, will require the Group to move from an 1 April 2016.The impact associated with these and any future incurred loss model to an expected loss model requiring it to changes in budgetary and taxation policies globally could have recognise not only credit losses that have already occurred but a material adverse effect on the Group’s financial position. also losses that are expected to occur in the future. It is not currently possible to estimate the precise financial effects of this In addition, multi-national corporations’ recognition of resources new standard on the Group’s results of operations, although it is for taxation purposes has come under considerable political expected that IFRS 9 will have a significant impact for the Group, scrutiny recently. The OECD, with the support of the G-20, has as is the case for the banking industry as a whole. The embarked on a project to address base erosion and profits introduction of IFRS 9 may also affect the Group’s capital shifting (“BEPS”) by multi-national companies, which is focused position. on combatting base erosion using arrangements to generate income that is not subject to meaningful taxation in any The Group mitigates this risk by holding capital resources in jurisdiction as well as profit shifting from high tax jurisdictions to excess of minimum regulatory and internal requirements, to act low tax jurisdictions. If these types of arrangements continue to as a buffer against volatility and unexpected events. be challenged, this could result in companies relocating from Risk of litigation arising from the Group’s activities The Group operates in a legal and regulatory environment that Ireland to or deciding to invest in other jurisdictions, which could have an adverse impact on the Irish economy. exposes it to potentially significant litigation and regulatory risks. The Group assesses this risk by undertaking sensitivity Disputes and legal proceedings in which the Group may be analysis in its financial planning process, and monitoring involved are subject to many uncertainties, and the outcomes financial performance against the Group’s financial plan on a of such disputes are often difficult to predict, particularly in the monthly basis. early stages of a case or investigation. Adverse regulatory action or adverse judgements in litigation could result in a monetary fine or penalty, adverse monetary judgement or settlement and/or restrictions or limitations on the Group’s operations or result in a material adverse effect on the Group’s reputation. Irish legislation and regulations in relation to mortgages, as well as judicial procedures for the enforcement of mortgages and custom, practice and interpretation of such legislation, regulations and procedures, may result in higher levels of default by Group’s customers, delays in the Group’s recoveries in its mortgage portfolio and increased impairments Legislation and regulations have been introduced to the Irish 54 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 55 mortgage market which may affect the Group’s customers’ In addition, the Group may be subject to allegations of attitudes towards their debt obligations, and hence their mis-selling of financial products, including as a result of having interactions with the Group in relation to their mortgages. sales practices and/or reward structures in place that are subsequently determined to have been inappropriate. This may There is a risk that legislation and regulations such as the result in adverse regulatory action (including significant fines) or Personal Insolvency Act and the Code of Conduct on Mortgages requirements to amend sales processes, withdraw products or Arrears (“CCMA”) will result in changes in customers’ attitudes provide restitution to affected customers, any or all of which towards their debt obligations. Customers may be more likely to could result in the incurrence of significant costs, may require default even when they have sufficient resources to continue provisions to be recorded in the financial statements and could making payments on their mortgages. This could result in delays adversely impact future revenues from affected products. in the Group’s recoveries in respect of its mortgage portfolio and increased impairments, which could have a material adverse Changes in laws or regulations may vastly change the effect on its business, results of operations, financial condition requirements applicable to the Group in a short period of time and prospects. and/or without transitional arrangements. If the Group is unable to manage these risks, its business, results of operations, Irish Government policy in relation to mortgages is continuing financial condition and prospects could be materially adversely to evolve. It is possible that further changes in legislation or affected. regulation could be introduced, or the way in which they are applied by the courts. The Government may seek to influence The Group has a mature Conduct Risk Framework, aligned with how credit institutions set interest rates on mortgages, may the Group Strategy, which is embedded in the organisation and amend the Personal Insolvency Act to reduce the entitlements provides oversight of conduct risks at Leadership Team and currently afforded to mortgage holders thereunder or may enact Board level by way of two key fora: other legislation or introduce further regulation that affects the – Group Conduct Committee: provides the Group Leadership rights of lenders in other ways which could have a material team oversight of conduct through promoting and adverse effect on the Group’s business, financial condition and supporting a customer centric culture and also oversees the prospects. key conduct Risk Appetite metrics for Complaints Management & Product Reviews. The Group actively engages with all relevant industry and – Group Product & Proposition Committee: focus is government stakeholders highlighting, as appropriate, the exclusively in product oversight and management including intended and unintended consequences of any proposed overseeing a rolling programme of product reviews. regulatory or legislative changes including its impacts on customers, the Group and the industry as a whole. The Group is subject to conduct risk, including changes in laws, regulations and practices of relevant authorities and the risk that its practices are challenged under current regulations or standards, and if it is deemed to have breached any of these laws or regulations, it could suffer reputational damage or become subject to challenges by customers or competitors, or sanctions, fines or other actions The Group is exposed to conduct risk, which the Group Risks relating to business operations, governance and internal control systems The Group’s strategy may not be optimal and/or not successfully implemented The Group has identified several strategic objectives for its business. There can be no assurance that the Group’s strategy is the optimal strategy for delivering returns to shareholders. The various elements of the Group’s strategy may be individually unnecessary or collectively incomplete. The Group’s defines as the risk that inappropriate actions or inactions cause strategy may also prove to be based on flawed assumptions poor or unfair customer outcomes or market instability. Certain regarding the pace and direction of future change across the aspects of the Group’s business may be determined by banking sector. Finally, the Group may not be successful in regulators in various jurisdictions or by courts not to have been implementing its strategy in a cost effective manner. The conducted in accordance with applicable local or, potentially, Group’s business, results of operations, financial condition and overseas laws and regulations, or in a fair and reasonable prospects could be materially adversely affected if any or all of manner as determined by the local ombudsman. If the Group these strategy-related risks were to materialise. fails to comply with any relevant laws or regulations, it may suffer reputational damage and may be subject to challenges by The entry of bank and non-bank competitors into the Group's customers or competitors, or sanctions, fines or other actions markets may put additional pressure on the Group's income imposed by regulatory authorities. The Group’s practices may streams and, consequently, have an adverse impact on its also be challenged under current regulations and standards. financial performance. Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 56 Risk management – 1. Principal risks and uncertainties The Group mitigates this risk by monitoring its performance credit risk, market risk, pension risk, regulatory compliance risk, against its strategic objectives on a regular basis, by periodically operational risk, restructure execution risk, model risk and reviewing the competitive landscape and by benchmarking its conduct risk. Although the Group invests substantially in its risk performance to peers. If a poor or inappropriate culture develops across the Group’s business, this may adversely impact its performance and impede the achievement of its strategic goals The Group must continuously develop and promote an management strategies and techniques, there is a risk that these fail to fully mitigate the risks in some circumstances. Furthermore, Senior Management are required to make complex judgements and there is a risk that the decisions made by Senior Management may not be appropriate or yield the results expected or that Senior Management may be unable to recognise emerging risks in order to take appropriate action in a appropriate culture that drives and influences the activities of timely manner. its business and staff and its dealings with customers in relation to managing and taking risks and ensuring risk considerations The Group mitigates this risk by regularly reviewing the design continue to play a key role in business decisions. It is senior and operating effectiveness of its risk management policies and management’s responsibility to ensure that the appropriate methodologies. These reviews are supplemented in some culture is embedded throughout the organisation. As was instances by external review and validation. demonstrated by many banks during the financial crisis, if an inappropriate culture develops, then a strategy or course of action could be adopted that results in poor customer outcomes. If the Group is unable to maintain an appropriate culture, this could have a negative impact on the Group’s business, result of operations, financial condition and prospects. The Group monitors the evolving culture through a staff engagement programme, iConnect and through the performance The Group uses risk measurement or quantum of valuation models across many, though not all, of its activities and if these models prove to be inaccurate, its management of risk may be ineffective or compromised and/or the value of its financial assets and liabilities may be overestimated or underestimated The Group uses models across many, though not all, of its management system. As a result, initiatives continue to be activities including, but not limited to, capital management, credit undertaken at team level to improve the way we do things and grading, provisioning, valuations, liquidity, pricing and stress from which we continuously identify opportunities to evolve our testing. The Group also uses financial models to determine the culture at Group level as a competitive advantage. fair value of derivative financial instruments, financial instruments Damage to the Group’s brand or reputation could adversely affect its relationships with customers, staff, shareholders and regulators Management aims to ensure that the Group’s brands, which through profit or loss, certain hedged financial assets and financial liabilities and financial assets classified as available for sale in accordance with International Financial Reporting Standards (“IFRS”). Since the Group uses risk measurement models based on historical observations, there is a risk that they include the AIB and EBS brands in Ireland, the AIB GB brand in underestimate or overestimate exposure to various risks to the Great Britain and the First Trust Bank brand in Northern Ireland, extent that future market conditions deviate from historical are at the heart of its customers’ financial lives by being useful, experience. Furthermore, as a result of evolving regulatory informative, easy to use and providing an exceptional customer requirements, the importance of models across the Group’s experience. The Group’s relationships with its stakeholders, business has been heightened and their importance may including its customers, staff and regulators, could be adversely continue to increase, in particular because of reforms introduced affected by any circumstance that causes real or perceived by the Basel Committee on Banking Supervision, including Basel damage to its brands or reputation. In particular, any regulatory IV. If the Group’s models do not accurately estimate its exposure investigations, inquiries, litigation, actual or perceived to various risks, it may experience unexpected losses. The misconduct or poor market practice in relation to customer Group may also incur losses as a result of decisions made based related issues could damage the Group’s brands and/or on inaccuracies in these models, including the data used to build reputation. Any damage to the Group’s brands and/or reputation them or an incomplete understanding of these models. If the could have a material adverse effect on the Group’s business, Group’s models are not effective in estimating its exposure to results of operations, financial condition or prospects. various risks or determining the fair value of its financial assets The Group’s risk management systems, processes, guidelines and policies may prove inadequate for the risks faced by its business and any failure to properly assess or manage the risks which it faces could cause harm to the Group’s business The Group is exposed to a number of material risks, such as and liabilities or if its models prove to be inaccurate, its business, financial condition, results of operations and prospects could be materially adversely affected. The Group mitigates this risk through the review and monitoring of the design and operating effectiveness of the Model Risk Framework and supporting policies. These reviews are supplemented in some instances by external review and business risk, capital adequacy risk, funding and liquidity risk, validation. 56 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 57 The Group has a relatively high level of criticised loans on its statement of financial position and there can be no assurance that it will continue to be successful in reducing the level of these loans. The management of criticised loans also gives rise to risks The Group has a relatively high level of criticised loans, which developments in recent years, including significant headcount reductions, reductions in compensation and a significant level of change across the organisation, and these developments may give rise to employee dissatisfaction and/or tensions with trade unions. The Group’s business is dependent on processing and reporting are defined as loans requiring additional management attention accurately and efficiently a high volume of complex transactions over and above that normally required for the loan type. across numerous and diverse products and services, which often includes personal customer data. Any weakness in these Criticised loans include “watch”, “vulnerable” and “impaired” systems or processes including failure of third party processes loans. The Group has been proactive in managing its criticised infrastructure and services on which the Group relies could have loans, in particular through restructuring activities and the an adverse effect on the Group's results and on its ability to development of a MARS, which built on and formalised the deliver appropriate customer outcomes during the affected period MARP introduced in order to comply with the Central Bank’s and/or expose the Group to investigative or enforcement actions CCMA. The Group has reduced the level of criticised loans, by the relevant regulatory authorities. In addition, any breach in however, there can be no assurance that the Group will continue security of the Group’s systems (for example from increasingly to be successful in reducing the level of its criticised loans. sophisticated cybercrime attacks), could disrupt its business, result in the disclosure of confidential information or create The monitoring of such loans can be time consuming and significant financial and/or legal exposure and the possibility of typically requires case-by-case resolution, which may divert damage to the Group’s reputation and/or brand. resources from other areas of the Group’s business. The Group’s ability to manage criticised loans may be adversely communications systems and its related operational processes affected by changes in the regulatory regime or changes in are critical to the Group’s success and these may not operate as The proper functioning of information technology (“IT”) and government policy. expected, including as a result of technical failures, human error, unauthorised access, cybercrime, natural hazards or disasters, or The Group has extensive credit policies and strategies, similarly disruptive events. implementation guidelines and monitoring structures in place to manage criticised loans. The Group regularly reviews these The Group is dependent on the performance of third party serv- credit policies as well as the performance of criticised loans ice providers, including providers that have licensed certain IT against financial plans. The Group faces operational risks – including people, cyber, outsourcing, process and systems risks Operational risk which is the risk arising from inadequate or systems to it, and if these providers do not perform their services or fail to provide services to the Group or renew their licences with the Group, the Group’s business could be disrupted and it could incur unforeseen costs. failed internal processes, people and systems, or from external Furthermore, the Group may be subject to privacy or data events. protection failures, cybercrime and fraudulent activity in relation to personal customer data, which could result in investigations by One of the Group's key operational risks is people risk. The regulators, liability to customers and/or reputational damage. Group’s efforts to restore and sustain the stability of its business on a long-term basis depend, in part, on the availability of The Group mitigates its operational risks by having detailed risk skilled management and the continued service of key members assessment and internal control requirements in relation to the of staff. management of its key people, process and systems risk, and through comprehensive and robust business continuity Under the terms of the recapitalisation of the Group by the Irish management arrangements. Government, the Group is required to comply with certain executive pay and compensation arrangements. As a result of these restrictions, and in the increasingly competitive markets in Ireland and the UK, the Group may not be able to attract, retain The Group may have insufficient capital to meet increased minimum regulatory requirements The Group is subject to minimum capital requirements as set and remunerate highly skilled and qualified personnel. Failure by out in CRD IV and implemented under the SSM. As a result of the Group to staff its day-to-day operations appropriately or these requirements banks in the EU have been, and could failure to attract and appropriately develop, motivate and retain continue to be required to increase the quantity and the quality highly skilled and qualified personnel could have an adverse of their regulatory capital. Given this regulatory context, and the effect on the Group’s results, financial condition and prospects. In levels of uncertainty in the current economic environment, there addition, employees have been affected by a number of is a possibility that the economic outturn over the Group's Allied Irish Banks, p.l.c. Annual Financial Report 2016 57 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 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 58 Risk management – 1. Principal risks and uncertainties capital planning period may be materially worse than expected subject to risk of challenge, however, the Group will robustly and/or that losses on the Group’s credit portfolio may be above defend any such challenge, legal or otherwise. forecast levels. Were such losses to be significantly greater than currently forecast, or capital requirements for other material risks to increase significantly, there is a risk that the Group’s capital position could be eroded to the extent that it would have insufficient capital to meet its regulatory requirements. In particular, capital levels may be negatively affected by volatility arising from the defined benefit pension schemes and the AFS portfolio values. Deferred tax assets that are recognised by the Group may be affected by changes in tax legislation, the interpretation of such legislation or relevant practices. The recognition of deferred tax asset is dependent on future taxable profit being available against which the unused tax losses recognised can be utilised. Changes in tax legislation or the interpretation of such This risk is mitigated by evaluating the adequacy of the Group's legislation, regulatory requirements, accounting standards or capital under both forecast and stress conditions as part of the practices of relevant authorities, could adversely affect the ICAAP. The ICAAP process includes the identification and basis for recognition of the value of these losses. In the United evaluation of potential capital mitigants and is undertaken Kingdom, for instance, legislation has been introduced to bi-annually. The Group is subject to the risk that the funding position of its defined benefit pension schemes could deteriorate, requiring it to make additional contributions The Group maintains a number of defined benefit pension restrict the proportion of a bank’s taxable profit that can be offset by certain carried forward losses to 50 per cent, effective from 1 April 2015, resulting in a decrease in the Group’s deferred tax asset for the year ended 31 December 2015. This was subsequently further reduced to 25 per cent, effective from 1 April 2016. This legislation has adversely affected the value of the Group’s deferred tax assets in relation to its UK operations. schemes for certain current and former employees. These If similar legislation were to be introduced in Ireland, this could defined benefit schemes were closed to future accruals from have a further adverse impact on the value of the Group’s 31 December 2013. In relation to these schemes, the Group deferred tax assets, which could adversely affect the Group’s faces the risk that the funding position of the schemes will business, results of operations, financial condition and prospects. deteriorate. This may require it to make additional contributions There is also a risk that the generation of future taxable profits above what is already planned to cover its pension obligations in Ireland or in the UK, supporting the current level of deferred towards current and former employees. Furthermore, IAS tax assets, may not arise or be generated beyond a period pension deficits as reported are a deduction from capital under where the Group believes that it can assess the likelihood of CRD IV. Accordingly, any increase in the Group’s pension deficit profits arising as more likely than not. may adversely affect its capital position. The capital adequacy rules under CRD IV, also require the The Group received approval from the Pensions Authority in Group, among other things, to deduct from its CET1 the value of 2013 in relation to a funding plan up to January 2018 with regard most of its deferred tax assets, including all deferred tax assets to the regulatory minimum funding standard (the “MFS”) arising from unused tax losses. This deduction from CET1 requirements of the AIB Irish Pension Scheme. For its defined commenced in 2015 and is to be phased in evenly over 10 benefit schemes in the UK, the Group established an asset years, although this phasing may be subject to change. backed funding vehicle to provide the required regulatory Because of these new rules, the Group may be required to hold funding. Nonetheless, a level of volatility associated with pension more capital in the transitional period. funding remains due to potential financial market fluctuations and possible changes to pension and accounting regulations. This The Group monitors this risk by regularly reviewing the basis volatility can be classified as market risk and actuarial risk. for recognition of its deferred tax assets. Market risk arises because the estimated market value of the pension scheme assets may decline or their investment returns may decrease 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. There has been a change to the actuarial assumption of the nature and extent of any obligation to fund discretionary increases to pensions in payment in the Group’s main Irish schemes. This has been assessed following a review by the Board, having considered actuarial and external legal advice. Although the Group is confident of its assessment, it may be 58 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 59 Risk management – 2. Framework Introduction The principal risks and uncertainties to which the Group is 2.2 Risk identification and assessment The Group uses a variety of approaches and methodologies to exposed are set out in the previous section. The governance and identify and assess its principal risks and uncertainties. A organisation framework through which the Group manages and Material Risk Assessment (“MRA”) is undertaken on at least an seeks to mitigate these risks, is described below. annual basis. The MRA identifies and assesses the most 2.1 Risk management framework The Group assumes a variety of risks in undertaking its business material risks facing the Group in terms of their likelihood and impact. Other assessments of risk are undertaken, as required, by business areas, focussing on the nature of the risk, the activities. Risk is defined as any event that could damage the adequacy of the internal control environment and whether core earnings capacity of the Group, increase cash flow volatility, additional management action is required. Periodic risk reduce capital, threaten business reputation or viability, and/or assessments are also undertaken in response to specific breach regulatory or legal obligations. AIB has adopted an internal or external events. Reporting on the Group’s risk profile enterprise risk management approach to identifying, assessing and emerging risks is presented to each Executive Risk and managing risks. To support this approach, a number of Committee ("ERC") and Board Risk Committee ("BRC") frameworks and policies approved by the Board (or Board meeting. delegation) 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. Risk Governance Structure Board of Directors Board Risk Committee Board Audit Committee Remuneration Committee Nominations & Corporate Governance Committee Leadership Team Conduct Committee Asset & Liability Committee (ALCo) Executive Risk Committee Group Disclosure Committee Market Announcements Committee Arrears & Restructuring Priority Committee Product and Proposition Committee Group Credit Committee Operational Risk Committee d r a o B e v i t u c e x E Allied Irish Banks, p.l.c. Annual Financial Report 2016 59 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 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 60 Risk management – 2. Framework 2.3 Risk appetite The Group’s risk appetite is defined as the amount of risk that 2.4.2 Committees with risk management responsibilities the Group is willing to accept or tolerate in order to deliver on The Board has delegated a number of risk governance its strategic and business objectives and ambition. The Group responsibilities to various committees and key officers. The Risk Appetite Statement (“RAS”) is a blend of qualitative diagram on the previous page summarises the current risk statements and quantitative limits and triggers linked to the committee structure of the Group. Group's strategic objectives. The role of the Board, the Board Audit Committee, and the The Group RAS is reviewed and approved by the Board at BRC is set out in Governance and Oversight – Corporate least annually and as required, in alignment with the business Governance report on pages 185 to 189. The Leadership and financial planning process. The Group RAS is cascaded Team comprises the Senior Executive managers of the Group down to the Group licensed subsidiaries and significant who manage the strategic business risks of the Group. It business areas to ensure it is embedded throughout the establishes the business strategy and risk appetite within Group. which the Group operates. While the Board approves the Group RAS, the Leadership Team The role of the ERC is to foster risk governance within the is accountable for ensuring that risks remain within appetite. The Group, to ensure that risks within the Group are appropriately Group’s risk profile is measured against its risk appetite and managed and controlled, and to evaluate the Group's risk adherence to the Group RAS is reported on a monthly basis to appetite against the Group’s strategy. It is a sub-committee of the ERC and BRC. Should any breaches of Group RAS limits the Leadership Team chaired by the Chief Financial Officer arise, these, together with associated management action plans, (“CFO”) and its membership includes the CRO and Chief are escalated to the Board for review, and also reported to the Operating Officer (“COO”) and the heads of significant business Central Bank of Ireland (“CBI”)/Joint Supervisory Team ("JST"), areas. in line with the provisions of its Corporate Governance Code. The ERC's principal duties and responsibilities include Risk appetite is embedded within the Group in a number of ways, reviewing the effectiveness of the Group’s risk frameworks and including, alignment with risk frameworks and policies, segment policies, monitoring and reviewing the Group’s risk profile, risk and subsidiary risk appetite statements, delegated authorities trends, risk concentrations and policy exceptions, and and limits and new product approval processes. Extensive monitoring adherence to approved risk appetite and other limits. communication and cascade of key aspects of the Group’s risk The ERC acts as a parent body to both the Group Credit appetite framework, as relevant, serve to ensure that risk Committee (“GCC”) and the Operational Risk Committee appetite drives strategy and informs day to day decision making. (“ORC”). 2.4 Risk governance 2.4.1 Risk management organisation The Board has ultimate responsibility for the governance of all Principal responsibilities of the GCC include: the exercising of approval authority for exposure limits to customers of the Group; exercising approval authority for credit policies; considering quarterly provision levels, assurance reviews and risk taking activity in the Group. The Group has adopted a credit review reports; the approval of credit inputs to credit ‘three lines of defence’ framework in the delineation of decisioning models, as well as the review and approval of accountabilities for risk governance. Under the three lines of other credit related matters as they occur. Principal defence model, primary responsibility for risk management lies responsibilities of the ORC is to provide oversight to ERC in with business line management. The Risk Management relation to the current and potential future operational risks/ function, headed by the Group Chief Risk Officer (“CRO”) profile facing the Group and operational risk strategy in that together with the Compliance function provide the second line of regard. It reviews, approves and recommends, as appropriate, defence, providing independent oversight and challenge to to ERC, BRC and Board, the Operational Risk Framework and business line managers. The third line of defence is the Group all other operational policies and standards. ORC is also Internal Audit function, under the Head of Group Internal Audit responsible for reviewing key operational risk assessments (“GIA”), which provides independent assurance to the Board and mandating related action plans, where required. Audit Committee on the effectiveness of the system of internal control. The role of the Group Conduct Committee is to promote a sustaining customer centric culture through the oversight of conduct across the Group’s operations including in Republic of Ireland, the UK and the USA and monitor compliance with the Board approved Conduct Risk Appetite and policy. It is a sub-committee of the Leadership Team chaired by the Chief 60 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 61 Marketing Officer (“CMO”) who is responsible for ensuring a The MAC’s principal duties include determination as to whether consistent approach to conduct risk management across the information raised is deemed to be inside information and, if so, Group. to implement and monitor the appropriate procedure to be followed together with assigning a business owner for each The Conduct Committee’s principal duties include monitoring of inside information event. The Committee also ensures that the the Group’s conduct profile to ensure it remains within risk Group issues an interim announcement in circumstances where appetite, approving and monitoring of the effectiveness of the an obligation to disclose insider information has arisen under Group Conduct Risk Framework as well as review and approval MAR but where the Group is not yet in a position to provide full of other conduct related matters including conduct training details of the underlying facts. The MAC is chaired by the CFO programmes. The Conduct Committee acts as a parent to the and its membership includes the CEO, the CRO, the Group Group Product and Proposition Committee, which has delegated General Counsel, the Director of Corporate Affairs and Strategy authority for the approval of the launch of products, propositions and the Group Treasurer. and oversight of the Group’s overall product portfolio. The Group Disclosure Committee is responsible for reviewing The role of the ALCo is to act as the Group’s strategic balance the Group financial information for compliance with legal and sheet management forum that combines a business-decisioning regulatory requirements prior to external publication, and for and risk governance mandate. It is a sub-committee of the exercising oversight of the Accounting Policies Forum, which Leadership Team, chaired by the Director of Finance (who ensures that the accounting policies adopted by the Group reports directly to the CFO) and its membership includes the conform to the highest standards in financial reporting. CFO, the CRO and the heads of significant business areas. ALCo is tasked with decision-making in respect of the Group’s The Arrears & Restructuring Priority Committee (“ARPC”) is a balance sheet structure, including capital, liquidity, funding, sub-committee of the Leadership Team and was established interest rate risk in the Banking Book (“IRRBB”) from an in 2016 to take all decisions and actions required or deemed economic value and net interest margin perspective, foreign necessary, or to establish the basis on which such decisions exchange hedging risks and other market risks. In ensuring and actions are taken, to execute the Group’s restructuring sound capital and liquidity management and planning, ALCo strategy. reviews and approves models for the valuation of financial instruments, for the measurement of market and liquidity risk, for regulatory capital (‘IRB models’), and for the calculation of expected and unexpected credit losses and stress testing. In addition, ALCo directs the shape of the balance sheet through funds transfer pricing, direction on product pricing and review and analysis of risk adjusted returns on capital (“RAROC”). The role of the Market Announcements Committee (“MAC”) is to act as an advisory committee to the CEO and CFO in determining on a timely basis the treatment of material information relating to the Group and its impacted subsidiary entities in order to comply with insider information disclosure obligations under the Market Abuse Regulation (“MAR”), the Central Bank of Ireland’s Market Abuse Rules and the Irish Stock Exchange Listing 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 2016 61 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 62 Risk management – 3. Individual risk types 3.1 Credit risk Definition Credit risk organisation and structure Measurement of credit risk Credit exposure Credit risk management: Credit risk monitoring Forbearance Loan loss provisioning Credit profile of the loan portfolio: Loans and receivables to customers – Residential mortgages Loans and receivables to customers – Republic of Ireland residential mortgages Loans and receivables to customers – United Kingdom residential mortgages Loans and receivables to customers – Segmental analysis Loans and receivables to customers – Large exposures Loans and receivables to customers – Credit ratings Financial investments available for sale Financial investments held to maturity Page 63 63 63 68 73 100 101 110 117 123 123 127 130 62 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 63 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, financial investments held to maturity 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 (“RAS”) 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 business 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, in the most part, by experienced credit risk professionals operating within a defined delegated authority framework. However, for certain selected retail portfolios, scorecards and automated strategies (together referred to as ‘score enabled decisions’) are deployed to automate and to support credit decisions and credit management (e.g. score enabled auto-renewal of overdrafts). 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”) and/or Board. 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. Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 64 Risk management – 3. Individual risk types 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. 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 estimated 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 At 31 December 2016, 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. This approval covers the adoption of the Foundation IRB approach for non-retail exposures and Advanced IRB for retail exposures. At 31 December 2016, 43% (31 December 2015: 43%) of credit risk weighted assets were calculated using internal credit models. 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. 64 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 65 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-defaulted credit exposures to customers in terms of EAD, PD, LGD and EL by IRB portfolios at 31 December 2016 and 2015: Residential mortgages Owner-occupier Buy-to-let Corporate SME Total Residential mortgages Owner-occupier Buy-to-let Corporate SME Total EAD € m 15,455 2,526 17,981 6,987 3,127 28,095 EAD € m 15,439 2,999 18,438 6,422 3,017 27,877 Average PD % Average LGD % 0.80 1.08 0.84 0.73 4.81 1.26 27.10 29.44 27.43 45.26 45.00 33.82 Average PD % Average LGD % 1.08 2.21 1.26 1.04 5.61 1.68 27.30 29.97 27.74 45.26 45.00 33.64 2016 EL(1) € m 47 17 64 27 69 160 2015 EL(1) € m 63 42 105 34 76 215 (1)EL has been applied following the outcome of the 2013 Balance Sheet Assessment by the CBI. The reduction in the average PD for the owner-occupier and the buy-to-let portfolios is due to the non-default population having a lower recent history of poor account behaviour performance than was previously observed. This has resulted in positive grade migration on this portion of the portfolio in the 12 months to 31 December 2016. The reduction in PD for the corporate portfolio primarily reflects growth in the international lending portfolio and growth in the AIB Ireland corporate portfolio and the reduction in the number of cases in the watch list grades. For financial reporting purposes, impairment allowances are recognised only with respect to losses that have been incurred at the reporting date based on objective evidence of impairment, accordingly, these will differ from amounts calculated from expected loss models. Allied Irish Banks, p.l.c. Annual Financial Report 2016 65 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 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 66 Risk management – 3. Individual risk types 3.1 Credit risk Measurement of credit risk (continued) Control mechanisms for rating systems The Group ALCo approves all material 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 relating to model governance, development and calibration, validation and deployment; and – All models are subject to in-depth analysis and review, at least annually, supplemented by model tracking on a quarterly basis. 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. In circumstances where a breach occurs, it must be reported to Senior Management and the Credit Risk function to assess any required remedial action. Credit Risk monitors credit performance trends, reviews and challenges exceptions to planned outcomes and tracks 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 deliver 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 66 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 67 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. This includes 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. 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 2016 67 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 68 Risk management – 3. Individual risk types 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 at 31 December 2016 and 2015: Maximum exposure to credit risk* Balances at central banks(3) Items in course of collection Derivative financial instruments Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments available for sale(4) Financial investments held to maturity Included elsewhere: Trade receivables Accrued interest Financial guarantees Loan commitments and other credit related commitments Amortised Fair cost(1) value(2) 2016 Total € m 5,921 134 – 1,399 60,639 1,799 € m € m – – 1,814 – – – 5,921 134 1,814 1,399 60,639 1,799 Amortised cost(1) € m 4,415 153 – 2,339 63,240 5,616 2015 Total € m 4,415 153 1,698 2,339 63,240 5,616 Fair value(2) € m – – 1,698 – – – – 14,832 14,832 – 15,708 15,708 3,356 90 340 – – – 3,356 3,483 90 340 539 399 – – – 3,483 539 399 73,678 16,646 90,324 80,184 17,406 97,590 910 10,289 11,199 – – – 910 1,375 10,289 11,199 9,747 11,122 – – – 1,375 9,747 11,122 Total 84,877 16,646 101,523 91,306 17,406 108,712 (1)All amortised cost items are ‘loans and receivables’ or ‘financial investments held to maturity’ 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 € 6,519 million (31 December 2015: € 4,950 million). (4)Excluding equity shares of € 605 million (31 December 2015: € 781 million). *Forms an integral part of the audited financial statements 68 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 69 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. 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 rating. 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 Credit risk mitigation may include a requirement to obtain collateral as set out in the Group’s lending policies. Where collateral or guarantees are required, they are usually taken as a secondary source of repayment in the event of the borrower’s default. The Group maintains policies which detail 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. 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. In accordance with the Group’s policy and guidelines on Property Collateral Valuation, the Group uses a number of methods to assist in reaching appropriate valuations for property collateral held. These include: – Use of independent professional valuations; – Use of internally developed residual value methodologies; and – Application of local knowledge in respect of the property and its location. Use of independent professional valuations represent circumstances where external firms are engaged to provide formal written valuations in respect of the property. Up to date external independent professional valuations are sought in accordance with the Group’s Property Valuation Policy. 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. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 69 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 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 70 Risk management – 3. Individual risk types 3.1 Credit risk – Credit exposure Credit risk mitigants* (continued) Methodologies for valuing collateral (continued) The residual value analysis methodology assesses the value of 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 in this methodology 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 represents circumstances where the local bank staff, familiar with the property concerned and with local market conditions, and with knowledge of recent completed transactions, provide indications of the likely realisable value and a potential timeline for realisation. Current 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. For non-mortgage lending, where collateral is taken, it 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. Where cash flows arising from the realisation of collateral held are included in impairment assessments, in many cases management rely on valuations or business appraisals from independent external professionals. Property collateral is reviewed on a regular basis in accordance with the Property Valuation policy. 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 remain 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. unserviced 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. 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 five years but sometimes this time period is exceeded. These estimates are periodically reassessed on a case by case basis. 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. *Forms an integral part of the audited financial statements 70 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 71 3.1 Credit risk – Credit exposure Credit risk mitigants* (continued) Methodologies for valuing collateral (continued) In assessing the value of collateral for collectively provided impaired mortgage loans in the Republic of Ireland, the Group has used a house price fall from peak of 40% Dublin and 44% non-Dublin as a base (2015: 41% and 42% respectively). This reflects a collateral value buffer against the latest available CSO residential property price index which at 31 December 2016 showed a 33% and a 37% fall from peak for Dublin and non-Dublin respectively (2015: 35% Dublin and 36% non-Dublin). In 2016, the CSO moved to an enhanced estimation methodology for compiling movements in property prices. AIB’s buffer to the latest available CSO index remained unchanged at 10% throughout 2016. 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 2016 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 House Price Index (United Kingdom) 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 68. Loans and receivables to customers – residential mortgages The following table shows the fair value of collateral held for the Group’s residential mortgage portfolio at 31 December 2016 and 2015: Neither past due nor impaired € m Past due but not impaired € 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 7,797 7,804 4,077 3,364 2,308 25,350 3,760 29,110 234 225 110 83 99 751 144 895 Impaired € m 430 553 356 374 423 2016 Total Neither past due nor impaired € m € m Past due but not impaired € m Impaired 2015 Total € m € m 8,461 8,582 4,543 3,821 2,830 7,116 6,858 4,109 3,616 2,634 237 235 114 114 101 801 525 709 466 533 619 7,878 7,802 4,689 4,263 3,354 2,852 27,986 2,136 28,237 24,333 1,786 3,922 5,690 33,927 4,631 206 28,964 1,007 2,356 5,208 7,193 35,179 Gross residential mortgages 29,730 933 4,576 35,239 29,796 1,056 5,966 36,818 Statement of financial position specific provisions Statement of financial position IBNR provisions Net residential mortgages (1,728) (1,728) (2,045) (2,045) (274) 2,848 33,237 (277) 3,921 34,496 (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 financial year end. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 72 Risk management – 3. Individual risk types 3.1 Credit risk – Credit exposure Credit risk mitigants* (continued) Loans and receivables to customers - other In addition to the credit risk mitigants outlined on the previous page, the Group holds reverse repurchase agreements amounting to Nil (2015: € 226 million) in its loans and receivables portfolio for which it had accepted collateral with a fair value of Nil (2015: € 222 million). 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 2016 amounted to € 1,814 million (2015: € 1,698 million) and those with negative fair value are reported as liabilities which at 31 December 2016 amounted to € 1,609 million (2015: € 1,781 million). The enforcement of netting agreements would potentially reduce the statement of financial position carrying amount of derivative assets and liabilities by € 971 million at 31 December 2016 (2015: € 1,052 million). The Group also has Credit Support Annexes (“CSAs”) in place which provide collateral for derivative contracts. As at 31 December 2016, € 487 million (2015: € 514 million) of CSAs are included within financial assets as collateral for derivative liabilities and € 322 million (2015: € 201 million) of CSAs are included within financial liabilities as collateral for derivative assets (note 44 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 2016, repurchase agreements amounted to Nil (2015: € 648 million) for which the Group had accepted collateral with a fair value of Nil (2015: € 737 million). NAMA senior bonds NAMA senior bonds, which at 31 December 2016 had a carrying value of € 1,799 million (2015: € 5,616 million), are guaranteed by the Irish Government as to principal and interest. Financial investments available for sale At 31 December 2016, government guaranteed senior bank debt which amounted to € 190 million (2015: € 174 million) was held within the available for sale portfolio. *Forms an integral part of the audited financial statements 72 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 73 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 information 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 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. 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 2016 73 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 74 Risk management – 3. Individual risk types 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 longer-term forbearance solutions which have been devised to assist existing Republic of Ireland primary residential mortgage customers in difficulty: 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 the 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 the full capital and agreed 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; 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; and 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. 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 74 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 75 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); permanent sustainable solutions including fundamental restructures (which may 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 (t) ‘Impairment of financial assets’ in note 1 to the consolidated financial statements. The effectiveness of the forbearance measures over the lifetime of the arrangements are subject to on-going management and review. 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 risk information – Forbearance’. 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 2016 75 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 76 Risk management – 3. Individual risk types 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 the 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/or 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; and – Country risk. 76 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 77 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 estimated 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 estimated 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 € 1,000,000 for AIB Ireland by customer connection, € 1,000,000 for EBS d.a.c. and £ 500,000 for AIB UK. The calculation of an impairment charge for loans below the “significant” threshold is undertaken on a collective basis. Individually significant loans and receivables* Within AIB, all loans that are considered individually significant are assessed on a case-by-case basis throughout the period for any objective evidence that the 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 69 to 71. 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. Within EBS, principal dwelling home (“PDH”) loans greater than € 1,000,000 are assessed and provided for through an automated process as opposed to individual assessments. The process takes into consideration collateral values and any costs in obtaining and selling associated collateral. 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 with balances less than € 1,000,000 for AIB Ireland and for EBS d.a.c., and £ 500,000 for AIB UK. Individually insignificant – Mortgage portfolio (Republic of Ireland)* The individually insignificant mortgage provisioning methodology applies to both owner-occupier and buy-to-let exposures. For individually insignificant mortgages, specific impairment provisions are calculated using an individually insignificant and IBNR mortgage provisioning model. The 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 additional data sets. Key model parameters at 31 December 2016 for owner-occupier mortgages are as follows: cure (14%) and disposal/forbearance (86%) (31 December 2015: cure 6% and disposal/forbearance 94%). The corresponding buy-to-let model parameters at 31 December 2016 are as follows: cure (7%) and disposal/forbearance (93%) (31 December 2015: cure 3.5% and disposal/forbearance 96.5%). The cure rate parameter in the individually insignificant model reflects the percentage of loans which were defaulted but have exited default after a 12 month satisfactory performance and no loss to the Group. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 77 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 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 78 Risk management – 3. Individual risk types 3.1 Credit risk – Credit risk management Loan loss provisioning (continued) Individually insignificant – Mortgage portfolio (Republic of Ireland)* (continued) 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 the Group Credit Committee on a quarterly basis. The main parameter changes for the year to 31 December 2016 were increases in the probabilities of disposal and cure, changes in the CSO index and in the property market fall from peak, increases in disposal haircuts and recovery periods. Individually insignificant – Non-mortgage portfolio (Republic of Ireland)* The non-mortgage individually insignificant and IBNR model 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)* For individually insignificant mortgages, specific impairment 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 occur 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. The estimation of IBNR also takes into consideration re-default and execution risk for restructured loans. Provisioning statistical models are used to determine the appropriate level of IBNR provisions for a portfolio/group of exposures with similar risk characteristics. A non-mortgage model as described above 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. *Forms an integral part of the audited financial statements 78 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 79 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 2016 and 2015: Owner-occupier Average PD % Average LGD % 0.5 1.7 12.6 35.3 25.7 10.0 13.8 15.4 17.2 15.6 17.6 16.6 Exposure € m 1,203 1,212 327 152 212 571 Buy-to-let Average PD % 2016 Average LGD % 2.1 6.1 22.9 37.3 41.6 17.0 19.7 24.9 27.4 26.2 31.3 28.7 2015 Owner-occupier Average PD % Average LGD % 0.6 2.8 10.7 55.7 23.6 13.6 17.3 18.6 19.8 19.4 19.9 18.9 Exposure € m 1,160 1,312 414 216 Buy-to-let Average PD % 1.2 4.4 16.8 56.7 Average LGD % 17.6 21.2 23.0 21.9 394 617 34.4 22.1 24.6 23.5 Exposure € m 15,050 8,191 1,913 407 860 2,828 Exposure € m 14,168 8,073 2,286 534 1,251 2,446 Good upper(1) Good lower(1) Watch(1) Vulnerable(1) Included in the above are the following sub portfolios which carry a higher level of IBNR: Cured Forborne – non-impaired Good upper(1) Good lower(1) Watch(1) Vulnerable(1) Included in the above are the following sub portfolios which carry a higher level of IBNR: Cured Forborne – non-impaired (1)For definition – see page 123. The parameters for Cured and Forborne non-impaired, are as follows: 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. 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 2016 79 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 80 Risk management – 3. Individual risk types 3.1 Credit risk – Credit risk management Loan loss provisioning (continued) Republic of Ireland non-mortgage portfolio – IBNR The non-mortgage portfolio IBNR which, excludes credit card portfolios, is calculated using the individually insignificant and IBNR non-mortgage model as described above. The table below sets out the parameters used in the calculation of IBNR for this portfolio at 31 December 2016 and 2015: Exposure € m 79 5,919 654 3,165 333 390 Average PD % 2016 Average LGD % 0.1 0.5 2.8 7.7 10.3 10.8 45.8 38.6 37.1 33.3 33.4 33.5 Exposure € m 103 5,940 1,155 3,057 375 591 Average PD % 2015 Average LGD % 0.1 1.1 4.3 12.3 12.0 11.3 45.3 45.9 38.1 37.4 36.8 32.6 Good upper(1) Good lower(1) Watch(1) Vulnerable(1) Included within the above are: > 90 days past due but not impaired Cured in the past 12 months (1)For definition – see page 123. 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 some 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. 80 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 81 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 and requiring a provision; and 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 and 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 2016, there was no change made to the Republic of Ireland emergence period for the mortgage (12 months) and non-mortgage (8 months) portfolios. The emergence period for credit cards and corporate portfolios, also remained at 3 and 6 months respectively. The average emergence period for UK mortgages is 12 months with the non-mortgage emergence period ranging from between 3 to 8 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 a designated Credit Risk representative as outlined in the terms of reference for Credit Committees (approved by ERC), 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 including non-contracted 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 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 revised agreement and subsequent satisfactory performance. Reversals of impairment* If the amount of an impairment loss decreases 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 portfolio at the reporting 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. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 81 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 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 82 Risk management – 3. Individual risk types 3.1 Credit risk – Credit risk management Loan loss provisioning (continued) Impact of changes to key assumptions and estimates on impairment provisions* (continued) 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 subjective and sensitive to the risk factors, in particular, to changes in economic and credit conditions across a number of geographical areas. Given the relative size of the Republic of Ireland mortgage portfolio, the key variables include house price fall from peak of 40% Dublin and 44% 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) (2015: 41% and 42% respectively). A 1% favourable change in the cure rate used for the Republic of Ireland collective mortgage provision model would result in a reduction in impairment provisions of 0.5% (blended rate of owner-occupier/buy-to-let) or c. € 7 million (2015: 1% and € 14 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 Republic of Ireland collective mortgage provision model for 31 December 2016 is estimated to result in movements in provisions of c. € 19 million (€ 16 million specific provision and € 3 million IBNR) (2015: € 20 million (€ 16 million specific and € 4 million IBNR)). A 1% change in the haircut on disposal for Dublin properties would result in a movement in provisions of c. € 5 million (€ 4 million specific provisions and € 1 million IBNR) (2015: € 5 million (€ 4 million specific and € 1 million IBNR)). A similar 1% change in the haircut on disposal for properties outside of Dublin would result in a movement in provisions of c. € 12 million (€ 10 million specific provisions and € 2 million IBNR) (2015: € 12 million (€ 10 million specific and € 2 million IBNR)) . An increase in the assumed repossession rate of 1% for the Republic of Ireland collective mortgage provision model would result in an increase in provisions of 0.7% (blended rate of owner-occupier/buy-to-let) or c. € 10 million (2015: 0.6% and € 9 million). For € 4.4 billion of the total impaired loans (€ 1.1 billion mortgages and € 3.3 billion non-mortgages) for which systemised 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 € 40 million (€ 16 million mortgages and € 24 million non-mortgages) (2015: € 49 million (€ 18 million mortgages and € 31 million non-mortgages)). – If anticipated cash receipt timelines moved out by 1 year, the impact on impairment provisioning would be an increase of € 56 million ( € 18 million mortgages and € 38 million non-mortgages) (2015: € 77 million (€ 24 million mortgages and € 53 million non-mortgages)). . 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 remains at 12 months; a decrease of one month in the loss emergence period would result in a decrease of c. € 14 million in IBNR provisions (2015: € 19 million). In the Republic of Ireland non-mortgage portfolio, an increase of one month in the loss emergence period for IBNR provisions would result in an increase of c. € 22 million (2015: € 27 million). For the Republic of Ireland non-mortgage portfolio, the impact to impairment provisions of a 1% favourable change in the average PD would be a decrease in impairment provisions of c. € 26 million (2015: € 18 million). For the Republic of Ireland collective mortgage provision model, the impact to impairment provisions of a 1% favourable change in the average PD would be a decrease in impairment provisions of c. € 57 million (2015: € 41 million). *Forms an integral part of the audited financial statements 82 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 83 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 following tables show for the financial years ended 31 December 2016 and 2015 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. 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 Provisions for impairment Total statement of financial position (1)Based on booking office. Total Analysed geographically(1) 2016 Republic of Ireland € m United Kingdom € m Rest of the World € m 1,680 276 1,508 6,894 4,279 1,062 484 3,269 33,444 2,870 55,766 93 182 464 2,500 1,160 343 200 2,375 1,795 230 9,342 – 1 57 – – – – 62 – – 120 % 2.7 0.7 3.1 14.4 8.3 2.2 1.1 8.8 54.0 4.7 100.0 € m 1,773 459 2,029 9,394 5,439 1,405 684 5,706 35,239 3,100 65,228 54,265 1,827 9,136 65,228 (4,589) 60,639 The credit portfolio is diversified within each of its geographic markets by spread of locations, industry classification and individual customer. At 31 December 2016, residential mortgages in the Republic of Ireland (51%) and property and construction (11%) represent the largest concentrations within the portfolio (2015: 49% and 12% respectively). No other industry or loan category in any geographic market accounts for more than 10% of the Group’s total loan portfolio. Loans booked in the Republic of Ireland include c. € 2.1 billion US syndicated and international debt and € 0.6 billion European syndicated and international debt which is described on page 122 of this report (2015: € 1.8 billion and € 0.3 billion respectively). 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 2016 83 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 84 Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Total Analysed geographically(1) 2015 Republic of Ireland € m United Kingdom € m Rest of the World € m 1,691 237 1,511 8,089 4,430 910 796 3,283 34,456 3,156 58,559 104 101 521 3,443 1,401 329 302 2,563 2,362 356 11,482 – 1 75 – – – 4 42 – – 122 % 2.6 0.5 3.0 16.4 8.3 1.8 1.6 8.4 52.5 4.9 100.0 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. € m 1,795 339 2,107 11,532 5,831 1,239 1,102 5,888 36,818 3,512 70,163 55,060 2,018 13,085 70,163 (139)(2) 48(2) (6,832) 63,240 (2)In 2016, unearned income and deferred costs have been allocated to the relevant sectors. *Forms an integral part of the audited financial statements 84 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 85 3.1 Credit risk – Credit profile of the loan portfolio 2016 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. Analysed geographically(1) United Kingdom € m Rest of the World € m Republic of Ireland € m Total € m 121 32 76 681 38 144 312 4,576 432 9,136 Total € m 171 38 162 4,308 1,071 60 147 464 5,966 698 2,724 2,174 117 31 60 606 14 135 246 4,382 386 8,151 4 1 16 550 75 24 9 66 194 46 985 – – – – – – – – – – – 2015 Analysed geographically(1) United Kingdom € m Rest of the World € m Republic of Ireland € m 166 37 122 3,295 875 36 135 393 5,711 631 5 1 40 1,013 196 24 12 71 255 67 – – – – – – – – – – – 13,085 11,401 1,684 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 2016 85 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 86 Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio 2016 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. Total € m 40 11 53 1,350 305 34 94 180 1,728 252 4,047 542 4,589 Total € m 76 15 102 2,475 551 57 60 291 2,045 486 6,158 674 6,832 Analysed geographically(1) United Kingdom € m Rest of the World € m Republic of Ireland € m 37 10 44 1,020 276 11 91 154 1,647 218 3,508 3 1 9 330 29 23 3 26 81 34 539 – – – – – – – – – – – 2015 Analysed geographically(1) United Kingdom € m Rest of the World € m Republic of Ireland € m 73 15 78 1,790 458 33 56 252 1,930 436 5,121 3 – 24 685 93 24 4 39 115 50 1,037 – – – – – – – – – – – *Forms an integral part of the audited financial statements 86 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 87 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 financial years ended 31 December 2016 and 2015: Gross loans and receivables to customers* Residential mortgages: Owner-occupier Buy-to-let Other personal Property and construction Non-property business Total Analysed as to asset quality(1) Satisfactory Watch Vulnerable Impaired AIB Ireland € m 28,631 4,813 33,444 2,870 6,864 9,761 52,939 1,564 231 1,795 230 2,492 4,800 9,317 2,469 6,168 8,134 532 461 961 Total criticised loans 16,771 1,954 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 – impairment (credit)/charge Specific IBNR Total impairment (credit)/charge Impairment (credit)/charge/ % 32 15 € m 3,504 475 3,979 % 43 49 8 € m (154) (121) (275) % % 21 10 € m 516 56 572 % 54 60 6 € m (31) (6) (37) % AIB Group & UK International € m € m 2016 Total € m 30,195 5,044 35,239 3,100 9,394 – – – – 38 2,934 17,495 AIB Ireland € m 28,880 5,576 34,456 3,156 8,055 10,223 AIB Group & UK International € m € m 2,048 314 2,362 356 3,443 5,292 – – – – 34 2,786 2015 Total € m 30,928 5,890 36,818 3,512 11,532 18,301 2,972 65,228 55,890 11,453 2,820 70,163 36,168 7,363 2,931 46,462 34,461 8,132 2,757 45,350 – – 41 41 % 1 1 € m 27 11 38 % 66 93 1 € m 14 4 18 % 3,001 6,629 9,136 18,766 % 29 14 € m 4,047 542 4,589 % 44 50 7 3,277 6,781 11,371 21,429 % 38 20 € m 5,109 596 5,705 % 45 50 10 € m (171) (123) (294) % € m (487) (405) (892) % 986 667 1,668 3,321 % 29 15 € m 1,027 71 1,098 % 62 66 10 € m (30) (14) (44) % 17 – 46 63 % 2 2 € m 22 7 29 % 48 63 1 € m 9 2 11 % 4,280 7,448 13,085 24,813 % 35 19 € m 6,158 674 6,832 % 47 52 10 € m (508) (417) (925) % 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 (0.50) (0.37) 0.65 (0.44) (1.52) (0.35) 0.50 (1.26) (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 64. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 87 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:50 Page 88 Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Gross loans and receivables to customers reduced by 7% or € 4.9 billion in 2016. While there was an increase in the level of new lending to € 8.7 billion in the year, this was offset by loan redemptions of € 10.0 billion, restructures and write-offs of € 1.8 billion and a currency impact and other movements of € 1.8 billion. The following summarises the key points affecting the credit profile of the loan portfolio: – The Group is predominantly Republic of Ireland and United Kingdom focused with most sectors experiencing improved trading conditions due to a stronger economic environment. The Group has material concentrations in residential mortgages (54% of gross loans) and property and construction (14%). In addition, there is a non-property business lending portfolio (27%) which is spread across a number of sub-sectors and a personal loan portfolio (5%). – Improved demand for credit resulted in new lending of € 8.7 billion in 2016 (2015: € 8.5 billion) spread across most sectors and included € 2.0 billion mortgage and € 3.5 billion non-mortgage in AIB Ireland, € 1.9 billion in AIB UK and € 1.3 billion in Group & International. – Continued progress in working with customers to restructure facilities, resulting in the quantum of impaired loans reducing by € 4 billion in the year (a decrease of 30%). The reduction reflects restructuring activity, write-offs (including non-contracted write-offs), redemptions and repayments due to customer asset sales. – As a result of the restructuring activity and the reduction in impaired loans, the overall credit quality profile has shown a significant improvement and criticised loans (including impaired) have reduced from 35% of total loans at 31 December 2015 down to 29% as at 31 December 2016. – A net writeback of impairment provisions of € 294 million in 2016 compared to a writeback of € 925 million in 2015. The key drivers of the net writeback continues to be writebacks due to restructuring activity, offset by provisions on newly impaired loans and that has remained consistent with 2015 levels. Restructuring* Restructuring the loans of customers in difficulty continues to be a key focus for the Group. Customer treatment strategies, as described on pages 73 to 75 are in place 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. This restructuring engagement with customers resulted in c. € 1.5 billion of loans restructured out of impairment during the year with a further € 1.8 billion of impaired loans written off (including non-contracted write-offs) (2015: € 3.4 billion and € 3.4 billion respectively). Provision writebacks* There was a total provision net writeback of € 294 million in 2016 compared to a provision net write back of € 925 million in 2015. Specific provision writebacks (net of top-ups) during the year were € 452 million (equivalent to c. 3.5% of opening impaired loans) (2015: € 789 million and 3.6%). These writebacks were split into mortgages € 205 million (2015: € 294 million); other personal € 53 million (2015: € 47 million); property and construction € 143 million (2015: € 270 million); and non-property business lending € 51 million (2015: € 178 million). These writebacks were partially offset by specific provisions amounting to € 281 million on newly impaired loans (2015: € 281 million). The key drivers of these writebacks include: – increased security values and improved business cash flows due to the stronger economic environment; – cases cured from impairment without loss; and – additional security from the customer as part of the restructuring process. The repayment of impaired loans remains dependent on significant levels of future collateral realisations in the near to medium term. The IBNR provisions released during the year amounted to € 123 million (2015: € 417 million). The release was mainly driven by a reduction in the probability of default as a result of recent observed default data. *Forms an integral part of the audited financial statements 88 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 89 3.1 Credit risk – Credit profile of the loan portfolio Credit quality Credit quality in the portfolio continues to improve. Criticised loans, including impaired, decreased by € 6.0 billion or 24%, and as a % of total loans have decreased from 35% at 31 December 2015, to 29% at 31 December 2016. The improving credit quality is driven by the level of new business in the year combined with the reduction in the criticised portfolio arising out of the restructuring process. Residential mortgages At 31 December 2016, residential mortgages accounted for 54% of gross loans and receivables to customers (€ 35.2 billion), with the loans mainly located in the Republic of Ireland (95%) (see page 101) and the remainder in the United Kingdom (see page 110). The portfolio consists of 86% owner-occupier loans and 14% buy-to-let. In the Republic of Ireland, total loans in arrears by value decreased by 18% during 2016, a decrease of 17% in the owner-occupier portfolio and a decrease of 21% in the buy-to-let portfolio. By number of customers, these decreases were 15%, 16% and 13% respectively. This decrease in arrears can be mainly attributed to the restructuring of the portfolio and the improving economic conditions. The reduction in arrears was evident in both early arrears (less than 90 days past due) and late arrears (greater than 90 days past due). Further detailed disclosures in relation to the Republic of Ireland mortgage portfolio are provided on pages 101 to 109 and the United Kingdom mortgage portfolio on pages 110 to 116. Other personal At 31 December 2016, the other personal portfolio amounted to € 3.1 billion (5% of gross loans and receivables to customers). 93% of loans relate to AIB Ireland with the remainder of loans relating to AIB UK. The portfolio comprises € 2.2 billion in loans and overdrafts and € 0.9 billion in credit card facilities. Strong levels of new lending at € 0.7 billion were observed and was due to both the improved economic environment and an expanded product offering, and was offset by loan redemptions and repayments. As a percentage of loans in the other personal portfolio, the satisfactory element increased to 73% (2015: 65%). Further detailed disclosures in relation to the other personal portfolio are provided on pages 117 and 118. Property and construction At 31 December 2016, the property and construction portfolio amounted to € 9.4 billion (14% of gross loans and receivables to customers). 73% of loans relate to AIB Ireland and 27% to AIB UK. The portfolio comprises of 77% investment loans (€ 7.2 billion), 16% land and development loans (€ 1.5 billion) and 7% other property and construction loans (€ 0.7 billion). Overall, the portfolio reduced by € 2.1 billion or 19% during 2016. This reduction is due primarily to the continuing impact of restructuring and to write-offs, amortisations and repayments resulting from asset disposals by customers and which was offset by new business written of c. €1.4 billion. Activity in the sector has been underpinned by improved economic performance and increased investment spending which has had a positive impact on the residential and commercial land and development market. Further detailed disclosures in relation to the property and construction portfolio are provided on pages 119 and 120. Non-property business At 31 December 2016, the non-property business portfolio amounted to € 17.5 billion (27% of gross loans and receivables to customers). 56% of loans relate to AIB Ireland, 27% to AIB UK and with the remainder of 17% to Group & International. The portfolio is concentrated in sub-sectors which are reliant on the respective domestic economies. It also includes corporate and syndicated and international lending exposures, some of which are dependent on international markets. Key sub-sectors include agriculture (10% of the portfolio), hotels (13% of the portfolio), licensed premises (3% of the portfolio), retail/wholesale (13% of the portfolio) and other services (33% of the portfolio). As a percentage of the portfolio satisfactory loans and receivables increased from 75% at 31 December 2015 to 80% at 31 December 2016 continuing the positive trend experienced in 2015. The level of criticised loans reduced by 22%, mainly due to a reduction of € 0.7 billion in impaired loans. Further detailed disclosures in relation to the non-property business portfolio are provided on pages 121 and 122. Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 90 Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Impairment provisions Specific impairment provisions as a percentage of impaired loans decreased from 47% at 31 December 2015 to 44% at 31 December 2016. This was mainly driven by restructures, writebacks, and write-offs of loans (partially or fully) 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 where further recovery is considered unlikely. The impairment provisions remain dependent on significant levels of future collateral realisation. IBNR provisions of € 0.5 billion were held at 31 December 2016 compared to € 0.6 billion at 31 December 2015. The level of IBNR reflects a conservative estimate of unidentified incurred loss within the portfolio. The income statement provision writeback of € 294 million in 2016 compared to a provision writeback of € 925 million in 2015. Income statement specific provisions included € 281 million from new impairments and a € 452 million writeback of provisions (net of top-ups) as described above. *Forms an integral part of the audited financial statements 90 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 91 3.1 Credit risk – Credit profile of the loan portfolio The following table profiles the asset quality of the Group’s loans and receivables at 31 December 2016 and 2015: 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 Gross loans and receivables less provisions 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 Gross loans and receivables less provisions Unearned income Deferred costs Net loans and receivables Residential mortgages Other personal € m 29,730 933 4,576 35,239 (1,728) (274) (2,002) 33,237 € m 2,498 170 432 3,100 (252) (38) (290) 2,810 Residential mortgages Other personal € m 29,796 1,056 5,966 36,818 (2,045) (277) (2,322) 34,496 € m 2,665 149 698 3,512 (486) (49) (535) 2,977 Property Non-property business and construction € m € m 15,729 362 1,404 17,495 (717) (131) (848) € m 15,780 408 2,113 18,301 (1,152) (174) (1,326) 6,308 362 2,724 9,394 (1,350) (99) (1,449) 7,945 6,819 405 4,308 11,532 (2,475) (174) (2,649) 8,883 16,647 60,639 Property Non-property business and construction € m 2016 Total € m 54,265 1,827 9,136 65,228 (4,047) (542) (4,589) 2015 Total € m 55,060 2,018 13,085 70,163 (6,158) (674) (6,832) 16,975 63,331 (139)(1) 48(1) 63,240 (1)In 2016, unearned income and deferred costs have been allocated to the relevant sectors. Gross loans and receivables to customers reduced by 7% to € 65.2 billion in 2016. The reduction was due to restructuring, provision write-offs of € 1.8 billion and customer repayments including asset sales. The satisfactory portfolio grew by 2.5% in the year (including currency movements). 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 2016 91 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 92 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 table analyses 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 2016, are classified as repayable within one year. 8% 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. Fixed rate Variable rate Total € m Republic of Ireland ......................4,734 ..............51,032 ..............55,766 United Kingdom ..............................793 ................8,549 ................9,342 Rest of the World ................................– ..................120 ..................120 € m € m Total 5,527 59,701 65,228 Fixed rate € m Variable rate € m Total € m Republic of Ireland ......................5,047 ..............53,512 ..............58,559 United Kingdom ..............................949 ..............10,533 ..............11,482 Rest of the World ................................– ..................122 ..................122 Total 5,996 64,167 70,163 year Within 1 After 1 year but within 5 years € m € m 9,260 3,603 109 After 5 years € m 33,668 3,881 – 12,838 1,858 11 14,707 Within 1 year € m 16,380 2,721 15 19,116 12,972 37,549 After 1 year but within 5 years € m 8,977 3,829 107 After 5 years € m 33,202 4,932 – 12,913 38,134 2016 Total € m 55,766 9,342 120 65,228 2015 Total € m 58,559 11,482 122 70,163 92 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 93 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 AIB Ireland AIB UK Group & International 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 AIB Ireland AIB UK Group & International As a percentage of total gross loans 1–30 days € m 31–60 days € m 40 6 8 144 72 4 1 40 469 27 55 866 792 74 – 866 % 1.33 7 – 1 28 12 1 1 20 131 5 15 221 188 33 – 221 % 0.34 1–30 days € m 31–60 days € m 55 1 29 127 63 4 3 30 536 30 40 918 808 110 – 918 % 1.31 21 – 2 54 14 – 1 20 151 5 19 287 249 38 – 287 % 0.41 61–90 days 91–180 days 181–365 days € m € m € m 2 1 – 25 3 1 – 2 72 3 11 120 103 17 – 120 % 0.18 7 – 2 28 7 – – 15 62 – 12 133 124 9 – 133 % 0.20 8 – – 38 8 – – 8 63 – 15 140 134 6 – 140 % 0.21 61–90 days 91–180 days 181–365 days € m € m € m 2 – – 15 10 – 1 7 86 3 6 130 112 18 – 130 % 0.18 8 – 1 54 13 – 1 11 73 2 12 175 142 33 – 175 % 0.25 5 – 1 45 6 – 1 8 65 1 7 139 130 9 – 139 % 0.20 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 2016 > 365 days € m 31 – 2 99 26 3 – 23 136 – 27 347 339 8 – 347 % 0.53 > 365 days € m 39 2 2 110 31 2 1 13 145 – 24 369 358 11 – 369 % 0.53 2016 Total € m 95 7 13 362 128 9 2 108 933 35 135 1,827 1,680 147 – 1,827 % 2.80 2015 Total € m 130 3 35 405 137 6 8 89 1,056 41 108 2,018 1,799 219 – 2,018 % 2.88 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 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 94 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) At 31 December 2016, loans past due but not impaired reduced by € 0.2 billion to € 1.8 billion or 2.8% of total loans and receivables to customers (2015: € 2.0 billion or 2.9%). Residential mortgage loans which were past due but not impaired at 31 December 2016, amounted to € 0.9 billion. This represents 51% of total loans which were past due but not impaired (2015: € 1.1 billion or 52%). The level of residential mortgage loans in early arrears (less than 30 days) continues to decrease which is 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 20% or € 0.4 billion of total loans which were past due but not impaired (2015: 20% or € 0.4 billion), with other personal at 9% or € 0.2 billion (2015: 7% or € 0.1 billion). All loans are tested for impairment when they reach 90 days past due to determine if a loss event has occurred and if an impairment provision is required. *Forms an integral part of the audited financial statements 94 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 95 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 at 31 December 2016 and 2015: Gross loans and receivables € m Impaired loans Individually Collectively assessed assessed Total % of total gross loans € m € m € m Retail Residential mortgages Other personal Total retail Commercial Property and construction Non-property business Total commercial Total Specific impairment provisions at 31 December 2016 Specific provision cover percentage 35,239 3,100 38,339 9,394 17,495 26,889 65,228 13 14 13 29 8 15 14 1,298 258 1,556 2,570 1,176 3,746 5,302 3,278 174 3,452 154 228 382 3,834 4,576 432 5,008 2,724 1,404 4,128 9,136 2,470 1,577 4,047 % 47 % 41 % 44 Gross loans and receivables € m Impaired loans Individually Collectively assessed assessed Total € m € m € m % of total gross loans Retail Residential mortgages Other personal Total retail Commercial Property and construction Non-property business Total commercial Total Specific impairment provisions at 31 December 2015 Specific provision cover percentage 36,818 3,512 40,330 11,532 18,301 29,833 70,163 16 20 17 37 12 22 19 1,914 358 2,272 3,950 1,632 5,582 7,854 4,052 340 4,392 358 481 839 5,966 698 6,664 4,308 2,113 6,421 5,231 13,085 3,975 2,183 6,158 % 51 % 42 % 47 2016 Specific impairment provisions % of impaired loans Total € m 1,728 252 1,980 1,350 717 2,067 4,047 38 58 40 50 51 50 44 2015 Specific impairment provisions % of impaired loans Total € m 2,045 486 2,531 2,475 1,152 3,627 6,158 34 70 38 57 55 56 47 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 Specific impairment provisions as a percentage of impaired loans have decreased from 47% at 31 December 2015 to 44% at 31 December 2016. The reduction principally occurred in individually assessed loans, with cover reduced from 51% at 31 December 2015 to 47% at 31 December 2016 driven by restructures, writebacks, and write-offs of loans (partially or fully). The higher provision cover on these restructured and written off loans had the impact of reducing overall cover for the remaining portfolio. Provision write-offs are generated through restructuring agreements with customers and also where further recovery is considered unlikely. For residential mortgages, specific provisions as a percentage of impaired loans increased from 34% to 38%. The increase in cover reflects a higher concentration of loans in the legal process, which take longer to resolve and typically require higher provision cover. *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 2016 95 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 96 Risk management – 3. Individual risk types 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 financial years ended 31 December 2016 and 2015: At 1 January Exchange translation adjustments Credit to income statement – customers(1) Amounts written off(2) Recoveries of amounts written off in previous years(2) At 31 December 2016 Total provisions are split as follows: Specific IBNR Amounts include: Residential mortgages Other personal € m 2,322 (28) (111) (181) – 2,002 1,728 274 2,002 € m 535 (10) (22) (213) – 290 252 38 290 Loans and receivables to customers (note 24 to the consolidated financial statements) At 1 January Exchange translation adjustments Credit to income statement – customers(1) Amounts written off(2) Disposals Recoveries of amounts written off in previous years(2) At 31 December 2015 Total provisions are split as follows: Specific IBNR Amounts include: Residential mortgages Other personal € m 3,427 16 (478) (643) – – 2,322 2,045 277 2,322 € m 768 2 (8) (226) (1) – 535 486 49 535 Loans and receivables to customers (note 24 to the consolidated financial statements) Property Non-property business and construction € m 2,649 (73) (145) (985) 3 1,449 1,350 99 1,449 5,652 102 (214) (2,738) (159) 6 2,649 2,475 174 2,649 € m 1,326 (19) (16) (450) 7 848 717 131 848 € m 2,559 11 (225) (986) (35) 2 1,326 1,152 174 1,326 Property Non-property business and construction € m 2016 Total € m 6,832 (130) (294) (1,829) 10 4,589 4,047 542 4,589 4,589 4,589 2015 Total € m 12,406 131 (925) (4,593) (195) 8 6,832 6,158 674 6,832 6,832 6,832 (1)Geographic split: Republic of Ireland a credit of € 262 million (2015: a credit of € 885 million); United Kingdom a credit of € 32 million (2015: a credit of € 40 million). (2)For geographical and sector split, see page 99. *Forms an integral part of the audited financial statements 96 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 97 3.1 Credit risk – Credit profile of the loan portfolio Provisions – income statement The following table analyses the income statement provisions/writeback of provisions split between individually significant, individually insignificant and IBNR for loans and receivables for the financial years ended 31 December 2016 and 2015 : Specific provisions – Individually significant loans and receivables – Individually insignificant loans and receivables IBNR Total provision for impairment (credit)/charge on loans and receivables to customers Writeback of provisions for impairment on financial investments available for sale Writeback of provisions for liabilities and commitments Total Specific provisions – Individually significant loans and receivables – Individually insignificant loans and receivables IBNR Total provisions for impairment (credit)/charge on loans and receivables to customers Writeback of provisions for liabilities and commitments Total AIB Ireland € m (142) (12) (121) (275) AIB Ireland € m (620) 133 (405) (892) AIB Group & UK International € m € m (26) (5) (6) (37) AIB UK € m (22) (8) (14) (44) 14 – 4 18 Group & International € m 9 – 2 11 2016* Total € m (154) (17) (123) (294) (2) (2) (298) 2015* Total € m (633) 125 (417) (925) (11) (936) 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 2016 97 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 98 Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Provisions – income statement (continued) The following table analyses by segment the income statement impairment provisions/writeback of provisions for the financial years ended 31 December 2016 and 2015: AIB Ireland AIB UK Group & International Total Residential mortgages € m Other 2016* Total € m € m (109) (166) (275) (2) – (35) 18 (37) 18 Residential mortgages € m (463) (15) – Other 2015* Total € m € m (429) (892) (29) 11 (44) 11 (111) (183) (294) (478) (447) (925) The following table analyses by segment the income statement impairment provisions/writeback of provisions as a percentage of average loans and receivables to customers expressed as basis points (“bps”) for the financial years ended 31 December 2016 and 2015: AIB Ireland AIB UK Group & International Total Residential mortgages bps Other 2016 Total bps bps Residential mortgages bps Other bps 2015 Total bps (32) (10) – (31) (80) (44) 65 (59) (50) (37) 65 (44) (131) (59) – (182) (152) (29) 50 (35) 50 (126) (125) (126) Writebacks decreased from a net writeback of € 925 million in 2015, to a net writeback of € 294 million in 2016. The writeback comprised € 171 million in specific provision writebacks and a release of IBNR provisions of € 123 million (31 December 2015: € 508 million net writeback in specific provisions and release of IBNR provisions of € 417 million). The specific provision writeback of € 171 million can be split into € 281 million new impairment provisions and a € 452 million writeback (net of top-ups). New impairment provisions have remained consistent (2015: € 281 million) and reflect the improved economic conditions. The key drivers of the total writebacks were the writeback of provisions due to restructuring activity offset by provisions on newly impaired loans. In AIB Ireland, the 2016 income statement provision writeback of € 275 million comprises a specific provision writeback of € 154 million and an IBNR release of € 121 million. This compares to an income statement specific provision writeback of € 487 million and an IBNR release of € 405 million for 2015. The writeback was primarily due to the positive impact of debt restructuring activities and continued low levels of new impairments. In AIB UK, the 2016 income statement provision writeback of € 37 million comprises a specific provision writeback of € 31 million and an IBNR release of € 6 million. This compares to a specific provision writeback of € 30 million and an IBNR release of € 14 million in 2015. The impairment provision charge in Group & International of € 18 million compares to a provision charge of € 11 million in 2015. The IBNR released in 2016 was € 123 million (2015: € 417 million). The release was mainly driven by a reduction in the probability of default in the portfolio reflecting the improved economic environment. *Forms an integral part of the audited financial statements 98 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 99 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 financial years ended 31 December 2016 and 2015: Loan 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 TOTAL Loans written off 2016 € m 47.4 9.8 29.0 719.8 169.0 16.6 1.6 114.8 160.7 208.8 2015 € m 74.2 24.8 38.7 2,218.9 536.2 13.6 28.5 135.7 604.3 214.0 1,477.5 3,888.9 0.2 – 11.4 264.8 43.1 0.1 1.6 5.7 20.2 4.5 3.7 – 9.4 518.6 61.4 0.1 0.3 59.8 38.7 11.6 Recoveries of loans previously written off 2015 € m 2016 € m 0.1 – 0.1 1.0 – 0.1 0.6 5.1 – – 7.0 – – 1.8 1.6 – – – – – – – – 0.3 3.2 0.1 0.1 – 1.3 – 0.2 5.2 – – – 3.2 – – – – – – 3.2 8.4 351.6 1,829.1 703.6 4,592.5 3.4 10.4 Write-offs in 2016, as a percentage of gross loans and receivables at 1 January 2016, were 2.6% compared to 6.1% in 2015. These include all write-offs, both full and partial and write-offs not contracted with customers of c. € 0.6 billion. 