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Backing our
customers
Annual Financial Report 2017
AIB Group plc
Bankcentre, PO Box 452, Dublin 4, Ireland
T: + 353 (1) 660 0311 / group.aib.ie
AIB Group plc
AIB 28877 AR2017 Cover AW.indd 1-3
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AIB is a financial services group operating predominantly
in the Republic of Ireland. We provide a comprehensive
range of services to retail, business and corporate customers,
and hold market-leading positions in key segments in the
Republic of Ireland.
AIB also operates in Great Britain, as Allied Irish Bank (GB),
and in Northern Ireland, under the trading name
of First Trust Bank.
Our purpose, as a financial institution, is to back our
customers to achieve their dreams and ambitions.
For more detailed information on our structure
and business units, see pages 2 and 3.
Contents
Annual Review
A strong performance in 2017
AIB at a glance
Chairman’s statement
Chief Executive’s review
Overview of the Irish economy
Our strategy
Strategy in action
Risk summary
Sustainable banking
Governance at a glance
Board of Directors
Leadership Team
Governance in action
Business Review
Operating and financial review
Capital
1
2
4
6
10
12
14
18
20
26
28
30
32
35
53
Risk Management
Financial Statements
Principal risks and uncertainties
Framework
Individual risk types
58
69
73
Governance and Oversight
180
183
186
195
200
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
204
Corporate Governance Committee
Report of the Remuneration Committee 207
Corporate Governance Remuneration
statement
Viability statement
Internal controls
Other governance information
Supervision and regulation
210
223
223
225
226
Directors’ Responsibility Statement
Independent auditors’ report
Consolidated financial statements
Notes to the consolidated
financial statements
AIB Group plc company financial
statements
Notes to AIB Group plc company
financial statements
General Information
Shareholder information
Forward-looking statements
Glossary of terms
Principal addresses
Index
229
230
239
245
371
374
377
378
379
385
386
This Annual Financial Report contains forward-looking statements with respect to certain of the Group’s plans and its current
goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives.
See page 378.
Annual Review:
Print management:
Custodian Consultancy
Unit 517 Grants Rise, Greenogue Business Park,
Rathcoole, Dublin 24, D24 R9YX
The paper used in this production has been sourced from a sustainably managed forest.
© AIB GROUP 2018
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A strong performance in 2017
Net interest margin 1
2.58%
Cost income ratio 2
48%
Profit before tax
€1.3bn
New lending 3
€9.4bn
Earning loans
€57.0bn
Impaired loans
€6.3bn
CET1 fully loaded
17.5%
2017
2016
2017
2016
2.58%
2.23%
Continued positive net interest margin (NIM) growth
from stable asset yield and reducing cost of funds.
NIM excluding interest on cured loans was 2.50%.
48%
52%
Increased income contributed to lower cost income
ratio (CIR) of 48%. CIR excluding income from cured/
restructured loans was 53%.
2017
2016
€1.3bn
€1.7bn
Profit before tax is lower due to higher exceptional costs.
Profit before tax and exceptional items increased to €1.6bn.
2017
2016
2017
2016
2017
2016
2017
2016
€9.4bn
€8.4bn
New lending increased by 13% with growth across
all segments.
€57.0bn
€56.1bn
Growth of €1.6bn in earning loan book excluding
FX impact, as a result of higher new lending and loans
upgraded from impaired.
€6.3bn
€9.1bn
Continued focus on reducing impaired loans through
sustainable restructuring solutions and disposal of
distressed loan portfolios.
17.5%
15.3%
Robust capital position with CET1 of 17.5%, after proposed
ordinary dividend of €326m, supporting future growth and
capacity for capital return.
1. Net interest margin (NIM) including eligible liabilities guarantee (ELG) charge. ELG charge is no longer material and is no longer separately disclosed.
2. Before bank levies, regulatory fees and exceptional items, cost income ratio (CIR) including these items was 61% in 2017 (2016: 54%). For exceptional items,
see pages 41 and 51.
3. New lending for 2016 has been restated by €0.3bn to exclude all transaction based new lending.
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AIB Group plc Annual Financial Report 2017
1
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements AIB AT A GLANCE
Customer-focused, strong capital base
and well-positioned for growth
Retail & Commercial
Banking (RCB)
69%
of net loans
Wholesale, Institutional
& Corporate Banking (WIB)
17%
of net loans
RCB is the leading provider of financial products
and services to personal and business customers
in Ireland. Its key business lines include: mortgages,
consumer lending, SME lending, asset-backed
lending, wealth management, daily banking,
and general insurance.
WIB provides customer-focused solutions
in private and public markets to AIB’s largest
customers and customers requiring specific
sector or product expertise.
Leading retail banking franchise
in Ireland with 2.4 million personal
and SME customers
Number one physical distribution
network in Ireland with 297 locations
and a further c. 1,100 locations
through An Post network
Number one digital channel
distribution in Ireland with 1.3 million
active digital customers; over 60% of
key products sold via digital channel
2.4m
customers
297
locations
1.3m
digital
customers
Well-established and diversified
business with market-leading position
in key sectors
Primary focus on senior debt
origination through Corporate
Banking, Real Estate Finance, Energy,
Climate Action & Infrastructure
Complementing traditional debt
offering through Specialised Finance,
Syndicated & International Finance,
and advisory services in
Corporate Finance
relationship-
driven model
sector
specialist
teams
product
specialist
teams
€4.6bn
New lending
€41.4bn
Net loans
€1,199m
Operating
contribution 1
€3.2bn
New lending
€10.3bn
Net loans
€225m
Operating
contribution 1
Market offering
Leading mortgage provider
Number one mortgage provider in a growing market
enabled via AIB’s multi-brand strategy, incl. EBS and Haven.
Business banking
Sector-led strategy and local expertise delivering the leading
market share across key SME products, incl. current account,
deposits and loans (Source: IPSOS January 2018).
Personal banking
Leading provider of financial services to personal customers
in the market, via digital innovation and relationship
management expertise. Full suite of services, incl. daily
banking, consumer credit, wealth management, savings
and investments.
Market offering
Corporate Banking
Leading domestic franchise and number one bank for foreign
direct investment (FDI).
Real Estate Finance
Multi-disciplinary team with established market position.
Energy, Climate Action & Infrastructure
A centre of excellence with particular focus on supporting
Ireland’s decarbonisation.
Specialised Finance
Services such as mezzanine, equity and structured finance.
Syndicated and International Finance
Proven ability with strong track record and reputation.
Corporate Finance
Providing advisory services and solutions.
2
AIB Group plc Annual Financial Report 2017
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AIB UK
Group
14%
of net loans
AIB UK operates in two distinct markets, providing
corporate and commercial banking services in
Great Britain, trading as Allied Irish Bank (GB), and
retail and business banking services in Northern
Ireland, trading as First Trust Bank.
Group comprises wholesale treasury activities,
Group control and support functions.
Over 322,000 retail, corporate
and business customers across Great
Britain and Northern Ireland
Treasury manages the Group’s
liquidity and funding position and
provides customer treasury services
and economic research
Treasury
A distribution network of 30 locations
throughout the United Kingdom:
Great Britain (15 business centres),
and Northern Ireland (15 branches,
including six co-located
business centres)
The Group control and support
functions include business and
customer services, marketing,
risk, compliance, audit, finance,
legal, human resources, and
corporate affairs
control and
support
Over 119,000 active digital customers
322k
customers
30
locations
119k
digital
customers
£1.5bn
New lending
£7.3bn
Net loans
£154m
Operating
contribution 1
Market offering
Allied Irish Bank (GB)
Niche commercial and corporate bank with locations in key
cities across Great Britain. Banking services include: lending,
treasury, trade facilities, asset finance, invoice discounting, and
day-to-day transactional banking.
First Trust Bank (FTB)
A long-established bank in Northern Ireland providing a full
banking service, including mobile, online, post office and
traditional banking to business and personal customers.
Operating contribution 1 by segment
AIB UK
11%
Wholesale,
Institutional &
Corporate Banking
14%
FY 2017 total:
€1.6bn2
Retail &
Commercial
Banking
75%
1. Pre-provision operating contribution.
2. Excludes the Group segment.
For a detailed report on our performance please read the
‘Operating and financial review’ on pages 35 to 52.
AIB Group plc Annual Financial Report 2017
3
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Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements
CHAIRMAN’S STATEMENT
2017 was a significant year for AIB
Reflecting on a year in which the bank delivered an IPO, a new group
holding company and a strong financial performance while taking steps
to rebuild trust and confidence in a challenging environment.
I am delighted to report on a highly
successful year for AIB. 2017 saw AIB
deliver the largest Initial Public Offering
(IPO) in Europe, the implementation of
a new group holding company, our first
payment of a dividend to shareholders
in many years and the publication of our
first Sustainability Report.
2017 was also a successful year
financially, with a profit before tax of
€1.3bn. The Board is pleased to propose
a final dividend for the financial year
ending 31 December 2017 of 12 cents
per ordinary share, up from 9.21 cents at
the previous year end. The strength of
our financial performance underpinned
the success of the IPO enabling the State
to sell off 28.75% of their shareholding
yielding a €3.4bn return to Ireland’s
taxpayers. It has always been the
ambition of the bank to enable the State
to achieve a full return on its investment
in AIB and this is now achievable.
Our IPO took place against the backdrop
of an improving Irish economy. We
currently anticipate these conditions to
continue across the Eurozone
notwithstanding Brexit, for which we
have sought to help our business and
corporate customers plan for whatever
eventuality might arise. Ireland’s trade
has diversified significantly since
accession to the EEC in 1973 and it is
fortunate that other overseas markets
have been expanding significantly in
2017. However Brexit risk remains a
major uncertainty.
“Our IPO took place
against the backdrop
of an improving
Irish economy.”
4
AIB Group plc Annual Financial Report 2017
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For more information on board activities during the year
see our ‘Governance in action’ section on page 32.
Dr. Michael Somers, our Deputy
Chairman, retired on 31 December 2017
having served on the Board since 2010
as a State Nominated Director. We
appreciate his contribution to the bank
during that period. The Deputy Chair
position is now taken by Catherine
Woods, who also holds the role of
Senior Independent Director. The State
is entitled to appoint two Directors to
the Board and we understand that the
Minister for Finance has initiated a
process in this regard.
The Board spent much of the first half
of the year on the IPO process with a
particular focus on ensuring the
accuracy and completeness of the
prospectus. Once the IPO was complete,
our focus turned to the regulatory
requirement to create a new holding
company to satisfy the bank resolution
directive, which involved another
prospectus and shareholders’ meeting
in November. IFRS 9 was also a regular
topic at Board meetings throughout the
year in order to ensure that the bank
was ready by the year end to apply this
complex new accounting standard.
Additionally, the Board continued to
concentrate on resolving the problems
of the past, including non-performing
loans and the Tracker Mortgage
Examination programme.
We commenced the tracker mortgage
programme in 2015 conducting a review
of c. 650,000 accounts in the process.
Our review has been conducted in
accordance with the Central Bank of
Ireland’s Framework. We believe we
have conducted this review in a fair
and transparent manner, most recently
agreeing with the Central Bank to include
within the Framework a grouping of
additional customers who never had a
tracker mortgage. However, the scale
of this issue has continued to erode trust
and confidence in the banking industry
as a whole. This is regrettable as we are
fully cognisant of our obligations,
and being a good corporate citizen
is an important objective of the Group.
With this in mind, we published our first
Sustainability Report during the year,
which we launched at a well-attended
and stimulating conference at Croke Park.
Our Board Sustainable Business
Advisory Committee led the work in
this area and it will now be an
annual publication.
achievements during 2017. Our purpose
is to back our customers to achieve their
dreams and ambitions, a goal which we
strive to meet on a daily basis.
We look forward to 2018 with
confidence. We would like to see the
political environment for banks and
bankers to be normalised, and we
realise that re-establishing trust and
confidence is a complex objective.
At the heart of this annual report I hope
readers will see that AIB is a great bank,
with fantastic employees, led by a top
quality executive team with a relentless
focus on our customers.
