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.
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Business review
1. Operating and financial review
2. Capital management
Page
24
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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
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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.
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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
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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
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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
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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
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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.
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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
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-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
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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.
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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.
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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).
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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.
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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
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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.
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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.
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Allied Irish Banks, p.l.c. Annual Financial Report 2016
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Business review - 1. Operating and financial review
Segment reporting
– Segment overview
– AIB Ireland
– AIB UK
– Group & International
Page
37
38
40
42
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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
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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
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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
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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
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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
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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
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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)
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*Forms an integral part of the audited financial statements
Allied Irish Banks, p.l.c. Annual Financial Report 2016
43
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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
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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
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€ 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
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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
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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
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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.
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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
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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.
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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
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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.
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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
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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
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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
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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
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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
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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.
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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
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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
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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
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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
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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.
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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
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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.
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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.
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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
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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
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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.
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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
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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
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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
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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
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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
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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.
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*Forms an integral part of the audited financial statements
Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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
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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’.
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*Forms an integral part of the audited financial statements
Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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.
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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
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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
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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.
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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.
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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
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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
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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).
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*Forms an integral part of the audited financial statements
Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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
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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
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Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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
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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)
%
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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
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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
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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
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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
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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).
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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
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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
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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
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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
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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
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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
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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)
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*Forms an integral part of the audited financial statements
Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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
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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.
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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.
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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.
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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.
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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
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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
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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.
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Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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
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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.
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*Forms an integral part of the audited financial statements
Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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
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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.
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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
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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
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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.
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*Forms an integral part of the audited financial statements
Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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
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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.
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Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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
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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
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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
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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)
%
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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
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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
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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
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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.
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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)
%
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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
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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.
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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.
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Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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)
–
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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
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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
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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
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s
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*Forms an integral part of the audited financial statements
Allied Irish Banks, p.l.c. Annual Financial Report 2016
135
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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
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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
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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
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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.
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*Forms an integral part of the audited financial statements
Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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
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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
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s
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e
t
a
t
s
l
i
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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
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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
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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
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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
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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
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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.
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*Forms an integral part of the audited financial statements
Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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
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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
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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.
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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
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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
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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).
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Allied Irish Banks, p.l.c. Annual Financial Report 2016
151
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Risk management – 3. Individual risk types
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Allied Irish Banks, p.l.c. Annual Financial Report 2016
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152
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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
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A6 Risk 3 AFR 2016 pages 147-172:Layout 1 10/03/2017
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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
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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
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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
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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.
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Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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
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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
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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
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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
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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
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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
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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.
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*Forms an integral part of the audited financial statements
Allied Irish Banks, p.l.c. Annual Financial Report 2016
165
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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
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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
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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.
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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.
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Richard Pym
Chairman
1 March 2017
Bernard Byrne
Chief Executive Officer
Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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.
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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
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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.
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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
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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
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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
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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.
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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.
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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.
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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.
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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;
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– 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.
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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.
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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
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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.
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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
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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
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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
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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.
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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
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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.
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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.
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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.
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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.
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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
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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
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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.
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*Forms an integral part of the audited financial statements
Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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.
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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.
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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.
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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
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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
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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
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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.
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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
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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.
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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.
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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.
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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
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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
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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
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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
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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
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Richard Pym
Chairman
1 March 2017
Bernard Byrne
Chief Executive Officer
Mark Bourke
Chief Financial Officer
Sarah McLaughlin
Company Secretary
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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
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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
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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
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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.
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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.
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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:
–
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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
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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:
–
–
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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.
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The Group discontinues hedge accounting when:
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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.
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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
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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.
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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.
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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.
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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
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– 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;
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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;
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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
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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.
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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
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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
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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.
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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
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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
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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.
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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
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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.
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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
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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.
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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
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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.
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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.
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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).
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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.
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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
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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.
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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.
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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
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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).
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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
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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
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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
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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.
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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
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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%).
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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
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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.
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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)
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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)
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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
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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.
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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
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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).
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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
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n
e
m
e
g
a
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m
k
s
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i
i
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e
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c
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o
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t
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m
e
t
a
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s
l
i
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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
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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.
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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.
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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.
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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.
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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.
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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
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(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.
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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.
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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
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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
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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.
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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
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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
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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.
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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.
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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).
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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
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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
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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.
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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.
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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.
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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.
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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
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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.
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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
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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
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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
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s
t
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e
m
m
e
e
t
t
a
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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.
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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.
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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.
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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
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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.
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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
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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.
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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
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a
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F
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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
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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
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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
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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:
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a
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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
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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
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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
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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
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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
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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.
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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
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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.
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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
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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
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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
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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
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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.
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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
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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.
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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;
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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.
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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
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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.
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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.
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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
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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.
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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
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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
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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
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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
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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.
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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
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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
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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
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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).
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A13 Par Co Fin Stats AFR 2016 pages 347-406:Layout 1
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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
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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
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non-euro schemes
Other
Contributions by employer
Benefits paid
(245)
(245)
(245)
(2)
249
–
129
129
1
173
40
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(89)
(1)
177
40
–
40
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(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
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s
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B
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m
e
g
a
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a
m
k
s
R
i
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a
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c
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a
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s
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m
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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.
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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
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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
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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
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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)
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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).
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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
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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.
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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
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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
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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).
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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.
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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.
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a
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k
s
R
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h
g
s
r
e
v
o
d
n
a
e
c
n
a
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r
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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
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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.
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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
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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.
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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
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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
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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).
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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.
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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.
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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).
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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).
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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.
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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
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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.
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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
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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
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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
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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
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a
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s
R
i
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h
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s
r
e
v
o
d
n
a
e
c
n
a
n
r
e
v
o
G
s
t
n
e
m
e
t
a
t
s
l
i
a
c
n
a
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F
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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
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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
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a
e
c
n
a
n
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e
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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
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r
o
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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
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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
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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
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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
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397
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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.
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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.
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399
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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
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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
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401
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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
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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.
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403
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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.
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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.
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405
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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)
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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)
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407
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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
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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
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409
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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
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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
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1,747
5,836
10,698
23,277
(89)
4
(3,562)
19,630(1)
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Details of the rating profiles and lending classifications are set out on page 123.
Allied Irish Banks, p.l.c. Annual Financial Report 2016
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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
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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
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(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.
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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
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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
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Allied Irish Banks, p.l.c. Annual Financial Report 2016
415
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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
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A14 Reports and Glossary pages 407-416:Directors etc 10/03/2017
20:16
Page 418
General information – New operating segments
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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
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New segments with Credit tables Dec16:A8
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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
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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.
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421
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New segments with Credit tables Dec16:A8
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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)
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(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.
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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)
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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
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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
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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
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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
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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)
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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
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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).
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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).
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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