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 2016 99 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 100 Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Loans and receivables to customers – Residential mortgages Residential mortgages amounted to € 35.2 billion at 31 December 2016, with the majority (95%) relating to residential mortgages in the Republic of Ireland and the remainder relating to the United Kingdom. This compares to € 36.8 billion at 31 December 2015, of which 94% related to residential mortgages in the Republic of Ireland. The split of the residential mortgage portfolio was owner-occupier € 30.2 billion and buy-to-let € 5 billion (2015: owner-occupier € 30.9 billion and buy-to-let € 5.9 billion). Statement of financial position provisions of € 2.0 billion were held at 31 December 2016, split € 1.7 billion specific and € 0.3 billion IBNR (2015: € 2.3 billion, split € 2.0 billion specific and € 0.3 billion IBNR). There was an impairment provision credit of € 111 million to the income statement in 2016 comprising a € 110 million specific writeback and a € 1 million IBNR release (2015: € 478 million provision credit comprising € 204 million specific writeback and a € 274 million IBNR release). This section provides the information listed below in relation to residential mortgages. Republic of Ireland residential mortgages – pages 101 to 109 – Credit profile – Origination profile – Loan-to-value profile: Actual and weighted average indexed loan-to-value ratios of Republic of Ireland residential mortgages Loan-to-value ratios of Republic of Ireland residential mortgages (index linked) that were neither past due nor impaired Loan-to-value ratios of Republic of Ireland residential mortgages (index linked) that were greater than 90 days past due and/or impaired – Credit quality profile – Republic of Ireland residential mortgages that were past due but not impaired – Collateral value of Republic of Ireland residential mortgages that were past due but not impaired – Republic of Ireland residential mortgages that were impaired – Republic of Ireland properties in possession – Repossessions disposed of United Kingdom (“UK”) residential mortgages – pages 110 to 116 – 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 – Repossessions disposed of 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. 100 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 101 3.1 Credit risk – Credit profile of the loan portfolio Loans and receivables to customers – Republic of Ireland residential mortgages The following table analyses the Republic of Ireland residential mortgage portfolio showing impairment provisions for the financial years ended 31 December 2016 and 2015: 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 (credit)/charge Income statement specific provisions Income statement IBNR provisions Total impairment (credit) Owner- occupier € m 28,631 3,176 3,042 2,898 1,042 160 % 35.9 € m (50) (27) (77) Buy-to-let € m 4,813 1,649 1,593 1,484 605 106 % 40.8 € m (61) 29 (32) 2016* Total € m 33,444 4,825 4,635 4,382 Owner- occupier € m 28,880 4,032 3,876 3,713 1,647 1,159 266 188 % 37.6 € m (111) 2 (109) % 31.2 € m (89) (232) (321) Buy-to-let € m 5,576 2,154 2,098 1,998 771 76 % 38.6 € m (106) (36) (142) 2015* Total € m 34,456 6,186 5,974 5,711 1,930 264 % 33.8 € m (195) (268) (463) (1)Includes all impaired loans whether past due or not. 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 2016 101 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 102 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 € 33.4 billion at 31 December 2016 compared to € 34.5 billion at 31 December 2015. The decrease in the portfolio was observed mainly in the criticised grades due to restructuring, loan repayments from customer asset sales, and write-offs. Total drawdowns in 2016 were € 2.0 billion, of which 97% related to owner-occupier, whilst the weighted average indexed loan-to-value for new residential mortgages was 68.4%. The split of the residential mortgage portfolio is 86% owner-occupier and 14% buy-to-let and comprised 35% tracker rate, 55% variable rate and 10% fixed rate mortgages. The proportion of the total residential mortgage portfolio in negative equity decreased from 24% at 31 December 2015 to 20% at 31 December 2016 reflecting the increase in residential property prices in Ireland during 2016 and loan amortisation, whilst the quantum of negative equity in the portfolio reduced from € 1.5 billion to € 1.0 billion. Residential mortgage arrears Total loans in arrears by value decreased by 18% during 2016, a decrease of 17% in the owner-occupier portfolio and a decrease of 21% in the buy-to-let portfolio in the year. By number of customers, these decreases were 15%, 16% and 13% respectively. These decreases in arrears can be mainly attributed to restructuring activity and improving economic conditions. The reduction was evident in both the performance of early arrears (less than 90 days past due) and the late arrears (greater than 90 days past due). The amount of loans which were new into arrears for the first time in 2016 fell by 38% compared to 2015. Total loans in arrears greater than 90 days at 7.2% as at 31 December 2016 decreased from 8.2% at 31 December 2015 and remain below the industry average of 8.9%(1). For the owner-occupier portfolio, loans in arrears greater than 90 days at 5.4% were below the industry average of 7.6%. For the buy-to-let portfolio, loans in arrears greater than 90 days at 18.8% exceeded the industry average of 16.2%. Forbearance Residential mortgages subject to forbearance measures increased by € 0.5 billion from 31 December 2015 to € 5.9 billion at 31 December 2016, compared to a decrease of € 0.1 billion from 2014 to 2015, and is significantly impacted by a change in the definition of forbearance (page 133). 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 pages 131 to 144. Impairment provisions Impaired loans decreased from € 5.7 billion at 31 December 2015 to € 4.4 billion at 31 December 2016, mainly due to restructuring, write-offs and repayments through customer asset sales. The level of newly impaired loans declined by 23% in 2016 compared to 2015. There was a specific provision writeback of € 111 million in 2016 compared to a € 195 million writeback in 2015. This can be split into a charge for new impairments of € 88 million and a writeback of provisions (net of top-ups) of € 199 million. The writeback was mainly due to the impact of restructuring, loans curing from impairment, and changes in a number of assumptions in the mortgage model (possession and cure rates). The specific provision cover level increased from 34% at 31 December 2015 to 38% at 31 December 2016. The increase was mainly driven by individually assessed buy-to-let loans, updated for higher property valuations and the impact of restructuring. An IBNR charge in 2016 of € 2 million compares to a release of € 268 million in 2015 mainly due to changes in the mortgage model parameters and a reduction in probability of default for the portfolio. Specific provisions of € 0.8 billion were held against the forborne impaired portfolio of € 2.3 billion providing cover of 35%. In relation to the non-impaired forborne portfolio of € 3.5 billion, of which € 0.4 billion is on an interest only arrangement, IBNR impairment provisions of € 0.1 billion were held at 31 December 2016. (1)Source: Central Bank of Ireland (“CBI”) Residential Mortgage Arrears and Repossessions Statistics as at 30 September 2016, based on numbers of accounts. 102 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 103 3.1 Credit risk – Credit profile of the loan portfolio Republic of Ireland 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 2016 and 2015: Republic of Ireland 1996 and before 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Total Impaired Total Impaired Number Balance € m Number Balance € m Number Balance € m Number Balance € m 2016* 2015* 2,948 2,267 2,834 3,785 4,816 5,424 9,052 12,809 17,612 24,780 32,290 32,049 30,557 19,973 13,916 4,218 6,196 5,338 7,409 10,178 11,669 95 40 73 135 223 316 629 1,076 1,836 2,972 4,736 4,861 4,684 2,823 1,955 578 889 779 1,138 1,636 1,970 436 171 258 339 474 494 863 1,370 2,164 3,446 5,307 5,300 4,124 1,657 584 87 17 6 14 7 – 14 6 12 25 35 41 83 156 307 550 988 993 774 278 97 14 4 1 2 2 – 4,502 2,561 3,127 4,171 5,196 6,218 9,738 13,728 18,768 26,086 34,317 33,353 31,756 20,962 14,598 4,443 6,465 5,560 7,642 10,343 – 118 54 91 164 261 364 724 1,225 2,065 3,310 5,214 5,294 5,102 3,068 2,111 626 961 845 1,207 1,652 – 642 244 343 474 615 664 1,090 1,792 2,657 4,250 6,593 6,586 5,217 2,145 753 98 23 6 5 1 – 22 10 16 33 46 55 113 212 384 707 1,296 1,281 1,025 366 124 15 5 1 – – – 260,120 33,444 27,118 4,382 263,534 34,456 34,198 5,711 The majority (€ 17.3 billion or 52%) of the € 33.4 billion residential mortgage portfolio originated between 2005 and 2008, of which 19% (€ 3.3 billion) was impaired at 31 December 2016. This cohort was impacted by reduced household income and increased unemployment rates in those years, and where property prices had decreased from a peak in 2007. 13% of the residential mortgage portfolio was originated before 2005 of which 15% was impaired at 31 December 2016, while the remaining 35% of the portfolio was originated since 2009 or after, of which 3% was impaired at 31 December 2016 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 2016 103 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 104 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 October 2016. The CSO Residential Property Price Index for October 2016 reported that national residential property prices were 31.5% lower than their highest level in early 2007 and reported an annual increase in residential property prices of 8.6% for the twelve months to October 2016. Actual and weighted average indexed loan-to-value ratios of Republic of Ireland 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 2016 and 2015: 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 % 6,806 7,189 3,862 3,217 2,236 3,147 1,642 387 145 23.8 25.1 13.5 11.2 7.8 11.0 5.7 1.4 0.5 Buy-to-let 2016* Total € m 1,036 996 489 461 484 618 377 258 94 % 21.5 20.7 10.2 9.6 10.0 12.8 7.8 5.4 2.0 € m 7,842 8,185 4,351 3,678 2,720 3,765 2,019 645 239 % 23.5 24.5 13.0 11.0 8.1 11.3 6.0 1.9 0.7 Total Weighted average indexed loan-to-value(1): 28,631 100.0 4,813 100.0 33,444 100.0 Stock of residential mortgages at financial year end New residential mortgages issued during the year Impaired residential mortgages 72.4 68.8 103.4 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 % 6,171 6,284 3,896 3,520 2,588 3,548 2,327 436 110 21.4 21.8 13.5 12.2 8.9 12.3 8.0 1.5 0.4 81.9 56.4 101.2 Buy-to-let % 17.8 18.8 9.7 9.7 11.2 15.1 9.9 6.4 1.4 € m 991 1,047 540 543 622 841 553 359 80 73.8 68.4 102.7 2015* Total % 20.8 21.3 12.9 11.8 9.3 12.7 8.3 2.3 0.6 € m 7,162 7,331 4,436 4,063 3,210 4,389 2,880 795 190 Total Weighted average indexed loan-to-value(1): 28,880 100.0 5,576 100.0 34,456 100.0 Stock of residential mortgages at financial year end New residential mortgages issued during year Impaired residential mortgages 76.1 71.1 101.4 87.4 59.1 104.8 77.9 70.7 102.6 (1)Weighted average indexed loan-to-values are the individual indexed loan-to-value calculations weighted by the mortgage balance against each property. 18% of the total owner-occupier and 26% of the total buy-to-let mortgages were in negative equity at 31 December 2016 (excluding unsecured) compared to 22% and 31% respectively at 31 December 2015. The weighted average indexed loan-to-value for the total residential mortgage portfolio was 74% at 31 December 2016 compared to 78% at 31 December 2015, with the reduction driven primarily by the amortisation of the portfolio and the increase in property prices in the year. *Forms an integral part of the audited financial statements 104 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 105 3.1 Credit risk – Credit profile of the loan portfolio (continued) Loan-to-value ratios of Republic of Ireland 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 2016 and 2015: 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% Unsecured Total Owner-occupier Buy-to-let 2016* Total € m 6,395 6,697 3,553 2,919 1,917 2,527 989 61 11 % € m 25.5 26.7 14.2 11.6 7.7 10.1 4.0 0.2 0.0 819 741 352 315 298 332 143 83 10 % 26.5 24.0 11.4 10.2 9.6 10.7 4.6 2.7 0.3 € m 7,214 7,438 3,905 3,234 2,215 2,859 1,132 144 21 % 25.6 26.4 13.9 11.5 7.8 10.2 4.0 0.5 0.1 25,069 100.0 3,093 100.0 28,162 100.0 Owner-occupier Buy-to-let 2015* Total € m 5,678 5,672 3,513 3,101 2,147 2,768 1,444 89 11 % 23.3 23.2 14.4 12.7 8.8 11.3 5.9 0.4 0.0 € m 766 757 373 336 365 416 198 114 11 % 23.0 22.7 11.2 10.1 10.9 12.5 5.9 3.4 0.3 € m 6,444 6,429 3,886 3,437 2,512 3,184 1,642 203 22 % 23.2 23.2 14.0 12.4 9.0 11.5 5.9 0.7 0.1 24,423 100.0 3,336 100.0 27,759 100.0 The proportion of residential mortgages that was neither past due nor impaired and in negative equity at 31 December 2016 (excluding unsecured) decreased to 15% compared to 18% at 31 December 2015, reflecting residential property price increases during the year, coupled with amortisation of the loan 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 2016 105 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 106 Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Loan-to-value ratios of Republic of Ireland 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 2016 and 2015: Owner-occupier Buy-to-let Total 2016* Total residential mortgage portfolio € m 308 366 240 247 268 550 610 323 130 % 10.1 12.0 7.9 8.1 8.8 18.1 20.1 10.6 4.3 € m 188 231 125 134 159 274 226 173 83 % 11.8 14.5 7.8 8.4 10.0 17.2 14.2 10.9 5.2 € m 496 597 365 381 427 824 836 496 213 % 10.7 12.9 7.9 8.2 9.2 17.8 18.0 10.7 4.6 € m 7,842 8,185 4,351 3,678 2,720 3,765 2,019 645 239 % 23.5 24.5 13.0 11.0 8.1 11.3 6.0 1.9 0.7 3,042 100.0 1,593 100.0 4,635 100.0 33,444 100.0 Owner-occupier Buy-to-let Total 2015* Total residential mortgage portfolio € m 385 493 314 351 380 690 822 343 98 % 9.9 12.7 8.1 9.1 9.8 17.8 21.2 8.9 2.5 €m 198 260 153 190 241 403 348 236 69 % 9.4 12.4 7.3 9.1 11.5 19.2 16.6 11.2 3.3 € m 583 753 467 541 621 1,093 1,170 579 167 % 9.7 12.6 7.8 9.1 10.4 18.3 19.6 9.7 2.8 € m 7,162 7,331 4,436 4,063 3,210 4,389 2,880 795 190 % 20.8 21.3 12.9 11.8 9.3 12.7 8.3 2.3 0.6 3,876 100.0 2,098 100.0 5,974 100.0 34,456 100.0 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% Unsecured Total The proportion of residential mortgages (excluding unsecured) that was greater than 90 days past due and/or impaired and in negative equity at 31 December 2016 (47%) decreased compared to 31 December 2015 (48%). This reflects the increase in residential property prices during the year. *Forms an integral part of the audited financial statements 106 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 107 3.1 Credit risk – Credit profile of the loan portfolio Credit quality profile of Republic of Ireland residential mortgages The following table profiles the asset quality of the Republic of Ireland residential mortgage portfolio at 31 December 2016 and 2015: 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 25,069 664 2,898 28,631 (1,202) 27,429 Buy-to-let € m 3,093 236 1,484 4,813 (711) 4,102 2016* Total € m 28,162 900 4,382 33,444 (1,913) 31,531 Owner- occupier € m 24,423 744 3,713 28,880 (1,347) 27,533 Buy-to-let € m 3,336 242 1,998 5,576 (847) 4,729 2015* Total € m 27,759 986 5,711 34,456 (2,194) 32,262 The percentage of the portfolio which is neither past due nor impaired increased at 31 December 2016 to 84% from 81% at 31 December 2015. Republic of Ireland 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 2016 and 2015: 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 386 96 38 34 35 75 664 Total gross residential mortgages 28,631 Buy-to-let € m 71 26 30 25 26 58 236 4,813 2016* Total € m 457 122 68 59 61 133 900 Owner- occupier € m 425 103 53 42 37 84 744 33,444 28,880 Buy-to-let € m 86 35 21 22 24 54 242 5,576 2015* Total € m 511 138 74 64 61 138 986 34,456 Loans past due but not impaired at 31 December 2016 decreased by 9% when compared to 31 December 2015, driven by the improved economic environment and continued 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 2016 107 n o i t a m r o n f i l a r e n e G A4 Risk 1 AFR 2016 pages 49-110:Layout 1 10/03/2017 19:51 Page 108 Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio Collateral value of Republic of Ireland 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 2016 and 2015: Republic of Ireland 1 - 30 days 31 - 60 days 61 - 90 days 91 - 180 days 181 - 365 days Over 365 days Total Owner- occupier Buy-to-let € m 372 91 37 33 34 73 € m 68 25 29 24 25 53 640 224 2016* Total € m 440 116 66 57 59 126 864 Owner- occupier Buy-to-let € m 409 99 50 40 37 83 718 € m 82 29 19 21 22 49 222 2015* Total € m 491 128 69 61 59 132 940 The collateral value for the past due but not impaired portfolio was 96% of the outstanding loan balances at 31 December 2016, an increase from 95% at 31 December 2015. Republic of Ireland residential mortgages that were impaired The following table profiles the Republic of Ireland residential mortgages that were impaired at 31 December 2016 and 2015: 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 Total gross residential mortgages Owner- occupier € m 584 133 63 53 138 173 1,754 2,898 28,631 Buy-to-let € m 263 46 26 19 44 83 1,003 1,484 4,813 2016* Total € m 847 179 89 72 182 256 2,757 4,382 Owner- occupier € m 966 189 87 65 163 234 2,009 3,713 33,444 28,880 Buy-to-let € m 453 50 37 28 80 137 1,213 1,998 5,576 2015* Total € m 1,419 239 124 93 243 371 3,222 5,711 34,456 Impaired loans decreased by € 1.3 billion during 2016 due to restructuring, cures and write-offs. In addition, the rate of new impairment continued to slow significantly compared to 2015 driven by an improved economic environment. Of the residential mortgage portfolio that was impaired at 31 December 2016, € 0.8 billion or 19% was not past due ( 2015: € 1.4 billion or 25%), of which € 0.7 billion was subject to forbearance measures at 31 December 2016 (2015: € 1.0 billion). *Forms an integral part of the audited financial statements 108 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 109 3.1 Credit risk – Credit profile of the loan portfolio Republic of Ireland residential mortgages – properties in possession(1) The Group seeks to avoid repossession through working with customers, but where agreement cannot be reached, it 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. The number (stock) of properties in possession at 31 December 2016 and 2015 is set out below: Owner-occupier Buy-to-let Total 2016* Balance outstanding € m 172 24 196 Stock 691 104 795 Stock 623 91 714 2015* Balance outstanding € m 156 21 177 (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 2016 relates to the addition of 273 properties (2015: 523 properties), partly offset by the disposal of 187 properties (2015: 439 properties). In addition, a further 5 properties that were classified as voluntary surrenders at 31 December 2015 have been removed from the reported stock as the customers have re-engaged with the Group or repaid the outstanding balances during the year. The increase in stock from 2015 is due to the continued focus on engagement with customers. Republic of Ireland residential mortgages – repossessions disposed of The following table analyses the disposals of repossessed properties for the years ended 31 December 2016 and 2015: Number of Outstanding Gross sales proceeds balance at disposals repossession on disposal date € m € m 170 17 187 42 4 46 20 2 22 Number of disposals Outstanding balance at repossession date € m Gross sales proceeds on disposal € m 390 49 439 108 12 120 46 5 51 Costs to sell € m 2 – 2 Costs to sell € m 4 – 4 2016* Loss on sale(1) € m 24 2 26 2015* Loss on sale(1)- € m 66 7 73 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 187 residential properties in the Republic of Ireland resulted in a total loss on disposal of € 26 million at 31 December 2016 (before specific impairment provisions) and compares to 2015 when 439 residential properties were disposed of resulting in a total loss of € 73 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 Allied Irish Banks, p.l.c. Annual Financial Report 2016 109 n o i t a m r o n f i l a r e n e G A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 20:34 Page 110 Risk management – 3. 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 financial years ended 31 December 2016 and 2015: 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 Owner- occupier € m 1,564 181 169 161 62 7 % 38.6 Buy-to-let € m 231 34 33 33 19 1 % 56.1 Income statement charge/(credit) € m € m Income statement specific provisions Income statement IBNR provisions Total impairment charge/(credit) (1)Includes all impaired loans whether past due or not. (1) (3) (4) 2 – 2 2016* Total € m 1,795 215 202 194 81 8 % 41.5 2016* € m 1 (3) (2) Owner- occupier € m 2,048 253 230 212 90 12 % 42.4 € m (7) (5) (12) Buy-to-let € m 314 47 45 43 25 1 % 57.8 € m (2) (1) (3) 2015* Total € m 2,362 300 275 255 115 13 % 45.0 2015* € m (9) (6) (15) The UK mortgage portfolio is predominantly based in Northern Ireland (73% of total) with the remainder located in Great Britain. The UK mortgage portfolio has decreased in sterling terms by c.11% on the financial year end December 2015. However, due to the impact of currency movements, the portfolio has decreased by c.24% in euro terms. UK economic growth for 2016 is estimated at 2% with consumer spending and business investment holding up despite the sharp fall in sterling. Household finances have continued to benefit from low interest rates, low unemployment rates, modest earnings growth and low inflation. The housing and mortgage market has been impacted by tax and regulatory change, despite which a modest increase in demand has been evidenced nationally. The domestic economic factors have had a positive impact on mortgage arrears in general. Total loans in arrears in AIB UK of greater than 90 days have improved to 11.2% (2015: 11.6%). Statement of financial position specific provisions of € 81 million were held at 31 December 2016 and provided cover of 42% for impaired loans (2015: € 115 million, providing cover of 45%). Statement of financial position IBNR provisions of € 8 million were held at 31 December 2016, down from € 13 million at 31 December 2015, reflecting an improvement in estimated incurred loss in the non-impaired portfolio. *Forms an integral part of the audited financial statements 110 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 111 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 2016 and 2015: United Kingdom 1996 and before 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Total Total Impaired Total Impaired 2016* 2015* Number Balance € m Number Balance € m 1,208 360 345 665 703 720 1,204 1,655 1,881 2,559 3,437 3,053 1,202 547 273 136 146 283 383 234 207 28 7 9 21 22 27 53 92 122 199 345 437 167 52 28 11 15 29 58 39 34 34 2 13 45 27 65 70 121 160 267 344 413 108 26 14 4 1 1 – 1 – 2 – – 2 1 3 3 6 10 22 38 75 23 4 5 – – – – – – Number 1,466 403 387 736 793 835 1,319 1,806 2,059 2,789 3,732 3,277 1,307 616 311 159 170 303 402 241 – Balance € m Number Balance € m 43 11 12 30 30 38 73 124 165 270 463 570 222 71 39 15 21 42 74 49 – 35 5 12 34 30 55 76 136 151 288 401 461 110 25 11 4 1 1 – – – 2 – – 2 1 3 4 8 11 31 55 104 23 5 6 – – – – – – 21,201 1,795 1,716 194 23,111 2,362 1,836 255 The majority (€ 1.1 billion or 64%) of the € 1.8 billion residential mortgage book in the UK was originated between 2005 and 2008, of which 14% (€ 0.2 billion) was impaired at 31 December 2016 driven by reduced household income and reflecting the decrease in property prices since their peak in 2007. 21% of the residential mortgage portfolio was originated before 2005 of which 7% was impaired at 31 December 2016, while the remaining 15% of the portfolio was originated since 2009 of which 3% was impaired at 31 December 2016. 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 2016 111 n o i t a m r o n f i l a r e n e G A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 112 Risk management – 3. Individual risk types 3.1 Credit risk – Credit profile of the loan portfolio United Kingdom residential mortgages 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 2016. The index for Quarter 3 2016 reported that house prices across the UK increased by 5.3% for the twelve months to the end of Quarter 3 2016. In Northern Ireland (which includes 73% of the UK residential mortgage portfolio), the Nationwide HPI for Quarter 3 2016 reported an increase of 2.4% for the twelve months to the end of Quarter 3 2016. 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 2016 and 2015: 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 Owner-occupier € m % 556 360 171 119 89 116 88 40 25 35.6 23.0 10.9 7.6 5.7 7.4 5.6 2.6 1.6 Buy-to-let 2016* Total € m 63 37 21 24 21 29 17 8 11 % 27.4 15.9 9.0 10.2 9.0 12.7 7.3 3.7 4.8 € m 619 397 192 143 110 145 105 48 36 % 34.5 22.1 10.7 7.9 6.1 8.1 5.9 2.7 2.0 Total Weighted average indexed loan-to-value(1): 1,564 100.0 231 100.0 1,795 100.0 Stock of residential mortgages at financial year end New residential mortgages issued during the year Impaired residential mortgages 67.6 72.0 108.1 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 Owner-occupier € m % 634 431 231 177 118 172 164 90 31 30.9 21.1 11.3 8.6 5.8 8.4 8.0 4.4 1.5 75.7 69.7 114.7 Buy-to-let % 26.3 12.9 7.0 7.2 8.2 14.9 16.3 2.5 4.7 € m 82 40 22 23 26 47 51 8 15 68.6 72.0 109.0 2015* Total % 30.3 20.0 10.7 8.5 6.1 9.3 9.1 4.1 1.9 € m 716 471 253 200 144 219 215 98 46 Total Weighted average indexed loan-to-value(1): 2,048 100.0 314 100.0 2,362 100.0 Stock of residential mortgages at financial year end New residential mortgages issued during the year Impaired residential mortgages 73.4 60.6 117.8 81.3 50.7 111.3 74.4 60.5 116.9 (1)Weighted average indexed loan-to-values are the individual indexed loan-to-value calculations weighted by the mortgage balance against each property. 16% of the total owner-occupier and 24% of the total buy-to-let mortgages were in negative equity at 31 December 2016 (excluding unsecured), compared to 21% and 34% respectively at 31 December 2015, driven primarily by the increase in property prices in 2016, coupled with amortisation of the loan portfolio. The weighted average indexed loan-to-value for the total residential mortgage portfolio was 68.6% at 31 December 2016 compared to 74.4% at 31 December 2015, partially reflecting the increase in residential property prices in the period. *Forms an integral part of the audited financial statements 112 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 113 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 2016 and 2015: 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 523 332 153 108 74 101 68 14 % 38.1 24.1 11.1 7.9 5.4 7.4 5.0 1.0 € m 60 34 19 22 19 27 13 1 % 30.9 17.5 9.8 11.2 9.6 13.7 6.8 0.5 2016* Total % 37.2 23.3 11.0 8.3 5.9 8.2 5.2 0.9 € m 583 366 172 130 93 128 81 15 1,373 100.0 195 100.0 1,568 100.0 Owner-occupier Buy-to-let € m 592 392 203 159 103 147 132 44 % 33.4 22.1 11.5 9.0 5.8 8.3 7.4 2.5 € m 80 37 20 20 19 43 43 3 % 30.0 14.0 7.7 7.4 7.1 16.2 16.3 1.3 2015* Total % 33.0 21.1 10.9 8.8 6.0 9.3 8.6 2.3 € m 672 429 223 179 122 190 175 47 1,772 100.0 265 100.0 2,037 100.0 Residential mortgages that were neither past due nor impaired and in negative equity at 31 December 2016 decreased in comparison to 31 December 2015, partially reflecting the increase in residential property prices in the year. 14% of residential mortgages that were neither past due nor impaired were in negative equity at 31 December 2016 compared to 20% at 31 December 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 *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 113 n o i t a m r o n f i l a r e n e G A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 114 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 2016 and 2015: Owner-occupier Buy-to-let Total € m 25 26 15 9 12 13 19 25 25 % 15.0 15.3 8.6 5.6 7.0 7.9 11.1 15.0 14.5 169 100.0 € m 3 2 1 1 2 2 3 8 11 33 % 8.1 6.3 3.5 3.7 5.3 7.1 9.3 23.0 33.7 100.0 € m 28 28 16 10 14 15 22 33 36 % 13.9 13.8 7.7 5.2 6.8 7.8 10.8 16.3 17.7 Owner-occupier Buy-to-let Total € m 25 26 25 13 12 24 30 44 31 % 11.0 11.3 10.9 5.8 5.2 10.3 13.0 19.2 13.3 230 100.0 € m 2 3 1 3 7 3 7 4 15 45 % 5.1 6.0 2.8 6.1 15.0 6.8 15.7 9.5 33.0 € m 27 29 26 16 19 27 37 48 46 % 10.0 10.4 9.6 5.8 6.8 9.8 13.5 17.6 16.5 2016* Total residential mortgage portfolio € m 619 397 192 143 110 145 105 48 36 % 34.5 22.1 10.7 7.9 6.1 8.1 5.9 2.7 2.0 2015* Total residential mortgage portfolio € m 716 471 253 200 144 219 215 98 46 % 30.3 20.0 10.7 8.5 6.1 9.3 9.1 4.1 1.9 202 100.0 1,795 100.0 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% Unsecured Total 100.0 275 100.0 2,362 100.0 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 2016, decreased in comparison to 31 December 2015, driven by a decrease in the amount of loans greater than 90 days past due and/or impaired coupled with an increase in property prices in the year. *Forms an integral part of the audited financial statements 114 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 115 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 at 31 December 2016 and 2015: United Kingdom Neither past due nor impaired Past due but not impaired Impaired - provisions held Gross residential mortgages Provisions for impairment Owner- occupier € m 1,373 30 161 1,564 (69) 1,495 Buy-to-let € m 195 3 33 231 (20) 211 2016* Total € m 1,568 33 194 1,795 (89) 1,706 Owner- occupier € m 1,772 64 212 2,048 (102) 1,946 Buy-to-let € m 265 6 43 314 (26) 288 2015* Total € m 2,037 70 255 2,362 (128) 2,234 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 their 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 2016 and 2015: 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 10 8 4 3 2 3 30 2 1 – – – – 3 2016* Total € m 12 9 4 3 2 3 33 Owner- occupier € m Buy-to-let € m 23 12 11 7 4 7 64 2 1 1 2 – – 6 2015* Total € m 25 13 12 9 4 7 70 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 2016 and 2015: 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 10 7 3 3 2 3 28 2 1 – – – – 3 2016* Total € m 12 8 3 3 2 3 31 Owner- occupier € m Buy-to-let € m 23 11 11 7 4 6 62 2 1 1 1 – – 5 *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 2015* Total € m 25 12 12 8 4 6 67 115 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 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 116 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 2016 and 2015: 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 Owner- occupier € m Buy-to-let € m 2016* Total € m 29 8 5 2 10 20 120 194 2015* Total € m 20 4 6 5 17 43 160 255 2,362 17 3 5 4 15 31 137 212 3 1 1 1 2 12 23 43 314 26 7 5 2 8 17 96 161 3 1 – – 2 3 24 33 231 Total gross residential mortgages 1,564 1,795 2,048 As at 31 December 2016, the level of residential mortgages that were impaired was 10.8%, and has remained constant compared to 31 December 2015. 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 at 31 December 2016 and 2015 is set out below: Owner-occupier Buy-to-let Total Stock 37 11 48 2016* Balance outstanding € m 9 2 11 Stock 46 19 65 2015* Balance outstanding € m 14 3 17 (1)The number of residential properties in possession relates to those held as security for residential mortgages only. The stock of residential properties continued to decrease in 2016, and has reduced from 65 properties at December 2015 to 48 properties. United Kingdom residential mortgages – repossessions disposed of The disposal of 60 residential properties in possession resulted in a loss on disposal of € 5 million before specific impairment provisions (2015: disposal of 119 properties resulting in a loss on disposal of € 15 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 116 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 117 3.1 Credit risk – credit profile of the loan portfolio Loans and receivables to customers – Other personal The following table analyses other personal lending by segment showing asset quality and impairment provisions for the financial years ended 31 December 2016 and 2015: AIB Ireland € m AIB Group & UK International € m € m 2016* Total € m AIB Ireland € m AIB Group & UK International € m € m 2,252 2,051 Analysed as to asset quality Satisfactory Watch Vulnerable Impaired Total criticised loans 2,091 161 110 283 386 779 10 13 46 69 Total gross loans and receivables 2,870 230 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 % 27 13 € m 218 34 252 % 56 65 9 – – – – – – % – – % 30 20 € m € m 34 4 38 % 74 83 17 – – – % – – – 2015* Total € m 2,298 160 356 698 1,214 3,512 % 35 20 € m 486 49 535 % 70 77 15 247 23 20 66 109 356 % 31 19 – – – – – – % – – € m € m 49 5 54 % 74 82 15 – – – % – – – 120 296 432 848 3,100 % 27 14 € m 252 38 290 % 58 67 9 (11) (11) (22) % 137 336 632 1,105 3,156 % 35 20 € m 437 44 481 % 69 76 15 € m (7) (7) (14) % 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 Income statement (credit)/charge € m € m € m € m € m € m € m Specific IBNR Total impairment (credit)/charge (9) (9) (18) % (2) (2) (4) % Impairment (credit)/charge /average loans (0.60) (1.06) – – – % – 2 4 6 % – – – % – (5) (3) (8) % (0.19) (0.63) (0.40) 1.52 *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 117 n o i t a m r o n f i l a r e n e G A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 118 Risk management - 3. Individual risk types 3.1 Credit risk – credit profile of the loan portfolio Loans and receivables to customers – Other personal The other personal lending portfolio at € 3.1 billion reduced by € 0.4 billion during 2016 and comprises € 2.2 billion in loans and overdrafts and € 0.9 billion in credit card facilities. An increase in demand for personal loans was observed during the year and was due to both the improved economic environment and an expanded service offering, including on-line approval through internet, mobile and telephone banking applications. The strong level of new lending is offset by redemptions and repayments. The portfolio experienced a € 0.4 billion reduction in criticised loans in 2016, of which € 0.2 billion was written off. At 31 December 2016, € 0.8 billion or 27% of the portfolio was criticised of which impaired loans amounted to € 0.4 billion (2015: € 1.2 billion or 35% and € 0.7 billion). At 31 December 2016, the specific provision cover decreased from 70% to 58%, driven by the write-off of impaired balances with a high provision cover and which were predominately low value retail loans on which recovery options had been exhausted. The income statement provision writeback of € 22 million compares to an € 8 million writeback in 2015. *Forms an integral part of the audited financial statements 118 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 119 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 financial years ended 31 December 2016 and 2015: AIB Ireland € m Group & AIB UK International € m € m AIB Ireland € m Group & AIB UK International € m € m 2016* Total € m 6,198 1,051 7,249 444 1,077 1,521 365 259 9,394 4,437 378 1,855 2,724 4,957 % 53 29 € m 1,350 99 1,449 % 50 53 15 € m (74) (71) (145) % – – – – – – 38 – 38 38 – – – % – – € m – – – % – – – – – – % – 5,154 1,002 6,156 583 1,142 1,725 174 – 1,453 456 1,909 69 758 827 227 480 8,055 3,443 2,435 486 1,839 3,295 5,620 % 70 41 € m 1,790 151 1,941 % 54 59 24 € m (187) 22 (165) % 1,683 487 260 1,013 1,760 % 51 29 € m 685 23 708 % 68 70 21 € m (29) (20) (49) % (1.38) (1.71) (1.13) 2015* Total € m 6,607 1,458 8,065 652 1,900 2,552 435 480 11,532 4,152 973 2,099 4,308 7,380 % 64 37 € m 2,475 174 2,649 % 57 61 23 € m (216) 2 (214) % (1.54) – – – – – – 34 – 34 34 – – – – % – – € m – – – % – – – € m – – – % – Investment: Commercial investment Residential investment Land and development Commercial development Residential development Contractors Housing associations 4,665 818 5,483 424 800 1,224 157 – 1,533 233 1,766 20 277 297 170 259 Total gross loans and receivables 6,864 2,492 Analysed as to asset quality Satisfactory 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 (credit)/charge Specific IBNR Total impairment (credit) 2,756 249 1,685 2,174 4,108 % 60 32 € m 1,020 84 1,104 % 47 51 16 € m (64) (67) (131) % 1,643 129 170 550 849 % 34 22 € m 330 15 345 % 60 63 14 (10) (4) (14) % Impairment (credit)/average loans (1.72) (0.48) *Forms an integral part of the audited financial statements € m € m Allied Irish Banks, p.l.c. Annual Financial Report 2016 119 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 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 120 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 14% of total loans and receivables compared to 16% as at 31 December 2015. The portfolio is comprised of 77% investment loans (€ 7.2 billion), 16% land and development loans (€ 1.5 billion) and 7% other property and construction loans (€ 0.6 billion). AIB UK accounts for 27% of the total property and construction portfolio. Overall, the portfolio reduced by € 2.1 billion or 19% during 2016. This reduction was due principally to the continuing impact of restructuring, and to write-offs, amortisations and repayments, resulting from asset disposals by customers. Impaired loans in this portfolio have reduced by € 1.6 billion in 2016, with specific provisions reducing by € 1.1 billion. There was a writeback of specific provisions net of top-ups of € 143 million (c. 3% of opening impaired loans) mainly due to the improved economic environment and the restructuring process described on page 88. This was partially off-set by provisions for new impairments which amounted to € 69 million. Investment Investment property loans amounted to € 7.2 billion at 31 December 2016 (2015: € 8.1 billion) of which € 6.2 billion related to commercial investment. The reduction was largely as a result of loan redemptions (asset sales by customers), restructures within the criticised loan portfolio and write-offs. € 5.5 billion of the investment property portfolio related to loans for the purchase of property in the Republic of Ireland and € 1.8 billion in the United Kingdom. 2016 saw strong investor interest in Irish commercial property with overseas capital continuing to play an important role, accounting for c. 64% of total investment in the Irish investment market in the year to 30 September 2016. The retail sector continues to be the most sought after asset class followed by the office sector which is principally focused in Dublin. € 3.8 billion or 52% of the investment property portfolio was criticised at 31 December 2016 compared with € 4.9 billion or 61% at 31 December 2015. Included in criticised loans was € 1.8 billion loans which were impaired (31 December 2015: € 2.4 billion) and on which the Group had € 0.8 billion in statement of financial position specific provisions, providing cover of 44% (2015: € 1.2 billion and 49%). Total impairment provisions as a percentage of total loans is 12%, down from 16% at 31 December 2015. The impairment writeback to the income statement was € 67 million on the investment property element of the property and construction portfolio compared to a writeback of € 140 million in 2015. Land and development At 31 December 2016, land and development loans amounted to € 1.5 billion (2015: € 2.6 billion). € 1.2 billion of this portfolio related to loans in AIB Ireland and € 0.3 billion in AIB UK. The development land market in 2016 saw strong activity, continuing the momentum of 2015, with a number of large transactions occurring throughout the year. € 1.1 billion of the land and development portfolio was criticised at 31 December 2016 (2015: € 2.2 billion), including € 0.8 billion of loans which were impaired (2015: € 1.8 billion) and on which the Group had € 0.5 billion in statement of financial position specific provisions, providing cover of 61% (2015: 68%). The impairment writeback of € 79 million to the income statement compares to a writeback of € 74 million in 2015. 120 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 121 3.1 Credit risk – Credit profile of the loan portfolio Loans and receivables to customers – Non-property business The following table analyses non-property business lending by segment showing asset quality and impairment provisions for the financial years ended 31 December 2016 and 2015: Agriculture Distribution: Hotels Licensed premises Retail/wholesale Other distribution Other services Other AIB Ireland € m 1,660 1,483 541 1,715 142 3,881 2,215 2,005 Total gross loans and receivables 9,761 Analysed as to asset quality Satisfactory 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 6,893 351 1,325 1,192 2,868 % 29 12 € m 619 91 710 % 52 60 7 Group & AIB UK International € m € m Group & AIB UK International € m € m 2016* Total € m 1,773 2,311 541 2,339 248 5,439 5,706 4,577 AIB Ireland € m 1,681 1,458 594 1,959 144 4,155 2,492 1,895 19 37 – 260 106 403 1,123 1,389 2015* Total € m 1,795 2,356 758 2,395 322 5,831 5,888 4,787 104 855 101 436 9 1,401 2,569 1,218 5,292 10 43 63 – 169 275 827 1,674 2,934 17,495 10,223 2,786 18,301 94 791 – 364 – 1,155 2,368 1,183 4,800 4,184 2,893 13,970 296 149 171 616 % 13 4 € m 71 29 100 % 42 58 2 – – 41 41 % 1 1 € m 27 11 38 % 66 93 1 647 1,474 1,404 3,525 % 20 8 € m 717 131 848 % 51 60 5 6,576 567 1,347 1,733 3,647 % 36 17 € m 952 137 1,089 % 55 63 11 € m (98) (152) (250) % 4,510 2,723 13,809 299 149 334 782 % 15 6 € m 178 30 208 % 53 62 4 17 – 46 63 % 2 2 € m 22 7 29 % 48 63 1 € m € m 6 8 14 % 9 2 11 % 883 1,496 2,113 4,492 % 25 12 € m 1,152 174 1,326 % 55 63 7 € m (83) (142) (225) % 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 Income statement (credit)/charge € m € m € m € m Specific IBNR Total impairment (credit)/charge Impairment (credit)/charge 30 (47) (17) % (20) 3 (17) % 14 4 18 % 24 (40) (16) % /average loans (0.17) (0.31) 0.65 (0.08) (2.36) 0.27 0.51 (1.24) *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 121 n o i t a m r o n f i l a r e n e G A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 122 Risk management – 3. Individual risk types 3.1 Credit risk – credit profile of the loan portfolio Loans and receivables to customers – Non-property business (continued) The non-property business portfolio comprises of Small Medium Enterprises (“SME”) which are reliant on the domestic economies in which they operate and larger corporate and institutional borrowers who are impacted by global economies. There was increased activity across most sub-sectors in the portfolio due to increased credit demand across all segments resulting in new lending of c. € 4.4 billion in 2016. However, this was more than offset by amortisation, restructuring activity and sterling depreciation, resulting in a reduction of € 0.8 billion in the portfolio (4% reduction). The portfolio amounted to 27% of total loans and receivables as at 31 December 2016. The majority of the portfolio exposure is to Irish borrowers with the UK and USA being the other main geographic concentrations. Satisfactory loans and receivables increased in 2016, continuing the positive trend experienced in 2015, with new drawdowns exceeding amortisation and repayment coupled with upward grade migration through improved performance. The level of criticised loans reduced from € 4.5 billion at 31 December 2015 to € 3.5 billion at 31 December 2016, mainly due to a reduction of € 0.7 billion in impaired loans as a result of significant restructuring. The following are the key themes within the main sub-sectors of the non-property business portfolio: – The agriculture sub-sector (10% of the portfolio) continued to perform well in 2016 - with the dairy sector recovering as milk prices increased in the second half of the year; – The hotels sub-sector comprises 13% of the portfolio. This sector continued to perform well in 2016, helped by a stronger local economy and increased number of tourists. Valuations for hotels have continued to increase, with a number of foreign investors and fund managers competing for available properties; – The licensed premises sub-sector comprises 3% of the portfolio. This sector continues to perform strongly in key urban centres, but outside the main cities, trading performance continues to show some weakness; – The retail/wholesale sub-sector (13% of the portfolio) continued to improve in 2016 due to the stronger economic environment, nevertheless, there is still stress in the sub-sector, particularly in rural areas; and – The other services sub-sector comprises 33% of the portfolio which includes businesses such as solicitors, accounting, audit, tax, computer services, research and development, consultancy, hospitals, nursing homes and plant and machinery. This sub-sector performed well in 2016 with an increase in drawdowns. In the table on the preceding page, there is a category of “Other” totalling € 4.6 billion (26% of the portfolio). This category includes a broad range of sub-sectors such as energy, manufacturing, transport and financial. 2016 was another year of strong economic growth in the Republic of Ireland. Notwithstanding this improved economic performance and a positive outlook, there are still challenges in the domestic market, and in particular, the heightened economic uncertainty and increased foreign exchange volatility that have followed the outcome of the Brexit referendum in 2016. The UK had another year of economic growth, though, following the outcome of the Brexit referendum in June 2016, there is increased uncertainty going into 2017. Group & International business segment includes € 2.8 billion (2015: € 2.2 billion) in syndicated and international lending exposures. The Group has specialised lending teams which are involved in participating in the provision of finance to US and European corporations for mergers, acquisitions, buy-outs and general corporate purposes. Loans originated by these teams, reported on the basis of the booking office are Ireland € 2.7 billion and Rest of the World € 0.1 billion. At 31 December 2016, 99.8% of the syndicated and international lending portfolio is in a satisfactory grade, with € 6 million or 0.2% classified as impaired. 76% of the customers in this portfolio are domiciled in the USA, 5% in the UK, and 19% in the Rest of the World (2015: 85% in the USA, 4% in the UK and 11% in the Rest of the World respectively). The largest sub-sectors within the portfolio include business services, telecoms, manufacturing, healthcare, pharmaceuticals and media. The income statement provision writeback in 2016 was € 16 million compared to a writeback of € 225 million in 2015. IBNR provisions reduced from € 174 million to € 131 million, or from 1.1% to 0.8% of non-impaired loans and receivables, in line with improved impairment trends. The specific provision cover decreased from 55% at 31 December 2015 to 51% at 31 December 2016 impacted by writebacks and write-offs of provisions for loans with higher provision cover. Specific provisions on new impairments amounted to € 75 million (2015: € 95 million) and were off-set by a writeback (net of top-ups) of € 51 million (2015: € 178 million) . The writeback amounted to c. 2% of opening impaired loans and was driven by the improved economic environment and the restructuring assessment process described on page 88. 122 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 123 3.1 Credit risk – credit profile of the loan portfolio Large exposures The 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 2016, the Group’s top 50 exposures amounted to € 4.5 billion, and accounted for 6.9% (2015: € 4.8 billion and 6.9%) of the Group’s on-balance sheet total gross loans and receivables to customers. In addition, these customers have undrawn facilities amounting to € 83 million (2015: € 266 million). No single customer exposure exceeded regulatory requirements. In addition, the Group holds NAMA senior bonds amounting to € 1.8 billion (2015: € 5.6 billion). 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 63 to 67. These lower credit quality loans are referred to as ‘Criticised loans’ and include Watch, Vulnerable and Impaired, and are defined on page 64. 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 estimated 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: The credit is exhibiting weakness but with the expectation that existing debt can be fully repaid from normal cash flows. Vulnerable: 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 2016 123 n o i t a m r o n f i l a r e n e G A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 124 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 2016 and 2015 is set out below: 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 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 15,937 9,811 1,575 2,407 29,730 5 50 281 597 933 4,576 35,239 Other Property and Non-property business € m personal construction € m € m 229 1,970 96 203 2,498 3 50 24 93 170 432 3,100 199 4,190 357 1,562 6,308 1 47 21 293 362 2,724 9,394 1,545 12,347 612 1,225 15,729 1 77 35 249 362 1,404 17,495 Residential mortgages € m Other personal € m Property and Non-property business construction € m € m 14,894 10,106 1,972 2,824 29,796 5 86 292 673 1,056 5,966 36,818 203 2,048 131 282 2,664 2 45 29 74 150 698 3,512 122 3,980 912 1,806 6,820 – 50 61 293 404 1,167 12,507 836 1,270 15,780 2 133 47 226 408 4,308 11,532 2,113 18,301 2016 Total € m 17,910 28,318 2,640 5,397 54,265 10 224 361 1,232 1,827 9,136 65,228 (4,589) 60,639 2015 Total € m 16,386 28,641 3,851 6,182 55,060 9 314 429 1,266 2,018 13,085 70,163 (139)(1) 48(1) (6,832) 63,240 (1)In 2016, unearned income and deferred costs have been allocated to the relevant asset classes. The above table shows reductions in “criticised” grade categories across all asset classes compared to December 2015. The increase in “good” grade categories was driven by new lending partially offset by pay-downs. Loans reduced in total by € 4.9 billion (a decrease of 7%) representing a net increase in "good" loans of € 1.1 billion and a decrease in “criticised” (watch, vulnerable and impaired) of € 6.0 billion. *Forms an integral part of the audited financial statements 124 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 125 3.1 Credit risk – credit profile of the loan portfolio Credit ratings (continued) Non-performing exposures to customers The internal credit ratings profile of loans and receivables to customers on the table above sets out the basis on which the Group manages its credit portfolio. In addition, the Group’s off–balance sheet commitments are set out in note 45 to the financial statements analysed by their internal ratings profile. For regulatory reporting purposes, the Group discloses details of its non-performing exposures which are set out in the table below. Non-performing exposures include a) loans and receivables to customers and b) off-balance sheet commitments such as loan commitments and financial guarantee contracts. In some respects, loans and receivables as reported in non-performing exposures overlap with the tables reported above, i.e. impaired loans (page 95) and greater than 90 days past due but not impaired (page 93). However, the category below ‘Neither past due nor impaired and/or less than 90 days past due’ will contain elements of the satisfactory portfolio, and the ‘watch’ and ‘vulnerable’ categories as set out above. All exposures categorised as non-performing have been tested for impairment. A profile of non-performing loans and receivables to customers by asset class together with the total outstanding value for non-performing off-balance sheet commitments at 31 December 2016 and 2015 is set out below: Residential mortgages € m Other Property and Non-property business € m personal construction € m € m 2016 Total € m Total gross loans and receivables 35,239 3,100 9,394 17,495 65,228 (a) Non-performing loans Impaired Greater than 90 days past due but not impaired Neither past due nor impaired and/or less than 90 days past due Total non-performing loans Non-performing loans as % of total gross loans 4,576 261 1,842 6,679 19% 432 54 175 661 21% 2,724 165 1,325 4,214 45% 1,404 140 974 2,518 14% Residential mortgages € m Other personal € m Property and Non-property business construction € m € m 9,136 620 4,316 14,072 22% 2015 Total € m Total gross loans and receivables 36,818 3,512 11,532 18,301 70,163 Non-performing loans Impaired Greater than 90 days past due but not impaired Neither past due nor impaired and/or less than 90 days past due Total non-performing loans Non-performing loans as % of total gross loans 5,966 283 1,561 7,810 21% 698 46 136 880 25% 4,308 209 1,596 6,113 53% 2,113 145 907 3,165 17% 13,085 683 4,200 17,968 26% (b) Total non-performing off-balance sheet commitments amounted to € 321 million (2015: € 399 million). Non-performing exposures as defined by the EBA are: – Material exposures which are more than 90 days past-due; and or, – The debtor is assessed as unlikely to pay its credit obligations in full without realisation of collateral, regardless of the existence of any past-due amount or of the number of days past due. Non-performing loans in the table above include: – – – Impaired loans; Loans that are greater than 90 days past due and not impaired; Loans that are deemed unlikely to repay without realisation of the underlying collateral; and – Certain other loans including those that have previously received a forbearance solution and that are required to remain as non-performing for a probation period, as defined under regulatory and EBA Implementing Technical Standards. Allied Irish Banks, p.l.c. Annual Financial Report 2016 125 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 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 126 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 shares) and financial investments available for sale (excluding equity shares) and financial investments held to maturity at 31 December 2016 and 2015 is set out below: AAA/AA A+/A/A- BBB+/BBB/BBB- Sub investment Unrated Total AAA/AA A/A- BBB+/BBB/BBB- Sub investment Unrated Total Bank € m 4,901 847 186 11 5 5,950 Bank € m 4,963 1,258 166 549 3 6,939 Corporate € m Sovereign € m 2,440 10,456(1) 2,028 – – 2,758 14,716(1) 2,317 – – – 27 19 21 – 67 – – – 86 1 87 Corporate € m Sovereign € m 14,924(2) 446 21,387 Other € m 446 – – – – 2016 Total € m 7,787 11,330 2,233 32 5 Other € m 328 – 1 – – 2015 Total € m 8,049 15,974 2,484 635 4 19,791(2) 329 27,146 (1)Includes NAMA senior bonds which do not have an external credit rating and to which the Group has attributed a rating of A at 31 December 2016 i.e. the external rating of the Sovereign (31 December 2015: A-). (2)Includes supranational banks and government agencies. *Forms an integral part of the audited financial statements 126 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 127 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 2016 and 2015: 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 Euro corporate securities Non Euro corporate securities Total debt securities Equity securities(1) Total financial investment available for sale Fair value € m 5,114 2,706 230 1,719 433 12 4,551 47 20 14,832 605 2016* Unrealised Unrealised gross gains gross losses € m € m 458 148 8 64 – – 102 – 3 783 448 (13) (6) (1) (1) (8) – (1) – – (30) (2) Fair value € m 5,406 3,033 245 2,008 328 1 4,600 30 57 15,708 781 Unrealised gross gains € m 2015* Unrealised gross losses € m 587 140 7 78 – – 81 – 3 896 696 – (3) (1) – (3) – (8) – (2) (17) (2) (19) 15,437 1,231 (32) 16,489 1,592 (1)Includes NAMA subordinated bonds with a fair value of € 466 million (2015: € 432 million) of which unrealised gains amount to € 419 million (2015: € 385 million). The following table categorises AIB Group’s available-for-sale debt securities by contractual residual maturity and weighted average yield at 31 December 2016 and 2015: Within 1 year € m Yield % After 1 but within 5 years € m Yield % After 5 but within 10 years € m Yield % 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 Euro corporate securities Non Euro corporate securities 1,209 174 9 265 – – 3.9 1.5 2.6 1.5 – – 2,548 837 137 1,247 – – 155 0.8 3,431 3 – – – 20 – Total ............................................................ 1,815 3.1 8,220 4.4 1.8 2.5 1.0 – – 0.8 0.3 – 2.1 1,029 1,695 84 127 – – 965 24 20 3,944 1.2 1.5 0.8 1.7 – – 0.5 1.2 5.4 1.2 Within 1 year € m Yield % After 1 but within 5 years € m Yield % After 5 but within 10 years € m Yield % 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 Euro corporate securities Non Euro corporate securities 816 8.1 3,889 – – – – – – – 1 – – – – – – – – 687 136 1,545 – – 3,602 20 35 Total ............................................................ 817 8.1 9,914 4.1 1.6 2.0 1.1 – – 0.9 4.1 5.2 2.3 414 2,346 109 437 – – 998 10 21 4,335 1.8 1.5 0.8 1.3 – – 0.8 2.8 5.9 1.3 2016 After 10 years € m Yield % 328 – – 80 433 12 – – – 1.3 – – 2.2 1.9 0.2 – – – 853 1.7 2015 After 10 years € m Yield % 287 – – 26 328 1 – – – 2.1 – – 2.0 1.6 0.1 – – – 642 1.8 Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 128 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 2016 and 2015: Government securities Republic of Ireland Italy France Spain Netherlands Germany Austria United Kingdom Finland Slovakia Czech Republic Poland Saudi Arabia Asset backed securities United States of America Spain Ireland Bank securities Republic of Ireland France Netherlands United Kingdom Australia Sweden Canada Finland Norway Belgium Germany Denmark New Zealand Switzerland Luxembourg Irish Government € m 5,114 Euro government € m – 2016* Non Euro government € m – Irish Government € m 5,406 Euro government € m – 2015* Non Euro government € m – – – – – – – – – – – – – 928 269 1,100 254 93 30 – – 32 – – – – – – – – – 76 – – 36 89 29 – – – – – – – – – – – – 1,164 275 1,153 260 96 30 – – 55 – – – 5,114 2,706 230 5,406 3,033 2016* Total € m 433 – 12 445 Euro € m 483 777 496 446 347 376 667 244 318 282 49 76 16 23 – 4,600 Euro € m 2016* Non Euro € m 471 569 712 443 315 394 661 234 300 297 31 57 24 18 25 4,551 – – – – – – – – – – – – – – – – – – – – – – 89 – – 36 120 – 245 2015* Total € m 328 1 – 329 2015* Non Euro € m – – – – – – – – – – – – – – – – *Forms an integral part of the audited financial statements 128 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 129 3.1 Credit risk – Financial investments available for sale Debt securities Debt securities available for sale (“AFS”) decreased from a fair value of € 15.7 billion at 31 December 2015 to € 14.8 billion at 31 December 2016. Sales, maturities and redemptions of € 3.1 billion (nominal € 3.5 billion) were offset by purchases of € 2.5 billion (nominal € 2.4 billion). Within the AFS portfolio, Irish Government securities reduced by € 0.3 billion and euro government securities reduced by € 0.3 billion as these holdings had moved to record low yields against a backdrop of ECB quantitative easing. Re-investment in US asset backed securities (€ 0.2 billion) was deemed to offer better relative value returns. The decrease in fair value of the overall portfolio was due to net sales of € 0.6 billion. The external ratings profile remained relatively static with total investment grade ratings remaining at 99%. The breakdown by rating was AAA: 31% (2015: 29%); AA: 18% (2015: 17%); A: 37% (2015: 38%); BBB: 13% (2015: 15%); and sub investment grade 1% (2015: 1%). Republic of Ireland securities The fair value of Irish debt securities amounted to € 5.6 billion at 31 December 2016 (2015: € 5.9 billion) and consisted of sovereign debt € 5.1 billion (2015: € 5.4 billion), senior unsecured bonds of € 0.2 billion (2015: € 0.2 billion) and covered bonds of € 0.3 billion (2015: € 0.3 billion). United Kingdom securities The fair value of United Kingdom securities amounted to € 0.5 billion at 31 December 2016 (2015: € 0.6 billion) and consisted of sovereign debt € 0.1 billion (2015: € 0.1 billion), senior unsecured bonds of € 0.1 billion (2015: € 0.1 billion) and covered bonds of € 0.3 billion (2015: € 0.4 billion). Euro government securities The fair value of government securities denominated in euros (excluding those issued by the Irish Government) decreased by € 0.3 billion to € 2.7 billion (2015: € 3.0 billion). This decrease was largely due to net sales and maturities and included reductions in Italian government securities of € 0.2 billion. Bank securities At 30 December 2016, the fair value of bank securities of € 4.5 billion (2015: € 4.6 billion) included € 3 billion in covered bonds (2015: € 3.2 billion), € 1.3 billion in senior unsecured bank debt (2015: € 1.2 billion) and € 0.2 billion in government guaranteed senior bank debt (2015: € 0.2 billion). The bank debt was diversified across banks in 15 countries with the largest exposures being to Dutch banks (€ 0.7 billion) and Canadian banks (€ 0.7 billion). Asset backed securities Asset backed securities increased to € 0.4 billion (2015: € 0.3 billion). This was due to purchases of AAA rated US collateralised mortgage obligations. Equity securities Equity securities held as AFS decreased by € 176 million with the decrease being primarily attributable to the disposal of AIB’s holding in Visa Europe which was held at a fair value of € 294 million at 31 December 2015. Consideration for the disposal comprised cash of € 207 million and preferred stock in Visa Inc. with a fair value of € 65 million. This holding in Visa Inc. preferred stock had a fair value of € 70 million at 31 December 2016. The fair value of the NAMA subordinated bonds increased to € 466 million at 31 December 2016 (2015: € 432 million) i.e. from 91.81% to 99.02% of nominal. A dividend amounting to € 25 million was received on these bonds in 2016. Other In addition to Irish Government securities outlined above, the Group holds NAMA senior debt amounting to € 1.8 billion (2015: € 5.6 billion), which is guaranteed by the Irish Government. However, this is classified as loans and receivables to customers and accounted for at amortised cost. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 130 Risk management – 3. Individual risk types 3.1 Credit risk – Financial investments held to maturity In December 2015, following a Board decision to reduce the AFS portfolio, € 3.5 billion (€ 2.9 billion nominal) in Irish Government securities were transferred to a new held to maturity (“HTM”) portfolio. The transfer covered a range of issues with maturities ranging from 2018 to 2030. The reclassification reflects the Group’s positive intention and ability to hold these securities to maturity. On the date of reclassification, the accumulated fair value gain held in other comprehensive income was c. € 0.5 billion. This unrealised gain is being amortised to interest income using the effective income method over the remaining life of the bonds. There are no immediate plans to increase this portfolio. At 1 January Transfers from available for sale securities (note 27 to the consolidated financial statements) Amortisation of fair value gain At 31 December 2016* € m 3,483 – (127) 3,356 2015* € m – 3,487 (4) 3,483 *Forms an integral part of the audited financial statements 130 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 131 3.2 Additional credit risk information – Forbearance* The Group’s forbearance initiatives are detailed on pages 73 to 75 in the ‘Risk management’ section of this report. The following table sets out the risk profile of loans and receivables to customers analysed as to non-forborne and forborne at 31 December 2016: 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 Residential mortgages € m 15,364 9,099 1,236 903 26,602 414 2,236 2,650 Other Property and Non-property business € m personal construction € m € m 228 1,695 74 77 2,074 109 302 411 199 4,150 293 479 5,121 203 2,124 2,327 1,544 12,195 529 459 14,727 231 954 1,185 2016 Total € m 17,335 27,139 2,132 1,918 48,524 957 5,616 6,573 Total non-forborne loans and receivables to customers 29,252 2,485 7,448 15,912 55,097 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 forborne loans and receivables 573 712 339 1,504 3,128 519 2,340 2,859 1 275 22 126 424 61 130 191 – 40 64 1,083 1,187 159 600 759 1 152 83 766 1,002 131 450 581 575 1,179 508 3,479 5,741 870 3,520 4,390 to customers 5,987(1) 615 1,946 1,583 10,131 Total gross loans and receivables to customers 35,239 3,100 9,394 17,495 65,228 Weighted average interest rate of forborne loans and receivables to customers (1)Republic of Ireland: € 5,931 million and United Kingdom: € 56 million. % 2.4 % 6.5 % 3.0 % 3.5 % 2.9 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 Republic of Ireland residential mortgage forbearance portfolio is profiled in more detail on pages 132 to 139 and further detail on the non-mortgage forbearance portfolio is included on pages 140 to 144. Interest income is recognised, based on the original effective interest rate, on forborne loans in accordance with Accounting policy (f) ‘Interest income and expense recognition’ in note 1 to the consolidated financial statements and is included in ‘Interest and similar income’ in the Income Statement. Interest income on non-impaired forborne loans is based on the gross loan balance, whereas, the net carrying value after specific provisions is used for impaired forborne loans. Interest income on overall impaired loans amounted to € 140 million in 2016 (2015: € 244 million). At 31 December 2016, the net carrying value of impaired loans was € 5,089 million ( 2015: € 6,927 million) which included forborne impaired mortgages of € 1,535 million (2015: € 1,600 million) and forborne impaired non-mortgages of € 680 million (2015: € 623 million). *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 2016 131 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 132 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 2015: 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 Residential mortgages € m Other personal € m Property and Non-property business construction € m € m 14,326 9,483 1,571 1,588 26,968 581 3,737 4,318 203 1,849 105 134 2,291 95 476 571 122 3,892 813 482 5,309 245 3,668 3,913 1,166 12,334 733 501 14,734 300 1,500 1,800 2015 Total € m 15,817 27,558 3,222 2,705 49,302 1,221 9,381 10,602 Total non-forborne loans and receivables to customers 31,286 2,862 9,222 16,534 59,904 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 forborne loans and receivables to customers Total gross loans and receivables to customers Weighted average interest rate of forborne loans and receivables to customers (1)Republic of Ireland: € 5,481 million and United Kingdom: € 51 million. 568 623 401 1,236 2,828 475 2,229 2,704 5,532(1) – 199 26 148 373 55 222 277 650 – 88 99 1,324 1,511 159 640 799 1 173 103 769 1,046 108 613 721 569 1,083 629 3,477 5,758 797 3,704 4,501 2,310 1,767 10,259 36,818 3,512 11,532 18,301 70,163 % 2.5 % 6.4 % 3.1 % 3.7 % 3.1 Republic of Ireland residential mortgages The Group has 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 74. In the following forbearance tables, temporary forbearance solutions (e.g. interest only, reduced payment) are included in the forbearance stock for as long as they are active, but are removed from the forbearance stock when the temporary agreement with the customer expires. *Forms an integral part of the audited financial statements 132 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 133 3.2 Additional credit risk information – Forbearance* Republic of Ireland residential mortgages (continued) 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 2016 and 2015: Republic of Ireland owner-occupier At 1 January Additions Expired arrangements Payments Interest Closed accounts(1) Advanced forbearance arrangements - valuation adjustments Write-offs(2) Transfer between owner-occupier and buy-to-let Adoption of EBA forbearance definition At 31 December Republic of Ireland buy-to-let At 1 January Additions Expired arrangements Payments Interest Closed accounts(1) Advanced forbearance arrangements - valuation adjustments Write-offs(2) Transfer between owner-occupier and buy-to-let Adoption of EBA forbearance definition At 31 December Republic of Ireland – Total At 1 January Additions Expired arrangements Payments Interest Closed accounts(1) Advanced forbearance arrangements - valuation adjustments Write-offs(2) Adoption of EBA forbearance definition Number 29,514 3,805 (3,217) – – (869) – (15) (6) 653 29,865 Number 7,826 659 (1,359) – – (692) – (26) 6 3,095 9,509 Number 37,340 4,464 (4,576) – – (1,561) – (41) 3,748 2016 Balance € m 3,995 537 (450) (216) 101 (67) (6) (6) 1 385 4,274 2016 Balance € m 1,486 104 (250) (113) 29 (86) (1) (16) (1) 505 Number 27,714 6,778 (4,095) – – (824) – (34) (25) – 2015 Balance € m 3,830 952 (578) (199) 102 (58) (17) (37) – – 29,514 3,995 Number 7,936 1,868 (1,198) – – (640) – (165) 25 – 2015 Balance € m 1,740 289 (240) (123) 43 (82) (2) (139) – – 1,657 7,826 1,486 2016 Balance € m 5,481 641 (700) (329) 130 (153) (7) (22) 890 Number 35,650 8,646 (5,293) – – (1,464) – (199) – 2015 Balance € m 5,570 1,241 (818) (322) 145 (140) (19) (176) – 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 At 31 December 39,374 5,931 37,340 5,481 (1)Accounts closed during year due primarily to customer repayments and redemptions. (2)Includes contracted and non-contracted write-offs in 2016 and 2015. The stock of loans subject to forbearance measures increased by € 0.5 billion from 31 December 2015 to € 5.9 billion at 31 December 2016 driven by a € 0.9 billion adjustment due to the adoption of a definition of forbearance as prescribed by the EBA which is mainly a reflection of the requirement to apply a probation period to loans subject to forbearance, which was not applied under the previous definition used. *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 2016 133 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 134 Risk management – 3. Individual risk types 3.2 Additional credit risk information – Forbearance* Republic of Ireland residential mortgages (continued) Under the previous definition used, and which was prescribed by the Central Bank of Ireland, loans subject to temporary forbearance measures (e.g. interest only, payment moratoriums) remained in the forbearance stock only for the period of their temporary arrangement, whilst loans subject to permanent forbearance measures (e.g. term extension, arrears capitalisations) remained in the forbearance stock for a period of five years. Under the EBA definition, loans subject to forbearance measures remain in the forbearance stock for a period of 2 years from the date the forborne loan was considered ”performing”. Prior to the application of the EBA definition, there was a € 0.4 billion reduction in forborne loans driven by lower numbers of customers seeking new forbearance solutions (i.e. new requests, renewals or extensions) and reflecting improving customer ability to meet their mortgage terms. Due to the significant levels of restructuring activity completed in 2014 and 2015, the pace of growth in advanced forbearance solutions slowed in 2016. *Forms an integral part of the audited financial statements 134 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 135 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 2016 and 2015: Republic of Ireland owner-occupier Interest only Reduced payment (greater than interest only) Payment moratorium Fundamental restructure Restructure Arrears capitalisation Term extension Split mortgages Voluntary sale for loss Low fixed interest rate Positive equity solutions Other Total forbearance Republic of Ireland buy-to-let Interest only Reduced payment (greater than interest only) Payment moratorium Fundamental restructure Restructure Arrears capitalisation Term extension Split mortgages Voluntary sale for loss Low fixed interest rate Positive equity solutions Other Total forbearance Total Number Balance € m Loans > 90 days in arrears and/or impaired Number Balance € m 2016 Loans neither > 90 days in arrears nor impaired Number Balance € m 5,214 1,030 1,526 2 303 796 213 241 – 38 2,587 629 247 – 200 13,494 1,888 5,093 1,857 3,066 510 1,163 1,453 247 212 474 28 182 157 45 336 646 241 170 61 35 417 139 33 – 25 766 36 97 21 29 6 9 2,627 401 1,279 2 103 8,401 1,521 2,420 269 993 1,392 212 379 74 208 – 13 1,122 176 377 7 153 151 36 29,865 4,274 10,245 1,578 19,620 2,696 Total Number Balance € m 1,990 770 307 1,195 804 3,015 619 138 303 8 27 333 412 175 40 169 72 564 110 37 25 1 3 49 9,509 1,657 Loans > 90 days in arrears and/or impaired Number Balance € m 1,034 223 414 191 378 703 92 25 53 59 2016 Loans neither > 90 days in arrears nor impaired Number Balance € m 956 356 116 817 101 1,736 321 1,279 137 85 110 – 1 257 5,046 38 28 20 – – 42 482 53 193 8 26 76 901 4,463 756 189 83 15 116 13 243 72 9 5 1 3 7 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 2016 135 n o i t a m r o n f i l a r e n e G A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 136 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 Republic of Ireland – Total Interest only Reduced payment (greater than interest only) Payment moratorium Fundamental restructure Restructure Arrears capitalisation Term extension Split mortgages Voluntary sale for loss Low fixed interest rate Positive equity solutions Other(1) Total forbearance Total Number Balance € m Loans > 90 days in arrears and/or impaired Number Balance € m 2016 Loans neither > 90 days in arrears nor impaired Number Balance € m 7,204 1,800 1,833 1,197 1,107 16,509 2,476 3,204 813 1,171 1,480 580 39,374 1,208 388 281 169 110 2,452 322 511 53 183 160 94 5,931 3,621 1,043 438 378 903 6,829 473 731 351 170 62 292 15,291 640 231 58 53 84 1,087 74 125 41 29 6 51 2,479 3,583 757 1,395 819 204 9,680 2,003 2,473 462 1,001 1,418 288 24,083 568 157 223 116 26 1,365 248 386 12 154 154 43 3,452 (1)Included in Other are: € 54 million relating to forbearance solutions whereby it has been agreed that the customers will dispose of the relevant assets but this has not yet completed; € 25 million relating to negative equity trade downs; and € 6 million relating to affordable mortgage solutions whereby customers agree to pay an amount that is affordable. *Forms an integral part of the audited financial statements 136 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 137 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 Voluntary sale for loss Low fixed interest rate Positive equity solutions Other(1) Total forbearance Republic of Ireland buy-to-let Interest only Reduced payment (greater than interest only) Payment moratorium Fundamental restructure Arrears capitalisation Term extension Split mortgages Voluntary sale for loss Low fixed interest rate Positive equity solutions Total forbearance Republic of Ireland – Total Interest only Reduced payment (greater than interest only) Payment moratorium Fundamental restructure Arrears capitalisation Term extension Split mortgages Voluntary sale for loss Low fixed interest rate Positive equity solutions Other(1) Total forbearance (1)Includes 15 negative equity trade downs (€ 4 million). *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 Total Loans > 90 days in arrears and/or impaired 2015 Loans neither > 90 days in arrears nor impaired Number Balance € m Number Balance € m Number Balance € m 2,017 754 426 15,664 4,850 2,872 453 1,241 1,221 16 29,514 338 157 61 2,122 510 450 24 195 134 4 3,995 909 454 133 7,184 444 1,169 244 108 96 – 10,741 165 107 18 1,032 49 177 17 20 11 – 1,596 Total Loans > 90 days in arrears and/or impaired Number Balance € m Number Balance € m 1,321 646 256 1,184 3,190 931 30 240 9 19 7,826 291 158 34 185 657 128 5 24 2 2 1,486 539 327 181 99 2,095 138 14 104 1 3 3,501 127 74 26 16 443 24 2 20 – – 732 1,108 300 293 8,480 4,406 1,703 209 1,133 1,125 16 18,773 173 50 43 1,090 461 273 7 175 123 4 2,399 2015 Loans neither > 90 days in arrears nor impaired Number Balance € m 782 319 75 1,085 1,095 793 16 136 8 16 4,325 164 84 8 169 214 104 3 4 2 2 754 Total Loans > 90 days in arrears and/or impaired Number Balance € m Number Balance € m 2015* Loans neither > 90 days in arrears nor impaired Number Balance € m 3,338 1,400 682 1,184 18,854 5,781 2,902 693 1,250 1,240 16 37,340 629 315 95 185 2,779 638 455 48 197 136 4 5,481 1,448 781 314 99 9,279 582 1,183 348 109 99 – 14,242 292 181 44 16 1,475 73 179 37 20 11 – 2,328 1,890 619 368 1,085 9,575 5,199 1,719 345 1,141 1,141 16 23,098 337 134 51 169 1,304 565 276 11 177 125 4 3,153 137 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 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 138 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) 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 €1 billion accounted for 17% of the total forbearance portfolio as at 31 December 2016, compared to 15% (€ 840 million) as at 31 December 2015. Following restructure, loans are reported as impaired for a probationary period of at least 12 months (unless a larger individually assessed case). 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 2016, but where an arrears capitalisation or term extension was awarded previously. Arrears capitalisation continues to be the largest category of forbearance solutions at 31 December 2016, accounting for 41% by value of the total forbearance portfolio (2015: 51%). While actually decreasing year on year, a high proportion of the arrears capitalisation portfolio (44% by value) is impaired or 90 days in arrears at 31 December 2016, a decrease from 53% at 31 December 2015. 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 significantly improved over the last 3 years with the development of a suite of advanced forbearance products. This is reflected in the performance of the forbearance portfolio where the proportion of the portfolio being 90 days in arrears and/or impaired remained at 42% at 31 December 2016 in line with the 31 December 2015, despite the inclusion of a € 0.4 billion net increase in forborne stock due to the adoption of a forbearance definition prescribed by the EBA as noted on page 134. 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 2016 and 2015: 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 194 60 24 20 24 50 372 Buy-to-let € m 46 18 10 19 20 29 2016 Total € m 240 78 34 39 44 79 Owner- occupier € m 199 52 25 17 19 40 Buy-to-let € m 49 22 11 10 9 18 2015 Total € m 248 74 36 27 28 58 142 514 352 119 471 Loans subject to forbearance and past due but not impaired increased by € 43 million in 2016 with later arrears (greater than 90 days in arrears) increasing by € 49 million. The proportion of the portfolio past due but not impaired increased slightly to 8.7% at 31 December 2016 (2015: 8.6%). *Forms an integral part of the audited financial statements 138 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 139 3.2 Additional credit risk information – Forbearance* Republic of Ireland residential mortgages (continued) 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 2016 and 2015: 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 491 116 51 43 102 127 554 1,484 Buy-to-let € m 179 36 20 14 31 60 493 833 2016 Total € m 670 152 71 57 133 187 1,047 2,317 Owner- occupier € m 736 146 62 41 96 97 342 1,520 Buy-to-let € m 229 29 17 14 31 57 318 695 2015 Total € m 965 175 79 55 127 154 660 2,215 Impaired loans subject to forbearance increased by € 0.1 billion in 2016. Statement of financial position specific provisions of € 0.8 billion were held against the forborne impaired portfolio at 31 December 2016 (2015: € 0.6 billion), providing cover of 35% (2015: 28.4%), while the income statement specific provision writeback was € 101 million for the year (2015: € 120 million). Within the impaired portfolio of € 2.3 billion at 31 December 2016, € 0.7 billion is currently performing in accordance with agreed terms for forbearance sustainable solutions and the continued compliance to these terms over a period of 12 months will result in an upgrade out of impairment. The remaining € 1.6 billion includes loans that have been the subject of a temporary or short term forbearance solution but will remain classified as impaired and in arrears until a sustainable solution has been put in place. Following this, they will be required to maintain a satisfactory performance for at least 12 months before being considered for upgrade out of impairment. 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 2016 and 2015: 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 728 875 505 470 398 693 483 73 49 Buy-to-let € m 235 266 143 159 162 287 191 137 77 2016 Total € m 963 1,141 648 629 560 980 674 210 126 Owner- occupier € m 703 805 449 454 398 627 481 54 24 Buy-to-let € m 195 242 128 135 156 272 201 133 24 2015 Total € m 898 1,047 577 589 554 899 682 187 48 4,274 1,657 5,931 3,995 1,486 5,481 Negative equity in the residential mortgage portfolio in the Republic of Ireland that was subject to forbearance measures at 31 December 2016 was 29% of the owner-occupier portfolio (2015: 29%) and 37% of the buy-to-let portfolio (2015: 41%), due primarily to the continued increase in property prices in 2016 and loan repayments. 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 2016 139 n o i t a m r o n f i l a r e n e G A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 140 Risk management – 3. Individual risk types 3.2 Additional credit risk information – Forbearance* Non-mortgage The following table analyses, at 31 December 2016, the movements in the stock of loans subject to forbearance in the Republic of Ireland and the United Kingdom, excluding residential mortgages which are analysed on page 133: Republic of Ireland At 1 January Additions Fundamental restructures - valuation adjustments Write-offs Expired arrangements Closed accounts Other movements At 31 December United Kingdom At 1 January Additions Expired arrangements Exchange translation adjustments Other movements At 31 December Total At 1 January Additions Fundamental restructures - valuation adjustments Write-offs Expired arrangements Closed accounts Exchange translation adjustments Other movements At 31 December Other personal € m Property and construction € m Non-property business € m 646 169 (10) (82) (53) (15) (47) 608 2,182 337 (53) (130) (83) (43) (348) 1,862 1,679 276 (23) (105) (129) (35) (136) 1,527 3,997 Other personal € m Property and construction € m Non-property business € m 4 5 (1) (1) – 7 128 20 (39) (17) (8) 84 88 11 (29) (12) (2) 56 Other personal € m Property and construction € m Non-property business € m 650 174 (10) (82) (54) (15) (1) (47) 615 2,310 1,767 357 (53) (130) (122) (43) (17) (356) 287 (23) (105) (158) (35) (12) (138) 1,946 1,583 4,144 2016 Total € m 4,507 782 (86) (317) (265) (93) (531) 2016 Total € m 220 36 (69) (30) (10) 147 2016 Total € m 4,727 818 (86) (317) (334) (93) (30) (541) *Forms an integral part of the audited financial statements 140 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 141 3.2 Additional credit risk information – Forbearance* Non-mortgage (continued) The following table analyses, at 31 December 2015, the movements in the stock of loans subject to forbearance in the Republic of Ireland and the United Kingdom, excluding residential mortgages which are analysed on page 133: Republic of Ireland At 1 January Additions Fundamental restructures - valuation adjustments Write-offs Expired arrangements Closed accounts Other movements At 31 December United Kingdom At 1 January Additions Write-offs Expired arrangements Closed accounts Asset disposals Exchange translation adjustments Other movements At 31 December Total At 1 January Additions Fundamental restructures - valuation adjustments Write-offs Expired arrangements Closed accounts Asset disposals Exchange translation adjustments Other movements At 31 December Other personal € m Property and construction € m Non-property business € m 693 230 (10) (20) (151) (72) (24) 646 1,976 1,026 (38) (167) (129) (430) (56) 2,182 1,514 757 (18) (29) (270) (226) (49) 1,679 4,507 Other personal € m Property and construction € m Non-property business € m 15 1 – (1) – (11) 1 (1) 4 374 31 (10) (161) (11) (107) 26 (14) 128 Other personal € m Property and construction € m 708 231 (10) (20) (152) (72) (11) 1 (25) 650 2,350 1,057 (38) (177) (290) (441) (107) 26 (70) 162 25 (8) (83) – (16) 11 (3) 88 Non-property business € m 1,676 782 (18) (37) (353) (226) (16) 11 (52) 2,310 1,767 4,727 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 2015 Total € m 4,183 2,013 (66) (216) (550) (728) (129) 2015 Total € m 551 57 (18) (245) (11) (134) 38 (18) 220 2015 Total € m 4,734 2,070 (66) (234) (795) (739) (134) 38 (147) *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 141 n o i t a m r o n f i l a r e n e G A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 142 Risk management – 3. Individual risk types 3.2 Additional credit risk information – Forbearance* Non-mortgage (continued) The following table sets out an analysis of non-mortgage forbearance solutions at 31 December 2016: Total Balance € m Loans neither > 90 days in arrears nor impaired Balance € m Loans > 90 days in arrears but not impaired Balance € m Impaired Specific loans provisions on impaired loans Balance € m Balance € m Other personal Interest only Reduced payment (greater than interest only) Payment moratorium Arrears capitalisation Term extension Fundamental restructure Restructure Asset disposals Other Total Property and construction Interest only Reduced payment (greater than interest only) Payment moratorium Arrears capitalisation Term extension Fundamental restructure Restructure Asset disposals Other Total Non-property business Interest only Reduced payment (greater than interest only) Payment moratorium Arrears capitalisation Term extension Fundamental restructure Restructure Asset disposals Other Total Total non-mortgage forbearance 58 25 109 17 141 48 187 25 5 615 235 90 8 44 193 829 355 141 51 29 16 107 4 130 36 123 11 4 460 57 62 4 18 97 702 201 110 26 1,946 1,277 191 64 17 42 202 448 530 33 56 1,583 4,144 107 37 14 18 118 416 304 21 36 1,071 2,808 6 – – 1 1 3 8 6 – 25 9 3 2 1 – 34 9 4 7 69 7 2 1 1 2 7 36 1 5 62 156 23 9 2 12 10 9 56 8 1 130 169 25 2 25 96 93 145 27 18 600 77 25 2 23 82 25 190 11 15 450 1,180 15 6 1 5 6 4 25 4 1 67 54 11 1 12 39 29 63 11 13 233 37 14 1 11 23 12 86 8 8 200 500 2016 Specific provision cover % % 65 63 59 41 56 46 45 55 78 51 32 43 73 46 41 31 43 41 69 39 48 57 50 47 28 49 45 75 54 45 42 *Forms an integral part of the audited financial statements 142 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 143 3.2 Additional credit risk information – Forbearance* Non-mortgage (continued) The following table sets out an analysis of non-mortgage forbearance solutions at 31 December 2015: Total Balance € m Loans neither > 90 days in arrears nor impaired Balance € m Loans > 90 days in arrears but not impaired Balance € m Impaired loans Balance € m Specific provisions on impaired loans 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 Non-property business lending Interest only Reduced payment (greater than interest only) Payment moratorium Arrears capitalisation Term extension Fundamental restructure Restructure Other Total Total non-mortgage forbearance 71 14 51 23 123 49 304 15 650 203 38 5 43 207 1,089 556 169 2,310 188 37 14 64 154 498 617 195 1,767 4,727 36 10 49 3 114 47 146 8 413 88 20 2 13 160 1,032 250 34 1,599 73 22 12 10 104 490 314 84 1,109 3,121 3 1 – 1 1 1 7 1 15 6 4 – 1 1 28 17 14 71 8 2 – 1 1 4 28 1 45 131 32 3 2 19 8 1 151 6 222 109 14 3 29 46 29 289 121 640 107 13 2 53 49 4 275 110 613 1,475 20 2 2 8 6 1 113 4 156 59 5 2 15 14 17 176 85 373 58 8 1 37 17 1 166 35 323 852 2015 Specific provision cover % % 63 62 74 42 69 59 75 71 70 54 39 74 53 30 58 61 70 58 54 59 33 70 34 27 60 32 52 58 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 Group has 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 74 and 75. Non-retail customers in difficulty typically have exposures across a number of asset classes including SME debt, associated property exposures and residential mortgages. *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 2016 143 A5 Risk 2 AFR 2016 pages 111-146:Layout 1 10/03/2017 19:53 Page 144 Risk management – 3. Individual risk types 3.2 Additional credit risk information – Forbearance* Non-mortgage (continued) At 31 December 2016, non-mortgage loans subject to forbearance amounted to € 4.1 billion, of which € 1.2 billion is impaired with specific provision cover of 42%. The majority of these forborne loans are in property and construction (€ 1.9 billion) and non-property business (€ 1.6 billion). Within non-mortgage forbearance categories, ’Fundamental restructure’ (€ 1.3 billion in total) includes long term solutions where customers have been through a full review, have proven sustainable cash flows/repayment capacity (through business cash flow and/or asset sales) and their debt has been restructured. Loans to borrowers that are fundamentally restructured typically result in the original loans together with any related impairment provision being derecognised and new facilities being classified as loans and receivables and recognised on day 1 at fair value (“main” and “secondary”) and being graded as “vulnerable”. At the time the fundamental restructure is agreed, the size of the main facility reflects the estimated sustainable cash flows from the customer such that the main facility will be repaid in full. Since no further cash flows are expected on the secondary facilities, the fair value of secondary facilities at inception is considered immaterial. During 2016, approximately € 0.2 billion of main facilities were recognised following the derecognition of c. € 0.6 billion of impaired loans with related impairment provisions of c. € 0.4 billion. While the new facilities are subject to legal agreements, the repayment conditions attaching to each facility are different and usually customer specific. Depending on the co-operation of the customer and the repayment of the main facilities, additional cash flows over the initial cash flow estimation may subsequently arise. This could occur where the disposal of collateral is at higher values than originally expected, stronger trading performance or new sources of income. There are incentives from a customer perspective to meet the repayment terms of the main facility as in doing so would result in some cases where the secondary facilities would be contractually written off. As part of its ongoing monitoring of fundamental restructure loans, AIB keeps under review the likelihood of any additional cash flows arising on the secondary facilities. There remains significant uncertainties involved in the crystallisation of future additional cash flows (in excess of the initial estimation) through asset sales over an extended period against a backdrop of a changing property market (in the case of property-related lending) that would be applied to secondary facilities. In the case of other lending, additional cash flows materialising either through trading conditions or other sources of income are equally uncertain. In this regard, income of € 82 million was recognised in 2016 (2015: € 43 million) on these facilities. At 31 December 2016, the carrying value of the main facilities in fundamental restructures, including buy-to-let mortgages, amounted to € 1.5 billion (2015:€ 1.8 billion). Main facilities that rely principally on the realisation of collateral (property assets held as security) are as follows: – Buy-to-let € 169 million which have associated contractual secondary facilities of € 204 million (2015: € 185 million and € 215 million respectively). – Property and construction of € 809 million which has associated contractual secondary facilities of € 2,129 million (2015: € 1,089 million and € 2,013 million respectively). These are further analysed as: – Commercial real estate primary facilities of € 703 million which have associated contractual secondary facilities of € 1,237 million (2015: € 927 million and € 1,224 million respectively). – Land and development primary facilities of € 106 million which have associated contractual secondary facilities of € 892 million (2015: € 162 million and € 789 million respectively). Non-property business lending and other personal lending where fundamental restructures have been granted amount to € 496 million which have associated secondary facilities of € 778 million (2015: € 547 million and € 753 million respectively). The ‘Restructure’ category (€ 1.1 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 who have received a term extension and 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. During 2016 the stock of non-mortgage forbearance loans reduced by € 583 million with new forborne borrowers (€ 818 million) being offset by reductions due to expired and closed forbearance arrangements and repayments. *Forms an integral part of the audited financial statements 144 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 145 3.3 Restructure execution risk There is a restructure execution risk that the Group’s restructuring activity programme for customers in difficulties will not be executed in line with management’s expectations. The Group continues to have a relatively high level of problem or criticised loans, which are defined as loans requiring additional management attention over and above that normally required for the loan type. The Group has been proactive in managing its criticised loans through a restructuring process. The objective of this process is to assist customers that find themselves in financial difficulties, to deal with them sympathetically, and to work with them constructively to explore appropriate solutions. By continuing to work together in this process, the Group and the customer can find a mutually acceptable and alternative way forward. These plans, if successfully completed, will materially change the make-up of the Group’s operations. It will improve the Group’s asset quality, lower its overall risk profile, and strengthen its solvency. However, as the Group moves forward into the post-restructure phase, the realisation of collateral and the receipt of expected cashflows within the timeframes estimated, presents a level of execution risk. In addition, there is the risk of customers re-defaulting, post restructure. The Group has extensive credit policies and strategies, implementation guidelines and monitoring structures in place to manage and to assist with the restructuring of problem loans. The Group regularly reviews the performance of these restructured loans and has a dedicated team to focus on asset sales within the restructured 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 2016 145 n o i t a m r o n f i l a r e n e G A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 146 Risk management – 3. Individual risk types 3.4 Funding and 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. Funding is the means by which liquidity is generated, e.g. secured or unsecured, wholesale, corporate or retail. In this respect, funding risk is the risk that a specific form of liquidity cannot be obtained at an acceptable cost. 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 Funding and liquidity risk is measured and controlled using a range of metrics and methodologies including Liquidity Stress Testing and ensuring adherence to limits based on the regulatory defined liquidity ratios, the Liquidity Coverage Ratio (“LCR”) and the Net Stable Funding Ratio (“NSFR”). Liquidity stress testing consists of applying severe but plausible stresses to the Group’s liquidity buffer through time in order to simulate a survival period. The simulated survival period is a key risk metric and is controlled using Board approved limits. 