Richard Pym
Chairman
28 February 2018
Since the IPO, I have visited most of the
large institutional shareholders on the
share register. They have been pleased
with their investment in the firm and
showed an appetite to acquire further
shares in any subsequent State sell
down. Consistent with the commitment
we gave in the IPO prospectus, we are
putting the group remuneration policy
to the Annual General Meeting for a
non-binding advisory vote, enabling us
to seek to introduce a Deferred Annual
Share Plan designed as a retention
vehicle for key executives considered
critical to the delivery of the Group’s
strategic objectives. Under current
agreements with the State, ministerial
permission will be required for the
introduction of this scheme.
We undertook an external evaluation
of the Board in 2017 and during the
review, the evaluator commented on
the notable commitment of Directors,
whom I would like to thank for their
dedication. I would also like to extend
my appreciation to the Leadership Team
and all colleagues for their exceptional
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AIB Group plc Annual Financial Report 2017
5
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements CHIEF EXECUTIVE’S REVIEW
Customer First strategy continuing to
deliver strong financial performance
2017 was a pivotal year for AIB, with the successful completion of
the largest IPO in Europe, resulting in the relisting of the company
on the Dublin and London stock exchanges.
Introduction
2017 was a pivotal year for AIB, with the
successful completion of the largest IPO in
Europe, resulting in the relisting of the Group
on the Dublin and London stock exchanges.
We delivered another robust set of financial
numbers, maintained strong positions in our
core markets and continued to make good
progress on our strategic priorities. All of this
has taken place against the background of
an improving domestic economy.
Our strategic pillars of Customer First, Simple
& Efficient, Risk & Capital and Talent & Culture
continue to be the foundations on which
we build our business and measure our
progress. Further details on the progress
made in 2017 are contained in a later section
of this report, and fundamentally they show
momentum on our journey to become a
bank that is all about efficiently and
effectively anticipating and meeting our
customers’ financial needs over the course
of their lives.
“As this is our first set
of annual results since the
completion of the IPO, I am
delighted they confirm we are
delivering against the financial
commitments made during that
IPO process.”
6
AIB Group plc Annual Financial Report 2017
Highlights
The IPO, which raised €3.4bn for the
Government and resulted in their
shareholding reducing to c. 71%, was a
significant public validation of the great work
completed to repair this business. Strong
investor interest in the bank, and ultimately
the remarkable Irish economic recovery
story, resulted in high demand for the stock.
This strong appetite remains evident with
a listing that continues to be well supported.
It is very encouraging that the combination
of the cash returned to the State to date and
the recent valuation of their current
shareholding in the Group has put the
Government in a position where the €20.8bn
bailout, injected during the crisis, can be
recovered. As this is our first set of annual
results since the completion of the IPO, I am
delighted they confirm we are delivering
against the financial commitments made
during that IPO process.
There were many other highlights in the
year, including the successful implementation
of our Group holding company structure and
the payment of our first ordinary dividend in
nearly a decade. I am pleased to confirm that
we intend to pay a full year dividend, for
2017, of €326m, an increase of 30% on 2016.
In the latter part of the year, we began to
more publicly progress our sustainability
agenda, hosting our first conference on the
topic and also publishing our first
Sustainability Report. We know that we need
to be a leader in developing truly sustainable
practices to ensure that we develop a real
social licence to operate. More detail on our
Sustainability agenda is provided in later
pages of this report.
Importantly, we also launched our Purpose
statement: To back our customers to achieve
their dreams and ambitions. We believe that
this conveys our intent as a bank. It defines
who we ultimately work for, how we can add
value and what we seek to become. It is
what the actions we take and decisions we
make must be focused on. We know this is
AIB 28877 AR2017 Front AW1.indd 6
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ambitious; something that many may doubt
and challenge. That, in part, is why we
picked it. It sets a stretching goal that will not
easily be achieved. That is what motivates an
organisation to deliver. In 2018, we will bring
our purpose to life throughout the bank,
ensuring that all of our people can really
connect, understand and contribute to our
purpose in their daily roles.
We significantly transformed our UK business
in 2017. It was a difficult programme for
employees and for some customers but
necessary to reposition this business. The
changes made will ensure that we are well
set up in the UK market to deliver against our
strategy for the customers we serve. The
uncertainties around Brexit continue to
impact but our business in the UK is
doing well.
We also made progress on our property
strategy for the next phase of the bank’s
development, with the addition of two
buildings at Molesworth Street and Central
Park in Leopardstown. The building on
Molesworth Street will be our new corporate
HQ and Central Park will be the centre of
excellence in digital innovation and
enablement for our customers. This will be
the new base for teams that design, deliver
and support our digitally enabled products
and services.
Diversity and inclusion are high on our
agenda, and in 2017 we made good
progress, leading to AIB becoming the first
Irish company to be awarded the Investors in
Diversity Ireland Standard. We are active
supporters of the 30% Club. We set a gender
diversity target for our management
population of 40% female representation by
the end of 2018, and at the end of 2017, we
are just north of 38%. We also set a gender
diversity target for our Leadership Team of
25% female representation, which we have
met. Our agenda extends beyond gender,
and following employee feedback we
launched resource groups for Pride, Abilities,
Women, Men, Families and Roots this year to
ensure all employees can express views
about improving AIB.
Financial performance
We delivered another strong financial
performance in the year. We achieved a
profit before tax of c. €1.3bn. This comprises
c. €1.57bn of profit excluding exceptional
items compared to c. €1.48bn in 2016. Our
net interest margin (NIM) at 2.58% has
increased by 35bps on last 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 17.5% (transitional 20.8%).
This sound capital base, comfortably above
minimum regulatory requirements, gives us
the ability to support our customers and to
grow our business. We have a stable funding
model and an improving credit profile, which
enabled us, in 2017, to deliver good financial
returns and a growing capital return to our
shareholders. I am pleased that the Board is,
today, proposing a dividend payment for the
full year 2017. Including this dividend, the
State will have received c. €10.5bn in capital,
fees, dividends, coupons and levies to date.
We continue to work hard to reduce our
impaired loan balances, which fell by €2.8bn
year on year to €6.3bn. The impaired loan
balances are €3.6bn net of specific provision
cover of 43%. Since 2013, we have reduced
the overall impaired loan balance by c.
€23bn or 78%. We are making steady
progress as we continue to move these
balances to more normalised European peer
levels. We have almost 1,500 employees
working in our Financial Solutions Group
who work with customers to deliver
long-term sustainable solutions. In 2017, we
agreed on average over 1,000 such solutions
each month. In addition, our deleveraging
strategy includes the sale of certain
commercial portfolios where appropriate.
Total costs for the year, excluding
exceptionals, at c. €1.4bn, are up c. €50m on
2016 and represent a c. €320m reduction on
2012 levels. Our year-end cost income ratio
was 48%, down 4 percentage points on
2016. The €870m three-year investment
programme which commenced in 2015 has
been completed with some real successes
achieved. You will see further details on
these achievements in the ‘Our strategy’
section of this report.
In 2017 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, in
particular, the ongoing recovery of the Irish
economy. We approved €14.4bn in new
lending during 2017, with actual customer
drawdowns at €9.4bn, up from €8.4bn in
2016. In Ireland, personal lending was up
16%, business lending was up 15%, corporate
lending was up 15% and mortgages were up
17%. Our market share of mortgage
drawdowns for the year was 33%. We
monitor this closely, tracking our share of
applications, which grew in the final quarter
of 2017 and we have made a good start to
2018. Wholesale and Institutional (including
syndicate and international lending in the US
and Europe) was up 21%. In our UK business,
we saw new lending recover, up 12% from
2016 levels.
Focused on delivering sustainable performance
Medium-term targets
Based on strong customer
franchise, capital accretion,
growth and shareholder returns
Investment
in Customer
First agenda
driving growth
Target return
on tangible
equity 10%+ 1
CREATING
SHAREHOLDER
VALUE
Maintain
strong and stable
NIM 2.40%+
Strong capital
base with
CET1 of 13%
Robust and
efficient operating
model CIR <50%
Source: Company information.
1. ROTE based on (PAT - AT1 coupon + DTA utilisation)/(CET1 @13% plus DTA).
AIB Group plc Annual Financial Report 2017
7
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Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements CHIEF EXECUTIVE’S REVIEW CONTINUED
The Leadership Team is a diverse 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 breath 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. The role
that this team played in 2017 in continuing
to lead the change agenda within the bank
and delivering many successes was huge,
including the vastly time-consuming
IPO process.
I would like to thank them, their teams and
all of my colleagues in the bank for their
ongoing commitment, dedication and
enthusiasm in what was a critical year for the
bank and all our stakeholders. Together, we
will continue to focus on positioning AIB to
respond to our customers’ needs and in so
doing, will evolve and improve this business.
Our stakeholders
As a bank, we have many stakeholders.
It is our job to know who our key
stakeholders are and to understand what
they expect of us. Our view is that our key
stakeholders, first and foremost, are our
customers. Others include our employees,
regulators, shareholders and investors, and
government representatives. We know that,
on occasion, our stakeholders and the bank
can have different and conflicting views,
which we try to understand. We must
balance, to the extent we can, if and how
we can deliver for our stakeholders, knowing
there will inevitably be conflict at times.
Customer First
We’ve made all this progress across our
business while focusing on putting our
customers first. Our Personal Relationship
Net Promoter Score (NPS) increased by
2 points in the last quarter of 2017. Our
Customer Transactional NPS was +39 in
Q4 2017, up 1 point since Q3 but when
compared to this time last year, down 6
points. This highlights the ongoing challenge
that we all face in continuing to deliver
a great banking experience for our
customers. They continue to expect more
from us and how they interact with us on
a daily basis has changed significantly over
recent years. We must continue to strive to
evolve our products and services to meet
their needs and to enable them to engage
with us how and when they wish. In 2018
we will continue to focus on driving change
and customer experience improvements.
Legacy customer challenges
We continue to face challenges, some
new and some, like the Tracker Mortgage
Examination programme, are still work in
progress. As they arise, we commit the
required resources to deal with them in an
open and fair way for our customers and
stakeholders. That is what is expected of us
and it is how we will continue to rebuild trust
and public confidence in AIB. The Tracker
Mortgage Examination programme has
been a long programme, which started in
2015 and is now defined by the Central Bank
of Ireland Framework. This includes a full
independent third party review and an
appeals process, which takes time to
complete. Customers are assured that
payments they receive under the redress and
compensation scheme will not compromise
their right to appeal so we can reasonably
expect that activities might flow on from this
for some time. We have made very material
progress and expect to conclude the main
customer elements by Q2 2018.
Daily user interactions
2013
148K
Mobile
Interactions
208K
Internet
Banking
Logins
880K
daily
interactions
18K
Contact
Centre
Calls
77K
Branch
Transactions
432K
ATM
Withdrawals
2017
903K
Mobile
Interactions
28K
Kiosk/Tablet
Logins
231K
Internet
Banking
Logins
Over 1.5m
daily
interactions
18K
Contact
Centre
Calls
98K
Branch
Transactions
294K
ATM
Withdrawals
Source: Company information.
In summary, we have a business that
continues to achieve strong underlying
profitability, maintains a robust capital base,
has increased new lending and reduced
impaired loan balances, while at the same
time, maintaining cost discipline and
investing in its future. All of this is being
achieved by focusing on how best to back
our customers while managing financial,
operational and regulatory requirements.
We still have more to do to achieve the
operating platform we aim for but we are
well positioned to do this.
Our culture
Having the right culture is critical to the
success of any business and it sets a baseline
for the beliefs and values of our people.
These beliefs and values drive behaviour,
and our collective behaviour determines
how we face out to our colleagues,
customers and those we engage with in
our communities. Culture has rightly been
identified as being at the heart of many of
the issues the banking industry faced in the
recent past. Too often, banks focused on
their own short-term priorities over and
above those of their customers. We are on
a journey of cultural change at AIB. We have
made good progress and we know that we
still have more to do. Our cultural ambition
reflects the three key themes of Accountability,
Collaboration and Trust (ACT). Our Code of
Conduct has been updated to reflect this,
and was relaunched to all employees in 2017.
We have enhanced our performance
management tool for all employees across
the organisation. In terms of assessing
individual performance, we now give equal
weighting to WHAT results we deliver and
HOW we actually deliver them. This means
that how employees go about their job,
including their behaviours and interactions
with customers, is just as important as what
they actually get done.
Our people
The success of AIB is built on the efforts and
commitment of the people who work here.
We are maintaining our focus on improving
everyone’s collective experience as
employees. We are challenging ourselves
to build a more collaborative and inclusive
culture where everyone can be at their best.
The momentum in our employee
engagement journey continued in 2017
and I was particularly delighted to see
another increase in our iConnect scores
and a participation rate of 88%, which is our
highest completion rate to date. Coming from
the 5th percentile of the Gallup worldwide
employee engagement database in 2013 to
the 62nd percentile in 2017 is a great
achievement and one that we will continue
to strive to better year on year.
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Our market position
We consider a number of factors when we
think about how strong our market position
is. These include how defined the market is,
how many customers we have in that market
and how active these customers are. We also
take into account 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 our balance sheet and the size of the
overall commitment.
When it comes to Personal, Business and
Corporate markets in Ireland 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.
Outlook and priorities for 2018
The past number of years have seen a
stronger than expected recovery by the Irish
economy and this was again evident in 2017
as the economy performed ahead of
expectations with increased employment
levels and exports maintaining their strong
upward trend. The unemployment rate fell
to 6.2% by the end of 2017 and consumer
confidence was close to a 15-year high in
H2 2017.
There was a further increase in housing
completions in Ireland in 2017 and a
corresponding growth in mortgage lending
of 29%. Housing completions continue to be
well below the required demand level but
further growth is expected in 2018.
As a bank, we have a crucial role to play in
ensuring that the housing supply increases,
and we are working to implement a number
of initiatives to achieve this. We are very
Our purpose
Strong market share positions in retail and business banking – stock
Mortgages2
33%
33%
Personal Current Accounts
36%
36%
Personal Loans3
21%
21%
Business Current Accounts
41%
41%
Leasing4
20%
20%
Main Business Loans
43%
43%
#1 Mortgages
#1 Personal Main Current Accounts
#1 Personal Loans
#1 Personal Credit Cards
#1 Business Main Current Accounts 1
#1 Business Main Loans
#1 Business Main Leasing 1
#2 Business Credit Cards
Source: Ipsos MRBI AIB Personal Tracker 2017; AIB SME Financial Monitor 2017; BPFI – 2017.
1.
Joint No. 1 position.
2. New lending flow 2017.
3. Amongst banks; excluding car finance.
4. Main business leasing agreement.
active in not just providing real estate finance
but increasingly facilitating social and
affordable housing.
Brexit remains an area of concern but to date
there has been little net impact on the Irish
economy. The UK economy has been
negatively impacted, however, and we will
continue to monitor this in the context of the
Irish economy, the bank and our customers.
The successful completion of the IPO
demonstrated strong market sentiment
towards AIB and the Irish economy. The
next step on that journey is a matter for
the Government.
Our strategic priorities will continue to evolve
into 2018 as we focus on how we can better
and more efficiently serve our customers,
how we organise ourselves to manage our
risk, finance and regulatory agenda, and
how we must think beyond 2018 and what
growth for this business looks like. All of these
remain underpinned by our focus on the
ongoing evolution of our operating model,
cost discipline and continuing to digitally
enable the bank to deliver for our customers.
We continue to focus on winning our social
licence to operate, essentially to build a
sustainable business and in doing so continue
to rebuild trust in AIB. We want AIB to become
a leader, both in thought and practice, in
sustainability and we are working on setting
clear targets for what we want to achieve as
we build out our strategy in this space.
We will continue to face challenges and as
noted earlier, as these issues arise, we will
deal with them in a fair and transparent way
for our customers and stakeholders.
Summary
2017 has been another strong year for AIB.
The momentum in our business continues
and these strong set of results are the output
of that. I am proud of what we delivered in
the year and I look forward to what 2018
will bring.
I want to thank our Chairman, my fellow
Board and Leadership Team members, and
my many other colleagues across the Group
for the ongoing support that I receive in
fulfilling my role as CEO. Together we are
confident that we are building a better bank
and are focused on delivering for our
customers, which centres on our purpose,
backing our customers to achieve their
dreams and ambitions.
Bernard Byrne
Chief Executive Officer
28 February 2018
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Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial StatementsCustomer FirstRisk & CapitalTalent & CultureSimple & EfficientInsightValuesCultureVisionOur purposeTo back our customers to achieve their dreams and ambitions OVERVIEW OF THE IRISH ECONOMY
The economy in the Republic of Ireland continues
to grow, with attractive market dynamics
Construction investment*
(Volume, 3 Qrt Mov Avg, YoY % Change)
Exports of services*
(Volume, 3 Qrt Mov Avg, YoY % Change)
%
40
30
20
10
0
-10
-20
-30
-40
%
20
18
12
8
4
0
Q3 2010
Q3 2011
Q3 2012
Q3 2013
Q3 2014
Q3 2015
Q3 2016
Q3 2017
Q3 2010
Q3 2011
Q3 2012
Q3 2013
Q3 2014
Q3 2015
Q3 2016
Q3 2017
Source: CSO.
Source: CSO.
* Charts refer to the Republic of Ireland economy only.
Economic overview of the Irish economy
Recent years have seen a stronger than
expected recovery by the Irish economy.
This has been led by robust export
growth, but there has also been a strong
rebound in domestic demand, including
business investment, construction and
consumer spending.
The Irish economy performed better
than expected in 2017. The latest
National Accounts data show that GDP
grew by 7.4% in the first three quarters
of the year. However, Irish GDP figures
are distorted by large flows related to
the activities of multinational companies.
A better measure of underling activity is
‘modified final domestic demand’, which
excludes factors such as intellectual
property rights and aircraft leasing that
distort GDP figures. This grew by 4.9%
in the first three quarters of 2017.
Housing
Construction continued to rebound,
with output up by 17% in the first three
quarters of 2017. Housing output
continued to rise steadily, albeit from
low levels. Housing commencements
rose by 33% in 2017, totalling 17,572 for
the full year. Housing completions,
as measured by electricity connections,
rose by 29% to 19,271 in 2017, up from
14,932 the previous year.
This level of building activity is still well
below the projected 30,000-35,000
units that are required to meet annual
demand. The mismatch between supply
and demand continued to exert strong
upward pressure on house prices and
rents last year. House price inflation was
running at 12.3% year-on-year in
December, with rents up by 6.1% in the
same month.
Rising exports and consumer spending
Exports maintained their strong uptrend
in 2017, with service exports rising by
13% in the first three quarters of
the year.
Consumer spending rose by 2% in the
first three quarters of the year, below
the strong growth rates of 4.2% and
3.3% seen in 2015 and 2016, respectively.
However, core retail sales (i.e. excluding
the motor trade) maintained their robust
growth rate, rising by 7% in 2017.
Conversely, consumer spending on
services was particularly sluggish,
showing no growth in the first three
quarters of 2017. It is possible that this
may be revised higher when more data
become available.
Consumer price inflation remained very
subdued reflecting global trends,
modest wage growth and the strength
of the euro against sterling. The HICP
rose by 0.2% in 2017, well below inflation
in the Eurozone, UK and US.
Employment
The Irish labour market remained strong
last year, with employment expanding
by an estimated 2.7%. Job growth was
evident across nearly all sectors of the
economy, with particularly strong
employment gains in construction,
IT, and healthcare. Meanwhile, the
unemployment rate had declined to
6.2% by the end of 2017 from 7.5% at
the end of 2016.
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Housing
commencements
+33%
in 2017
Employment/Unemployment*
Unemployment rate: (%) LHS
Employment (‘000): RHS
Retail sales (ex-autos)*
(Volume, YoY, %)
%
18
16
14
12
10
8
6
4
(’000)
2300
2200
2100
2000
1900
1800
1700
12
10
8
6
4
2
0
-2
-4
Q4 2010
Q4 2011
Q4 2012
Q4 2013
Q4 2014
Q4 2015
Q4 2016
Q4 2017
Q3 2010
Q3 2011
Q3 2012
Q3 2013
Q3 2014
Q3 2015
Q3 2016
Q3 2017
Source: CSO via Thomson Datastream.
Source: CSO via Thomson Datastream.
Lending activity
The strength of economic activity
was reflected in strong growth in new
lending activity. Mortgage lending
recorded a strong 29% increase in 2017,
rising to €7.3bn from €5.7bn in 2016.
However, this is still quite some way
short of the level of lending that would
be associated with a more normalised
housing market.
Business lending also continued to
grow. Central bank data show new
lending to the SME sector at €3.4bn in
the first three quarters of 2017, up 5%
from the corresponding period of 2016,
despite some signs of weakness in
business investment.
Brexit
Brexit remains a concern. To date, there
has been limited impact on the Irish
economy from Brexit. The associated
sharp weakening of sterling has clearly
impacted those trading with the UK, as
well as the number of British tourists
coming to Ireland. Overall though, Irish
companies have had to get used to
dealing with a weak and volatile sterling
during most of the past decade.
The Bank of England has observed that
the progress made at the end of last year
in the EU-UK Brexit negotiations has
“reduced the likelihood of a disorderly
exit”. This is welcome news.
It is hoped that agreement can be
reached in the spring of 2018 on a
transition period being put in place when
the UK departs the EU in March 2019,
which would leave the current trading
arrangements largely in place until at least
2020. This should permit the talks to
proceed to discussing the future trading
relationship between the UK and EU.
UK economy overview and outlook
The UK economy has already been
impacted by Brexit. The pace of growth
slowed in 2017 as a sharp rise in inflation
and slower employment growth
weighed on consumer spending, and
uncertainty around Brexit held back
investment. GDP growth in 2017
estimated at 1.7%, down from
an average rate of 2.3% in the previous
four-year period. Activity is expected to
remain subdued in 2018, with GDP
growth forecast at 1.5% and 1.4% by the
International Monetary Fund (IMF)
and UK Office for Budget Responsibility
(OBR), respectively.
Outlook for the Irish economy
Most forecasters see economic growth
in Ireland slowing somewhat to around
4% in 2018, with the uncertainty around
Brexit, the slowdown in UK economic
activity and the rise of the euro,
especially against sterling, all seen as
headwinds. However, this would still
be a very good performance by the
Irish economy.
Leading indicators of activity remain
strong, pointing to continued good
economic growth. The favourable
external environment will support
exports, with domestic spending
underpinned by continuing low interest
rates and rising employment and
incomes, as well as the ongoing
rebound in construction activity.
This should result in a further strong
rise in new lending activity in 2018.
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AIB Group plc Annual Financial Report 2017
11
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements
OUR STRATEGY
How we run our business and measure our progress
AIB, and the banking industry, has been on a difficult journey over the last decade. Having gone through significant change
and emerged from the financial crisis, our sights are set on ensuring that we have learned our lessons from the past and that
we are building a business that is focused on meeting the needs of our customers to enable them to prosper. Our purpose
is to back our customers to achieve their dreams and ambitions. We know that this is a brave statement and we know that
we have a road to travel yet, but it does convey our intent. It defines who we ultimately work for, how we add value and
what we seek to become. There are four strategic pillars that determine our areas of focus and drive our investment.
These pillars, and the progress made against them in 2017, are set out below.
What this means in AIB
Progress in 2017
Customer First
We put our customers at the heart
of our organisation, continually
adapting our product and service
offerings to meet their needs. We
provide a digitally-enabled, omni-
channel banking experience that
allows customers to interact with
the bank how and when they want.
Simple &
Efficient
We are at the forefront of digitally
enabled banking, with ongoing
investment in technology and
innovation. Our products and
services are simple and easily
accessible, supported by a resilient
and agile technology platform.
• Further reductions for mortgage customers in the Standard
Variable Rate (SVR), the fifth rate reduction for existing customers
in three years.
• Launched an enhanced Mortgage to Rent scheme in
conjunction with iCare Housing and the Irish Mortgage Holders
Organisation.
• Funded the acquisition of social housing by voluntary
housing associations.
• Continued participation in the Strategic Banking Corporation
of Ireland (SBCI) fund to provide competitively-priced cash flow
support to the agri-food sector.