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. Risk management and mitigation The Group’s Asset and Liability Committee (“ALCo”) is a sub-committee of the Leadership Team and has a decision making and risk governance mandate in relation to the Group’s strategic balance sheet management including the management of funding and liquidity risk. The ALCo is responsible for approving the liquidity risk management control structures, for approving liquidity risk limits, for monitoring adherence to these limits and making decisions on risk positions where necessary and for approving liquidity risk measurement methodologies. The Group operates a three lines of defence model for risk management. In terms of Funding and Liquidity Risk the first line comprises the Capital and Liquidity and Treasury functions. The Group’s Capital and Liquidity unit, reporting to the CFO, is the owner of the Group’s Funding and Liquidity plan which sets out the strategy for funding and liquidity management for the Group and is responsible for the management of the Group’s liquidity gap and the efficient management of the liquidity buffer. This involves the identification, measurement and reporting of funding and liquidity risk, the valuation of financial assets for collateral and the application of behavioural adjustments to assets and liabilities. The Group’s Treasury function is responsible for the day to day management of liquidity to meet payment obligations, execution of wholesale funding requirements in line with the Funding and Liquidity Plan and the management of the foreign exchange funding gap. First line management of funding and liquidity risk consists of: – firstly, through the Group’s active management of its liability maturity profile, it aims to ensure a balanced spread of repayment obligations with a key focus on periods up to 1 month. 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 upon their cash-equivalence and price sensitivity; and finally, net inflows and outflows are monitored on a daily basis. – The Financial Risk function, reporting to the CRO, provides second line assurance. Financial Risk is responsible for exercising independent risk oversight and control over the Group’s funding and liquidity management. Financial Risk provides oversight on the effectiveness of the risk and control environment. It proposes and maintains the Funding and Liquidity Framework and Policy as the basis of the Group’s control architecture for funding and liquidity risk activities, including the annual agreement of funding and liquidity risk limits (subject to the Board approved Risk Appetite Statement). The Financial Risk function is also responsible for the integrity of the Group’s liquidity risk methodologies. Group Internal Audit provides third line assurance on Funding and Liquidity Risk. The Group’s Internal Liquidity Adequacy Assessment Process (“ILAAP”) encompasses all aspects of funding and liquidity management, including planning, analysis, stress testing, control, governance, policy and contingency planning. The ILAAP considers evolving regulatory standards and aims to ensure that the Group maintains sufficient financial resources of appropriate quality for the Group’s funding profile. On an annual basis, the Board attests to the Group’s liquidity adequacy via the liquidity adequacy statement. *Forms an integral part of the audited financial statements 146 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 147 3.4 Funding and liquidity risk Risk monitoring and reporting* The Group funding and liquidity position is reported regularly to Treasury, Finance and Risk, ALCo, the Executive Risk Committee (“ERC”) and Board Risk Committee (“BRC”). In addition, the Leadership Team and the Board are briefed on funding and liquidity on an on-going basis. At 31 December 2016, the Group held € 30 billion (2015: € 34 billion) in qualifying liquid assets/contingent funding of which € 12 billion (2015: € 18 billion) was not available due to repurchase, secured loan and other restrictions. The available Group liquidity pool comprises the remainder and is held to cover contractual and stress outflows. As at 31 December 2016, the Group liquidity pool was € 18 billion (2015: € 16 billion). During 2016, the liquidity pool ranged from € 16 billion to € 20 billion and the average balance was € 18 billion. Composition of the Group liquidity pool The following table shows the composition of the Group’s liquidity pool at 31 December 2016 and 2015: Cash and deposits with central banks Total government bonds Other: Covered bonds Other including NAMA senior bonds Total other Total Cash and deposits with central banks Total government bonds Other: Covered bonds Other including NAMA senior bonds Total other Total Liquidity pool available (ECB eligible) € bn 2016* High Quality Liquid Assets (HQLA) Level 1 € bn Level 2 € bn Liquidity pool € bn 1.9 9.0 1.8 5.0 6.8 – 8.9 1.7 4.9 6.6 17.7 15.5 3.9(1) 8.9 1.4 1.4 2.8 15.6 – – 0.4 0.1 0.5 0.5 Liquidity pool € bn Liquidity pool available (ECB eligible) € bn 2015* High Quality Liquid Assets (HQLA) Level 1 € bn Level 2 € bn 0.6 6.2 1.2 8.0 9.2 – 6.1 1.1 7.7 8.8 16.0 14.9 3.2(1) 6.2 1.2 4.3 5.5 14.9 – – – – – – (1)For LCR purposes, assets outside the Liquidity function’s control can qualify as High Quality Liquid Assets (“HQLA”) in so far as they match outflows in the same jurisdiction. For the Group, this means that UK HQLA can qualify up to the amount of the 30 day UK outflows under LCR but are not included in the Group’s calculation of available QLA stocks. Liquidity pool by currency Liquidity pool at 31 December 2016 Liquidity pool at 31 December 2015 EUR € bn 17.3 15.9 GBP € bn 0.1 – USD € bn 0.3 0.1 Other € bn – – Total € bn 17.7 16.0 Level 1 - HQLA include amongst others, domestic currency (euro) denominated bonds issued or guaranteed by European Economic Area (“EEA”) sovereigns, very highly rated covered bonds, 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. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 147 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 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 148 Risk management – 3. Individual risk types 3.4 Funding and liquidity risk Management of the Group liquidity pool* AIB manages the liquidity pool on a centralised basis. The composition of the liquidity pool is subject to limits set by the Board and the independent Risk function. These pool assets primarily comprise of government guaranteed bonds. AIB’s liquidity buffer increased in 2016 by € 2 billion which was predominantly due to a decrease in the funding requirement following a reduction in customer loans. Other contingent liquidity* AIB has access to other unencumbered assets providing a source of contingent liquidity which are not in the Group’s liquidity pool. However, these assets may be monetised in a stress scenario to generate liquidity through use as collateral for secured funding or outright sale. Liquidity risk stress testing Stress testing is a key component of the liquidity risk management framework and ILAAP. The Group undertakes liquidity stress testing as a key liquidity control. These 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. The purpose of these tests is to ensure the continued stability of the Group’s liquidity position, within the Group’s pre-defined liquidity risk tolerance levels. The Group has established the Contingency Funding Plan (“CFP”) which is designed to ensure that the Group can manage its business in stressed liquidity conditions and restore its liquidity position should there be a major stress event. Liquidity stress test results are reported to the ALCo, Leadership Team and Board, and to other committees. If Board approved survival limits are breached, the CFP will be activated. The CFP can also be activated by management decision independently of the stress tests. The CFP is a key element in the Group’s Recovery Plan in relation to funding and liquidity. Liquidity regulation AIB Group is required to comply with the liquidity requirements of the SSM/CBI 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 CRD IV related liquidity metrics – the LCR and the NSFR. AIB Group had an LCR of 128% as at 31 December 2016 (31 December 2015: 116%). The minimum LCR requirement in 2016 was 70%, rising to 100% by 1 January 2018. AIB Group has fully complied with the requirement. The minimum NSFR requirement is scheduled to be introduced by 1 January 2018 at 100%. At 31 December 2016, the Group had an estimated NSFR of 119% (31 December 2015: 111%). In addition, the Group is required to carry out liquidity stress testing capturing firm-specific, systemic risk events and a combination of both. AIB adheres to this requirement. 148 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 149 3.4 Funding and liquidity risk Liquidity risk The LCR table below has been produced in line with the 2014 Basel Committee on Banking Supervision (“BCBS”) LCR disclosure standards. All figures included in the table are averages of the 12 month ends LCRs from January to December 2016. High Quality Liquid Assets (“HQLA”) Total HQLA Cash outflows Retail deposits and deposits from small business customers, of which: Stable deposits Less stable deposits Unsecured wholesale funding of which: Operational deposits (all counterparties) and deposits in networks of co-operative banks Non-operational deposits (all counterparties) Unsecured debt Secured wholesale funding Additional requirements, of which: Outflows related to derivative exposures and other collateral requirements Outflows related to loss of funding on debt products Credit and liquidity facilities Other contractual funding obligations Other contingent funding obligations Total cash outflows Cash inflows Secured lending (reverse repos) Inflows from fully performing exposures Other cash inflows Total cash inflows Total HQLA Total net cash outflows Liquidity coverage ratio (average) Total unweighted value (average) € m 2016 Total weighted value (average) € m 16,251 Total unweighted value (average) € m 2015 Total weighted value (average) € m 15,322 20,716 11,738 – 16,880 369 – 401 220 10,012 – 1,415 37 1,736 123 1,896 19,865 10,869 – 15,885 404 – 452 71 9,564 – 1,326 756 1,999 252 3,007 1,035 1,690 – 8,162 369 140 401 220 887 – 1,110 14,014 – 692 144 836 € m 16,251 13,178 % 123(1) 993 1,711 – 8,131 404 438 452 71 969 – 1,326 14,495 42 788 252 1,082 € m 15,322 13,413 % 114(1) The month-end LCR ranged from 118% to 129% and was 128% as at 31 December 2016. The average HQLA for the year ended 31 December 2016 was € 16,251 million of which government securities constituted c. 71%. The outflows related to derivative exposures and undrawn commitments constituted c. 0.2% and 6% respectively of average cash outflows of € 14,014 million. Average inflows from assets were € 836 million. (1)LCR = Total HQLA/total net cash outflows 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 2016 149 n o i t a m r o n f i l a r e n e G A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 150 Risk management – 3. Individual risk types 3.4 Funding and liquidity risk Funding structure* The Group’s funding strategy is to deliver a sustainable, diversified and robust customer deposit base at economic pricing and to further enhance and strengthen the wholesale funding franchise with appropriate access to term markets 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 Asset covered securities (“ACS”) Asset backed securities (“ABS”) Senior debt Capital Total source of funds Other The following table analyses average deposits by customers for 2016 and 2015: Customer accounts Current accounts Deposits: Demand Time Repurchase agreements Total 31 December 2016 % € bn 63.5 69 8 1 – 5 1 1 15 100 7.0 0.7 0.2 5.2 0.5 1.0 13.9 92.0 3.6 95.6 31 December 2015 % € bn 63.4 13.4 0.5 0.1 4.7 0.6 1.6 14.4 98.7 4.4 103.1 Year to 2016 Total € m 27,003 12,076 22,294 525 61,898 64 14 – – 5 – 2 15 100 Year to 2015 Total € m 23,753 11,165 27,711 1,219 63,848 Current accounts include both interest bearing and non-interest bearing cheque accounts raised through the 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. The following table analyses customer deposits by currency at 31 December 2016 and 2015: Customer deposits by currency Euro US dollar Sterling Other currencies Total 31 December 2016 Total € m 50,220 1,887 11,294 101 63,502 2015 Total € m 49,190 1,223 12,717 253 63,383 *Forms an integral part of the audited financial statements 150 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 151 3.4 Funding and liquidity risk Funding structure (continued) Customer deposits represent the largest source of funding for the Group. The core retail franchises and accompanying deposit base in both the Republic of Ireland and the UK provide a stable and reasonably predictable source of funds. Customer accounts have broadly remained flat with a slight increase of € 0.1 billion in 2016. This was mainly due to an increase in Euro and USD deposits with underlying growth in GBP deposits of € 0.5 billion offset by a fall in the value of GBP of € 1.9 billion over the course of the year. The Group’s loan to deposit ratio at 31 December 2016 was 95% (2015: 100%). The Group maintains access to a variety of sources of wholesale funds, including those available from money markets, repo markets and term investors. The Group participates in CBI/ECB operations, the funding from which amounted to € 1.9 billion at 31 December 2016 (2015: € 2.9 billion). The Group early matured the legacy € 1.9 billion in the Targeted Longer-Term Refinancing Operations I (“TLTRO I”) facility and re-invested in the TLTRO II facility to lock in low cost term funding for the extended period. In the 12 months to 31 December 2016, AIB raised secured funding through a € 1 billion covered bond issuance with a 7 year tenor which was issued at a spread over mid-swaps of 54 bps. The Group did not issue senior debt in 2016 and outstanding senior debt decreased from € 1.6 billion at 31 December 2015 to € 1.0 billion at 31 December 2016 due to contractual maturities. A final regulatory decision on future Minimum Required Eligible Liabilities (“MREL”), specific to AIB is expected in 2017. In advance of this, the Group has considered a pathway to MREL compliance in the Group’s funding and liquidity strategy. The management of stable retail funds is paramount to the Group's overall funding and liquidity strategy and will be a key factor in the Group's capacity for future asset growth. Composition of wholesale funding* At 31 December 2016, total wholesale funding outstanding was € 15 billion (2015: € 23 billion). € 8 billion of wholesale funding matures in less than one year (2015: € 16 billion). € 7 billion of wholesale funding had a residual maturity of over one year (2015: € 7 billion) including € 1.9 billion of TLTRO II drawings. Outstanding wholesale funding comprised € 13 billion of secured funding (2015: € 19 billion) and € 2 billion of unsecured funding (2015: € 4 billion). 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 2016 151 n o i t a m r o n f i l a r e n e G A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 152 Risk management – 3. Individual risk types 6 1 0 2 l a t o T 7 . 7 2 . 0 0 . 1 7 . 5 n b € 8 . 0 4 . 5 1 7 . 2 7 . 2 1 4 . 5 1 5 1 0 2 l a t o T n b € 9 . 3 1 1 . 0 6 . 1 3 . 5 3 . 2 2 . 3 2 5 . 4 7 . 8 1 2 . 3 2 s r a e y 5 r e v O n b € n b € s r a e y 5 n b € s r a e y 3 n a h t e r o m n a h t e r o m n b € s r a e y 3 r e v O t o n t u b r a e y 1 r e v O t o n t u b l a t o T n a h t r a e y 1 s s e l 6 r e v O s h t n o m t o n t u b n a h t r a e y n b € 1 e r o m – – – 8 . 1 8 . 0 6 . 2 8 . 1 8 . 0 6 . 2 s r a e y 5 r e v O – – – 7 . 1 8 . 0 5 . 2 7 . 1 8 . 0 5 . 2 n b € 9 . 1 – 5 . 0 2 . 1 – 6 . 3 1 . 3 5 . 0 6 . 3 – – 5 . 0 6 . 0 – 1 . 1 6 . 0 5 . 0 1 . 1 8 . 5 2 . 0 – 1 . 2 – 1 . 8 2 . 7 9 . 0 1 . 8 – – – – – – – – – – – 0 . 1 8 . 0 – 8 . 1 8 . 0 0 . 1 8 . 1 s r a e y 3 r e v O t o n t u b n b € s r a e y 5 n a h t e r o m – – 3 . 2 – 5 . 2 – 5 . 2 5 . 2 2 . 0 n b € r a e y 1 r e v O t o n t u b s r a e y 3 n a h t e r o m n b € 7 . 3 1 1 . 0 6 . 0 5 . 0 5 . 1 4 . 6 1 7 . 2 7 . 3 1 4 . 6 1 l a t o T n a h t r a e y 1 s s e l – 9 . 1 6 . 0 5 . 0 5 . 1 5 . 4 4 . 2 1 . 2 5 . 4 6 r e v O s h t n o m t o n t u b n a h t r a e y n b € 1 e r o m – – 7 . 1 – 9 . 1 – 9 . 1 9 . 1 2 . 0 n b € 3 r e v O s h t n o m t o n t u b s h t n o m 6 n a h t e r o m – – – – 2 . 0 – 2 . 0 2 . 0 2 . 0 n b € 3 r e v O s h t n o m t o n t u b s h t n o m 6 n a h t e r o m 5 . 2 2 . 0 – 4 . 0 – 1 . 3 9 . 2 2 . 0 1 . 3 1 r e v O h t n o m t o n t u b n b € s h t n o m 3 n a h t e r o m 1 . 3 n b € – – – – 1 . 3 4 2 . 7 . 0 1 3 . 1 n a h t h t n o m e r o m t o N 1 r e v O h t n o m t o n t u b s h t n o m 3 n a h t e r o m 1 n a h t h t n o m e r o m t o N 7 . 5 1 . 0 n b € – – – 8 . 5 7 . 5 1 . 0 8 . 5 9 . 5 n b € – – – – 9 . 5 4 5 . 5 . 0 9 5 . r e p a p r e p a p l i a c r e m m o c d n a s t i s o p e d f o e t a c i f i t r e C t b e d i r o n e S / S B A S C A 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 r e h t 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 6 1 0 2 r e b m e c e D 1 3 l a t o T d e r u c e s n U d e r u c e S : h c h w i f O 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 l i a c r e m m o c d n a s t i s o p e d f o e t a c i f i t r e C t b e d r o n e S i / S B A S C A r e h t 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 5 1 0 2 r e b m e c e D 1 3 l a t o T d e r u c e s n U d e r u c e S : h c h w i f O s t n e m e t a t s 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 * Allied Irish Banks, p.l.c. Annual Financial Report 2016 ) d e u n i t n o c ( i * g n d n u f e l a s e l o h w f o n o i t i s o p m o C k s i r y t i d u q i i l i d n a g n d n u F 4 . 3 152 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 153 3.4 Funding and liquidity risk Currency composition of wholesale debt* At 31 December 2016, 93% (2015: 97%) of wholesale funding was in euro with the remainder held mainly in GBP and USD. AIB manages cross-currency refinancing risk to foreign exchange cash-flow limits. Deposits by central banks and banks Certificate of deposits and commercial paper Senior debt ACS/ABS Subordinated liabilities and other capital instruments Total funding % of total funding Deposits by central banks and banks Certificate of deposits and commercial paper Senior debt ACS/ABS Subordinated liabilities and other capital instruments Total funding % of total funding EUR € bn 7.0 – 1.0 5.6 0.8 14.4 % 93.5 EUR € bn 13.3 0.1 1.6 5.2 2.3 22.5 % 97 GBP € bn 0.3 – – 0.1 – 0.4 % 2.6 GBP € bn 0.2 – – 0.1 – 0.3 % 1 USD € bn 0.4 0.2 – – – 0.6 % 3.9 USD € bn 0.4 – – – – 0.4 % 2 Other € bn – – – – – – % – Other € bn – – – – – – % – 2016 Total € bn 7.7 0.2 1.0 5.7 0.8 15.4 % 100 2015 Total € bn 13.9 0.1 1.6 5.3 2.3 23.2 % 100 Encumbrance 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 asset encumbrance disclosure has been produced in line with the 2014 European Banking Authority (“EBA”) Guidelines complemented by EBA clarifications on the disclosure of encumbered and unencumbered assets. The ability to encumber certain pools of assets is an important 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 a downward trend in asset encumbrance in recent years, this trend is expected to continue over the coming years. The Group includes two authorised mortgage banks, AIB Mortgage Bank and EBS Mortgage Finance, that issue residential mortgage asset 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. 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 company and other Group entities (e.g. EBS Limited, and AIB Group (UK) p.l.c.) is an element of the Group’s liquidity management processes. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 153 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 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 154 Risk management – 3. Individual risk types 3.4 Funding and liquidity risk Encumbrance (continued) The following table analyses total assets by encumbered assets and unencumbered assets at 31 December 2016 and 2015: Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments available for sale: Debt securities Equity securities Financial investments held to maturity Other Total Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments available for sale: Debt securities Equity securities Financial investments held to maturity Other Total Assets Encumbered assets € m 1,399 60,639 1,799 14,832 605 3,356 12,992 95,622 € m 1,287 11,848 542 5,762 – 238 457 Assets Encumbered assets € m 2,339 63,240 5,616 15,708 781 3,483 11,955 € m 1,518 13,487 1,240 9,227 – 1,570 222 2016 Unencumbered assets Not readily Readily available available and not available for collateral € m € m 101 9,632 1,257 9,070 – 3,118 – 173 9,217 4,376 6,481 – 1,913 2,953 11 39,159 – – 605 – 12,535 52,310 648 40,536 – – 781 – 8,780 50,745 20,134 23,178 2015 Unencumbered assets Readily Not readily available and available not available for collateral € m € m 103,122 27,264 25,113 The Group had an encumbrance ratio of 21% at 31 December 2016 (2015: 26%). 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. At 31 December 2016 € 9,632 million of residential loan mortgages are unencumbered but are regarded by the Group as readily available as they are held in covered bond and securitisation structures (2015: € 9,217 million). The remaining loan assets in this category amounting to € 39,159 million, whilst unencumbered, are not regarded as being available in support of liquidity management at present (2015: € 40,536 million). Other assets such as deferred tax assets, derivative assets, property, plant and equipment are not regarded as encumberable. 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. The potential for the creation of such funding structures is continually under review. 154 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 155 3.4 Funding and liquidity risk Encumbrance (continued) The following table analyses the asset encumbrance of loans and receivables to customers at 31 December 2016 and 2015: Mortgages (residential mortgage backed securities) Other Total Mortgages (residential mortgage backed securities) Retail and SME (credit card issuance) Other Total Assets(1) € bn 20.7 0.8 21.5 Assets(1) € bn 21.4 0.3 1.0 22.7 Externally issued notes € bn Other secured funding € bn 5.7(2) – 5.7 1.8(3) – 1.8 Externally issued notes € bn Other secured funding € bn 5.4(2) – – 5.4 3.2(3) 0.2(4) – 3.4 2016 Retained notes(5) € bn 3.3 – 3.3 2015 Retained notes(5) € bn 3.1 – – 3.1 (1)Loans and receivables which are both encumbered and readily available for encumbrance. (2)Mortgage covered securities issued by the Group and held by third parties (3)Mortgage covered securities issued and retained by the Group which were used in secured transactions at the reporting date. (4)Funding arising from securitisation of credit card receivables. (5)Mortgage covered securities retained by the Group and not used in secured transactions at the reporting date, were available as collateral. 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 2016, the Group had excess collateral within its asset backed funding programmes that could readily be used to issue additional bonds of € 3.2 billion (2015: € 2.9 billion). Interbank repurchase agreements and ECB refinancing operations The following table analyses the interbank repurchase agreements and ECB refinancing operations as at 31 December 2016 and 2015: Less than 1 month € bn 1 month to 3 months € bn Over 3 months € bn Highly liquid Less liquid Maturity profile 3 – 3 2 – 2 – 2 2 2016 Total € bn 5 2 7 Less than 1 month € bn 1 month to 3 months € bn Over 3 months € bn 5 1 6 6 – 6 – 2 2 2015 Total € bn 11 3 14 Credit ratings In September 2016, Moody’s upgraded the ratings on AIB’s short term and long term deposits in addition to the ratings on its issued debt securities. In January 2017, S&P upgraded AIB’s long term credit rating. The Group is now rated as Investment grade from S&P and Moody’s. The Group’s debt ratings as at 31 January 2017 for all debt/deposits not covered by the ELG scheme are as follows: – – – S&P long-term "BBB-" and short-term "A-3" – effective 13 January 2017; Fitch long-term "BB+" and short-term "B"; and Moody's long-term "Baa2" for deposits and "Baa3" for senior unsecured debt and short-term “Prime 2” for deposits and "Prime 3" for 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. Allied Irish Banks, p.l.c. Annual Financial Report 2016 155 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 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 156 Risk management – 3. Individual risk types 3.4 Funding and liquidity risk Financial assets and financial liabilities by contractual residual maturity* The following table sets out financial assets and financial liabilities by contractual residual maturity at 31 December 2016 and 2015: Repayable on demand Financial assets Derivative financial instruments(1) Loans and receivables to banks(2) Loans and receivables to customers(2) NAMA senior bonds(3) Financial investments available for sale(4) Financial investments held to maturity Other financial assets Financial liabilities Deposits by central banks and banks Customer accounts Trading portfolio financial liabilities(5) Derivative financial instruments(1) Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities € m – 1,387 11,112 – – – – 12,499 333 42,437 – – – – 442 43,212 Repayable on demand Financial assets Derivative financial instruments(1) Loans and receivables to banks(2) Loans and receivables to customers(2) NAMA senior bonds(3) Financial investments available for sale(4) Financial investments held to maturity Other financial assets Financial liabilities Deposits by central banks and banks Customer accounts Trading portfolio financial liabilities(5) Derivative financial instruments(1) Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities € m – 1,654 15,270 – 1 – – 16,925 290 37,632 – – – – 456 38,378 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 2016 Total € m € m € m € m 124 11 899 1,799 53 – 430 3,316 5,349 12,133 – 74 546 – – 18,102 3 months or less but not repayable on demand € m 62 685 1,086 5,616 – – 938 8,387 11,471 14,666 86 85 100 – – 26,408 226 1 2,696 – 1,761 – – 4,684 150 5,959 – 112 1,744 – – 7,965 470 – 12,972 – 8,221 2,113 – 23,776 1,900 2,870 – 589 2,815 – – 8,174 994 – 37,549 – 4,797 1,243 – 1,814 1,399 65,228 1,799 14,832 3,356 430 44,583 88,858 – 103 – 834 1,775 791 – 3,503 7,732 63,502 – 1,609 6,880 791 442 80,956 2015 Total 1 year or less but over 3 months 5 years or less but over 1 year Over 5 years € m € m € m € m 96 – 2,760 – 816 – – 3,672 1,902 7,436 – 74 1,055 1,524 – 11,991 659 – 12,913 – 9,914 2,204 – 25,690 200 3,596 – 737 4,125 – – 8,658 881 – 38,134 – 4,977 1,279 – 1,698 2,339 70,163 5,616 15,708 3,483 938 45,271 99,945 – 53 – 885 1,721 794 – 3,453 13,863 63,383 86 1,781 7,001 2,318 456 88,888 (1)Shown by maturity date of contract. (2)Shown gross of provisions for impairment, unearned income and deferred costs. (3)New notes will be issued at each maturity date, with the next maturity date being 1 March 2017. Upon maturity, the issuer has the option to settle in cash or issue new notes and to date has issued new notes. (4)Excluding equity shares. (5)Trading portfolio financial liabilities are shown in the above table based on their contractual maturity. However, in the ‘Undiscounted contractual maturity’ table trading portfolio liabilities are shown in the ‘on demand’ bucket reflecting their nature. *Forms an integral part of the audited financial statements 156 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 157 3.4 Funding and 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 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 at 31 December 2016 and 2015: 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 Trading portfolio financial liabilities(1) Derivative financial instruments Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities Repayable on demand € m 333 42,453 – – – 442 43,228 Repayable on demand € m 290 37,660 86 – – – 456 38,492 3 months or less but not repayable on demand € m 5,345 12,217 76 579 – – 1 year or less but over 3 months 5 years or less but over 1 year Over 5 years 2016 Total € m € m € m € m 150 6,065 334 1,864 31 – 1,900 2,921 809 3,004 130 – – 106 486 1,808 1,019 – 7,728 63,762 1,705 7,255 1,180 442 18,217 8,444 8,764 3,419 82,072 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 2015 Total € m € m € m € m 11,470 14,752 – 107 125 – – 26,454 1,909 7,564 – 309 1,205 1,791 – 12,778 201 3,784 – 912 4,414 124 – – 55 – 543 1,766 963 – 13,870 63,815 86 1,871 7,510 2,878 456 9,435 3,327 90,486 (1)Shown as ‘on demand’ reflecting their nature but by contractual maturity in the ‘Financial assets and financial liabilities by contractual residual maturity’ 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 *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 157 n o i t a m r o n f i l a r e n e G A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 158 Risk management – 3. Individual risk types 3.4 Funding and 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 910 10,289 11,199 Payable on demand € m 1,375 9,747 11,122 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 – – – – – – – – – – – – 2016 Total € m 910 10,289 11,199 2015 Total € m 1,375 9,747 11,122 3.5 Capital adequacy risk Capital adequacy risk is defined as the risk that the Group breaches or may breach regulatory capital ratios and internal targets. The key material risks impacting on the capital adequacy position of the Group is credit risk, although it should be noted that all material risks can to some degree impact capital ratios. Capital adequacy risk is mitigated at Group level by an evaluation of the adequacy of the Group’s capital under both forecast and stress conditions as part of the Internal Capital Adequacy Assessment Process (“ICAAP”). The ICAAP process includes the identification and evaluation of potential capital mitigants. Further details of the Group’s capital position and the management thereof can be found in the capital management section of the Business review. *Forms an integral part of the audited financial statements 158 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 159 3.6 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 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. Changes in interest rates impact the underlying value of the Group’s assets, liabilities and off-balance sheet instruments and, hence, its economic value (or capital position). Similarly, interest rate changes will impact the Group’s net interest income (NII) through interest-sensitive income and expense effects. 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 that has been transferred to it by the customer facing businesses and the Group’s Asset and Liability Management (“ALM”) function which operates within the Capital and Liquidity unit in Finance. Treasury also has 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 process. 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 terms of the VaR metric, the Group calculates a daily historical simulation VaR to a 95% confidence level, using a one day holding period and based on one year of historic data. The Group’s VaR models are regularly back-tested to ensure robustness. In addition to VaR, Capital at Risk (“CaR”) is also measured to a one(1) year time horizon, a 99% confidence level and a longer set of data. Risk management and mitigation The Group Asset and Liability Committee (“ALCo”) is a sub-committee of the Leadership Team and makes decisions 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. The Group operates a three lines of defence model for risk management. In terms of Market risk, the first line comprises the Capital and Liquidity and Treasury functions. The Group’s Capital and Liquidity unit, reporting to the CFO, is responsible for the identification and the transfer of market risk to Treasury, and making structural market risk management recommendations to ALCo. This function is also responsible for reporting the Group’s aggregate market risk profile and managing the Group’s financial instruments valuation processes. The Financial Risk function, reporting to the Chief Risk Officer (“CRO”) provides second line assurance. Financial Risk 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 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. (1)The Capital at Risk on core trading book positions is assessed using a ten day horizon. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 160 Risk management – 3. Individual risk types 3.6 Market risk* Risk management and mitigation Group Internal Audit provides third line assurance on market risk. Market risk in the Group is transferred to and managed by Treasury, subject to Capital and Liquidity review and oversight by the Group ALCo. Treasury proactively manages the market risk on the Group’s balance sheet, as well as providing risk management solutions to the core retail and corporate customers. Within Treasury, credit spread risk on the available for sale (“AFS”) portfolio, IRRBB and trading risk are managed by distinct front office teams. Market risk is managed against a range of Board approved VaR limits which cover market risk in the trading book, interest rate risk in the banking book and credit spread risk in the banking book. The Board approved limits are supplemented by a range of ALCo approved limits which include VaR limits, nominal and sensitivity limits and stop loss limits. Treasury documents an annual Market Risk Strategy and Appetite statement as part of the annual financial planning cycle which ensures Treasury’s market risk aligns with the Group’s strategic business plan. 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 On a daily basis, front office and risk functions receive a range of valuation, sensitivity and market risk 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. 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: *Forms an integral part of the audited financial statements 160 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 161 3.6 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 2016 and 2015: 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 Financial investments held to maturity 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 Carrying amount € m Market risk measures Trading Non-trading portfolios € m portfolios € m Risk factors 2016 6,519 1 1,814 1,399 60,639 1,799 15,437 3,356 7,732 63,502 1,609 6,880 791 – 1 800 – – – – – – – 6,519 Interest rate, foreign exchange – Equity 1,014 Interest rate, foreign exchange, 1,399 60,639 1,799 15,437 credit spreads, equity Interest rate, foreign exchange Interest rate, foreign exchange Interest rate Interest rate, credit spreads, equity 3,356 Interest rate, credit spreads 7,732 63,502 Interest rate, foreign exchange Interest rate, foreign exchange 861 748 Interest rate, foreign exchange, credit spreads, equity – – 6,880 791 Interest rate, credit spreads Interest rate, credit spreads Carrying amount € m Market risk measures Trading Non-trading portfolios € m portfolios € m Risk factors 2015 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 Financial investments held to maturity Liabilities subject to market risk Deposits by central banks and banks Customer accounts Trading portfolio financial liabilities Derivative financial instruments Debt securities in issue Subordinated liabilities and other capital instruments *Forms an integral part of the audited financial statements 4,950 1 1,698 2,339 63,240 5,616 16,489 3,483 13,863 63,383 86 1,781 7,001 2,318 – 1 877 – – – – – – – 86 933 – – 4,950 Interest rate, foreign exchange – 821 2,339 63,240 5,616 16,489 Equity Interest rate, foreign exchange, credit spreads, equity Interest rate, foreign exchange Interest rate, foreign exchange Interest rate Interest rate, credit spreads, equity 3,483 Interest rate, credit spreads 13,863 63,383 – 848 Interest rate, foreign exchange Interest rate, foreign exchange Interest rate, credit spreads Interest rate, foreign exchange, credit spreads, equity 7,001 2,318 Interest rate, credit spreads Interest rate, credit spreads Allied Irish Banks, p.l.c. Annual Financial Report 2016 161 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 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 162 Risk management – 3. Individual risk types 3.6 Market risk* Interest rate sensitivity The net interest rate sensitivity of the Group at 31 December 2016 and 2015 is illustrated in the following table. The table sets 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 table shows the sensitivity of the statement of financial position at one point in time and is not necessarily indicative of positions at other dates. In developing the classifications used in the table, 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. *Forms an integral part of the audited financial statements 162 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 163 6 1 0 2 l a t o T m € 1 1 1 9 9 3 , 1 9 9 7 , 1 9 3 6 , 0 6 7 3 4 , 5 1 6 5 3 , 3 0 8 9 , 2 1 2 2 6 , 5 9 2 3 7 , 7 2 0 5 , 3 6 1 9 7 0 8 8 , 6 9 6 5 , 3 8 4 1 , 3 1 2 2 6 , 5 9 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 6 2 3 5 3 4 5 6 2 5 – ) 7 1 ( – ) 7 1 ( – ) 7 1 ( – ) 7 1 ( – ) 7 1 ( 1 ) 7 1 ( 8 2 ) 8 1 ( ) 6 4 ( ) 6 4 ( 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 ) s t m € m € g n i r a e b m € i g n d a r T t s e r e t n i - n o N + s r a e y 5 – 1 – – – – – 0 0 8 1 0 8 – – – – – 1 6 8 1 6 8 – – ) 0 6 ( m € ) 5 2 ( – 1 1 9 8 3 ) 2 6 6 , 4 ( – – 5 0 6 9 5 2 , 6 2 0 6 , 2 – – – 8 4 7 , 5 2 – 8 0 7 , 2 8 4 1 , 3 1 4 0 6 , 1 4 ) 2 0 0 , 9 3 ( 0 6 m € ) 0 7 9 , 0 3 ( 7 0 0 , 2 2 3 0 , 2 ) 1 1 ( m $ ) 1 8 3 , 1 ( m £ ) 0 3 ( ) 8 5 1 , 1 ( m $ ) 9 4 1 , 2 ( ) 0 7 3 , 1 ( m £ ) 6 2 4 , 6 ( ) 8 2 1 , 1 ( – – – – 8 0 0 , 1 7 1 4 , 4 4 4 2 , 1 – 5 < 4 m € s r a e Y – – – – – – 7 3 7 2 0 6 , 1 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 – – – – 2 7 8 – – – – 4 5 8 – – – – 4 0 9 – – – – 3 2 6 , 1 – 1 9 7 – 3 3 5 – 8 8 7 – – 3 5 0 , 2 5 3 9 , 2 5 7 1 , 1 3 4 7 , 1 – – 2 – – 4 9 0 , 6 9 9 7 , 1 0 4 5 – – 8 0 0 , 1 9 0 2 , 3 5 – – 7 6 3 1 2 9 , 5 9 6 6 , 6 9 3 3 , 2 6 1 7 , 3 2 2 3 , 4 7 6 8 , 2 6 6 3 , 3 5 3 4 , 8 5 0 5 , 0 6 – 3 1 5 7 7 , 1 – – 1 4 – 6 6 0 0 5 – – – – 5 4 4 0 5 7 0 5 2 , 1 – – – 0 4 3 5 6 5 – – – – – – – 0 0 5 6 7 7 , 1 – – – – 5 9 9 , 5 5 7 6 , 1 9 2 8 , 1 6 6 5 5 4 4 , 2 5 0 9 6 7 2 , 2 0 7 6 , 7 ) 9 8 9 , 4 ( ) 5 0 5 , 3 ( ) 8 4 3 , 3 ( 3 0 8 , 1 ) 9 5 5 , 2 ( ) 4 9 5 , 3 ( 9 2 8 , 9 2 6 0 , 9 3 8 7 2 , 5 3 3 2 , 9 2 9 1 6 , 4 5 5 9 , 3 2 4 1 6 , 1 6 3 3 , 9 1 0 5 1 , 3 2 2 7 , 7 1 ) 0 1 7 ( 2 7 5 , 4 1 – – – 2 4 7 , 1 4 3 0 , 3 6 1 2 2 9 9 , 4 6 7 8 , 1 7 6 5 , 1 2 8 2 , 5 1 m € m € m € m € m € 7 0 0 , 9 2 0 0 , 3 3 1 7 9 , 4 5 9 9 , 3 2 4 0 3 , 4 4 2 0 , 9 1 3 7 3 , 1 0 2 7 , 4 1 7 9 0 , 2 7 4 3 , 3 1 m € ) 3 8 6 ( m € ) 0 3 ( 0 5 2 , 1 1 3 3 9 , 1 1 m $ 7 5 9 7 7 m £ 5 6 7 m $ 1 7 2 2 7 m £ 6 3 2 m $ 5 7 1 5 6 m £ 0 4 2 m $ ) 4 8 ( 6 7 5 m £ 5 2 3 m $ 1 0 2 0 6 6 m £ 2 5 8 m $ ) 9 2 ( 9 5 4 m £ 1 m $ 2 6 9 8 8 4 m £ 7 0 6 8 9 2 , 5 3 3 5 , 4 7 9 2 , 4 7 5 0 , 4 2 3 7 , 3 0 8 8 , 2 9 7 8 , 2 – – – 9 9 3 0 9 9 , 5 5 8 0 , 6 2 4 7 4 , 2 3 6 1 3 , 4 1 5 1 7 , 3 1 5 1 7 , 3 1 m € 3 6 9 , 1 1 3 6 9 , 1 1 m $ ) 4 7 4 ( ) 4 7 4 ( m £ 2 7 2 , 2 2 7 2 , 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 – * k s i r t e k r a M 6 . 3 l e a s r o f l d e h 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 s t e s s A 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 s e i t i l i b a i l i d e t a n d r o b u S 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 e u s s i n i s e i t i r u c e s t b e D 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 t a r t s e r e t n i g n i t c e f f a s e v i t a v i r e D 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 y t i u q e d n a s e i t i l i b a i l l t a o T s e i t i l i b a i l r e h t O y t i u q E s t e s s a r e h t O s t e s s a l t a 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 s d n o b i r o n e s A M A N y t i r u t a m o t l d e h s t n e m t s e v n i l i a c n a n F i s r e m o t s u c o t s k n a b o t l s e b a v e c e r i l s e b a v e c e r i d n a s n a o L d n a s n a o L Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 £ ( 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 n e a v u q e i o r u e n i i s e c n e r r u c r e h O t ( 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 163 n o i t a m r o n f i l a r e n e G l i ) s t n e a v u q e o r u e n i $ ( A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 164 Risk management – 3. Individual risk types 5 1 0 2 l a t o T m € 8 1 9 3 3 , 2 6 1 6 , 5 0 4 2 , 3 6 9 8 4 , 6 1 3 8 4 , 3 6 4 9 , 1 1 2 2 1 , 3 0 1 3 6 8 , 3 1 3 8 3 , 3 6 6 8 1 0 0 , 7 8 1 3 , 2 3 2 3 , 4 8 4 1 , 2 1 – 1 – – – – – 7 7 8 8 7 8 – – – – 6 8 – 3 3 9 2 2 1 , 3 0 1 9 1 0 , 1 – – ) 1 4 1 ( m € ) 8 0 1 ( ) 4 4 8 ( m $ ) 1 1 ( 8 8 2 m £ ) 7 2 ( 7 1 2 8 – 8 9 4 ) 1 1 9 , 6 ( – – 1 8 7 4 5 6 , 6 0 3 0 , 1 – – – 9 0 1 7 0 9 , 1 2 – 0 9 3 , 3 8 4 1 , 2 1 4 5 5 , 7 3 ) 4 2 5 , 6 3 ( 1 4 1 m € ) 0 1 1 , 0 3 ( ) 6 3 7 ( m $ ) 9 6 9 ( 9 9 2 m £ 4 4 2 ) 1 5 9 , 5 ( m € m € g n i r a e b m € i g n d a r T t s e r e t n i - n o N + s r a e y 5 – – – – 3 0 3 , 1 1 0 9 , 4 9 7 2 , 1 – m € 5 < 4 s r a e Y – – – – 3 4 8 2 0 9 , 1 – 4 2 8 m € 4 < 3 s r a e Y m € 3 < 2 s r a e Y m € 2 < 1 s r a e Y 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 – – – – 4 5 5 – – – – 6 0 0 , 1 – – – – 0 4 9 – 7 5 5 – 3 2 8 – – 2 7 1 , 3 1 3 5 , 1 0 1 4 , 2 – – – – – – 6 1 8 7 7 0 , 2 – – 7 9 4 7 4 0 , 7 6 1 6 , 5 8 8 5 – – – – 4 4 3 , 1 1 8 3 , 6 5 – – 8 8 3 5 1 4 , 4 3 8 4 , 7 9 6 5 , 3 3 8 2 , 4 0 6 3 , 3 0 5 3 , 3 3 9 8 , 2 8 4 7 , 3 1 8 2 5 , 2 6 l e a s r o f l d e h 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 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 s d n o b i r o n e s A M A N y t i r u t a m o t l d e h s t n e m t s e v n i l i a c n a n F i 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 l s e b a v e c e r i l s e b a v e c e r i d n a s n a o L d n a s n a o L ) 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 – * k s i r t e k r a M 6 . 3 – 3 – – – 4 4 5 7 2 , 1 – – 6 2 1 0 5 7 0 5 2 , 1 – – 2 2 3 , 1 6 2 1 , 2 ) 9 2 6 , 5 ( ) 9 4 6 , 1 ( – – 3 0 3 5 6 5 – – – 8 6 8 8 9 3 – – 3 6 6 0 0 5 – – – – – 3 9 3 , 2 5 7 6 , 1 – – – – 2 0 9 , 1 6 8 4 , 7 0 0 0 , 1 4 2 5 , 1 – – 2 7 8 , 5 3 1 2 , 4 – 0 9 2 – – – – – – – 6 4 4 0 8 9 , 5 9 8 2 , 6 2 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 s e i t i l i b a i l i d e t a n d r o b u S 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 e i t i l i b a i l 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 e u s s i n i s e i t i r u c e s t b e D s t n u o c c a r e m o t s u C s e i t i l i b a i l r e h t O y t i u q E 3 6 1 , 1 8 6 0 , 4 2 1 9 , 1 1 5 7 3 , 0 1 5 1 7 , 2 3 y t i u q e d n a s e i t i l i b a i l l t a o T 0 9 7 , 1 1 5 6 6 , 6 3 2 9 0 , 3 5 7 8 , 4 2 7 1 0 , 3 3 8 7 , 1 2 9 5 2 , 3 6 6 7 , 8 1 6 3 8 , 1 7 0 5 , 5 1 ) 7 2 9 , 6 ( 1 7 6 , 3 1 m € m € m € m € 5 5 0 , 1 1 4 7 3 , 9 2 4 6 8 , 2 9 1 3 , 8 1 4 1 5 , 2 5 5 4 , 5 1 2 4 3 , 3 1 4 9 , 2 1 m $ 2 7 – m $ m $ 4 7 1 ) 1 ( m $ m € 2 3 7 , 1 9 9 5 , 9 – m $ 8 6 2 , 1 6 9 1 , 1 6 9 1 , 1 2 2 0 , 1 3 2 0 , 1 m £ 3 6 6 m £ 8 2 2 m £ 9 2 3 m £ ) 2 8 ( m £ 4 0 1 5 9 1 , 6 2 3 5 , 5 4 0 3 , 5 5 7 9 , 4 7 5 0 , 5 m € ) 6 7 1 , 6 ( 7 6 8 , 7 m $ ) 8 8 1 ( 3 2 0 , 1 m £ ) 8 7 5 ( 3 5 9 , 4 2 8 7 , 2 8 9 5 , 0 2 m € 4 9 4 3 4 0 , 4 1 m $ 4 7 0 , 1 1 1 2 , 1 m £ 5 0 2 , 1 1 3 5 , 5 ) 2 6 0 , 1 ( ) 4 5 5 , 2 ( ) 2 9 0 , 2 ( 1 9 5 7 9 9 , 1 1 6 1 8 , 7 1 6 1 8 , 7 1 m € 9 4 5 , 3 1 9 4 5 , 3 1 m $ 7 3 1 7 3 1 m £ 6 2 3 , 4 6 2 3 , 4 y t i v i t i s n e s e t a r t s e r e t n i g n i t c e f f a s e v i t a v i r e D 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 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 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 £ ( 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 ( 5 9 3 3 6 0 5 4 3 3 – ) 2 7 1 ( – ) 2 7 1 ( – – ) 2 7 1 ( ) 2 7 1 ( – ) 2 7 1 ( 5 1 ) 2 7 1 ( 9 ) 7 8 1 ( ) 6 9 1 ( ) 6 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 164 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 165 3.6 Market risk* Market risk profile The table below shows the sensitivity of the Group’s banking book to an immediate and sustained 100 basis point (“bp”) movement in interest rates in terms of 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 31 December 2016 € m 110 (110) 2015 € m 99 (99)(1) (1)In 2015, an assumption was made that market interest rates would not fall below 0.50%. The figure reported in 2015 was negative € 45 million under this assumption. In 2016, this assumption has been removed and the results in the table above reflect the impact of the full 100 bps move. 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 interest rate VaR profile to a 95% confidence level with a one day holding period. AIB recognises the limitations of VaR models, and supplements its VaR measures with stress tests which draw from a longer set of historical data and also with sensitivity measures. Interest rate risk 1 day holding period: Average High Low At 31 December VaR (trading book) VaR (banking book) Total VaR 2016 € m 2015 € m 2016 € m 2015 € m 2016 € m 2015 € m 0.1 1.1 – 0.1 0.3 1.1 – 1.1 3.2 4.3 2.5 4.1 2.7 3.6 1.3 3.0 3.2 5.2 2.5 5.2 2.7 5.2 1.3 2.9 The following table sets out the VaR for foreign exchange rate and equity risk for the financial years ended 31 December 2016 and 2015: 1 day holding period: Average High Low At 31 December Foreign exchange rate risk Equity risk VaR (trading book) 2015 2016 € m € m VaR (trading book) 2015 2016 € m € m 0.04 0.13 0.01 0.03 0.07 0.16 0.02 0.05 0.05 0.35 0.01 0.04 0.04 0.10 0.01 0.02 The low level of VaR in the trading book throughout 2016 is as a result of very small discretionary positions managed by Treasury. The higher banking book interest rate VaR is as a result of a more substantial level of interest rate existing in the Group’s banking book. 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 2016 165 n o i t a m r o n f i l a r e n e G A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 166 Risk management – 3. Individual risk types 3.6 Market risk* Structural foreign exchange risk Structural foreign exchange risk is the exposure of the Group’s consolidated capital 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 comprehensive income’ in the financial statements. The 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. In 2016, the Group reduced its capital ratio sensitivity to the euro sterling exchange rate by converting a portion of its euro capital to sterling. The sensitivity of the Group’s CET1 ratio to a 10% devaluation of the euro against the US dollar and pound sterling is illustrated in the table below. The table below shows the sensitivity of the Group’s fully loaded CET1 ratio to a hypothetical and sustained movement in GBP/EUR and USD/EUR foreign exchange rates. Sensitivity of CET 1 fully loaded capital to foreign exchange movements + 10% move in GBP and USD FX rates – 10% move in GBP and USD FX rates 31 December 2016 (0.17%) 0.16% 2015 (0.34%) 0.33% The above analysis is subject to certain simplifying assumptions such as GBP/EUR and USD/EUR foreign exchange movements moving in the same direction and at the same time. 3.7 Operational risk* Operational risk is the risk arising from inadequate or failed internal processes, people and systems, or from external events. This includes legal risk – the potential for loss arising from the uncertainty of legal proceedings and potential legal proceedings, but excludes strategic and reputational risk. In essence, operational risk is a broad canvas of individual risk types which include product, project, people and property, continuity and resilience, information and security and outsourcing. Operational risk operating model AIB’s operating model for operational risk is designed to ensure the framework described below is embedded and executed robustly across the Group. The key principles of the framework are: – A strong operational risk function, appropriately staffed and clearly independent of the first line of defence; and – Technology, policies and procedures in place to support effective assessment and mitigation of operational risks. Risk identification and assessment Risk and Control Assessment (“RCA”) is a core process in the identification and assessment of operational risk across the Group. The process serves to ensure that key 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 is recorded on Shield (the risk management system). RCAs are regularly reviewed and updated by business unit management. A materiality matrix is in place to enable the scoring of risks and action plans must be developed to introduce mitigants for the more significant risks. Monitoring processes are in place at business and support level. The central Operational Risk Team sets and maintains policies and procedures for self-assessment and undertakes risk based reviews and testing 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 risks. The Operational Risk Framework includes policies specific to key operational risks (such as information security and continuity and resilience) and key operational risk management processes (such as incident reporting and management) to ensure an effective and consistent approach to operational risk management across the Group. *Forms an integral part of the audited financial statements 166 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 167 3.7 Operational risk* (continued) An important element of the Group’s operational risk framework is the on-going monitoring of risks, control deficiencies and weaknesses, including the tracking of operational risk events. AIB also 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. 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 operational risk function is accountable to the Chief Risk Officer and to the Board through the Board Risk Committee, Executive Risk Committee and the Operational Risk Committee. 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 and 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. 3.8 Regulatory compliance risk and conduct 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. Conduct risk is defined as the risk that inappropriate actions, or inaction, by the Group cause poor and unfair outcomes for its customers or market instability. A mature Conduct Risk Framework, aligned with the Group Strategy, is embedded in the organisation and provides oversight of conduct risks at Leadership Team and Board level. This includes the embedding of a customer centric culture aligned to Group’s Brand Values and Code of Conduct and the promotion of good conduct throughout the organisation. The Group’s regulators have defined consumer protection principles in conduct of business regulations. These principles are embedded in the Group’s Conduct risk management and policies and procedures. Conduct risk is managed in line with the processes, procedures and organisational structures for the management of Regulatory compliance risk. 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 *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 168 Risk management – 3. Individual risk types 3.8 Regulatory compliance risk and conduct risk* (continued) 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 Board Risk Committee, approves the Group’s compliance policy and its mandate for the Regulatory Compliance function. The Board is responsible for ensuring that the Group complies with its regulatory responsibilities. The Board’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. The Board ensures 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 certain consequences of risk events which fall under the regulatory compliance umbrella, subject to policy terms and conditions. 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 with monitoring undertaken on both 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 timelines 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 Board Risk Committee, on the effectiveness of the processes established to ensure compliance with laws and regulations within its scope. 3.9 Culture risk Culture risk is the risk that intentional or unintentional behaviours or actions taken by employees which are not conducive with the overall strategy, culture and values of AIB Group will adversely impact business performance or prospects. Mitigating actions Culture is an essential component in realising an organisation’s strategic ambitions. An effective culture is built around a general principle of “doing the right thing“ for all stakeholders, including customers, staff and regulators. AIB seeks to foster a consistent culture, in the way decision making occurs and how we communicate this from the top and throughout the Group. In this way, AIB has embedded a set of customer centric Brand Values. These values drive and influence activities of all staff, guiding our dealings with customers, each other and all stakeholders. The Brand Values are embedded within the Group’s framework, from the way we recruit, promote, reward and manage our people. A strong culture demonstrates a consistent approach to compliance in both the letter and spirit of the law. AIB’s Risk Culture Principles and Code of Conduct places great emphasis on the integrity of staff and accountability for both inaction and actions taken. These frameworks describe for staff the standards we apply that translate into how we behave. How we all live up to our values determines what behaviours are acceptable in AIB and this means aligning remunerations and reward models around these values. In 2016, AIB launched the Aspire Performance Management Programme (‘Aspire’) to facilitate quality performance discussions that contribute to delivering the Group’s strategic ambitions. Aspire allows all staff to create goals that are clear on “What” they will achieve and that “How” they behave will be important to deliver these goals. This means that AIB stands out from its peers in embracing the right behaviours and outcomes with equal weighting, in achieving its strategic ambition. *Forms an integral part of the audited financial statements 168 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 169 3.9 Culture risk (continued) AIB has made significant steps in increasing engagement and awareness of our risk management activities throughout the Group by embedding the Risk Appetite Statement in policies and frameworks of the Group. The Risk Appetite Statement contains clear statements of intent as to our attitude to taking and managing risk, including culture risk. It ensures we monitor and report against certain culture metrics in measuring culture risk and tracking cultural change. We closely monitor our evolving culture at a Group level through our staff engagement programme, iConnect. Engagement scores have consistently increased since its inception in 2013. As a result, initiatives continue to be undertaken at team level to improve the way we do things and from which we continuously identify opportunities to evolve our culture at Group level as a competitive advantage. AIB’s iLearn training portal, provides all staff with a dedicated and bespoke curriculum that allow teams and individuals to invest in themselves and therefore the organisation. AIB’s Speak Up Policy and process also provides staff with a protected channel for raising concerns which is at the heart fostering an open and receptive cultural environment. 3.10 Business risk Business risk is defined as the risk that external and internal factors impact on the Group's performance and the achievement of its strategic objectives. External factors include the macro-economic, geo-political and competitive environment. Internal factors include plan delivery, cost management and execution/change management. Competition risk, which is a component of business risk, is the risk that the actions of competitors or new entrants to the market impair the Group’s competitive position, threaten the viability of its business model or even its ability to survive. Risk identification and assessment AIB identifies and assesses business risk as part of its integrated planning process, which encapsulates strategic, business and financial planning. This process drives delivery of AIB’s strategic objectives aligned to the Group’s risk appetite and enables measurable business objectives to be set for management aligned to the short, medium and long-term strategy of the Group. The Group reviews its assumptions on its external operating environment and, by extension, its strategic objectives on a periodic basis, the frequency of which is determined by a number of factors including the speed of change of the economic environment, changes in the financial services industry and the competitive landscape, regulatory change and deviations in actual business outturn from strategic targets. In normal circumstances, this is annually. The Group’s business and financial planning process supports the Group’s strategy. Every year, the Group prepares three- year business plans at a Group level based on macro-economic and market forecasts across a range of scenarios. The plan includes an evaluation of planned performance against a suite of key metrics, supported by detailed analysis and commentary on underlying trends and drivers, across P&L, balance sheet and business targets. This assessment includes, but is not limited to discussion on new lending volumes and pricing, deposits volumes and pricing, other income, cost management initiatives and credit performance. The Group plan is supported by detailed business unit plans. Each business unit plan is aligned to the Group strategy and risk appetite. The business plan typically describes the market in which the segment operates, market and competitor dynamics, business strategy, financial assumptions underpinning the strategy, actions/investment required to achieve financial outcomes and any risks/opportunities to the strategy. Risk management and mitigation At a strategic level, the Group manages business risk within its risk appetite framework, by setting limits in respect of measures such as financial performance, portfolio concentration and risk-adjusted return. At a more operational level, the risk is mitigated through periodic monitoring of variances to plan. Where performance against Plan is outside agreed tolerances or risk appetite metrics, proposed mitigating actions are presented and evaluated, and tracked thereafter. During the year, periodic forecast updates for the full year financial outcome may also be produced. The frequency of forecast updates during each year will be determined based on prevailing business conditions. At an individual level, planning targets translate into accountable objectives to enable performance tracking across the Group and to facilitate formulation and review of Leadership Team performance scorecards. Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017 19:55 Page 170 Risk management – 3. Individual risk types 3.10 Business risk (continued) Risk monitoring and reporting Performance against plan is monitored at segment level on a monthly basis and reported to senior management teams within the business. At an overall Group level, performance against Plan is monitored as part of the CFO Report which is discussed at Leadership Team and Board on a monthly basis. Risk profile against risk appetite measures, some of which would reference performance against Plan, is monitored by the CRO and reported on a monthly basis to the Executive Risk Committee, Leadership Team and Board. 3.11 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 additional contributions would be required to cover its funding obligations to the pension; – The capital position of the Group is negatively affected. Deficits recorded under International Financial Reporting Standards (“IFRS”) measurement impact regulatory capital on a phased basis and any funding deficits will be fully deductible from regulatory capital beginning in 2018; and – There could be a negative impact on industrial relations if the funding level of the schemes were to deteriorate significantly. The Group maintains a number of defined benefit pension schemes for current and former employees, further details of which are included in note 12 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 defined benefit scheme liabilities may increase due to changes in actuarial assumptions. There has been a change to the actuarial assumption of the nature and extent of any obligation to fund discretionary increases in pensions in payment in the Group’s main Irish schemes in 2016. This has been reassessed following a review by the Board, having considered actuarial and external legal advice. Although the Group is confident of its assessment, it may be subject to risk of challenge, however, the Group will robustly defend any such challenge, legal or otherwise. The ability of the pension schemes to meet the projected pension payments is managed by the Trustees through the active management of the investment portfolios across geographies and asset classes and as the schemes are closed to future accrual a process of de-risking the investment strategy to reduce market risk. 3.12 Model risk Model risk is the risk of potential adverse consequences from decisions based on incorrect or misused model outputs and reports. The responsibilities and accountabilities in relation to the governance of model risk is outlined in the Group’s Model Risk Framework. The Group mitigates model risk by having policies and standards in place in relation to model development, operation and validation. In addition, Group Internal Audit provide independent assurance on the adequacy, effectiveness and sustainability of the governance, risk management and control framework supporting model risk through their periodic review of the Model Risk Management processes. *Forms an integral part of the audited financial statements 170 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:57 Page 171 Governance and oversight – The Board – The Leadership Team – Group Directors’ report – Schedule to the Group Directors’ report – Corporate Governance report – Report of the Board Audit Committee – Report of the Board Risk Committee – Report of the Nomination and Corporate Governance Committee – Report of the Remuneration Committee – Corporate Governance Remuneration statement – Viability statement – Internal controls – Other governance information – Supervision and Regulation Page 172 177 180 182 185 190 194 198 201 203 208 208 210 211 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 Allied Irish Banks, p.l.c. Annual Financial Report 2016 171 n o i t a m r o n f i l a r e n e G A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:57 Page 172 Governance and oversight – The Board Board of Directors Non-Executive Chairman Richard Pym, CBE Background and experience: 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. Mr Pym 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 a former Chairman of 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 Limited. Mr Pym is a former Chairman of Nordax Bank AB (publ), The Co-operative Bank plc, Brighthouse Group plc and Halfords Group plc. He is a former Non-Executive Director of The British Land Company plc, Old Mutual plc and Selfridges plc. Age: 67 Appointed: 13/10/2014 (Chairman Designate) Committee memberships: 01/12/2014 (Chairman) Chairman of the Nomination and Corporate Governance Committee Remuneration Committee Non-Executive Directors Dr Michael Somers, B.Comm, M.Econ.Sc, Ph.D – Deputy Chairman Background and experience: Dr Somers is former Chief Executive Officer of the National Treasury Management Agency. He is Chairman of Goodbody Stockbrokers, a Non-Executive Director of Fexco Holdings Limited, 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 Age: 74 1989-1993 and of the European Community Group that established the European Bank Appointed: 14/01/2010 as a Nominee of the for Reconstruction and Development. He was formerly a member of the Council of the Minister for Finance under the Government’s Dublin Chamber of Commerce and a Non-Executive Director of St. Vincent's National Pensions Reserve Fund Act 2000 Healthcare Group Limited and Willis Group Holdings plc. (as amended) 14/06/2010 (Deputy Chairman) Committee memberships: Board Risk Committee Nomination and Corporate Governance Committee 172 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:57 Page 173 Non-Executive Directors Catherine Woods, BA, Mod (Econ) – Senior Independent Non-Executive Director Background and experience: Ms Woods is a Non-Executive Director of AIB Mortgage Bank and EBS d.a.c. She was appointed Senior Independent Non-Executive Director in January 2015. She has been a Director of Beazley Re DAC since July 2015 and became a Director of Beazley plc in January 2016. She is a former Vice President and Head of the JPMorgan European Banks Equity Research Team, where her mandates included the recapitalisation of Lloyds of London and the re-privatisation of Scandinavian banks. Ms Woods is a former Chairman of EBS d.a.c., former Director of An Post, a former member of the Electronic Communications Appeals Panel and a former Finance Expert on the adjudication panel established by the Government to oversee the rollout of the National Broadband Age: 54 Appointed: 13/10/2010 Committee memberships: Scheme. Chairman of the Board Audit Committee Board Risk Committee Nomination and Corporate Governance Committee Simon Ball, B.Sc (Econ), FCA Background and experience: Mr Ball has previously held roles as Chairman of Anchura Group Limited and Non-Executive Deputy Chairman and Senior Independent Director of Cable & Wireless Communications plc and has served as Group Finance Director of 3i Group plc and the Robert Fleming Group. He has held a series of senior finance and operational roles at Dresdner Kleinwort Benson and was Director General, Finance, for HMG Department for Constitutional Affairs. He is currently a member of the Board of Commonwealth Games England. Age: 56 Appointed: 13/10/2011 Tom Foley, B.Comm, FCA Committee memberships: Board Risk Committee Remuneration Committee Nomination and Corporate Governance Committee Background and experience: Mr. Foley is a Non-Executive Director of EBS d.a.c. since November 2012 and AIB Group (UK) p.l.c. since April 2015. He is a Non-Executive Director of Intesa SanPaolo Life d.a.c. Mr Foley is a former Executive Director of KBC Bank Ireland, former CEO of KBC Homeloans 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 Expert Group on Mortgage Arrears and Personal Debt during 2010. Mr Foley is a former Non-Executive Director of BPV Finance (International) plc. He qualified as a Chartered Accountant with PricewaterhouseCoopers (PwC) and is a former senior executive with Ulster Investment Bank. Age: 63 Appointed: 13/09/2012 Committee memberships: Board Audit Committee Remuneration Committee Allied Irish Banks, p.l.c. Annual Financial Report 2016 173 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 i t t h h g g s s r r e e v v o o d d n n a a e e c c n n a a n n r r e e v v o o G 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 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:57 Page 174 Governance and oversight – The Board Non-Executive Directors Peter Hagan, B.Sc, Dip BA Background and experience: Mr Hagan is former Chairman and CEO of Merrill Lynch’s US commercial banking subsidiaries and was also a Director of Merrill Lynch International Bank (London), Merrill Lynch Bank (Swiss), ML Business Financial Services, FDS Inc and The Thomas Edison State College Foundation. 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). 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 of 179 East 70th Corp. Age: 68 Committee memberships: Appointed: 26/07/2012 Chairman of the Board Risk Committee Board Audit Committee Carolan Lennon, B.Sc, MBA Background and experience: Ms Lennon is the Managing Director of Open Eir, Eir's Networks and Wholesale Division. She has held a number of senior roles in Eir, including Acting Managing Director and Consumer and Chief Commercial Officer. Prior to joining Eir, she held a number of senior roles in Vodafone Ireland. Ms. Lennon is a former Non-Executive Director of the DIT Foundation and the Irish Management Institute and currently sits on the Council of Patrons for Special Olympics Ireland. Committee membership: None Background and experience: Ms Normoyle is currently the Chief Marketing Officer of Countrywide, the UK’s largest estate agency group, however, she is taking up a new role as Marketing Director of Boots UK and Ireland in April 2017. She previously held the role of Chief Marketing Officer at DFS, Britain’s leading upholstered furniture retailer, responsible for all aspects of the company’s marketing communications and PR. Prior to joining DFS, she was Director of Marketing & Audiences at the BBC, responsible for the corporation’s marketing, research, planning and audience services. In 2003, she joined Ofcom, the UK’s telecoms and communications regulator as Director of Market Research where she established and led Ofcom’s market research and intelligence team and, latterly, the Media Literacy team. Before joining Ofcom, she held a range of posts over an eight year period at Motorola, including Director of Marketing and Director of Global Consumer Age: 50 Appointed: 27/10/2016 Helen Normoyle, BBS Age: 49 Appointed: 17/12/2015 Insights and Product Marketing. She started her career working for one of Europe's leading market research agencies, Infratest+GfK, based in Germany. Committee membership: Chairman of the Board Sustainable Business Advisory Committee 174 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:57 Page 175 Non-Executive Directors Jim O’Hara Background and experience: 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 currently 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 and Fyffes plc.. 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 d.a.c. in June 2012. Age: 66 Appointed: 13/10/2010 Committee memberships: Chairman of the Remuneration Committee Board Audit Committee Nomination and Corporate Governance Committee Board Sustainable Business Advisory Committee Brendan McDonagh, BBS, MA, FCIM Background and experience Mr McDonagh is a Non-Executive Director of UK Asset Resolution Limited, where he is the Chairman of the Audit Committee and a Member of the Risk Committee and Nomination Committee. He currently serves on the advisory board of the business school of Trinity College Dublin. He started his banking career with HSBC in 1979 and worked in Asia, the Middle East, Europe and North America. Mr McDonagh is a former member of the board of Ireland's National Treasury Management Agency and other previous roles include Executive Chairman of the Bank of N.T. Butterfield & Son Limited, Hamilton, Bermuda, and a former CEO of HSBC North America Holdings Inc with responsibility for the Group’s banking and consumer finance operations in the US and Canada. He was also Group Managing Director for HSBC Holdings Inc and a member of the HSBC Group Management Board. Age: 58 Appointed: 27/10/2016 Committee membership: Board Risk 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 Allied Irish Banks, p.l.c. Annual Financial Report 2016 175 n o i t a m r o n f i l a r e n e G A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:57 Page 176 Governance and oversight – The Board Executive Directors Bernard Byrne, FCA – Chief Executive Officer Background and experience: Mr Byrne was appointed Chief Executive Officer in May 2015. He joined AIB in May 2010 as Group Chief Financial Officer and member of the Leadership Team and was co-opted to the Board on 24 June 2011. Since then he has held a number of leading Director roles including Director of Personal, Business & Corporate Banking. Mr Byrne was appointed to the Board of EBS d.a.c. in July 2011. In January 2015, he was appointed President of Banking & Payments Federation Ireland (BPFI) and remained in this position until December 2016. Mr Byrne is the Deputy President of the Institute of Banking. A Chartered Accountant by profession, Mr Byrne joined Pricewaterhouse- Coopers (PwC) in 1988 and moved to ESB International, a leading international energy engineering and investment firm, in 1994, where he worked as Commercial Director for Age: 48 International Investments. In 1998, he became the Finance Director and later Deputy Appointed: 24/06/2011 CEO of IWP International plc. In 2003, he joined ESB, an electricity utility, as Group Finance Director (and later Commercial Director), until he left to join AIB. Committee membership: None Mark Bourke, B.E., ACA, AITI – Chief Financial Officer Background and experience: 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: 50 Appointed: 29/05/2014 Committee membership: None 176 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:57 Page 177 Governance and oversight – The Leadership Team The Leadership Team is the Bank’s most senior executive committee. The membership comprises the two Executive Directors and the heads of the businesses and support and control functions, biographies for whom are included below(1). The Chief Risk Officer role is currently subject to an executive search. Helen Dooley, LLB – Group General Counsel Background and experience: Ms Dooley was appointed to her current role as Group General Counsel and a member of the Bank’s Executive Leadership Team in October 2012. In June 2014 she also assumed responsibility for the Compliance function. Ms Dooley previously held the role of Head of Legal in EBS d.a.c. Prior to this, she held a number of other senior roles in EBS d.a.c. 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: 48 Appointed: 10/10/2012 Triona Ferriter – Chief People Officer Age: 46 Appointed: 03/01/2017 Donal Galvin – Group Treasurer Background and experience: Ms Ferriter joined AIB in January 2017 as Chief People Officer and a member of the Bank’s Executive Leadership Team. She has 20 years experience in Human Resources operating at a Senior Management level within both US multinational and indigenous Irish companies, working across diverse business functions, including sales and marketing, manufacturing, shared services and retail, mainly in the pharmaceutical sector. With experience in companies such as Schering-Plough/MSD, Dunnes Stores and Procter & Gamble, her responsibilities have included the full range of Human Resources functions both at a local organisation and pan European level, and key areas of expertise include effective change management through organisation restructuring and development, strategic business partnering and planning, and management of industrial and employee relations in both unionised and non-unionised environments. Background and experience: Mr Galvin joined AIB in 2013 as Head of Treasury and was appointed to the Bank’s Executive Leadership Team as Group Treasurer in 2016. He has worked in domestic and international financial markets for the past twenty years. Prior to joining AIB, he was Managing Director in Mizuho Securities Asia, the investment banking arm of Japanese bank Mizuho, where he was responsible for Asian Global Markets. Before that, he was Managing Director in Dutch Rabobank where his responsibilities included managing all European & Asian Global Financial Markets business, as well as leading Rabobank’s Global Client Structured Products division. Age: 44 Appointed: 28/04/2016 (1)Mr Dominic Clarke, Chief Risk Officer, resigned from the Group with effect from 8 January 2017. Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:57 Page 178 Governance and oversight – The Leadership Team Colin Hunt, Ph.D – Managing Director, Wholesale Institutional & Corporate Banking Background and experience: Dr Hunt joined AIB as Managing Director, Wholesale & Institutional Banking Division and a member of the Bank’s Executive Leadership Team in August 2016. Prior to joining AIB, he was Managing Director at Macquarie Capital where he led the development of its business in Ireland. Previously, Dr Hunt was a Special Policy Adviser at the Departments of Transport and Finance, Research Director and Chief Economist at Goodbody Stockbrokers, Head of Trading Research and Senior Economist at Bank of Ireland Group Treasury and a country risk analyst at NatWest. Age: 46 Appointed: 08/08/2016 Tom Kinsella, B.Comm, FMII, CBD – Chief Marketing Officer Background and experience: Mr Kinsella joined AIB in November 2012 as Group Marketing Director and was appointed to his current role as Chief Marketing Officer and a member of the Bank’s Executive Leadership Team in November 2015. In his role, he is responsible for ensuring that all parts of the organisation are mobilised around providing a great customer experience, in order to realise AIB’s objective of becoming a truly customer focused bank. Prior to AIB, he worked in a variety of senior marketing roles in Diageo, working across a wide variety of brands both globally and domestically. Age: 47 Appointed: 02/11/2015 Robert Mulhall, B.Sc, MA, QFA, CFA – Managing Director, Retail & Commercial Banking Ireland Background and experience: Mr Mulhall was appointed Managing Director of AIB’s Retail & Commercial Banking Ireland (formerly known as Retail, Corporate and Business Banking) in October 2015. His career in AIB has spanned almost 20 years and covered a variety of roles up to senior executive management level in areas including Digital Channels Innovation, Retail Banking Distribution, Customer Relationship Management, Business Intelligence, Strategic Marketing, Strategy Development, Operations and Sales Management. Coupled with his AIB career, he also held the position of Managing Director, Distribution & Marketing Consulting, and Financial Services with Accenture in North America from 2013 to 2015. In this capacity he brought his industry experience to build a rapidly growing consulting practice in the fast moving and innovative areas of Financial Services in North America. Age: 43 Appointed: 19/10/2015 178 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:57 Page 179 Brendan O’Connor, BA, MBA – Managing Director, AIB Group (UK) p.l.c. Background and experience: Mr O’Connor joined AIB in 1984 and has held a number of senior roles throughout the organisation both in New York and Dublin including Head of AIB Global Treasury Services, Head of Corporate Banking International and Head of AIB Business Banking. Mr O’Connor joined the Bank’s Executive Leadership Team in February 2013 as Head of Financial Solutions Group. He was appointed to his current role of Managing Director, AIB Group (UK) p.l.c. in October 2015. Age: 51 Appointed: 15/02/2013 Jim O’Keeffe, BA, H.Dip – Head of Financial Solutions Group Background and experience: Mr O’Keeffe is a graduate of University College Cork and has over 27 years banking experience with AIB. During his career, he has worked across many aspects of banking from IT to the retail business. From 2004 to 2008 he relocated to AIB’s then subsidiary BZWBK in Poland as Head of Personal & SME Business Development. Following his return to Ireland, from 2009 to 2011 he was Head of AIB’s Direct Channels before taking up his previous role as Head of AIB’s Mortgage Business in June 2011. He was appointed as Head of Financial Solutions Group and a member of the Bank’s Executive Leadership Team in November 2015. Age: 49 Appointed: 02/11/2015 Tomás O’Midheach, B.Comm, MBS, FCCA – Chief Operating Officer Background and experience: Mr O’Midheach was appointed to the role of Chief Operating Officer in February 2016. He has over 22 years experience in the financial services industry. His banking experience has spanned many diverse areas of banking including Finance, Data, Customer Analytics, Direct Channels and Digital. Mr O’Midheach spent 11 years with Citibank in the UK, Spain and Dublin where he held several senior positions in Finance. He joined AIB in June 2006 to head up a finance operating model transformation and has since held a number of senior executive positions including Head of Direct Channels & Analytics and Chief Digital Officer. Age: 47 Appointed: 01/02/2016 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 2016 179 n o i t a m r o n f i l a r e n e G A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:57 Page 180 Governance and oversight – Group Directors’ report for the financial year ended 31 December 2016 The Directors of Allied Irish Banks, p.l.c. (‘the Company’) present Group’s ability to continue as a going concern over the period their report and the audited financial statements for the financial of assessment. year ended 31 December 2016. A Statement of the Directors’ responsibilities is shown on page 213. Results The Group’s profit attributable to the ordinary shareholders of the Company amounted to € 1,356 million and was arrived at as shown in the consolidated income statement on page 221. Dividend There was no dividend paid to ordinary shareholders in 2016. Directors Compliance Statement As required by section 225(2) of the Companies Act 2014, the Directors acknowledge that they are responsible for securing the Company's compliance with its relevant obligations (as defined in section 225(1)). The Directors confirm that: (a) a compliance policy statement (as defined in section 225(3)(a)) has been drawn up setting out the Company’s policies, which, in the in the Directors’ opinion, are appropriate to ensure compliance with the Company’s The Board is recommending a dividend of € 0.0921 per share relevant obligations; payable on 9 May 2017 to shareholders on the Company’s (b) appropriate arrangements or structures that are, in the register of members at the close of business on 24 March 2017. Directors' opinion, designed to secure material compliance Going concern The financial statements for the financial year ended 31 December 2016 have been prepared on a going concern basis as the Directors are satisfied, having considered the principal risks and uncertainties impacting the Group, that it has with the relevant obligations have been put in place; and (c) a review of those arrangements or structures has been conducted in the financial year to which this report relates. Capital Information on the structure of the Company’s share capital, the ability to continue in business for the period of assessment. including the rights and obligations attaching to each class of The period of assessment used by the Directors is twelve months shares, is set out in the Schedule on pages 182 to 184 and in from the date of approval of these annual financial statements. note 40 to the consolidated financial statements. In making their assessment, the Directors have considered a wide range of information relating to present and future Accounting policies The principal accounting policies, together with the basis of conditions. These have included financial plans covering the preparation of the financial statements, are set out in note 1 to period 2017 to 2019 approved by the Board in December 2016, the consolidated financial statements. 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 Review of principal activities The statement by the Chairman on pages 4 and 5, the review by environment and forecasts for growth and employment were the Chief Executive Officer on pages 6 to 13 and the operating considered as well as the stabilisation of property prices. The and financial review on pages 24 to 42 contain an overview of Directors have also considered the outlook for the eurozone and the development of the business of the Company during the UK economies, and the factors and uncertainties impacting their performance including the possible fallout from Brexit. year, of recent events, and of likely future developments. In addition, the Directors have considered the principal risks and Directors Following due process and consideration, including in relation uncertainties which could materially affect the Group’s future to the independence criteria under the Central Bank’s 2015 business performance and profitability and which are outlined on Requirements and the UK Code, the following Board changes pages 50 to 58 in the ‘Risk management’ section of this report. occurred with effect from the dates shown: The Directors believe that the capital resources are sufficient to Non-Executive Director on 27 October 2016. ensure that the Group is adequately capitalised both in a base – Mr Brendan McDonagh was appointed Independent and stress scenario. The Group’s regulatory capital resources are Non-Executive Director on 27 October 2016; – Ms Carolan Lennon was appointed Independent detailed on pages 43 to 48. The Group funding and liquidity profile is outlined on pages 146 note on each Director, are shown on pages 172 to 176. to 158. In relation to funding and liquidity, the Directors are satisfied, based on AIB’s position in the market place that in all The appointment and replacement of Directors, and their powers, reasonable circumstances required liquidity and funding would be are governed by law and the Constitution of the Company, and available to the Group during the period of assessment. information on these is set out on pages 183 and 184. The names of the Directors, together with a short biographical Accordingly, 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 Directors’ and Secretaries’ Interests in the Share Capital The interests of the Directors and Secretaries in the share capital of the Company are shown in the Directors’ Remuneration report on page 207. 180 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:57 Page 181 Directors’ Remuneration The Company’s policy with respect to Directors’ remuneration Principal Risks and Uncertainties Information concerning the principal risks and uncertainties is included in the Directors’ Remuneration report on page 203. facing the Company, as required under the terms of the Details of the total remuneration of the Directors in office during European Accounts Modernisation Directive (2003/51/EEC) 2016 and 2015 are shown in the Remuneration report on pages 205 (implemented in Ireland by the European Communities and 206. Substantial Interests in the Share Capital The following substantial interests in the Ordinary Share Capital was notified to the Company at 21 December 2015: – Ireland Strategic Investment Fund 99.9%. Corporate Governance The Directors’ Corporate Governance report is set out on pages 185 (International Financial Reporting Standards and Miscellaneous Amendments) Regulations 2005), is set out in the ‘Risk management’ section on pages 50 to 58. 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, the Grand Cayman Islands and the to 189 and forms part of this report. Additional information, being United States of America. disclosed in accordance with the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006, is included in the Schedule to the Group Directors’ report on pages 182 to 184. Disclosure Notice under Section 33AK of the Central Bank Act 1942 The Company did not receive a Disclosure Notice under Section In accordance with Section 167 of the Companies Act 2014, the 33AK of the Central Bank Act 1942 during 2016. Directors confirm that a Board Audit Committee is established. Details on the Board Audit Committee’s membership and activities are shown on pages 190 to 193. Political Donations The Directors have satisfied themselves that there were no Auditors The Auditors, Deloitte, were appointed on 20 June 2013 following Shareholder approval at the 2013 Annual General Meeting on that date, and have signified willingness to continue in office in accordance with section 383(2) of the Companies political contributions during the year that require disclosure under Act 2014. the Electoral Act 1997. Accounting Records The measures taken by the Directors to secure compliance with the Statement of relevant audit information Each of the persons who is a Director at the date of approval of this report confirms that: Company's obligation to keep adequate accounting records include (a) so far as the Director is aware, there is no relevant audit the use of appropriate systems and procedures, incorporating those information of which the company’s auditor is unaware; and set out within ‘Internal controls’ in the Governance and oversight (b) the Director has taken all the steps that he/she ought to section on pages 208 and 209, and the employment of competent have taken as a Director in order to make himself/herself persons. The accounting records are kept at the Company's aware of any relevant audit information and to establish Registered Office at Bankcentre, Ballsbridge, Dublin 4, Ireland; at that the company’s auditor is aware of that information. the principal offices of the Company's main subsidiary companies, as shown on page 439 and at the Company's other principal offices, as shown on those pages. Other information This confirmation is given and should be interpreted in accordance with the provisions of section 330 of the Companies Act 2014. Other information relevant to the Director’s Report may be found in the following pages of the Report: 2016 Financial Highlights Page 3 Financial risk management objectives and policies of the Group and the Company 50 to 170 Non-adjusting events after the reporting period 354 The Directors’ Report for the year ended 31 December 2016 comprises these pages and the sections of the Report referred to under ‘Other information’ above, which are incorporated into the Directors’ Report by reference. 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 1 March 2017 Bernard Byrne Chief Executive Officer Allied Irish Banks, p.l.c. Annual Financial Report 2016 181 n o i t a m r o n f i l a r e n e G A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:57 Page 182 Governance and oversight – Schedule to the Group Directors’ report for the financial year ended 31 December 2016 Additional information required to be contained in the payment of any dividend payable on such shares and the Directors’ Annual Report by the European Communities shareholder will not be entitled to transfer such shares except (Takeover Bids (Directive 2004/25/EC)) Regulations 2006. by sale through a Stock Exchange to a bona fide unconnected As required by these Regulations, the information contained below represents the position as of 31 December 2016. Capital Structure The authorised share capital of the Company is € 2,500,000,000 divided into 4,000,000,000 Ordinary Shares of € 0.625 each (‘Ordinary Shares’). The issued share capital of the company is 2,714,381,238 Ordinary Shares. Rights and Obligations of Each Class of Share The following rights attach to 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), at least twenty-one days before the Annual General Meeting, a copy of the Directors’ and Auditors’ reports accompanied by copies of the balance sheet, profit and loss account and other documents required by the Companies Act to be annexed to the balance sheet or such summary financial statements as may be permitted by the Companies Act. – 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 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. Restrictions on the Transfer of Shares Save as set out below, there are no limitations in Irish law or in the Company’s Constitution 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. 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; (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 2014. 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. 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. 182 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:57 Page 183 Deadlines for exercising Voting Rights Voting rights at general meetings of the Company are exercised – One-third of the Directors for the time being (or if their number is not three or a multiple of three, not less than when the Chairman puts the resolution at issue to the vote of the one-third), are obliged to retire from office at each Annual 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 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, other question is taken either immediately, or at such time (not adopted the practice of all (those wishing to continue in being more than thirty days from the date of the meeting at which office) offering themselves for re-election at the Annual the poll was demanded or directed) as the Chairman of the General Meeting. meeting directs. Where a person is appointed to vote for a – A person is disqualified from being a Director, and their shareholder as proxy, the instrument of appointment must be office as a Director ipso facto vacated, in any of the received by the Company not less than forty-eight hours before following circumstances: the time appointed for holding the meeting or adjourned meeting – if at any time the person has been adjudged bankrupt at which the appointed proxy proposes to vote, or, in the case of or has made any arrangement or composition with his a poll, not less than forty-eight hours before the time appointed or her creditors generally; for taking the poll. – if found to be mentally disordered in accordance with law; Rules Concerning Amendment of the Company’s Constitution As provided in the Companies Act 2014, the Company may, by – if the person be prohibited or restricted by law from being a Director; – if, without prior leave of the Directors, he or she be special resolution, alter or add to its Constitution. A resolution is a absent from meetings of the Directors for six special resolution when it has been passed by not less than three-fourths of the votes cast by shareholders entitled to vote successive months (without an alternate attending) and the Directors resolve that his or her office be and voting in person or by proxy, at a general meeting at which vacated on that account; not less than twenty-one clear days’ notice specifying the – if, unless the Directors or a court otherwise determine, intention to propose the resolution as a special resolution, has he or she be convicted of an indictable offence; 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 – 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 a majority in number of the members having the right to attend Director concerned) passed at a specially convened 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 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 therefor has been given to the Director; or – if he or she has reached an age specified by the Directors as being that at which that person may not be appointed on a resolution of the shareholders at a general appointed a Director or, being already a Director, is meeting, usually the Annual General Meeting. – No person, other than a Director retiring at a general meeting required to relinquish office and a Director who reaches the specified age continues in office until the last day of is eligible for appointment as a Director without a recommendation by the Directors for that person’s the year in which he or she reaches that age. – In addition, the office of Director is vacated, subject to any appointment unless, not less than forty-two days before the right of appointment or reappointment under 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. Company’s Constitution, 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 – The Directors have power to fill a casual vacancy or to office on retirement or otherwise; or appoint an additional Director (within the maximum number – the Director tenders his or her resignation to the of Directors fixed by the Company in general meeting) and Directors and the Directors resolved to accept it; or any Director so appointed holds office only until the – he or she ceases to be a Director pursuant to any conclusion of the next Annual General Meeting following his provision of the Company’s Constitution. appointment, when the Director concerned shall retire, but – Notwithstanding anything in the Company’s Constitution shall be eligible for reappointment at that meeting. or in any agreement between the Company and a Director, Allied Irish Banks, p.l.c. Annual Financial Report 2016 183 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 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:57 Page 184 Governance and oversight – Schedule to the Group Directors’ report for the financial year ended 31 December 2016 the Company may, by Ordinary Resolution of which extended notice has been given in accordance with the Companies Act, 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 Company’s Constitution, 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 Act, the Constitution of the Company and to any directions given by special resolution of a general meeting. The Company’s Constitution further provides 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 Act, the Directors are unconditionally authorised until 16 December 2020 to exercise all the powers of the Company to allot relevant securities up to the aggregate nominal amount of € 1,191,314,686. By such authority, the Directors may make offers or agreements which would, or might, require the allotment of such securities after 16 December 2020. 