• Automated the credit application process for customers who take
out a personal loan, resulting in quicker decision-making.
• Hosted our inaugural sustainability conference and produced
our first Sustainability Report.
• Completed the three-year €870m investment programme,
focused on improving system resilience and delivering a better
experience for customers.
• Delivered a further increase in digitally and device-enabled
banking, resulting in 77% of personal loan applications online.
• Continued enhancements in our mobile platform, including the
launch of Apple Pay.
• Significant progress in the digitisation of our back office
functions, with 60% of activity now paperless.
• Ongoing deployment of robotic process automation resulting
in faster fraud detection.
Risk & Capital
We are increasing the value of the
business while maintaining a strong
risk management framework,
improved asset quality and robust
capital levels. We offer value to
our customers while consistently
delivering a strong financial
performance that paves the way for
future development and addresses
legacy challenges.
• €3.4bn raised through a successful IPO, with the State reducing
its shareholding to c. 71%.
• Payment of an ordinary dividend of €250m to shareholders
– the first since 2008.
• Successfully transitioned the Group structure into a holding
company (“HoldCo”) legal corporate structure.
• Continued strong momentum in the reduction in impaired loans,
with a 31% reduction year-on-year, from €9.1bn to €6.3bn.
• Continued work on legacy challenges, with the Tracker Mortgage
Examination programme expected to be substantially completed
by end Q2 2018.
Talent &
Culture
We ensure that we have the
right talent, skills and capabilities
within the organisation to support
accountable, collaborative and
trusted ways of working. We
promote a culture of diversity and
inclusion, where people can be at
their best.
• Launched our purpose statement: To back our customers
to achieve their dreams and ambitions.
• Continued improvement in employee engagement scores,
with a grand mean of 4.08 out of 5 and in the 62nd percentile
(Gallup worldwide data) versus 5th in 2013.
• Maintained our target of 25% representation of women
on the Board, while the Leadership Team has 25% female
representation and 38.7% of all management are women.
• Hosted internal Diversity and Inclusion week and Invest in
You week, incorporating Group-wide events and significant
employee engagement.
• Introduced paternity leave and paternity benefits.
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“We run our business with the objective of achieving
significant progress, every year, on each of our four strategic
pillars – Customer First, Simple & Efficient, Risk & Capital and
Talent & Culture. They continue to be the foundations on
which we build our business and measure our success.”
Bernard Byrne, CEO
Measure
Description
Outcomes 2017
Financial and non-
financial targets 1
Relationship Net Promoter
Score (NPS)
A measure of our customers’ overall AIB
relationship experience
Transaction Net Promoter
Score (NPS)
Measured after customer transactions for key
touch points
Personal
SME
39
21
19
50+
50+
Channel trends
% number of our active customers
transacting digitally
Cost income ratio (CIR) 2
Financial benchmark of efficiency
53%
48% 4
55%+
Robust and efficient
operating model CIR < 50%
Cash paid to State
Cash paid to the Irish State, including value received
through the IPO
€10.5bn 3
Return on tangible equity
(ROTE) 2
A measure of how well the bank deploys capital to
generate earnings growth
12.3%
CET1 ratio (fully loaded) 2
A measure of our ability to withstand financial
stress and remain solvent
17.5%
Non performing exposures
(NPEs)
Measures the credit quality of our loan stock
16% of gross loans
Net interest margin (NIM) 2 A measure of the difference between the interest
2.58%
income generated and the amount of interest paid
out relative to (interest-earning) assets
Repay State investment
of €20.8bn in full
Target returns of 10%+
Strong capital base with
CET1 of 13%
In line with European
banking norms
Strong and stable NIM
2.40%+
Diversity
Women as % of all management
38.7%
40%
Engagement
Employee engagement relative to Gallup
client population
62nd percentile
Top quartile
1. All targets are long-term, with the exception of medium-term financial targets communicated to the market on 9 March 2017.
2. Medium-term financial targets communicated to the market on 9 March 2017.
3.
4. CIR excluding income from cured/restructured loans was 53%.
Includes proposed dividend for full-year 2017.
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Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements STRATEGY IN ACTION
Customer First
Home and mortgage customers
AIB leads the mortgage market with a
33% share in the Republic of Ireland,
extending c. €2.4bn in new mortgage
loans in 2017. Our strategy has been to
pass on variable rate reductions to both
new and existing customers, which
means existing SVR customers
automatically benefit from new variable
rates. In 2017 we reduced our SVR by
0.25%, the fifth rate reduction in three
years, resulting in a 1.25% reduction
during that period, and we also
established a Homes Centre of
Excellence in Airside, Dublin.
We know that customers want choice
and that different propositions appeal
to different customers, which drives our
multi-brand mortgage strategy. For our
EBS customers, we continue to provide
a cashback offer.
We also provide finance in support of
social housing in Ireland. For example,
in 2017 we partnered with Túath
Housing Association to fund the
acquisition of c. 200 social homes.
In September 2017, we launched an
enhanced Mortgage to Rent scheme to
help customers in difficulty. This is a joint
initiative with iCare Housing and the
Irish Mortgage Holders Organisation
and, to date, we have seen good levels
of customer engagement.
Personal loans and payments
We continue to enhance our service
offering to enable customers to engage
with us how and when they want. When
making a personal loan application, for
example, customers can now complete
the process end-to-end on their mobile
device, and receive a decision within
three hours.
We continue to waive the transaction fee
for contactless payments. Contactless is
a convenient payment method which
reduces the need for customers to
carry cash.
Backing business and farming customers
In 2017, we partnered with the Strategic
Banking Corporation of Ireland (SBCI)
and the Department of Agriculture to
deliver the Agriculture Cash Flow
Support Loan to the primary agriculture
sector. This extends credit at a
discounted rate to farmers and SMEs
engaged in primary agriculture.
In supporting start-up customers, we
Máire O’Meara,
Mortgage customer
offered MyBusinessToolkit, a tailored suite
of business applications, free to these
customers for a three-month trial period.
MyBusinessToolkit is an innovative way for
AIB SME customers to manage their
business, allowing them to access a host
of business applications such as business
planning, data back-up, and accounts
and payroll. In 2017, we launched a
programme to support female business
owners by providing financial support,
mentoring masterclasses and enterprise
growth academies.
Corporate customers
AIB is Ireland’s leading corporate bank
and number one bank for foreign direct
investment (FDI), with diversified
portfolios and an end-to-end
relationship model. We continue to back
our larger corporate customers by
providing them with different methods
of funding and integrated solutions that
meet their needs. For example, in 2017
AIB, along with the Ireland Strategic
Investment Fund (ISIF), provided €76m
of seed equity to Greencoat Renewables
to fund the acquisition of wind farms in
the south of Ireland. Greencoat
Renewables completed a successful IPO
later in the year. In 2017, AIB also made
an equity investment in TransferMate,
a global B2B fintech payments business
whose products are primarily used by
business customers to make and receive
cross-border payments.
Early stage seed capital
In partnership with Frontline Ventures,
AIB continues to support the next
generation of Irish technology
entrepreneurs through the AIB Discovery
Programme. This reflects AIB’s ‘backing
brave’ philosophy, with AIB supporting
entrepreneurs in the early stages.
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Gareth Irvine, Copeland Gin,
SME customer (First Trust Bank)
Automated customer transactions
95%
STRATEGY IN ACTION
Simple & Efficient
Investment programme
The three-year investment programme
of €870m, completed in 2017, is driving
additional efficiencies, productivity
enhancements, improved customer
satisfaction and capacity for
business growth.
The programme is delivering tangible
outcomes, including more than 1.3
million active online users, and 700,000
mobile device users. 95% of customer
transactions are now automated, with
77% of personal loans applied for online
and 69% of transactional activity on
digital channels.
Branch refresh
Our branch network completed a
four-year Branch Refresh Programme,
delivering a more relaxed environment
to do business. The refresh upgraded
the ‘look and feel’ while also
incorporating self-banking technology
and new digital signage. The designs
are aligned to customer-specific needs,
e.g. our student campus branches look
very different to those on the high street.
Digitally enabled banking
The use of digital channels is growing
across locations and age profiles. AIB is
the market leader in digitally enabled
banking in Ireland. Over 60% of all key
products are now purchased via online
channels, while over the counter (OTC)
transactions have reduced by 52% in
four years.
Digital centre of excellence
AIB is establishing a centre of excellence
in digital innovation and enablement in
Central park in Leopardstown, Dublin.
This will be the new base for teams that
design, deliver and support our digitally
enabled products and services.
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AIB Group plc Annual Financial Report 2017
15
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements Nichola Murtagh, Beef farmer,
SME customer
Liquidity coverage ratio
132%
STRATEGY IN ACTION
Risk & Capital
Strengthened balance sheet
As a Group, we are generating capital
and delivering strong ratios with a fully
loaded CET1 ratio of 17.5% due to profit
generation and a reduction in risk
weighted assets. Our funding model is
both stable and low cost. The net stable
funding ratio was 123%, with a liquidity
coverage ratio of 132% at year end. The
loan to deposit ratio stands at c. 93%.
Earning loans have increased due to
growth in the quality of new-term lending
and progress on case restructuring.
Strong risk management
Strong risk management continues
to drive a reduction in impaired loans.
This is underpinned by a full range of
product solutions for customers in
difficulty, coupled with significant
capability in arrears management.
Risk Adjusted Return on Capital (RAROC)
is the mechanism AIB uses to determine
a risk-based return. RAROC metrics
demonstrate that AIB is generating
appropriate returns and allocating
capital in an efficient manner. A RAROC
rate comprises the margin and fee
income arising from a loan, adjusted
for expected loan losses, as a
percentage of the capital that the Group
is required to set aside against the loan.
We have a consistent RAROC measure
across the Group, which facilitates a
meaningful comparison of returns
across business units and product lines
by adjusting for risk costs, enhancing
the sustainability of our profitability over
the long term.
AIB Group holding company
The establishment of a holding
company in 2017 was a corporate
restructure for AIB, giving effect to
a regulatory decision taken by our
resolution authorities under the
EU Bank Recovery and Resolution
Directive (BRRD).
Rating agency upgrades
The three main rating agencies all
upgraded AIB in 2017, and we are now
rated Investment Grade (IG) for all three
for Allied Irish Banks, p.l.c.. Fitch
upgraded AIB to BBB- from BB+ and
Moody’s moved AIB from Baa3 to Baa2,
while S&P upgraded AIB to BBB- in
January 2017 and revised its outlook
to Positive in December.
Value creation
AIB has consistently delivered strong
organic capital generation over the last
three years. This has enabled substantial
repayments to the State, including an
ordinary dividend payment in 2017.
The Group is now working towards
an annual pay-out ratio in line with
normalised European banks, with the
capacity for excess capital to be returned
to the shareholders.
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STRATEGY IN ACTION
Talent & Culture
“We have moved
from the 5th
percentile of the
worldwide Gallup
database in 2013,
to the 62nd
percentile in 2017.”
We launched our first Diversity and
Inclusion week in 2017 aimed at raising
employee awareness of the ambition to
become a more diverse and inclusive
place to work.
We set a gender diversity target of 25%
female representation for our Leadership
Team, which we have met. We also set a
similar target of 40% for our management
population by the end of 2018. At the end
of 2017, we were at 38.7%.
Attracting talent
The graduate hiring programme which
has been recently reintroduced saw over
80 talented graduates join the AIB team
in 2017. Graduates joined departments
across multiple areas of the bank
including Technology, Finance, Treasury,
Retail and Commercial Banking (RCB)
and Wholesale, Institutional and
Corporate Banking (WIB).
At AIB, we believe our employees work
best when they are afforded flexibility
and can work in a way that suits them.
We advocate an Agile Working Policy
which aims to provide a modern and
supportive work environment.
A purpose-led organisation
AIB aims to be a purpose-led
organisation. In 2017, we launched
our purpose statement: To back our
customers to achieve their dreams
and ambitions. We know that our future
success is inextricably linked to that our
of customers, and we want to help them
to succeed.