184 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 185 Governance and oversight – Corporate Governance report Corporate Governance arrangements and practices AIB’s Governance Framework (the ‘Framework’) encompasses are deemed significant for the purposes of the European Union (Capital Requirements) Regulations 2014 (‘CRD’) the leadership, direction and control of AIB and its subsidiaries [S.I. 158/2014]. (collectively referred to as ‘AIB’, the ‘Group’ or the ‘Company’). The Framework reflects best practice standards, guidelines and statutory obligations and ensures that organisation and control arrangements are appropriate to governance of the Group’s The 2015 Requirements impose minimum core standards upon all credit institutions licensed or authorised by the Central Bank of Ireland (the ‘Central Bank’). The Directors believe that the strategy, operations and mitigation of related material risks. The Company materially complied with the 2015 Requirements Framework underpins effective decision making and throughout 2016. Following changes to the Boards of AIB’s three accountability and is the basis on which the Group conducts its material Irish licensed subsidiaries during 2016, applications for business and engages with customers and stakeholders. appointments to the subsidiary Boards are under consideration by the Central Bank to ensure compliance with the relevant The Framework reflects Irish company law, various corporate 2015 Requirements. governance codes and regulations, the Listing Rules of the Enterprise Securities Market of the Irish Stock Exchange, The Company has also adopted the provisions of the UK European Banking Authority (“EBA”) Guidelines, Basel Committee Corporate Governance Code (‘the 2014 UK Code’ which is on Banking Supervision Guidelines on Corporate Governance available on www.frc.org.uk), including a number of the new Principles for Banks, and other relevant EU best practice provisions contained in the April 2016 revised UK Code (the guidelines and, in relation to the UK businesses, UK company 2016 UK code’) earlier than formally expected. The Directors law. Further detail on AIB’s governance practices is available on believe the Company complied fully with the provisions of the http://aib.ie/investorrelations. 2014 UK Code, during the financial year ended 31 December 2016, other than in the following instances: The Group’s governance arrangements include: – provision B.7.1 which requires that all Directors should be – a Board of Directors of sufficient size and expertise, the subject to annual election by shareholders; Dr Michael majority of whom are independent Non-Executive Directors, to Somers was appointed Non-Executive Director in 2010 as – – – – – 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, 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 ensuring an effective organisation structure, the appointment, stand for election or regular re-election by shareholders; motivation and direction of Senior Executive Management, – provision D.2.2 with regard to the Remuneration and for the operational management, compliance and Committee’s delegated responsibility for setting performance of all the Group’s businesses; remuneration for all Executive Directors and the Chairman, an Executive Leadership Team comprising strong and diverse including pension rights and any compensation payments; management capabilities; under the terms of capital agreements with the Irish a clear organisational structure with well defined, transparent Government and the Relationship Framework agreed with and consistent lines of responsibility; the Minister, neither the Committee nor the Board has a well-documented and executed delegation of authority autonomy in that regard. 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; The Board of Directors The Board is responsible for corporate governance, encompassing leadership, direction and control of the Group, – effective structures and processes to identify, manage, and is accountable to shareholders for financial performance. monitor and report the risks to which the Group is or might be exposed; While arrangements have been made by the Directors for – adequate internal control mechanisms, including sound delegation of the management, organisation and administration administrative and accounting procedures, IT systems and of the Company’s affairs, the following matters are specifically controls, and remuneration policies and practices which are reserved for decision by the Board: consistent with and promote sound and effective risk – to retain primary responsibility for corporate governance management; and within the Company at all times and oversee the efficacy of – strong and functionally independent internal and external governance arrangements; audit functions. AIB is subject to the provisions of the Central Bank of Ireland’s Corporate Governance Requirements for Credit Institutions 2015 (the ‘2015 Requirements’ which is available on www.centralbank.ie), including compliance with requirements – 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 which specifically relate to ‘high impact institutions’ and additional acquisitions and disposals, and risk appetite limits, corporate governance obligations on credit institutions which designated frameworks and relevant policies; Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 186 Governance and oversight – Corporate Governance report – to appoint the Chairman of the Board, Board Directors, Chief Executive Officer and Members of the Leadership Chairman The Chairman’s responsibilities include the leadership of the Team, to address related succession planning, and to Board, ensuring its effectiveness, setting its agenda, ensuring approve, where appropriate, the removal of persons in that the Directors receive adequate, accurate and timely charge of Control Functions; information, facilitating the effective contribution of the – to endorse the appointment of people who may have a Non- Executive Directors, ensuring the proper induction of new material impact on the risk profile of the Company and Directors, the on-going training and development of all Directors, monitor on an ongoing basis their appropriateness for the and reviewing the performance of individual Directors. role; – – to render an account of the Company's activities to its Mr Richard Pym was appointed Chairman Designate on shareholders; 13 October 2014 and assumed the role of Non-Executive to protect the assets of the Company taking into account the Chairman with effect from 1 December 2014. In addition to his interests of the shareholders and the employees in general role as Chairman, Mr Pym is Chairman of the Nomination and with appropriate regard for the interests of other stakeholders; Corporate Governance Committee and a Member of the and Remuneration Committee. – to put in place and monitor procedures designed to ensure that the Company complies with the law and good corporate Mr Pym was formerly Chairman and Director of Nordax Bank AB citizenship. (publ); he stood down from these roles on 15 October 2015 and 11 May 2016 respectively. He stood down from his position as The Board is responsible for approving high level policy and Chairman of UK Asset Resolution Ltd (‘UKAR’) on 5 June 2016, strategic direction in relation to the nature and scale of risk that remaining as a Director of UKAR, and related companies AIB is prepared to assume in order to achieve its strategic Bradford & Bingley plc and NRAM Limited, until he retired from objectives. The Board ensures that an appropriate system of these roles on 26 July 2016. Mr Pym currently has no other internal controls is maintained and that effectiveness is reviewed. external directorship commitments. Mr Pym’s biographical details are available on page 172. Specifically the Board: – – – sets the Group’s Risk Appetite, incorporating risk limits; The role of the Chairman is separate from the role of the Chief approves designated Risk Frameworks, incorporating risk Executive Officer, with clearly-defined responsibilities attaching strategies, policies, and principles; to each; these are set out in writing and agreed by the Board. approves stress testing and capital plans under the Group’s Internal Capital Adequacy Assessment Process (“ICAAP”); and Deputy Chairman Dr Michael Somers was appointed as Deputy Chairman in June – approves other high-level risk limits as required by Credit, 2010. In addition to this role, Dr Somers is a Member of the Capital, Liquidity and Market policies. Nomination and Corporate Governance Committee and the Board Risk Committee. Dr Somers was Chairman of the Board The Board receives regular updates on the Group’s risk profile Risk Committee from 10 November 2010 until 27 January 2016. through the Chief Risk Officer’s monthly report, and relevant Dr Somers’ biographical details are available on page 172. updates from the Chairman of the Board Risk Committee. An overview of the Board Risk Committee’s activities is detailed on pages 194 to 197. AIB has received significant support from the Irish State (‘the State’) in the context of the financial crisis because of its systemic 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 Chief Executive Officer have failed to resolve, or for which such contact is considered by the importance to the Irish financial system, as a result of which the shareholder(s) concerned to be inappropriate. Ms Catherine State holds c.99.9% of the issued ordinary shares of the Woods was appointed Senior Independent Non-Executive Company. The relationship between AIB and the State as Director with effect from 30 January 2015. shareholder is governed by a Relationship Framework. Within the Relationship Framework, with the exception of a number of In addition to her role as Senior Independent Non-Executive important items requiring advanced consultation with or approval by the State, the Board retains responsibility and authority for all of the operations and business of the Group in accordance with its Director, Ms Woods is Chairman of the Board Audit Committee and Member of the Board Risk Committee and the Nomination and Corporate Governance Committee. Ms Woods’ biographical legal and fiduciary duties and retains responsibility and authority details are available on page 173. for ensuring compliance with the regulatory and legal obligations of the Group. The Relationship Framework is available on the Group’s website at http://aib.ie/investorrelations. Independent Non-Executive Directors As an integral component of the Board, Independent Non- Executive Directors represent a key layer of oversight of the The names of the Directors, with brief biographical notes, are activities of the Company. It is essential for Independent shown on pages 172 to 176. Non- Executive Directors to bring an independent viewpoint to 186 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 187 the deliberations of the Board that is objective and independent of good governance standards. A number of Non-Executive the activities of the management and of the Company. Directors of Allied Irish Banks, p.l.c. are also Non-Executive Biographical details for each of the Independent Non-Executive Directors of the Company’s major regulated subsidiary Directors are available on pages 172 to 175. companies, namely AIB Group (UK) p.l.c., AIB Mortgage Bank and EBS d.a.c. Executive Directors Executive Directors have executive functions in the Company in addition to their Board duties. The role of Executive Directors, led Board Membership It is the policy of the Board that a majority of the Directors by the Chief Executive Officer, is to propose strategies to the should be Non-Executive. At 31 December 2016, there were 10 Board and following challenging Board scrutiny, to execute the Non-Executive Directors and 2 Executive Directors. The Board agreed strategies to the highest possible standards. Biographical deems the appropriate number of Directors to meet the details for each of the Executive Directors are available on page requirements of the business to be between 10 and 14. 176. Chief Executive Officer The Chief Executive Officer is responsible for the day-to-day 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 running of the Group, ensuring an effective organisation structure, against liability arising from legal actions brought against them the appointment, motivation and direction of Senior Executive in the course of their duties. Management, and for the operational management of all the Group’s businesses. Mr Bernard Byrne was appointed Chief Executive Officer on 29 May 2015. Balance and Independence Responsibility has been delegated by the Board to the Nomination and Corporate Governance Committee for ensuring Leadership Team The Leadership Team is the most senior executive committee of an appropriate balance of experience, skills and independence on the Board. Non-Executive Directors are appointed so as to the Group and is accountable to the Chief Executive Officer. provide strong and effective leadership and appropriate Subject to financial and risk limits set by the Board, and excluding challenge to executive management. those matters which are reserved specifically for the Board, the Leadership Team under the stewardship of the Chief Executive The independence of each Director is considered by the Officer has responsibility for the day-to-day management of the Nomination and Corporate Governance Committee prior to Group’s operations. It assists and advises the Chief Executive appointment and reviewed annually thereafter. In reviewing the Officer in reaching decisions on the Group’s strategy, governance independence of Directors, the Committee considers the and internal controls, and performance and risk management. independence criteria contained in the 2015 Requirements and the 2014 UK Code. Joint Group Company Secretaries The Directors have access to the advice and services of the joint The Board has determined that all Non-Executive Directors in Group Company Secretaries who are responsible for advising the office at 31 December 2016, namely Mr Simon Ball, Mr Tom Board through the Chairman on all governance matters, ensuring Foley, Mr Peter Hagan, Ms Carolan Lennon, Mr Brendan that Board procedures are followed and that applicable rules and McDonagh, Ms Helen Normoyle, Mr Jim O’Hara, Mr Richard regulations are complied with. The Group Company Secretaries facilitate information flows within the Board and its Committees and between Senior Executive Management and Non-Executive Directors, as well as facilitating induction and assisting with 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 professional development as required. Mr David O’Callaghan was Ireland confirmed that Dr Somers should be considered Company Secretary until 27 October 2016, at which point independent for the purposes of the 2015 Requirements. Mr Robert Bergin and Ms Sarah McLaughlin were appointed as joint Group Company Secretaries. Notwithstanding Dr Somers’ designation as non-independent under the 2014 UK Code arising from his appointment by the Irish Board Meetings The Chairman sets the agenda for each Board meeting. The State as shareholder, the Board is satisfied that Dr Somers exercises independence of thought and action in fulfilling his Directors are provided with relevant papers in advance of the duties as a Non-Executive Director. meetings to enable them to consider the agenda items, and are encouraged to participate fully in the Board’s deliberations. Conflicts of Interest The Board approved Code of Conduct and Conflicts of Interest The Board held 14 scheduled meetings and 2 additional Policy sets out how actual, potential or perceived conflicts of out-of-course meetings during 2016. Attendance at Board interest are to be evaluated, reported and managed to ensure meetings and meetings of Committees of the Board is reported on below. During 2016, the Non-Executive Directors met on occasion in the absence of the Executive Directors, in accordance with that Directors act at all times in the best interests of the Company and its stakeholders. Allied Irish Banks, p.l.c. Annual Financial Report 2016 187 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 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 188 Governance and oversight – Corporate Governance report Executive Directors, as employees of AIB, are also subject to the The Board agreed on its priority areas of focus for the year organisation’s Code of Conduct and Conflicts of Interests Policy ahead, which included development of people, talent and for employees. Performance Evaluation There is a formal process in place for the annual evaluation of the Board’s own performance and that of its principal Committees and individual Directors. In accordance with the 2015 Requirements culture, the appropriateness of the current Board skillset and experience, including in the context of succession planning, and initiatives for (a) continuing to improve the quality of information provided to the Board, (b) a more forward looking approach in the development of the Group’s strategy, and (c) enhancing the professional development and training provided to Directors. In and the 2014 UK Code, an external evaluation is conducted at addition, during the evaluation, the Directors noted the least every three years, with internal evaluations in the intervening continued application of the Government remuneration years. The objective of these evaluations is to review past restrictions and the risk to the Group of management attrition. An performance with the aim of identifying any opportunities for external Board evaluation will be conducted during 2017. improvement, determining whether the Board and its Committees are as a whole effective in discharging their responsibilities and, in Attendance at Board and Committee meetings is one of a the case of individual Directors, to determine whether each number of important factors considered in evaluating Directors’ Director continues to contribute effectively and to demonstrate performance, and a table showing each Board Member’s commitment to the role. attendance at such meetings is shown below and separately within the commentary on each of the Board Committees on An external independent evaluation was conducted by Boardroom subsequent pages. Review Limited during 2014, with internal evaluations undertaken during 2015 and 2016. The self-evaluation process, led by the As part of the process, the Chairman meets annually with each Chairman and supported by the Company Secretary, included the Director to review their performance. These reviews include completion of questionnaires including written evaluations by each discussion of, inter alia, the Director’s individual contributions Director (covering areas such as Board composition, Board and performance at the Board and relevant Board Committees, meetings and the effectiveness thereof, information quality and the conduct of Board meetings, the performance of the Board flows, and Board priorities), one to one discussions between the as a whole and its committees, compliance with Director-specific Chairman and each Director, and Board discussion of the provisions of the relevant Central Bank Code, the requirements outcome of the evaluation process and agreed actions. of the Central Bank’s Fitness and Probity Regulations, and other specific matters which the Chairman and/or Directors may wish On reviewing the outcome of the 2016 internal evaluation to raise. process, the Board concluded that each individual Director continued to make a valuable contribution to the deliberations Separately, during 2016, the Senior Independent Non-Executive of the Board and demonstrated continuing commitment to the Director led an evaluation of the Chairman’s performance with role, and that the recommendations identified during the previous evaluation processes had been adequately addressed. the other Directors for consideration by the Board and the Chairman. Board (scheduled) (out of course) Board Board Audit Committee Board Risk Remuneration Committee Committee Attendance at Board and Board Committee Meetings Name Directors Richard Pym Simon Ball Mark Bourke Bernard Byrne Tom Foley Peter Hagan Carolan Lennon A 14 14 14 14 14 14 4 B 14 14 14 14 14 14 4 (appointed 27 October 2016) Brendan McDonagh 4 4 (appointed 27 October 2016) Helen Normoyle Jim O’Hara Dr Michael Somers Catherine Woods 14 14 14 14 14 14 14 13 A B A B 2 2 2 2 2 2 1 1 2 2 2 2 2 2 2 2 2 2 1 1 2 1 2 2 7 7 7 7 7 7 7 6 A 9 9 1 9 9 B 9 9 1 9 9 Nomination and Corporate Governance Committee A 7 7 B 7 7 1 1 A 6 6 6 2 B 6 6 6 2 6 6 7 7 1 5 7 1 Column A indicates the number of scheduled meetings held during 2016 which the Director was eligible to attend; Column B indicates the number of meetings attended by each Director during 2016. 188 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 189 Terms of appointment Non-Executive Directors are generally appointed for a three year term, with the possibility of renewal for a further three years on the recommendation of the Nomination and Corporate Governance Committee. Any additional term beyond six years will be subject to annual review and approval by the Board. 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. He was subsequently reappointed a Non-Executive Director for a further two year period from December 2015, on foot of a direction to the National Treasury Management Agency by the Minister for Finance pursuant to section 43(1) of the National Treasury Management (Amendment) Act 2014. Following appointment, in accordance with the requirements of the Company’s Constitution, 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 reappointment 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 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 terms of appointment and appointees’ responsibilities, stipulate that a specific time commitment is required from Directors. A copy of the Directors’ letters of appointment are available to members of the Company for inspection during business hours on request from the Group Company Secretaries. Directors disclose details of their other significant commitments along with a broad indication of the time absorbed by such commitments before appointment. Before accepting any additional external commitments, including other directorships that might impact on the time available to devote to their role, the agreement of the Chairman and the Group Company Secretaries, and, in certain cases, the Central Bank, must be sought. Induction and professional development There is an induction process in place 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. Each Committee operates under terms of reference approved by the Board. 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 Board Audit Committee, the Board Risk Committee, the Nomination and Corporate Governance Committee and the Remuneration Committee are available on Group’s website at http://aib.ie/investorrelations. During 2016, the Board established a Sustainable Business Advisory Committee, comprising of Non-Executive Directors and senior executive management members, to support the execution of the Group’s sustainable business strategy, which includes the development and safeguarding of the Group’s ‘social license to operate’, such that AIB plays its part in helping its customers prosper as an integral component of the Group’s business and operations. Further details in relation to related activities are available on pages 16 to 22. 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. Reports from the Board Audit Committee, the Board Risk Committee, the Nomination and Corporate Governance Committee and the Remuneration Committee are presented on the following pages. 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 2016 189 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 190 Governance and oversight – Report of the Board Audit Committee Letter from Catherine Woods, Chairman of the Board Audit Committee I am pleased to report that management has fully adopted this approach and tangible progress has been made in each of the seven themes. There has been a notable decrease in audit issues identified throughout the course of audit reviews across the majority of the themes. As we look to 2017, with significant improvement made on many of these themes, we intend to transition focus on these areas back into the business as usual control and review activities and introduce new relevant themes for the Committee’s attention at the appropriate juncture during the year. One of the key Committee activities is consideration of significant matters relating to the Company’s annual accounts. During the course of 2016, we considered the 2015 full year and Dear Shareholder, On behalf of the Board Audit Committee (the “Committee”), I am 2016 half-year accounts and related accounting considerations. pleased to introduce the Board Audit Committee Report (the “Report”) on the Committee’s activities for the financial year One of the most important issues considered by the Committee ended 31 December 2016. is in relation to credit provisions. We spent a considerable amount of our time during 2016 reviewing and challenging the The Committee is appointed by the Board to assist the Board in process and key judgements underlying the credit provisions fulfilling its oversight responsibilities in relation to: made on a quarterly basis. The risk function reported on the − the quality and integrity of the Group’s accounting policies, results of its regular assurance process in relation to credit financial and narrative reports, and disclosure practices; decisioning and the governance supporting the credit − the effectiveness of the Group’s internal control, risk provisioning process. Group Internal Audit also reviewed specific management, and accounting and financial reporting areas, at our request. systems; – the effectiveness of the Group’s Code of Conduct and the We discussed with management and the External Auditor the adequacy of arrangements by which staff may, in confidence, key accounting decisions, risks and significant management raise concerns about possible improprieties in matters of judgements underlying the financial statements. We also financial reporting or other matters; discussed the findings of the External Auditors and, where − the independence and performance of the Internal and applicable, other experts in ensuring that disclosures in the External Auditors. accounts in relation to significant management judgements and estimates were transparent and appropriate. The Committee recognises and acknowledges the vital role that it has in ensuring that AIB operates a strong control environment. The Committee considered the recent audit reform introduced At the end of 2015, the Committee decided to focus on by the European Union(1) and made any necessary proactively discussing control issues on a thematic and holistic enhancements to internal policy. The audit reform introduced basis rather than only dealing with individual control issues the mandatory rotation of statutory audit firms every 10 years for reactively. To that end, in conjunction with the Group Head of Public Interest Entities, which includes AIB as a credit institution. Internal Audit, we identified seven key themes for focused The Committee had pre-empted this when, in 2013, we tendered attention, responsibility for each of which was assigned to a for a new statutory auditor which resulted in the appointment of specific member of the executive leadership team. During 2016, Deloitte as the Company’s statutory auditor. the Management owner presented plans and progress in relation to enhancement of the control environment in connection with As a Committee, we regularly review our whistleblowing, or each identified theme. In addition, Group Internal Audit regularly “speak up” policy, as it is known internally, and related informed the Committee of its assessment of the underlying risk procedures. We strongly encourage our employees to use both and management progress on each of the seven themes. The the established internal and independent external channels to themes in 2016 were as follows: report any apparent wrongdoing or shortcoming in our – Compliance Risk Management including Anti Money commitment to our customers. We treat any such reports with Laundering; – Key person/Succession/Handover; the utmost respect and confidentiality, and investigate any allegations swiftly and thoroughly. A number of investigations – IT Governance Change and Third Party Management; were launched during 2016 and a full report was made in each – Conduct; instance to the Committee and Regulators, as appropriate. I am – Oversight of subsidiaries including focus on the UK and the New York Branch; (1) (Statutory Audits) (Directive 2006/43/EC, as amended by Directive – Assurance Framework for Prudential Regulatory Reporting; and 2014/56/EU, and Regulation (EU) No 537/2014) Regulations 2016 – Credit. 190 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 191 pleased to report that management has responded in an I also carried on my practice of meeting with the CFO, Group appropriate manner and have implemented any necessary Head of Internal Audit and other members of the executive changes to behaviours, policies and procedures across the leadership team, as appropriate, on a regular basis throughout Group. the year. As Committee Chairman, I reported after each Committee meeting to the Board on the principal matters discussed to ensure all Directors were fully informed of the Committee’s work. I would like to personally thank each of my fellow Committee members for their unwavering support and for the personal dedication and commitment which they have demonstrated throughout 2016. Catherine Woods Committee Chairman AIB remains committed to addressing the legacy issues and control failings of the past and the Committee has been focused on returning the Group to a more normalised control environment. To that end, there was a step-change during 2016 as the Committee decided to eliminate the historic concept of risk-accepted internal audit issues as a category, as any historic risk-accepted issues had been addressed. The number of overdue internal audit issues were reduced to single digits and management consistently closed new issues on time. Furthermore, management awareness ratings evidently improved during 2016 and are continually tracked through the executive leadership team scorecard. The control environment rating being applied to audit reviews is now within the normal industry range. The Committee has had a full and busy agenda during 2016. The pie chart below illustrates approximately how we spent our time in Committee meetings during the year. Board Audit Committee - indicative analysis of focus during 2016 14% 6% 9% 6% 40% 25% Internal Audit & Controls Finance / External Auditor Regulation & compliance Subsidiary Companies Provisions / Credit Management Governance & Administration The Members of the Committee, and a record of their meeting attendance during 2016, are outlined in the full Report below. I and each of the Committee Members met with representatives of the Company’s Regulators, the Central Bank of Ireland and European Central Bank, on a one to one basis on a number of occasions during the year. It is worth noting that the regulatory agenda is becoming increasingly heavy and the Committee remains focused on regulatory matters, along with our colleagues on the Board Risk Committee. Following an assessment of each Committee’s responsibilities it was agreed that oversight of Compliance activities was better placed with the Board Risk Committee and this transition occurred during 2016. The Committee members held private meetings both before and after the Committee meetings and also met confidentially with the Group Head of Internal Audit, the External Auditor and members of management including the Chief Risk Officer and Chief Financial Officer (“CFO”) during 2016. Allied Irish Banks, p.l.c. Annual Financial Report 2016 191 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 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 192 Governance and oversight – Report of the Board Audit Committee Report of the Board Audit Committee Membership and meetings The Board Audit Committee comprises 4 Independent Non- The Committee: – reviewed the Group’s 2015 annual and 2016 interim financial statements prior to approval by the Board; details Executive Directors. The Board is satisfied that the Committee is of the significant considerations in relation to the 2015 appropriately constituted in the context of the UK Code and other annual accounts were outlined in the 2015 Annual Financial requirements regarding recent and relevant financial experience Report; and competence. Mr Peter Hagan and Ms Catherine Woods are – in reviewing the Group’s annual and interim financial also Members of the Board Risk Committee, the common membership of which is considered to facilitate effective statements considered the Group’s accounting policies and practices; the minutes ofthe Group Disclosure Committee governance across all finance and risk issues. Biographical (an Executive Committee whose role is to ensure the details of each of the Members are outlined on pages 173 to 175. compliance of AIB Group financial information with legal and regulatory requirements prior to external publication); A total of 7 scheduled meetings of the Committee were held effectiveness of internal controls; and the findings, during 2016. Meetings are attended by the Chief Financial conclusions and recommendations of the Auditors and Officer and relevant Internal Audit, Finance, Legal and Group Internal Auditor; Compliance executives along with the Auditors. At least twice – in the context of reviewing the financial statements, during the year the Committee meets in private session with the engaged with Management in respect of accounting Auditors and separately with Internal Audit management. matters, and considered matters where Management judgement was important to the results and financial The Chairman and Members of the Committee, together with position of the Group, the most significant of which their attendance at scheduled meetings, are shown below. related to: Members: Ms Catherine Woods (Chairman), Mr Tom Foley, Mr Peter Hagan, Mr Jim O’Hara Member attendance during 2016: Tom Foley Peter Hagan Jim O’Hara Catherine Woods A 7 7 7 7 B 7 7 7 6 – the level of provisions for impairment on loans and receivables and other liabilities and commitments as at 31 December 2016; – the accounting considerations and treatments relating to engagement with customers in financial difficulty and associated loan restructuring activity; – Management’s assessment of the appropriateness of preparing the financial statements of the Group for the financial year ended 31 December 2016 on a going concern basis; – the basis of recognition of deferred tax assets in Ireland Column A indicates the number of Committee meetings held and the UK; during 2016 which the Member was eligible to attend; Column B – in early 2017, the Board Audit Committee considered indicates the number of meetings attended by each Member during 2016. Performance Evaluation An internal performance evaluation of the Committee was the key judgement regarding the potential funding of discretionary increases to pensions in payment in the Group’s main Irish schemes. The Committee considered the relevant documentation and recommended a process to the Board for the making of this decision conducted during 2016. Overall the review concluded that the annually. Committee continued to operate effectively. The outcome of the evaluation was shared with the Board. Role and responsibilities The Committee’s primary responsibilities are set out in its terms – retirement benefit obligations and related accounting treatment and disclosure requirements. This was particularly relevant in light of the change in actuarial assumption with regard to funding of discretionary increases of pensions in payment in the Group’s main of reference which are reviewed annually by the Committee and Irish schemes. approved by the Board. The terms of references are available on the Group’s website at http://aib.ie/investorrelations. In addressing these issues, the Committee considered the Activities 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. appropriateness of Management’s judgements and estimates. The Auditors were present during such discussion and, where appropriate, the views of the Auditors on Management’s approach were sought. 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 note 2 to the consolidated financial statements; 192 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 193 – provided advice to the Board in respect of the Annual The Committee provided oversight in relation to the Auditors’ Financial Report, confirming that the Committee is satisfied effectiveness and relationship with the Group, including agreeing that the Annual Financial Report for the financial year the Auditors’ terms of engagement, remuneration, and monitoring ended 31 December 2016, taken as a whole, is fair, the independence and objectivity of the Auditors. To help ensure balanced and understandable and provides the information the objectivity and independence of the Auditors, the Committee necessary for shareholders to assess the Company’s policy on the engagement of the Auditors to supply non-audit performance, business model and strategy; services outlines the types of non-audit service for which the use – reviewed the scope of the independent audit, and the of the Auditors is pre-approved, for which specific approval findings, conclusions and recommendations of the Auditors; from the Committee is required before they are contracted, – satisfied itself through regular reports from the Group Head of and from which the Auditor is excluded. That Policy was Internal Audit, the Chief Financial Officer, the Chief Risk updated to ensure compliance with the EU Audit Reform Officer and the Auditors that the system of internal controls during 2016. (see note16 to the consolidated financial over financial reporting was effective; statements). Further detail can be found on the Group’s – received regular updates from Group Internal Audit, website at http://aib.ie/investorrelations. including reports detailing Internal Audit reports issued during the previous period, control issues identified The Committee considered the detailed audit plan in respect of and related remediating actions; the annual and interim financial statements, and the Auditors’ – received rolling updates from human resources senior findings, conclusions and recommendations arising from the management regarding the operation of the Speak-Up half-yearly and annual audits. The Committee, through process, through which staff of the company may, in consideration of the work undertaken, confidential discussions confidence, raise concerns about possible improprieties in with the Auditors, feedback received from Management in matters of financial reporting or other matters; respect of the audit process, and through its annual evaluation – reviewed the minutes of all meetings of subsidiary of the Committee’s effectiveness, which incorporated companies’ Audit Committees, requesting and receiving questions regarding the external audit process, satisfied further clarification on issues when required, and met with, itself with regard to the Auditors’ effectiveness, independence and received annual reports from, the AIB UK Audit and objectivity. Committee chairman; and – held formal confidential consultations during the year The Committee met with the Auditors in confidential session separately with the Auditors, the Chief Risk Officer and the twice during 2016, in the absence of Management, and the Group Head of Internal Audit, in each case with only Committee Chairman met with the Auditors between scheduled Non-Executive Directors present. meetings of the Committee to discuss material issues arising. On the basis of all of the above, and the Committee’s determination of the Auditors’ effectiveness, independence and objectivity, the Committee recommend that Deloitte should be reappointed as the Auditors at the Annual General Meeting on 27 April 2017. 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 annual audit plan and the adequacy of resources allocated to the function. Throughout the year, the Chairman of the Committee met with Group Internal Audit management between scheduled meetings of the Committee to discuss forthcoming agendas for Committee meetings and material issues arising, and the Committee met with the Group Head of Internal Audit in confidential session once during 2016, in the absence of Management. The Group Head of Internal Audit has unrestricted access to the Chairman of the Board Audit Committee. The Committee is responsible for making recommendations in relation to the Group Head of Internal Audit, including appointment, replacement, and remuneration, in conjunction with the Remuneration Committee, and confirming the Group Head of Internal Audit’s independence. External Audit Deloitte were appointed Auditors by shareholders at the Company’s AGM in 2013 following a competitive tender process which was overseen by the Members of the Board Audit Committee. Allied Irish Banks, p.l.c. Annual Financial Report 2016 193 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 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 194 Governance and oversight – Report of the Board Risk Committee Letter from Peter Hagan, Chairman of the Board Risk The work of the Committee contributes to the Group’s success; Committee (since 28 January 2016) Dear Shareholder, however, it is Management’s commitment to a responsible risk culture across the organisation that has enabled our decisions to be rapidly implemented. Historically credit risk was the principal focus of the Committee. However, in recent years other elements of risk including Compliance, Conduct, and Market risk have occupied an increasing portion of the Committee's agenda. Among other concerns, the Brexit vote in the UK and the election of President Trump in the US have created a less certain environment which the Group must navigate. Implications of this new political landscape range from the potential impact on the Irish economy in the event that a border with Northern Ireland is implemented to the possible loss of senior staff as UK based banks move On behalf of the Board Risk Committee (“the Committee”), I am functions from London to Dublin. pleased to report on the Committee’s activities during the financial year ended 31 December 2016. Risk culture across the Group was further enhanced this year I would like to start by expressing my gratitude to Dr Michael Programme which was delivered to Senior Management and through the delivery of an extensive Risk Appetite Embedding Somers, who led this Committee for five years before passing staff across the organisation. the Chairmanship to me at the beginning of 2016. Michael has remained on the Committee and his advice has been invaluable. Key areas of focus for the Committee during 2016 included consideration of: This year, we were also pleased to welcome Mr Brendan – the risk appetite statement and the ongoing monitoring of McDonagh to the Committee, whose extensive experience in performance against agreed risk metrics; international banking has enabled him to fully contribute to our – the review of risk related policies and frameworks; deliberations from the outset, and whose skill set complements – the Group’s capital and liquidity position, with particular well the expertise of both Ms Catherine Woods and Mr Simon reference to the Internal Capital Adequacy Assessment Ball, who remain members of the Committee. Process (“ICAAP”) and Internal Liquidity Adequacy While the Committee has a wide range of responsibilities, its – updates received on significant credit activity across the Assessment Process (“ILAAP”); primary roles and responsibilities are: organisation. – providing oversight and advice to the Board in relation to current and potential future risks facing the Group and risk Throughout the reporting period, through discussion and strategy in that regard, including the Group’s risk appetite deliberation with Management, the Committee satisfied itself and tolerance; that the key risks facing the organisation were being – ensuring the effectiveness of the Group’s risk management appropriately managed with relevant mitigants in place and infrastructure; appropriate actions taken, where necessary. – compliance with relevant laws, regulation obligations and relevant codes of conduct; Further detail on the Committee’s activities, Members of the – monitoring and reviewing the Group’s risk profile, risk trends, Committee and their record of attendance at meetings during risk concentrations and risk policies; 2016, are outlined in the full report below. – considering and acting upon the implications of reviews of risk management undertaken by Group Internal Audit and/or To ensure that all Directors are aware of the Committee’s work, external third parties. I provided an update to the Board following each meeting on the key topics considered by the Committee. I am satisfied that The responsibilities of the Committee are discharged through its the skills and experience of the Committee Members enables meetings, and through commissioning, receiving and considering the Committee to provide the independent risk oversight it is reports from the Chief Risk Officer, the Chief Credit Officer, the tasked with, while maintaining a constructive relationship with Chief Financial Officer and the Group Head of Internal Audit, all Management. of whom attend meetings of the Committee. Other individuals including the Chairman of the Bank’s UK Subsidiary and The Committee's focus in 2017 will be to ensure that your members of Senior Management, including the Chief Group's risk culture, policies, procedures and management Compliance Officer, also attend meetings by invitation, as and controls are sufficiently robust to support its ongoing financial when appropriate. 194 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 195 progress through the political, regulatory and structural changes underway. I wish to express my gratitude to my fellow Members for their contribution to the effective working of the Committee during the year. Peter Hagan, Committee Chairman 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 2016 195 n o i t a m r o n f i l a r e n e G A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 196 Governance and oversight – Report of the Board Risk Committee Report of the Board Risk Committee Membership and meetings Performance Evaluation An internal evaluation of the Committee’s performance was The Board Risk Committee comprises five independent conducted in 2016. While identifying some areas for potential Non-Executive Directors whom the Board has determined have enhancement, the overall results concluded that the Committee the collective skills and relevant experience to enable the continued to operate in an effective manner and had made Committee to discharge its responsibilities. To ensure improvements in a number of areas as identified in the 2015 co-ordination of the work of the Board Risk Committee with the evaluation process. risk related considerations of the Board Audit Committee, Mr Peter Hagan and Ms Catherine Woods are also members of Role and responsibilities the Board Audit Committee. This common membership provides The Board Risk Committee assists the Board in proactively effective oversight across relevant risk and finance issues. In fostering sound risk governance within the Group through addition, to ensure that remuneration policies and practices are ensuring that risks are appropriately identified and managed, consistent with and promote sound and effective risk and that the Group’s strategy is informed by, and aligned with, management, common membership between the Board Risk the Board approved risk appetite. The Committee’s Terms of Committee and the Remuneration Committee is maintained. When Mr Peter Hagan stepped down as a Member of the Remuneration Committee on 28 January 2016, common Reference are available on the Group’s website at http://aib.ie/investorrelations. membership continued through the appointment to the Activities Remuneration Committee of Mr Simon Ball. Biographical details The following, while not intended to be exhaustive, is a of each of the Members are outlined on pages 172 to 175. summary of the key items considered, reviewed and/or approved or recommended by the Committee during the year: The Committee met on nine occasions during 2016. All meetings − the Group’s risk management infrastructure including are attended by the Auditors, the Chief Financial Officer, the actions taken to strengthen the Group’s risk management Chief Risk Officer, the Chief Credit Officer, the Group Head of governance, people skills and system capabilities; Internal Audit and on occasion by the Chief Executive Officer, − monthly reports from the Chief Risk Officer which provide with the exception of the meeting which took place in the Group’s an overview of key risks including funding and liquidity, New York Office in October, which was attended by the Chief capital adequacy, credit risk, market risk, regulatory risk, Risk Officer and the Group Head of Internal Audit. Other senior business risk, conduct risk, cyber risk and related mitigants; executives also attended by invitation, where appropriate. During − periodic reports and presentations from Management and 2016, the Chief Risk Officer had unrestricted access to the the Chief Credit Officer regarding the credit quality, Chairman of the Board Risk Committee and met on two performance, provision levels and outlook of key credit occasions in confidential session with the Committee, in the portfolios within the Group; absence of other management. Since the resignation of − items of a risk and compliance related nature, including: Mr Dominic Clarke in January 2017, necessary arrangements (a) governance and organisational frameworks; have been implemented to adequately cover the responsibilities (b) the risk appetite framework and risk appetite statement; of the Chief Risk Officer, pending the appointment of a successor (c) the funding and liquidity policy, strategy and related to the role. stress tests; (d) risk frameworks and policies, including those relating to The Chairman and Members of the Committee, together with their attendance at scheduled meetings, are shown below. (i) credit and credit risk, (ii) capital management, Members: Mr Peter Hagan, Chairman (with effect from 28 January 2016), Mr Simon Ball, Dr Michael Somers (Chairman up to 27 January 2016), Ms Catherine Woods and Mr Brendan McDonagh (with effect from 27 October 2016). Member attendance during 2016: Simon Ball Peter Hagan Dr Michael Somers Catherine Woods Brendan McDonagh A 9 9 9 9 1 B 9 9 9 9 1 (iii) financial risk, including market risk, and (iv) conduct risk; (e) capital planning, including consideration of the Group ICAAP and ILAAP reports and related firm wide stress test scenarios; and (f) macro-economic scenarios for financial planning; − 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 regular Column A indicates the number of Committee meetings held updates on significant credit transactions; during 2016 which the Member was eligible to attend; Column B (d) structure and operation of the Compliance function; and indicates the number of meetings attended by each Member (e) regulatory developments, including business during 2016. 196 preparedness. Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 197 Activities (continued) − Recovery and Resolution planning, and; − Management’s plans and progress in meeting actions required under the Central Bank of Ireland’s Risk Mitigation Programme. The Committee has had a full and busy agenda during 2016. The pie chart below illustrates approximately how the Committee spent its time in Committee meetings during the year. Board Risk Committee - indicative analysis of focus during 2016 19% 5% 6% 27% 13% 9% 21% Risk reports Credit Activity Capital & Liquidity Compliance / Regulation Governance & Administration Policy / Frameworks Business Updates 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 2016 197 n o i t a m r o n f i l a r e n e G A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 198 Governance and oversight – Report of the Nomination and Corporate Governance Committee Letter from Richard Pym, Chairman of the Nomination and experience and diversity, and Board succession planning; Corporate Governance Committee and – the Group’s compliance with corporate governance requirements and related policies and practices. With regard to gender diversity and the underrepresentation of females on the Board, I am pleased to report that, during October 2016, the Board achieved its aim to ensure that the percentage of females on the Board reached or exceeded 25 per cent. The search for Board candidates will continue to be conducted, and nominations/appointments made, with due regard to the benefits of diversity on the Board. However, all appointments to the Board are ultimately based on merit, measured against objective criteria, and the skills and experience the individual can bring to the Board. It is intended Dear Shareholder, On behalf of the Nomination and Corporate Governance that, henceforth, the percentage of females on the Board will Committee (the ‘Committee’), I am pleased to introduce the remain at or exceed 25 per cent. Report on the Committee’s activities for the financial year ended 31 December 2016. New Non-Executive Directors are required by our Regulator to have very detailed knowledge of banking in general, and of AIB The Members of the Committee and a record of their meeting in particular, before they are approved to join the Board. Quite attendance during 2016 are outlined in the full report below. obviously not everyone is an expert banker and achieving this regulatory hurdle prior to appointment is a tough ask. We do The Nomination and Corporate Governance Committee has want to continue to attract candidates for some Board roles oversight responsibility for: from diverse and non-banking backgrounds to challenge us in – reviewing the size, structure and composition of the Board, the Boardroom. What is important is to maintain a balance of including its numerical strength, the ratio of executive to skills on the Board and to create an environment where Non-Executive Directors, the balance of skills, knowledge different knowledge and perspective can be brought to bear on and experience of individual Members of the Board and of a decision in open debate. the Board collectively, and the diversity and service profiles of the Directors, and making recommendations to the Board The Committee has continued to grapple with the issue of with regard to any changes considered appropriate; management succession. The Government restrictions – identifying persons who, having regard to the criteria laid applicable to bailed-out banks mean that whenever we recruit down by the Board, appear suitable for appointment to the externally, the pool of willing candidates is small. However, the Board, evaluating the suitability of such persons and making Committee is delighted that we have maintained a strong and recommendations to the Board; effective management team whose success and progress is – reviewing the size, structure, composition, diversity and skills evident in the results for 2016. More detail on the Committee’s of the Board Committees and subsidiary company Boards activities is outlined in the Committee’s full report. and the independence of Non-Executive Directors; – – reviewing Board and Senior Executive succession planning; As Committee Chairman, I reported after each Committee reviewing and assessing the adequacy of the Company's corporate governance policies and practices. meeting to the Board on the principal matters discussed to ensure all Directors were fully informed of the Committee’s Discharge of these responsibilities during 2016 was supported by on the Committee for their effective contribution to the meetings with and the receipt of reports from the Group Committee’s performance during 2016. Finally, I would like to Company Secretary and various other members of Senior welcome Ms Catherine Woods to the Committee, having been Executive Management, including the Deputy Chief People appointed to the Committee on 27 October 2016. work. I would like to extend my appreciation to my colleagues Officer and the Chief Executive Officer, who attend Committee meetings by invitation. Key areas of focus for the Nomination and Corporate Governance Committee during 2016 included: – the search for new Non-Executive Directors with particular skill sets identified by the Board, resulting in the subsequent appointments of Ms Carolan Lennon and Mr Brendan McDonagh on 27 October 2016; – consideration of appointments to the Leadership Team, and Leadership Team succession planning; – Board composition, including in relation to skillset, Richard Pym, Committee Chairman 198 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 199 Report of the Nomination and Corporate Governance Committee Membership and meetings The Nomination and Corporate Governance Committee currently comprises 5 Independent Non-Executive Directors whom the Board has determined have the collective skills and experience to enable the Committee to discharge its responsibilities. – – – – recommended to the Board appointments to key executive positions; considered the composition of the Boards of the Group’s material licensed subsidiaries; reviewed the schedule of matters reserved for the Board; reviewed the independence of individual Directors and the Board; Mr Peter Hagan stood down as a Member of the Committee on – monitored progress against the Board Diversity Policy and 28 January 2016 upon appointment as Chairman of the Board related targets; Risk Committee. Ms Catherine Woods was appointed to the – considered compliance with the Central Bank of Ireland and Committee on 27 October 2016 reflecting her role as Senior UK Corporate Governance Codes and other corporate Independent Director. Biographical details of each of the governance requirements. Members are outlined on pages 172 to 175. The Committee met on 7 occasions during 2016. The Chairman Board appointments The search for suitable candidates for the Board is a continuous and Members of the Committee, together with their attendance at process, and recommendations for appointment are made scheduled meetings, are shown below. based on merit and objective criteria, having regard to the collective skills, experience and diversity requirements of the Members: Mr Richard Pym (Chairman), Mr Simon Ball, Mr Peter Board. Hagan (Member to 28 January 2016), Mr Jim O’Hara, Dr Michael Somers, Ms Catherine Woods (Member from 27 October 2016) Member attendance during 2016: Richard Pym Simon Ball Jim O’Hara Dr Michael Somers Ms Catherine Woods Former member: Peter Hagan A 7 7 7 7 1 1 B 7 7 5 7 1 1 Column A indicates the number of Committee meetings held during 2016 which the Member was eligible to attend; Column B indicates the number of meetings attended by each Member during 2016. Performance Evaluation An internal performance evaluation of the Committee was conducted during 2016. Overall, the review concluded that the Committee continued to operate effectively. The outcome of the evaluation was shared with the Board. Role and responsibilities The Committee’s primary responsibilities are set out in its terms of reference which are reviewed annually by the Committee and approved by the Board. The terms of reference are available on the Group’s website at http://aib.ie/investorrelations. Activities 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: – – – lead the search for new Non-Executive Directors with specific skill sets for appointment to the Board; considered Board skills and succession planning; considered the mandate and composition of each of the Board Committees; In addressing appointments to the Board, a role profile for the proposed new Director is prepared by the Group Company Secretary on the basis of the criteria laid down by the Board or the Nomination and Corporate Governance Committee, taking into account the existing skills and expertise of the Board and the anticipated time commitment required. The services of experienced third party professional search firms are retained for Non-Executive Director appointments at the discretion of the Nomination and Corporate Governance Committee. The typical process involves a series of meetings and interviews with potential candidates, at different stages in the process by 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. A Board-approved Policy for the Assessment of the Suitability of Members of the Board, which outlines the board appointments process, is in place, in accordance with European Banking Authority Guidelines. Merc Partners were retained to assist with our Non-Executive Director searches during 2016. Merc Partners have no other connection with AIB, other than to provide executive recruitment services. Open advertising was not used in 2016 for Non-Executive Board positions as the Committee believes that Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 200 Governance and oversight – Report of the Nomination and Corporate Governance Committee targeted recruitment, based on the agreed role and skills profile specification, is the optimal way of recruiting for these positions. 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 stated that the Board’s aim, with regard to gender diversity, was to ensure that the percentage of females on the Board reached or exceeded 25 per cent by the end of 2016 and thereafter. That target was achieved during October 2016 and the Policy was updated to state the Board’s aim to ensure that the percentage of females on the Board remained at or exceeded 25 per cent. A copy of the Board Diversity Policy is available on the Group’s website at http://aib.ie/investorrelations. 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 is reviewed annually by the Committee in conjunction with Board succession and skills planning. 200 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 201 Governance and oversight – Report of the Remuneration Committee Letter from Jim O’Hara, Chairman of the Remuneration During 2016, key areas of focus for the Committee included: Committee – the remuneration of newly appointed members of the Leadership Team; – the 2015 Annual Financial Report remuneration disclosures and the 2015 Remuneration Disclosure Report; – ongoing compliance with relevant statutory and regulatory remuneration requirements and guidelines; – the overall reward strategy for the Group; – consideration of the resignation of certain senior executives. The Members of the Committee, and their record of attendance at meetings during 2016, are outlined in the full Committee report below, along with further detail on the Committee’s Dear Shareholder, activities during 2016. As Chairman of the Remuneration Committee (“the Committee”), As Chairman, I have ensured that all Directors are kept up to I am pleased to introduce this report on the Committee’s activities date on the work of the Committee through the provision of during 2016. periodic updates at Board meetings. I would like to acknowledge the valuable input of my colleagues on the The Remuneration Committee has responsibility for: Committee to its effective operation and thank them for their – recommending Group remuneration policies and practices to endeavours during 2016. Jim O’Hara Committee Chairman the Board; – the remuneration of the Chairman of the Board (which matter is considered in his absence); – determining the remuneration of the Chief Executive Officer, other Executive Directors, and the other members of the Leadership Team, under advice to the Board; – reviewing 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”); – performance-related and share-based incentive schemes, when appropriate. AIB’s Remuneration Policy continues to be governed by the Subscription and Placing Agreements in place with the Irish State and encompasses all financial benefits available to employees across the Group. Given these arrangements, we are unable to implement a competitive market driven compensation and benefit structure, within the EBA framework, to retain and incentivise our key executives. This is a key risk for the future stability and performance of the Group. The Committee’s responsibilities are discharged through regular meetings which consider relevant submissions and reports from Senior Management and ongoing interaction and consultation with the Chief People Officer. Mr Dave Keenan acted in the role of Deputy Chief People Officer following the resignation of the previous Chief People Officer in February 2016. Following an extensive internal and external search, Ms Triona Ferriter was appointed to the role of Chief People Officer on 3 January 2017. Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 202 Governance and oversight – Report of the Remuneration Committee Report of the Remuneration Committee Membership and Meetings The Remuneration Committee comprises 4 Independent Performance Evaluation An internal evaluation of the Committee’s performance was conducted in 2016. While identifying some areas for potential Non-Executive Directors whom the Board is satisfied possess enhancement, the overall results concluded that the Committee the required knowledge and experience to enable the Committee continued to operate in an effective manner. to operate effectively. To ensure that remuneration policies and practices are consistent with and promote sound and effective risk management, common membership between the Role and responsibilities The Committee’s primary responsibilities are described in its Remuneration Committee and the Board Risk Committee is terms of reference which are reviewed annually with any maintained, with Mr Simon Ball having been a member of both proposed amendments submitted to the Board for approval. A Committees during 2016. Biographical details of each of the Members are outlined on pages 172 to 175. copy of the terms of reference is available on the Group’s website at http://aib.ie/investorrelations. Directors’ remuneration Details of the total remuneration of the Directors in office The Committee met on six occasions during 2016. Meetings are during 2016 and 2015 are shown in the Directors’ attended by the Chief Executive Officer, the Chief People Officer/ Remuneration report on the following pages 205 and 206. Deputy Chief People Officer, the Head of Pensions and Reward and, where relevant, by other Senior Management on the invitation of the Chairman. The Chairman and Members of the Committee, together with their attendance at scheduled meetings, are shown below. Members: Mr Jim O’Hara (Chairman), Mr Simon Ball, Mr Tom Foley, Mr Peter Hagan (Member to 28 January 2016), Mr Richard Pym. Member attendance during 2016: A 6 Simon Ball Tom Foley Jim O’Hara Richard Pym Former member: Peter Hagan 6 6 6 2 B 6 6 6 6 2 Column A indicates the number of Committee meetings held during 2016 which the Member was eligible to attend; Column B indicates the number of meetings attended by each Member during 2016. 202 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 203 Governance and oversight – Corporate Governance Remuneration statement Remuneration Policy and Governance The Remuneration Policy provides the overall framework under Disclosure AIB publishes its Remuneration Disclosure Report as part of the which all remuneration policies and practices are applied across Group’s Pillar 3 Disclosures. The Disclosure Report provides the Group. 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 additional details in relation to AIB’s decision making process and governance of remuneration, the link between pay and performance, the remuneration of those staff whose professional Remuneration Policy is therefore designed to foster a truly activities are considered to have a material impact on AIB’s risk customer focused culture; to create long term sustainable value profile and the key components of AIB’s remuneration structure. for our customers and stakeholders; to attract, develop and retain This is available on the Group website. the best people and to safeguard the Group’s capital, liquidity and risk positions. The scope of the Remuneration Policy In accordance with EBA remuneration benchmarking includes all financial benefits available to employees and extends requirements, AIB is further required to disclose remuneration to all areas of the Group. data in respect of Identified Staff and High Earners (those earning above €1 million) to the Central Bank of Ireland. AIB The Remuneration Policy was comprehensively revised during continued to comply with these reporting requirements during 2016 with the principal objectives of aligning it more closely to 2016. AIB’s customer first values, longer term strategy and within current remuneration constraints arising from State ownership. The revised policy reflects the key principles of simplicity, Identified Staff and Risk Appetite AIB maintains a list of those staff whose professional activities transparency, fairness, performance based, external market are considered to have a material impact on the Group’s risk alignment and strong risk management. The policy sets out the profile (“Identified Staff”). During 2016, AIB undertook a key components of AIB’s current remuneration together with the detailed review of the identification process which sets out the approach to remuneration for key groups of individuals, including design criteria by which employees are assessed as Identified non-executive directors, senior executives, material risk takers, employees in control functions and all other employees. Staff in compliance with CRD IV and the EBA Guidelines. The identification process was reviewed and approved by the Remuneration Committee and forms an addendum to the The Remuneration Policy is governed by the Remuneration Remuneration Policy. Committee on behalf of the Board. The Remuneration Committee’s governance role in this respect is outlined in the During 2016, a programme of communication to embed the Committee’s Terms of Reference which were reviewed by the concept of Risk Appetite was launched and cascaded Committee in 2016. Remuneration Constraints AIB operates under a number of remuneration constraints arising from State ownership, in particular, arising under the terms of Placing and Subscription Agreements entered between AIB and the State and commitments provided to the Minister for Finance in respect of remuneration practices (“State Agreements”). These throughout the Group. This was further supplemented by an on-line Risk Appetite training module for completion by all employees while at least one role specific risk objective is mandatory for inclusion in each employee’s performance management plan. Remuneration Strategy The Board recognises the need to attract, retain and embed the constraints apply to all Directors, senior management, employees right skill sets and behaviours which reflect AIB’s customer and service providers across the Group. AIB considers that it is centric brand values and which will enable AIB to deliver long in compliance with the terms of the State Agreements. European Banking Authority (EBA) Guidelines In December 2015, the EBA issued its final guidelines on sound remuneration policies which take effect from 1 January 2017. The Remuneration Policy was updated to reflect the key term sustainable growth. The Board aims to provide fair and competitive remuneration consistent with the terms of the State Agreements and within the parameters of AIB’s Risk Appetite Statement. Individual remuneration across the Group continues to be provisions of the guidelines as they apply to the Group’s current principally comprised of base salary, allowances and employer remuneration practices and also to set out the key functional pension contributions. Following the closure of all defined responsibilities in relation to the ongoing design, implementation benefit schemes to future accrual on 31 December 2013, all and governance of the Remuneration Policy. employees were migrated to a defined contribution 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 AIB’s remuneration policies and practices, while implemented in Remuneration is closely monitored in line with financial accordance with the constraints outlined above, comply with the performance, budgetary parameters and the constraints arising remuneration provisions of the EBA Guidelines and, additionally, the Senior Managers Regime in respect of the Group’s UK activities. There was no scope in practice to implement the under State Agreements. Increases in base salary are performance based, determined by performance against each individual’s objectives which, in turn, reflect AIB’s strategy, goals principles of incentive schemes as outlined in the EBA and values. Such increases may arise following the annual pay Guidelines. 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 2016 203 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 204 Governance and oversight – Corporate Governance Remuneration statement review process, through promotion and, in exceptional cases, through out-of-course increases to ensure that business critical staff and key skills are retained in light of restructuring or employee departures. Following recommendations issued by the Workplace Relations Commission in May 2016, AIB introduced a performance based pay matrix as part of the annual pay review process. The matrix comprised pay increases ranging from 0% to 3% based on each employee’s individual performance rating for 2015 and was implemented with effect from 1 April 2016. The increase was paid to eligible employees in June 2016. The remuneration of the Chief Executive Officer, Executive Directors and Leadership Team Members is determined and approved by the Group Remuneration Committee on behalf of the Board. There were no bonuses paid or awarded to the Chief Executive Officer, Executive Directors, Leadership Team or Identified Staff during 2016. AIB does not currently operate and there were no general bonus schemes, long-term incentive plans or share incentive schemes in operation in 2016. 204 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 205 Directors’ remuneration* The following tables detail the total remuneration of the Directors in office during 2016 and 2015: Remuneration Executive Directors Mark Bourke Bernard Byrne Non-Executive Directors Simon Ball Tom Foley(2) Peter Hagan Carolan Lennon (Appointed 27 October 2016) Brendan McDonagh (Appointed 27 October 2016) Helen Normoyle Jim O’Hara Richard Pym(1(a)) (Chairman) Dr Michael Somers (Deputy Chairman) Catherine Woods Former Directors Declan Collier(2) Stephen L Kingon(2) (Resigned 31 October 2016) Anne Maher(5) David Pritchard(2) (Resigned 29 February 2016) Other(6) Total Directors’ fees Parent and Irish subsidiary companies(1) € 000 Directors’ fees AIB Group (UK) p.l.c.(2) Salary Annual taxable benefits(3) Pension contribution(4) 2016 Total € 000 € 000 € 000 € 000 € 000 467 500 967 30 – 30 93 100 193 590 600 1,190 85 90 95 13 15 73 103 365 111 146 1,096 39 40 40 56 47 16 85 130 95 13 15 73 103 365 111 146 1,136 56 47 39 16 13 2,497 (1)Fees paid to Non-Executive Directors in 2016 were as follows: (a) Mr. Richard Pym, Chairman, was paid a non-pensionable flat fee of € 365,000, which includes remuneration for all services as a Director of Allied Irish Banks, p.l.c.; (b) All other Non-Executive Directors were paid a basic, non-pensionable fee in respect of service as a Director of € 65,000 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 role of Deputy Chairman, 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) plc (“AIB UK”) are separately paid a non-pensionable flat fee, which is independently agreed and paid by AIB UK, in respect of their service as a Director of that company. In that regard, Messrs. Foley, Collier, Kingon and Pritchard earned fees as quoted during 2016; (3)‘Annual Taxable Benefits’ represents a non-pensionable cash allowance in lieu of company car, medical insurance and other contractual benefits; (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 Chairman, Deputy Chairman and 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; and (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. *Forms an integral part of the audited financial statements Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 206 Governance and oversight – Corporate Governance Remuneration statement Directors’ remuneration* (continued) Remuneration Executive Directors Mark Bourke Bernard Byrne David Duffy (Resigned 29 May 2015) Non-Executive Directors Simon Ball Tom Foley Peter Hagan Helen Normoyle (Appointed 17 December 2015) Jim O’Hara Richard Pym (Chairman) Dr Michael Somers (Deputy Chairman) Catherine Woods Former Directors Declan Collier Stephen L Kingon Anne Maher David Pritchard Other Total fees Directors’ Parent and Irish subsidiary companies(1) € 000 Directors’ fees AIB Group (UK) p.l.c.(2) Salary Annual taxable benefits(3) Pension contribution(4) 2015 Total € 000 € 000 € 000 € 000 € 000 450 479 177 1,106 30 12 3 45 90 96 27 570 587 207 213 1,364 80 90 95 3 100 365 120 143 996 39 31 31 61 63 110 80 121 95 3 100 365 120 143 1,027 61 63 39 110 10 2,674 *Forms an integral part of the audited financial statements 206 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 207 Directors’ remuneration* (continued) Interests in shares The beneficial interests of the Directors and the Joint Company Directors’ remuneration* (continued) Share options No share options were granted or exercised during 2016 and Secretaries in office at 31 December 2016, and of their spouses there were no options to subscribe for ordinary shares and minor children, in the Company’s ordinary shares are as outstanding in favour of the Executive Directors or Joint follows: Company Secretaries at 31 December 2016. Performance shares There were no conditional grants of awards of ordinary shares outstanding to Executive Directors or the Joint Company Secretaries at 31 December 2016. Apart from the interests set out above, the Directors and Joint Company Secretaries in office at 31 December 2016, and their spouses and minor children, have no other interests in the shares of the Company. There were no changes in the Directors’ and Joint Company Secretaries’ interests shown above between 31 December 2016 and 2 March 2017. The year-end closing price, on the Enterprise Securities Market of the Irish Stock Exchange, of the Company’s ordinary shares was € 5.00 per share. The price ranged from € 4.70 to € 10.25 during the year. Service contracts There are no service contracts in force for any Director with the Company or any of its subsidiaries. Ordinary shares 31 December 2016 1 January 2016** Directors: Simon Ball Mark Bourke Bernard Byrne Tom Foley Peter Hagan Carolan Lennon Brendan McDonagh Helen Normoyle Jim O’Hara Richard Pym Dr Michael Somers Catherine Woods Company Secretaries: Sarah McLaughlin (from 27 October 2016) Robert Bergin (from 27 October 2016) David O’Callaghan (to 27 October 2016) **or date of appointment, if later – – – 1 – – – – – – – – 2 – 31 – – – 1 – – – – – – 55 – 2 – 31 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 2016: Title of class Ordinary shares Identity of person or group Number owned Percent of class Directors and Leadership Team members of AIB as a group 64 *** ***The total shares in issue at 31 December 2016, was 2,714,381,238. 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 2016 207 n o i t a m r o n f i l a r e n e G A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 208 Governance and oversight – Viability statement / Internal controls Viability statement In accordance with provision C.2.2 of the UK Corporate Governance Code published in April 2016, the Directors have assessed the viability of the Group taking into account its current position and the principal risks facing the Group over the next three years to 31 December 2019. The Directors concluded that a three year time span was an appropriate period for the annual assessment given that this is the key period of focus within the Group’s strategic planning process. The strategic plan is considered annually and is subject to stress testing to reflect the potential impact of plausible yet severe scenarios which take account of the principal risks and uncertainties facing the Group. The assessment considered the current financial performance, funding and liquidity management and capital management of the Group, as set out in the Business review section on pages 23 to 42 and the governance and organisation framework through which the Group manages and seeks, where possible, to mitigate risk, as described on pages 59 to 61. A robust assessment of the principal risks facing the Group including those that would threaten the business operations, governance and internal control systems was also undertaken and considered, the details of which are included on pages 50 to 61. The Directors have a reasonable expectation, taking into account the Group’s current position, and subject to the identified principal risks, that the Group will be able to continue in operation and meet its liabilities as they fall due over the three year period of assessment. Internal controls 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 controls 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 controls 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, error, loss or fraud. This process includes an assessment of the effectiveness of internal controls, 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 of Ireland’s 2015 Corporate Governance requirements for Credit Institutions and the UK Corporate Governance Code. Supporting this process, the Group’s system of internal controls is based on the following: Board governance and oversight – The Board reviews the effectiveness of the system of internal controls on a continuous basis supported by a number of sub-committees including a Board Risk Committee (“BRC”), a Board Audit Committee (“BAC”), 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 BAC 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 BAC’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 BAC 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. Executive risk management and controls – 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 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. 208 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 209 Governance and oversight – Internal controls Internal controls (continued) – There is a centralised risk control function headed by the Code of conduct The Group has adopted a Code of Conduct in relation to CRO who is responsible for ensuring that risks are identified, business ethics that applies to all employees. The Code of measured, monitored and reported on, and for reporting on Conduct sets out the key standards for behaviour and conduct risk mitigation actions. that apply to all employees, and includes particular requirements – The Risk function is responsible for establishing and regarding responsibilities of Management for ensuring that embedding risk management frameworks, ensuring that business and support activities are carried out to the highest material risk policies are reviewed, and reporting on standards of behaviour. The application of the Code of Conduct adherence to risk limits as set by the Board of Directors. is underpinned by policies, practices and training which are – The Group’s risk profile is measured against its risk appetite designed to ensure that the Code is understood and that all on a monthly basis and exceptions are reported to the ERC employees act in accordance with it. The Code of Conduct is and BRC through the monthly CRO report. Material breaches reviewed and re-launched annually. of risk appetite are escalated to the Board and reported to the Central Bank of Ireland/SSM. The Code of Conduct is supported by the Group’s Speak-Up – The centralised Credit function is headed by a Chief Credit policy which encourages its employees to raise any concerns Officer who reports to the CRO. of wrongdoing through a number of channels, both internal and – There is an independent Compliance function which provides external. One such channel includes a confidential external advisory services to the Group and which monitors and helpline. Employees are assured that if they raise a concern in reports on conduct of business and financial crime good faith, the Group will not tolerate any victimisation or unfair compliance and forthcoming regulations across the Group, treatment of the employee as a result. and on Management’s focus on compliance matters. – There is an independent Group Internal Audit function which The Protected Disclosure Act 2014 (Republic of Ireland) came is responsible for independently assessing the effectiveness into law in July 2014 and provides statutory protection for of the Group’s corporate governance, risk management and whistleblowers in relation to reporting potential wrongdoing in internal controls and which reports directly to the Chairman the workplace. An extensive review of the Speak-Up policy in of the BAC. 2014 addressed the requirements of the Protected Disclosure – AIB employees who perform Pre-Approved Controlled Act 2014, as well as the UK Public Interest Disclosure Act 1998 functions/Controlled functions meet the required standards as outlined in AIB’s Fitness and Probity programme. (as amended 2013) and the recommendations of the UK Whistleblowing Commission (2013). The Speak-Up policy is reviewed at least annually to ensure that it continues to For further information, on the Risk management framework of address all legislative requirements within the jurisdictions in the Group, see pages 59 to 61 of this report. which the Group operates and continues to promote industry practice. In the event that material failings or weaknesses in the systems of risk management or internal control are identified, the relevant The Code of Conduct and supporting policies are subject to Leadership Team member is required to attend the relevant annual review and update to the Board. Board forum to provide an explanation of the issue and to present a proposed remediation plan. Agreed remediation plans are tracked to conclusion, with regular status updates provided to the relevant Board forum. Given the work of the Board, BRC, BAC and representations made by the Leadership Team during the year, the Board is satisfied that the necessary actions to address any material failings or weaknesses identified through the operation of the Group’s risk management and internal control framework have been taken, or are currently being undertaken. Taking this and all other information into consideration as outlined above, the Board is satisfied that there has been an effective system of control in place throughout 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 2016 209 n o i t a m r o n f i l a r e n e G A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 210 Governance and oversight – Other governance information Relations with shareholders The Group has a number of procedures in place to allow its Annual General Meeting (“AGM”) All shareholders are invited to attend the AGM and to shareholders and other stakeholders to stay informed about participate in the proceedings. At the AGM, it is practice to give matters affecting their interests. In addition to this Annual a brief update on the Group’s performance and developments Financial Report, which is available on the Group’s website at of interest for the year to date. Separate resolutions are http://aib.ie/investorrelations and sent in hard copy to those proposed on each separate issue and voting is conducted by shareholders who request it, the following communication tools way of poll. The votes for, against, and withheld, on each are used by the Group: resolution, including proxies lodged, are subsequently published on Group’s website. Proxy forms provide the option for Shareholders’ Report The Shareholders’ Report (‘the Report’) is a summary version of shareholders to direct their proxies to withhold their vote. It is usual for all Directors to attend the AGM and to be available to AIB’s Annual Financial Report. This Report, which covers AIB’s meet shareholders before and after the meeting. The Chairmen performance in the previous year, is sent to shareholders who of the Board Committees are available to answer questions have opted to receive it instead of the full Annual Financial about the Committees’ activities. A help desk facility is available Report. This summary report does not form part of the Annual to shareholders attending. The Company’s 2016 AGM is Financial Report and is referred to for reference purposes only. scheduled to be held on 27 April 2017, at the RDS Concert Hall, Merrion Road, Ballsbridge, Dublin 4 and it is intended that Website The Group’s website, http://aib.ie/investorrelations, contains, for Notice of the Meeting will be posted to shareholders at least 20 working days before the meeting, in accordance with the years since 2000, the Annual Financial Report, the Interim UK Code requirements. Report/Half-yearly Financial Report, and the Annual Report on Form 20-F for relevant years. In accordance with the Transarency (Directive 2004/109/EC)(Amendment)(No.2) Regulations 2015, this and all future Annual and Half-Yearly Financial Reports will remain available to the public for at least ten years. For the period 2008 to 2013, the Annual Financial Report and the Annual Report on Form 20-F were combined. The Group’s presentation to fund managers and analysts of annual and interim financial results are also available on the Group’s website. None of the information on the Group’s website is incorporated in, or otherwise forms part of, this Annual Financial Report. 210 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 211 Governance and oversight – Supervision and Regulation Throughout 2016, the Group continued to work with its guidance. The approach to implementation of European regulators, which include the European Central Bank (“ECB”); Regulation will be reviewed in light of Brexit and any impact the Central Bank of Ireland (“CBI”), the Prudential Regulation which Brexit might have on applicability of such regulation to Authority (“PRA”) and the Financial Conduct Authority (“FCA”) in AIB Group (UK) p.l.c. the United Kingdom (“UK”); the New York State Department of Financial Services (“NYSDFS”) and the Federal Reserve Bank of As further regulatory reforms continue to emerge from the New York in the United States of America (“USA”), to focus on regulators, AIB Group (UK) p.l.c. will continue to focus on the ensuring compliance with existing regulatory requirements management of regulatory change and its compliance together with the management of regulatory change. obligations. Current climate of regulatory change The level of regulatory change remained high in 2016 as the In particular, AIB Group (UK) p.l.c. is focused on the Senior Managers Regime (“SMR”) which came into force on 7 March regulatory landscape for the banking sector continued to evolve. 2016. The SMR replaced the Approved Persons Regime and The Group is committed to proactively identifying regulatory senior managers and enhance their individual accountability. obligations arising in each of the Group’s operating markets in The Certification Regime, which in practice covers the next Ireland, the UK and the USA and ensuring the timely layers of management, along with those who advise implementation of regulatory change. customers on regulated products, will be fully implemented in is designed to promote a clear allocation of responsibilities to Throughout 2016, cross-functional programmes were put in March 2017. place to ensure that the Group met its new regulatory In addition, AIB Group (UK) p.l.c will focus on the requirements. In particular, the Group focused on the EU implementation of the retail banking market investigation order directive on credit agreements for consumers relating to (2017) (the “Order”). The Order will provide for remedies to residential immovable property (known as the Mortgage Credit market-wide issues identified as part of the Competition and Directive); the EU directive on the prevention of the use of the Markets Authority’s Retail Banking Market Investigation into financial system for the purpose of money laundering and the Personal Current Accounts and SME Banking markets in terrorist financing (the “4th AML Directive”); the recast EU the UK. directive on payment services in the internal market (known as PSD2); the EU directive on the comparability of fees related to United States payment accounts, payment account switching and access to payment accounts with basic features (known as the Payment Compliance with federal and state banking laws and Account Directive); the Market Abuse Regulation and EU Directive on Criminal Sanctions for Market Abuse (together regulations During 2016, AIB’s state-licensed branch in New York known as MAD2); and the Central Bank (Supervision and continued to prioritise compliance with its regulatory Enforcement) Act 2013 (Section 48) Lending to Small and obligations in the USA and will remain focused on this Medium-Sized Enterprises Regulations (known as the SME throughout 2017. In particular, it will continue to monitor Regulations). ongoing business activities with regard to the Dodd Frank Act 2010. In addition, particular focus will be given to the new The level of regulatory change is expected to remain high in Transaction Monitoring and Filtering Programme Regulation 2017. In particular, the Group will focus on the implementation of and new Cybersecurity Regulation from the NYSDFS. PSD2; the EU directive on security of network and information systems; the EU General Data Protection Regulation; the 4th AML Directive; the ECB Regulation on the collection of granular credit and credit risk data (known as the AnaCredit Regulation) and the Credit Reporting Act 2013 with regard to the central credit register. United Kingdom During 2016, AIB Group (UK) p.l.c. continued to prioritise compliance with its regulatory obligations in Great Britain and Northern Ireland and will remain focused on this throughout 2017. Regulatory change horizon – UK AIB Group (UK) p.l.c. is subject to the European Regulation described under “Current climate of regulatory change” above and works closely with Group to ensure the requirements are implemented compliantly taking into consideration UK regulatory Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A7 Governance AFR 2016 pages 173-212:Layout 1 10/03/2017 19:58 Page 212 Financial statements 1 Statement of Directors’ responsibilities 2 Independent Auditors’ Report 3 Consolidated financial statements 4 Notes to the consolidated financial statements 5 Parent company financial statements 6 Notes to the parent company financial statements Page 213 214 221 227 355 360 212 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A8 Finan stats AFR 2016 pages 213-224:Layout 1 10/03/2017 20:00 Page 213 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 Auditors in relation to the financial statements. The Directors are responsible for preparing the Annual Financial 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 prepare the Group financial statements in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the EU and in the case of the Company financial statements in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2014. The Directors have also elected to prepare the Group financial statements in accordance with IFRSs as issued by the International Accounting Standards Board ("lASB"). In preparing both 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 adequate accounting records 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 Act 2014. 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 2016 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 2016; the Directors' report, Business review and Risk management sections, contained in the Annual Financial Report provide 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 Financial 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 Richard Pym Chairman 1 March 2017 Bernard Byrne Chief Executive Officer Allied Irish Banks, p.l.c. Annual Financial Report 2016 213 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 A8 Finan stats AFR 2016 pages 213-224:Layout 1 10/03/2017 20:00 Page 214 Independent Auditors’ Report Independent Auditors’ Report to the members of Allied Irish Banks, p.l.c. Opinion on the financial statements of Allied Irish Banks, p.l.c. In our opinion: – – – the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2016 and of the Group’s profit for the financial year then ended; the Group and Parent Company financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2014 and, as regards the Group financial statements, Article 4 of the IAS Regulation. The financial statements that we have audited comprise: – – – – – – the consolidated income statement; the consolidated statement of comprehensive income; the consolidated and Parent Company statement of financial position; the consolidated and Parent Company statement of cash flows; the consolidated and Parent Company statement of changes in equity; and the related notes 1 to 59 and a to ak. The financial reporting framework that has been applied in their preparation is applicable 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 Act 2014. Summary of our audit approach Key risks The key risks that we identified in the current year were: – Loan impairment and restructuring; – Deferred tax; – IT controls; – Retirement benefit obligations; and – Conduct risk provisions. Our key risks are consistent with our prior year assessment. Materiality The materiality that we used in the current year was €66 million which was determined on the basis of a range of 4-8% of profit before tax (“PBT”). Materiality is 4% of the Group’s 2016 PBT. Scoping We focused our group audit scope primarily on the audit work in four legal entities all of which were subject to individual statutory audit work, whilst the other 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. These audits and specified audit procedures covered over 95% of the Group’s net assets. Significant changes in our approach In the prior year we used shareholders’ equity as our basis for determining materiality. This was due to the high levels of volatility in the income statement. With the income statement volatility reducing we have determined, in our professional judgement, Group PBT to be one of the principal benchmarks within the financial statements relevant to members of the Parent Company in assessing financial performance. 214 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A8 Finan stats AFR 2016 pages 213-224:Layout 1 10/03/2017 20:00 Page 215 Separate opinion in relation to IFRSs as issued by the IASB As explained in note 1 to the Group financial statements, in addition to complying with its legal obligation to apply IFRSs as adopted by the European Union, the Group has also applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the Group financial statements comply with IFRSs as issued by the IASB. Going concern and the Directors’ assessment of the principal risks that would threaten the solvency or liquidity of the Group We have reviewed the Directors’ statement regarding the We agreed with the Directors’ adoption of the going appropriateness of the going concern basis of accounting concern basis of accounting and we did not identify any contained within note 1 to the financial statements. such material uncertainties. However, because not all We are required to state whether we have anything material to statement is not a guarantee as to the Group’s ability to add or draw attention to in relation to: continue as a going concern. future events or conditions can be predicted, this – the Directors' confirmation on page 180 that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; – – the disclosures on pages 50 to 58 that describe those risks and explain how they are being managed or mitigated; the Directors’ statement in note 1 to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing the financial statements and their identification in note 2 of any material uncertainties to the Group’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements; and – the Director's explanation on page 208 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions. 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. Loan impairment and restructuring Risk description The risk that provisions for impairment of loans and receivables do not represent an appropriate estimate of the losses incurred. This includes the risk that the estimate of cash flows on restructuring cases is not appropriately measured. The determination of appropriate provisions requires a significant amount of management judgment and relies on available data. Please also refer to page 190 (Board Audit Committee Report), page 243 (Accounting Policy – Impairment of financial assets), Note 2 – Critical accounting judgements and estimates and Note 25 – Provisions for impairment on loans and receivables. Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A8 Finan stats AFR 2016 pages 213-224:Layout 1 10/03/2017 20:00 Page 216 Independent Auditors’ Report Loan impairment and restructuring (continued) How the scope of our audit responded to the risk We undertook an assessment of the provisioning practices to compare them with the requirements of IFRS. We have evaluated the design and tested the operating effectiveness of controls over impairment identification and calculation. We have evaluated the design and tested the operating effectiveness of controls over credit management processes, new lending, restructuring transactions and front line credit monitoring and assessment. Furthermore, we have evaluated the design and tested the operating effectiveness of controls in the operations over collective and latent models, including source data and calculations, and the work of the credit review function. In examining both the sample loan cases and the 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, management adjustments, together with the calculations involved 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. This allowed us to determine whether appropriate valuation methodologies were employed and assess the objectivity of the external experts used. Deferred tax Risk description The risk relates to the incorrect recognition or measurement of deferred taxation. Deferred tax assets are recognised for unused tax losses to the extent that it is probable that there will be sufficient future taxable profits against which the losses can be used. The assessment of the conditions for the recognition of a deferred tax asset is a critical judgment, given the inherent uncertainties associated with projecting profitability over a long time period. Please refer to page 190 (Board Audit Committee Report), page 236 (Accounting Policy – Deferred taxation), Note 2 – Critical accounting judgements and estimates and Note 32 - Deferred taxation. We have evaluated the design of controls over the preparation of financial plans and budgets. We reviewed the financial plans and the model used by management to assess the likelihood of future profitability and challenged management’s assessment of a range of positive and negative evidence for the projection of long-term future profitability. We compared management’s assumptions to industry norms and other economic metrics. We reviewed management’s analysis of their consideration of the “more likely than not” test and reviewed the sensitivity analysis disclosed. How the scope of our audit responded to the risk IT controls Risk description The Group’s IT environment is complex, with financial accounting systems dependent on IT. Financial reporting processes and controls are dependent on the Group’s IT environment and related controls. There is a risk that if controls are not operating as designed in respect of IT security, change management and user access over significant IT applications, this could lead to failure of other controls or errors within the financial reporting process. Please refer to page 190 (Board Audit Committee Report) and page 185 (Corporate Governance report). How the scope of our audit responded to the risk We have evaluated the design and tested the operating effectiveness of IT controls that are critical to financial reporting, including those relating to system access, IT operations and program change, including other controls that mitigate deficiencies, where relevant. 216 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A8 Finan stats AFR 2016 pages 213-224:Layout 1 10/03/2017 20:00 Page 217 Retirement benefit obligations Risk description The risk is that the recognition and measurement of retirement benefit liabilities are inappropriate. There is a high degree of estimation and judgement in the calculation of retirement benefit liabilities. Material change in the liability can result from small movements in the underlying actuarial assumptions, specifically the discount rates, pensions in payment increases and inflation rates. Please refer to page190 (Board Audit Committee Report), page 235 (Accounting Policy – Employee benefits), Note 2 – Critical accounting judgements and estimates and Note 12 Retirement benefits. How the scope of our audit responded to the risk We have utilised Deloitte pension actuaries as part of our team to assist us in evaluating the appropriateness of actuarial assumptions with particular focus on discount rates, pensions in payment increases and inflation rates. Our work included discussions with Management and their advisors to understand the processes and assumptions used in calculating retirement benefit liabilities. We benchmarked assumptions used against market data where available. Conduct risk provisions Risk description The risk that the recognition, measurement and disclosure of provisions in respect of allegations of mis-selling of financial products, allegations of overcharging and breach of contract and/or regulation are inappropriate. Please refer to page 190 (Board Audit Committee Report), page 248 (Accounting Policy – Non-credit risk provisions), Note 2 – Critical accounting judgements and estimates and Note 38 – Provisions for liabilities and commitments. How the scope of our audit responded to the risk We have evaluated the design and tested operating effectiveness of the Group’s controls over the identification and measurement of the provision and the disclosure of exposures. We challenged the assumptions, regarding the interpretation of contract terms, the numbers of customers affected and the costs arising from the issue, used in the provisioning models. We met with Group General Counsel and Group compliance and reviewed the correspondence with regulators and legal advice. The description of risks above should be read in conjunction with the significant issues considered by the Audit Committee, which is discussed on page 190. 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. 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 2016 217 n o i t a m r o n f i l a r e n e G A8 Finan stats AFR 2016 pages 213-224:Layout 1 10/03/2017 20:00 Page 218 Independent Auditors’ Report Our application of materiality We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person 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. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: Group materiality € 66 million (2015: € 60 million) Basis for determining materiality Group materiality is set within a range of 4-8% of Group PBT. Materiality is 4% of the Group’s 2016 PBT. For each component, we allocated a materiality that is less than 50% of group materiality. Rationale for the benchmark applied In the prior year we used a measure of shareholders’ equity as our basis for determining materiality. This was due to the high levels of volatility in the income statement. With the income statement volatility reducing we have determined, in our professional judgement, Group PBT to be one of the principal benchmarks within the financial statements relevant to members of the Parent Company in assessing financial performance. Group materiality €66m Component materiality range €18m to €30m Audit Committee reporting threshold €3m PBT Group materiality We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of € 3 million as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Board 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. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed by us, as the group engagement team, or auditors within Deloitte network firms operating under our instruction (‘component auditors’). Where the work was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those components to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the consolidated financial statements as a whole. Based on that assessment, we focused our group audit scope primarily on the audit work in the four legal entities as disclosed in note 46 to the consolidated financial statements, all of which are subject to individual statutory audits, whilst the other 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. These audits and specified audit procedures covered over 95% of the Group’s net assets. We also tested the consolidation process and carried out analytical procedures to assess there were no additional significant risks of material misstatement arising from the aggregated financial information of the remaining entities not subject to audit or specified audit procedures. 218 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A8 Finan stats AFR 2016 pages 213-224:Layout 1 10/03/2017 20:00 Page 219 An overview of the scope of our audit (continued) The group audit team sent component auditors detailed instructions on audit procedures to be undertaken and the information to be reported back to the group audit team. Regular contact was maintained throughout the course of the audit with key component auditors which included holding group planning meetings, maintaining communications on the status of the audits and continuing with a programme of planned visits designed so that the group audit team met each significant component audit team during the year. The levels of coverage of key financial aspects of the Group by type of audit procedures as set out below: 4% 5% 1% 2% Net assets Total operating income 95% Full audit scope Specified audit procedures Review at group level 93% Full audit scope Specified audit procedures Review at group level Opinion on other matters prescribed by the Companies Act 2014 Directors’ Report and Corporate Governance Statement In our opinion, the information given in the Directors’ Report is consistent with the financial statements. Based on the work undertaken in the course of the audit the description in the Corporate Governance Statement of the main features of the internal control and risk management systems in relation to the financial reporting is consistent with the financial statements and has been prepared in accordance with section 1373 Companies Act 2014. Based on our knowledge and understanding of the Group and its environment obtained in the course of the audit, we have not identified any material misstatements in this information. In our opinion, the information required pursuant to section 1373(2) (a), (b), (e) and (f) of the Companies Act 2014 is contained in the Corporate Governance Statement. Adequacy of explanations received and accounting records Under the Companies Act 2014 we are required to report to you if, in our opinion: – we have not received all the information and explanations we require for our audit; or – – adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or the Parent Company financial statements are not in agreement with the accounting records and returns. We have nothing to report in respect of these matters. Matters on which we are required to report by exception Directors’ remuneration Under the Companies Act 2014 we are required to report to you if, in our opinion, the disclosures of Directors’ remuneration and transactions specified by law are not made. Corporate Governance Statement We agreed to review the parts of the Corporate Governance Statement for compliance with the following provisions of Section C “Accountability” of the UK Corporate Governance Code: C1.1; C.2.1 and C3.1 – C3.7. Allied Irish Banks, p.l.c. Annual Financial Report 2016 219 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 A8 Finan stats AFR 2016 pages 213-224:Layout 1 10/03/2017 20:00 Page 220 Independent Auditors’ Report Matters on which we are required to report by exception (continued) Our duty to read other information in the Annual Financial Report Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the Annual Financial Report is: – materially inconsistent with the information in the audited financial statements; – – 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. In particular, we are required to consider whether we have identified any inconsistencies between the knowledge acquired during our audit and the Directors’ statement that they consider the Annual Financial Report is fair, balanced and understandable and whether the Annual Financial Report appropriately discloses those matters that we communicated to the Board Audit Committee which we consider should have been disclosed. We have nothing to report arising from these matters. Respective responsibilities of Directors and Auditor As detailed in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view and otherwise comply with the Companies Act 2014. 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 Parent Company’s members, as a body, in accordance with section 391 of the Companies Act 2014. Our audit work has been undertaken so that we might state to the Parent Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent 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, as a result of 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 Financial 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 with our audit of the financial statements, we consider the implications for our report. Gerard Fitzpatrick For and on behalf of Deloitte Chartered Accountants and Statutory Audit Firm Dublin 1 March 2017 220 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A8 Finan stats AFR 2016 pages 213-224:Layout 1 10/03/2017 20:00 Page 221 Consolidated income statement for the financial year ended 31 December 2016 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 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 Depreciation of property, plant and equipment Total operating expenses Operating profit before provisions Writeback of provisions for impairment on loans and receivables Writeback of provisions for impairment on financial investments available for sale Writeback of provisions for liabilities and commitments Operating profit Associated undertakings Profit on disposal of property Profit on disposal of business Profit before taxation from continuing operations Income tax charge from continuing operations Profit after taxation from continuing operations attributable to owners of the parent Basic earnings per share Continuing operations Diluted earnings per share – adjusted Continuing operations Notes 4 4 5 6 6 7 8 9 10 30 31 25 13 38 29 14 15 17 18(a) 18(b) 2016 € m 2,611 (598) 2,013 26 430 (35) 71 11 403 906 2,919 (1,462) (70) (39) 2015 € m 2,821 (894) 1,927 26 449 (44) 95 (22) 197 701 2,628 (1,604) (39) (35) (1,571) (1,678) 1,348 294 2 2 950 925 – 11 1,646 1,886 35 – 1 1,682 (326) 25 3 – 1,914 (534) 1,356 1,380 48.6c 47.9c 44.0c 43.0c 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 2016 221 n o i t a m r o n f i l a r e n e G A8 Finan stats AFR 2016 pages 213-224:Layout 1 10/03/2017 20:00 Page 222 Consolidated statement of comprehensive income for the financial year ended 31 December 2016 Profit for the year Other comprehensive income – continuing operations Items that will not be reclassified subsequently to profit or loss: Net change in property revaluation reserves Net actuarial gains in retirement benefit schemes, net of tax Total items that will not be reclassified subsequently to profit or loss Items that will be reclassified subsequently to profit or loss when specific conditions are met: 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 Total items that will be reclassified subsequently to profit or loss when specific conditions are met Notes 17 17 17 17 Other comprehensive income for the year, net of tax from continuing operations Total comprehensive income for the year from continuing operations 2016 € m 1,356 2015 € m 1,380 (1) 103 102 (168) 106 (359) (421) (319) – 743 743 31 (29) 103 105 848 attributable to owners of the parent 1,037 2,228 222 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A8 Finan stats AFR 2016 pages 213-224:Layout 1 10/03/2017 20:01 Page 223 Consolidated statement of financial position as at 31 December 2016 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 Financial investments held to maturity Interests in associated undertakings Intangible assets Property, plant and equipment Other assets Current taxation Deferred tax assets Prepayments and accrued income Retirement benefit assets Total assets Liabilities Deposits by central banks and banks Customer accounts Trading portfolio financial liabilities Derivative financial instruments Debt securities in issue Current taxation Deferred tax liabilities Other liabilities Accruals and deferred income Retirement benefit liabilities Provisions for liabilities and commitments Subordinated liabilities and other capital instruments Total liabilities Equity Share capital Share premium Reserves Total shareholders’ equity Other equity interests Total equity Total liabilities and equity Notes 50 20 21 22 23 24 26 27 28 29 30 31 32 12 33 34 35 22 36 32 37 12 38 39 40 40 42 2016 € m 6,519 134 11 1 1,814 1,399 60,639 1,799 15,437 3,356 65 392 357 248 13 2,828 444 166 2015 € m 4,950 153 8 1 1,698 2,339 63,240 5,616 16,489 3,483 70 289 344 785 35 2,897 503 222 95,622 103,122 7,732 63,502 – 1,609 6,880 18 81 973 484 158 246 791 82,474 1,696 1,386 9,572 12,654 494 13,148 95,622 13,863 63,383 86 1,781 7,001 31 – 1,108 653 368 382 2,318 90,974 1,696 1,386 8,572 11,654 494 12,148 103,122 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 1 March 2017 Bernard Byrne Chief Executive Officer Mark Bourke Chief Financial Officer Sarah McLaughlin Company Secretary 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 2016 223 A8 Finan stats AFR 2016 pages 213-224:Layout 1 10/03/2017 20:01 Page 224 Consolidated statement of cash flows for the financial year ended 31 December 2016 Cash flows from operating activities Profit before taxation for the year from continuing operations Adjustments for: – Non-cash and other items – Change in operating assets – Change in operating liabilities – Taxation paid Net cash inflow/(outflow) from operating activities Cash flows from investing activities 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 business Disposal of property, plant and equipment Additions to intangible assets Dividends received from associated undertakings Net cash inflow from investing activities Cash flows from financing activities Net proceeds on issue of Additional Tier 1 Securities Net proceeds on issue of € 750 million Tier 2 Notes due 2025 Redemption of 2009 Preference Shares Redemption of Contingent Capital Notes Distribution paid on other equity interests Dividends paid on 2009 Preference Shares Interest paid on subordinated liabilities and other capital instruments Net cash outflow from financing activities Change in cash and cash equivalents Opening cash and cash equivalents Effect of exchange translation adjustments Closing cash and cash equivalents (1)Excludes non-cash acquisition of € 65 million. (2)Excludes non-cash disposal consideration of € 84 million. Notes 50 50 50 27 31 15 30 29 42 39 40 39 19 19 50 2016 € m 2015 € m 1,682 1,914 (266) 6,507 (4,588) (106) 3,229 (875) 4,230 (5,353) (9) (93) (2,477)(1) (4,270) 3,386(2) (55) 1 1 (173) 40 723 – – – (1,600) (37) – (191) (1,828) 2,124 5,672 (632) 7,164 4,624(3) (89) – 16 (156) 24 149 494 750 (1,700) – – (446) (160) (1,062) (1,006) 6,384 294 5,672 (3)Transfer from financial investments available for sale to financial investments held to maturity of € 3,487 million not reflected in cash flows (note 28). 224 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A8 Finan stats AFR 2016 pages 213-224:Layout 1 10/03/2017 20:01 Page 225 ) 9 1 3 ( 6 5 3 , 1 7 3 0 , 1 – ) 8 6 1 ( ) 8 6 1 ( 8 4 1 , 2 1 ) 4 8 3 ( l a t o T m € m € 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 m € 0 4 5 , 5 3 0 1 6 5 3 , 1 9 5 4 , 1 e u n e v e R s e v r e s e r – ) 7 3 ( ) 7 3 ( – – – 1 6 3 ) 7 3 ( 4 2 3 m € 4 5 3 – 6 0 1 6 0 1 – – – i g n g d e h s e v r e s e r – ) 9 5 3 ( ) 9 5 3 ( 2 7 4 , 1 m € 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 – – – m € 6 1 – ) 1 ( ) 1 ( – – – – – – – – – m € 4 1 s e v r e s e r t n e r a p f o s r e d o h y t i u q e o t l e l b a t u b i r t t A 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 l a t i p a C s e v r e s e r n o i t p m e d e r s e v r e s e r y t i u q e n i s e g n a h c f o t n e m e a t t s d e t a d i l o s n o C r e h t O y t i u q e s t s e r e t n i e r a h S i m u m e r p e r a h S l a t i p a c 6 1 0 2 r e b m e c e D 1 3 d e d n e r a e y l i a c n a n i f e h t r o f – – – – ) 1 6 3 ( ) 1 6 3 ( – – – – – – – – – – – – – – – – – – m € 0 6 5 , 1 m € 4 9 4 m € m € 6 8 3 , 1 6 9 6 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 ) 7 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 t i f o r P 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 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 6 1 0 2 y r a u n a J 1 t A 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 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 p u o r G e h t f o s t s e r e t n i y t i u q e r e h t o n o n o i t u b i r t s D i ) 3 4 e t o n ( s n o i t u b i r t n o c l a t i p a C s n o i t u b i r t s d d n a i y b s n o i t u b i r t n o c l a t o T p u o r G e h t f o s r e n w o o t 8 4 1 , 3 1 ) 2 5 5 ( 3 2 3 , 7 0 6 4 3 1 1 , 1 5 1 4 1 9 9 1 , 1 4 9 4 6 8 3 , 1 6 9 6 1 , 6 1 0 2 r e b m e c e D 1 3 t A 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 2016 225 A8 Finan stats AFR 2016 pages 213-224:Layout 1 10/03/2017 20:01 Page 226 l a t o T m € 2 7 5 , 1 1 8 4 8 0 8 3 , 1 8 2 2 , 2 – ) 0 8 2 ( – – – 4 9 4 ) 1 2 ( ) 0 0 7 , 1 ( ) 1 2 7 , 1 ( 1 2 – ) 6 6 1 ( 5 – – – – – ) 5 ( – – – – – – – – – 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 – – – – – – 2 6 4 – – – – – – – – ) 2 5 6 , 1 ( 8 4 1 , 2 1 ) 5 ( – – 2 6 4 ) 4 8 3 ( 0 4 5 , 5 4 5 3 2 7 4 , 1 – 1 3 1 3 – – – – – – – – – – – – – m € 1 2 6 , 5 3 4 7 0 8 3 , 1 3 2 1 , 2 e u n e v e R s e v r e s e r 8 9 3 ) 0 8 2 ( 5 ) 2 6 4 ( – 1 – ) 0 0 7 , 1 ( ) 0 0 7 , 1 ( – – ) 6 6 1 ( ) 4 0 2 , 2 ( m € 3 8 3 – ) 9 2 ( ) 9 2 ( i g n g d e h s e v r e s e r – – – – – – – – – – – – – – 3 0 1 3 0 1 – – – – – – – – – – – – – – – – – – – – – ) 1 ( – – – – – – ) 1 ( 6 1 m € ) 2 6 4 ( m € ) 5 1 4 ( 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 t n e r a p f o s r e d o h l y t i u q e o t l e b a t u b i r t t A w o l f h s a C l e b a l i a v A n o i t a u a v e R l l a t i p a C m € 9 6 3 , 1 l e a s r o f s e v r e s e r s e i t i r u c e s m € 7 1 s e v r e s e r – – – – – – – – – – – 4 1 4 1 – – – 4 1 4 1 m € 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 m € 8 5 9 , 1 ) 8 9 3 ( – – – – – – – – – – – – – – – – – – – – – – – – – – 4 9 4 m € r e h t O y t i u q e s t s e r e t n i 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 5 7 , 1 m € 4 4 3 1 , – – – – – – – – – – – – – – – – – – – – – – ) 1 2 ( ) 4 1 ( ) 5 3 ( 1 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 ) 7 1 e t 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 t i f o r P 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 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 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 y t i u q e n i y l t c e r i d 5 1 0 2 y r a u n a J 1 t A ) 3 4 e t o n ( s n o i t u b i r t n o c l a t i p a C p u o r G e h t f o i n o s r e v n o c – s e r a h S e c n e r e f e r P 9 0 0 2 n o i t p m e d e r – s e r a h S e c n e r e f e r P 9 0 0 2 i n o s r e v n o c n o d e u s s i s e r a h s y r a n d r O i n o d e u s s i s e r a h s i y r a n d r o s u n o B s e r a h S e c n e r e f e r P 9 0 0 2 f o s e i t i r u c e S 1 r e T i l a n o i t i d d A f o e u s s I s e r a h s y r u s a e r t f o n o i t a l l e c n a C ) 0 4 e t o n ( n o i t i a s n a g r o e r l a t i p a C 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 e r a h S e c n e r e e r P 9 0 0 2 n o f d n e d v D i i ) 6 6 3 ( 6 6 3 s e r a h S e c n e r e f e r P 9 0 0 2 f o i n o s r e v n o c – – n o i t p m e d e r / n o s r e v n o c i f o e t a d o t f s e r a h S e c n e r e e r P 9 0 0 2 n o d a p i d n e d v D i i ) 8 9 3 ( 0 6 5 , 1 4 9 4 4 9 4 ) 6 6 3 ( 2 5 3 6 8 3 , 1 6 9 6 1 , s n o i t u b i r t s d d n a i y b s n o i t u b i r t n o c l a t o T p u o r G e h t f o s r e n w o o t 5 1 0 2 r e b m e c e D 1 3 t A Allied Irish Banks, p.l.c. Annual Financial Report 2016 y t i u q e n i s e g n a h c f o t n e m e a t t s d e t a d i l o s n o C 226 5 1 0 2 r e b m e c e D 1 3 d e d n e r a e y l i a c n a n i f e h t r o f A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 227 Notes to the consolidated financial statements Page 229 Note 32 Deferred taxation Note 1 2 3 4 5 6 7 8 9 10 11 Accounting policies Critical accounting judgements and estimates Segmental information Net interest income Dividend income Net fee and commission income Net trading income Profit/(loss) on disposal/transfer of loans and receivables Other operating income Administrative expenses Share-based compensation schemes 12 Retirement benefits 13 Writeback of provisions for impairment on financial investments available for sale 14 15 16 17 18 Profit on disposal of property Profit on disposal of business Auditors’ fees Taxation Earnings per share 19 Distributions on equity shares and other equity interests 20 Disposal groups and non-current assets held for sale 21 Trading portfolio financial assets 22 Derivative financial instruments 23 24 Loans and receivables to banks Loans and receivables to customers 25 Provisions for impairment on loans and receivables 26 NAMA senior bonds 27 28 29 30 31 Financial investments available for sale Financial investments held to maturity Interests in associated undertakings Intangible assets Property, plant and equipment 256 261 265 266 266 266 266 267 267 268 269 275 275 275 275 276 278 279 279 279 280 286 287 288 288 289 292 292 294 295 33 Deposits by central banks and banks 34 Customer accounts 35 Trading portfolio financial liabilities 36 Debt securities in issue 37 Other liabilities 38 39 Provisions for liabilities and commitments Subordinated liabilities and other capital instruments 40 Share capital 41 Own shares 42 Other equity interests 43 Capital reserves and capital redemption reserves 44 Offsetting financial assets and financial liabilities Page 396 299 300 300 300 300 301 302 304 307 308 309 310 45 Memorandum items: contingent liabilities and commitments, and contingent assets 315 46 Subsidiaries and consolidated structured entities 47 Off-balance sheet arrangements and transferred financial assets 48 Classification and measurement of financial assets and financial liabilities Fair value of financial instruments Statement of cash flows 49 50 51 Related party transactions 52 Commitments 53 Employees 54 Regulatory compliance 55 56 Financial and other information Average balance sheets and interest rates 57 Non-adjusting events after the reporting period 58 Dividends 59 Approval of financial statements 318 319 323 325 334 336 349 350 351 351 352 354 354 354 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 2016 227 n o i t a m r o n f i l a r e n e G A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 228 Notes to the consolidated financial statements 1 Accounting policies Index (a) Reporting entity (b) (c) (d) (e) (f) Statement of compliance Basis of preparation Basis of consolidation Foreign currency translation Interest income and expense recognition (g) Dividend income (h) (i) (j) Fee and commission income Net trading income Employee benefits (k) Operating leases (l) Income tax, including deferred income tax (m) Financial assets (n) (o) Financial liabilities Leases (p) Determination of fair value of financial instruments (q) Sale and repurchase agreements (including stock borrowing and lending) (r) NAMA senior bonds (s) Derivatives and hedge accounting (t) Impairment of financial assets (u) Collateral and netting (v) Financial guarantees (w) Property, plant and equipment (x) (y) Intangible assets Impairment of property, plant and equipment, goodwill and intangible assets (z) Disposal groups and non-current assets held for sale (aa) Non-credit risk provisions (ab) Equity (ac) Cash and cash equivalents (ad) Segment reporting (ae) Prospective accounting changes 228 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 229 1 Accounting policies (continued) The significant accounting policies that the Group applied in the preparation of the financial statements are set out in this section. (a) 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 period. The Group is and has been primarily involved in retail and corporate banking. (b) 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 financial year ended 31 December 2016. The consolidated financial statements also comply with those parts of the Companies Act 2014 applicable to companies reporting under IFRS, the European Union (Credit Institutions: Financial Statements) Regulations, 2015 and the Asset Covered Securities Acts 2001 and 2007. The accounting policies have been consistently applied by Group entities and are consistent with the previous year, unless otherwise described. (c) 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 estimates are 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; retirement benefit obligations; and provisions for liabilities and commitments. 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 256 to 260. Allied Irish Banks, p.l.c. Annual Financial Report 2016 229 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 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 230 Notes to the consolidated financial statements 1 Accounting policies (continued) (c) Basis of preparation (continued) Going concern The financial statements for the financial year ended 31 December 2016 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. Adoption of new accounting standards During the financial year to 31 December 2016, the Group adopted amendments to standards and interpretations which had an insignificant impact on these annual financial statements. 230 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 231 1 Accounting policies (continued) (d) 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. 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. 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 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 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 2016 231 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 232 Notes to the consolidated financial statements 1 Accounting policies (continued) (d) Basis of consolidation (continued) 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 (ab) ‘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. 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. 232 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 233 1 Accounting policies (continued) (e) 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: – – – – 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. (f) 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. Allied Irish Banks, p.l.c. Annual Financial Report 2016 233 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 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 234 Notes to the consolidated financial statements 1 Accounting policies (continued) (g) 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. (h) 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 has 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. (i) 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. 234 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 235 1 Accounting policies (continued) (j) 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. A surplus is only recognised as an asset to the extent that it is recoverable through a refund from the scheme or through reduced contributions in the future. 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 net interest on the net defined benefit liability/(asset), calculated by applying the discount rate to the net defined benefit liability/(asset) at the start of the annual reporting period, taking into account contributions and benefit payments during the period, 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 defined 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. In early 2017, the Board reassessed its obligation to fund increases in pensions in payment. The Board confirmed that funding of increases in pensions in payment is a decision to be made by the Board each year where increases are discretionary. This was based on actuarial and external legal advice obtained. In previous years, the assumption for increases in pensions in payment was determined based on the long term inflation rate when arriving at the present value of the defined benefit obligation. 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. Allied Irish Banks, p.l.c. Annual Financial Report 2016 235 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 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 236 Notes to the consolidated financial statements 1 Accounting policies (continued) (j) Employee benefits (continued) 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. (k) 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. (l) 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. 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. 236 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 237 1 Accounting policies (continued) (m) Financial assets The Group classifies its financial assets into the following categories: - financial assets at fair value through profit or loss; loans and receivables; available for sale financial assets; and financial investments held to maturity. 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. Held to maturity Held to maturity investments are non-derivative financial assets with fixed or determinable payments that the Group’s management has the intention and ability to hold to maturity. If the Group was to sell other than an insignificant amount of held to maturity assets, the remainder would be required to be reclassified as available for sale. Held to maturity investments are initially recognised at fair value including direct and incremental transaction costs and are carried on an amortised cost basis using the effective interest method. Any available for sale financial investments reclassified into the held to maturity category are transferred at fair value and are subsequently carried at amortised cost using the effective interest rate method. Unrealised gains or losses held in equity in respect of such reclassified assets are amortised to the income statement using the effective interest rate method. 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 2016 237 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 238 Notes to the consolidated financial statements 1 Accounting policies (continued) (n) 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 subsequent 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. Issued financial instruments are classified as equity when the Group has no contractual obligation to transfer cash, or other financial assets or to issue a variable number of its own equity instruments. Incremental costs directly attributable to the issue of equity instruments are shown as a deduction from the proceeds of issue, net of tax. (o) 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. (p) 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. 238 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 239 1 Accounting policies (continued) (p) Determination of fair value of financial instruments (continued) 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 ask 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 ask 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. 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. Allied Irish Banks, p.l.c. Annual Financial Report 2016 239 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 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 240 Notes to the consolidated financial statements 1 Accounting policies (continued) (p) Determination of fair value of financial instruments (continued) 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. (q) 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. (r) NAMA senior bonds NAMA senior bonds were received as consideration for financial assets transferred to NAMA. In addition, on the acquisition of EBS and the Anglo deposit business in 2011, NAMA bonds were part of the acquired assets. 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 policies (f), (t) and (m)). 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. 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. 240 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 241 1 Accounting policies (continued) (s) 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. 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 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. 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. 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 2016 241 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 242 Notes to the consolidated financial statements 1 Accounting policies (continued) (s) Derivatives and hedge accounting (continued) 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. 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. 242 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 243 1 Accounting policies (continued) (t) 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. 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 impairment 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. Allied Irish Banks, p.l.c. Annual Financial Report 2016 243 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 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 244 Notes to the consolidated financial statements 1 Accounting policies (continued) (t) Impairment of financial assets (continued) 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. 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. 244 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 245 1 Accounting policies (continued) (t) Impairment of financial assets (continued) 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 cash flows 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. 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. 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 2016 245 n o i t a m r o n f i l a r e n e G A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 246 Notes to the consolidated financial statements 1 Accounting policies (continued) (u) 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 on 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. (v) 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. 246 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 247 1 Accounting policies (continued) (w) 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. (x) 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. (y) 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. Allied Irish Banks, p.l.c. Annual Financial Report 2016 247 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 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 248 Notes to the consolidated financial statements 1 Accounting policies (continued) (z) 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. 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. (aa) 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. 248 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 249 1 Accounting policies (continued) (ab) 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. 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 end of the reporting date are disclosed in note 58. Dividends on preference shares accounted for as equity are recognised in equity when approved for payment by the Board of Directors. Other equity interests Other equity interests relate to Additional Tier 1 Perpetual Contingent Temporary Write-down Securities (AT1s) issued on 3 December 2015 which are accounted for as equity instruments in the statement of financial position (note 42). Distributions on the AT1s 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 In 2015, the capital redemption reserves arose from the redemption of 2,140 million 2009 Preference Shares whereby on redemption, the nominal value of shares redeemed was transferred from the share capital account to the capital redemption reserve account. In addition, the nominal value of treasury shares cancelled was transferred from the share capital to the capital redemption reserve account. 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. In addition, unrealised gains/losses on financial assets transferred from available for sale to held to maturity are held in this caption. Unrealised gains or losses held in equity in respect of such reclassified assets are amortised to the income statement using the effective interest rate method. 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. Allied Irish Banks, p.l.c. Annual Financial Report 2016 249 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 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 250 Notes to the consolidated financial statements 1 Accounting policies (continued) (ab) Equity (continued) Capital contributions Capital contributions represent the receipt of non-refundable considerations arising from transactions with the Irish Government (note 43). 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(1). The capital contribution from the EBS transaction is treated as non-distributable as the related net assets received were 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 39) where the proceeds of issue amounting to €1.6 billion exceeded the fair value of the instruments issued. This excess was accounted for as a capital contribution and was treated as distributable when the fair value adjustment on the notes amortised to the income statement. These notes were repaid in full on 28 July 2016. The non-refundable receipts of € 6,054 million from the Irish Government and the NPRFC(1) are distributable. These are included in revenue reserves. 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. 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. (ac) 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. (1)Transferred to the Ireland Strategic Investment Fund (“ISIF”) on 22 December 2014. Ownership of ISIF vests with the Minister for Finance and is controlled and managed by the NTMA. 250 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 251 1 Accounting policies (continued) (ad) 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. 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 2016 251 n o i t a m r o n f i l a r e n e G A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 252 Notes to the consolidated financial statements 1 Accounting policies (continued) (ae) Prospective accounting changes The following new standards and amendments to existing standards which have been approved by the IASB, 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: Amendments to IAS 7 Statement of Cash Flows The amendments to IAS 7 Statement of Cash Flows, which were issued in January 2016, require that the following changes in liabilities arising from financing activities be disclosed to the extent necessary: – Changes from financing cash flows; – Changes arising from obtaining or losing control of subsidiaries or other businesses; – The effect of changes in foreign exchange rates; and – Other changes. It also stresses that the new disclosure requirements also relate to changes in financial assets if they meet the definition. These amendments are not expected to have a significant impact on AIB Group. The amendments are subject to EU endorsement. Effective date: Annual periods beginning on or after 1 January 2017. Amendments to IAS 12 Income Taxes: Recognition of Deferred Tax Assets for Unrealised Losses The amendments in Recognition of Deferred Tax Assets for Unrealised Losses, which were issued in January 2016, clarify the following aspects: – Unrealised losses on debt instruments measured at fair value and measured at cost for tax purposes give rise to a deductible temporary difference regardless of whether the debt instrument's holder expects to recover the carrying amount of the debt instrument by sale or by use; – The carrying amount of an asset does not limit the estimation of probable future taxable profits; – Estimates for future taxable profits exclude tax deductions resulting from the reversal of deductible temporary differences; and – An entity assesses a deferred tax asset in combination with other deferred tax assets. Where tax law restricts the utilisation of tax losses, an entity would assess a deferred tax asset in combination with other deferred tax assets of the same type. These amendments are not expected to have a significant impact on AIB Group. The amendments are subject to EU endorsement. Effective date: Annual periods beginning on or after 1 January 2017. Annual improvements to IFRSs 2014 - 2016 Cycle/Other The IASB has published a number of minor amendments to IFRSs through both standalone amendments and through the Annual Improvements to IFRS Standards 2014-2016 cycle. Whilst these have not yet been endorsed by the EU, they are expected to be effective from 1 January 2018 apart from the amendment to IFRS 12 ‘Disclosure of Interests in Other Entities’ which is effective from 1 January 2017. These amendments are expected to have an insignificant effect on the financial statements. IFRIC 22 Foreign Currency Transactions and Advance Consideration IFRIC 22 Interpretation on ‘Foreign Currency Transactions and Advance Consideration’ which was issued in December 2016 clarifies the requirements about which exchange rate to use in reporting foreign currency transactions (such as revenue transactions) when payment is made or received in advance. The interpretation states that the date of the transaction, for the purpose of determining the exchange rate, is the date of initial recognition of the non-monetary prepayment asset or deferred income liability. If there are multiple payments or receipts in advance, a date of transaction is established for each payment or receipt. Effective date: Annual periods beginning on or after 1 January 2018. 252 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 253 1 Accounting policies (continued) (ae) Prospective accounting changes (continued) IFRS 15 Revenue from Contracts with Customers IFRS 15, which was issued in May 2014, replaces IAS 11 Construction Contracts and IAS 18 Revenue in addition to IFRIC 13, IFRIC 15, IFRIC 18 and SIC-31. IFRS 15 specifies how and when an 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. A Group-wide project has been rolled out where the various types of revenue streams have been identified and analysed. However, due to the nature of these revenue streams, no significant change to the Group’s financial statements has been highlighted as a result of the analysis. Accordingly, it is expected that any impact will be minimal, although not yet quantified. On transition, while the Group will apply this standard retrospectively, it will exercise certain practical expedients as allowed by the standard. Prior periods will not be restated and the opening balance of retained earnings will be adjusted for any prior period impacts. Additionally, for contracts completed before the earliest period presented, AIB will not be restating the opening balance of retained earnings. Effective date: Annual periods beginning on or after 1 January 2018. IFRS 9 Financial Instruments IFRS 9 Financial Instruments was issued in July 2014 and will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes a revised classification and measurement model, a forward looking ‘expected credit loss’ impairment methodology and modifies the approach to hedge accounting. Unless early adopted, the standard is effective for accounting periods beginning 1 January 2018. The key changes under the standard are: Classification and measurement – Financial assets are classified on the basis of the business model within which they are held and their contractual cash flow characteristics. The classification and measurement categories are amortised cost, fair value through other comprehensive income and fair value through profit and loss; – A financial asset is measured at amortised cost if two criteria are met: a) the objective of the business model is to hold the financial asset for the collection of the contractual cash flows, and b) the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (“SPPI”); If a financial asset is eligible for amortised cost measurement, an entity can elect to measure it at fair value if it eliminates or significantly reduces an accounting mismatch; Interest is calculated on the gross carrying amount of a financial asset, except where the asset is credit impaired in which case interest is calculated on the carrying amount after deducting the impairment provision; There is no separation of an embedded derivative where the instrument is a financial asset; – – – – Equity instruments must be measured at fair value, however, an entity can elect on initial recognition to present fair value changes, including any related foreign exchange component on non-trading equity investments directly in other comprehensive income. There is no subsequent recycling of fair value gains and losses to profit or loss; however dividends from such investments will continue to be recognised in profit or loss; Impairment 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 – Requires more timely recognition of expected credit losses using a three stage approach. For financial assets where there has been no significant increase in credit risk since origination, a provision for 12 months expected credit losses is required. For financial assets where there has been a significant increase in credit risk or where the asset is credit impaired, a provision for full lifetime expected losses is required; – The assessment of whether credit risk has increased significantly since origination is performed for each reporting period by considering the change in risk of default occurring over the remaining life of the financial instrument, rather than by considering an increase in expected credit loss; – The assessment of credit risk, and the estimation of expected credit loss, are required to be unbiased and probability-weighted, and should incorporate all available information which is relevant to the assessment, including information about past events, current 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 2016 253 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 254 Notes to the consolidated financial statements Accounting policies (continued) (ae) Prospective accounting changes (continued) IFRS 9 Financial Instruments Impairment conditions and reasonable and supportable forecasts of future events and economic conditions at the reporting date. In addition, the estimation of expected credit loss should take into account the time value of money. As a result, the recognition and measurement of impairment is more forward-looking than under IAS 39 and the resulting impairment charge will tend to be more volatile. It will also tend to result in an increase in the total level of impairment allowances, since all financial assets will be assessed for at least 12-month expected credit loss and the population of financial assets to which lifetime expected credit loss applies is likely to be larger than the population for which there is objective evidence of impairment in accordance with IAS 39. Financial liabilities – The classification of financial liabilities is essentially unchanged, except that, for certain liabilities measured at fair value, gains or losses relating to changes in the entity’s own credit risk are to be included in other comprehensive income; Hedge accounting – The general hedge accounting requirements aim to simplify hedge accounting, creating a stronger link with risk management strategy and permitting hedge accounting to be applied to a greater variety of hedging instruments and risks. The standard does not explicitly address macro hedge accounting strategies, which are being considered in a separate project. To remove the risk of any conflict between existing macro hedge accounting practice and the new general hedge requirements, IFRS 9 includes an accounting policy choice to remain with IAS 39 hedge accounting. Assessment of IFRS 9 impacts A Group-wide Programme, led jointly by Risk and Finance, commenced work during 2015 to oversee delivery of the requirements for implementation of IFRS 9. The governance structure includes a Steering Committee mandated to oversee implementation in accordance with the standard, a Technical Approval Group to approve key accounting policy change decisions and a Process and Data Group to approve operating model specifications. Detailed planning was completed during 2015 and the design phase commenced thereafter. The Programme is structured with various work streams responsible for designing and implementing the end state process and reporting model, technical accounting interpretations, building and validating IFRS 9 provision models and assessing data and systems requirements. Classification and measurement Classification and measurement of financial assets is not expected to result in any significant changes for the Group. In general: – – – – loans and receivables to banks and customers that are currently classified as ‘loans and receivables’ under IAS 39 will be measured at amortised cost under IFRS 9; debt securities classified as available for sale under IAS 39 will be measured at FVOCI; debt securities classified as held to maturity under IAS 39 will be measured at amortised cost; all equity securities will continue to be measured at fair value, however, for individual securities, it has yet to be decided if the fair value movements will be presented in profit or loss or in other comprehensive income. The business model assessment which has been carried out on the portfolio at 31 December 2015 is not expected to change the current measurement basis at the Group level. In relation to SPPI testing which is being carried out on the financial instruments portfolio, it is expected that a small number of instruments, mainly loans and receivables to customers, will fail the SPPI test. Accordingly, such instruments will be measured at fair value through profit or loss in accordance with IFRS 9. Fair value movements on these instruments will be shown in profit or loss. The impact on transition to this new measurement basis is not expected to be significant. The classification of financial liabilities is largely unchanged under IFRS 9. Given that the Group does not fair value its own debt, there is no impact as a result of changes required under IFRS 9. 254 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 255 Accounting policies (continued) (ae) Prospective accounting changes (continued) IFRS 9 Financial Instruments Impairment To date the Programme has focused on designing and documenting accounting policy changes, identifying and remediating data gaps, developing risk modelling options and methodologies for the calculation of the impairment allowance. The Programme’s focus is now on building impairment models, validating outputs, testing policy proposals and processes which are being developed, and setting up processes for ‘business as usual ‘ under the new standard. The impairment models will impact on IT, risk management and financial reporting systems. Significant progress has been made in ensuring business readiness for all such systems. Due to the complexity of decisions required around several aspects of the impairment requirements of IFRS 9, and the interdependencies of variables within the models and the dynamic nature of some of those variables, it is considered premature at this stage to quantify the impacts of impairment under IFRS 9 with any degree of accuracy. However, it is expected that this information will be available in the 2017 Annual Financial Report. Hedge accounting IFRS 9 includes an accounting policy choice which allows entities remain with IAS 39 hedge accounting requirements until macro hedge accounting is addressed by the IASB as part of a separate project. AIB Group will exercise this policy choice and continue to account under IAS 39. However, it will implement the revised hedge accounting disclosures required by the amendments to IFRS 7. Initial application/disclosures/other The Group will apply the various provisions of IFRS 9 with effect from 1 January 2018, however, prior periods will not be restated. Any difference between the previous carrying amount under IAS 39 and the carrying amount at the date of initial application of IFRS 9 on 1 January 2018, will be recognised in opening retained earnings (or other component of equity as appropriate) at 1 January 2018. A significant suite of reporting requirements are being developed for statutory, regulatory and management reporting in line with the requirements of IFRS 9 and the various regulatory bodies. In so far as possible, definitions of data items within reports are being aligned so as to assist comparability. Furthermore, briefings to the business and various stakeholders throughout the Group have taken place and will continue throughout 2017 on the impacts of IFRS 9 and its consequences for the Group. Effective date: Annual periods beginning on or after 1 January 2018. IFRS 16 Leases IFRS 16 Leases, which was issued in January 2016, replaces IAS 17 Leases. The new standard brings most leases on-balance sheet for lessees under a single model, eliminating the distinction between operating and finance leases. Under IFRS 16, a lessee recognises a right-of-use asset and a lease liability. The right-of-use asset is treated similarly to other non-financial assets and depreciated accordingly. The lease liability is initially measured at the present value of the lease payments payable over the lease term, discounted at the rate implicit in the lease if that can be readily determined. If that rate cannot be readily determined, the lessee shall use their incremental borrowing rate. Lessor accounting remains largely unchanged and the distinction between operating and finance leases is retained. These amendments will impact AIB Group as it has leased as lessee a number of properties which are currently classified as operating leases. AIB is currently assessing the impact of IFRS 16, however, it is not yet practicable to quantify its effects. This standard is subject to EU endorsement. Effective date: Annual periods beginning on or after 1 January 2019. Allied Irish Banks, p.l.c. Annual Financial Report 2016 255 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 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 256 Notes to the consolidated financial statements 2 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 financial year ended 31 December 2016 have been prepared on a going concern basis as the Directors are satisfied, having considered the principal 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 2017 to 2019 approved by the Board in December 2016, 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 including the possible fallout from Brexit. Loan impairment AIB’s accounting policy for impairment of financial assets is set out in accounting policy (t) in note 1. The provisions for impairment on loans and receivables at 31 December 2016 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 256 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 257 2 Critical accounting judgements and estimates (continued) Specific provisions (continued) collectively for assets that are not individually significant. 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 81 and 82 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 81 and 82 of the Risk management section of this report. Forbearance The Group’s accounting policy for forbearance is set out in accounting policy (t) ‘Impairment of financial assets’ in note 1 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 and on the future cash flows arising from restructured loans. 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 (l) in note 1. 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 Allied Irish Banks, p.l.c. Annual Financial Report 2016 257 n o i t a m r o n f i l a r e n e G A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 258 Notes to the consolidated financial statements 2 Critical accounting judgements and estimates (continued) Deferred taxation (continued) 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 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 changes to the UK tax rates and the utilisation of deferred tax assets) 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 has continued to date. Growth thereafter has been reaffirmed in the annual planning exercise covering the period 2017 to 2019 undertaken by the Group in the second half of 2016. 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 2017 to 2019. Assuming a sustainable market return on equity (c.8.5%) 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 billion) to be utilised. Furthermore, under this scenario, it is expected that 52% (2015: 60%) of the deferred tax asset will be utilised within 15 years with 83% (2015: 92%) utilised within 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 4 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. Furthermore, legislation enacted in the UK in the past two years affected both the quantum of carried forward tax losses that could be utilised against future profits and the tax rate at which they will reverse. This legislation has resulted in the deferred tax asset reducing by € 92 million. 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 the recognition of deferred tax assets. The amount of recognised deferred tax assets arising from unused tax losses amounts to € 3,050 million of which € 2,928 million relates to Irish tax losses and € 122 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 258 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 259 2 Critical accounting judgements and estimates (continued) Deferred taxation (continued) 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. 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 (p) in note 1. 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 variables 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 (r) in note 1. 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 (m). (f) and (t) in note 1). 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. AIB continually reviews 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. 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 (t) in note 1). Retirement benefit obligations The Group’s accounting policy for retirement benefit schemes is set out in accounting policy (j) in note 1. 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 2016 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 A9 Acc Pols 1-2 AFR 2016 pages 225-250:Layout 1 10/03/2017 20:03 Page 260 Notes to the consolidated financial statements 2 Critical accounting judgements and estimates (continued) Retirement benefit obligations (continued) In calculating the scheme liabilities, the Directors have chosen a number of financial and demographic assumptions within an acceptable range, under advice from the Group’s Actuary which include price inflation, pensions in payment increases and the longevity of scheme members. The impact on the income statement, other comprehensive income and statement of financial position could be materially different if a different set of assumptions were used. In early 2017 the Group, having taken actuarial and external legal advice, the Board has determined that the funding of discretionary increases in pensions in payment is a decision to be made by the Board annually for the Group’s main Irish schemes. A process, taking account of all relevant interests and factors has been implemented by the Board. These interests and factors include the advice of the Actuary; the interests of the members of the scheme; the interests of the employees; the Bank’s financial circumstances and ability to pay; the views of the Trustees; the Bank’s commercial interests and any competing obligations to the State. In early 2017, the Board implemented this process and made a decision not to provide any funding for any discretionary increases in pensions in payment for the coming year. The assumptions adopted for the Group's defined benefit schemes are set out in note 12 to the financial statements, together with a sensitivity analysis of the schemes’ liabilities to changes in those assumptions. Provisions for liabilities and commitments The Group’s accounting policy for provisions for liabilities and commitments is set out in accounting policy number (aa) ‘Non-credit risk provisions’ in note 1. The Group recognises liabilities where it has present legal or constructive obligations as a result of past events and it is more likely than not that these obligations will result in an outflow of resources to settle the obligations and the amount can be reliably estimated. Details of the Group’s liabilities and commitments are shown in note 38 to the financial statements. The recognition and measurement of liabilities, in certain instances, may involve a high degree of uncertainty, and thereby, considerable time is expended on research in establishing the facts, scenario testing, assessing the probability of the outflow of resources and estimating the amount of any loss. This process will, of its nature, require significant management judgement and will require revisions to earlier judgements and estimates as matters progress towards resolution. However, at the earlier stages of provisioning, the amount provided for can be very sensitive to the assumptions used and there may be a wide range of possible outcomes in particular cases. Accordingly, in such cases, it is often not practicable to quantify a range of possible outcomes. In addition, it is also not practicable to measure ranges of outcomes in aggregate in a meaningful way because of the diverse nature of these provisions and the differing fact patterns. At 31 December 2015, the Group provided € 190 million for redress to customers. This provision related to the expected outflow for compensation/refunds of interest to customers in respect of tracker mortgages where rates given to customers were either not in accordance with original contract terms or where the transparency of terms did not conform to that which a customer could reasonably expect. The provision covered various compensations and costs arising from this issue. Considerable progress was made throughout 2016 in identifying impacted customers and in calculating and making redress. However, this process is on-going and work is expected to extend into the second six months of 2017. To date € 93 million of the provision has been utilised covering both redress and costs leaving a residual provision of € 97 million at 31 December 2016. Validation of the examination process is being undertaken by the Group, however, the resultant final redress is subject to independent third party assurance and also subject to assessment and challenge by the CBI. Given the uncertainty attaching to certain of the assumptions and judgements underpinning the above provisions, it is possible that the eventual outcome may differ from the current estimates with a resultant charge/credit to the income statement in future periods. 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. 260 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 261 3 Segmental information During 2016, the Group reported through the segments set out below which reflect the internal reporting structure used by management to assess performance and allocate resources: – AIB Ireland; – AIB UK; and – Group & International. AIB Ireland AIB Ireland comprises Personal, Business and Corporate Banking. It is the leading franchise bank across key segments and products in the domestic market and is well positioned for growth. Personal offers a comprehensive suite of personal lending, mortgages, savings, deposit, credit card, insurance and financial planning products via the branch network, online, mobile and direct channels. Our multi-brand approach via AIB, EBS and Haven offers choice to mortgage customers and allows us to tailor products to meet their needs. Business is committed to actively supporting entrepreneurs, early start-ups and established SMEs via a sector-led approach, flexible digital and self-service channels, and timely credit decisions. Corporate (including property) develops strong relationships with corporate customers by providing sectoral expertise, tailored financial solutions and a premium customer service. AIB UK AIB UK comprises of two trading entities operating in two distinct markets with different economies and operating environments: Allied Irish Bank (GB) ("AIB GB") which offers full banking services to predominantly business customers across Great Britain; and First Trust Bank ("FTB") which offers full banking services to business and personal customers across Northern Ireland. Both entities are supported by a single operations function. AIB GB is a long established specialist Business Bank, supporting businesses in Great Britain for over 40 years. It operates out of 15 business centres in key cities across Great Britain, providing a full clearing and day-to-day transactional banking service to customers. First Trust Bank is a long established bank in Northern Ireland, providing a full banking service, including online, mobile and telephone banking to business and personal customers. Group & International Group & International includes syndicated and international lending in the United States of America and Europe. It also includes wholesale treasury activities, central control and support functions (business and customer services, risk, audit, finance, general counsel, human resources and corporate affairs). Certain overheads related to these activities are managed and reported in the Group & International segment. Segment allocations 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 Group & International. 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 attributable to capital is allocated to segments based on each segment’s capital requirement. In 2016, the funding and liquidity allocation methodology has been refined further to more accurately reflect each segment’s funding cost. The financial year segment performance to December 2015 has been presented on this revised allocation methodology. Applying the methodology to the segment performance as reported in Annual Financial Report 2015, results in a decrease in net interest income of € 85 million in AIB Ireland, a decrease in net interest income of € 12 million in AIB UK offset by an increase in net interest income of € 97 million in Group & International. Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 262 Notes to the consolidated financial statements 3 Segmental information (continued) AIB Ireland AIB UK Group & International Total € m € m € m € m Bank Exceptional items(2) levies and regulatory fees(1) € m € m 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 1,458 466 1,924 (454) (311) (63) (828) Operating profit/(loss) before provisions 1,096 Bank levies and regulatory fees – Writeback/(provisions) for impairment 245 65 310 (84) (53) (2) (139) 171 1 310 86 396 (179) (202) (29) (410) (14) (113) 2,013 617 2,630 (717) (566) (94) (1,377) 1,253 (112) on loans and receivables 275 37 (18) 294 Writeback/(provisions) for liabilities and commitments Writeback of provisions for impairment on financial investments available for sale Total writeback/(provisions) Operating profit/(loss) Associated undertakings Profit on disposal of business Profit/(loss) before taxation from 4 – 279 1,375 31 – – – 37 209 4 1 (2) 2 (18) (145) – – 2 2 298 1,439 35 1 continuing operations 1,406 214 (145) 1,475 – – – – (112) – (112) (112) 112 – – – – – – – – 2016 Total € m 2,013 906 2,919 (742) (720) (109) (1,571) 1,348 – 294 2 2 298 – 289(3) 289 (25)(4)(5) (42)(5)(6) (15) (82) 207 – – – – – 207 1,646 – – 35 1 207 1,682 (1)In the consolidated financial statements, bank levies and regulatory fees are shown as part of general and administrative expenses. They are disclosed separately in the ‘Operating and Financial Review’ - see page 24. (2)Exceptional and one-off items are shown separately above. These are items that Management believes obscures the underlying performance trends in the business. Exceptional items include: (3)Gain on disposal of financial instruments; (4)Termination benefits; (5)Restitution and restructuring expenses; and (6)Other exceptional items. For further information on these items see page 25. 262 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 263 3 Segmental information (continued) AIB Ireland AIB UK Group & International Total € m € m € m € m Bank Exceptional items(2) levies and regulatory fees(1) € m € m 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 Bank levies and regulatory fees Writeback/(provisions) for impairment on loans and receivables Writeback/(provisions) for liabilities and commitments Total writeback/(provisions) Operating profit/(loss) Associated undertakings Profit on disposal of property Profit/(loss) before taxation from 1,360 443 1,803 (462) (251) (42) (755) 1,048 – 892 9 901 1,949 21 3 285 50 335 (96) (59) (3) (158) 177 (4) 44 – 44 217 3 – 282 203 485 (167) (183) (29) (379) 106 (67) 1,927 696 2,623 (725) (493) (74) (1,292) 1,331 (71) (11) 925 (11) (22) 17 1 – (2) 923 2,183 25 3 continuing operations 1,973 220 18 2,211 – – – – (71) – (71) (71) 71 – – – – – – – (1)In the consolidated financial statements, bank levies and regulatory fees are shown as part of general and administrative expenses. They are disclosed separately in the ‘Operating and Financial Review’ - see page 24. In 2015, a payment of € 4 million was made to the FSCS in the UK relating to a Deposit Guarantee Scheme and a refund of € 1 million was received from Irish legacy deposit protection fund. These amounts were reclassified from ‘Other general and administrative expenses’ to ‘Bank levies and regulatory fees’. (2)Exceptional and one-off items are shown separately above. These are items that Management believes obscures the underlying performance trends in the business. Exceptional items include: (3)Gain on transfer of financial instruments; (4)Termination benefits; (5)Restitution and restructuring expenses; and (6)Other exceptional items. For further information on these items see page 25. 2015 Total € m 1,927 701 2,628 – 5(3) 5 (38)(4)(5) (763) (277)(5)(6) (841) – (74) (315) (1,678) (310) – – 13(5) 13 950 – 925 11 936 (297) 1,886 – – 25 3 (297) 1,914 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 2016 263 n o i t a m r o n f i l a r e n e G A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 264 Notes to the consolidated financial statements 3 Segmental information (continued) Other amounts – statement of financial position Loans and receivables to customers Customer accounts Loans and receivables to customers Customer accounts 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 AIB Ireland € m 48,960 52,134 AIB Ireland € m 50,077 50,250 AIB UK € m 8,745 10,350 Group & International € m 2,934 1,018 AIB UK € m 10,343 11,665 Group & International € m 2,820 1,468 Republic of Ireland € m United Kingdom € m Rest of the World € m 2,399 188 2,587 509 (185) 324 11 (3) 8 Republic of Ireland € m United Kingdom € m Rest of the World € m 2,218 (43) 2,175 397 47 444 13 (4) 9 2016 Total € m 60,639 63,502 2015 Total € m 63,240 63,383 2016 Total € m 2,919 – 2,919 2015 Total € m 2,628 – 2,628 Revenue from external customers comprises interest and similar income and interest expense and similar charges (note 4), and all other items of income (notes 5 to 9). Geographic information Non-current assets(3) Geographic information Non-current assets(3) Republic of Ireland € m United Kingdom € m Rest of the World € m 717 31 1 Republic of Ireland € m 608 United Kingdom € m 24 Rest of the World € m 1 2016 Total € m 749 2015 Total € m 633 (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. 264 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 265 4 Net interest 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 Interest on financial investments held to maturity Negative interest on liabilities Interest and similar income 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 Negative interest on assets Interest expense and similar charges Net interest income 2016 € m 2,248 18 – 11 182 131 2,590 21 2,611 8 341 50 199 598 – 598 2015 € m 2,363(1) 24 1 31 398(1) 4 2,821 – 2,821 4 520(1) 92(1) 278 894 – 894 2,013 1,927 The Group presents interest resulting from negative effective interest rates on financial assets as interest expense, rather than as offset against interest income. Likewise, negative interest on financial liabilities has been presented as interest income. Interest income reported above, calculated using the effective interest method, relates to financial assets not carried at fair value through profit or loss. Interest expense reported above, calculated using the effective interest method, relates to financial liabilities not carried at fair value through profit or loss. Interest income recognised on impaired loans amounts to € 140 million (2015: € 244 million). Included within interest expense is a charge of € 17 million (2015: a charge of € 30 million) in respect of the Irish Government’s Eligible Liabilities Guarantee (“ELG”) Scheme. Cash flow hedges Interest income includes a credit of € 193 million (2015: a credit of € 150 million) transferred from other comprehensive income in respect of cash flow hedges. Interest expense includes a charge of € 75 million (2015: a charge of € 86 million) transferred from other comprehensive income in respect of cash flow hedges. Fair value hedges Interest received/paid on fair value hedges is now included within interest income/expense on the underlying hedged items as follows: – – – – financial investments available for sale – a charge of € 124 million (2015: a charge of € 116 million); customer accounts – a credit of € 4 million (2015: a credit of € 19 million); debt securities in issue – a credit of € 125 million (2015: a credit of € 115 million); and subordinated liabilities and other capital instruments – a credit of € 2 million (2015: Nil). (1)In 2015, the net interest received on fair value hedges amounting to € 18 million was reported in ‘Interest and similar income’ as part of loans and receivables to customers. To better reflect the nature of the transactions, this has now been reallocated to interest income/expense on the underlying hedged items as set out above. Allied Irish Banks, p.l.c. Annual Financial Report 2016 265 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 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 266 Notes to the consolidated financial statements 5 Dividend income Dividend income relates to income from equity shares held as financial investments available for sale and amounts to € 26 million (2015: € 26 million). € 25 million of this dividend income was received on NAMA subordinated bonds (2015: € 25 million). 6 Net fee and commission income Retail banking customer fees Credit related fees Insurance commissions Fee and commission income Fee and commission expense(1) 2016 € m 364 41 25 430 (35) 395 2015 € m 381 38 30 449 (44) 405 (1)Fee and commission expense includes ATM expenses of € 5 million (2015: € 6 million) and credit card commissions of € 18 million (2015: € 28 million). Fees and commissions which are an integral part of the effective interest rate are recognised as part of interest and similar income or interest expense and similar charges (note 4). 7 Net trading income Foreign exchange contracts Interest rate contracts and debt securities(1) Credit derivative contracts Equity securities, index contracts and warrants(2) 2016 € m 2015 € m 55 13 – 3 71 41 52 (6) 8 95 (1)Includes a gain of € 1 million (2015: gain of € 17 million) in relation to XVA adjustments. (2)€ 3 million (2015: € 8 million) mark to market gain on equity warrants The total hedging ineffectiveness on cash flow hedges reflected in the consolidated income statement amounted to Nil (2015: Nil). 8 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: Loss on disposal of loans and receivables to customers Gain on transfer of loans and receivables to NAMA Total 2016 € m (6) 17 11 2015 € m (27) 5 (22) NAMA finalised certain issues in relation to loans and receivables which had transferred in 2010 and 2011. This resulted in a net release of provisions in the current year as set out above. 266 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 267 9 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 Acceleration/re-estimation of the timing of cash flows on NAMA senior bonds (note 26) Net gains on buy back of debt securities in issue Realisation/re-estimation of cash flows on restructured loans Miscellaneous operating income(3) 2016 € m 90 (59) 272(2) 10 1 85 4 403 2015 € m 158 (81) 8 6 8 45 53 197 (1)The majority of the loss on termination relates to the disposal of available for sale debt securities. In addition, it includes a € 2 million charge transferred from other comprehensive income in respect of cash flow hedges (2015: € 5 million). (2)€ 272 million relates to the disposal of the equity interest in Visa Europe and comprises € 207 million for the cash and deferred cash component and € 65 million being the fair value of preferred stock acquired in Visa Inc. (3)Miscellaneous operating income includes: – Foreign exchange gains € 1 million (2015: a gain of € 15 million). – Income on settlement of claims of Nil (2015: € 38 million). 10 Administrative expenses Personnel expenses: Wages and salaries Termination benefits(1) Retirement benefits(2) (note 12) Social security costs Other personnel expenses(3) Total personnel expenses General and administrative expenses: Bank levies and regulatory fees Other general and administrative expenses Total general and administrative expenses 2016 € m 2015 € m 563 24 79 59 17 742 112 608 720 562 37 106 58 – 763 71(4) 770 841 1,462 1,604 (1)At 31 December 2016, a charge of € 24 million (2015: € 37 million) was made to the consolidated income statement in respect of termination benefits arising from the voluntary severance programme in operation in the Group. (2)Comprises a charge of € 2 million relating to defined benefit expense (2015: charge of € 21 million), a defined contribution expense charge of € 71 million (2015: € 79 million) and a long term disability payments expense charge of € 6 million (2015: € 6 million (note 12)). (3)Other personnel expenses include staff training, recruitment and various other staff costs. (4)In 2015, € 3million reclassified from ‘Other general and administrative expenses’. Personnel expenses of € 22 million (2015: € 34 million) were capitalised as part of the cost of intangible 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 2016 267 n o i t a m r o n f i l a r e n e G A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 268 Notes to the consolidated financial statements 11 Share-based compensation schemes The Group previously operated 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 operated in respect of ordinary shares in Allied Irish Banks, p.l.c., were: (i) The AIB Group Share Option Scheme; (ii) Employees’ Profit Sharing Schemes; and (iii) AIB Group Performance Share Plan 2005. (i) AIB Group Share Option Scheme Options were last granted under this scheme in 2005. This scheme terminated in April 2015 with all outstanding options either being forfeited or lapsed. (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 terminated in April 2015 and there were no awards of performance shares in the year to 31 December 2015. Income statement expense The total expense arising from share-based payment transactions amounted to Nil for the financial year ended 31 December 2016 (2015: Nil). 268 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 269 12 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 On 1 January 2014, all Group staff transferred to defined contribution (“DC”) 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%. The total cost in respect of the Irish DC scheme, the EBS DC scheme and the UK DC scheme for 2016 was € 71 million (2015: € 79 million). The cost in respect of defined contributions is included in administrative expenses (note 10). 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. 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. In the main Irish Scheme, there are 16,736 members comprising 3,913 pensioners and 12,823 deferred members as at 31 December 2016. Within the deferred members, there are over 1,890 members who are currently employed by AIB Group; who had joined the Group prior to December 1997 and were not part of a hybrid pension arrangement. The hybrid pension arrangement was introduced in December 2007 and staff who joined from December 1997 had the option at that time to switch to the hybrid arrangement. Staff joining after December 2007 automatically joined the hybrid arrangement up until the defined benefit schemes closed on 31 December 2013. Over 8,330 members have benefits accrued from 2007 to 2012 under the hybrid arrangements. In addition, there are over 270 members of the EBS Defined Benefit Schemes who are currently employed by AIB Group. 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, together with the additional risk reserve requirements, 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 contributions amounting to € 80 million remaining at 31 December 2016. 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 2016 269 n o i t a m r o n f i l a r e n e G A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 270 Notes to the consolidated financial statements 12 Retirement benefits (continued) Funding of increases in pensions in payment for the defined benefit scheme The Board has determined that the funding of discretionary increases to pensions in payment is a decision to be made by the Board each year. A process, taking account of all relevant interests and factors has been implemented by the Board. These interests and factors include the advice of the Actuary; the interests of the members of the scheme; the interests of the employees; the Bank’s financial circumstances and ability to pay; the views of the Trustees; the Bank’s commercial interests and any competing obligations to the State. The Bank completed this process for 2017 and after carefully considering all the relevant interests and factors decided that funding of discretionary increases to pensions in payment was not appropriate for 2017. In accordance with the process as outlined, the Board will make its next decision on the funding of discretionary increases to pensions in payment for the Group’s main Irish schemes for 2018 in early 2018. The actuarial assumption for discretionary increases in pensions in payment has changed in line with the process outlined above from the long term inflation rate. This is reported as a remeasurement gain as part of changes to financial assumptions and included in ‘Other comprehensive income’ – see page 272 for further information. A sensitivity analysis demonstrating the impact on the schemes’ liabilities of a future discretionary increase to pensions in payment as at 31 December 2016 is as follows: Percentage Increase for one year Impact on schemes’ liabilities % 0.0 0.5 1.0 € m – 12 23 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 170 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 2015 and 31 December 2014 respectively using Projected Unit Method. The next actuarial valuations of the Irish and UK schemes as at 30 June 2018 and 31 December 2017, will be completed by 31 March 2019 and 31 December 2018 respectively. Actuarial valuations are available for inspection by the members of the schemes. Contributions The total contributions to all the defined benefit pension schemes operated by the Group in the year ended 31 December 2017 are estimated to be € 64 million. Payments in the year to 31 December 2016 amounted to € 59 million, of which € 40 million related to the Irish scheme, as required by regulation, as part of the Scheme’s Minimum Funding Standard regulatory funding plan. 270 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 271 12 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 2016 and 2015. 