Employee engagement
Since 2013, AIB has partnered with
Gallup, international employee
engagement experts. In that period we
have seen improved levels of employee
engagement as measured in the
iConnect workplace survey.
The annual iConnect survey allows us
to assess engagement levels of our
people and to identify and address
engagement issues, both at local team
levels and across the organisation.
We have moved from the 5th percentile
of the worldwide Gallup database in
2013 to the 62nd percentile in 2017,
and reached our highest participation
rate of 88%. Our engaged employees
compared to actively disengaged
employees is now 8.4:1, compared
to 0.3:1 in 2013.
Diversity and inclusion
Diversity and Inclusion are important
aspects of our Talent & Culture agenda.
As an organisation, AIB is committed
to a more diverse workforce where
employees can be at their best.
Our engagement journey
AIB outpaces other Gallup clients
at similar stages of the journey
Average mean score for Gallup clients
AIB
Strong participation
Engaged outnumber actively disengaged
n
a
e
M
d
n
a
r
G
3.65
3.15
3.96
3.89
3.80
3.65
+14%
4.22
4.15
4.08
3.96
88%
Wave 1
5th
Wave 2
22nd
Wave 3
43rd
Percentile
Wave 4
52nd
Wave 5
62nd
7%
2013
0.3:1
2014
1.5:1
2015
4.0:1
2016
6.3:1
50%
2017
8.4:1
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Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements
RISK SUMMARY
AIB’s governance arrangements include structures and processes to identify,
manage, mitigate, monitor and report the risks to which AIB is exposed,
including a three lines of defence risk management model.
Managing risk
AIB adopts an enterprise risk
management approach to identifying,
assessing and managing risks. Risk is
defined as any event that could damage
the core earnings capacity of AIB, increase
cash flow volatility, reduce capital,
threaten business reputation or viability
and/or breach regulatory or
legal obligations.
The first line of defence owns the risks
and is responsible for identifying,
recording, reporting and managing them,
and ensuring that the right controls and
assessments are in place to mitigate
them. The second line of defence sets the
frameworks and policies for managing
specific risk areas, provides advice and
guidance in relation to the risk and
provides independent reporting on AIB’s
risk profile. The third line of defence is the
Internal Audit function, which provides
independent and objective assurance
of the adequacy of the design and
operational effectiveness of the risk and
control environment.
Risk governance structure
The Board has ultimate responsibility for
the governance of all risk-taking activity
at AIB. The Board has delegated a
number of risk governance responsibilities
to various committees, principally:
• Board Risk Committee
• Board Audit Committee
• Executive Risk Committee
• Asset & Liability Committee
• Operational Risk Committee
• Group Credit Committee
Risk appetite
The Board sets AIB’s Risk Appetite
Statement (RAS), which is an articulation
of the bank’s tolerance and philosophy
for risk-taking.The RAS is aligned to AIB’s
strategy in protecting risk and capital,
and is cascaded to the business
segment level. This is a key part of
embedding risk culture and fostering
responsible risk-taking and risk-
management behaviours throughout
the organisation. AIB’s compliance with
the RAS limits is reported to the Board
on a monthly basis.
AIB’s RAS is built on the following
overarching qualitative statements:
1. We have low appetite for income
volatility, and target steady, sustainable
earnings to enable appropriate regular
dividend payments.
2. We do not have an appetite for large
market risk positions.
3. We accept the concentration risk
arising from our focus on markets in
Ireland and the UK. Within these
markets we seek to avoid excessive
concentrations to sectors or single-
names, and test repayment capacity
in stress conditions.
4. We seek to attract and retain skilled
staff and reward behaviours
consistent with our brand values and
code of conduct.
5. We offer our customers transparent,
consistent and fair products and
services, and always seek to deliver
fair customer outcomes.
6. We seek to maintain the highest level
of availability of key services for
our customers.
7. We seek to comply with all relevant
laws and regulations; our business is
underpinned by a strong
control framework.
8. We hold capital in excess of the
regulatory requirements while
achieving returns on capital in line
with stakeholder and market
expectations.
9. We seek resilient, diversified funding,
relying significantly on retail deposits.
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 AIB taking
into account its current position and the
principal risks facing AIB over the next
three years to 31 December 2020. 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 AIB’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 AIB.
The assessment considered the current
financial performance, funding and
liquidity management and capital
management of AIB, and the governance
and organisation framework through
which AIB manages and seeks, where
possible, to mitigate risk. A robust
assessment of the principal risks facing
AIB, including those that would threaten
business operations, governance and
internal control systems was also
undertaken and considered.
Taking into account AIB’s current
position, and subject to the identified
principal risks, the Directors have a
reasonable expectation that AIB will
be able to continue operations and
meet its liabilities as they fall due over
the three-year period of assessment.
For more information, see our ‘Risk
management’ section on pages 58 to 179.
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Risk management
in practice
AIB performs both a top-down and bottom-up Material Risk Assessment (MRA) to ensure
all material risks to which AIB is exposed are identified and appropriately managed. The
Risk Appetite Statement is developed based on the MRA and is cascaded down to licensed
subsidiaries and significant business segments to enable responsible risk-taking and risk
management behaviours throughout the Group.
AIB conducts comprehensive capital and liquidity adequacy assessments to ensure its capital
and liquidity positions are in line with the regulatory requirements and AIB’s internal strategic
objectives. AIB also operates a wide-ranging stress testing programme to assess the strength
and resilience of AIB and drive strategic decision-making.
Bottom-up risk and control assessments are also undertaken to ensure all risks are identified,
evaluated and controlled in a consistent manner. AIB’s risk management processes are
supported by a comprehensive risk framework and policy architecture.
The following table summarises the linkage
between AIB’s strategic pillars, the principal
risks and uncertainties, (see pages 58-68 for
more details) and AIB’s material risks.
Principal risks and uncertainties
Macro-economic and geopolitical risks
Customer First
Simple & Efficient
Risk & Capital
Talent & Culture
Strategic pillars
primarily impacted
Material risk
primarily impacted
1. Deterioration in the Irish or UK economy or in global economic conditions
2. Geopolitical developments, particularly in Europe and the US
3. Brexit and UK
4. Market risk
Regulatory and legal risks
5.
Impact of Bank Recovery and Resolution Directive
6.
Impact of laws and regulations, regulatory actions, fines, litigation
7.
Impact of Anti-Money Laundering and terrorist financing regulations
8.
Impact of changes to accounting standards
9.
Impact of budgetary and taxation policies of the Irish, UK and other governments
10. Impact of Irish legislation and regulations in relation to mortgages
11. Conduct risk
Risks relating to business operations, governance and internal control systems
12. Credit risks, including concentration risk
13. The Group’s strategy may not be optimal and/or not successfully implemented
14. Impact of a poor or inappropriate culture across the Group
15. Reputational risk
16. Impact of constraints on the Group’s access to funding
17. Risk of inadequate or non-effective Group risk management systems
18. Risk that the models used are inaccurate
19. Impact of the high level of criticised loans
20. Operational risks, including people, cyber, outsourcing, process and systems risks
21. The Group may have insufficient capital to meet increased minimum
regulatory requirements
22. Risk that the funding position of its defined benefit pension schemes will deteriorate
23. Impact of changes in legislation affecting deferred tax assets
Business model
Credit
Business model
Financial
Business model
Credit
Financial
Capital adequacy
Funding & liquidity
Regulatory compliance
Regulatory compliance
Regulatory compliance
Capital adequacy
Business model
Credit
Credit
Restructure execution
Conduct
Credit
Capital adequacy
Business model
People & culture
Conduct
All risks
Funding & liquidity
All risks
Model
Restructure execution
Capital adequacy
Operational risk
People & culture
Capital adequacy
Financial
Capital adequacy
Capital adequacy
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AIB Group plc Annual Financial Report 2017
19
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements
SUSTAINABLE BANKING
Backing a sustainable future
Having a sustainable and responsible approach to how we do business – now and in
the future – is integral to everything AIB does. We want to create long-term value in our
business, the economy and the communities where we work: shared value. We are acutely
conscious of the need to rebuild our social licence to operate, in particular having
received the support of the State when we needed it most. By framing our approach
in this way, we are fully embedding a sustainable culture at every level of our business.
In 2017 we set and achieved the
following goals under the banner
‘Backing a sustainable future’:
1. To align the 2016 materiality research
with our four pillar business strategy,
understanding what matters and how
we can respond.
2. To create an understanding of what
sustainability means to AIB: the need
to create shared value, for our business
and for society.
3. To host our inaugural conference on
sustainability, facilitating a conversation
with customers, colleagues and other
stakeholders, enabling us all to listen
and learn from Irish and
international experts.
4. To publish our first Sustainability
Report, clearly articulating our
approach, highlighting both what we
already do well, and where we have
more to do.
These were key milestones for AIB,
setting us up well for continued progress
in 2018.
Progress in 2017
2017 was a significant year for AIB, the
key event being the completion of a
successful IPO in June. Notwithstanding
this, as a business, we have more to do
to ensure our long-term success. We are
still managing issues from the past
where we failed to put the customer at
the centre of our decision making. We
are learning from these mistakes, so we
never again lose sight of our role in the
economy and our responsibility to
society. Rebuilding trust and public
confidence in our business will be done
through actions, not just words.
Specific examples of how we are
changing our culture towards more
Customer First decision-making include:
1. Rebuilding our complaint management
process, enabling swift and efficient
local decision-making in addition to a
centralised team of excellence for more
complicated issues.
2. Improving our root cause analysis:
where there are trends emerging in
complaints, these can be managed
quickly and appropriately.
3. Continued strong momentum in the
reduction of imparied loans, with a
31% reduction year-on-year, from
€9.1bn to €6.3bn, together with
appropriate support and assistance
for customers in difficulty.
4. Internal promotion of our confidential
Speak Up policy, promoting the
ability of our people to call out when
they see any activity that goes
against our culture of being
customer-led.
The AIB approach
We aim to be a sustainable bank. A
sustainable bank puts its customers
first, aiming to be profitable, offering
products and services to both new and
existing customers that are relevant,
simple to access and consistently priced.
A sustainable bank is technologically
well-developed and organised,
environmentally conscious’ and socially
responsible. A sustainable bank takes
care of its employees, and plays a strong
role in communities, in the economy and
in society. Fundamentally, a sustainable
bank is one that is trusted and, as a
result, has the societal support needed
to both survive and thrive.
The Office of Sustainable Business (OSB)
was established in January 2016 to
advise and support AIB’s Leadership
Team on sustainability issues. The
Sustainable Business Advisory
Committee (SBAC) was then established
in April 2016 to advise the Board of
Directors further and to provide focus
to the efforts being made.
In December 2016 an extensive
materiality exercise was completed,
which identified and validated 32 key
sustainability issues that mattered most
to our stakeholders and formed the
basis for our sustainability approach in
2017. This exercise is currently being
refreshed in Q1 2018.
The SBAC is supported by the
Sustainable Business Executive Council
(SBEC), which was set up in April 2017.
Both the SBEC and OSB support
on-going projects and developments
while also influencing decision-making
and strategic direction.
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Sustainability, governance & risk
Governance
The SBAC advises the Board of Directors
on our sustainability strategy and agenda,
which is aligned to AIB’s strategic and
financial plan. Chaired by Helen
Normoyle, an independent Non-
Executive AIB Director, the committee
comprises two Non-Executive Directors
as well as our Chief Marketing Officer,
Chief People Officer and Director of
Corporate Affairs. The SBAC supervises
the development and execution of the
bank’s sustainable business strategy.
Developing this strategy includes
enhancing and safeguarding the bank’s
social licence to operate.
The SBAC is supported by the SBEC,
comprising members of the leadership
team and senior managers representing
a cross-section of all the bank’s functions.
Our sustainability strategy and programme
of activity originates, and is managed
out of, the Office of Sustainable Business.
Sustainability and risk
Managing the sustainability of our
organisation involves identifying and
managing all risks that relate to both
day-to-day and future operations. It also
means planning for and anticipating
potential future risk across the business
(e.g. environmental risk). We recognise the
need to align our operational and lending
risk frameworks, policies and practices to
environmental, social and governance
(ESG) principles of sustainability. This
piece of work commenced in Q4 2017
and will be a key area of focus for
completion in H1 2018.