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 2016 % 2015 % 0.00(1) 1.90 1.25(3) 3.20 2.70 3.20 1.45(2) 2.70 1.50 3.00 3.90 3.00 0.00 – 3.20 0.00 – 3.00 1.90 – 4.15 2.70 – 4.35 1.70 – 3.20 1.50 – 3.00 (1)Having taken actuarial and external legal advice, the Board has determined that the funding of discretionary increases in pensions in payment is a decision to be made by the Board annually. The assumption in relation to discretionary pension increases has, therefore, been removed in relation to the Group’s main Irish schemes. The assumption for 2015 was made prior to the Group undertaking this detailed review, including obtaining the actuarial and external legal advice. The Board has decided that there would be nil funding for discretionary increases in pensions in payment in the Group’s main Irish pension schemes in the coming year. [(2)Nil for the next 2 years and 1.50% per annum thereafter. (3)Due to the non-funding of pension increases, the inflation assumption applies to the revaluation of deferred members’ benefits up to their retirement date only, resulting in a reduction in both the duration to which it applies and the rate. Mortality assumptions The life expectancies underlying the value of the scheme liabilities for the Irish and UK schemes at 31 December 2016 and 2015 are shown in the following table: Retiring today age 63 Retiring in 10 years at age 63 Life expectancy - years Irish scheme 2016 2015 UK scheme 2016 2015 24.9 27.0 26.1 28.2 24.8 26.8 26.0 28.1 25.7 27.9 26.8 29.1 25.6 27.8 26.7 29.0 Males Females Males Females The mortality assumptions for the Irish and UK schemes were updated in 2015 to reflect emerging market experience. The table shows that a member of the Irish scheme retiring at age 63 on 31 December 2016 is assumed to live on average for 24.9 years for a male (25.7 years for the UK scheme) and 27 years for a female (27.9 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 2016 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 2016 271 n o i t a m r o n f i l a r e n e G A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 272 Notes to the consolidated financial statements 12 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 2016 and 2015: Defined Fair value benefit of scheme Asset ceiling/ assets minimum obligation At 1 January Included in profit or loss Past service cost 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 € m (6,343) € m 6,197 funding(1) € m – (178) – (178) 79 (10) (160) – 177 (1) 176 – – – interest income – 470 – Asset ceiling/minimum funding adjustments Translation adjustment on non-euro schemes Other Contributions by employer Benefits paid 198 107 – 261 261 (228) 242 59 (261) (202) (252) (252) At 31 December (6,153) 6,413 (252) 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 surplus/(deficit) 2016 Net defined benefit (liability) asset € m (146) Defined Fair value benefit of scheme assets obligation € m (7,071) € m 6,007 2015 Net defined benefit (liability) asset € m (1,064) – (1) (1) (2) 79 (10) (160) 470 (252) 127(2) (30) 97 59 – 59 8 159 7 166 (80) (56) (22) (158) 8 (1) (177) – (178) (60) (10) 863 – 158 (1) 157 – – – – 53 (87) 706 – 200 200 95 148 84 (199) (115) (1) (19) (1) (21) (60) (10) 863 53 846(2) 8 854 84 1 85 (6,343) 6,197 (146) 203 19 222 (293) (55) (20) (368) (146) Impact of changes in actuarial assumptions included in ‘Other comprehensive income’ before taxation € m Discount rates: (Irish schemes – € 840 million; UK scheme – € 335 million; Other – € 2 million) Pensions in payment assumptions (€ 1,017 million); asset ceiling/minimum funding (negative € 252 million) Return on scheme assets excluding interest income Other Total (1,177) 765 470 69 127(2) (1)In recognising the net surplus or deficit of a pension scheme, the funded status of each scheme is adjusted to reflect any minimum funding requirement and any ceiling on the amount that the sponsor has a right to recover from a scheme. (2)After tax € 103 million (2015: € 743 million) see page 277. 272 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 273 12 Retirement benefits (continued) Scheme assets The following table sets out an analysis of the scheme assets 31 December 2016 and 2015: 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 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 Total investment funds Mortgage backed securities(2) Structured debt Fair value of scheme assets (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 2016 2016 € m 344 73 198 160 174 342 156 190 178 53 49 1,573 11 1,584 1,055 1,078 2,133 54 2,187 304 (26) 24 333 9 94 95 36 810 222 1 1,624 1,624 391 5 6,413 2015 € m 169 62 206 166 91 330 172 178 169 53 47 1,474 10 1,484 1,021 1,031 2,052 53 2,105 255 14 14 421 23 91 95 36 728 318 1 1,727 1,727 434 9 6,197 273 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 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 274 Notes to the consolidated financial statements 12 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 at 31 December 2016. 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 (198) 57 120 212 (54) (120) (66) 66 41 71 (62) (41) Maturity of the defined benefit obligation The weighted average duration of the Irish scheme at 31 December 2016 is 19 years and of the UK scheme at 31 December 2016 is 20 years. Asset-liability matching strategies The Irish Scheme continues to review its investment strategies which includes 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 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 269, 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. The asset backed funding plan grants the UK Scheme annual payments from 1 April 2016 to 31 December 2032. Based on the results of the December 2014 valuation, the asset backed funding plan will pay the UK Scheme £19.1 million in 2017 (2016: £ 14 million). 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 47). 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 2016, the Group contributed € 6 million (2015: € 6 million) towards insuring this benefit. This amount is included in administrative expenses (note 10). 274 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 275 13 Writeback of provisions for impairment on financial investments available for sale Debt securities (note 27) 2016 € m 2 2 2015 € m – – 14 Profit on disposal of property The sale of properties surplus to requirements in 2016 gave rise to profit on disposal of Nil (2015: € 3 million). 15 Profit on disposal of business Profit on disposal of business amounted to € 1 million (2015: Nil). 16 Auditors’ fees The disclosure of Auditors’ fees is in accordance with Section 322 of the Companies Act 2014. This mandates disclosure of fees paid/payable to the Group Auditors only (Deloitte Ireland) for services to the parent company in the categories set out below. All years presented are on that basis. Auditors’ fees (excluding VAT): Audit of Group financial statements Other assurance services Other non-audit services Taxation advisory services 2016 € m 2.0 0.7 1.9 – 4.6 2015 € m 3.4(1) 4.7(2) 2.1 – 10.2 Included in the above are amounts paid to the Group Auditors, for services provided to other Group companies: – – – audit € 0.3 million (2015: € 0.3 million); other assurance services € 0.08 million (2015: € 0.07 million); and other non–audit services € 0.15 million (2015 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 Auditors, 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 Board Audit Committee of the engagement of the Auditors for non-audit work. The Board Audit Committee has reviewed the level of non-audit services fees and is satisfied that it has not affected the independence of the Auditors. It is Group policy to subject all large consultancy assignments to competitive tender, where appropriate. The following table shows fees paid to overseas auditors (excluding Deloitte Ireland): Auditors’ fees excluding Deloitte Ireland (excluding VAT)(3) (1)Includes fee related to the audit of the Half-Yearly Financial Report 2015. 2016 € m 0.54 2015 € m 1.9 (2)In anticipation of an application to list on the Main Securities Market of the Irish Stock Exchange, Deloitte have been appointed as Reporting Accountant for the Group. Work commenced during 2015 and fees paid are included in “Other assurance services”. (3)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 2016, € 0.15 million (2015: € 1.3 million) was paid to Deloitte LLP as this review has continued. Allied Irish Banks, p.l.c. Annual Financial Report 2016 275 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 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 276 Notes to the consolidated financial statements 17 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 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 Impact of change in tax legislation on deferred tax asset(1) Total tax charge for the year Effective tax rate 2016 € m 2015 € m (98) – (98) (32) 16 (16) (114) (28) 5 (97) (92) (212) (326) (12) 1 (11) (8) (2) (10) (21) (26) (11) (234) (242) (513) (534) 19.4% 27.9% Factors affecting the effective tax rate The following table explains the difference between the tax charge that would result from applying the standard corporation tax rate in Ireland of 12.5% and the actual tax charge for the year: Profit before tax from continuing operations Tax charge at standard corporation tax rate in Ireland of 12.5% Effects of: Foreign profits taxed at other rates Expenses not deductible for tax purposes Exempted income, income at reduced rates and tax credits Share of results of associates shown post tax in the income statement 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 prior years Impact of change in tax legislation on deferred tax asset(1) Tax charge (1)See note 32 ‘Deferred taxation’. 2016 % € m 1,682 2015 % € m 1,914 (210) 12.5 (239) 12.5 (15) (23) 1 3 (63) 60 2 (10) 21 (92) 0.9 1.4 (0.1) (0.2) 3.7 (3.6) (0.1) 0.6 (1.2) 5.5 (326) 19.4 (21) (20) 1 4 (25) 43 – (23) (12) (242) (534) 1.1 1.1 (0.1) (0.2) 1.3 (2.2) – 1.2 0.6 12.6 27.9 276 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 277 17 Taxation (continued) Analysis of selected other comprehensive income Continuing operations Property revaluation reserves Net change in property revaluation reserves Total Retirement benefit schemes Actuarial 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 taken to other comprehensive income Total Available for sale securities reserves Fair value (gains) transferred to income statement Fair value gains taken to other comprehensive income Total Gross € m Tax € m 2016 Net € m Gross € m Tax € m 2015 Net € m – – (1) (1) (1) (1) 127 127 (24) (24) 103 103 (168) (168) (116) 235 119 (362) (116) (478) – – (168) (168) 15 (28) (13) 99 20 119 (101) 207 106 (263) (96) (359) – – 846 846 31 31 (59) 30 (29) – – – – (103) (103) 743 743 – – 7 (7) – 31 31 (52) 23 (29) (166) 17 (149) 352 186 (100) (83) 252 103 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 2016 277 n o i t a m r o n f i l a r e n e G A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 278 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 attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue, excluding treasury shares and own shares held, as appropriate. The calculation of the weighted average number of ordinary shares in issue for the year ended 31 December 2015 was adjusted for the share consolidation which occurred on 21 December 2015 with a consequent adjustment to the calculation of diluted earnings per share in respect of the number of ordinary shares that would be issuable on conversion of the contingent capital notes (“CCNs”). On 17 December 2015, AIB issued 155,147 million ordinary shares of € 0.0025 each nominal value to the NTMA (for the ISIF) on conversion of 2,140 million 2009 Preference Shares (see note 40). The diluted earnings per share is based on the profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue, excluding treasury shares and own shares held as appropriate, adjusted for the effect of dilutive potential ordinary shares. (a) Basic Profit attributable to equity holders of the parent from continuing operations Distribution on other equity interests Dividends on the 2009 Preference Shares Profit attributable to ordinary shareholders of the parent from continuing operations Weighted average number of ordinary shares in issue during the year Earnings per share from continuing operations – basic (b) Diluted – adjusted Profit attributable to ordinary shareholders of the parent from continuing operations (note 18 (a)) Dilutive effect of CCN’s interest charge Adjusted profit attributable to ordinary shareholders of the parent from continuing operations Weighted average number of ordinary shares in issue during the year Dilutive effect of CCNs Potential weighted average number of shares Earnings per share from continuing operations - diluted 2016 € m 1,356 (37) – 1,319 2015 € m 1,380 – (446)(1) 934 Number of shares (millions) 2,714.4 2,119.3 EUR 48.6c EUR 44.0c 2016 € m 1,319 157 1,476 2015 € m 934 252 1,186 Number of shares (millions) 2,714.4 365.5 3,079.9 2,119.3 640.0 2,759.3 EUR 47.9c EUR 43.0c (1)Includes the annual dividend to 13 May 2015 and a dividend paid for the period from 13 May 2015 to 17 December 2015 i.e. date of conversion/ redemption of the 2009 Preference Shares. – In July 2011, AIB issued € 1.6 billion in contingent capital notes (“CCNs”). These notes were mandatorily redeemable and convertible into 640 million new AIB ordinary shares, (note 40), if the Core Tier 1 capital ratio fell below 8.25%. These incremental shares have been included in calculating the diluted per share amounts in both 2016 and 2015 because they were potentially dilutive. On 28 July 2016, AIB redeemed the CCNs at their nominal amount. Accordingly, in computing diluted earnings per share – adjusted for 2016, the amount convertible to AIB ordinary shares has been included on a time apportioned basis up to the date of redemption. The ordinary shares are included in the weighted average number of shares on a time apportioned basis. 278 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 279 19 Distributions on equity shares and other equity interests Other equity interests – distribution 2009 Preference shares – dividends paid 2016 € m 37 – 37 2015 € m – 446 446 A distribution amounting to € 37 million was paid on the Additional Tier 1 securities during 2016 (note 42). A dividend amounting to € 280 million was paid in May 2015 on the 2009 Preference shares and a dividend amounting to € 166 million was paid in December 2015 on the conversion/redemption of the 2009 Preference shares. No dividends were paid on the ordinary shares in either 2016 or 2015. Final 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 declared by the Board of Directors and paid in the period. Dividends declared after the balance sheet date are disclosed in note 58. 20 Disposal groups and non-current assets held for sale Total disposal groups and non-current assets held for sale 2016 € m 11 2015 € m 8 Disposal groups and non-current assets held for sale comprise property surplus to requirements and repossessed assets. 21 Trading portfolio financial assets Equity shares Of which unlisted: Equity shares 2016 € m 2015 € m 1 1 1 1 1 1 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 2016 279 n o i t a m r o n f i l a r e n e G A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 280 Notes to the consolidated financial statements 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. 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 notional principal amount of interest rate, exchange rate, equity and credit derivative contracts together with the positive and negative fair values attaching to those contracts at 31 December 2016 and 2015: 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 2016 € m 2015 € m 64,882 1,692 (1,485) 4,968 73 (79) 1,036 49 (45) – – – 70,886 1,814 (1,609) 70,300 1,540 (1,622) 6,805 67 (64) 2,398 91 (89) 340 – (6) 79,843 1,698 (1,781) (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)At 31 December 2016, 64% of fair value relates to exposures to banks (2015: 69%). 280 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 281 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 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 2016 Total € m < 1 year € m 1 < 5 years € m 5 years + € m 2015 Total € m Residual maturity Notional principal amount 21,833 27,243 Positive fair value 350 470 21,810 994 70,886 1,814 23,196 34,912 158 659 21,735 881 79,843 1,698 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 2015 € m 2016 € m Positive fair value 2016 € m 2015 € m 68,605 2,007 274 70,886 77,071 2,428 344 79,843 1,334 460 20 1,814 1,273 402 23 1,698 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 2016 281 n o i t a m r o n f i l a r e n e G A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 282 Notes to the consolidated financial statements 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 interest 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 financial 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 2016 and 2015, are presented within this note. 282 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 283 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 at 31 December 2016 and 2015. A description of how the fair values of derivatives are determined is set out in note 49. Notional principal amount € m 2016 Fair values Assets Liabilities € m € m Notional principal amount € m 2015 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 bought and sold Total interest rate derivatives – OTC Interest rate derivatives – OTC – central clearing Interest rate swaps Total interest rate derivatives – OTC – central clearing Interest rate derivatives – exchange traded Interest rate futures bought and sold Total interest rate derivatives – exchange traded 10,387 455 613 11,455 1,470 1,470 2,182 2,182 614 52 1 667 10 10 1 1 (668) (50) (4) (722) (15) (15) – – 15,114 432 670 16,216 100 100 2,184 2,184 661 56 2 719 – – – – (716) (55) (3) (774) – – – – Total interest rate derivatives 15,107 678 (737) 18,500 719 (774) Foreign exchange derivatives – OTC Foreign exchange contracts Currency options bought and sold Total foreign exchange derivatives Equity derivatives – OTC Equity warrants Equity index options bought and sold Total equity derivatives Credit derivatives – OTC Credit derivatives Total credit derivatives 4,961 7 4,968 2 1,034 1,036 – – 73 – 73 2 47 49 – – (79) – (79) – (45) (45) – – 6,736 69 6,805 2 2,396 2,398 340 340 66 1 67 2 89 91 – – (64) – (64) – (89) (89) (6) (6) Total derivatives held for trading 21,111 800 (861) 28,043 877 (933) 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 2016 283 n o i t a m r o n f i l a r e n e G A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 284 Notes to the consolidated financial statements 22 Derivative financial instruments (continued) Notional principal amount € m 2016 Fair values Assets Liabilities € m € m Notional principal amount € m 2015 Fair values Assets Liabilities € m € m Derivatives held for hedging Derivatives designated as fair value hedges – OTC Interest rate swaps 14,523 227 (387) 16,503 321 (424) Total derivatives designated as fair value hedges – OTC 14,523 227 (387) 16,503 321 (424) Derivatives designated as fair value hedges – OTC – central clearing Interest rate swaps Total interest rate fair value hedges – OTC – central clearing 1,218 1,218 Total derivatives designated as fair value hedges 15,741 Derivatives designated as cash flow hedges – OTC Interest rate swaps Cross currency interest rate swaps Total interest rate cash flow hedges – OTC Derivatives designated as cash flow hedges – OTC – central clearing Interest rate swaps Total interest rate cash flow hedges – OTC – central clearing Total derivatives designated as cash flow hedges Total derivatives held for hedging Total derivative financial instruments 24,704 2,589 27,293 6,741 6,741 34,034 49,775 70,886 23 23 250 619 130 749 15 15 764 1,014 1,814 (2) (2) – – – – – – (389) 16,503 321 (424) (254) (61) (315) (44) (44) (359) (748) 32,872 2,371 35,243 54 54 35,297 51,800 475 24 499 1 1 500 821 (319) (105) (424) – – (424) (848) (1,609) 79,843 1,698 (1,781) 284 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 285 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 35 66 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 19 51 65 72 169 52 Within 1 year € m 27 5 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 26 12 155 44 233 63 2016 Total € m 288 241 2015 Total € m 441 124 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 35 85 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 19 68 65 94 169 64 Within 1 year € m 27 29 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 26 31 155 78 233 84 2016 Total € m 288 311 2015 Total € m 441 222 For AIB Group, the ineffectiveness reflected in the income statement that arose from cash flow hedges at 31 December 2016 is Nil (2015: Nil). 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 in respect of cash flow hedges at 31 December 2016 was a gain of € 106 million (2015: a charge of € 29 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 49. The net mark to market on fair value hedging derivatives, excluding accrual and risk adjustments at 31 December 2016 is negative € 179 million (2015: negative € 147 million) and the net mark to market on the related hedged items at 31 December 2016 is positive € 176 million (2015: positive € 146 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 44. Allied Irish Banks, p.l.c. Annual Financial Report 2016 285 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 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 286 Notes to the consolidated financial statements 23 Loans and receivables to banks Funds placed with central banks Funds placed with other banks Amounts include: Reverse repurchase agreements Loans and receivables to banks by geographical area(1) Republic of Ireland United Kingdom United States of America 2016 € m 587 812 1,399 2015 € m 779 1,560 2,339 – 648 2016 € m 269 1,127 3 1,399 2015 € m 1,030 1,305 4 2,339 (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 € 494 million (2015: € 475 million) placed with derivative counterparties in relation to net derivative positions and placed with repurchase agreement counterparties (note 44). There were no reverse repurchase agreements outstanding at 31 December 2016. Under reverse repurchase agreements, the Group accepted collateral that it was permitted to sell or repledge in the absence of default by the owner of the collateral. The collateral received consisted of non-government securities (bank bonds) with a fair value of Nil (2015: € 737 million). The fair value of collateral sold or repledged amounted to Nil (2015: € 43 million). These transactions were conducted under terms that are usual and customary to standard reverse repurchase agreements. 286 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 287 24 Loans and receivables to customers Loans and receivables to customers Reverse repurchase agreements Amounts receivable under finance leases and hire purchase contracts (see below) Unquoted debt securities Provisions for impairment (note 25) Of which repayable on demand or at short notice Amounts include: Due from associated undertakings 2016 € m 63,975 – 1,173 80 (4,589) 60,639 2015 € m 68,578 226 1,049 219 (6,832) 63,240 11,112 15,270 – – The unwind of the discount on the carrying amount of impaired loans amounted to € 140 million ( 2015: € 244 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 Nil (2015: € 222 million) 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 include cash collateral amounting to € 11 million (2015: € 73 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’. Amounts receivable under finance leases and hire purchase contracts The following balances principally comprise of leasing arrangements and hire purchase agreements 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 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 (note 25). 2016 € m 472 757 21 1,250 (81) 4 1,173 457 698 18 2015 € m 447 653 14 1,114 (69) 4 1,049 434 604 11 1,173 1,049 27 668 58 593 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 2016 287 n o i t a m r o n f i l a r e n e G A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 288 Notes to the consolidated financial statements 25 Provisions for impairment on loans and receivables The following table shows provisions for impairment on loans and receivables. Further information on provisions for impairment is disclosed in the ‘Risk management’ section of this report. At 1 January Exchange translation adjustments Credit to income statement – customers 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 customers (note 24) 2016 € m 6,832 (130) (294) (1,829) – 10 4,589 4,047 542 4,589 4,589 4,589 2015 € m 12,406 131 (925) (4,593) (195) 8 6,832 6,158 674 6,832 6,832 6,832 26 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, subject to a 0% floor. The bonds were issued on 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 Acceleration/re-estimation of the timing of cash flows At 31 December 2016 € m 5,616 11 (3,838) 10 1,799 2015 € m 9,423 21 (3,834) 6 5,616 On initial recognition of the NAMA senior bonds, AIB made certain assumptions as to the timing of expected repayments. The assumptions underpinning the repayments and their timing are subject to continuing review. Accordingly, in 2016, a gain of € 10 million has been recognised following the acceleration of repayments by NAMA (2015: a gain of € 6 million). These gains were accounted for as adjustments to the carrying value of the bonds and were reflected in ‘Other operating income’. The estimated fair value of the bonds at 31 December 2016 is € 1,807 million (2015: € 5,626 million). The nominal value of the bonds is € 1,805 million (2015: € 5,643 million). Whilst these bonds do not have an external credit rating, the Group has attributed to them a rating of A (2015: A–) i.e. the external rating of the Sovereign. At 31 December 2016, € 729 million (2015: € 1,257 million) of NAMA senior bonds were pledged to central banks and banks (note 33). 288 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 289 27 Financial investments available for sale The following table sets out at 31 December 2016 and 2015, 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 Fair value € m 5,114 2,706 230 1,719 433 12 4,551 47 20 14,832 466 139 605 Fair value € m 5,406 3,033 245 2,008 328 1 4,600 30 57 15,708 432 349 781 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 Euro corporate 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 Collateralised mortgage obligations Other asset backed securities Euro bank securities Euro corporate 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 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 (91) 662 (52) (5) (57) 367 22 389 2016 Net after tax € m 390 124 6 55 (4) – 88 – 3 2015 Net after tax € m 514 120 5 68 (2) – 64 – 1 (55) (18) (1) (8) 4 – (13) – – (73) (17) (1) (10) 1 – (9) – – (109) 770 (48) (98) (146) 337 211 548 458 148 8 64 – – 102 – 3 783 419 29 448 (13) (6) (1) (1) (8) – (1) – – (30) – (2) (2) 445 142 7 63 (8) – 101 – 3 753 419 27 446 587 140 7 78 – – 81 – 3 896 385 311 696 – (3) (1) – (3) – (8) – (2) (17) – (2) (2) 587 137 6 78 (3) – 73 – 1 879 385 309 694 15,437 1,231 (32) 1,199 (148) 1,051 Unrealised gross gains € m Unrealised gross losses € m Net unrealised gains/ (losses) € m Tax effect € m 16,489 1,592 (19) 1,573 (255) 1,318 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 2016 289 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 290 Notes to the consolidated financial statements Debt securities € m Equity securities € m 2015 Total € m 27 Financial investments available for sale (continued) Analysis of movements in financial investments available for sale At 1 January Exchange translation adjustments Purchases/acquisitions Sales/disposals Maturities IAS 39 reclassifications out(1) (note 28) Writeback of provisions for impairment Amortisation of discounts net of premiums Movement in unrealised gains/(losses) At 31 December Of which: Listed Unlisted Debt securities € m Equity securities € m 15,708 (1) 2,463 (3,100) (93) – 2 (110) (37) 14,832 14,832 – 14,832 781 – 79 (277) – – – – 22 605 – 605 605 2016 Total € m 16,489 (1) 2,542 (3,377) (93) – 2 (110) (15) 19,772 27 4,257 (4,296) (323) (3,487) – (97) (145) 15,437 15,708 14,832 605 15,437 15,708 – 15,708 413 20,185 – 13 (8) – – – – 363 781 – 781 781 27 4,270 (4,304) (323) (3,487) – (97) 218 16,489 15,708 781 16,489 (1)Irish Government securities with a carrying value of € 3,487 million were reclassified from financial investments available for sale to financial investments held to maturity in 2015. 290 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 291 27 Financial investments available for sale (continued) The following table sets out at 31 December 2016 and 2015, 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 Irish Government securities Euro government securities Non Euro government securities Supranational banks and government agencies Collateralised mortgage obligations Euro bank securities Total debt securities Equity securities Equity securities – other Total 286 294 30 75 182 152 1,019 6 1,025 – – – – 229 – 229 16 245 Investments with unrealised losses of less than 12 months € m Investments with unrealised losses of more than 12 months € m Debt securities Euro government securities Non Euro government securities Collateralised mortgage obligations Euro bank securities Non Euro corporate securities Total debt securities Equity securities Equity securities – other Total 471 43 241 1,241 – 1,996 5 2,001 – – 65 – 1 66 18 84 Fair value Total € m 286 294 30 75 411 152 1,248 22 1,270 Fair value Total € m 471 43 306 1,241 1 2,062 23 2,085 Unrealised losses of less than 12 months € m (13) (6) (1) (1) (4) (1) (26) – (26) Unrealised losses of less than 12 months € m (3) (1) (2) (8) – (14) – (14) 2016 Unrealised losses Total Unrealised losses of more than 12 months € m € m (13) (6) (1) (1) (8) (1) (30) (2) (32) € m (3) (1) (3) (8) (2) (17) (2) (19) – – – – (4) – (4) (2) (6) – – (1) – (2) (3) (2) (5) 2015 Unrealised losses Total Unrealised losses of more than 12 months € m Available for sale financial investments with unrealised losses have been assessed for impairment based on the credit risk profile of the counterparties involved. A writeback of impairment losses of € 2 million on debt securities (2015: Nil) has been recognised as set out in note 13. 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 2016 291 n o i t a m r o n f i l a r e n e G A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 292 Notes to the consolidated financial statements 28 Financial investments held to maturity Government bonds Total financial investments held to maturity Analysis of movements in financial investments held to maturity At 1 January IAS 39 reclassifications in 2015 (note 27) Amortisation of fair value gain At 31 December 2016 € m 3,356 3,356 2016 € m 3,483 – (127) 3,356 2015 € m 3,483 3,483 2015 € m – 3,487 (4) 3,483 Following a review of the Group’s investment strategy, a decision was taken to reclassify a portfolio of Irish Government securities to held to maturity from the available for sale asset portfolio. Government bonds with a fair value of € 3,487 million were reclassified from available for sale to held to maturity in 2015. The reclassification reflects the Group’s positive intention and ability to hold these securities to maturity. On the date of reclassification, the accumulated fair value gain held in other comprehensive income was € 549 million. This unrealised gain is being amortised to interest income using the effective income method over the remaining life of the bonds. Financial investments held to maturity are listed on a recognised stock exchange. Their maturity profile is set out in ‘Risk management’ 3.3 Liquidity risk. 29 Interests in associated undertakings Included in the income statement is the contribution net of tax from investments in associated undertakings as follows: Income statement Share of results of associated undertakings(1) Reversal of impairment of associated undertakings(2) Share of net assets including goodwill At 1 January Income for the year Dividends received from associates(3) Reversal of impairment of associated undertakings At 31 December(4) Disclosed in the statement of financial position within: Interests in associated undertakings Of which listed on a recognised stock exchange 2016 € m 27 8 35 2016 € m 70 27 (40) 8 65 65 – 2015 € m 25 – 25 2015 € m 69 25 (24) – 70 70 – (1)Includes profit: AIB Merchant Services € 22 million (2015: € 21 million); Aviva Undershaft Five Limited € 5 million (2015: € 4 million); and other associates Nil (2015: Nil). (2)Reversal of impairment of associated company: Aviva Undershaft Five Limited € 8 million (2015: Nil). (3)Includes dividends received from: AIB Merchant Services € 16 million (2015: € 19 million); Aviva Undershaft Five Limited € 24 million (2015: € 4 million). (4)Includes the Group’s investments in AIB Merchant Services and Aviva Undershaft Five Limited. Aviva Undershaft Five Limited previously known as Aviva Health Group Ireland Limited, with a carrying value of € 2 million, is in the process of being liquidated at 31 December 2016. 292 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 293 29 Interests in associated undertakings (continued) The following is the principal associate company of the Group at 31 December 2016 and 2015: Name of associate Principal activity Place of incorporation Proportion of ownership and operation interest and voting power held by the Group at 2015 % 2016 % Zolter Services d.a.c. 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 Sections 316 and 348 of the Companies Act 2014 and the European Communities (Credit Institutions: Financial Statements) Regulations 2015, 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 at 31 December 2016 or 2015. 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 2016 293 n o i t a m r o n f i l a r e n e G A10 Notes 3-30 APR 2016 pages 251-286:Layout 1 10/03/2017 20:05 Page 294 Notes to the consolidated financial statements 30 Intangible assets Cost At 1 January Additions Transfers in/(out) Exchange translation adjustments At 31 December Amortisation/impairment At 1 January 2016 Amortisation for the year Impairment for the year Exchange translation adjustments At 31 December Carrying value at 31 December Cost At 1 January Additions Transfers in/(out) Amounts written off (1) Exchange translation adjustments At 31 December Amortisation/impairment At 1 January Amortisation for the year Impairment for the year Amounts written off(1) Exchange translation adjustments At 31 December Carrying value at 31 December Software externally purchased € m Software Software internally under generated construction € m € m Other € m 293 18 – – 311 266 13 8 – 287 24 479 41 61 (1) 580 337 42 3 (1) 381 199 120 114 (61) – 173 – – 4 – 4 169 3 – – – 3 3 – – – 3 – Software externally purchased € m Software internally generated € m Software under construction € m Other € m 286 15 – (8) – 293 264 10 – (8) – 266 27 442 47 14 (25) 1 479 333 29 – (25) – 337 142 40 94 (14) – – 120 – – – – – – 120 3 – – – – 3 3 – – – – 3 – 2016 Total € m 895 173 – (1) 1,067 606 55 15 (1) 675 392 2015 Total € m 771 156 – (33) 1 895 600 39 – (33) – 606 289 (1)Relates to assets which are no longer in use with a Nil carrying value. Future capital expenditure in relation to both intangible assets and property, plant and equipment is set out in note 52. 294 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 295 31 Property, plant and equipment Cost At 1 January Transfers in/(out) Additions Disposals Exchange translation adjustments At 31 December Depreciation/impairment At 1 January Transfers in/(out) Depreciation charge for the year Disposals Exchange translation adjustments At 31 December Carrying value at 31 December Cost At 1 January Transfers in/(out) Additions Disposals Amounts written off(1) Exchange translation adjustments At 31 December Depreciation/impairment At 1 January Depreciation charge for the year Disposals Amounts written off(1) Exchange translation adjustments At 31 December Carrying value at 31 December Freehold € m 217 3 1 – (4) 217 73 (4) 6 – (3) 72 145 Property Long Leasehold leasehold under 50 years € m € m 91 2 – – (1) 92 34 2 2 – (1) 37 55 121 7 6 – (2) 132 82 – 7 – (2) 87 45 Freehold € m Property Long leasehold € m Leasehold under 50 years € m 174 1 41 – – 1 217 68 4 – – 1 73 144 88 1 2 – – – 91 32 2 – – – 34 57 119 2 5 – (6) 1 121 80 7 – (6) 1 82 39 Equipment € m 491 4 35 (1) (5) 524 412 2 24 (1) (4) 433 91 Equipment € m 473 1 19 (2) (2) 2 491 392 22 (2) (2) 2 412 79 Assets under construction € m 25 (16) 13 – (1) 21 – – – – – – 21 Assets under construction € m 8 (5) 22 – – – 25 – – – – – – 25 2016 Total 945 – 55 (1) (13) 986 601 – 39 (1) (10) 629 357 2015 Total € m 862 – 89 (2) (8) 4 945 572 35 (2) (8) 4 601 344 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)Relates to assets which are no longer in use with a Nil carrying value. The carrying value of property occupied by the Group for its own activities was € 242 million (2015: € 237 million), excluding those held as disposal groups and non-current assets held for sale. Property leased to others by AIB Group had a carrying value of € 3 million (2015: € 3 million). Future capital expenditure in relation to both property plant and equipment and intangible assets is set out in note 52. 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 2016 295 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 296 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 Other Total gross deferred tax assets Deferred tax liabilities: Cash flow hedges Retirement benefits Amortised income on loans Assets used in business Available for sale securities Other Total gross deferred tax liabilities Net deferred tax assets Represented on the statement of financial position as follows: Deferred tax assets Deferred tax liabilities 2016 € m – 27 6 3,050 22 3,105 (67) (40) (12) (12) (161) (66) (358) 2015 € m 1 15 9 3,201 50 3,276 (54) – (18) (14) (280) (13) (379) 2,747 2,897 2,828 (81) 2,747 2,897 – 2,897 For each of the years ended 31 December 2016 and 2015, 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 17) At 31 December 2016 € m 2,897 (19) 81 (212) 2,747 2015 € m 3,576 20 (186) (513) 2,897 Comments on the basis of recognition of deferred tax assets on unused tax losses are included in note 2 ‘Critical accounting judgements and estimates’ on pages 257 to 259. Information on the regulatory capital treatment of deferred tax assets is included in ‘Principal risks and uncertainties’ on page 58. At 31 December 2016, recognised deferred tax assets on tax losses and other temporary differences, net of deferred tax liabilities, totalled € 2,747 million (2015: € 2,897 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 provisions for impairment on loans and receivables, amortised income, assets leased to customers, and assets used in the course of the business. Net deferred tax assets at 31 December 2016 of € 2,651 million (2015: € 2,722 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 assess the likelihood of its profits arising as being more likely than not. 296 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 297 32 Deferred taxation (continued) With effect from 1 April 2015, legislation was introduced in the UK whereby only 50% of a bank’s annual trading profits can be sheltered by unused tax losses arising before that date, accordingly, the Group’s UK deferred tax asset was reduced by € 242 million in 2015. Furthermore, in November 2015, UK legislation was enacted to reduce the UK corporation tax rate to 19% from April 2017 with a further reduction to 18% from April 2020. In addition, an 8% corporation tax surcharge was introduced which applies to banking profits from January 2016, subject to an annual exemption for the first £ 25 million of profits. Taxable profits for the purpose of the surcharge cannot be reduced by pre-2016 tax losses. Effective from 1 April 2016, UK legislation further reduced the amount of annual taxable profits a bank can shelter with unused tax losses arising before 1 April 2015 from 50% to 25% and resulted in a reduction of € 92 million in the UK deferred tax asset. In addition, the legislation provided that the UK corporation tax rate will reduce to 17% from 1 April 2020. These changes have been reflected in the carrying value of deferred tax assets and liabilities at 31 December 2016 and 2015. 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. The Group has not recognised deferred tax assets in respect of; Irish tax on unused tax losses of € 122 million (2015: € 305 million); overseas tax (UK and USA) on unused tax losses of € 3,315 million (2015: € 3,475 million); and foreign tax credits for Irish tax purposes of € 3 million (2015: € 3 million). Of these tax losses totalling € 3,437 million for which no deferred tax is recognised: € 33 million expire in 2032; € 42 million in 2033; € 27 million in 2034; and € 5 million in 2035. 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 (31 December 2015: Nil). Deferred tax recognised directly in equity amounted to Nil (31 December 2015: Nil). Analysis of income tax relating to total 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 gains 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 2016 Net amount attributable to owners of the parent € m 1,356 (168) 106 (359) 103 (1) € m 1,356 (168) 106 (359) 103 (1) 1,037 1,037 € m 1,682 (168) 119 (478) 127 – 1,282 € m (326) – (13) 119 (24) (1) (245) 1,282 (245) 1,037 1,037 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 2016 297 n o i t a m r o n f i l a r e n e G A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 298 Notes to the consolidated financial statements 32 Deferred taxation (continued) Analysis of income tax relating to total comprehensive income Gross Tax Net of tax 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 gains in retirement benefit schemes Total comprehensive income for the year Attributable to: Owners of the parent 2015 Net amount attributable to owners of the parent € m 1,380 31 (29) 103 743 € m 1,380 31 (29) 103 743 2,228 2,228 € m 1,914 31 (29) 186 846 2,948 € m (534) – – (83) (103) (720) 2,948 (720) 2,228 2,228 298 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 299 33 Deposits by central banks and banks Central banks Eurosystem refinancing operations(1) Other borrowings Banks Securities sold under agreements to repurchase Other borrowings – secured – unsecured Amounts include: Due to associated undertakings 2016 € m 1,900 12 1,912 4,973 150 697 5,820 7,732 2015 € m 2,900 50 2,950 10,153 350 410 10,913 13,863 – – (1)Eurosystem refinancing operations are credit facilities from the Eurosystem secured by a fixed charge over securities. Securities sold under agreements to repurchase (note 47) and Eurosystem refinancing operations, with the exception of € 1.9 billion funded through the ECB two year Targeted Long Term Refinancing Operation II (“TLTRO II”) mature within six months and are secured by Irish Government bonds, NAMA senior bonds, other marketable securities and eligible assets. These agreements are completed under market standard Global Master Repurchase Agreements. Repurchase agreements with ECB are completed under a Master Repurchase Agreement. In addition, the Group has granted a floating charge over certain residential mortgage pools, the drawings against which were Nil (2015: Nil). Deposits by central banks and banks include cash collateral of € 268 million (2015: € 182 million) received from derivative counterparties in relation to net derivative positions (note 44) and also from repurchase agreement counterparties. Financial assets pledged (a) Financial assets pledged under existing agreements to repurchase, for secured borrowings, and providing access to future funding facilities with central banks and banks are detailed in the following table: Central banks € m Total carrying value of financial assets pledged 3,293 Of which: Government securities(1) Other securities (1)Includes NAMA senior bonds. 498 2,795(2) Banks € m 5,239 3,891 1,348 2016 Total € m 8,532 4,389 4,143 Central banks € m 5,357 Banks € m 2015 Total € m 10,829 16,186 20 5,337(2) 8,364 2,465 8,384 7,802 (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) At 31 December 2015, the Group had securitised credit card receivables with a carrying value of € 292 million as described in note 47. Funding received from external investors was included above in ‘Other borrowings - secured’ and was secured on both existing and future credit card receivables. This securitisation structure was terminated in November 2016. 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 2016 299 n o i t a m r o n f i l a r e n e G A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 300 Notes to the consolidated financial statements 34 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 Amounts include: Due to associated undertakings 2016 € m 29,721 12,663 20,496 622 63,502 25,748 37,754 63,502 2015 € m 25,955 11,698 24,825 905 63,383 21,907 41,476 63,383 271 201 (1The Group pledged government available for sale securities with a fair value of € 220 million (2015: € 627 million) and non-government available for sale securities with a fair value of € 420 million (2015: € 302 million) as collateral for these facilities and providing access to future funding facilities (see note 44 for further information). Customer accounts include cash collateral of € 60 million received from derivative counterparties in relation to net derivative positions (note 44). At 31 December 2016, the Group’s five largest customer deposits amounted to 3% (2015: 5%) of total customer accounts. 35 Trading portfolio financial liabilities Debt securities: Government securities For contractual residual maturity see ‘Risk management’ – 3.4 Liquidity risk. 36 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 2016 € m – – 2016 € m 1,000 5,733 6,733 147 6,880 2015 € m 86 86 2015 € m 1,555 5,346 6,901 100 7,001 Debt securities issued during the year amounted to € 1,389 million (2015: € 3,522 million) of which: € 1,000 million relates to a covered bond issuance (2015: € 1,500 million); Nil relates to an EMTN bond issuance (2015: € 500 million) with the balance relating to issuances under the short-term commercial paper programme. Debt securities matured or repurchased amounted to € 1,509 million (2015: € 4,397 million) of which € 9 million (2015: € 129 million) related to securities repurchased as part of a debt buyback programme. 37 Other liabilities Notes in circulation Items in transit Creditors Fair value of hedged liability positions Other 300 2016 € m 366 122 10 146 329 973 2015 € m 425 163 10 203 307 1,108 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 301 38 Provisions for liabilities and commitments At 1 January Transfers in Exchange translation adjustments Charged to income statement Released to income statement Provisions utilised At 31 December Liabilities and charges € m 49 – – 2(4) (4)(4) – 47 NAMA(1) provisions Onerous(2) contracts Legal claims € m 39 (12) – 14(1) (31)(1) (8) 2 € m € m 13 – (1) 4 (2) (2) 12 32 – (1) 6 (4) (1) 32 provisions Other(3) Voluntary severance scheme € m € m 249 – (6) 56 (15) (131) 153 – – – – – – – 2016 Total € m 382 (12) (8) 82 (56) (142) 246(5) Liabilities and charges NAMA(1) provisions Onerous(2) contracts Legal claims Other(3) provisions 31 December 2015 Total Voluntary severance scheme € m 60 – – 11(4) (22)(4) – 49 € m 33 14 – 7(1) (12)(1) (3) 39 € m 51 – 3 – (11) (30) 13 € m 32 – – 4 (3) (1) 32 € m 81 – 4 201 (9) (28) 249 € m 1 – – 4 – (5) – € m 258 14 7 227 (57) (67) 382(5) At 1 January Transfers in Exchange translation adjustments Charged to income statement Released to income statement Provisions utilised At 31 December Provisions for customer redress and related matters (included in ‘Other provisions’) In December 2015, the Central Bank of Ireland (“CBI”), requested the Irish banking industry, including AIB, to conduct a broad examination of tracker mortgage related issues, comprising of a review of mortgage loan books (including both PDH and Buy-to-let properties and loans that have been redeemed and/or sold), to assess compliance with both contractual and regulatory requirements. In situations where customer detriment is identified from this examination, AIB is required to provide appropriate redress and compensation in line with the CBI ‘Principles for Redress’. At 31 December 2015, the Group had provided € 190 million for customer redress. This provision related to the expected outflow for compensation/refunds of interest to customers in respect of tracker mortgages where rates given to customers were either not in accordance with original contract terms or where the transparency of terms did not conform to that which a customer could reasonably expect. The provision covered various compensations and costs arising from this issue. Considerable progress was made throughout 2016 in identifying impacted customers and in calculating and making redress. To date € 93 million of the provision has been utilised covering both redress and related costs leaving a residual provision of € 97 million at 31 December 2016 (€ 40 million for customer redress and € 57 million for various ancillary external costs and other matters). Given that the grounds on which the provisions have been estimated could prejudice the position of the Group, further information as required by IAS 37 Provisions, Contingent Liabilities and Contingent Assets is not disclosed. (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 which are surplus to requirements. (3)Includes € 139 million (2015: € 232 million) provisions for customer restitution. These relate to redress provisions under the CBI “Principles for Redress” (see above), payment protection insurance in both Ireland and the UK, interest rate hedge products in the UK, credit card insurance, and other miscellaneous provisions. (4)Included in writeback of provisions for liabilities and commitments in income statement. (5)The total provisions for liabilities and commitments expected to be settled within one year amount to € 141 million (2015: € 290 million). Allied Irish Banks, p.l.c. Annual Financial Report 2016 301 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 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 302 Notes to the consolidated financial statements 39 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 Redemption Dated loan capital – European Medium Term Note Programme: € 750 million Subordinated Tier 2 Notes due 2025, Callable 2020 € 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 £ 1 million (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 2016 € m 2015 € m 1,600 (447) 447 1,600 (1,600) – 750 8 32 1 791 791 2016 € m 791 1,600 (447) 371 1,524 – 1,524 750 8 35 1 794 2,318 2015 € m 794 € 1.6bn Contingent Capital Tier 2 Notes due 2016 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 51 (f)). Interest was payable annually in arrears on the nominal value of the notes at a fixed rate of 10% per annum. The CCNs were unsecured and subordinated obligations of AIB. The notes matured on 28 July 2016 and were redeemed at their nominal value of € 1.6 billion. 302 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 303 39 Subordinated liabilities and other capital instruments (continued) 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. (a) € 750 million Subordinated Tier 2 Notes due 2025, Callable 2020 On 26 November 2015, AIB issued € 750 million Subordinated Tier 2 Notes due 2025, Callable 2020. These notes mature on 26 November 2025 but can be redeemed in whole, but not in part, at the option of AIB on the optional redemption date on 26 November 2020, subject to the approval of the Financial Regulator, with approval being conditional on meeting the requirements of the EU Capital Requirements Regulation. The notes bear interest on the outstanding nominal amount at a fixed rate of 4.125%, payable annually in arrears on 26 November each year. The interest rate will be reset on 26 November 2020 to Eur 5 year Mid Swap rate plus the initial margin of 395 basis points. (b) Other dated subordinated loan capital Following the liability management exercises in 2011 and the Subordinated Liabilities Order (“SLO”) in April 2011, residual balances remained on the dated loan capital instruments above. The SLO, which was effective from 22 April 2011, changed the terms of all of those outstanding dated loan agreements. 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. 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 2016 303 n o i t a m r o n f i l a r e n e G A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 304 Notes to the consolidated financial statements 40 Share capital Authorised Ordinary share capital Ordinary shares of € 0.625 each Issued Ordinary share capital Ordinary shares of € 0.625 each Number of shares m 2016 € m Number of shares m 2015 € m 4,000.0 2,500 4,000.0 2,500 2,714.4 1,696 2,714.4 1,696 2016 There were no movements in the ordinary share capital in the financial year to 31 December 2016. 2015 Capital reorganisation Ordinary shares and 2009 Preference shares Arising from, inter alia, a requirement to return State aid to the Irish Government in line with AIB’s obligations under the EU Restructuring Plan, to create a sound and sustainable capital base on which to grow its business and to meet regulatory requirements under CRD IV and the BRRD, AIB implemented a number of measures in order to reorganise its capital following resolutions passed at the EGM of shareholders held on 16 December 2015 (‘the EGM’). These measures impacted ordinary share capital, 2009 Preference Share capital, share premium and revenue reserves and are outlined below under the following key steps: – – 2009 Preference Share conversion; 2009 Preference Share redemption; – Ordinary share consolidation; and – Changes to authorised share capital. 2009 Preference Shares On 13 May 2009, AIB issued 3,500 million non-cumulative redeemable preference shares to the Minister for Finance for a subscription price of € 3.5 billion (nominal price of € 0.01 per share). The shares carried a fixed non-cumulative dividend at a rate of 8% per annum, payable annually in arrears at the discretion of AIB. On 13 May 2015, this dividend, amounting to € 280 million was paid in cash. Under the terms of the agreement with the Minister for Finance, these 2009 Preference Shares were redeemable at the option of AIB from distributable profits and/or the proceeds of an issue of shares constituting core tier 1 capital (now CET 1) which if redeemed more than five years after issue, at a price of € 1.25 per share i.e. a 25 per cent step up on the subscription price. On 20 November 2015, in connection with the Capital Reorganisation, the 2009 Preference Share Conversion and Redemption Agreement was made between AIB, the Minister for Finance and the NTMA and was approved at the EGM held on 16 December 2015. Under this agreement, AIB agreed to convert 2,140 million of the 2009 Preference Shares into ordinary shares at their subscription price of € 2,140 million plus a 25 per cent step up (€ 2,675 million in total). On 17 December 2015, in accordance with the terms of the 2009 Preference Shares in the Constitution of the Company, AIB redeemed the remaining 2009 Preference Shares (1,360 million shares) for cash at their subscription price of € 1,360 million plus the 25 per cent step up (total € 1,700 million). 304 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 305 40 Share capital (continued) 2009 Preference Share conversion For the purpose of converting € 2,675 million into ordinary shares, AIB and the Minister for Finance agreed a fair value of € 0.01724176 per € 0.0025 ordinary share. This required 155,146,574,363 ordinary shares to satisfy the conversion. In order to convert the 2009 Preference Shares of € 0.01 per share (paid up to € 1.00, inclusive of premium paid upon issue) into ordinary shares of € 0.0025 each, each converting preference share was sub-divided into four 2009 Preference Shares of € 0.0025 each which resulted in 8,560 million new ‘sub-divided Preference shares’ in issue. Each sub-divided Preference Share was re-designated as one ordinary share of € 0.0025 in part satisfaction for the conversion. This re-designation of the 2009 Preference Shares to ordinary shares amounted to € 21.4 million. In addition, bonus ordinary shares with a nominal value € 0.0025 were issued to the NTMA for the residual number of shares due on conversion. The number of bonus shares was calculated as the total entitlement in respect of converting shares i.e. 155,146,574,363 less the number of shares re-designated from 2009 Preference Shares to ordinary shares i.e. 146,586,574,363 shares. The bonus shares issue resulted in a transfer of the nominal value of each ordinary share issued from share premium to ordinary share capital which totalled € 366 million. The effective date for the 2009 Preference Share conversion was 17 December 2015. 2009 Preference Share redemption Immediately following the conversion on 17 December 2015 of 2,140 million of the 2009 Preference Shares into ordinary shares, AIB redeemed the remaining 1,360 million of the 2009 Preference Shares (nominal value of € 13.6 million) at a price equal to 125 per cent of the subscription price per share on issue. Total cost of redemption was € 1,700 million. This transaction was reflected as a reduction in revenue reserves and, in accordance with the Companies Act 2014, the nominal value of the shares redeemed was transferred from the share capital account to capital redemption reserves. Dividend paid on conversion/redemption A dividend for the period from the last dividend payment date of 13 May 2015 up to the date of conversion/redemption of the 2009 Preference Shares, amounting to € 166 million, was paid in cash to the NTMA (for the ISIF) on 17 December 2015. Ordinary share consolidation At 17 December 2015, following the issue of ordinary shares to the NTMA (for the ISIF) on conversion of the 2009 Preference Shares as outlined above, the total number of ordinary shares with a nominal value of €0.0025 per share in issue amounted to 678,585,019,800 (after deduction of 35,680,114 treasury shares which were cancelled on 17 December 2015 (note 41)). A Consolidation Resolution, passed at the EGM, resolved that all ordinary shares with a nominal value of € 0.0025 (‘existing ordinary shares’) be consolidated so that for every 250 shares held by a shareholder, that shareholder will hold one ‘new’ ordinary share with a nominal value of € 0.625 after the consolidation. In addition, where residual fractions remained following the division of a shareholder’s holding into ‘new ordinary shares’, the shareholding was rounded up by the allotment of new shares to shareholders by way of bonus issue to ensure that no fractions remained following consolidation. On 21 December 2015, AIB allotted 10,289,700 ordinary shares with a nominal value of € 0.0025 per share (total € 25,724) as bonus shares on the rounding up of shareholdings resulting in a transfer from share premium account to ordinary share capital. The total number of new shares of nominal value € 0.625 each arising from consolidation amounted to 2,714,381,238 (€ 1,696 million) which was effective on 21 December 2015. The rights attaching to the ‘new ordinary shares’ are identical in all respects to the ‘existing ordinary shareholders’ including voting and dividend rights and rights on a return of capital. Changes to authorised share capital All authorised but unissued 2009 Preference Shares and authorised but unissued sub-divided 2009 Preference Shares were cancelled following the conversion/redemption of the 2009 Preference Shares and the completion of the ordinary share consolidation. In addition, the authorised share capital of the Company was increased by the creation of such new ordinary shares of € 0.625 each as was necessary to result in the authorised share capital being 4,000 million shares (€ 2,500 million). Allied Irish Banks, p.l.c. Annual Financial Report 2016 305 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 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 306 Notes to the consolidated financial statements 40 Share capital (continued) Movements in share capital The following tables show the movements in share capital in the statement of financial position during the financial year: Issued share capital At 1 January: Ordinary shares Preference shares 2009 Preference Shares subdivision into € 0.0025 each nominal for conversion to ordinary shares 2009 Preference Shares redemption for cash Ordinary shares issued on conversion of 2009 Preference Shares Bonus ordinary shares issued on conversion of 2009 Preference Shares Consolidation of ordinary shares of nominal value € 0.0025 each into ordinary shares of nominal value € 0.625 each Cancellation of ordinary shares of nominal value € 0.0025 each At 31 December Of which: Ordinary shares 2009 Preference Shares Share premium At 1 January Bonus ordinary shares issued on conversion of 2009 Preference Shares At 31 December Structure of the Company’s share capital as at 31 December 2016 Class of share Ordinary share capital The following table shows the Group’s capital resources at 31 December 2016 and 2015: Capital resources Equity Contingent capital notes (note 39) Dated capital notes (note 39) Total capital resources 2016 € m 1,696 – 1,696 – – – – – – – 1,696 – – 1,696 2016 € m 1,386 – 1,386 2015 € m 1,309 35 1,344 (21) (14) (35) 21 366 1,696 (1,696) 1,696 1,696 – 1,696 2015 € m 1,752 (366) 1,386 Authorised share capital % Issued share capital % 100 100 2016 € m 13,148 – 791 13,939 2015 € m 12,148 1,524 794 14,466 306 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 307 41 Own shares Following approval by the Board on 17 December 2015, AIB cancelled all its outstanding treasury shares and in accordance with Section 106 of the Companies Act 2014, the nominal value of the shares cancelled, amounting to € 89,200, was transferred from the ordinary share capital account to the capital redemption reserve account. The balance on the treasury shares account was transferred to revenue reserves account. The company did not reissue any ordinary shares from its pool of treasury shares since 2008. 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 2016, 5,820 shares (2015: 5,820 shares) were held by trustees with a carrying value of € 23 million (2015: € 23 million), and a market value of € 0.029 million (2015: € 0.039 million). The carrying 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 2016 307 n o i t a m r o n f i l a r e n e G A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 308 Notes to the consolidated financial statements 42 Other equity interests At 1 January Additional Tier 1 securities issued Transaction costs(1) At 31 December (1)Taxation Nil. 2016 € m 494 – – 494 2015 € m – 500 (6) 494 Additional Tier 1 Perpetual Contingent Temporary Write-down Securities On 3 December 2015, as part of its capital reorganisation, AIB issued € 500 million nominal value of Additional Tier 1 Perpetual Contingent Temporary Write-down Securities (‘AT1s’). The securities, which are accounted for as equity in the statement of financial position, are included in AIB’s capital base as fully CRD IV compliant additional tier 1 capital on a fully loaded basis. Interest on the securities, at a fixed rate of 7.375% per annum, is payable semi-annually in arrears on 3 June and 3 December, commencing on 3 June 2016. On the first reset date on 3 December 2020, in the event that the securities are not redeemed, interest will be reset to the relevant 5 year rate plus a margin of 7.339%. AIB has sole and absolute discretion at all times to cancel (in whole or in part) any interest payment that would otherwise be payable on any interest payment date. In addition, there are certain limitations on the payment of interest if such payments are prohibited under Irish banking regulations or regulatory capital requirements, if AIB has insufficient reserves available for distribution or if AIB fails to satisfy the solvency condition as defined in the securities’ terms. Any interest not paid on an interest payment date by reason of the provisions as to cancellation of interest or by reason of the solvency condition set out in the terms and conditions, will not accumulate or be payable thereafter. The securities are perpetual securities with no fixed redemption date. AIB may, in its sole and full discretion, redeem all (but not some only) of the securities on the first call date or on any interest payment date thereafter at the prevailing principal amount together with accrued but unpaid interest. However, redemption is subject to the permission of the Single Supervisory Mechanism/Central Bank of Ireland who has set out certain conditions in relation to redemption, purchase, cancellation and modification of these securities. In addition, the securities are redeemable at the option of AIB for certain regulatory or tax reasons. The securities, which do not carry voting rights, rank pari passu with holders of other tier 1 instruments (excluding the Company’s ordinary shares) and with the holders of preference shares, if any, which have a preferential right to a return of assets in a winding-up of AIB. They rank ahead of the holders of ordinary share capital of the Company but junior to the claims of senior creditors. If the CET1 ratio of Allied Irish Banks p.l.c. or the Group at any time falls below 7% (a Trigger Event) and is not in winding-up, subject to certain conditions AIB may write down the AT1s by the lower of the amount necessary to generate sufficient common equity tier 1 capital to restore the CET1 ratio to 7% or the amount that would reduce the prevailing principal amount to zero. To the extent permitted, in order to comply with regulatory capital and other requirements, AIB may at its sole and full discretion reinstate any previously written down amount. 308 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 309 43 Capital reserves and capital redemption reserves Capital reserves At 1 January Transfer to revenue reserves: Anglo business transfer CCNs issuance (note 39) Capital contribution reserves € m Other capital reserves € m 1,382 178 (285) (76) (361) – – – 2016 Total € m 1,560 (285) (76) (361) Capital contribution reserves € m Other capital reserves € m 2015 Total € m 1,780 178 1,958 (285) (113) (398) – – – (285) (113) (398) At 31 December 1,021 178 1,199 1,382 178 1,560 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 ab in note 1. The transfers to revenue reserves relate to the capital contributions being deemed distributable. The capital contribution reserves which arose on the issue of the CCNs are now deemed to be fully distributable as the CCNs have been repaid in full. In addition, 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 capital 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)Transferred to the Ireland Strategic Investment Fund (“ISIF”) on 22 December 2014. Ownership of ISIF vests with the Minister for Finance and is controlled and managed by the NTMA. Capital redemption reserves At 1 January Transfer from 2009 Preference Share capital (note 40) At 31 December 2016 € m 14 – 14 2015 € m – 14 14 2015 On 17 December 2015, AIB redeemed 1,360 million of the 2009 Preference Shares (nominal value € 13.6 million) which was reflected as a transfer to the capital redemption reserve account from the 2009 Preference Share capital account in accordance with the Companies Act 2014 (note 40). On 17 December 2015, AIB cancelled its holding of treasury shares (note 41). This resulted in the transfer of the nominal value of shares cancelled (€ 89,200) from the ordinary share capital account to capital redemption 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 Allied Irish Banks, p.l.c. Annual Financial Report 2016 309 n o i t a m r o n f i l a r e n e G A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 310 Notes to the consolidated financial statements 44 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 € 971 million (2015: € 1,052 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 CSAs in place provide collateral for derivative contracts. At 31 December 2016, € 487 million (2015: € 514 million) of CSAs are included within financial assets and € 322 million ( 2015: € 201 million) of CSAs are included within financial liabilities. 310 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 311 44 Offsetting financial assets and financial liabilities (continued) The following table shows financial assets and financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements at 31 December 2016 and 2015: 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 1,316 350 1,666 – 1,316 (971) (322) (350) (350) – 1,316 – (971) – (322) 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 Related amounts not offset in the statement of financial position Financial collateral (including cash collateral) pledged € m Financial position instruments € m € m 2016 Net amount € m 23 – 23 2016 Net amount € m 5,323 (350) 4,973 (4,999) (12) (38) 622 1,468 7,413 – – (350) 622 1,468 7,063 (641) (971) (6,611) – (487) (499) (19) 10 (47) Financial assets Derivative financial instruments Loans and receivables to banks – Reverse repurchase agreements Note 22 23 Total Financial liabilities Note Deposits by central banks and banks – Securities sold under agreements to repurchase Customer accounts – Securities sold under agreements to repurchase Derivative financial instruments 33 34 22 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 2016 311 n o i t a m r o n f i l a r e n e G A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 312 Notes to the consolidated financial statements 44 Offsetting financial assets and financial liabilities (continued) Gross amounts of recognised financial liabilities offset in the statement of financial position € m – – – – Gross amounts of recognised financial assets € m 1,245 648 226 2,119 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 1,245 (1,052) (201) 648 (737) 226 2,119 (222) (2,011) – – (201) 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 2015 Net amount € m (8) (89) 4 (93) 2015 Net amount € m Financial assets Derivative financial instruments Loans and receivables to banks – Reverse repurchase agreements Loans and receivables to customers – Reverse repurchase agreements Note 22 23 24 Total Financial liabilities Note Deposits by central banks and banks – Securities sold under agreements to repurchase Customer accounts – 33 10,153 Securities sold under agreements to repurchase Derivative financial instruments 34 22 Total 905 1,605 12,663 – – – – 10,153 (10,571) (20) (438) 905 1,605 (928) (1,052) 12,663 (12,551) (1) (514) (535) (24) 39 (423) 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. 312 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 313 44 Offsetting financial assets and financial liabilities (continued) The following table reconciles 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 2016 and 2015: Net amounts of financial assets presented in the statement of financial position € m Line item in statement of financial position 1,316 Derivative financial instruments Carrying amount in statement of financial position € m 1,814 1,399 2016 Financial assets not in scope of offsetting disclosures € m 498 1,399 Loans and receivables to banks – – Loans and receivables to customers 60,639 60,639 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 2016 Financial liabilities not in scope of offsetting disclosures € m 4,973 Deposits by central banks and banks 7,732 2,759 622 1,468 Customer accounts Derivative financial instruments 63,502 1,609 62,880 141 Financial assets Derivative financial instruments Loans and receivables to banks – Reverse repurchase agreements 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 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 2016 313 n o i t a m r o n f i l a r e n e G A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 314 Notes to the consolidated financial statements 44 Offsetting financial assets and financial liabilities (continued) Net amounts of financial assets presented in the statement of financial position € m Line item in statement of financial position 1,245 Derivative financial instruments Financial assets Derivative financial instruments Loans and receivables to banks – Reverse repurchase agreements 648 Loans and receivables to banks Loans and receivables to customers – Carrying amount in statement of financial position € m 1,698 2,339 2015 Financial assets not in scope of offsetting disclosures € m 453 1,691 Reverse repurchase agreements 226 Loans and receivables to customers 63,240 63,014 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 2015 Financial liabilities not in scope of offsetting disclosures € m 10,153 Deposits by central banks and banks 13,863 3,710 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 1,605 Derivative financial instruments 905 Customer accounts 63,383 1,781 62,478 176 314 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 315 45 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 2016 € m 2015 € m 527 383 910 62 7,760 2,467 10,289 11,199 735 640 1,375 39 7,206 2,502 9,747 11,122 (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 2016 € m 661 145 104 910 2015 € m 673 544 158 2016 € m 8,540 1,744 5 1,375 10,289 2015 € m 8,030 1,710 7 9,747 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 Allied Irish Banks, p.l.c. Annual Financial Report 2016 315 n o i t a m r o n f i l a r e n e G A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 316 Notes to the consolidated financial statements 45 Memorandum items: contingent liabilities and commitments, and contingent assets (continued) The credit ratings of contingent liabilities and commitments as at 31 December 2016 and 2015 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 2016 € m 3,231 7,145 383 268 172 – 11,199 2015 € m 3,166 5,425 258 164 366 1,743 11,122 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 cash flows 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 38 and 47). (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. 316 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 317 45 Memorandum items: contingent liabilities and commitments, and contingent assets (continued) Participation in TARGET 2 – Ireland (continued) 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. 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. It has been extended to also provide for a first floating charge in favour of the Central Bank over a participant’s right, title, interest and benefit, present and future, in and to the balances now or at any time standing to the credit of a dedicated cash account (as defined in the Terms and Conditions for Participation in TARGET 2 –Ireland). AIB does not currently hold a dedicated cash account in relation to its participation in TARGET 2 –Ireland. 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 2016 317 n o i t a m r o n f i l a r e n e G A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:07 Page 318 Notes to the consolidated financial statements 46 Subsidiaries and consolidated structured entities The following are the material companies of AIB Group at 31 December 2016 and 2015: 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 d.a.c. – 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 m to the parent company’s financial statements. Consolidated structured entities The Group has acted as sponsor and invested in a number of special purpose entities (“SPEs”) 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 SPEs are consolidated by the Group: – Emerald Mortgages No. 4 Public Limited Company; – Emerald Mortgages No. 5 d.a.c.; – Mespil 1 RMBS d.a.c.; – Tenterden Funding p.l.c.; – Goldcrest Funding No. 1 d.a.c.; and – AIB PFP Scottish Limited Partnership. Further details on these SPEs are set out in note 47. 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 financial 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. Further details on AIB’s principal subsidiaries are set out in note m to the parent company’s financial statements. 318 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 319 47 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 is 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 share based compensation schemes are summarised in note 11 ‘Share-based compensation schemes’, however, activity has been minimal for the past number of years. 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/securities lending 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 with 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. The Group enters into securities lending in the form of collateral swap agreements with other parties. 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. As a result of these transactions, the Group is unable to use, sell or pledge the transferred assets for the duration of the transaction. A fee is generated for the Group under this transaction. 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 Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 320 Notes to the consolidated financial statements 47 Off-balance sheet arrangements and transferred financial assets (continued) Issuance of covered bonds (continued) be recognised on the Group’s statement of financial position with the related covered bonds included within ‘Debt securities in issue’ (note 36). 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 € 9 billion, internal Group companies hold € 4 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. Special purpose entities Securitisations are transactions in which the Group sells loans and receivables to customers (mainly mortgages) to special purpose entities (“SPEs”), which, in turn, issue notes to external investors. The notes 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 in 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 36). 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 the AIB Group (UK) p.l.c. residential mortgage portfolio.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 36) in the statement of financial position. At 31 December 2016, the carrying amount of the assets which the Group continues to recognise is € 207 million (31 December 2015: € 294 million) and the carrying amount of the associated liabilities is € 69 million (31 December 2015: € 135 million). In 2013, the Group securitised part of its credit card receivables portfolio. These credit card receivables were transferred to a securitisation vehicle, Goldcrest Funding No.1 d.a.c. (‘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 were not derecognised as the Group retained substantially all the risks and rewards of ownership and the credit card receivables continued to be reported in the Group’s statement of financial position. Goldcrest was consolidated into the Group’s financial statements with the junior loan facility being eliminated on consolidation. In November 2016, the securitisation transaction was terminated and Goldcrest is being liquidated. 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 d.a.c.; and Mespil 1 RMBS d.a.c. Emerald Mortgages No. 4 Public Limited Company The total carrying value of the original residential mortgages transferred by EBS d.a.c. 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 2016 is € 615 million (2015: € 677 million). The carrying amount of the bonds issued by Emerald 4 to third party investors amounts to € 399 million (2015: € 446 million) and is included within ‘Debt securities in issue’ (note 36). On 15 December 2016, Emerald 4 announced to the Irish Stock Exchange that it had received notice from its parent (EBS d.a.c.) of its intention to refinance loan notes on 15 March 2017 which Emerald 4 held. Consequent upon this, Emerald 4 stated that it will either exercise its option to redeem the bonds or repay outstanding bond holders. Emerald Mortgages No. 5 d.a.c. The total carrying amount of original residential mortgages transferred by EBS d.a.c. to Emerald Mortgages No.5 d.a.c. (‘Emerald 5’) as part of the securitisation amounted to € 2,500 million. The carrying amount of transferred secured loans that the Group has recognised at 31 December 2016 is € 1,189 million (2015: € 1,304 million). Bonds were issued by Emerald 5 to EBS d.a.c. but these are not shown in the Group’s financial statements, as these bonds are eliminated on consolidation. Mespil 1 RMBS d.a.c. The total carrying amount of secured loans that the Group has recognised at 31 December 2016 is € 734 million (2015: € 780 million) in relation to the transfers from EBS d.a.c. and Haven Mortgages Limited to Mespil 1 RMBS d.a.c. The bonds issued by Mespil 1 RMBS d.a.c. to EBS d.a.c. are not shown in the Group’s financial statements, as these bonds are eliminated on consolidation. 320 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 321 47 Off-balance sheet arrangements and transferred financial assets (continued) The following table summarises as at 31 December 2016 and 2015, 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 € m € m Carrying amount of associated liabilities held by Group companies € m Fair value of transferred assets Fair value of associated liabilities held by third parties € m € m Fair value of associated liabilities held by Group companies € m Sale and repurchase agreements/ similar products 6,224(1) (2) 5,745(1) Covered bond programmes Residential mortgage backed 9,521(3) Securitisations 822 5,265 468 – – 420 6,229 5,745 8,682 800 5,459 449 – – 398 Carrying amount of transferred assets Carrying amount of associated liabilities held by third parties € m € m Carrying amount of associated liabilities held by Group companies € m Fair value of transferred assets Fair value of associated liabilities held by third parties € m € m Fair value of associated liabilities held by Group companies € m Sale and repurchase agreements/ similar products 12,398(1) (2) 11,208(1) Covered bond programmes Residential mortgage backed 9,219(3) Securitisations 1,263 4,765 781 (1)See notes 33 and 34. – – 558 12,398 11,208 8,169 1,210 4,990 752 – – 533 2016 Net fair value position € m 484 3,223 (47) 2015 Net fair value position € m 1,190 3,179 (75) (2)Includes € 345 million of assets pledged in relation to securities lending arrangements at 31 December 2016 (2015: € 640 million). (3)The asset pools € 19 billion (2015: € 18 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 € 9,521 million (2015: € 9,219 million) above refers to those assets apportioned to external investors. 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 in the range of £ 15 million to £ 35 million per annum from 2016 until 2032, with a potential termination payment in 2032 of up to £ 60 million. Following the approval of the triennial valuation in December 2014, the current annual payments were set at £ 19.1 million per annum, commencing 1 April 2016, but subject to review following each future triennial valuation. 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. Allied Irish Banks, p.l.c. Annual Financial Report 2016 321 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 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 322 Notes to the consolidated financial statements 47 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 an SPE 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 2016, the Group recognised € 1 million (cumulative € 5.3 million) (2015: € 1.1 million (cumulative € 4.3 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 was 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 2016, the Group recognised € 4 million (cumulative € 86 million) (2015: € 13 million (cumulative € 82 million)) in the income statement for the servicing of financial assets transferred to NAMA. 322 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 323 48 Classification and measurement of financial assets and financial liabilities Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. The accounting policy for financial assets in note 1 (m) and financial liabilities in note 1 (n), describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the financial assets and financial liabilities by category as defined in IAS 39 Financial Instruments: Recognition and Measurement and by statement of financial position heading at 31 December 2016 and 2015: At fair value through profit and loss Held for trading € m Fair value hedge derivatives € m At fair value through equity Cash flow Available for sale derivatives securities € m hedge € m At amortised cost Loans and Held to receivables maturity € m € m Financial assets Cash and balances at central banks Items in the course of collection Trading portfolio financial assets – – 1 – – – – – – Derivative financial instruments 800 250 764 Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments available for sale Financial investments held to maturity Other financial assets – – – – – – – – – – – – – – – – – – – – – – – – – 15,437 – – 5,921 134 – – 1,399 60,639 1,799 – – – – – – – – – – – 3,356 2016 Total Other € m € m 598(1) 6,519 – – – – – – – – 134 1 1,814 1,399 60,639 1,799 15,437 3,356 430 – 430 801 250 764 15,437 69,892 3,356 1,028 91,528 Financial liabilities Deposits by central banks and banks Customer accounts Trading portfolio financial liabilities – – – – – – – – – Derivative financial instruments 861 389 359 Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities (1)Comprises cash on hand. – – – – – – – – – 861 389 359 – – – – – – – – – – – – – – – – – – – – – – – – 7,732 7,732 63,502 63,502 – – 6,880 791 442 – 1,609 6,880 791 442 79,347 80,956 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 2016 323 n o i t a m r o n f i l a r e n e G A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 324 Notes to the consolidated financial statements 48 Classification and measurement of financial assets and financial liabilities (continued) At fair value through profit and loss Held for trading € m Fair value hedge derivatives € m At fair value through equity Cash flow hedge derivatives € m Available for sale securities € m At amortised cost Loans and Held to receivables maturity € m € m Financial assets Cash and balances at central banks Items in the course of collection Trading portfolio financial assets – – 1 – – – – – – Derivative financial instruments 877 321 500 Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments available for sale Financial investments held to maturity Other financial assets – – – – – – – – – – – – – – – – – – – – – – – – – 16,489 – – 4,415 153 – – 2,339 63,240 5,616 – – – – – – – – – – – 3,483 2015 Total Other € m € m 535(1) 4,950 – – – – – – – – 153 1 1,698 2,339 63,240 5,616 16,489 3,483 938 – 938 878 321 500 16,489 75,763 3,483 1,473 98,907 Financial liabilities Deposits by central banks and banks Customer accounts Trading portfolio financial liabilities Derivative financial instruments Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities – – 86 933 – – – – – – – – – 424 424 – – – – – – 1,019 424 424 (1)Comprises cash on hand. – – – – – – – – – – – – – – – – – – – – – – – – 13,863 63,383 – – 7,001 2,318 456 13,863 63,383 86 1,781 7,001 2,318 456 87,021 88,888 324 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 325 49 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 1 (p). 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 2016. 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; and 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 2016 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 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. Allied Irish Banks, p.l.c. Annual Financial Report 2016 325 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 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 326 Notes to the consolidated financial statements 49 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. 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 332. 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 a downgrade in the CDS of the reference entities used to derive the funding curve. The combination of CVA and FVA is referred to as XVA. 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 by 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. 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. An adjustment is made for credit risk which at 31 December 2016 took account of the Group’s expectations on credit losses over the life of the loans. The fair value of mortgage products, including tracker mortgages, is calculated by discounting expected cash flows using discount rates that reflect the interest rate/credit risk in the portfolio. 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 calculated using a market price sourced from a pricing provider. Financial investments held to maturity The Group’s holding of financial investments held to maturity consists of Irish Government securities. These have been fair valued based on quoted market prices. 326 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 327 49 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 other receivables and payables. 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 45. 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 table on the following pages sets out the carrying amount and fair value of financial instruments across the three levels of the fair value hierarchy at 31 December 2016 and 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 2016 327 n o i t a m r o n f i l a r e n e G A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 328 Notes to the consolidated financial statements 49 Fair value of financial instruments (continued) Carrying amount Fair value Fair value hierarchy € m Level 1 € m Level 2 € m Level 3 € m 2016 Total € m 1 1,692 73 49 8,050 1,719 445 4,551 67 605 17,252 6,519 134 1,399 31,296 26,790 58,086 1,807 3,439 430 71,814 1,485 79 45 1,609 709 7,024 29,721 12,663 20,625 622 6,950 147 845 442 1 1,692 73 49 8,050 1,719 445 4,551 67 605 – – – – 8,050 1,719 432 4,551 67 – 1 1,189 73 43 – – 13 – – 1 17,252 14,819 1,320 6,519 134 1,399 33,375 27,264 60,639 1,799 3,356 430 74,276 1,485 79 45 1,609 709 7,023 29,721 12,663 20,496 622 6,733 147 791 442 79,347 598(1) – – – – – – 3,439 – 4,037 – – – – – – – – – – 6,391 – 766 – 7,157 – 503 – 6 – – – – – 604 1,113 – 134 812 31,296 26,790 58,086 1,807 – 430 5,921 – 587 – – – – – – 6,508 61,269 1,328 79 41 1,448 – 1,901 – – – – 559 147 79 – 157 – 4 161 709 5,123 29,721 12,663 20,625 622 – – – 442 Financial assets measured at fair value Trading portfolio financial assets Equity securities Derivative financial instruments Interest rate derivatives Exchange rate derivatives Equity derivatives Financial investments available for sale Government securities Supranational banks and government agencies Asset backed securities Bank securities Corporate securities Equity securities Financial assets not measured at fair value Cash and balances at central banks Items in the course of collection Loans and receivables to banks Loans and receivables to customers Mortgages(2) Non-mortgages Total loans and receivables to customers NAMA senior bonds Financial investments held to maturity Other financial assets Financial liabilities measured at fair value Derivative financial instruments Interest rate derivatives Exchange rate derivatives Equity derivatives Financial liabilities not measured at fair value Deposits by central banks and banks Other borrowings Secured borrowings Customer accounts Current accounts Demand deposits Time deposits Securities sold under agreements to repurchase Debt securities in issue Bonds and medium term notes Other debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities (1)Comprises cash on hand. (2)Includes residential and commercial mortgages. 