For more information, see our
‘Risk management’ section on pages
58 to 179.
Materiality Index – stakeholder
engagement
In late 2016, we developed an
evaluation of the key sustainability issues
that mattered to our stakeholders. This
was a comprehensive process involving
a representative group of c. 1,150
individuals, from which 32 material
issues were identified and validated.
These are the issues that mattered most
to our stakeholders, which we reported
against in 2017. Full details on this, along
with the report, are available on
www.aib.ie/sustainability
In 2018, we commenced work to update
our materiality index. We want to actively
listen, understand and respond to the
issues that matter to our customers,
stakeholders and society. In doing this,
we will deliver a more robust, pan-bank
approach to our sustainability programme,
anchored in our purpose, with clear
targets and KPIs.
This work will be undertaken for us by
KPMG, and also follows a recommendation
from Deloitte, who assured our 2017
Sustainability Report.
Board of Directors
Sustainable Business
Advisory Committee
Leadership Team
Sustainable Business
Executive Council
A tense moment at the AIB GAA
Hurling All Ireland Senior Club
Championship 2017
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Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements SUSTAINABLE BANKING CONTINUED
Where we are on our sustainability journey...
Jan 2016
The Office of Sustainable Business (OSB) was
established to advise and support AIB’s Leadership
Team on sustainability issues.
Dec 2016
Extensive materiality exercise undertaken
with input from over 1,150 stakeholders
identified 32 key materiality issues.
Apr 2016
Formation of the Sustainable Business Advisory
Committee (SBAC).
Apr 2017
Formation of the Sustainabile Business Executive
Council (SBEC), establishing AIB’s sustainability
governance structures.
Oct 2017
We hosted a conversation between Irish and
international experts along with our customers and
colleagues on how business can be truly sustainable.
Over 300 people attended this event.
Oct 2017
Published our first
Sustainability Report
aib.ie/sustainability
I
I
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B
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B
A
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A
S
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A
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BACKING A
SUSTAINABLE
FUTURE
Allied Irish Banks, p.l.c. Sustainability Report 2016
Iseult Ward (FoodCloud) and Geoff McDonald (ex-Unilever) at
our conference in October 2017.
“We can either allow the past to prevent us from
moving forward, or we can accept the fact that
the future needs to be different and it’s our job to
make it both different and sustainable.”
Bernard Byrne
Chief Executive Officer
“We want to be a positive contributor to society.
In that way, our business will last.”
Richard Pym
Chairman
What’s next
In 2018, we will refresh our materiality exercise,
build out our ESG credentials, publish our second
report, and host a further conversation in October
on sustainability matters.
22
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Our community
Two participants in the
Time to Read programme
As a pillar bank in Ireland, AIB can play an
important role in supporting local communities.
We recognise our role and obligations
in all of the communities where we do
business. Prior to the financial crash,
AIB was one of the biggest contributors
to charitable initiatives and local
volunteering in Ireland. While this was
curtailed at a corporate level, there
has remained a large number of local
initiatives that were supported by
various teams and individuals at AIB
in recent years.
In 2017, we made a strategic decision
to rebuild our community programme,
focusing on two core themes in a more
considered way, with both financial and
volunteer support. A comprehensive
Group-wide programme encompassing
Youth & Education and Social
Entrepreneurship in local communities
will be launched in early 2018. This
strategic approach to supporting
impactful social programmes also
includes a new initiative for our people to
have two days’ annual volunteering leave,
enabling and supporting them to get
involved with the project of their choice.
AIB’s employees are already very active
in volunteering, holding regular
fundraising events and collections.
Together with our customers, they are
making a big difference to a wide range
of worthy local causes. We hope that by
enabling dedicated volunteer days as part
of this programme, we can have even
more impact at both local and
national levels.
AIB and education – building on
existing relationships
We already have a long-standing
relationship with Junior Achievement
Ireland (JAI), which helps children of all
ages understand the benefits of staying
in education. We have supported this
organisation since its inception in 1996,
and over 1,000 of our colleagues have
been involved during the past 20 years,
benefitting more than 27,000 students
in Ireland.
We also enjoy partnerships with
a variety of third-level institutions.
In Dublin City University (DCU) AIB’s
support has established a Chair in Data
Analytics, while we have partnered with
University College Dublin (UCD) to
establish the AIB Chair in Behavioural
Economics, together with a PhD
scholarship programme, an MSc
programme, and a new UCD-AIB
Behavioural Economics Lab. And in
Northern Ireland, First Trust Bank
supports Graduate and Student of the
Year awards in both the Ulster University
and Queen’s University Belfast.
GAA – Backing club and county
AIB’s partnership with the GAA dates
back more than 30 years and is one of
the most enduring in Irish sport. Since
1991 we have sponsored the All-Ireland
Club Championships, in 2013 we
became proud sponsors of the All
Ireland Camogie Club Championships,
and in 2015 we extended our relationship
and became sponsors of the All Ireland
Football Championship.
This partnership allows us to engage
at the grassroots level of the GAA, with
1,700 GAA clubs and communities right
across Ireland all year round. During
2017, AIB launched a bespoke Home
Insurance offer for GAA clubs, contributing
€50 per new Home Insurance policy to a
GAA club of a new customer’s choice. So
far, over 800 GAA clubs have registered
for this offer and over €100,000 is
being distributed.
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Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements SUSTAINABLE BANKING CONTINUED
Our physical environment
Our ongoing actions to reduce carbon emissions, develop the low-carbon economy
and mitigate our climate change risks, have resulted in AIB being recognised as a global
leader for corporate action on climate change.
A leader tackling climate change
AIB has proudly earned a place
on the CDP’s Climate A List as of 2017,
one of only two Irish companies to
achieve this accolade. We have worked
hard to attain accreditation of both ISO
50001 (energy management) and ISO
14001 (environmental management)
across office locations.
In 2017 this certification was also
achieved for all branches in all locations
across Ireland and the UK.
Other 2017 highlights include:
• Winner of the Large Green
Organisation of the year at the
2017 Green Awards.
AIB Group’s target is to
reduce its carbon emissions
by 33% before 2020
Carbon reduction target
achieved since 2009
28%
Expected carbon savings
7,182 tCO2e*
*1 tCO2e is equal to one tonne
of carbon dioxide
Equivalent to a year
of electricity use in
1,061
homes
• Digitisation of documentation with
remote scanning and DocuSign
eSignatures reducing paper and
increasing efficiencies.
• Datahack, facilitated by AIB’s Digital
department with the theme of ‘Smart
Cities’, saw 200 students competing
in our Head Office to create
innovative solutions for
sustainable cities.
• With the introduction of AIB Bikes,
a bike-sharing scheme, sustainable
transport options have been bolstered
and also include Go Car, a car-sharing
programme and a shuttle bus service
between central office locations,
alongside the national Bike to Work and
Tax Saver transport initiatives.
• For the first time, AIB purchased
100% renewable energy for all its
power requirements for the full year.
Energy reduction remains a
continued focus with a 22% reduction
on primary energy achieved
since 2009.
Cathal & Richard King, The Kings of Connemara,
SME Customer
24
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Robert Gallagher, Willsborough Ltd,
SME customer (First Trust Bank)
Our virtual environment
We design and operate our systems to remain secure while
providing fit-for-purpose products and services. We actively
manage cyber threats to ensure that no unauthorised party may
access, manipulate or acquire private information.
Data security and protection
While we recognise the many benefits
of data analysis and data science in
developing improved experiences,
we acknowledge the importance of
maintaining standards of confidentiality
in the safeguarding of information about
our customers, as well as our employees.
Our Data Protection Policy aims to
protect an individual’s right to freedom
from unnecessary intrusion into their
financial and personal privacy, while at
the same time complying with our legal
and regulatory obligations.
Our 8 Key Principles of Data Protection are:
1. Obtain and process
information fairly.
2. Keep it only for specified
lawful purposes.
3. Process it only in ways compatible
with the purpose for which it
was obtained.
4. Keep it safe and secure.
5. Keep it accurate, complete and up
to date.
6. Ensure it is adequate, relevant, and
not excessive.
7. Retain for no longer than necessary.
8. Give all personal information to a
person on their request.
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25
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements GOVERNANCE AT A GLANCE
High corporate governance standards are critical to creating and sustaining value
for shareholders and in ensuring a well-managed and transparent business.
As a listed company, AIB Group plc
is subject to the listing rules of the
Exchanges, including the Irish Corporate
Governance Annex to the Irish Stock
Exchange Rules, the Disclosure &
Transparency Rules of the London Stock
Exchange, the Central Bank of Ireland’s
Transparency Rules, and the provisions
of the UK Corporate Governance Code.
Allied Irish Banks, p.l.c., its sole
subsidiary, as a credit institution licensed
and regulated by the Central Bank of
Ireland, is subject to the provisions of the
Central Bank of Ireland’s Corporate
Governance Requirements for Credit
Institutions 2015 and the European
Capital Requirements Directive.
Corporate Structure
During 2017, at the direction of the
European Single Resolution Board, and
following shareholder approval, Allied Irish
Banks, p.l.c. established a new parent
holding company, AIB Group plc. The
holding company is an Irish Registered
Company which has securities listed on
the main markets of the Irish and London
stock exchanges. Allied Irish Banks, p.l.c.
continues to be the principal operating
and regulated financial services company,
and the only direct subsidiary of the
holding company.
Corporate governance
A key component of any corporate
governance regime is an effective
board, whose primary role is to promote
the overall success of the organisation
and to ensure a clear and transparent
corporate governance and
organisational structure.
The Board is committed to promoting
effective corporate governance, and has
ensured AIB Group’s governance
framework reflects the corporate
governance provisions required by law,
regulation and best practice guidance.
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.
Richard Pym
Chairman
“Our governance
framework
underpins effective
decision-making
and accountability,
and is the basis on
which we conduct
our business.”
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“The Board has established a number
of Board Committees to facilitate in discharging
its responsibilities for monitoring key activities.”
Our Board
The Board has 11 Directors, with a
majority of Independent Non-Executive
Directors. The Board currently comprises
a Chairman, who was independent on
appointment, two executive Directors,
and eight independent Non-Executive
Directors, one of whom is the Senior
Independent Director. Biographies for
each Director can be found on pages
28 and 29.
Our Board Committees
The Board has established a number
of Board Committees to facilitate in
discharging its responsibilities for
monitoring key activities.
The Board Committees are generally
composed of Non-Executive Directors
and operate under Board-approved
Terms of Reference, details of which
are available in the full Corporate
Governance Report which can be
found on page 186.
Leadership Team
The Leadership Team is responsible for
developing and delivering the Group’s
strategy and monitoring and managing
financial performance, capital allocation,
risk strategy and policy, risk management
and internal control, and operational
and customer issues. Biographies for
each Leadership Team Member can be
found on pages 30 and 31.
AIB Group Board
Board Audit
Committee
Board Risk
Committee
Remuneration
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
Remuneration
policies and
practices,
remuneration
of Chairman,
CEO, Executive
Directors and
Leadership Team
Nomination and
Corporate
Governance
Committee
Board composition,
committee
membership,
corporate
governance policies
and practices, and
succession planning
Sustainable
Business Advisory
Committee
Support the Group
with its sustainable
business strategy.
which includes the
development and
safeguarding of the
bank’s social licence
to operate
Please read in conjunction with our
‘Corporate Governance report’ on page 186.
AIB Group plc Annual Financial Report 2017
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Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements BOARD OF DIRECTORS
Richard Pym
Non-Executive
Chairman (68)
Nationality
British
Date of appointment
13 October 2014 Chairman
Designate
1 December 2014 Chairman
Committee membership
R N
Expertise
Richard is a Chartered
Accountant with extensive
experience in financial
services. He is a former
Chairman of UK Asset
Resolution Limited, the entity
which manages the run-off
of the UK Government
owned closed mortgage
books of Bradford & Bingley
plc and NRAM Limited.
Richard 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.
Key external appointments
None
Catherine Woods
Senior Independent
Non-Executive
Director, Deputy
Chairman (55)
Simon Ball
Non-Executive Director
(57)
Tom Foley
Non-Executive Director
(64)
Peter Hagan
Non-Executive Director
(69)
Carolan Lennon
Non-Executive
Director (51)
Irish
British
Irish
American
Irish
13 October 2010
13 October 2011
13 September 2012
26 July 2012
26 October 2016
A R N
R R N
A R
A R
R S
Simon 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.
A Chartered Accountant, 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.
Tom qualified as a Chartered
Accountant with
PricewaterhouseCoopers
and has extensive
experience within financial
services. He 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 Ireland
and the UK. During the
financial crisis, Tom was a
member of the Nyberg
Commission of Investigation
into the Banking Sector and
the Department of Finance
Expert Group on Mortgage
Arrears and Personal Debt.
Appointed Deputy Chairman
of the Board on 1 January,
2018, Catherine was
appointed Senior
Independent Non-Executive
Director in January 2015.
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.
Catherine is a former director
of An Post, a former member
of the Electronic
Communications Appeals
Panel, and a former Finance
Expert on the government
adjudication panel
overseeing the rollout of the
National Broadband Scheme.
Prior to her current role of
Managing Director, Carolan
held a variety of executive
roles in Eir Limited, including
Acting Managing Director
Consumer and Chief
Commercial Officer. Prior to
joining Eir, she held a
number of senior roles in
Vodafone Ireland, including
Consumer Director and
Marketing Director. Carolan
is a former Non-Executive
Director of the DIT
Foundation, Idiro Analytics
Limited and the Irish
Management Institute.
Peter 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. Peter
has held various executive
positions across the
international banking
industry, including Vice
Chairman and
Representative Director
of the Aozora Bank (Tokyo)
and a Director of each US
subsidiaries of IBRC. He is
at present a consultant in
the fields of financial
service litigation and
regulatory change.
Chairman, Beazley Insurance
d.a.c.
Non-Executive Director,
Beazley plc
Board member,
Commonwealth Games
England
Non-Executive Director,
Intesa SanPaolo Life d.a.c.
None
Managing Director of Eir
Sits on the Council of Patrons
for Special Olympics Ireland
Nationality
Board diversity, by tenure
Irish (8)
British (2)
American (1)
0-3 years
3-6 years
6-9 years
28
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Helen Normoyle
Non-Executive Director
(50)
Jim O’Hara
Non-Executive Director
(67)
Brendan McDonagh
Non-Executive Director
(59)
Bernard Byrne
Chief Executive
Officer, Executive
Director (49)
Mark Bourke
Chief Financial Officer,
Executive Director (51)
Nationality
Irish
Date of appointment
Irish
Irish
Irish
Irish
17 December 2015
13 October 2010
27 October 2016
24 June 2011
29 May 2014
A R N S
R
None
None
Committee membership
S
Expertise
Helen is currently Marketing
Director of Boots UK and
Ireland. She started her
career working for one of
Europe’s leading market
research agencies,
Infratest+GfK, based in
Germany. Helen moved to
Motorola, where she held
senior positions of Director
of Marketing and Director
of Global Consumer Insights
and Product Marketing. In
2003, Helen moved to
Ofcom, the UK’s Telecoms
and Communications
Regulator as Director of
Market Research. Helen
also held the roles of Chief
Marketing Officer at
Countrywide, Chief
Marketing Officer at DFS and
Director of Marketing and
Audiences at the BBC.
Jim is currently Chairman
of a number of indigenous
technology start-up
companies. Jim is a former
Vice President of Intel
Corporation and General
Manager of Intel Ireland,
where he was responsible
for Intel’s technology and
manufacturing group in
Ireland. He is a past President
of the American Chamber of
Commerce in Ireland and
former board member of
Enterprise Ireland and
Fyffes plc.
Brendan started his banking
career with HSBC in 1979,
working across Asia, Europe
and North America, where
he held various roles such
as Group Managing Director
for HSBC Holdings Inc,
membership of the HSBC
Group management Board,
and CEO of HSBC North
America Holdings Inc.
Brendan is a former Director
of Ireland’s National Treasury
Management Agency. He
was previously the Executive
Chairman of Bank of N.T.
Butterfield & Son Limited.
Key external appointments
Marketing Director, Boots UK
and Ireland
Chairman, Decawave Limited
Non-Executive Director,
Wisetek
Non-Executive Director, Audit
Committee Chairman and
member of the Risk and
Nomination Committees of
UK Asset Resolution Limited
Serves on the Advisory Board
of the Trinity College Dublin
Business School, and on the
Board of The Ireland Funds,
Ireland Chapter.
Mark joined AIB in April
2014 as Chief Financial
Officer and Leadership
Team member, and was
co-opted to the Board in
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. Mark
began his career at
PricewaterhouseCoopers
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.
Bernard started his
career in 1988 in
PricewaterhouseCoopers
before moving in 1994 to
ESB International as
Commercial Director for
International Investments.
In 1998 he joined IWP
International plc as Finance
Director, and later Deputy
CEO. In 2003, Bernard
joined ESB as Group
Finance Director. Before his
appointment as Chief
Executive Officer of AIB in
May 2015, Bernard was an
Executive Director of the
AIB Board, and held various
executive positions such as
Chief Financial Officer and
Director of Personal,
Business and Corporate
Banking. Bernard was
President of Banking and
Payments Federation
Ireland until
December 2016.
President of the Institute
of Banking Ireland
(until 5 March 2018)
None
Executive vs Non-Executive Directors
Key to Committee membership
Non-Executive Directors (9)
Executive Directors (2)
A Board Audit Committee
R Board Risk Committee
R Remuneration Committee
N Nomination and Corporate Governance Committee
S Sustainability Business Advisory Committee
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AIB Group plc Annual Financial Report 2017
29
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements LEADERSHIP TEAM
Deirdre Hannigan (57)
Chief Risk Officer
Above centre
Jim O’Keeffe (50)
Head of Financial
Solutions Group
Above right
Triona Ferriter (47)
Chief People Officer
Above left
Brendan O’Connor (52)
Managing Director,
AIB Group (UK) plc
Above centre
Tomás O’Midheach (48)
Chief Operating Officer
Above right
Brendan 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. He joined the
Leadership Team as Head
of Financial Solutions
Group before moving
to his current role as
Managing Director of
AIB Group (UK) plc in
November 2015.
Tomás has over 22
years’ experience in the
financial services industry,
spanning many diverse
areas of banking, including
Finance, Data, Customer
Analytics, Direct Channels
and Digital. Tomás 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 lead a finance operating
model transformation, and
has since held a number of
senior executive positions,
including Head of Direct
Channels and Analytics
and Chief Digital Officer.
During his career, Jim
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. On his
return to Ireland in 2009,
he was appointed Head
of AIB’s Direct Channels
before taking up the role
of Head of AIB’s Mortgage
Business in June 2011.
Deirdre joined AIB from
the National Treasury
Management Agency
where she was Chief
Risk Officer and chaired
the Executive Risk
Committee. In prior years
she held a number of
senior international risk
management roles with
GE Capital. Before joining
GE Capital she held
progressively senior roles
in Bank of Ireland primarily
in Strategy and Risk
Management. The early
part of her career was
spent working in Retail
and Corporate Banking
with AIB and Rabobank.
In 2010, she was admitted
as a Chartered Director to
the Institute of Directors
in London.
Triona has 20 years’
experience in Human
Resources operating at
an executive level within
both US multinational
and indigenous Irish
companies, working
across diverse business
functions mainly in
the pharmaceutical
sector. With experience
in companies such as
Schering-Plough/MSD,
Dunnes Stores and
Procter & Gamble, her
responsibilities included
the full range of Human
Resources functions, both
at a local organisation
and pan-European level.
Her key areas of expertise
include organisation
restructuring and
development, strategic
business partnering
and planning, and the
management of industrial
and employee relations in
both unionised and non-
unionised environments.
30
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Robert Mulhall (44)
Managing Director, Retail
& Commercial Banking
Ireland
Tom Kinsella (48)
Chief Marketing Officer
Above centre
Colin Hunt (47)
Managing Director,
Wholesale, Institutional
& Corporate Banking
Helen Dooley (49)
Group General Counsel
Donal Galvin (44)
Group Treasurer
Above centre
Above right
Above left
Prior to joining AIB, Colin
was Managing Director at
Macquarie Capital, where
he led the development
of its business in Ireland.
Previously, he 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.
Tom joined AIB in
November 2012 as Group
Marketing Director and
was appointed to his
current role as Chief
Marketing Officer and
Leadership Team member
in November 2015. Tom
has responsibility for
ensuring all parts of the
Group are mobilised
around providing a great
customer experience.
Prior to AIB, Tom worked
in a variety of senior
marketing roles in Diageo,
working across a wide
variety of brands both
globally and domestically.
Helen 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.
Prior to her appointment
as Group General Counsel
and Leadership Team
member at AIB, Helen held
various executive positions
in EBS d.a.c., such as
Head of Legal, Head of
Regulatory Compliance
and Company Secretary.
Donal has worked in
domestic and international
financial markets over the
last 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 its European
and Asian Global Financial
Markets business, as well
as leading Rabobank’s
Global Client Structured
Products division.
Above left
Robert’s career in AIB
has spanned almost 20
years, covering 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 and
Development, Sales
Management and
Operations. Coupled with
his AIB Career, Robert
also held the position
of Managing Director,
Distribution & Marketing
Consulting and Financial
Services with Accenture in
North America from 2013
to 2015, during which time
he brought his industry
experience to build a
rapidly growing consulting
practice in the fast-moving
and innovative areas of
Financial Services.
Bernard Byrne (CEO) and Mark Bourke (CFO) and are also on the
Leadership Team. Their biographies can be found on page 29.
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AIB Group plc Annual Financial Report 2017
31
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements GOVERNANCE IN ACTION
Effective Board practice is the foundation to ensuring sound corporate governance
standards. The Board is fully aware of the importance of its role and is committed to
upholding high standards. This section provides a high level account of how the Group
has applied a number of the key principles of the UK Corporate Governance Code.
Composition
There was one change to the Board
during 2017. Deputy Chairman Dr. Michael
Somers retired on 31 December 2017, and
was succeeded on 1 January 2018 by
Ms Catherine Woods.
The Nomination & Corporate
Governance Committee is tasked with
monitoring the Board succession plan
so we are well positioned to ensure
timely and suitable replacements for
Directors reaching the end of their
terms. In doing this, the Committee
considers the performance, current skills
and experience mix and diversity profile
of the Board as a collective.
To that end, we have commenced the
search for a successor to Ms Catherine
Woods whose nine-year term concludes
in late 2019. The search process
commences early to ensure a rigorous
assessment process to identify a suitable
candidate with the necessary skills and
experience to succeed Ms Woods,
specifically in her role as Chairman
of the Board Audit Committee.
Under the Relationship Framework
governing the relationship between our
majority shareholder, the Minister for
Finance, and AIB Group plc, the Irish
State may appoint two Directors to
the Board.
The Board recognises and embraces
the benefits of diversity among its own
members, including diversity of skills,
experience, background, gender and
other qualities. We are committed to
reflecting diversity in its broadest sense,
while ensuring that we maintain the
necessary skills and experience required
to oversee the significant financial
service activities and related
requirements of the Group.
In reviewing the Board composition
and appointments, candidates are
considered on merit against objective
criteria and with due regard for the
benefits of diversity. The Board has a
Board Diversity Policy, the aim of which
is to ensure that the percentage of
women on the Board remains at or
exceeds 25%. The percentage is
currently 27%.
All Directors are subject to re-election
by shareholders at this year’s Annual
General Meeting and will be subject to
annual re-election thereafter. The
Board’s composition will remain under
continuous review.
Leadership
There is a clear division of responsibilities
between the Chairman, responsible for
leading the Board and ensuring its
effectiveness, and the Chief Executive
Officer, responsible for running
the business.
Non-Executive Directors constructively
challenge and assist the Leadership
Team in developing proposals on
strategy and other material matters.
Meetings are held by the Non-Executive
Directors without the executives being
present, at least annually, and ad hoc
as required.
Led by the Senior Independent Director,
the Non-Executive Directors meet
without the Chairman present at least
annually to appraise the Chairman’s
performance, and on such other
occasions as are deemed appropriate.