2,686 69,905 79,748 328 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 329 49 Fair value of financial instruments (continued) Financial assets measured at fair value Trading portfolio financial assets Equity securities Derivative financial instruments Interest rate derivatives Exchange rate derivatives Equity derivatives Financial investments available for sale Government securities Supranational banks and government agencies Asset backed securities Bank securities Corporate securities Equity securities Financial assets not measured at fair value Cash and balances at central banks Items in the course of collection Loans and receivables to banks Loans and receivables to customers Mortgages(2) Non-mortgages Total loans and receivables to customers NAMA senior bonds Financial investments held to maturity Other financial assets Financial liabilities measured at fair value Trading portfolio financial liabilities Debt securities Derivative financial instruments Interest rate derivatives Exchange rate derivatives Equity derivatives Credit derivatives Financial liabilities not measured at fair value Deposits by central banks and banks Other borrowings Secured borrowings Customer accounts Current accounts Demand deposits Time deposits Securities sold under agreements to repurchase Debt securities in issue Bonds and medium term notes Other debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities Carrying amount Fair value Fair value hierarchy Level 2 € m Level 1 € m Level 3 € m – – – – 8,533 2,008 328 4,600 76 – 1 1,069 67 50 151 – 1 – – 1 – 471 – 41 – – – – 11 780 € m 1 1,540 67 91 8,684 2,008 329 4,600 87 781 2015 Total € m 1 1,540 67 91 8,684 2,008 329 4,600 87 781 18,188 15,545 1,340 1,303 18,188 4,950 153 2,339 34,667 28,573 63,240 5,616 3,483 938 80,719 86 1,622 64 89 6 1,867 460 13,403 25,955 11,698 24,825 905 6,901 100 2,318 456 87,021 535(1) – – 4,415 – 779 – – – – 3,479 – 4,014 86 – – – – 86 – – – – – – 6,479 – 758 – 7,237 – – – – – – 5,194 – 1,369 64 51 6 1,490 – 2,903 – – – – 670 100 1,778 – 5,451 – 153 1,560 32,181 28,192 60,373 5,626 – 938 68,650 – 253 – 38 – 291 460 10,503 25,955 11,698 25,067 905 – – – 456 4,950 153 2,339 32,181 28,192 60,373 5,626 3,479 938 77,858 86 1,622 64 89 6 1,867 460 13,406 25,955 11,698 25,067 905 7,149 100 2,536 456 75,044 87,732 (1)Comprises cash on hand. (2)Includes residential and commercial mortgages. Allied Irish Banks, p.l.c. Annual Financial Report 2016 329 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 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 330 Notes to the consolidated financial statements 49 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 financial years ended 31 December 2016 and 2015: Financial assets Trading portfolio € m Debt securities € m Transfer into Level 2 from Level 1 – – 2016 Total € m – Financial assets Trading portfolio € m – Debt securities € m – 2015 Total € m – Reconciliation of balances in Level 3 of the fair value hierarchy The following table shows a reconciliation from the opening balances to the closing balances for fair value measurements in Level 3 of the fair value hierarchy for the financial years ended 31 December 2016 and 2015: Derivatives € m 512 38 (41) – (41) – – – – – – 509 Financial assets Available for sale Debt securities € m Equity securities € m 11 – – – – – – – – (9) (2) – 780 – – 272 272 (250) – (250) 79 (277) – 604 Financial liabilities Total Derivatives Total 2016 € m 1,303 38 (41) 272 231 (250) – (250) 79 (286) (2) 1,113 € m 291 – (70) – (70) – (2) (2) – – (58) 161 € m 291 – (70) – (70) – (2) (2) – – (58) 161 At 1 January 2016 Transfers into Level 3(1) Total gains or (losses) in: Profit or loss – Net trading income – Other operating income Other comprehensive income – Net change in fair value of financial investments available for sale – Net change in fair value of cash flow hedges Purchases/additions Sales/disposals Settlements At 31 December 2016 (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 the measurement of fair value for a particular agreement relied mainly on unobservable data. 330 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 331 49 Fair value of financial instruments (continued) Reconciliation of balances in Level 3 of the fair value hierarchy Derivatives € m 642 (8) – – – – – (122) 512 Financial assets Available for sale Debt securities € m Equity securities € m 3 – (2) – (2) 10 – – 11 411 – 363 – 363 13 (7) – 780 2015 Financial liabilities Total Derivatives Total € m 1,056 (8) 361 – 361 23 (7) (122) 1,303 € m 300 – – 20 20 – – (29) 291 € m 300 – – 20 20 – – (29) 291 At 1 January 2015 Transfers out of Level 3(1) Total gains or (losses) in: 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 Settlements(2) At 31 December 2015 (1)Transfers between levels of the fair value hierarchy are recognised at the end of the reporting period during which the change occurred. (2)Includes gains and losses recognised in ‘Net trading income’ (note 7). In addition, for unrealised gains or losses at 31 December 2015, see table below. Transfers out of level 3 arose as a result of the ability to measure financial instruments using observable data for their fair value measurement either directly or indirectly. The table below sets out the 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 2016 and 2015: Net trading income – gains 2016 € m 136 2015 € m 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 Allied Irish Banks, p.l.c. Annual Financial Report 2016 331 n o i t a m r o n f i l a r e n e G A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 332 Notes to the consolidated financial statements 49 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 2016 and 2015 in measuring financial instruments categorised as Level 3 in the fair value hierarchy: Fair Value Range of estimates Financial instrument Uncollateralised Asset customer Liability derivatives 2016 € m 509 161 2015 Valuation € m technique Significant unobservable input 512 CVA LGD 291 PD 2016 47% – 67% (Base 54%) 0.8% – 1.6% 2015 47% – 79% (Base 55%) 0.9% – 1.5% (Base 1.2% 1 year PD) (Base 1.2% 1 year PD) Combination As above with greater As above with greater LGD and PD(1) unfavourable impact unfavourable impact due to combination of due to combination of PD and LGD changes PD and LGD changes FVA Funding spreads (0.6%) to 0.5% (0.4%) to 0.5% (1)The fair value measurement sensitivity to unobservable inputs ranges at 31 December 2016 from negative € 37 million to positive € 23 million (31 December 2015: negative € 57 million to positive € 26 million). 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. Financial instrument 2016 € m 2015 Valuation € m technique Significant unobservable input 2016 2015 NAMA Asset 466 432 Discounted NAMA Discount rate of 7.21% Discount rate of 9% subordinated bonds cash flows profitability i.e. applicable to base applicable to base ability to generate asset price. The asset price. The cash flow for estimates range from estimates range from: repayment (a) discount rate of (a) NAMA making 9%; to (b) an early full 5.26% coupon full repayment of coupons plus capital (March 2019). payments; to (b) an early full repayment of coupons plus capital (March 2019). In June 2016, the Group received Series B Preferred Stock in Visa Inc. as part consideration for its holding of shares in Visa Europe. This preferred stock will be convertible into Class A Common Stock of Visa Inc. at some point in the future. The conversion is subject to certain Visa Europe litigation risks that may affect the ultimate conversion rate. In addition, the stock, being denominated in US dollars, is subject to foreign exchange risk. 2016 € m 70 Asset Financial instrument Visa Inc. Series B Preferred Stock 2015 Valuation € m technique Significant unobservable inputs Range of estimates at 31 December 2016 N/A Quoted market price Final conversion Estimates range from: (a) no discount of Visa Inc. Class A rate of Visa Inc. for conversion rate variability with a Common Stock to Series B Preferred discount for illiquidity only; to (b) 100% which a discount Stock into Visa Inc. discount for conversion rate variability. has been applied for Class A Common Stock. the illiquidity and the conversion rate variability of the preferred stock of Visa Inc. (50%). This was converted to euro at the year end rate. 332 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 333 49 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 for 31 December 2016 and 2015: 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 2016 Effect on income statement Favourable Unfavourable € m € m Effect on other comprehensive income Favourable Unfavourable € m € m 38 – 38 – – (47) (65) (112) (3) (3) – 81 81 – – – (12) (12) – – 2015 Level 3 Effect on income statement Favourable Unfavourable € m € m Effect on other comprehensive income Favourable Unfavourable € m € m 87 – 87 14 14 (71) – (71) (63) (63) – 26 26 – – – (105) (105) – – 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 2016 333 n o i t a m r o n f i l a r e n e G A11 Notes 31-49 AFR 2016 pages 287-326:Layout 1 10/03/2017 20:08 Page 334 Notes to the consolidated financial statements 50 Statement of cash flows Non-cash and other items included in profit before taxation Non-cash items Profit on disposal of business 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 of provisions for impairment on loans and receivables Writeback of provisions for impairment on financial investments available for sale Writeback of provisions for liabilities and commitments Change in other provisions Retirement benefits – defined benefit expense Termination benefits Depreciation, amortisation and impairment Interest on subordinated liabilities and other capital instruments Net (gains) on buy back of debt securities in issue Profit on disposal of financial investments available for sale Loss on termination of hedging swaps Remeasurement of NAMA senior bonds Amortisation of premiums and discounts Fair value gain on re-estimation of cash flows on loans and receivables previously restructured Income from settlement of claim Change in prepayments and accrued income Change in accruals and deferred income Effect of exchange translation and other adjustments(1) Total non-cash items Contributions to defined benefit pension schemes Dividends received from equity securities Total other items Non-cash and other items for the year ended 31 December 2016 € m (1) – (11) (26) (40) (35) (294) (2) (2) 28 2 – 109 199 (1) (362) 59 (10) 227 (15) – 54 (94) (18) (233) (59) 26 (33) (266) 2015 € m – (3) 22 (26) (24) (25) (925) _ (11) 177 21 4 74 278 (8) (166) 81 (6) 79 (3) (38) 25 (84) (259) (817) (84) 26 (58) (875) (1)The impact of foreign exchange translation for each line of the statement of financial position is removed in order to show the underlying cash impact. 334 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 335 50 Statement of cash flows (continued) Change in operating assets(1) Change in loans and receivables to customers Change in NAMA senior bonds Change in loans and receivables to banks Change in derivative financial instruments Change in items in course of collection Change in other assets Change in operating liabilities(1) Change in deposits by central banks and banks Change in customer accounts Change in trading portfolio financial liabilities Change in debt securities in issue Change in notes in circulation Change in other liabilities 2016 € m 1,286 3,838 769 125 7 482 2015 € m 1,546 3,834 (709) (328) (2) (111) 6,507 4,230 2016 € m (6,115) 1,884 (86) (118) (59) (94) 2015 € m (2,927) (1,539) 86 (867) 3 (109) (4,588) (5,353) (1)The impact of foreign exchange translation for each line of the statement of financial position is removed in order to show the underlying cash impact. 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 2016 € m 6,519 645 7,164 2015 € m 4,950 722 5,672 The Group is required to maintain balances with the Central Bank of Ireland which at 31 December 2016 amounted to € 21 million (2015: € 121 million). The Group is required by law to maintain reserve balances with the Bank of England. At 31 December 2016, these amounted to € 566 million (2015: € 658 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. 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 2016 335 n o i t a m r o n f i l a r e n e G A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 336 Notes to the consolidated financial statements 51 Related party transactions Related parties of the Group include associated undertakings, 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 ‘arm’s length’ basis. Balances between AIB and its subsidiaries are detailed in notes g, h, k, m, q and r 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 h to the parent company financial statements, while deposits from associates are set out in note r. (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 47). 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 entity 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 47). (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 177 to 179). The figures shown below include the figures separately reported in respect of Directors’ remuneration in the Directors’ Remuneration report on pages 203 to 207). Short-term compensation(1) Post-employment benefits(2) Termination benefits(3) Total 2016 € m 6.7 0.8 0.3 7.8 Group 2015 € m Allied Irish Banks, p.l.c. 2015 € m 2016 € m 6.7 0.8 0.2 7.7 6.1 0.8 0.3 7.2 6.2 0.8 0.2 7.2 (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 including, where relevant, payment in lieu of notice, 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 company’s defined benefit pension schemes closed to future accrual with effect from 31 December 2013 and all employee pension benefits have accrued on the basis of defined contributions since that date. (3)Comprises severance payments made to Senior Executives who left during 2016 and 2015. 336 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 337 51 Related party transactions (continued) (e) Transactions with Key Management Personnel As at 31 December 2016, deposit and other credit balances held by Key Management Personnel, namely Executive and Non-Executive Directors and Senior Executive Officers, who were in office during the year amounted to € 6.39 million (2015: € 5.77 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. The aggregate balance of loans and guarantees held by Key Management Personnel, at the beginning and end of the financial year, represents less than 0.03% of the net assets of the Company. Directors: There were 12 Directors in office during the year, 8 of whom availed of credit facilities (2015:5). 6 of the 8 Directors who availed of credit facilities had balances outstanding at 31 December 2016 (2015: 6). Senior Executive Officers: There were 11 Senior Executive Officers in office during the year, 10 of whom availed of credit facilities (2015:9). 8 of the 10 Senior Executive Officers who availed of credit facilities had balances outstanding at 31 December 2016 (2015:9). Details of transactions with Key Management Personnel, and connected parties where indicated, for the years ended 31 December 2016 and 2015 are as follows: (i) Current Directors Mark Bourke: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Tom Foley: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Carolan Lennon: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Brendan McDonagh: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Allied Irish Banks, p.l.c. Annual Financial Report 2016 Balance at 31 December 2015 € 000 Amounts advanced during 2016 Amounts repaid during 2016 Balance at 31 December 2016 € 000 563 – 563 – – – – 3 3 – – – – – – – – – – – – – – – 48 – 48 – – – – – – – – – 515 – 515 6 563 – 2 2 – 4 – 2 2 – 12 – – – – 1 337 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 A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 338 Notes to the consolidated financial statements 51 Related party transactions (continued) (e) Transactions with Key Management Personnel (i) Current Directors (continued) Jim O’Hara: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Dr Michael Somers: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Catherine Woods: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Balance at 31 December 2015 € 000 Amounts advanced during 2016 € 000 Amounts repaid during 2016 € 000 Balance at 31 December 2016 € 000 – – – – 3 3 69 – 69 – – – – – – – – – – – – – – – 10 – 10 – – – – 1 – 2 2 – 3 59 – 59 1 69 No impairment charges or provisions have been recognised during the year in respect of any of the above loans or facilities and all interest that has fallen due on all of these loans or facilities has been paid. As at 31 December 2016, guarantees entered into by Catherine Woods in favour of the Group amounted to € 0.032 million. No amounts were paid or liability incurred in fulfilling the guarantee. Mr Simon Ball had a credit card facility which had an opening, closing and maximum debit balance during 2016 of less than € 500 and no interest was incurred during the year. Mr Richard Pym had a credit card facility which was not used during the year and Helen Normoyle had an overdraft facility of less than € 2,000 which was not used during the year. Bernard Byrne and Peter Hagan had no facilities with the Group during 2016. *Amounts advanced and repaid are not shown for overdraft/credit card facilities as these are revolving in nature (i.e. they may be drawn, repaid and redrawn up to their limit over the course of the year). **The maximum debit balance is calculated by aggregating the maximum debit balance drawn on each facility during the year. 338 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 339 51 Related party transactions (continued) (e) Transactions with Key Management Personnel (ii) Former Directors who were in office during the year No Directors resigned during the year. (iii) Senior Executive Officers in office during the year (Aggregate of 11 persons (2015: 9)): Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Balance at 31 December 2016 € 000 Balance at 31 December 2015 € 000 2,218 10 2,228 3,839 46 3,885 97 5,105 No impairment charges or provisions have been recognised during the year in respect of any of the above loans or facilities and all interest that has fallen due on all of these loans or facilities has been paid. (iv) Aggregate amounts outstanding at year end Directors (2016: 6 persons; 2015: 6 persons) Senior Executive Officers (2016: 8 persons; 2015: 9 persons) Loans, overdrafts/credit cards 31 December 2016 € 000 31 December 2015 € 000 580 3,885 4,465 1,723 2,228 3,951 As at 31 December 2016, guarantees entered into by 1 Director in favour of the Group amounted to € 0.032 million in aggregate (2015: € 0.05 million by 1 Director). No amounts were paid or liability incurred in fulfilling the guarantee. As at 31 December 2016, no Senior Executive Officer had entered into guarantees in favour of the Group. (v) Connected persons The aggregate of loans to connected persons of Directors in office as at 31 December 2016, as defined in Section 220 of the Companies Act 2014, are as follows (aggregate of 26 persons; 2015: 20 persons): Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Balance at 31 December 2016 € 000 Balance at 31 December 2015 € 000 914 89 1,003 1,755 70 1,825 40 2,013 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 No impairment charges or provisions have been recognised during the year in respect of any of the above loans or facilities and all interest that has fallen due on all of these loans or facilities has been paid. *Amounts advanced and repaid are not shown for overdraft/credit card facilities as these are revolving in nature (i.e. they may be drawn, repaid and redrawn up to their limit over the course of the year). **The maximum debit balance is calculated by aggregating the maximum debit balance drawn on each facility during the year. 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 2016 339 A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 340 Notes to the consolidated financial statements 51 Related party transactions (continued) (e) Transactions with Key Management Personnel As at 31 December 2015, deposit and other credit balances held by Key Management Personnel, namely Executive and Non-Executive Directors and Senior Executive Officers, who were in office during the year amounted to € 5.77 million (2014: € 4.56 million). The aggregate balance of loans and guarantees held by Key Management Personnel, at the beginning and end of the financial year, represented 0.03% of the net assets of the Company. (i) Directors in office during 2015 Balance at 31 December 2014 € 000 Amounts advanced during 2015 Amounts repaid during 2015 Balance at 31 December 2015 € 000 Mark Bourke: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Tom Foley: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Jim O’Hara: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Dr Michael Somers: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Catherine Woods: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** 611 – 611 – – – – – – – 3 3 79 – 79 – n/a n/a – n/a n/a – n/a n/a – n/a n/a – n/a n/a 48 n/a n/a – n/a n/a – n/a n/a – n/a n/a 10 n/a n/a 563 – 563 7 611 – – – – 1 – – – – 11 – 3 3 – 6 69 – 69 1 79 As at 31 December 2015, guarantees entered into by Catherine Woods in favour of the Group amounted to € 0.05 million. No amounts were paid or liability incurred in fulfilling the guarantee. Mr Richard Pym has a credit card facility which had an opening, closing and maximum debit balance during 2015 of less than €500 and no interest was incurred during the year. Simon Ball, Bernard Byrne, Peter Hagan and Helen Normoyle had no facilities with the Group during 2015 No impairment charges or provisions were recognised during the year in respect of any of the above loans or facilities detailed in (i) to (v) and all interest that had fallen due on all of these loans or facilities was paid. *Amounts advanced and repaid are not shown for overdraft/credit card facilities as these are revolving in nature (i.e. they may be drawn, repaid and redrawn up to their limit over the course of the year). **The maximum debit balance is calculated by aggregating the maximum debit balance drawn on each facility during the year, 340 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 341 51 Related party transactions (continued) (e) Transactions with Key Management Personnel (ii) Former Directors who were in office during the year David Duffy: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** (iii) Senior Executive Officers in office during the year (Aggregate of 9 persons (2014: 7)): Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** (iv) Aggregate amounts outstanding at year end Directors (2015:6 persons; 2014: 7 persons) Senior Executive Officers (2015:9 persons; 2014: 7 persons) Balance at 31 December 2014 € 000 Amounts advanced during 2015 € 000 Amounts repaid during 2015 € 000 Balance at 31 December 2015 € 000 1,171 4 1,175 – n/a n/a 92 n/a n/a 1,079 9 1,088 8 1,214 Balance at 31 December 2015 € 000 Balance at 31 December 2014 € 000 1,607 50 1,657 2,218 10 2,228 37 2,456 Loans, overdrafts/credit cards 31 December 2015 € 000 31 December 2014 € 000 1,723 2,228 3,951 1,868 1,657 3,525 As at 31 December 2015, guarantees entered into by 1 Director in favour of the Group amounted to € 0.05 million in aggregate (2014: € 0.1 million by 1 Director). No amounts were paid or liability incurred in fulfilling the guarantee. As at 31 December 2015, no Senior Executive Officer held guarantees in favour of the Group. No impairment charges or provisions were recognised during the year in respect of any of the above loans or facilities detailed in (i) to (v) and all interest that had fallen due on all of these loans or facilities was paid. *Amounts advanced and repaid are not shown for overdraft/credit card facilities as these are revolving in nature (i.e. they may be drawn, repaid and redrawn up to their limit over the course of the year). **The maximum debit balance is calculated by aggregating the maximum debit balance drawn on each facility 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 2016 341 n o i t a m r o n f i l a r e n e G A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 342 Notes to the consolidated financial statements 51 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 2015, as defined in Section 220 of the Companies Act 2014, are as follows (aggregate of 20 persons; 2014: 19 persons): Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Balance at 31 December 2015 € 000 Balance at 31 December 2014 € 000 1,322 58 1,380 914 89 1,003 20 1,591 No impairment charges or provisions were recognised during the year in respect of any of the above loans or facilities detailed in (i) to (v) and all interest that had fallen due on all of these loans or facilities was paid. *Amounts advanced and repaid are not shown for overdraft/credit card facilities as these are revolving in nature (i.e. they may be drawn, repaid and redrawn up to their limit over the course of the year). **The maximum debit balance is calculated by aggregating the maximum debit balance drawn on each facility during the year. (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 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. (1)Transferred to the Ireland Strategic Investment Fund (“ISIF”) on 22 December 2014. Ownership of ISIF vests with the Minister for Finance and is controlled and managed by the NTMA. 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; 342 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 343 51 Related party transactions (continued) (f) Summary of relationship with the Irish Government – 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 management section of this report. The relationship of the Irish Government with AIB is outlined under the following headings: – Capital investments; – Capital reorganisation; – 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. – 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. All the 2009 Preference Shares were either converted to ordinary shares or redeemed on 17 December 2015 following a capital reorganisation implemented in December 2015 (see below). Ordinary shares At 31 December 2016, the Irish Government, through the NTMA, held 2.7 billion (31 December 2015: 2.7 billion) ordinary shares in AIB representing 99.9% of the issued ordinary share capital (31 December 2015: 99.9%). See note 40 for details of the Government’s investment in the ordinary shares of AIB. Contingent capital notes On 27 July 2011, AIB issued € 1.6 billion of contingent capital notes at par to the Minister with interest payable annually in arrears at a rate of 10% on the nominal value of the notes. Details of this transaction are set out in note 39. On 28 July 2016, AIB redeemed in full all outstanding contingent capital notes (€ 1.6 billion) together with accrued interest thereon amounting to € 160 million. 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 43. 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 2016 343 n o i t a m r o n f i l a r e n e G A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 344 Notes to the consolidated financial statements 51 Related party transactions (continued) (f) Summary of relationship with the Irish Government – Capital reorganisation AIB implemented a number of measures in order to reorganise its capital following resolutions passed at an EGM of shareholders held on 16 December 2015. These measures were designed to enable AIB: return State aid to the Irish Government in line with its obligations under its EU restructuring plan; create a sound and sustainable capital base on which to grow its business; meet regulatory capital requirements under CRD IV; allow the future payment of dividends on ordinary shares; and position itself for a return to private ownership over time. The measures outlined below impacted on the Irish Government as a related party to AIB: (a) 2009 Preference Shares (aggregate subscription price of € 3.5 billion) (i) Conversion of € 2,140 million 2009 Preference Shares into ordinary shares (note 40); (ii) Redemption of € 1,360 million of the 2009 Preference Shares (note 40); and (iii) Payment of dividend on the 2009 Preference Shares. A dividend amounting to € 166 million was paid in cash for the period from the last dividend payment date of 13 May 2015 up to the date of conversion/redemption of the 2009 Preference Shares on 17 December 2015. (b) Consolidation of ordinary shares The Irish Government, through the ISIF, held a total of 677,705,287,273 ordinary shares in AIB with a nominal value of € 0.0025 per share as a result of the conversion of € 2,140 million of the 2009 Preference Shares into ordinary shares noted above. On 21 December 2015, all ordinary shares with a nominal value of € 0.0025 were consolidated into one ordinary share with a nominal value of € 0.625 for every 250 shares held following a Consolidation Resolution passed at the EGM on 16 December 2015. For details of this consolidation, see note 40. The Irish Government, through the ISIF, held 2,710,821,147 ordinary shares with a nominal value of € 0.625 per share at 31 December 2015 (99.9 % of total issued ordinary share capital). (c) Issue of warrants to the Minister for Finance (or another State Entity nominated by the Minister for Finance) In recognition of the significant financial support provided to AIB by the Irish Government since 2008 and as consideration for its supporting and participating in the Capital Reorganisation, AIB received shareholder approval, at the EGM held on 16 December 2015, to enter into a Warrant Agreement with the Minister for Finance (or another State Entity nominated by the Minister for Finance). Under the terms of this Warrant Agreement, as part of a Regulated Market Event, the Minister for Finance will be entitled to issue a Warrant Notice to AIB, subject to certain conditions, requiring AIB to issue warrants for nil consideration to the Minister for Finance (or another State Entity nominated by the Minister for Finance). On the occurrence of a Regulated Market Event, the warrants would entitle the Minister for Finance (or another State Entity nominated by the Minister for Finance) to subscribe for AIB ordinary shares with a nominal value of € 0.625 per share, subject to a maximum of 9.99 per cent of the issued ordinary share capital. The warrant exercise price will be not less than 200 per cent of the Initial Regulated Market price and the warrants will be exercisable for a period of ten years after the date of the Regulated Market Event. Since the Regulated Market Event had not occurred at 31 December 2016, no notice has issued to AIB for the issue of warrants, accordingly, these warrants have not been accounted for in the financial statements. (d) Redemption of Promissory Note On 17 December 2015, the EBS Promissory Note which was held as an available for sale security was redeemed at its carrying value following the EBS Promissory Note Termination Agreement entered into on 20 November 2015 between the Minister for Finance, the NTMA, EBS and AIB. 344 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 345 51 Related party transactions (continued) (f) Summary of relationship with the Irish Government – 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. In January 2010, AIB and certain of its subsidiaries, became participating institutions for the purposes of the ELG Scheme. This scheme expired on 28 March 2013 for all new liabilities.The total liabilities guaranteed under the ELG Scheme at 31 December 2016 amounted to € 1.1 billion (31 December 2015: € 1.8 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 the period to the 31 December 2016 and 31 December 2015, are set out in note 4. 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. – 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 8, 26 and 27. 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: – – – 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. Details of the contingent liability/asset are set out in note 45. Investment in National Asset Management Agency Investment d.a.c. (“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 2016: € 11 million; 31 December 2015 of € 10 million), with the remainder invested on behalf of clients. – Funding support Throughout the financial crisis, the Irish Government provided guarantees to AIB and, in this regard, the ELG scheme is outlined above. In addition, AIB has availed of Targeted Long Term Refinancing Operation II (“TLTRO II”) funding from the ECB, through the Central Bank. At 31 December 2016, the amounts outstanding, totalling € 1.9 billion (31 December 2015: € 2.9 billion for TLTRO) are included within ‘Deposits by central banks and banks’ in the table below. See note 33 for details of collateral. The interest rate on the TLTRO II is the main ECB rate which is currently 0%. The term of the TLTRO II is four years with AIB having the option to repay after two years. These facilities, together with other assets and liabilities with Irish Government entity counterparties, are set out below. 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 2016 345 n o i t a m r o n f i l a r e n e G A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 346 Notes to the consolidated financial statements 51 Related party transactions (continued) (f) Summary of relationship with the Irish Government – 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. – 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: – – – – Acquisition of EBS d.a.c. (“EBS”). a Direction Order in December 2010; a Transfer Order in February 2011; a Subordinated Liabilities Order in April 2011; and 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 provided the Central Bank with additional powers to achieve an effective and efficient resolution regime for credit institutions that were failing or likely to fail and that would be effective in protecting the Exchequer and the stability of the financial system and the economy. However, in early 2016, the Single Resolution Mechanism (“SRM”) became principally involved in determing the Group’s resolution strategy. – 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 already 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. 346 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 347 51 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) together with the highest balances held at any point during the period. Assets 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 Financial investments held to maturity Total assets Liabilities Deposits by central banks and banks Customer accounts Trading portfolio financial liabilities Derivative financial instruments Subordinated liabilities and other capital instruments Total liabilities a b c d e f g h Balance 2016 Highest(2) Balance Note balance held € m € m 2015 Highest(2) balance held € m 2,830 391 4 121 168 9,427 10,019 3,487 € m 41 – 3 121 81 5,616 5,839 3,483 15,184 1,529 3,618 – – 21 19 1,799 5,580 3,356 12,304 – 7 965 82 5,619 5,854 3,483 Balance 2016 Highest(2) Balance 2015 Highest(2) balance held € m € m balance held € m € m 1,912 806 – 18 – 2,736 2,950 1,020 86 55 1,600 2,950 688 86 69 1,523 5,316 5,300 3,856 551 142 1,523 (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 period, together with the outstanding balance at the year end, 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 2016 was € 529 million (2015: € 513 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 € 5,114 million (2015: € 5,406 million) in Irish Government securities held in the normal course of business and NAMA subordinated bonds which have a fair value at 31 December 2016 of € 466 million (2015: € 432 million) detailed above under ‘NAMA’. e These comprise Irish Government securities (note 28). f g This relates to funding received from the ECB through the Central Bank which is detailed under ‘Funding Support’ above. Includes € 325 million (2015: € 160 million) borrowed from the Strategic Banking Corporation of Ireland (“SBCI”), the ordinary share capital of which is owned by the Minister for Finance. h Redeemed on 28 July 2016 (note 39). All other balances, both assets and liabilities are carried out in the ordinary course of banking business on normal terms and condi- tions. Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 348 Notes to the consolidated financial statements 51 Related party transactions (continued) (f) Summary of relationship with the Irish Government Local government(1) During 2016 and 2015, 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 2016 and 2015, 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 2016 and 2015, 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) 2016 € m 1 3 471 89 4 – 2015 € m 10 494 483 29 7 17 (1)The highest balance in loans and receivables to banks amounted to € 501 million in respect of funds placed during the period (2015: € 616 million). (2)The highest balance in deposits by central banks and banks amounted to € 369 million in respect of funds received during the period (2015: € 395 million). (3)The highest balance in customer deposits amounted to € 17 million in respect of funds received during the period (2015: € 22 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). AIB Group is currently engaging with the Joint Special Liquidators in relation to the claim. Given AIB’s aggregate liability to IBRC at the date of Special Liquidation exceeded these claims, no financial loss is expected to occur. 348 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 349 51 Related party transactions (continued) (f) Summary of relationship with the Irish Government Irish bank levy In 2014, a bank levy was introduced on certain financial institutions, including the Group. This levy is recognised in the income statement on the date on which all the criteria set out in the legislation are met. The levy equals 35% of each financial institution’s Deposit Interest Retention Tax payment for 2011 and was chargeable on this basis for each of the years 2014-2016 inclusive. The annual levy paid by the Group for 2016 and reflected in the income statement amounted to € 60 million. Legislation enacted in December 2016 extended this levy to 2021, with the total amount to be collected from all financial institutions remaining at its current level of € 150 million per annum. However, the basis for calculating an individual financial institution’s share of the levy was revised as set down in the Finance Act 2016. (f) 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. 52 Commitments Capital expenditure Estimated outstanding commitments for capital expenditure not provided for in the financial statements Capital expenditure authorised but not yet contracted for 2016 € m 9 38 Operating lease rentals The total of future minimum lease payments under non-cancellable operating leases is 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 2016 € m 62 58 55 53 51 268 547 2015 € m 7 38 2015 € m 59 54 51 49 48 342 603 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 14 years. The average lease length outstanding until a break clause in the lease arrangements is approximately 5 years with the final contractual remaining terms ranging from 1 year to 22 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 (2015: € 3 million). Operating lease payments recognised as an expense for the period were € 65 million (2015: € 58 million). Sublease income amounted to Nil (2015: Nil). Allied Irish Banks, p.l.c. Annual Financial Report 2016 349 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 A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 350 Notes to the consolidated financial statements 53 Employees The following table shows the geographical analysis of average employees for 2016 and 2015 as follows: Average number of staff (Full time equivalents) Republic of Ireland United Kingdom United States of America Total The following table shows the segmental analysis of average employees for 2016 and 2015 as follows: AIB Ireland AIB UK Group & International(1) Total 2016 8,797 1,376 53 2015 9,145 1,463 55 10,226 10,663 2016 5,436 1,064 3,726 2015 5,754 1,138 3,771 10,226 10,663 (1)Group & International includes the businesses outside Ireland and the UK. It also includes wholesale treasury activities, central control and support functions (business and customer services, risk, audit, finance, general counsel, human resources and corporate affairs). The average number of employees for 2016 and 2015 set out above (excludes employees on career breaks and other unpaid long term leaves). Actual full time equivalent numbers at 31 December 2016 were 10,376 (31 December 2015: 10,204). 350 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 351 54 Regulatory compliance During the years ended 31 December 2016 and 2015, AIB Group, and Allied Irish Banks, p.l.c. and its regulated subsidiaries complied with their externally imposed capital ratios. 55 Financial and other information Operating ratios Operating expenses/operating income Operating expenses/operating income before exceptional items, bank levies and regulatory fees Other income/operating income Other income/operating income before exceptional items Net interest margin(1) Performance measures Return on average total assets Return on average ordinary shareholders’ equity 2016 % 53.8 52.4 31.0 23.5 2.23 2015 % 63.9 49.3 26.7 26.5 1.94 1.4 11.1(2) 1.3 12.4(3) (1)Represents net interest income as a percentage of average interest earning assets. (2)Profit attributable to ordinary shareholders after deduction of the distribution on other equity interests as a percentage of average ordinary shareholders’ equity which excludes other equity interests of € 494 million. (3)Profit attributable to ordinary shareholders after deduction of the annual dividend on the 2009 Preference Shares as a percentage of average ordinary shareholders’ equity (i.e. excludes the € 3.5 billion in 2009 Preference Shares which were redeemed/converted in December 2015). Rates of exchange € /$* Closing Average € /£* Closing Average 2016 2015 1.0541 1.1069 0.8562 0.8196 1.0887 1.1097 0.7340 0.7260 *Throughout this report, US dollar is denoted by $ and Pound sterling is denoted by £. Currency information Euro Other Assets 2015 € m 82,053 21,069 103,122 2016 € m 76,885 18,737 95,622 Liabilities and equity 2015 € m 2016 € m 77,392 18,230 95,622 85,268 17,854 103,122 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 2016 351 n o i t a m r o n f i l a r e n e G A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 352 Notes to the consolidated financial statements 56 Average balance sheets and interest rates(1) The following table shows interest rates prevailing at 31 December 2016 and 2015 together with average prevailing interest rates, gross yields, spreads and margins for the years ended 31 December 2016 and 2015: 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 ECB refinancing rate Gross yields, spreads and margins(2) Gross yields(3) Interest rate spread(4) Net interest margin(5) 31 December 2016 % 2015 % Average interest rates for years ended 31 December 2015 % 2016 % 0.13 0.25 0.16 0.43 (0.37) (0.32) 0.25 0.26 0.37 0.00 (0.20) (0.13) 0.50 0.50 0.59 0.05 (0.34) (0.26) (0.07) (0.02) 0.40 0.41 0.50 0.01 2.87 1.87 2.23 0.50 0.51 0.57 0.05 2.84 1.54 1.94 (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. 352 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 353 56 Average balance sheets and interest rates (continued) The following table shows the average balances and interest rates of interest earning assets and interest bearing liabilities for the years ended 31 December 2016 and 2015. 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 less liabilities Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments available for sale Financial investments held to maturity Total average interest earning assets Non-interest earning assets Total average assets Liabilities and 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 Equity Total average liabilities and equity Year ended 31 December 2016 Interest Average rate % € m Average balance € m Year ended 31 December 2015 Average rate % € m Interest(1) – 18 2,248 11 182 131 2,590 – 0.3 3.6 0.3 1.2 3.8 2.9 Average balance € m 38 7,143 64,868 7,614 19,503 106 99,272 7,557 1 24 2,363 31 398 4 2,821 2,590 2.6 106,829 2,821 (13) (0.1) 341 50 199 577 0.9 0.7 12.2 1.0 577 0.7 15,734 43,777 7,475 1,625 68,611 25,985 94,596 12,233 4 520 92 278 894 894 577 0.6 106,829 894 – 6,077 62,116 3,644 14,925 3,419 90,181 8,005 98,186 9,728 38,894 7,474 1,629 57,725 28,056 85,781 12,405 98,186 2.6 0.3 3.6 0.4 2.0 3.8 2.8 2.6 0.0 1.2 1.2 17.1 1.3 0.9 0.8 (1)In the 2015 financial statements, net interest income on swaps was shown as a separate line item in the average balance sheet. In the 2015 comparatives above, this net amount has been allocated to the underlying hedged items (note 4). In the above table, negative interest expense amounting to € 21 million is offset against interest expense (2015: Nil). In the income statement, the Group presents interest resulting from a negative effective interest rate on financial assets as interest expense. Similarly, interest resulting from a negative effective interest rate on financial liabilities is presented as interest income. 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 2016 353 n o i t a m r o n f i l a r e n e G A12 Notes 50-59 AFR 2016 pages 327-346:A11 10/03/2017 20:10 Page 354 Notes to the consolidated financial statements 57 Non-adjusting events after the reporting period On 3 February 2017, AIB announced that it had been informed by the Single Resolution Board (“SRB”) that the preferred strategy for the Group is a single point of entry bail-in strategy through a holding company. This holding company would become the new parent company of the current Group. The Group is engaging with the SRB in relation to the establishment of such a holding company which would require shareholder approval. 58 Dividends No dividends on ordinary shares were paid during the financial year ended 31 December 2016. Final dividends are not accounted for until they have been approved at the Annual General Meeting of Shareholders to be held on 27 April 2017. The Board is recommending that a final dividend of € 0.0921 per ordinary share amounting in total to € 250 million be paid on 9 May 2017. The financial statements for the financial year ended 31 December 2016 do not reflect this which will be accounted for in shareholders’ equity as an appropriation in 2017 of distributable reserves. 59 Approval of financial statements The financial statements were approved by the Board of Directors on 1 March 2017. 354 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 355 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 Note a b c d e f g h i j k l Accounting policies 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 Provisions for impairment on loans and receivables NAMA senior bonds Financial investments available for sale Financial investments held to maturity m Investments in Group undertakings n o p q r s t u v w x y z Intangible assets Property, plant and equipment Deferred taxation Deposits by central banks and banks Customer accounts Trading portfolio financial liabilities Debt securities in issue Other liabilities Provisions for liabilities and commitments Subordinated liabilities and other capital instruments Share capital Other equity interests Capital reserves and capital redemption reserves aa Offsetting financial assets and financial liabilities ab Memorandum items: Contingent liabilities and commitments, and contingent assets ac Transferred financial assets ad Classification and measurement of financial assets and financial liabilities ae af Fair value of financial instruments Statement of cash flows ag Related party transactions ah Commitments ai aj Credit risk information Funding and liquidity risk information ak Market risk information Page 356 357 358 360 360 360 363 363 364 368 369 370 371 372 373 374 379 380 381 382 383 383 383 384 384 385 385 385 385 386 389 390 391 393 400 402 402 403 413 414 i i w w e e v v e e r r s s s s e e n n s s u u B B i 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 2016 355 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 356 Parent company statement of financial position as at 31 December 2016 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 Financial investments held to maturity Interests in associated undertakings Investments in Group undertakings Intangible assets Property, plant and equipment Other assets Current taxation Deferred tax assets Prepayments and accrued income Total assets Liabilities Deposits by central banks and banks Customer accounts Trading portfolio financial liabilities Derivative financial instruments Debt securities in issue Current taxation Deferred tax liabilities Other liabilities Accruals and deferred income Retirement benefit liabilities Provisions for liabilities and commitments Subordinated liabilities and other capital instruments Total liabilities Equity Share capital Share premium Reserves Total shareholders’equity Other equity interests Total equity Total liabilities and equity Notes af d e f g h j k l m n o p q r s f t u c v w x x y 2016 € m 2015 € m 2,396 1,333 59 1 1 1,852 18,129 25,870 1,799 17,660 3,356 3 5,704 373 315 191 2 2,457 381 80,549 13,411 49,325 – 1,848 1,147 – 33 271 243 101 170 791 67,340 1,696 1,386 9,633 12,715 494 13,209 80,549 67 2 1 1,718 21,311 29,500 5,616 17,510 3,483 3 5,226 278 299 249 1 2,421 435 89,453 19,651 49,129 86 2,032 1,600 16 – 265 407 310 205 2,318 76,019 1,696 1,386 9,858 12,940 494 13,434 89,453 Richard Pym Chairman 1 March 2017 356 Bernard Byrne Chief Executive Officer Mark Bourke Chief Financial Officer Sarah McLaughlin Company Secretary Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 357 Parent company statement of cash flows for the financial year ended 31 December 2016 Cash flows from operating activities Profit before taxation for the year from continuing operations Adjustments for: – Non-cash and other items – Change in operating assets – Change in operating liabilities – Taxation (paid)/refund Net cash inflow from operating activities Cash flows from investing activities 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 Investment in Group undertakings Dividends received from associated undertakings Net cash (outflow) from investing activities Cash flows from financing activities Net proceeds on issue of Additional Tier 1 Securities Net proceeds on issue of € 750 million Tier 2 Notes due 2025 Redemption of 2009 Preference Shares Redemption of Contingent Capital Notes Distribution paid on other equity interests Dividends paid on 2009 Preference Shares Interest paid on subordinated liabilities and other capital instruments Net cash outflow from financing activities Change in cash and cash equivalents Opening cash and cash equivalents Effect of exchange translation adjustments Closing cash and cash equivalents (1)Excludes non-cash acquisition of € 65 million. (2)Excludes non-cash disposal consideration of € 75 million. Notes af af af k o n y w x af 2016 € m 2015 € m 124 1,096 628 9,666 (5,667) (71) 4,680 (741) 6,540 (6,184) 3 714 (3,713)(1) (4,257) 3,364(2) (52) – (162) (1,126) 11 (1,678) – – – (1,600) (37) – (191) 4,386(3) (82) 14 (155) 13 (81) 494 750 (1,700) – – (446) (160) (1,828) (1,062) 1,174 1,872 (100) 2,946 (429) 2,242 59 1,872 (3)Transfer from financial investments available for sale to financial investments held to maturity of € 3,487 million not reflected in cash flows (note 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 Allied Irish Banks, p.l.c. Annual Financial Report 2016 357 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 358 m € 4 3 4 , 3 1 m € ) 9 7 ( m € 8 1 5 , 7 l a t o 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 ) 0 2 ( ) 8 6 1 ( ) 8 8 1 ( – ) 7 3 ( ) 7 3 ( – 8 8 – – – ) 0 2 ( 6 5 1 6 3 1 1 6 3 ) 7 3 ( 4 2 3 m € 9 1 3 – 2 9 2 9 – – – i g n g d e h s e v r e s e r – ) 4 2 4 ( ) 4 2 4 ( – – – 3 9 4 , 1 m € 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 m € 0 1 – – – – – – – – – – – – m € 4 1 s e v r e s e r 9 0 2 , 3 1 ) 1 7 ( 8 7 9 , 7 1 1 4 9 6 0 , 1 0 1 4 1 m € 3 8 5 – – – – ) 1 6 3 ( ) 1 6 3 ( 2 2 2 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 l a t i p a C s e v r e s e r n o i t p m e d e r s e v r e s e r m € 4 9 4 r e h t O y t i u q e s t s e r e t n i 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 € m € 6 8 3 , 1 6 9 6 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 6 1 0 2 y r a u n a J 1 t A 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 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 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 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 s t s e r e t n i y t i u q e r e h t o n o n o i t u b i r t s D i ) z e t o n ( s n o i t u b i r t n o c l a t i p a C s n o i t u b i r t s d d n a i y b s n o i t u b i r t n o c l a t o T s r e n w o o t 4 9 4 6 8 3 , 1 6 9 6 1 , 6 1 0 2 r e b m e c e D 1 3 t A Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 358 6 1 0 2 r e b m e c e D 1 3 d e d n e r a e y l i a c n a n i f e h t r o f A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 359 ) 9 7 ( 8 1 5 , 7 9 1 3 3 9 4 , 1 6 4 9 7 8 7 3 3 7 , 1 – ) 0 8 2 ( – – – 4 9 4 ) 1 2 ( ) 0 0 7 , 1 ( ) 1 2 7 , 1 ( 1 2 – ) 6 6 1 ( – – – – – ) 8 1 ( – – – – – – – – – – – – – – – 9 4 5 – – – – – – – – ) 2 5 6 , 1 ( ) 8 1 ( 4 3 4 , 3 1 – – 9 4 5 – 2 2 – – – – – – – – – – – – – 3 5 3 , 3 1 8 1 l a t o T m € 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 m € ) 9 4 5 ( m € ) 1 8 ( 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 m € 1 7 1 , 8 6 4 9 9 7 6 5 2 6 , 1 m € 7 2 3 – ) 8 ( ) 8 ( 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 m € 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 9 7 3 , 1 – 4 1 1 4 1 1 8 9 3 ) 0 8 2 ( 8 1 ) 9 4 5 ( – 1 – ) 0 0 7 , 1 ( ) 0 0 7 , 1 ( – – ) 6 6 1 ( ) 8 7 2 , 2 ( – – – – – – – – – – – – – – – – – – – – – – – – – – n o i t a u a v e R l l a t i p a C – – – – – – – – ) 1 ( – – – – – – ) 1 ( 0 1 m € 1 1 s e v r e s e r – – – – – – – – – – – 4 1 4 1 – – – 4 1 4 1 m € 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 r e h t O y t i u q e s t s e r e t n i 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 € 1 8 9 – – – ) 8 9 3 ( – – – – – – – – – – – m € m € m € – – – – – – – – – – – – – – – 4 9 4 2 5 7 , 1 4 4 3 1 , 5 1 0 2 y r a u n a J 1 t A – – – – – – – – – – – – – – – – – – – – – – ) 1 2 ( ) 4 1 ( ) 5 3 ( 1 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 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 e v i s n e h e r p m o c l a t 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 r e n w o h t i w s n o i t c a s n a r 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 i n o s r e v n o c – s e r a h S e c n e r e f e r P 9 0 0 2 n o i t p m e d e r – s e r a h S e c n e r e f e r P 9 0 0 2 s e i t i r u c e S 1 r e T i l a n o i t i d d A f o e u s s I s e r a h s y r u s a e r t f o n o i t a l l e c n a C s t n e m y a p d e s a b e r a h S ) x e t o n ( n o i t i a s n a g r o e r l a t i p a C s t n e m e v o m r e h t O i n o s r e v n o c n o d e u s s i s e r a h s y r a n d r O i n o d e u s s i s e r a h s i y r a n d r o s u n o B s e r a h S e c n e r e f e r P 9 0 0 2 f o s e r a h S e c n e r e e r P 9 0 0 2 n o f d n e d v D i i ) z e t o n ( s n o i t u b i r t n o c l a t i p a C ) 6 6 3 ( 6 6 3 s e r a h S e c n e r e f e r P 9 0 0 2 f o i n o s r e v n o c – – n o i t p m e d e r / n o s r e v n o c i f o e t a d o t f s e r a h S e c n e r e e r P 9 0 0 2 n o d a p i d n e d v D i i ) 8 9 3 ( 3 8 5 4 9 4 4 9 4 ) 6 6 3 ( 2 5 3 6 8 3 , 1 6 9 6 1 , s n o i t u b i r t s d d n a i y b s n o i t u b i r t n o c l a t o T 5 1 0 2 r e b m e c e D 1 3 t A s r e n w o o t 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 5 1 0 2 r e b m e c e D 1 3 d e d n e r a e y l i a c n a n i f e h t r o f Allied Irish Banks, p.l.c. Annual Financial Report 2016 359 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 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 360 Notes to the parent company financial statements a Accounting policies Where applicable, the accounting policies adopted by Allied Irish Banks, p.l.c. (the parent company) are the same as those of AIB Group as set out in note 1 to the consolidated financial statements on pages 229 to 255. The parent company financial statements and related notes set out on pages 356 to 414 have been prepared in accordance with International Financial Reporting Standards (collectively “IFRSs”) as issued by the IASB and IFRSs as adopted by the EU and applicable for the financial year ended 31 December 2016. They also comply with those parts of the Companies Act 2014 applicable to companies reporting under IFRS and with the European Union (Credit Institutions: Financial Statements) Regulations 2015. 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. A description of the critical accounting judgements and estimates is set out in note 2 to the consolidated financial statements on pages 256 to 260. Parent Company Income statement In accordance with Section 304(2) of the Companies Act 2014, the parent company is availing of the exemption to omit the income statement, statement of comprehensive income and related notes from its financial statements; from presenting them to the Annual General Meeting; and from filing them with the Registrar of Companies. The parent company’s loss after tax for the financial year ended 31 December 2016 is € 20 million. b Administrative expenses Personnel expenses: Wages and salaries Termination benefits(1) Retirement benefits(2) Social security costs Other personnel expenses(3) Total personnel expenses General and administrative expenses: Bank levies and regulatory fees Other general and administrative expenses Total general and administrative expenses 2016 € m 2015 € m 491 22 74 53 (73) 567 86 445 531 475 24 97 53 (81) 568 50(4) 395 445 1,098 1,013 (1)At 31 December 2016, a charge of € 22 million (2015: a charge of € 24 million) was made to the income statement in respect of termination benefits arising from the voluntary severance programme. (2)Comprises a charge of € 8 million relating to defined benefit expense (2015: a charge of € 25 million), a defined contribution expense of € 60 million (2015: € 66 million) and a long term disability payments expense of € 6 million (2015: € 6 million) (note c). (3)Other personnel expenses include other compensation costs of Nil (2015: Nil). (4)In 2015, a credit of € 1 million reclassified from ‘Other general and administrative expenses’. Personnel expenses of € 22 million (2015: € 33 million) were capitalised as part of the cost of intangible assets. c 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 12). The total cost in respect of the DC scheme for 2016 was € 60 million (2015: € 66 million) and is included in administrative expenses (note b). 360 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 361 c Retirement benefits (continued) 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 12). 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 12 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 12). Movement in defined benefit obligation and scheme assets The following table sets out the movement in the defined benefit obligation and scheme assets during 2016 and 2015: Defined benefit obligation Fair value of scheme ceiling/ assets minimum 2016 Asset Net defined benefit (liability) asset € m € m funding(1) Defined Fair value benefit of scheme assets obligation € m € m 2015 Net defined benefit (liability) asset € m (310) (5,473) 4,330 (1,143) At 1 January Included in profit or loss Past service cost 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 € m € m (4,813) 4,503 – (129) – (129) 66 – 185 – 122 (1) 121 – – – interest income – 172 – Asset ceiling/minimum funding adjustments Translation adjustment on non-euro schemes Other Contributions by employer Benefits paid (245) (245) (245) (2) 249 – 129 129 1 173 40 (129) (89) (1) 177 40 – 40 – (7) (1) (8) 66 – 185 172 (1) (119) – (120) (72) (47) 769 – 96 (1) 95 – – – – 127 (4) 646 – 134 134 2 129 82 (133) (51) (1) (23) (1) (25) (72) (47) 769 127 (2) 775 82 1 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 At 31 December (4,564) 4,708 (245) (101) (4,813) 4,503 (310) (1)In recognising the net surplus or deficit of a pension scheme, the funded status of each scheme is adjusted to reflect any minimum funding requirement imposed on the sponsor and any ceiling on the amount that the sponsor has a right to recover from a scheme. 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 2016 361 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 362 Notes to the parent company financial statements c Retirement benefits (continued) Scheme assets The following table sets out an analysis of the scheme assets at 31 December 2016 and 2015: 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 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 Total investment funds Mortgage backed securities(2) Fair value of scheme assets at 31 December (1)Located in Europe. (2)A quoted market price in an active market is not available. 2016 € m 328 73 198 160 174 342 156 190 178 53 49 1,573 11 1,584 388 1,078 1,466 54 1,520 304 (22) 333 8 12 36 214 603 603 391 2015 € m 135 62 206 166 91 330 172 178 169 53 47 1,474 10 1,484 294 1,031 1,325 53 1,378 255 23 421 7 12 36 318 794 794 434 4,708 4,503 362 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 363 c Retirement benefits (continued) 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 the event of illness or injury resulting in the employee’s long term absence from work. In 2016, Allied Irish Banks, p.l.c. contributed € 6 million (2015: € 6 million) towards insuring this benefit. This amount is included in administrative expenses (note b). d Disposal groups and non-current assets held for sale Total disposal groups and non-current assets held for sale Disposal groups and non-current assets held for sale comprise property surplus to requirements. e Trading portfolio financial assets Equity shares Of which unlisted: Equity securities 2016 € m 1 2015 € m 2 2016 € m 2015 € m 1 1 1 1 1 1 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 2016 363 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 364 Notes to the parent company financial statements f 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 of interest rate, exchange rate, equity and credit derivative contracts together with the positive and negative fair values attaching to those contracts at 31 December 2016 and 2015: 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 Total negative fair value 2016 € m 2015 € m 97,621 1,732 (1,724) 103,431 1,561 (1,873) 4,977 73 (79) 1,034 47 (45) – – – 6,825 68 (64) 2,396 89 (89) 340 – (6) 103,632 112,992 1,852 (1,848) 1,718 (2,032) (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 2016 Total € m < 1 year € m 1 < 5 years € m 5 years + € m 2015 Total € m Residual maturity Notional principal amount 47,168 31,351 Positive fair value 358 481 25,113 1,013 103,632 1,852 27,892 61,950 23,150 112,992 168 673 877 1,718 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 2016 € m 102,285 1,073 274 2015 € m 111,211 1,437 344 103,632 112,992 2016 € m 1,507 325 20 1,852 2015 € m 1,411 284 23 1,718 364 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 365 f 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 at 31 December 2016 and 2015. A description of how the fair values of derivatives are determined is set out in note 49 to the consolidated financial statements. Notional principal amount € m 2016 Fair values Assets Liabilities € m € m Notional principal amount € m 2015 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 bought and sold Total interest rate derivatives – OTC Interest rate derivatives – OTC – central clearing Interest rate swaps Total interest rate derivatives – OTC – central clearing Interest rate derivatives – exchange traded Interest rate futures bought and sold Total interest rate derivatives – exchange traded 39,862 455 641 40,958 1,520 1,520 2,182 2,182 822 52 1 875 15 15 1 1 (858) (50) (5) (913) (15) (15) – – 44,236 432 689 45,357 912 56 2 970 (944) (55) (3) (1,002) 100 100 2,184 2,184 – – – – – – – – Total interest rate derivatives 44,660 891 (928) 47,641 970 (1,002) Foreign exchange derivatives – OTC Foreign exchange contracts Currency options bought and sold Total foreign exchange derivatives Equity derivatives – OTC Equity index options bought and sold Total equity derivatives Credit derivatives – OTC Credit derivatives Total credit derivatives 4,970 7 4,977 1,034 1,034 – – 73 – 73 47 47 – – (79) – (79) (45) (45) 6,756 69 6,825 2,396 2,396 –340 – 340 67 1 68 89 89 – – (64) – (64) (89) (89) (6) (6) Total derivatives held for trading 50,671 1,011 (1,052) 57,202 1,127 (1,161) 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 2016 365 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 366 Notes to the parent company financial statements f Derivative financial instruments (continued) Notional principal amount € m 2016 Fair values Assets Liabilities € m € m Notional principal amount € m 2015 Fair values Assets Liabilities € m € m Derivatives held for hedging Derivatives designated as fair value hedges – OTC Interest rate swaps Total derivatives designated as fair value hedges – OTC Derivatives designated as fair value hedges – OTC – central clearing Interest rate swaps Total interest rate fair value hedges – OTC –central clearing 9,308 9,308 1,168 1,168 Total derivatives designated as fair value hedges 10,476 Derivatives designated as cash flow hedges – OTC Interest rate swaps Cross currency interest rate swaps Total interest rate cash flow hedges – OTC 33,155 2,589 35,744 40 40 17 17 57 639 130 769 (388) 11,738 (388) 11,738 (1) (1) – – 64 64 – – (418) (418) – – (389) 11,738 64 (418) (303) (61) (364) 41,627 2,371 43,998 502 24 526 1 1 527 591 (348) (105) (453) – – (453) (871) Derivatives designated as cash flow hedges – OTC – central clearing Interest rate swaps 6,741 15 (43) Total interest rate cash flow hedges – OTC – central clearing 6,741 Total derivatives designated as cash flow hedges 42,485 Total derivatives held for hedging 52,961 15 784 841 (43) (407) (796) 54 54 44,052 55,790 Total derivative financial instruments 103,632 1,852(1) 1,848(2) 112,992 1,718(1) (2,032)(2) (1)Includes exposure to subsidiary undertakings of € 177 million (2015: € 172 million). (2)Includes amounts due to subsidiary undertakings of € 245 million (2015: € 289 million). 366 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 367 f 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 44 77 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 23 58 68 92 169 74 Within 1 year € m 29 22 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 27 29 160 90 234 101 2016 Total € m 304 301 2015 Total € m 450 242 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 44 97 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 23 75 68 115 169 87 Within 1 year € m 29 47 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 27 49 160 126 234 123 2016 Total € m 304 374 2015 Total € m 450 345 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 2016 367 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 368 Notes to the parent company financial statements g Loans and receivables to banks Funds placed with central banks Funds placed with other banks 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 2016 € m 17 18,112 18,129 569 17,560 18,129 2015 € m 102 21,209 21,311 1,293 20,018 21,311 2,362 4,896 2016 € m 2015 € m 17,588 20,748 539 2 560 3 18,129 21,311 (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 € 929 million (2015: € 848 million) placed with derivative counterparties in relation to net derivative positions (note aa). Under reverse repurchase agreements with both 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 of non-government securities (bank bonds) with a fair value of € 2,619 million (2015: € 5,728 million). The fair value of collateral sold or repledged amounted to € 2,445 million (2015: € 4,532 million). These transactions were conducted under terms that are usual and customary to standard reverse repurchase agreements. 368 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 369 h Loans and receivables to customers Loans and receivables to customers Reverse repurchase agreements Amounts receivable under finance leases and hire purchase contracts 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 (1)Amounts due from subsidiary undertakings may include repurchase agreements. 2016 € m 27,335 – 574 80 (2,119) 25,870 19,001 6,869 25,870 12,082 2015 € m 32,129 226 488 219 (3,562) 29,500 19,630 9,870 29,500 17,169 – – Under reverse repurchase agreements, AIB has accepted collateral with a fair value of Nil (2015: € 222 million) that it is permitted to sell or repledge in the absence of default by the owner of the collateral. For details of credit quality, refer to note ai ‘Credit risk information’. Amounts receivable under finance leases and hire purchase contracts The following balances principally comprise of hire purchase agreements 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 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). 2016 € m 2015 € m 231 382 15 628 (58) 4 574 221 341 12 574 11 345 213 312 6 531 (47) 4 488 204 279 5 488 30 274 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 2016 369 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 370 Notes to the parent company financial statements i Provisions for impairment on loans and receivables The following table shows provisions for impairment on loans and receivables. The classification below aligns to the asset classes disclosed in the ‘Risk management’ section of this report. At 1 January 2016 Exchange translation adjustments Credit to income statement – customers Amounts written off Recoveries of amounts written off in previous years At 31 December 2016 Total provisions are split as follows: Specific IBNR Amounts include: Loans and receivables to customers (note h) At 1 January 2015 Exchange translation adjustments Credit to income statement – customers Amounts written off Recoveries of amounts written off in previous years At 31 December 2015 Total provisions are split as follows: Specific IBNR Amounts include: Loans and receivables to customers (note h) Other Property and Non-property business € m construction € m personal € m Residential mortgages € m 136 – (20) (9) – 107 92 15 107 480 – (18) (208) – 254 220 34 254 1,855 – (128) (689) – 1,038 958 80 1,038 (365) (1,271) Residential mortgages € m Other personal € m Property and construction € m Non-property business € m 198 1 (41) (22) – 136 125 11 136 713 1 (14) (220) – 480 436 44 480 4,458 15 (196) (2,425) 3 1,855 1,707 148 1,855 2016 Total € m 3,562 (3) (175) 6 2,119 1,896 223 2,119 2,119 2015 Total € m 7,564 27 (501) (3,533) 1,091 (3) (9) 6 720 626 94 720 2,195 10 (250) (866) 2 5 1,091 3,562 955 136 1,091 3,223 339 3,562 3,562 370 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 371 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 Amortisation of discount Repayments Acceleration/re-estimation of the timing of cash flows At 31 December 2016 € m 5,616 11 (3,838) 10 1,799 2015 € m 9,423 21 (3,834) 6 5,616 On initial recognition of the NAMA senior bonds, AIB made certain assumptions as to the timing of expected repayments. These assumptions underpinning the repayments and their timing are subject to continuing review. Accordingly, in 2016, a gain of € 10 million has been recognised following the acceleration of repayments by NAMA (2015: a gain of € 6 million). These gains were accounted for as adjustments to the carrying value of the bonds and were reflected in ‘Other operating income’. The estimated fair value of the bonds at 31 December 2016 is € 1,807 million (2015: € 5,626 million). The nominal value of the bonds is € 1,805 million (2015: € 5,643 million). Whilst these bonds do not have an external credit rating, the Group has attributed to them a rating of A (2015: A–) i.e. the external rating of the Sovereign. At 31 December 2016, € 729 million (2015: € 1,257 million) of NAMA senior bonds were pledged to central banks and banks (note q). 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 Allied Irish Banks, p.l.c. Annual Financial Report 2016 371 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 372 Notes to the parent company financial statements k Financial investments available for sale The following table sets out at 31 December 2016 and 2015, the carrying value (fair value) of financial investments available for sale by major classifications together with the unrealised gains and losses: 2016 Net after tax € m 449 124 6 55 (4) – 10 – 3 2015 Net after tax € m 514 120 5 68 (2) – 38 – 1 Fair value € m 5,114 2,706 230 1,719 433 12 6,861(1) 47 20 17,142 447 71 518 Fair value € m 5,406 3,033 245 2,008 328 1 5,720(1) 30 57 16,828 414 268 682 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 Euro corporate 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 Collateralised mortgage obligations Other asset backed securities Euro bank securities Euro corporate 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 Unrealised gross gains € m Unrealised Net unrealised gains/ (losses) € m gross losses € m Tax effect € m 525 148 8 64 – – 102 – 3 850 401 13 414 (13) (6) (1) (1) (8) – (91) – – (120) – – – 512 142 7 63 (8) – 11 – 3 730 401 13 414 (63) (18) (1) (8) 4 – (1) – – (87) 643 (50) (3) (53) 351 10 361 17,660 1,264 (120) 1,144 (140) 1,004 Unrealised gross gains € m Unrealised gross losses € m Net unrealised gains/ (losses) € m Tax effect € m 587 140 7 78 – – 81 – 3 896 369 267 636 – (3) (1) – (3) – (38) – (2) (47) – – – 587 137 6 78 (3) – 43 – 1 (73) (17) (1) (10) 1 – (5) – – 849 (105) 744 369 267 636 (46) (88) (134) 323 179 502 17,510 1,532 (47) 1,485 (239) 1,246 (1)Includes € 2,310 million (2015: € 1,120 million) in respect of subsidiary undertakings. Available for sale financial investments with unrealised losses have been assessed for impairment based on the credit risk profile of the counterparties involved. A writeback of impairment losses of € 2 million on debt securities (2015: Nil) has been recognised. 372 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 373 Debt securities € m Equity securities € m 2015 Total € m k Financial investments available for sale (continued) Analysis of movements in financial investments available for sale At 1 January Exchange translation adjustments Purchases/acquisitions Sales/disposals Maturities IAS 39 reclassification out Writeback of provisions for impairment Amortisation of discounts net of premiums Movement in unrealised gains/(losses) At 31 December Of which: Listed Unlisted Debt securities € m Equity securities € m 16,828 (1) 3,713 (3,100) (93) – 2 (110) (97) 17,142 17,142 – 17,142 682 – 65 (246) – – – – 17 518 – 518 518 2016 Total € m 17,510 (1) 3,778 (3,346) (93) – 2 (110) (80) 20,620 27 4,257 (4,077) (309) (3,487)(1) – (98) (105) 17,660 16,828 17,142 518 17,660 16,828 – 16,828 360 20,980 – – – – – – – 322 682 – 682 682 27 4,257 (4,077) (309) (3,487) – (98) 217 17,510 16,828 682 17,510 (1)Irish Government securities with a carrying value of € 3,487 million were reclassified from financial investments available for sale to financial investments held to maturity in 2015. l Financial investments held to maturity Government bonds Total financial investments held to maturity Analysis of movements in financial investments held to maturity At 1 January IAS 39 reclassifications in 2015 (note k) Amortisation of fair value gain At 31 December 2016 € m 3,356 3,356 2015 € m 3,483 3,483 Debt securities 2016 € m 3,483 – (127) 3,356 2015 € m – 3,487 (4) 3,483 Following a review of the Group’s investment strategy, a decision was taken to reclassify a portfolio of Irish Government securities to held to maturity from the available for sale asset portfolio. Government bonds with a fair value of € 3,487 million were reclassified from available for sale to held to maturity in 2015. The reclassification reflects the Group’s positive intention and ability to hold these securities to maturity. On the date of reclassification, the accumulated fair value gain held in other comprehensive income was € 549 million. This unrealised gain is being amortised to interest income using the effective income method over the remaining life of the bonds. Financial investments held to maturity are listed on a recognised stock exchange. Their maturity profile is set out in note aj. 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 2016 373 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 374 Notes to the parent company financial statements m Investments in Group undertakings Equity At 1 January Additions (Impairment)/reversal of impairment At 31 December Subordinated debt At 1 January and 31 December Total Of which: Credit institutions Other Total – all unquoted 2016 € m 4,926 1,126(1) (648)(2) 5,404 300 5,704 4,397 1,307 5,704 2015 € m 4,806 – 120 4,926 300 5,226 4,397 829 5,226 (1)In 2016, Allied Irish Bank, p.l.c. invested € 1.1 billion equity capital into AIB Holding (N.I.) Limited. (2)Impairment amounting to € 678 million in AIB Holding (N.I.) Limited offset by reversal of impairment amounting to € 30 million in AIB UK Loan Management Limited. 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 d.a.c.* *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 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. 374 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 375 m Investments in Group undertakings (continued) Principal subsidiary undertakings incorporated in the Republic of Ireland (continued) AIB Mortgage Bank (continued) As at 31 December 2016, the total amount of principal outstanding in respect of mortgage covered securities issued by AIB Mortgage Bank was € 7.7 billion (2015: € 7.2 billion) of which € 5.3 billion was held by external debt investors (2015: € 4.8 billion), € 2.4 billion by Allied Irish Banks, p.l.c. (2015: 1.1 billion) and Nil was self-issued to AIB Mortgage Bank (2015: € 1.3 billion). The mortgage covered securities issued to Allied Irish Banks, p.l.c. and to AIB Mortgage Bank were held in an Allied Irish Banks, p.l.c. account subject to a fixed charge in favour of the Central Bank of Ireland in support of Eurosystem refinancing operations. As at 31 December 2016, the total amount of principal outstanding of mortgage loans (mortgage credit assets) and cash comprised in AIB Mortgage Bank’s cover assets pool was € 13.9 billion (2015: € 13.9 billion). EBS d.a.c. (“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 € 12.9 billion as at 31 December 2016. 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. 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 directors 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. Between December 2008 and 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 € 8.44 billion. As at 31 December 2016, the total amount of principal outstanding of mortgage loans (mortgage credit assets) and cash comprised in EBS Mortgage Finance’s cover assets pool was € 3.8 billion (2015: € 4.2 billion). In December 2008, EBS Mortgage Finance launched a € 6 billion Mortgage Covered Securities Programme. As at 31 December 2016, the total amount of principal outstanding in respect of mortgage covered securities issued by EBS Mortgage Finance was € 1.5 billion (2015: € 2.4 billion) of which Nil (2015: Nil) was held by external debt investors. EBS held € 1.5 billion (2015: € 2.4 billion). Prior to its acquisition by AIB, EBS had set up a number of special purpose entities (“SPEs”), 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 € 2,733 million (2015: € 2,961 million). For further details on these SPEs, see note 47 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 2016 375 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 376 Notes to the parent company financial statements m Investments in Group undertakings (continued) 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 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 £ 13.4 billion at 31 December 2016. 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. Great Britain (GB) In this market, the segment operates as Allied Irish Bank (GB) (“AIB GB”) out of 16 locations in key cities across Great Britain. AIB GB’s strategy is to be a leading provider of full banking services to owner-managed businesses and small corporates who value a high-service relationship in local geographies and in selected sectors. In addition, AIB GB has a committed and unique focus on British Irish trade. Northern Ireland (NI) In this market, the segment operates as First Trust Bank (“FTB”) which operates out of 30 branches and outlets throughout Northern Ireland. FTB offers a full banking service, including online, mobile and telephone banking to business and personal customers across the range of customer segments, including professionals, high net worth individuals, SMEs, as well as public and corporate sectors. 376 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 377 m Investments in Group undertakings (continued) 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 357 of the Companies Act 2014. In accordance with the Act, Allied Irish Banks, p.l.c. has irrevocably guaranteed the liabilities of these subsidiaries. AIB Capital Markets Limited AIB Corporate Banking Limited AIB Corporate Finance Limited AIB Holdings (Ireland) Limited AIB Finance Limited AIB International Leasing Limited AIB Leasing Limited AIB Services Limited Skonac Unlimited Company Skobar Unlimited Company Skovale Unlimited Company Skopek Unlimited Company 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 Unlimited Company General Estates and Trust Company Limited AIB Limited Commdec Limited Dohcar Limited Dohhen Limited Kavwall 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 AIB Investment Services Limited AIB Financial Services Limited AIB Insurance Services Limited AIB 24 Hour Services Limited AIB Commercial Finance Limited AIB Debt Management Limited In presenting details of the principal subsidiary undertakings, the exemption permitted by sections 316 and 348 of the Companies Act 2014 and by the European Union (Credit Institutions: Financial Statements) Regulations 2015, has been availed of and Allied Irish Banks, p.l.c. will annex all relevant information, including a full listing of subsidiary undertakings, to its annual return to the Companies Registration Office in accordance with these regulations and the Companies Act 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 2016 377 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 378 Notes to the parent company financial statements m Investments in Group undertakings (continued) 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 AIB Corporate Leasing Limited AIB Capital Markets Holdings (UK) Limited EBS d.a.c. EBS Mortgage Finance AIB Holdings (NI) Limited AIB Film Distribution Impairment losses 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 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 2016, the carrying value of investments in the following subsidiary undertakings of the parent company were reviewed for impairment/reversal of impairment: – AIB Holdings (N.I.) Limited; and – AIB UK Loan Management Limited. 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 shareholder reserves in this subsidiary. 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 remained negative shareholder reserves in this company. In 2016, following a capital injection of € 1,126 million (£ 862 million), AIB reviewed this investment for impairment and provided for impairment amounting to € 678 million (£ 508 million) in order to writedown the investment to its estimated recoverable amount based on its value in use. AIB UK Loan Management Limited The carrying value of the investment in AIB UK Loan Management Limited, € 965 million (£805 million), 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 with some selective disposals. Against this backdrop, a review at 31 December 2015 was carried out. As a result of positive shareholder reserves in the subsidiary and future expectations, it was considered that there were sufficient indicators to suggest that the reversal of a portion of the previous impairment loss was appropriate. Accordingly, € 120 million (£ 100 million) of the previous impairment provision was reversed. In 2016, it was considered appropriate to reverse a further € 30 million (£ 25 million) due to continued positive shareholder reserves and future expectations. 378 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 379 n Intangible assets Cost At 1 January Additions Transfers in/(out) At 31 December Amortisation/impairment At 1 January Amortisation for the year Impairment for the year At 31 December Carrying value at 31 December Cost At 1 January Additions Transfers in/(out) Amounts written off(1) Exchange translation adjustments At 31 December Amortisation/impairment At 1 January Amortisation for the year Impairment for the year Amounts written off(1) Exchange translation adjustments At 31 December Carrying value at 31 December Software externally purchased € m Software Software under internally generated construction € m € m Other € m 288 18 – 306 261 13 8 282 24 438 40 60 538 305 39 3 347 191 118 104 (60) 162 – – 4 4 158 3 – – 3 3 – – 3 – Software externally purchased € m Software internally generated € m Software under construction € m Other € m 278 15 – (5) – 288 257 9 – (5) – 261 27 396 48 14 (20) – 438 299 26 – (20) – 305 133 40 92 (14) – – 118 – – – – – – 118 3 – – – – 3 3 – – – – 3 – (1)Relates to assets which are no longer in use with a Nil carrying value. 2016 Total € m 847 162 – 1,009 569 52 15 636 373 2015 Total € m 717 155 – (25) – 847 559 35 – (25) – 569 278 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 2016 379 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 380 Notes to the parent company financial statements o Property, plant and equipment Freehold € m 162 3 1 – – 166 43 (1) 4 – 46 120 Freehold € m 121 – 41 – 162 40 3 – 43 119 Property Long leasehold € m Leasehold under 50 years € m 74 2 – – – 76 25 – 2 – 27 49 93 7 5 – (1) 104 56 1 6 – 63 41 Equipment Assets under construction € m 449 3 34 (1) – 485 377 – 23 (1) 399 86 € m 22 (15) 12 – – 19 – – – – – 19 Property Long leasehold € m Leasehold under 50 years € m 73 1 – – 74 24 1 – 25 49 87 2 4 – 93 50 6 – 56 37 Equipment € m 432 1 18 (2) 449 358 21 (2) 377 72 Assets under construction € m 7 (4) 19 – 22 – – – – 22 2016 Total € m 800 – 52 (1) (1) 850 501 – 35 (1) 535 315 2015 Total € m 720 – 82 (2) 800 472 31 (2) 501 299 Cost At 1 January Transfers in/(out) Additions Disposals Exchange traslation adjustments At 31 December Depreciation/impairment At 1 January Transfers in/(out) Depreciation charge for the year Disposals At 31 December Carrying value at 31 December Cost At 1 January Transfers in/(out) Additions Disposals At 31 December Depreciation/impairment At 1 January Depreciation charge for the year Disposals At 31 December Carrying value at 31 December The carrying value of property occupied by Allied Irish Banks, p.l.c. for its own activities was € 208 million (2015: € 201 million). 380 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 381 p Deferred taxation Deferred tax assets: Retirement benefits Unutilised tax losses Other Total gross deferred tax assets Deferred tax liabilities: Cash flow hedges Assets used in business Available for sale securities Other Total gross deferred tax liabilities Net deferred tax assets Represented on the statement of financial position as follows: Deferred tax assets Deferred tax liabilities 2016 € m 20 2,644 22 2,686 (60) (16) (153) (33) (262) 2015 € m 45 2,684 46 2,775 (49) (15) (277) (13) (354) 2,424 2,421 2,457 (33) 2,424 2,421 – 2,421 For each of the years ended 31 December 2016 and 2015, 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 2016 € m 2,421 – 89 (86) 2015 € m 2,756 (2) (183) (150) 2,424 2,421 Comments on the basis of recognition of deferred tax assets on unused tax losses are included in note 2 ‘Critical accounting judgements and estimates’ on pages 256 to 260. Information on the regulatory capital treatment of deferred tax assets is included in ‘Principal risks and uncertainties’ on page 58. At 31 December 2016, recognised deferred tax assets on tax losses and other temporary differences, net of deferred tax liabilities, totalled € 2,424 million (2015: € 2,421 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 2016 381 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 382 Notes to the parent company financial statements q Deposits by central banks and banks Central banks Eurosystem refinancing operations(1) Other borrowings Banks Securities sold under agreements to repurchase Other borrowings Of which: Due to third parties Due to subsidiary undertakings(2) Amounts include: Due to related party 2016 € m 1,900 12 1,912 4,973 6,526 11,499 13,411 7,727 5,684 13,411 2015 € m 2,900 50 2,950 10,153 6,548 16,701 19,651 13,637 6,014 19,651 – – (1)Eurosystem refinancing operations are credit facilities from the Eurosystem secured by a fixed charge over securities. (2)Amounts due to subsidiary undertakings may include repurchase agreements. Details of AIB’s sale and repurchase activity are set out in note 47 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 2016 (2015: Nil). Deposits by central banks and banks include cash collateral of € 388 million (2015: € 321 million) received from derivative counterparties in relation to net derivative positions (note 33) and also from repurchase agreement counterparties. Financial assets pledged (a) Financial assets pledged under existing agreements to repurchase, for secured borrowings, 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 3,293 5,239 8,532 5,357 10,829 16,186 Central banks € m Banks € m 2016 Total € m Central banks € m Banks € m 2015 Total € m Of which: Government securities(1) Other securities (1)Includes NAMA senior bonds. 498 2,795 3,891 1,348 4,389 4,143 20 5,337 8,364 2,465 8,384 7,802 (b) At 31 December 2015, Allied Irish Banks, p.l.c. had securitised credit card receivables with a carrying value of € 292 million as described in note 47. Funding received from external investors was included above in ‘Other borrowings’ and was secured on both existing and future credit card receivables. This securitisation structure was terminated in November 2016. 382 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 383 r 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 2016 € m 23,329 9,154 16,039 803 49,325 23,040 26,285 49,325 46,727 2,598 49,325 2015 € m 19,390 8,123 20,532 1,084 49,129 19,082 30,047 49,129 45,045 4,084 49,129 263 192 (1)AIB pledged government available for sale securities with a fair value of € 258 million (2015: € 663 million) and non-government available for sale securities with a fair value of € 619 million (2015: € 545 million) as collateral for these facilities and providing access to future funding facilities. (2)Amounts due to subsidiary undertakings may include repurchase agreements. Customer accounts include cash collateral of € 60 million received from derivative counterparties in relation to net derivative positions note aa). s Trading portfolio financial liabilities Debt securities: Government securities For contractual residual maturity – see note aj ‘Liquidity risk information’. t Debt securities in issue Bonds and medium term notes: European medium term note programme Other debt securities in issue: Commercial paper 2016 € m – – 2015 € m 86 86 2016 € m 2015 € m 1,000 1,500 147 1,147 100 1,600 Debt securities issued during the year amounted to € 389 million (31 December 2015: € 2,022 million) of which Nil relates to an EMTN issuance (31 December 2015: € 500 million) with the balance relating to issuances under the short-term commercial paper programme. Debt securities matured or repurchased amounted to € 850 million (31 December 2015: € 3,045 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 2016 383 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 384 Notes to the parent company financial statements u Other liabilities Items in transit Creditors Fair value of hedged liability positions Other v Provisions for liabilities and commitments At 1 January Exchange translation adjustments Charged to income statement Released to income statement Provisions utilised At 31 December At 1 January Transfers in Exchange translation adjustments Charged to income statement Released to income statement Provisions utilised At 31 December Liabilities and charges € m 49 – 2(3) (4)(3) – 47 Liabilities and charges € m 60 – – 11(3) (22)(3) – 49 NAMA(1) provisions Onerous(2) contracts Legal claims Other provisions € m 39 – – (29)(1) (8) 2 € m € m 2 – – – – 2 23 – 5 (3) (1) 24 € m 92 (12) 44 (1) (28) 95(4) NAMA(1) provisions Onerous(2) contracts Legal claims Other provisions € m 33 14 – 7(1) (12)(1) (3) 39 € m 16 – – – (5) (9) 2 € m 23 – – 3 (2) (1) 23 € m 90 – 5 5 – (8) 92(4) 2016 € m 21 7 23 220 271 Voluntary severance scheme € m – – – – – – Voluntary severance scheme € m – – – – – – – 2015 € m 16 8 21 220 265 2016 Total € m 205 (12) 51 (37) (37) 170(5) 2015 Total € m 222 14 5 26 (41) (21) 205(5) (1)NAMA income statement charge/(credit) relates to on-going 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)Included in writeback of provisions for liabilities and commitments in the income statement. (4)Includes € 71 million (2015: € 82 million) due to a subsidiary undertaking. (5)The total provisions for liabilities and commitments expected to be settled within one year amount to € 8 million (2015: € 55 million). 384 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 385 w 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 39 to the consolidated financial statements. x Share capital The share capital and share premium of Allied Irish Banks, p.l.c. are detailed in note 40 to the consolidated financial statements, all of which relates to Allied Irish Banks, p.l.c.. y Other equity interests Other equity interests comprise Additional Tier 1 Securities which were issued by Allied Irish Banks, p.l.c. on 3 December 2015. These are detailed in note 42 to the consolidated financial statements. z Capital reserves and capital redemption reserves Capital reserves At 1 January Transfer to revenue reserves: Anglo business transfer CCNs issuance (note w) At 31 December Capital contribution reserves € m Other capital reserves € m 427 156 (285) (76) (361) 66 – – – 156 2016 Total € m 583 (285) (76) (361) 222 Capital contribution reserves € m Other capital reserves € m 825 156 (285) (113) (398) 427 – – – 156 2015 Total € m 981 (285) (113) (398) 583 The capital contribution reserves which arose from the acquisition of Anglo deposit business and EBS and the issue of CCNs are non-distributable on initial recognition but may become distributable as outlined in accounting policy (ab) in note 1 to the consolidated financial statements. The transfers to revenue reserves relate to the capital contributions being deemed distributable. The capital contribution reserves which arose on the issue of the CCNs are now deemed to be fully distributable as the CCNs have been repaid in full. Capital redemption reserves All capital redemption reserves are held in Allied Irish Banks p.l.c. and are detailed in note 43 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 2016 385 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 386 Notes to the parent company financial statements aa 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 44 to the consolidated financial statements and apply equally to Allied Irish Banks, p.l.c. The following table shows financial assets and financial liabilities subject to offsetting, enforceable master netting arrangements and similar agreements at 31 December 2016 and 2015: Gross Net amounts of amounts of financial recognised financial assets presented liabilities in the amounts of offset 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 – 1,483 (985) (441) 2016 Net amount € m 57 (350) (350) 2,362 3,845 (2,619) (3,604) – (441) (257) (200) 1,483 2,712 4,195 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 Related amounts not offset in the statement of financial position Financial collateral (including cash collateral) pledged € m Financial position instruments € m € m 2016 Net amount € m 5,323 (350) 4,973 (4,999) (12) (38) 803 1,677 7,803 – – (350) 803 1,677 7,453 (877) (985) (6,861) – (922) (934) (74) (230) (342) Financial assets Derivative financial instruments Loans and receivables to banks – Reverse repurchase agreements Note f g Total Financial liabilities Note Deposits by central banks and banks – Securities sold under agreements to repurchase Customer accounts – Securities sold under agreements to repurchase Derivative financial instruments q r f Total 386 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 387 aa Offsetting financial assets and financial liabilities (continued) Financial assets Derivative financial instruments Loans and receivables to banks – Reverse repurchase agreements Loans and receivables to customers – Reverse repurchase agreements Note f g h Total Financial liabilities Note Deposits by central banks and banks – Securities sold under agreements to repurchase Customer accounts – Securities sold under agreements to repurchase Derivative financial instruments q r f Total Gross amounts of recognised financial assets € m 1,399 4,896 226 6,521 Gross amounts of recognised financial liabilities € m 10,153 1,084 1,894 13,131 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 2015 Net amount € m 1,399 (1,079) (341) (21) – – – – 4,896 (5,728) 226 6,521 (222) (7,029) – – (341) 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 – – – – 10,153 (10,571) (20) (438) 1,084 1,894 (1,208) (1,079) 13,131 (12,858) (1) (888) (909) (125) (73) (636) (832) 4 (849) 2015 Net amount € m 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. 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 2016 387 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 388 Notes to the parent company financial statements aa Offsetting financial assets and financial liabilities (continued) The following table reconciles 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 2016 and 2015: Net amounts of financial assets presented in the statement of financial position € m Line item in statement of financial position Carrying amount in the statement of financial position € m 2016 Financial assets not in scope of offsetting disclosures € m 1,483 Derivative financial instruments 1,852 369 Financial assets Derivative financial instruments Loans and receivables to banks – Reverse repurchase agreements 2,362 Loans and receivables to banks 18,129 15,767 Loans and receivables to customers – Reverse repurchase agreements – Loans and receivables to customers 25,870 25,870 Net amounts of financial liabilities presented in the statement of financial position € m Line item in statement of financial position Carrying amount in the statement of financial position € m 2016 Financial liabilities not in scope off offsetting disclosures € m 4,973 Deposits by central banks and banks 13,411 8,438 803 1,677 Customer accounts Derivative financial instruments 49,325 1,848 48,522 171 Net amounts of financial assets presented in the statement of financial position € m Line item in statement of financial position Carrying amount in the statement of financial position € m 2015 Financial assets not in scope of offsetting disclosures € m 1,399 Derivative financial instruments 1,718 319 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 4,896 Loans and receivables to banks 21,311 16,415 Loans and receivables to customers – Reverse repurchase agreements 226 Loans and receivables to customers 29,500 29,274 Net amounts of financial liabilities presented in the statement of financial position € m Line item in statement of financial position Carrying amount in the statement of financial position € m 2015 Financial liabilities not in scope of offsetting disclosures € m 10,153 Deposits by central banks and banks 19,651 9,498 1,084 1,894 Customer accounts Derivative financial instruments 49,129 2,032 48,045 138 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 388 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 389 ab 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 m). Details of contingent liabilities and commitments entered into by AIB Group are set out in note 45 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 45 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(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 2016 € m 2015 € m 453 312 765 54 6,007 1,619 7,680 497 334 831 37 5,992 1,590 7,619 8,445(5) 8,450(5) (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. (5)Included in exposures are amounts relating to Group subsidiaries of € 263 million (2015: € 239 million). Concentration of exposure Republic of Ireland United Kingdom United States of America Total Contingent liabilities 2015 2016 € m € m 661 1 103 765 673 1 157 831 2016 € m 7,671 4 5 7,680 Commitments Credit ratings The credit ratings of contingent liabilities and commitments as at 31 December 2016 and 2015 are set out in the following table: Good upper Good lower Watch Vulnerable Impaired Unrated Total Allied Irish Banks, p.l.c. Annual Financial Report 2016 2016 € m 3,140 4,824 98 239 144 – 8,445 2015 € m 7,597 15 7 7,619 2015 € m 2,838 4,348 199 141 311 613 8,450 389 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 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 390 Notes to the parent company financial statements ac 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 47 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 € m € m Carrying amount of associated liabilities held by Group companies € m Fair value of transferred assets Fair value of associated liabilities held by third parties € m € m Fair value of associated liabilities held by Group companies € m Sale and repurchase agreements/ similar products Securitisations: 6,461 5,926(1) Credit card receivables(2) – – – – 6,466 5,926 – – – – Carrying amount of transferred assets € m Sale and repurchase agreements 12,677 Securitisations: Carrying amount of associated liabilities held by third parties € m 11,387(1) Credit card receivables 292 200 Carrying amount of associated liabilities held by Group companies € m – 92 Fair value of transferred assets Fair value of associated liabilities held by third parties € m 12,677 € m 11,387 292 200 Fair value of associated liabilities held by Group companies € m – 92 (1)See notes q and r. (2)Securitisation transaction terminated in November 2016 (note 47 to the consolidated financial statements). 2016 Net fair value position € m 540 – 2015 Net fair value position € m 1,290 – (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 by Allied Irish Banks, p.l.c. in assets transferred to NAMA are set out in note 47 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 2016, Allied Irish Banks, p.l.c. recognised € 4 million (cumulative € 86 million) (2015: € 13 million (cumulative € 82 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 2016, Allied Irish Banks, p.l.c. recognised € 63 million (cumulative € 519 million) (2015: € 60 million (cumulative € 456 million)) in the income statement for the provision of services under this agreement. 390 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 391 ad Classification and measurement of financial assets and financial liabilities Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. The accounting policy for financial assets in note 1 (m) to the consolidated financial statements and financial liabilities in note 1 (n) to the consolidated financial statements describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the financial assets and financial liabilities by category as defined in IAS 39 Financial Instruments: Recognition and Measurement and by statement of financial position heading. At fair value through profit and loss Held for trading € m Fair value hedge derivatives € m At fair value through equity Cash flow Available for sale derivatives securities € m hedge € m At amortised cost Loans and Held to receivables maturity € m € m Financial assets Cash and balances at central banks Items in the course of collection Trading portfolio financial assets – – 1 Derivative financial instruments(2) 1,011 Loans and receivables to banks(3) Loans and receivables to customers(4) NAMA senior bonds Financial investments available for sale(5) Financial investments held to maturity Other financial assets – – – – – – – – – 57 – – – – – – – – – 784 – – – – – – – – – – – – – 17,660 – – 1,840 59 – – 18,129 25,870 1,799 – – – – – – – – – – – 3,356 – 1,012 57 784 17,660 47,697 3,356 2016 Total Other € m € m 556(1) 2,396 – – – – – – – – 363 919 59 1 1,852 18,129 25,870 1,799 17,660 3,356 363 71,485 – – – – – – – – – – – – – – – – – – – – – 13,411 49,325 – 1,147 13,411 49,325 1,848 1,147 791 239 791 239 64,913 66,761 Financial liabilities Deposits by central banks and banks(6) Customer accounts(7) – – Derivative financial instruments(8) 1,052 Debt securities in issue(9) Subordinated liabilities and other capital instruments Other financial liabilities – – – – – 389 – – – – – 407 – – – 1,052 389 407 Following footnotes to be updated. (1)Comprises cash on hand. (2)Includes exposure to subsidiary undertakings of € 177 million. (3)Includes exposure to subsidiary undertakings of € 17,560 million. (4)Includes exposure to subsidiary undertakings of € 6,869 million. (5)Includes exposure to subsidiary undertakings of € 2,310 million. (6)Includes amounts due to subsidiary undertakings of € 5,684 million. (7)Includes amounts due to subsidiary undertakings of € 2,598 million. (8)Includes amounts due to subsidiary undertakings of € 245 million. (9)Includes amounts due to subsidiary undertakings of Nil. Allied Irish Banks, p.l.c. Annual Financial Report 2016 391 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 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 392 Notes to the parent company financial statements ad Classification and measurement of financial assets and financial liabilities (continued) At fair value through profit and loss Held for trading € m Fair value hedge derivatives € m At fair value through equity Cash flow hedge derivatives € m Available for sale securities € m At amortised cost Loans and Held to receivables maturity € m € m – – – 64 – – – – – – – – – 527 – – – – – – –840 – – – – – – 17,510 – – 67 – – 21,311 29,500 5,616 – – – – – – – – – – – 3,483 – 1,128 64 527 17,510 57,334 3,483 Financial assets Cash and balances at central banks Items in the course of collection Trading portfolio financial assets – – 1 Derivative financial instruments(2) 1,127 – – – – – – Loans and receivables to banks(3) Loans and receivables to customers(4) NAMA senior bonds Financial investments available for sale(5) Financial investments held to maturity Other financial assets Financial liabilities Deposits by central banks and banks(6) Customer accounts(7) Trading portfolio financial liabilities – – 86 – – – – – – Derivative financial instruments(8) 1,161 418 453 Debt securities in issue(9) Subordinated liabilities and other capital instruments Other financial liabilities – – – – – – – – – 1,247 418 453 (1)Comprises cash on hand. (2)Includes exposure to subsidiary undertakings of € 172 million. (3)Includes exposure to subsidiary undertakings of € 20,018 million. (4)Includes exposure to subsidiary undertakings of € 9,870 million. (5)Includes exposure to subsidiary undertakings of € 1,120 million. (6)Includes amounts due to subsidiary undertakings of € 6,014 million. (7)Includes amounts due to subsidiary undertakings of € 4,084 million. (8)Includes amounts due to subsidiary undertakings of € 289 million. (9)Includes amounts due to subsidiary undertakings of Nil. – – – – – – – – – – – – – – – – – – – – – – – – 2015 Total Other € m € m 493(1) 1,333 – – – – – – – – 452 945 19,651 49,129 – – 1,600 2,318 229 67 1 1,718 21,311 29,500 5,616 17,510 3,483 452 80,991 19,651 49,129 86 2,032 1,600 2,318 229 72,927 75,045 392 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 393 ae 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 2016. 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 Allied Irish Banks, p.l.c. Annual Financial Report 2016 393 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 394 Notes to the parent company financial statements ae Fair value of financial instruments (continued) Carrying amount Fair value Fair value hierarchy € m Level 1 € m Level 2 € m Level 3 € m Financial assets measured at fair value Trading portfolio financial assets Equity securities Derivative financial instruments Interest rate derivatives Exchange rate derivatives Equity derivatives Financial investments available for sale Government securities Supranational banks and government agencies Asset backed securities Bank securities Corporate securities Equity securities Financial assets not measured at fair value Cash and balances at central banks Items in the course of collection Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments held to maturity Other financial assets Financial liabilities measured at fair value Derivative financial instruments Interest rate derivatives Exchange rate derivatives Equity derivatives Financial liabilities not measured at fair value Deposits by central banks and banks Other borrowings Secured borrowings Customer accounts Current accounts Demand deposits Time deposits Securities sold under agreements to repurchase Debt securities in issue Bonds and medium term notes Other debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities (1)Comprises cash on hand. 1 1,732 73 47 8,050 1,719 445 6,861 67 518 – – – – 8,050 1,719 432 4,551 67 – 1 1,364 73 43 – – 13 2,310 – 1 19,513 14,819 3,805 2,396 59 18,129 25,870 1,799 3,356 363 51,972 1,724 79 45 1,848 6,388 7,023 23,329 9,154 16,039 803 556(1) – – – – 3,439 – 3,995 – – – – – – – – – – 1,000 1,043 147 791 239 – 766 – 1,840 – 17 – – – – 1,570 79 41 1,690 – 1,901 – – – – – 147 79 – 64,913 1,809 2,127 – 368 – 4 – – – – – 517 889 – 59 18,112 25,637 1,807 – 363 154 – 4 158 6,388 5,123 23,329 9,154 16,081 803 – – – 239 61,117 1,857 45,978 2016 Total € m 1 1,732 73 47 8,050 1,719 445 6,861 67 518 19,513 2,396 59 18,129 25,637 1,807 3,439 363 51,830 1,724 79 45 1,848 6,388 7,024 23,329 9,154 16,081 803 1,043 147 845 239 65,053 394 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 395 ae Fair value of financial instruments (continued) Carrying amount Fair value Fair value hierarchy Level 2 € m Level 1 € m Level 3 € m Financial assets measured at fair value Trading portfolio financial assets Equity securities Derivative financial instruments Interest rate derivatives Exchange rate derivatives Equity derivatives Financial investments available for sale Government securities Supranational banks and government agencies Asset backed securities Bank securities Corporate securities Equity securities Financial assets not measured at fair value Cash and balances at central banks Items in the course of collection Loans and receivables to banks Loans and receivables to customers NAMA senior bonds Financial investments held to maturity Other financial assets Financial liabilities measured at fair value Trading portfolio financial liabilities Debt securities Derivative financial instruments Interest rate derivatives Exchange rate derivatives Equity derivatives Credit derivatives Financial liabilities not measured at fair value Deposits by central banks and banks Other borrowings Secured borrowings Customer accounts Current accounts Demand deposits Time deposits Securities sold under agreements to repurchase Debt securities in issue Bonds and medium term notes Other debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities (1)Comprises cash on hand. Allied Irish Banks, p.l.c. Annual Financial Report 2016 € m 1 1,561 68 89 8,684 2,008 329 5,720 87 682 – – – – 8,533 2,008 328 4,600 76 – 19,229 15,545 1,333 67 21,311 29,500 5,616 3,483 452 61,762 86 1,873 64 89 6 2,118 6,598 13,053 19,390 8,123 20,532 1,084 1,500 100 2,318 229 72,927 493(1) – – – – 3,479 – 3,972 86 – – – – 86 – – – – – – 1,542 – 758 – 2,300 1 1,237 68 50 151 – 1 1,120 – – 2,628 840 – 102 – – – – 942 – 1,655 64 51 6 1,776 – 2,903 – – – – – 100 1,778 – 4,781 2015 Total € m 1 1,561 68 89 8,684 2,008 329 5,720 87 682 – 324 – 39 – – – – 11 682 1,056 19,229 – 67 21,209 29,283 5,626 – 452 56,637 – 218 – 38 – 256 6,598 10,153 19,390 8,123 20,623 1,084 – – – 229 66,200 1,333 67 21,311 29,283 5,626 3,479 452 61,551 86 1,873 64 89 6 2,118 6,598 13,056 19,390 8,123 20,623 1,084 1,542 100 2,536 229 73,281 395 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 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:11 Page 396 Notes to the parent company financial statements ae Fair value of financial instruments (continued) Significant transfers between Level 1 and Level 2 of the fair value hierarchy The following table shows transfers between Level 1 and Level 2 of the fair value hierarchy for the years ended 31 December 2016 and 2015: Financial assets Transfer into Level 2 from Level 1 Trading portfolio € m – Debt securities € m – 2016 Total € m – Trading portfolio € m – Debt securities € m – 2015 Total € m – 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 2016 and 2015: Financial assets Financial liabilities 2016 Derivatives Available for sale Total Derivatives Total Debt securities € m Equity securities € m 11 – – – – – – – – (9) (2) – 682 – – 246 246 (230) – (230) 65 (246) – 517 € m 363 32 (23) – (23) – – – – – – 372 € m 1,056 32 (23) 246 223 (230) – (230) 65 (255) (2) 889 € m 256 – (38) – (38) – (2) (2) – – (58) 158 € m 256 – (38) – (38) – (2) (2) – – (58) 158 At 1 January 2016 Transfers into Level 3(1) Total gains or (losses) in: Profit or loss – Net trading income – Other operating income Other comprehensive income – Net change in fair value of financial investments available for sale – Net change in fair value of cash flow hedges Purchases/additions Sales/disposals Settlements At 31 December 2016 (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 the measurement of fair value for a particular agreement relied mainly on unobservable data. 396 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 397 ae Fair value of financial instruments (continued) Reconciliation of balances in Level 3 of the fair value hierarchy Financial assets Available for sale Debt securities € m Equity securities € m 3 359 At 1 January 2015 Total gains or (losses) in: Other comprehensive income – Net change in fair value of financial investments available for sale – Net change in fair value of cash flow hedges Purchases Settlements(2) At 31 December 2015 Derivatives € m 460 – – – – (97) 363 (2) – (2) 10 – 11 2015 Financial liabilities Total Derivatives Total € m 822 321 – 321 10 (97) 323 – 323 – – 682 1,056 € m 271 – 19 19 – (34) 256 € m 271 – 19 19 – (34) 256 (2)Includes gains and losses recognised in ‘Net trading income/(loss)’. In addition, for unrealised gains or losses at 31 December 2016, see table below. The following table shows 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 2016 and 2015: Net trading income – gains 2016 € m 89 2015 € m 54 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 2016 397 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 398 Notes to the parent company financial statements ae Fair value of financial instruments (continued) Significant unobservable inputs The table below sets out information about significant unobservable inputs used at the years ended 31 December 2016 and 2015 in measuring financial instruments categorised as Level 3 in the fair value hierarchy: Fair Value 2016 € m 372 158 2015 € m 363 256 Financial instrument Uncollateralised Asset customer Liability derivatives Valuation technique Significant unobservable inputs CVA LGD PD Range of estimates 2016 47% – 67% (Base 54%) 0.8% – 1.6% 2015 47% – 73% (Base 55%) 1.0% – 1.6% (Base 1.2% 1 year PD) (Base 1.3% 1 year PD) Combination As above with greater As above with greater LGD and PD(1) unfavourable impact unfavourable impact due to combination of due to combination of PD and LGD changes PD and LGD changes FVA Funding spreads (0.6%) – 0.5% (0.4%) – 0.5% (1)The fair value measurement sensitivity to unobservable inputs ranges from negative € 33 million to positive € 19 million (2015: negative € 44 million to positive € 23 million). 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. Financial instrument NAMA Asset subordinated bonds 2016 € m 447 2015 € m Valuation technique Significant unobservable inputs 2016 2015 414 Discounted NAMA Discount rate of 7.21% Discount rate of 9% cash flows profitability i.e. applicable to base applicable to base ability to generate asset price. The asset price. The cash flow for estimates range from estimates range from:: repayment (a) discount rate of 9%; (a) NAMA making to (b) an early full full 5.26% coupon repayment of coupons payments; to (b) an plus capital (March 2019) early full repayment of coupons plus capital (March 2019). In June 2016, the Group received Series B Preferred Stock in Visa Inc. as part consideration for its holding of shares in Visa Europe. This preferred stock will be convertible into Class A Common Stock of Visa Inc. at some point in the future. The conversion is subject to certain Visa Europe litigation risks that may affect the ultimate conversion rate. In addition, the stock, being denominated in US dollars, is subject to foreign exchange risk. 2016 € m 70 Asset Financial instrument Visa Inc. Series B Preferred Stock 2015 Valuation € m technique Significant unobservable inputs Range of estimates at 31 December 2016 N/A Quoted market price Final conversion Estimates range from: (a) no discount of Visa Inc. Class A rate of Visa Inc. for conversion rate variability with a Common Stock to Series B Preferred discount for illiquidity only; to (b) 100% which a discount Stock into Visa Inc. discount for conversion rate variability. has been applied for Class A Common Stock. the illiquidity and the conversion rate variability of the preferred stock of Visa Inc. (50%). This was converted to euro at the year end rate. 398 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 399 ae 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 at 31 December 2016 and 2015: Level 3 2016 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 31 – 31 – – (39) (65) (104) (3) (3) – 80 80 – – – (12) (12) – – 2015 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 29 – 29 2 2 (43) – (43) (9) (9) – 25 25 – – – (98) (98) – – Day 1 gain or loss: No difference existed between the fair value of financial instruments at initial recognition 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 2016 399 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 400 Notes to the parent company financial statements af Statement of cash flows Non-cash and other items included in profit before taxation Non-cash items Profit on disposal of property, plant and equipment Profit on disposal/transfer of loans and receivables Dividends received from equity securities Dividends received from associated undertakings Provisions/(writeback of provisions) for impairment of subsidiary undertakings (Writeback of provisions) for impairment on loans and receivables (Writeback of provisions) for impairment on financial investments available for sale (Writeback of provisions) for liabilities and commitments Change in other provisions Retirement benefits – defined benefit expense Depreciation, amortisation and impairment Interest on subordinated liabilities and other capital instruments Profit on disposal of financial investments available for sale Loss on termination of hedging swaps Remeasurement of NAMA senior bonds Amortisation of premiums and discounts Fair value gain on re-estimation of cash flows on loans and receivables previously restructured Income from settlement of claim Change in prepayments and accrued income Change in accruals and deferred income Effect of exchange translation and other adjustments(1) Total non-cash items Contributions to defined benefit pension schemes Dividends received from equity securities Total other items Non-cash and other items for the year 2016 € m – (29) (24) (11) 648 (175) (2) (2) 16 8 102 199 (336) 59 (10) 226 (11) – 51 (95) 30 644 (40) 24 (16) 628 2015 € m (3) (18) (24) (13) (120) (501) – (11) 10 25 66 278 (126) 81 (6) 81 (1) (38) 16 (67) (311) (682) (83) 24 (59) (741) (1)The impact of foreign exchange translation for each line of the statement of financial position is removed in order to show the underlying cash impact. 400 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 401 af Statement of cash flows (continued) Change in operating assets(1) Change in loans and receivables to customers Change in NAMA senior bonds Change in loans and receivables to banks Change in derivative financial instruments Change in items in course of collection Change in other assets Change in operating liabilities(1) Change in deposits by central banks and banks Change in customer accounts Change in trading portfolio financial liabilities Change in debt securities in issue Change in other liabilities 2016 € m 2,859 3,838 2,752 152 8 57 2015 € m 1,369 3,834 1,721 (330) (1) (53) 9,666 6,540 2016 € m (5,757) 659 (86) (453) (30) (5,667) 2015 € m (3,759) (1,443) 86 (1,022) (46) (6,184) (1)The impact of foreign exchange translation for each line of the statement of financial position is removed in order to show the underlying cash impact. 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 2016 € m 2,396 550 2,946 2015 € m 1,333 539 1,872 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 2016 401 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 402 Notes to the parent company financial statements ag 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 51 to the consolidated financial statements. ah Commitments Capital expenditure Estimated outstanding commitments for capital expenditure not provided for in the financial statements Capital expenditure authorised but not yet contracted for 2016 € m 7 37 Operating lease rentals The total of future minimum lease payments under non-cancellable operating leases is 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 2016 € m 46 29 27 26 24 95 247 2015 € m 7 34 2015 € m 45 32 16 16 15 113 237 Operating lease payments recognised as an expense for the year were € 59 million (2015: € 51 million). Sublease income amounted to Nil (2015: Nil). Included in the lease payments to other Group subsidiaries is € 30 million (2015: € 37 million). Future minimum lease payments due to subsidiaries of Allied Irish Banks, p.l.c. amount to € 24 million excluding VAT (2015: € 41 million excluding VAT) and are included in the total of € 247 million in 2016 (2015: € 237 million). 402 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 403 ai 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 2016 and 2015: Maximum exposure to credit risk Balances at central banks(3) Items in course of collection Derivative financial instruments(4) Loans and receivables to banks(5) Loans and receivables to customers(6) NAMA senior bonds Financial investments available for sale(7) Financial investments held to maturity Other assets: Trade receivables Accrued interest(8) Financial guarantees Loan commitments and other credit related commitments Amortised cost(1) € m 1,840 59 – 18,129 25,870 1,799 Fair value(2) €m – – 1,852 – – – – 17,142 3,356 68 295 – – – 2016 Total € m 1,840 59 1,852 18,129 25,870 1,799 17,142 3,356 68 295 Amortised cost(1) € m 840 67 – 21,311 29,500 5,616 Fair value(2) € m – – 1,718 – – – 2015 Total € m 840 67 1,718 21,311 29,500 5,616 – 16,828 16,828 3,483 100 352 – – – 3,483 100 352 51,416 18,994 70,410 61,269 18,546 79,815 765 7,680 8,445 – – – 765 7,680 8,445(9) 831 7,619 8,450 _ – – 831 7,619 8,450(9) Total 59,861 18,994 78,855 69,719 18,546 88,265 (1)All amortised cost items are ‘loans and receivables’ per IAS 39 Financial Instruments: Recognition and Measurement 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 € 2,396 million (2015: € 1,333 million). (4)Exposures to subsidiary undertakings of € 177 million (2015: € 172 million) have been included. (5)Exposures to subsidiary undertakings of € 17,560 million (2015: € 20,018 million) have been included. (6)Exposures to subsidiary undertakings of € 6,869 million (2015: € 9,870 million) have been included. (7)Exposures to subsidiary undertakings of € 2,310 million (2015: € 1,120 million) have been included but equity shares amounting to € 518 million (2015: 682 million) have been excluded. (8)Exposures to subsidiary undertakings of € 5 million (2015: € 12 million) have been included. (9)Exposures to subsidiary undertakings of € 263 million (2015: € 239 million) have been included. 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 2016 403 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 404 Notes to the parent company financial statements ai 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 69. The information contained in this note relates only to third party exposures arising within Allied Irish Banks, p.l.c.. 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 estimated 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, Allied Irish Banks, p.l.c. 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. Allied Irish Banks, p.l.c. 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 2016 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. Summary of risk mitigants by selected portfolios Set out below are details of risk mitigants used by Allied Irish Banks, p.l.c. in relation to financial assets detailed in the maximum exposure to credit risk table on page 403. Loans and receivables to customers - residential mortgages The following table shows the fair value of collateral held for the residential mortgage portfolio at 31 December 2016 and 2015: Neither past due nor impaired € m Past due but not impaired € m Impaired 2016 Total € m € m Neither past due nor impaired € m Past due but not impaired € m Impaired 2015 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 205 208 122 129 120 784 351 1,135 1,191 6 5 3 4 4 24 28 24 22 41 22 139 235 241 149 155 165 945 10 32 34 87 226 243 448 1,393 1,468 (91) (91) (15) 152 1,362 193 192 126 139 150 800 410 1,210 1,282 6 6 3 2 8 15 25 22 33 58 25 153 214 223 151 174 216 978 12 37 39 121 274 298 543 1,521 1,619 (125) (125) (11) 173 1,483 (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. 404 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 405 ai Credit risk information (continued) Loans and receivables to customers – other In addition to the credit risk mitigants outlined above, Allied Irish Banks, p.l.c. holds reverse repurchase agreements amounting to Nil (2015: € 226 million) in its loans and receivables portfolio for which it had accepted collateral with a fair value of Nil (2015: € 222 million). 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 2016, repurchase agreements amounted to Nil (2015: € 649 million) for which Allied Irish Banks, p.l.c. had accepted collateral with a fair value of Nil (2015: € 737 million). 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 2016 have a carrying value of € 1,799 million (2015: € 5,616 million). 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 2016 amounted to € 1,852 million (2015: € 1,718 million) and those with negative fair value are reported as liabilities which at 31 December 2016 amounted to € 1,848 million (2015: € 2,032 million). The enforcement of netting agreements would potentially reduce the statement of financial position carrying amount of derivative assets and liabilities by € 984 million at 31 December 2016 (2015: € 1,079 million). Allied Irish Banks, p.l.c. also has Credit Support Annexes (“CSAs”) in place which provide collateral for derivative contracts. As at 31 December 2016, € 884 million (2015: € 888 million) of CSAs are included within financial assets as collateral for derivative liabilities and € 437 million (2015: € 341 million) of CSAs are included within financial liabilities as collateral for derivative assets (note aa). Additionally, Allied Irish Banks, p.l.c. has agreements in place which may allow it to net the termination values of cross currency swaps upon occurrence of an event of default. Financial investments available for sale At 31 December 2016, government guaranteed senior bank debt amounting to € 190 million (2015: € 174 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 Allied Irish Banks, p.l.c. Annual Financial Report 2016 405 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 406 Notes to the parent company financial statements ai Credit risk information (continued) The information contained in this note relates only to third party exposures arising within Allied Irish Banks, p.l.c.. The following table shows loans and receivables to customers by industry sector and geography at 31 December 2016 and 2015: Total Analysed geographically(1) 2016 Republic of Ireland € m United Kingdom € m Rest of the World € m 1,621 260 863 6,641 3,839 648 375 2,325 1,467 2,865 20,904 – 10 7 – – 35 4 41 – – 97 – – 57 – – – – 62 – – 119 % 7.7 1.3 4.4 31.4 18.2 3.2 1.8 11.4 7.0 13.6 100.0 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 Provisions for impairment Total (1)Based on booking office. (2)Excludes intercompany balances of € 6,869 million. € m 1,621 270 927 6,641 3,839 683 379 2,428 1,467 2,865 21,120 16,422 801 3,897 21,120 (2,119) 19,001(2) 406 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 407 Total Analysed geographically(1) 2015 Republic of Ireland € m United Kingdom € m Rest of the World € m 1,644 198 792 7,818 4,064 575 695 2,422 1,619 3,142 22,969 – 15 9 – 23 13 79 48 – – – 1 75 – – – 4 41 – – 187 121 % 7.1 0.9 3.8 33.6 17.5 2.5 3.3 10.8 7.0 13.5 100.0 ai Credit risk information (continued) 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 (1)Based on booking office. (2)Excludes intercompany balances of € 9,870 million. € m 1,644 214 876 7,818 4,087 588 778 2,511 1,619 3,142 23,277 16,609 832 5,836 23,277 (89) 4 (3,562) 19,630(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 2016 407 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 408 Notes to the parent company financial statements ai 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 2016 and 2015: Total Analysed geographically(1) 2016 Republic of Ireland € m United Kingdom € m Rest of the World € m Agriculture Energy Manufacturing Property and construction Distribution Transport Financial Other services Personal: Residential mortgages Other Total Agriculture Energy Manufacturing Property and construction 3,160 3,160 Distribution Transport Financial Other services Personal: Residential mortgages Other Total (1)Based on booking office. 868 54 135 373 298 631 868 36 135 373 298 631 5,836 5,818 € m 115 29 55 115 29 55 2,071 2,071 599 33 135 231 243 386 599 10 135 231 243 386 3,897 3,874 Total € m 164 36 117 164 36 117 2015 Analysed geographically(1) Republic of Ireland € m United Kingdom € m Rest of the World € m – – – – – 23 – – – – 23 – – – – – – – – – – – – – – – – 18 – – – – 18 – – – – – – – – – – – 408 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 409 ai 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 2016 and 2015: Agriculture Energy Manufacturing Property and construction Distribution Transport Other services Personal: Residential mortgages Credit cards Other Total As a percentage of total loans(1) 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) 1 – 30 days € m 31 – 60 days € m 61 – 90 days € m 91 – 180 days € m 181 – 365 days € m > 365 days € m 39 6 6 96 68 4 32 8 26 52 337 1.6% 7 – – 16 9 1 13 4 5 14 69 2 – – 13 3 – 2 1 3 10 34 6 – 2 23 7 – 15 3 – 10 66 8 – – 35 7 – 8 5 – 15 78 0.3% 0.2% 0.3% 0.4% 31 – 2 94 25 3 21 14 – 27 217 1.0% 1 – 30 days € m 31 – 60 days € m 61 – 90 days € m 91 – 180 days € m 181 – 365 days € m > 365 days € m 51 1 5 88 50 4 1 24 12 30 34 300 1.3% 21 – 2 34 14 – – 16 5 5 17 114 0.5% 2 – – 11 8 – – 6 2 3 5 37 0.1% 8 – 1 35 12 – – 8 6 2 11 83 0.4% 5 – – 42 6 – 1 7 5 1 6 39 2 2 103 31 2 – 13 9 – 24 (1)Total loans (excluding intercompany) are gross of impairment provisions and unearned income. 73 0.3% 225 1.0% 832 3.6% 2016 Total € m 93 6 10 277 119 8 91 35 34 128 801 3.8% 2015 Total € m 126 3 10 313 121 6 2 74 39 41 97 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 2016 409 n o i t a m r o n f i l a r e n e G A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 410 Notes to the parent company financial statements ai Credit risk information (continued) Provisions for impairment by geographic location and industry sector The following table presents by industry sector an analysis of provisions for impairment on loans and receivables to customers for Allied Irish Banks, p.l.c. at 31 December 2016 and 2015: 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 (1)Based on booking office. Total Analysed geographically(1) 2016 Republic of Ireland € m United Kingdom € m Rest of the World € m 36 9 40 959 273 8 91 147 92 218 1,873 221 2,094 – – – – – 23 – – – – 23 1 24 – – – – – – – – – – – 1 1 2015 Analysed geographically(1) Republic of Ireland € m United Kingdom € m Rest of the World € m 71 14 72 1,707 451 33 55 241 125 436 3,205 339 3,544 – – – – – 18 – – – – 18 – 18 – – – – – – – – – – – – – € m 36 9 40 959 273 31 91 147 92 218 1.896 223 2,119 Total € m 71 14 72 1,707 451 51 55 241 125 436 3,223 339 3,562 410 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 411 ai 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 2016 and 2015 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 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 (1)Excludes intercompany loans. Other Property and Non-property business € m construction € m personal € m Residential mortgages € m 602 418 47 123 1,190 – 1 4 29 34 243 1,467 228 1,809 86 194 2,317 3 47 23 89 162 386 2,865 174 2,525 150 1,445 4,294 1 24 11 240 276 2,071 6,641 Residential mortgages € m Other personal € m Property and construction € m Non-property business € m 585 471 105 123 1,284 – 4 6 29 39 298 1,621 203 1,792 109 267 2,371 2 39 28 69 138 631 3,140 92 2,274 395 1,584 4,345 – 33 38 242 313 3,160 7,818 1,197 3,897 10,147 21,120 (2,119) 19,001(1) 2016 Total € m 2,193 10,814 592 2,823 16,422 5 138 67 591 801 2015 Total € m 1,910 10,522 1,102 3,075 16,609 3 167 115 547 832 1,189 6,062 309 1,061 8,621 1 66 29 233 329 1,030 5,985 493 1,101 8,609 1 91 43 207 342 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 1,747 5,836 10,698 23,277 (89) 4 (3,562) 19,630(1) n o i t a m r o n f i l a r e n e G Details of the rating profiles and lending classifications are set out on page 123. Allied Irish Banks, p.l.c. Annual Financial Report 2016 411 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 412 Notes to the parent company financial statements ai 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 shares), financial investments available for sale (excluding equity shares) and financial investments held to maturity for Allied Irish Banks, p.l.c. at 31 December 2016 and 2015 is as follows: Bank(1) € m Corporate € m Sovereign € m AAA/AA A+/A/A- BBB+/BBB/BBB- Sub investment Unrated Total AAA/AA A/A- BBB+/BBB/BBB- Sub investment Unrated Total 4,282 654 171 10 3 5,120 Bank(1) € m 4,215 988 160 527 3 5,893 2,440 10,456(2) 2,028 – – 2,758 14,716(2) 2,317 – – – 27 19 21 – 67 – – – 86 1 87 Corporate € m Sovereign € m 14,924(3) 446 20,557 Other € m 446 – – – – 2016 Total € m 7,168 11,137 2,218 31 3 Other € m 328 – 1 – – 2015 Total € m 7,301 15,704 2,478 613 4 19,791(3) 329 26,100 (1)Excludes balances with subsidiaries of € 19,870 million (2015: € 21,103 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 (2015: A–) i.e. the external rating of the Sovereign. (3)Includes supranational banks and government agencies. 412 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 413 aj Funding and 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 2016 Total Over 5 years € m € m Financial assets Derivative financial instruments(1) Loans and receivables to banks(2) Loans and receivables to customers(2) NAMA senior bonds(3) Financial investments available for sale(4) Financial investments held to maturity Other financial assets – 18,117 12,082 – 1 – – 131 11 768 1,799 53 – 363 227 1 2,177 – 2,143 – – 481 – 1,013 – 7,296 5,666 – 10,149 2,113 – – 4,796 1,243 – 1,852 18,129 27,989 1,799 17,142 3,356 363 30,200 3,125 4,548 20,039 12,718 70,630 Financial liabilities Deposits by central banks and banks Customer accounts Derivative financial instruments(1) Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities Financial assets Derivative financial instruments(1) Loans and receivables to banks(2) Loans and receivables to customers(2) NAMA senior bonds(3) Financial investments available for sale(4) Financial investments held to maturity Other financial assets Financial liabilities Deposits by central banks and banks Customer accounts Derivative financial instruments(1) Debt securities in issue Subordinated liabilities and other capital instruments Trading debt securities Other financial liabilities 6,012 35,079 – – – 239 41,330 Repayable on demand € m – 20,653 17,169 – 1 – – 37,823 6,278 31,537 – – – – 229 38,044 5,349 9,996 74 147 – – 150 2,990 200 – – – 1,900 1,157 667 1,000 – – – 103 907 – 791 – 13,411 49,325 1,848 1,147 791 239 15,566 3,340 4,724 1,801 66,761 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 2015 Total Over 5 years € m € m 71 658 920 5,616 – – 452 7,717 11,471 11,965 87 100 – 86 – 97 – 2,161 – 816 – – 673 – 877 – 7,248 5,649 – 10,396 2,204 – – 5,615 1,279 – 1,718 21,311 33,147 5,616 16,828 3,483 452 3,074 20,521 13,420 82,555 1,902 4,267 86 500 1,524 – – – 1,307 965 1,000 – – – – 53 894 – 19,651 49,129 2,032 1,600 794 2,318 – – 86 229 23,709 8,279 3,272 1,741 75,045 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)Shown by maturity date of contract. (2)Shown gross of provisions for impairment, unearned income and deferred costs. (3)New notes will be issued at each maturity date, with the next maturity date being 1 March 2017. Upon maturity, the issuer has the option to settle in cash or issue new notes and to date has issued new notes. (4)Excluding equity shares. The balances shown above include exposures to/by subsidiary undertakings. 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 2016 413 A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1 10/03/2017 20:12 Page 414 Notes to the parent company financial statements aj Funding and liquidity risk information (continued) Financial liabilities by undiscounted contractual maturity 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 Commitments Payable on demand € m 765 7,680 8,445(1) Payable on demand € m 831 7,619 8,450(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 – – – – – – – – – – – – 2016 Total € m 765 7,680 8,445 2015 Total € m 831 7,619 8,450 (1)Includes € 263 million (2015: € 239 million) relating to Group subsidiaries. ak Market risk information Market risk profile The following table summarises Treasury’s interest rate VaR profile to a 95% confidence level with a one day holding period at 31 December 2016 and 2015. AIB recognises the limitations of VaR models, and supplements its VaR measures with stress tests which draw from a longer set of historical data and also with sensitivity measures. Interest rate risk 1 day holding period: Average High Low At 31 December VaR (trading book) VaR (banking book) Total VaR 2016 € m 2015 € m 2016 € m 2015 € m 2016 € m 2015 € m 0.1 1.1 – 0.1 0.3 1.1 – 1.1 3.2 4.3 2.5 4.1 2.7 3.6 1.3 3.0 3.2 5.2 2.5 5.2 2.7 5.2 1.3 2.9 The following table sets out the VaR for foreign exchange rate and equity risk for the financial years ended 31 December 2016 and 2015: 1 day holding period: Average High Low At 31 December Foreign exchange rate risk Equity risk VaR (trading book) 2015 2016 € m € m VaR (trading book) 2015 2016 € m € m 0.04 0.13 0.01 0.03 0.07 0.16 0.02 0.05 0.05 0.35 0.01 0.04 0.04 0.10 0.01 0.02 414 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:14 Page 415 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; view any outstanding payments, change your address and view your shareholding by signing into Investor Centre on http://www.computershare.com/ie/InvestorCentre You will need your unique user ID and password which you created during registration. Or register at http://www.computershare.com/ie/investor/register to become an Investor Centre member. To register you will be required to enter the name of the company in which you hold shares, your Shareholder Reference Number (SRN), your family or company name and security code (provided on screen). – 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. 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 Ireland Strategic Investment Fund holds 2,710,821,149 ordinary shares of € 0.625 each in the share capital of Allied Irish Banks, p.l.c. Financial calendar Annual General Meeting: 27 April 2017, at the RDS, Ballsbridge, Dublin 4. Interim results The unaudited Half-Yearly Financial Report 2016 will be announced towards the end of July/early August 2017 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 www.investorcentre.com/ie/contactus or www.aibgroup.com 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 2016 415 n o i t a m r o n f i l a r e n e G New segments with Credit tables Dec16:A8 01/03/2017 23:02 Page 2 General information - New operating segments New segment reporting – Segment overview – Segmental reporting information – Retail & Commercial Banking (“RCB”) – Wholesale, Institutional & Corporate Banking (“WIB”) – AIB UK – Group – Credit profile of the loan portfolio Page 417 418 419 420 421 422 423 416 Allied Irish Banks, p.l.c. Annual Financial Report 2016 New segments with Credit tables Dec16:A8 01/03/2017 23:02 Page 3 Segment overview From the 1st of January 2017, following realignment of Leadership Team responsibilities the Group will be managed going forward through the following business segments: Retail & Commercial Banking (“RCB”), Wholesale, Institutional & Corporate Banking (“WIB”), AIB UK and Group. The following section presents 2016 and 2015 restated to show the performance under the new structure. Segment allocations 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 Group. 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 attributable to capital is allocated to segments based on each segment’s capital requirement. The funding and liquidity allocation methodology has been further refined to more accurately reflect each segment’s funding profile and will be implemented from the 1st of January 2017. The performance in 2016 and 2015 has been presented on this revised allocation methodology. AIB segments at a glance Retail & Commercial Banking (“RCB”) Largest retail and commercial bank in Ireland with; • Over 2.3m personal and SME customers • €42.7bn net loans and €42.9bn customer accounts • Multi-brand: AIB, EBS, Haven • Broad Infrastructure: 297 locations, 982 ATMs • Leading market shares and leading position in digital enablement Wholesale, Institutional & Corporate Banking (“WIB”) WIB comprises of; • Corporate Banking – relationship-driven model with sector specialisms: €4.4bn net loans • Syndicated & International Finance: bank’s interface to public loan markets €2.8bn net loans • Real Estate Finance – centralised origination and management: €1.7bn net loans • Specialised Finance – structured finance, mezzanine finance, and equity product offering: €0.2bn net loans AIB UK AIB UK – AIB GB and First Trust Bank • Over 363,000 retail and SME customers • £7.5bn net loans, £8.9bn customer accounts • FTB – focused challenger in Northern Ireland • AIB GB – is a specialist Business Bank Group Group, Treasury and Support Functions • Treasury activities • Central control and support functions Allied Irish Banks, p.l.c. Annual Financial Report 2016 417 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 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:16 Page 418 General information – New operating segments 5 1 0 2 l a t o T e r o f e b ( m € ) s m e t i l a n o i t p e c x e 6 9 6 7 2 9 , 1 3 2 6 , 2 ) 5 2 7 ( ) 3 9 4 ( ) 4 7 ( ) 2 9 2 , 1 ( ) 1 7 ( 1 3 3 , 1 5 2 9 ) 2 ( – 3 2 9 5 2 3 3 8 1 , 2 p u o r G K U B A I I B W B C R m € 9 2 2 1 2 2 0 5 4 ) 0 6 1 ( ) 9 7 1 ( ) 9 2 ( ) 8 6 3 ( 2 8 ) 7 6 ( ) 3 ( – – ) 3 ( 2 1 – – m € m € m € 2 5 2 0 5 2 0 3 ) 6 9 ( ) 9 5 ( ) 3 ( ) 8 5 1 ( ) 4 ( 4 4 1 4 4 – – 4 4 4 8 1 3 – 6 2 2 3 4 9 6 2 ) 2 5 ( ) 0 3 ( ) 3 ( ) 5 8 ( 4 8 1 – ) 4 1 ( ) 1 1 ( – ) 5 2 ( 9 5 1 – – 2 8 3 0 2 2 , 1 2 0 6 , 1 ) 7 1 4 ( ) 5 2 2 ( ) 9 3 ( ) 1 8 6 ( – 1 2 9 8 9 8 9 – 2 2 3 7 0 9 8 2 8 , 1 6 1 0 2 l a t o T e r o f e b ( m € ) s m e t i l a n o i t p e c x e 7 1 6 3 1 0 , 2 0 3 6 , 2 ) 7 1 7 ( ) 6 6 5 ( ) 4 9 ( ) 7 7 3 , 1 ( ) 2 1 1 ( 3 5 2 , 1 7 4 2 3 0 1 0 5 3 ) 0 7 1 ( ) 9 9 1 ( ) 8 2 ( ) 7 9 3 ( ) 7 4 ( ) 3 1 1 ( 4 9 2 ) 8 ( 2 2 5 3 1 8 9 2 9 3 4 , 1 – 2 ) 6 ( ) 6 6 1 ( – – p u o r G K U B A I I B W B C R m € m € m € m € 4 2 2 5 6 9 8 2 ) 4 8 ( ) 3 5 ( ) 2 ( ) 9 3 1 ( 1 0 5 1 7 3 – – 7 3 8 8 1 4 1 9 6 2 1 5 0 2 3 ) 9 5 ( ) 7 3 ( – ) 6 9 ( 4 2 2 – ) 1 2 ( ) 2 ( – ) 3 2 ( 1 0 2 – – 8 9 3 3 7 2 1 , 1 7 6 1 , ) 4 0 4 ( ) 7 7 2 ( ) 4 6 ( ) 5 4 7 ( – 6 2 9 6 8 2 4 – 1 3 – 0 9 2 6 1 2 1 , 1 1 2 , 2 2 1 7 8 1 9 5 1 3 5 8 , 1 5 7 4 , 1 ) 6 6 1 ( 3 9 1 1 0 2 7 4 2 1 , n o i t a m r o f n i g n i t r o p e r l a t n e m g e S 418 t n e m g e s s s e n i s u b y b s n o i t a r e p O e m o c n i g n i t a r e p o l t a o T s e s n e p x e l e n n o s r e P e m o c n i t s e r e t n i t e N e m o c n i r e h t O n o i t a s i t r o m a d n a t n e m r i a p m i i , n o i t a c e r p e D s e s n e p x e g n i t a r e p o l t a o T i i s n o s v o r p e r o f e b ) s s o l ( / t i f o r p g n i t a r e p O s e e f y r o t l a u g e r d n a i s e v e l k n a B s e s n e p x e e v i t i a r t s n m d a i d n a l a r e n e G t n e m r i a p m i r o f i i ) s n o s v o r p ( / k c a b e t i r W l s e b a v e c e r i d n a s n a o l n o 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 i f n o t n e m r i a p m i r o f i s n o s v o r p i f o k c a b e t i r W s t n e m t i m m o c d n a i i ) s n o s v o r p ( / k c a b e t i r w l t a o T ) s s o l ( / t i f o r p g n i t a r e p O s e i t i l i b a i l r o f i i ) s n o s v o r p ( / k c a b e t i r W i s s e n s u b f o l a s o p s d i n o t i f o r P n o i t a x a t e r o f e b ) s s o l ( / t i f o r P m o r f s m e t i l a n o i t p e c x e d n a s n o i t a r e p o g n u n i t n o c i i s g n k a t r e d n u d e t a c o s s A i Allied Irish Banks, p.l.c. Annual Financial Report 2016 New segments with Credit tables Dec16:A8 01/03/2017 22:56 Page 5 Retail & Commercial Banking (“RCB”) RCB contribution statement Net interest income Business income Other items Other income Total operating income Total operating expenses Operating contribution before bank levies, regulatory fees and provisions Total net writeback of provisions Operating contribution Associated undertakings Contribution before disposal of property Profit on disposal of property Contribution before exceptional items RCB balance sheet metrics Mortgages Personal Business Legacy distressed loans(1) Net loans Mortgages Personal Business New lending Current accounts Deposits Customer accounts 2016 2016 Earning Impaired € m € m 1,131 142 2016 Total € m 1,273 320 78 398 1,671 (745) 926 290 1,216 31 1,247 - - - - 142 (90) 52 183 235 - 235 - 320 78 398 1,529 (655) 874 107 981 31 1,012 - 1,012 235 1,247 31 Dec 2016 31 Dec 2016 Earning Impaired € bn € bn 28.7 2.5 6.3 0.8 38.3 2.7 0.2 1.3 0.2 4.4 31 Dec 2016 Total € bn 31.4 2.7 7.6 1.0 42.7 2.0 0.7 1.2 3.9 19.4 23.5 42.9 2015 Earning € m 2015 Impaired € m 2015 Total € m 1,046 174 1,220 331 51 382 1,428 (591) 837 382 1,219 22 1,241 3 1,244 - - - 331 51 382 174 (90) 1,602 (681) 84 525 609 - 609 - 921 907 1,828 22 1,850 3 609 1,853 31 Dec 2015 Earning € bn 31 Dec 2015 Impaired € bn 31 Dec 2015 Total € bn 28.4 2.3 6.1 1.0 37.8 3.7 0.3 1.6 0.3 5.9 32.1 2.6 7.7 1.3 43.7 1.7 0.5 1.1 3.3 16.7 23.7 40.4 Net interest income €1,273m €1,220m Increase of € 53 million due to continued reduction in cost of funds partly offset by the impact of Net earning loans €38.3bn €37.8bn Increased by € 0.5 billion mainly due to strong levels of new lending and loans upgraded to earning in the mortgage rate cuts and lower net impaired loans as restructuring year partly offset by redemptions. activity continued. Other income €398m €382m Net fee and commission income remained stable excluding the impact of the card interchange while the New lending €3.9bn €3.3bn New lending was up € 0.6 billion (+20%) compared to 2015. Strong mortgage lending of € 2.0 billion was up 22%, with a gain in market share to 36% (2% higher than 34% increase was due to to higher gains on the realisation / in 2015). Personal lending was up € 0.2 billion (+36%) compared re-estimation of cashflows on loans previously restructured. to 2015 and Business was up € 0.1 billion (+9%) as demand for Total operating expenses €745m €681m Costs have increased due to increased average salary costs, cost of regulatory compliance, marketing and spend on the investment programme. RCB also includes the costs for the workout unit for loan restructuring. credit increased. Net impaired loans €4.4bn €5.9bn Decrease of € 1.5 billion as RCB made further progress in restructuring customers in financial difficulty. Total net writeback of provisions €290m €907m Lower level of writebacks in 2016 as the pace and quantum of writebacks moderate. (1)Larger legacy distressed loans that have been subject to restructuring arrangement which are managed through the RCB workout unit. cost of funds. Customer accounts €42.9bn €40.4bn The customer accounts base continued to grow in 2016, maintaining market share while reducing average Allied Irish Banks, p.l.c. Annual Financial Report 2016 419 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 New segments with Credit tables Dec16:A8 01/03/2017 22:56 Page 6 General information - New operating segments Wholesale, Institutional & Corporate Banking (“WIB”) WIB contribution statement Net interest income Other income Total operating income Total operating expenses Operating contribution before bank levies, regulatory fees and provisions Total provisions Contribution before exceptional items 2016 € m 269 51 320 226 43 269 (96) (85) 224 (23) 201 184 (25) 159 2015 % € m change WIB balance sheet metrics 31 Dec 31 Dec % 2015 € bn change 2016 € bn 19 19 19 13 22 -8 26 Corporate Syndicated and international Real Estate Finance Specialised Finance Net loans Corporate Syndicated and international Real Estate Finance Specialised Finance New lending Current accounts Deposits Customer accounts 4.4 2.8 1.7 0.2 9.1 0.9 1.3 0.6 0.1 2.9 3.7 2.7 6.4 4.6 2.3 1.5 0.2 8.6 0.9 1.1 0.3 0.2 2.5 2.6 3.4 6.0 -4 22 11 -2 5 -8 16 137 -68 11 44 -21 7 Net interest income €269m €226m Net interest income increased by € 43 million compared to 2015 due to strong net loan growth Net loans €9.1bn €8.6bn Earning loans of € 8.9 billion at 31 December 2016 were combined with margin improvement from continued reductions in € 0.7 billion higher than € 8.2 billion at 31 December 2015 due to cost of funds. Other income €51m €43m Other income increased by € 8 million compared to 2015. Business income of € 44 million increased by € 5 million driven by credit related fees. Other items amounted to € 7 million in 2016. Total operating expenses €96m €85m Total operating expenses increased by € 11 million compared to 2015 due to increased average salary costs and from additional resources in response to loan growth and development of business initiatives. Total provisions €23m €25m Provision charge of € 23 million in 2016 reduced from a charge of € 25 million in 2015. strong levels of new lending. Net impaired loans of € 0.2 billion at 31 December 2016 have reduced from € 0.4 billion at 31 December 2015. New lending €2.9bn €2.5bn New lending was up € 0.4 billion (up 11%) compared to 2015, with growth in Real Estate Finance (up 137%) and Syndicated and international (up 16%). Corporate remained the No. 1 bank for foreign direct investment in Ireland. Customer accounts €6.4bn €6.0bn Customer accounts increased € 0.4 billion with an increase in current accounts of € 1.1 billion partly offset by decrease in term deposits. 420 Allied Irish Banks, p.l.c. Annual Financial Report 2016 New segments with Credit tables Dec16:A8 01/03/2017 22:56 Page 7 AIB UK AIB UK contribution statement Net interest income Other income Total operating income Total operating expenses 2016 £ m 183 54 237 183 36 219 (115) (114) Operating contribution before bank levies, regulatory fees and provisions Bank levies and regulatory fees Total net writeback of provisions Operating contribution Associated undertakings 122 1 30 153 3 Contribution before disposal of business 156 Profit on disposal of business 1 Contribution before exceptional items 157 Contribution before exceptional items €m 193 105 (3) 32 134 3 137 - 137 187 2015 % £ m change AIB UK balance sheet metrics 31 Dec 2016 £ bn 31 Dec % 2015 £ bn change 5.1 2.4 7.5 1.3 0.2 1.5 4.7 4.2 8.9 5.1 2.5 7.6 1.6 0.3 1.9 4.8 3.8 8.6 - -4 -1 -21 -16 -20 -2 11 3 AIB GB FTB Net loans AIB GB FTB New lending AIB GB FTB Customer accounts - 50 8 1 16 - -6 14 - 14 - 15 3 Net interest income £183m £183m Net interest income is in line with 2015. Reduction in cost of funds is offset by the disposal of a loan Net loans £7.5bn £7.6bn Net earning loans of £ 7.1 billion were in line with portfolio of £ 0.5 billion in the second half of 2015 and the impact 31 December 2015 as new lending was offset by redemptions. of a reduction in the Bank of England Base Rate in August 2016. Net impaired loans of £ 0.4 billion at 31 December 2016 have Other income £54m £36m Net fee and commission income was in line with 2015, with an increase in lending fees, partly offset by reduced transaction fees. Other items in 2016 included a loss of £ 3 million relating to the final settlement of UK loan disposals at reduced from £ 0.5 billion at 31 December 2015 due to repayments and write-offs in the period. New lending £1.5bn £1.9bn New lending of £ 1.5 billion in 2016, AIB GB at £ 1.3 billion and FTB at £ 0.2 billion, was £ 0.4 billion lower than the end of 2015 (loss of £ 29 million in 2015). 2015 due to reduction of £ 0.4 billion in corporate lending. Total operating expenses £115m £114m Total operating expenses of £ 115 million in 2016, broadly in line with 2015. New business was written across a range of key sectors in both AIB GB and FTB and the developing sector strategies will build on the momentum developed through 2016. Total net writeback of provisions £30m £32m Total net writeback of provisions of £ 30 million in 2016 compared to £ 32 million for 2015 as a result Customer accounts £8.9bn £8.6bn Customer accounts were £ 8.9 billion at 31 December 2016 and increased by £ 0.3 billion since of continued restructuring activity. 31 December 2015 with an increase in current accounts partly offset by a reduction in term and treasury deposits. 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 2016 421 n o i t a m r o n f i l a r e n e G New segments with Credit tables Dec16:A8 01/03/2017 22:56 Page 8 General information - New operating segments Group Group contribution statement Net interest income Other income Total operating income Total operating expenses Operating contribution before bank levies, regulatory fees and provisions Bank levies and regulatory fees Total provisions Contribution before exceptional items (47) (113) (6) (166) (3) 100 12 - 2016 € m 247 103 350 (397) (368) 2015 % € m change Group balance sheet metrics 31 Dec 2016 € bn 31 Dec % 2015 € bn change 229 221 450 82 (67) Net loans 0.1 0.6 -83 Financial investments available for sale 15.4 16.5 Financial investments held to maturity NAMA senior bonds Customer accounts 3.4 1.8 3.9 3.5 5.6 5.4 -7 -3 -68 -28 8 -53 -22 8 - 69 Net interest income €247m €229m Net interest income of € 247 million in 2016 was € 18 million higher than 2015 due to lower cost of funds. This was partly offset by lower income on NAMA senior bonds and lower income from the securities portfolio due to the sale and maturity of legacy high yielding assets. Other income €103m €221m Business income of € 61 million reduced mainly due to the movement in valuations on the Group’s sterling derivative positions. Other items of € 42 million in 2016 compared to € 135 million in 2015. Other items Net profit on disposal of AFS securities Effect of acceleration / re-estimation of the timing of cash flows on NAMA senior bonds Settlements and other gains Other items 2016 € m 31 10 1 42 2015 € m 77 6 52 135 Total operating expenses €397m €368m Total operating expenses increased by € 29 million (+8%) compared to 2015 reflecting the impact of salary inflation and costs relating to outsourcing initiatives partly offset by reduced staff numbers. This is also impacted by spend on the investment programme, including depreciation on assets now live. Bank levies and regulatory fees €113m €67m Bank levies and regulatory fees of € 113 million for 2016 related to the Irish bank levy € 60 million, Deposit Guarantee Scheme (“DGS”) € 35 million (fee includes claim on the DGS legacy fund) and € 18 million for the Single Resolution Fund. 422 Net loans €0.1bn €0.6bn Net loans reduced € 0.5 billion in the year as legacy loans, including asset backed securities, were managed down by Treasury. Financial investments Available for Sale (“AFS”) €15.4bn €16.5bn AFS assets which are held for liquidity and investment purposes have reduced by € 1.1 billion during 2016, consistent with plans to reduce overall AFS holdings in line with liquidity requirements. Financial investments Held to Maturity (“HTM”) €3.4bn €3.5bn There have been no further additions to the held to maturity category during 2016. NAMA senior bonds €1.8bn €5.6bn NAMA senior bonds reduced by € 3.8 billion during the year due to redemptions. NAMA senior bonds are expected to be fully redeemed by the end of 2017. Customer accounts €3.9bn €5.4bn Customer accounts have reduced € 1.5 billion mainly due to maturity of high yielding term deposits and reduction in repos. Allied Irish Banks, p.l.c. Annual Financial Report 2016 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 423 Credit profile of the loan portfolio The following table analyses loans and receivables to customers by new operating segments showing asset quality and impairment provisions for the financial years end 31 December 2016 and 2015: Gross loans and receivables to customers Residential mortgages: Owner-occupier Buy-to-let Other personal Property and construction Non-property business 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 – 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 – impairment (credit)/charge Specific IBNR Total impairment (credit)/charge Impairment (credit)/charge/ average loans RCB € m 28,624 4,784 33,408 2,768 4,403 6,025 46,604 30,397 2,441 5,858 7,908 16,207 % 35 17 € m 3,462 453 3,915 % 44 50 8 € m (183) (103) (286) % WIB € m 7 29 36 102 2,499 6,520 9,157 AIB UK € m 1,564 231 1,795 230 2,492 4,800 9,317 Group € m – – – – – 150 150 2016 Total € m 30,195 5,044 35,239 3,100 9,394 17,495 65,228 8,588 7,363 114 46,462 28 310 231 569 % 6 3 € m 44 33 77 % 19 33 1 € m 35 (14) 21 % 532 461 961 1,954 % 21 10 € m 516 56 572 % 54 60 6 € m (31) (6) (37) % – – 36 36 % 24 24 € m 25 – 25 % 69 69 17 € m 8 – 8 % 3,001 6,629 9,136 18,766 % 29 14 € m 4,047 542 4,589 % 44 50 7 € m (171) (123) (294) % (0.60) (0.23) (0.37) 2.12 (0.44) 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)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 64. 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 2016 423 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 424 General information – New operating segments Credit profile of the loan portfolio Gross loans and receivables to customers Residential mortgages: Owner-occupier Buy-to-let Other personal Property and construction Non-property business 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 – 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 – impairment (credit)/charge Specific IBNR Total impairment (credit)/charge Impairment (credit)/charge/ average loans RCB € m 28,834 5,538 34,372 2,935 5,641 6,267 49,215 28,898 3,030 6,502 10,785 20,317 % 41 22 € m 4,896 556 5,452 % 45 51 11 € m (524) (374) (898) % WIB € m 10 38 48 221 2,448 6,173 8,890 7,747 264 279 600 1,143 % 13 7 € m 218 47 265 % 36 44 3 € m 43 (29) 14 % AIB UK € m 2,048 314 2,362 356 3,443 5,292 11,453 8,132 986 667 1,668 3,321 % 29 15 € m 1,027 71 1,098 % 62 66 10 € m (30) (14) (44) % Group € m 36 – 36 – – 569 605 573 – – 32 32 % 5 5 € m 17 – 17 % 53 53 3 € m 3 – 3 % 2015 Total € m 30,928 5,890 36,818 3,512 11,532 18,301 70,163 45,350 4,280 7,448 13,085 24,813 % 35 19 € m 6,158 674 6,832 % 47 52 10 € m (508) (417) (925) % (1.72) 0.17 (0.35) 0.59 (1.26) (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 yy 43. 424 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 425 Credit profile of the loan portfolio Loans and receivables to customers – Other personal The following table analyses other personal lending by new operating segments showing asset quality and impairment provisions for the financial years ended 31 December 2016 and 2015: Analysed as to asset quality(1) Satisfactory Watch Vulnerable Impaired Total criticised loans RCB € m 1,995 110 279 384 773 WIB € m 96 – 4 2 6 Total gross loans and receivables 2,768 102 AIB UK € m 161 10 13 46 69 230 % 30 20 € m 34 4 38 % 74 83 17 Group € m – – – – – – % – – € m – – – % – – – % 6 2 € m – – – % – – – % 28 14 € m 218 34 252 % 57 66 9 € m (21) (7) (28) % € m € m € m 12 (2) 10 % (2) (2) (4) % – – – % – (0.46) 6.67 (1.06) 2016 Total € m 2,252 120 296 432 848 3,100 % 27 14 € m 252 38 290 % 58 67 9 € m (11) (11) (22) % (0.63) 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 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 – impairment (credit)/charge Specific IBNR Total impairment (credit)/charge Impairment (credit)/charge/ average loans Footnote Allied Irish Banks, p.l.c. Annual Financial Report 2016 425 n o i t a m r o n f i l a r e n e G A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 426 General information – New operating segments Credit profile of the loan portfolio Loans and receivables to customers – Other personal (continued) Analysed as to asset quality(1) Satisfactory Watch Vulnerable Impaired Total criticised loans Total gross loans and receivables 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 – impairment (credit)/charge Specific IBNR Total impairment (credit)/charge Impairment (credit)/charge/ average loans RCB € m 1,875 134 307 619 1,060 2,935 % 36 21 € m 435 42 477 % 70 77 16 € m (7) (7) (14) % (0.46) WIB € m 176 3 29 13 45 221 % 20 6 € m 2 2 4 % 15 31 2 AIB UK € m 247 23 20 66 109 356 % 31 19 € m 49 5 54 % 74 82 15 Group € m – – – – – – % – – € m – – – % – – – 2015 Total € m 2,298 160 356 698 1,214 3,512 % 35 20 € m 486 49 535 % 70 77 15 € m € m € m € m – – – % – 2 4 6 % 1.52 – – – % – (5) (3) (8) % (0.19) 426 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 427 Credit profile of the loan portfolio Loans and receivables to customers – Property and construction The following table analyses property and construction lending by new operating segments showing asset quality and impairment provisions for the financial years ended 31 December 2016 and 2015: Investment: Commercial Residential Land and development: Commercial Residential development Contractors Housing associations Total Analysed as to asset quality Satisfactory 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 – impairment (credit)/charge Specific IBNR Total impairment (credit)/charge Impairment (credit)/charge/ average loans Allied Irish Banks, p.l.c. Annual Financial Report 2016 RCB € m 2,612 716 3,328 324 638 962 113 – WIB € m 2,053 102 2,155 100 162 262 82 – AIB UK € m 1,533 233 1,766 20 277 297 170 259 4,403 2,499 2,492 661 246 1,421 2,075 3,742 % 85 47 € m 1,011 77 1,088 % 49 52 25 € m (76) (56) (132) % 2,133 1,643 3 264 99 366 % 15 4 € m 9 7 16 % 9 16 1 € m 12 (11) 1 % 129 170 550 849 % 34 22 € m 330 15 345 % 60 63 14 € m (10) (4) (14) % (2.63) 0.04 (0.48) Group € m – – – – – – – – – – – – – – % – – € m – – – % – – – € m – – – % – 2016 Total € m 6,198 1,051 7,249 444 1,077 1,521 365 259 9,394 4,437 378 1,855 2,724 4,957 % 53 29 € m 1,350 99 1,449 % 50 53 15 € m 74) (71) (145) % (1.38) 427 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 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 428 General information – New operating segments Credit profile of the loan portfolio Loans and receivables to customers – Property and construction (continued) Investment: Commercial Residential Land and development: Commercial Residential development Contractors Housing associations Total Analysed as to asset quality Satisfactory 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 – impairment (credit)/charge Specific IBNR Total impairment (credit)/charge Impairment (credit)/charge/ average loans RCB € m 3,115 905 4,020 454 1,043 1,497 124 – 5,641 615 325 1,649 3,052 5,026 % 89 54 € m 1,711 133 1,844 % 56 60 33 € m (215) 29 (186) % WIB € m 2,039 97 2,136 129 99 228 84 – AIB UK € m 1,453 456 1,909 69 758 827 227 480 2,448 3,443 1,854 161 190 243 594 % 24 10 € m 79 18 97 % 33 40 4 € m 28 (7) 21 % 1,683 487 260 1,013 1,760 % 51 29 € m 685 23 708 % 68 70 21 € m (29) (20) (49) % (2.63) 0.82 (1.13) Group € m – – – – – – – – – – – – – – % – – € m – – – % – – – € m – – – % – 2015 Total € m 6,607 1,458 8,065 652 1,900 2,552 435 480 11,532 4,152 973 2,099 4,308 7,380 % 64 37 € m 2,475 174 2,649 % 57 61 23 € m (216) 2 (214) % (1.54) 428 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 429 Credit profile of the loan portfolio Loans and receivables to customers – Non-property business The following table analyses non- property business lending by new operating segments showing asset quality and impairment provisions for the financial years ended 31 December 2016 and 2015: Agriculture Distribution: Hotels Licensed premises Retail/wholesale Other distribution Other services Other Total Analysed as to asset quality Satisfactory 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 – impairment (credit)/charge Specific IBNR Total impairment (credit)/charge Impairment (credit)/charge/ average loans RCB € m 1,531 508 386 1,090 127 2,111 1,435 948 6,025 3,333 327 1,296 1,069 2,692 % 45 18 € m 587 77 664 % 55 62 11 € m 24 (41) (17) % WIB € m 148 1,012 155 885 121 2,173 1,897 2,302 6,520 AIB UK € m 94 791 – 364 – 1,155 2.368 1,183 4,800 Group € m – – – – – – 6 144 150 2016 Total € m 1,773 2,311 541 2,339 248 5,439 5,706 4,577 17,495 6,339 4,184 114 13,970 24 29 128 181 % 3 2 € m 34 25 59 % 27 46 1 € m 12 (2) 10 % 296 149 171 616 % 13 4 € m 71 29 100 % 42 58 2 € m (20) 3 (17) % – – 36 36 % 24 24 € m 25 – 25 % 69 69 17 € m 8 – 8 % 647 1,474 1,404 3,525 % 20 8 € m 717 131 848 % 51 60 5 € m 24 (40) (16) % (0.28) 0.16 (0.31) 2.12 (0.08) Allied Irish Banks, p.l.c. Annual Financial Report 2016 429 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 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 430 General information – New operating segments Credit profile of the loan portfolio Loans and receivables to customers – Non-property business (continued) Agriculture Distribution: Hotels Licensed premises Retail/wholesale Other distribution Other services Other Total Analysed as to asset quality Satisfactory 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 – impairment (credit)/charge Specific IBNR Total impairment (credit)/charge Impairment (credit)/charge/ average loans RCB € m 1,533 549 513 1,047 234 2,343 1,523 868 6,267 3,070 495 1,297 1,405 3,197 % 51 22 € m 821 117 938 % 58 67 15 € m (106) (127) (233) % WIB € m 158 952 144 912 79 2,087 1,726 2,202 6,173 AIB UK € m 104 855 101 436 9 1,401 2,569 1,218 5,292 Group € m – – – – – – 70 499 569 2015 Total € m 1,795 2,356 758 2,395 322 5,831 5,888 4,787 18,301 5,692 4,510 537 13,809 89 50 342 481 % 8 6 € m 136 27 163 % 40 48 3 € m 14 (23) (9) % 299 149 334 782 % 15 6 € m 178 30 208 % 53 62 4 € m 6 8 14 % – – 32 32 % 6 6 € m 17 – 17 % 53 53 3 € m 3 – 3 % 883 1,496 2,113 4,492 % 25 12 € m 1,152 174 1,326 % 55 63 7 € m (83) (142) (225) % (3.33) (0.16) 0.27 0.62 (1.24) 430 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 431 Credit profile of the loan portfolio Provisions – income statement The following table analyses the income statement provisions/writeback of provisions split between individually significant, individually insignificant and IBNR for loans and receivables for the financial years ended 31 December 2016 and 2015 : Specific provisions – Individually significant – Individually insignificant IBNR Total provisions for impairment (credit)/charge on loans and receivables to customers Writeback of provisions for impairment on financial investments available for sale Writeback of provisions for liabilities and commitments Total Specific provisions – Individually significant – Individually insignificant IBNR Total provisions for impairment (credit)/charge on loans RCB € m (163) (20) (103) (286) RCB € m (657) 133 (374) WIB € m 27 8 (14) 21 WIB € m 43 – (29) AIB UK € m (26) (5) (6) (37) AIB UK € m (22) (8) (14) and receivables to customers (898) 14 (44) Writeback of provisions for liabilities and commitments Total Group € m 8 – – 8 Group € m 3 – – 3 2016 Total € m (154) (17) (123) (294) (2) (2) (298) 2015 Total € m (633) 125 (417) (925) (11) (936) 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 2016 431 n o i t a m r o n f i l a r e n e G A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 21:03 Page 432 General information – New operating segments Credit profile of the loan portfolio Provisions – income statement The following table analyses by segment the income statement impairment provisions/writeback of provisions for the financial years ended 31 December 2016 and 2015: RCB WIB AIB UK Group Total Residential mortgages € m Other 2016 Total € m € m Residential mortgages € m Other € m 2015 Total € m (110) (176) (286) (465) (433) (898) – (1) – 21 (36) 8 21 (37) 8 2 (15) – 12 (29) 3 14 (44) 3 (111) (183) (294) (478) (447) (925) The following table analyses by segment the income statement impairment provisions/writeback of provisions as a percentage of average loans and receivables to customers expressed as basis points (“bps”) for the financial years ended 31 December 2016 and 2015: RCB WIB AIB UK Group Total Residential mortgages bps (32) – (10) – (31) Other bps (126) 23 (44) 212 (59) 2016 Total bps (60) 23 (37) 212 (44) Residential mortgages bps Other bps 2015 Total bps (131) 388 (59) – (254) (171) 15 (29) 64 17 (35) 62 (126) (125) (126) 432 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 433 Glossary of terms Additional Tier 1 Additional Tier 1 Capital (“AT1”) are securities issued by AIB and included in its capital base as fully CRD IV compliant additional Capital Arrears tier 1 capital on a fully loaded basis. Arrears relates to 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. Available for sale securities Available for sale (“AFS”) financial assets are non-derivative financial investments that are designated as available for sale and are not classified as a) loans and receivables b) held-to-maturity investments or c) financial assets at fair value through profit or loss The following debt securities are included in AIB’s AFS portfolio: Irish Government securities – Securities issued by the Irish Government in euro. Euro government securities – Securities issued by European governments in euro. Non-euro government securities – Securities issued by governments in currencies other than the euro. Supranational banks and government agencies – Supranational banks and government agencies are international organisations or unions in which member states transcend national boundaries or interests. These include such institutions as the European Investment Bank and the European Financial Stability Fund. Asset backed securities (“ABS”) – 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. Euro bank securities – Securities issued by financial institutions denominated in euro. Euro corporate securities – Securities issued by corporates denominated in euro. Non-euro corporate securities – Securities issued by corporates denominated in currencies other than the euro. Bank Recovery and Resolution Directive The Bank Recovery and Resolution Directive (“BRRD”) is a European legislative package issued by the European Commission and adopted by EU Member States. The BRRD introduces a common EU framework for how authorities should intervene to address banks which are failing or are likely to fail. The framework includes early intervention and measures designed to prevent failure and in the event of bank failure for authorities to ensure an orderly resolution. 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 or HTM securities portfolios). Basis point 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. Basis risk 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. Buy-to-let mortgage Capital Requirements Directive Capital Requirements Directive IV A residential mortgage loan approved for the purpose of purchasing a residential investment property. Capital Requirements Directive (“CRD”): Capital adequacy legislation implemented by the European Union and adopted by Member States designed to ensure the financial soundness of credit institutions and certain investment firms and give effect in the EU to the Basel II proposals which came into force on 20 July 2006. Capital Requirements Directive IV (“CRD IV”), which came into force on 1 January 2014, comprises a Capital Requirements Directive and a Capital Requirements Regulation which implements the Basel III capital proposals together with transitional arrangements for some of its requirements. The Regulation contains the detailed prudential requirements for credit institutions and investment firms. Requirements Regulation (No. 575/2013) (“CRR”) and the Capital Requirements Directive (2013/36/EU). 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 Collateralised bond obligation/ 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 collateralised debt common features. In the case of synthetic CBOs/CDOs, the risk is backed by credit derivatives instead of the sale of assets (cash obligation CBOs/CDOs). Collectively assessed impairment 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). 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 2016 433 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 434 Glossary of terms Commercial paper Commercial property Commercial paper is similar to a deposit and is a relatively low-risk, short-term, unsecured promissory note traded on money markets and 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. Common equity The highest quality form of regulatory capital under Basel III that comprises ordinary shares issued and related share premium, tier 1 capital (“CET 1”) retained earnings and other reserves excluding cash flow hedging reserves, and deducting specified regulatory adjustments. Common equity Common equity tier 1 ratio – A measurement of a bank’s common equity tier 1 capital expressed as a percentage of its total tier 1 ratio risk-weighted assets. Concentration Concentration risk is the risk of loss from lack of diversification, investing too heavily in one industry, one geographic area or one risk type of security. Contractual maturity Contractual residual maturity Credit default swaps The period when a scheduled payment is due and payable in accordance with the terms of a financial instrument. The time remaining until the expiration or repayment of a financial instrument in accordance with its contractual terms. 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. Credit derivatives 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 inherent in a financial asset such as a loan or might be a generic credit risk such as the bankruptcy risk of an entity. Credit risk The risk that one party to a financial instrument will cause a financial loss to the other party by failing to discharge an obligation. Credit risk mitigation Techniques used by lenders 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 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. Credit support Credit support annex (“CSA”) provides credit protection by setting out the rules governing the mutual posting of collateral. CSAs annex are used in documenting collateral arrangements between two parties that trade over-the-counter derivative securities. The trade is documented under a standard contract called a master agreement, developed by the International Swaps and Derivatives Association (“ISDA”). The two parties must sign the ISDA master agreement and execute a credit support annex before they trade derivatives with each other. Credit valuation Credit valuation adjustment (“CVA “) is an adjustment to the valuation of OTC derivative contracts to reflect the creditworthiness of adjustment derivative counterparties. Criticised loans Loans requiring additional management attention over and above that normally required for the loan type. Customer accounts 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. 434 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 435 Debt This is the process whereby customers in arrears, facing cash flow or financial distress, renegotiate the terms of their loan restructuring 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 an equity stake 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 certificates. Default 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 a CRD IV context when a loan is greater than 90 days past due and/or the borrower is unlikely to pay his credit obligations. This may require additional capital to be set aside. Derecognition The removal of a previously recognised financial asset or financial liability from the Group’s statement of financial position. ECB refinancing The main refinancing rate or minimum bid rate is the interest rate which banks have to pay when they borrow from the ECB rate under its main refinancing operations. Economic capital The amount of capital which the Group needs to run the business given the risks it is exposed to and remain solvent. 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 nineteen European Union countries that have adopted the euro as their common currency: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain. Exposure at default The expected or actual amount of exposure to the borrower at the time of default. Exposure value For on balance sheet exposures, it is the amount outstanding less provisions and collateral held taking into account relevant netting agreements. For off balance sheet exposures, including commitments and guarantees, it is the amount outstanding less provisions and collateral held taking into account relevant netting agreements and credit conversion factors First/second lien 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 Forbearance is the term used when repayment terms of a loan contract have been renegotiated in order to make these terms more manageable for borrowers. Standard 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/ unfunded exposures Funding value adjustment 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. Funding value adjustment (“FVA”) is an adjustment to the valuation of OTC derivative contracts due to a bank’s funding rate exceeding the risk-free rate. Held to maturity Held to maturity (“HTM”) investments as those which are non-derivative financial assets with fixed or determinable payments and fixed maturity that an entity has the positive intention and ability to hold to maturity other than: (a) (b) (c) Those that the entity upon initial recognition designates as at fair value through profit or loss; Those that the entity designates as available for sale; and Those that meet the definition of loans and receivables. Guarantee An undertaking by the Group/other party to pay a creditor should a debtor fail to do so. Allied Irish Banks, p.l.c. Annual Financial Report 2016 435 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 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 436 Glossary of terms Home loan A loan secured by a mortgage on the primary residence or second home of a borrower. Internal liquidity The internal liquidity adequacy assessment processes (“ILAAP”) is a key element of the risk management framework for credit adequacy assessment process institutions. ILAAP is defined in the EBA’s SREP Guidelines as “the processes for the identification, measurement, management and monitoring of liquidity implemented by the institution pursuant to Article 86 of Directive 2013/36/EU”. It thus contains all the qualitative and quantitative information necessary to underpin the risk appetite, including the description of the systems, processes and methodology to measure and manage liquidity and funding risks. Internal Capital Internal Capital Adequacy Assessment Process (“ICAAP”): The Group’s own assessment, through an examination of its risk profile Adequacy Assessment Process from regulatory and economic capital perspectives, of the levels of capital that it needs to hold. Impaired loans Loans are typically reported as impaired when interest thereon is more than 90 days 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 present value of impaired loans due to the passage of time is reported as interest income Internal Ratings Based Approach ISDA Master Agreements 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”). 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 Liquidity Coverage Ratio (“LCR”): The ratio of the stock of high quality liquid assets to expected net cash outflows over the next 30 Ratio days under a stress scenario. CRD IV requires that this ratio exceeds 100% on 1 January 2018. Leverage ratio 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. Syndicated and international lending Syndicated and international 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. Syndicated and international lending is extended typically to non-investment grade borrowers and carries commensurate rates of return. Loss Given Default 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. Loan to deposit This is the ratio of loans and receivables expressed as a percentage of customer accounts, as presented in the statement of ratio financial position. 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 optimise the level of recovery by the Group. Loan to Value 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. 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. 436 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 437 Medium term notes National Asset Management Agency Net interest income Net interest margin Medium term notes (“MTNs”) are notes issued by the Group across a range of maturities under the European Medium Term Notes (“EMTN”) 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. Net Stable Funding Net Stable Funding Ratio (“NSFR”): The ratio of available stable funding to required stable funding over a 1 year time horizon. Ratio Off balance sheet Off balance sheet items include undrawn commitments to lend, guarantees, letters of credit, acceptances and other items as listed items in Annex I of the CRR. Offsetting Offsetting, or ‘netting’, is the presentation of the net amounts of financial assets and financial liabilities in the statement of financial position as a result of Group’s rights of set-off. 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 product and change risk, outsourcing, information security, cyber, business continuity, health and safety risks, people risk and legal risk. Optionality risk Principal components analysis Private equity investments 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. 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 “demeaned”; 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 shift, twist and bow). PCA is a very useful tool in reducing the dimensionality of a yield curve analysis problem and, in particular, in projecting stressed rate scenarios. Equity securities in operating companies not quoted on a public exchange, often involving the investment of capital in private companies. 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. Probability of Probability of Default (“PD”) is the likelihood that a borrower will default on an obligation to repay. Default Regulatory capital Regulatory capital is determined in accordance with rules established by the SSM/ECB for the consolidated Group and by local regulators for individual Group companies. 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. Repurchase agreement 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. Allied Irish Banks, p.l.c. Annual Financial Report 2016 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 n o i t a m r o n f i l a r e n e G A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 438 Glossary of terms Residential Residential mortgage-backed securities (“RMBS”) are debt obligations that represent claims to the cash flows from pools of mortgage-backed mortgage loans, most commonly on residential property. securities Risk weighted Risk weighted assets (“RWAs”) are a measure of assets (including off-balance sheet items converted into asset equivalents e.g. assets 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. Securitisation Securitisation is the process of aggregation and repackaging of non-tradable financial instruments such as loans and receivables, or company cash flows into securities that can be issued and traded in the capital markets. Single Supervisory The Single Supervisory Mechanism ("SSM") is a system of financial supervision comprising the European Central Bank (“ECB”) Mechanism and the national competent authorities of participating EU countries. 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. Special purpose Special purpose entity (“SPE”) is a legal entity which can be a limited company or a limited partnership created to fulfil narrow or entity 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). Stress testing Stress testing is a technique used to evaluate the potential effects on an institution’s financial condition of an exceptional but plausible event and/or movement in a set of financial variables. 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. Tier 1 capital A measure of a bank’s financial strength defined by the Basel Accord. It captures common equity tier 1 capital and other instruments in issue that meet the criteria for inclusion as additional tier 1 capital. These are subject to certain regulatory deductions. 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. Value at Risk 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. Wholesale funding Wholesale funding refers to funds raised from wholesale market sources. Examples of wholesale funding include senior unsecured bonds, covered bonds, securitisations, repurchase transactions, interbank deposits and deposits raised from non-bank financial institutions. 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. 438 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 439 AIB Commercial Finance Limited Bankcentre, Ballsbridge, Dublin 4. Telephone: + 353 1 667 0233 AIB Corporate Banking Britain St Helen’s, 1 Undershaft, London EC3A 8AB. Telephone: + 44 207 090 7130 Facsimile: + 44 207 090 7100 EBS d.a.c. 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 Principal addresses Ireland & Britain Group Headquarters Bankcentre, PO Box 452, Ballsbridge, Dublin 4. Telephone: + 353 1 660 0311 Website: group.aib.ie Allied Irish Banks, p.l.c. Bankcentre, Ballsbridge, Dublin 4. Telephone: + 353 1 660 0311 AIB Retail & Commercial Banking Ireland Bankcentre, Ballsbridge, Dublin 4. Telephone: + 353 1 660 0311 AIB Wholesale & Institutional Banking, Bankcentre, Ballsbridge, Dublin 4. Telephone: + 353 1 660 0311 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 AIB Customer Treasury Services Bankcentre, Ballsbridge, Dublin 4. Telephone: + 353 1 660 0311 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 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 Bank from the Republic of Ireland. Allied Irish Banks, p.l.c. Annual Financial Report 2016 439 n o i t a m r o n f i l a r e n e G A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 440 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 Auditor’s fees Average balance sheets and interest rates B Board Audit Committee Board Committees Board and Executive Officers Business risk and competition risk C Capital adequacy risk 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 report Credit ratings Credit risk Critical accounting judgements and estimates Culture risk 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 report Disposal groups and non-current assets held for sale Disposal of businesses Disposal of property Distributions on equity shares 229 267 415 356 354 292 275 352 190 189 172 169 158 43 309 309 4 6 349 187 315 309 185 123 62 256 168 351 300 300 296 299 280 172 207 202 279 275 275 279 Dividend income Dividends E Earnings per share Employees Exchange rates 266 354 278 354 351 M Market risk Memorandum items: contingent liabilities and commitments and contingent assets Model risk F Fair value of financial instruments N NAMA senior bonds 325 NAMA subordinated bond Finance leases and hire purchase Net fee and commission income contracts Financial and other information Financial assets and financial liabilities by contractual residual maturity Financial calendar Financial investments 287 351 156 415 available for sale 127 and 289 Net trading income Nomination and Corporate Governance Committee 198 Non-adjusting events after the reporting period 354 Notes to the financial statements 227 292 157 221 131 169 2 146 416 230 171 192 221 214 294 265 265 159 163 O Off balance sheet arrangements Offsetting financial assets and financial liabilities Operating and financial review Operational risk Other equity interests 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 Financial investments held to maturity Financial liabilities by undiscounted contractual maturity Financial statements Forbearance Foreign exchange risk Forward looking information Funding and liquidity risk 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 in the banking book Interest rate sensitivity Investments in Group undertakings Irish Government L Liquidity risk Loans and receivables to banks Loans and receivables to customers 343 146 286 287 318 and 374 and commitments 159 315 170 288 289 266 266 319 310 24 166 308 300 267 307 403 170 439 275 266 295 252 275 286 301 440 Allied Irish Banks, p.l.c. Annual Financial Report 2016 A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017 20:17 Page 441 R Regulatory capital and capital ratios Regulatory compliance Regulatory compliance and conduct risk Related party transactions Report of the Directors Restructure execution risk Retirement benefits Risk appetite Risk framework Risk governance structure Risk identification and assessment process Risk management Risk management and internal controls S Schedule to the Group Directors’ report 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 Trading portfolio financial liabilities Transferred financial assets V Viability statement W Website 44 351 167 336 180 145 269 60 59 59 59 49 208 182 261 268 304 224 222 225 213 223 415 302 318 211 276 279 300 319 208 415 Allied Irish Banks, p.l.c. Annual Financial Report 2016 441 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 AIB Group Bankcentre, PO Box 452, Dublin 4, Ireland. T: + 353 (1) 660 0311 / group.aib.ie Design and print management: Custodian Consultancy 1B Damastown Way, Dublin 15, Ireland. www.custodian-consultancy.ie Cover design: Dynamo 5 Upper Ormond Quay, Dublin 7, Ireland. www.dynamo.ie The paper used in this production has been sourced from a sustainably managed forest. © AIB GROUP 2017 

Continue reading text version or see original annual report in PDF format above