To ensure clarity, and that no single
individual has unfettered powers of
decision, roles and responsibilities,
including a formal schedule of matters
specifically reserved for Board decisions,
are formally documented and
communicated to key stakeholders.
It is expected that in order to discharge
their responsibilities effectively, Directors
will each allocate sufficient time to their
role on the Board. A minimum annual
time commitment is agreed with each
Non-Executive Director, and each is
required to operate within certain
limitations on other directorships held
by them, and to seek prior approval
should they wish to take on any
additional external roles.
Given the nature of the Group, the role
of Director is demanding, and Directors
are expected to attend and to be
well-prepared for all Board and
32
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“The Board conducts an annual evaluation of its
effectiveness, and is required to have an external
evaluation conducted once every three years.”
Committee meetings, and to make time
to continue to ensure they understand
the business, engage with executives
and regulators, and complete
relevant training.
An overview of the number of
scheduled and out of course meetings
held and attended by each Director can
be found on page 189. If, due to
exceptional circumstances, a Director is
unable to attend a meeting, they ensure
that their views are made known to the
Chairman in advance of the meeting.
Effectiveness
The Board conducts an annual
evaluation of its effectiveness, and is
required to have an external evaluation
conducted once every three years. An
external evaluation was conducted in
2017. Details of that evaluation, along
with progress made in addressing any
findings identified during the 2016
internal evaluation, can be found on
pages 192 to 193.
In addition to the external evaluation,
the Chairman held meetings with
individual Directors to discuss their
individual effectiveness in their role.
A review of the Chairman’s effectiveness,
and that of the Chief Executive Officer,
was formally conducted during 2017
through a combination of external and
internal evaluations.
We consider the independence of our
Non-Executive Directors annually, using
the independence criteria set out in the
Board gender diversity over the last 5 years (%)
30%
15%
2013
2014
2015
2016
2017
AIB
PLC sector average
UK Corporate Governance Code and,
having regard for the co-terminus
appointments of the Directors to the
Board of Allied Irish Banks, p.l.c. and
the holding company, the Central Bank
of Ireland’s Corporate Governance
Requirements for Credit Institutions
2015. Any actual, potential or perceived
conflicts of interest and certain
behaviours that are essential in order
to be considered independent, assessed
as part of the Board and Director
evaluations referred to above, are also
continually monitored.
We currently exceed the necessary
minimum ratio of independent Directors
on the Board as determined by the UK
Corporate Governance Code. Excluding
the Chairman, 80% of the Board is
deemed independent, the other 20%
being the two Executive Directors who
are deemed non-independent by virtue
of their executive roles.
Accountability
The Board is required to present a
fair, balanced and understandable
assessment of the Group’s position and
prospects. Through a combination of the
Board Audit Committee and the Board
Risk Committee, a detailed review of the
Group’s risk management and internal
control systems and financial record and
reporting systems is conducted. In
addition, as part of the recent process
to re-list on the main markets of the Irish
and London stock exchanges, the Board
was required to conduct a Financial
Position and Prospects Procedures
(FPPP) process. This required a full
review of the Group’s control
environment to ensure the necessary
procedures were in place to provide a
reasonable basis for the Board to make
proper judgements on an on-going
basis as to the financial position and
prospects of the Group. This review is
now required to be conducted on an
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AIB Group plc Annual Financial Report 2017
33
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements GOVERNANCE IN ACTION CONTINUED
annual basis, and will provide further
assurance to the Board as to the
robustness of the procedures in place
across the Group.
Remuneration
The Board is cognisant of its obligation
to ensure that remuneration, in
particular that of Executive Directors’
remuneration, is designed to promote
the long-term success of the company
and that any performance-related
elements should be transparent,
stretching and rigorously applied.
As you will see later in the report, the
Group’s Remuneration Policy continues
to be governed by restrictions contained
in the Subscription and Placing
Agreements in place with the Irish State.
In light of these restrictions, as reported
in previous years, the Group is unable
to implement a competitive, market-
aligned compensation and benefit
structure to retain and incentivise key
executives. This remains a key risk for the
future stability and performance of the
Group and is of utmost concern to the
Committee and the Board as a whole.
The Board explains later in the
Corporate Governance Report that it
is unable to comply with remuneration-
related provisions of the UK Code due
to the fact that neither the Board nor
the Remuneration Committee have
autonomy over remuneration, as they
are restricted in their ability to set
remuneration for all Executive Directors
and the Chairman, including pension
rights and any compensation payments,
and, to design Executive Directors’
remuneration packages to promote
the long-term success of the Group.
The lack of autonomy with regard to
remuneration is of ongoing concern
to the Board.
You will also see in the Corporate
Governance Remuneration Report that
the Remuneration Committee and the
Board have been working on designing
a short-term retention tool to somewhat
mitigate the heightened retention risk
that currently exists arising from these
restrictions until such time as the Group
is able to return to normalised
remuneration practices.
In designing this tool, the Remuneration
Committee and the Board have ensured
that the performance elements
underpinning the plan reflect the
strategic objectives of the Group are
consistent with the medium term targets
and commitments previously
communicated to the market, and are
appropriately stretching to reflect the
quantum of remuneration potential, in
line with the UK Code requirements.
Engagement
The Chairman and other Board
representatives, including the Chief
Executive Officer and Chief Financial
“The Board is
required to present
a fair, balanced and
understandable
assessement of the
Group’s position
and prospects.”
Officer, regularly engage in investor
relations activities to ensure that the
Group’s strategy and performance is
being communicated effectively, and
to receive a better understanding of
investor views.
Reports on investor relations activity,
along with regular reports of changes
in the holdings of substantial
shareholders and reports on share price
movements, are provided to the Board.
It is intended that a number of events
will be held throughout the coming year
to maintain an open dialogue with
investors. The Annual General Meeting
(AGM) provides a good opportunity for
the Board to engage with a broader
group of shareholders.
Read more details in our Committee Reports in the ‘Corporate
governance and oversight’ section on pages 180 to 228.
34
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Op Review (Q7.5) Dec 17:Layout 1 28/02/2018
19:08
Page 35
Business review
1. Operating and financial review
2. Capital
Page
36
53
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n
u
a
l
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e
v
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n
AIB Group plc Annual Financial Report 2017
35
Op Review (Q7.5) Dec 17:Layout 1 28/02/2018
19:08
Page 36
Business review - 1. Operating and financial review
Basis of presentation
This operating and financial review is prepared using IFRS and non-IFRS measures to analyse the Group’s performance. Non-IFRS
measures include management and regulatory performance measures which are considered Alternative Performance Measures
(“APMs”). APMs are when the basis of calculation is derived from non-IFRS measures. A description of the Group’s APMs and their
calculation is set out on page 51.
These management performance measures are consistent with performance measures presented to the Board and Leadership Team
and include the presentation of bank levies and regulatory fees and exceptional items separately on the income statement, as
management believe that due to their size and nature they distort the comparability of performance from period to period. The
management performance information should be considered in conjunction with IFRS information as set out in the consolidated
financial statements on page 239. A reconciliation between IFRS and management performance summary income statement is set out
on page 52.
Basis of calculation
Percentages presented throughout this review are calculated on the absolute figures and therefore may differ from the percentages
based on the rounded numbers. The impact of currency movements was 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.
Management performance - summary income statement
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 of 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
Profit from continuing operations before exceptional items
Gain on disposal of loan portfolios
Customer redress
Restitution and restructuring costs
Termination benefits
Property strategy costs
IPO and capital related costs
IFRS 9 costs
Gain on transfer of financial instruments
Profit on disposal of Visa Europe
Total exceptional items
Profit before taxation from continuing operations
Income tax charge from continuing operations
Profit for the year
36
AIB Group plc Annual Financial Report 2017
2017
€ m
2,176
524
267
791
2,967
(711)
(601)
(116)
(1,428)
1,539
(105)
113
8
-
121
1,555
19
-
1,574
33
(30)
(45)
(70)
(65)
(51)
(41)
1
-
(268)
1,306
(192)
1,114
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)
(24)
-
-
-
17
272
207
1,682
(326)
1,356
% change
8
6
115
28
13
-1
6
23
4
23
-6
-62
300
-
-59
8
-46
-
7
-
-
-
-
-
-
-
-
-
-
-22
-41
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Net interest income
Net interest income
Net interest margin(1)
Average asset yield of 292 bps in 2017 was 5 bps higher than
€2,176m
2.58%
Net interest income
Interest income(2)
Interest expense(2)
Net interest income
Average interest earning assets
2017
€ m
2,464
(288)
2,176
84,454
NIM(1)
NIM excluding interest on cured loans
that was previously not recognised
%
2.58
2.50
2016
%
€ m change
2,590
(577)
2,013
90,181
-5
-50
8
-6
% change
2.23
0.35
2.16
0.34
Net interest income
Net interest income increased by
€2,176m
Excluding the impact of currency movements, net interest income
€ 163 million compared to 2016.
increased by € 178 million.
The increase in net interest income was driven by lower funding
costs partly offset by a reduction in interest income as interest
earning assets reduced.
Interest income
Interest income of € 2,464 million in 2017 decreased by
€ 126 million compared to 2016 mainly due to lower average
interest earning assets.
2016 reflecting the impact of the overall portfolio mix being
increasingly weighted towards loans and receivables to
customers, with a reduction in lower yielding NAMA senior bonds.
Yields on loans and receivables to customers reduced to 357 bps
from 362 bps. This was driven by mortgage rate reductions in the
second half of 2016 and 2017 and a reduction in non-mortgage
yields due to the impact of the competitive environment. This was
partly offset by the reducing tracker mortgage book (average
volume € 1.2 billion lower than 2016). Yields on financial
investments available for sale reduced as a result of sales and
maturities of higher yielding assets.
Interest expense
Interest expense of € 288 million in 2017 decreased by
€ 289 million compared to 2016. The reduction in interest expense
was driven by lower cost of funds and a reduced funding
requirement. The 2017 cost of funds of 60 bps reduced from
100 bps in 2016 due to the redemption of € 1.6 billion Contingent
Capital Notes in July 2016, maturity of other higher yielding debt
securities issued and a reduction in rates on customer accounts
as higher interest bearing deposits matured.
Net interest margin
2.58%
2017 from 2.23% in 2016.
NIM has continued its positive
trajectory increasing to 2.58% in
The material drivers of NIM movement were:
• Redemption of € 1.6 billion Contingent Capital Notes in July
2016, c. +20 bps impact.
• Reduction in customer accounts volumes and rates, c. +12 bps
Average interest earning assets of € 84.5 billion in 2017 decreased
impact.
from € 90.2 billion in 2016. There was a reduction of € 1.5 billion in
• Redemption of low yielding NAMA senior bonds, c. +8 bps
loans and receivables to customers (€ 0.6 billion is attributable to
impact.
FX rates) driven by redemptions, restructures and disposals of the
• Variable rate cuts in H2 2016 and 2017, c. -3 bps impact.
non performing loan book. Additionally reduced financial
investments of € 1.4 billion and reduction in NAMA senior bonds of
The 2017 NIM excluding interest on cured loans that was
€ 3.1 billion contributed to the decrease in interest income.
previously not recognised, was 2.50%. Cured loans are loans
upgraded from impaired without incurring financial loss.
(1)Net interest margin (“NIM”) including eligible liabilities guarantee (“ELG”) charge. ELG charge is no longer material and is no longer separately disclosed.
(2)Negative interest expense on liabilities amounting to € 13 million (2016: € 21 million) is offset against interest expense. Negative interest income on
assets amounting to € 4 million (2016: Nil) is offset against interest income.
AIB Group plc Annual Financial Report 2017
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Business review - 1. Operating and financial review
Net interest income (continued)
Average balance sheet
The table below provides a summary of the Group’s average balance sheet, volumes and rates. This table has been extracted from
page 369 of the notes to the consolidated financial statements.
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 interest earning liabilities
Average interest earning liabilities
Non interest earning liabilities
Equity
Total liabilities & equity
Year ended
31 December 2017
Interest(1) Average
rate
%
€ m
Average
balance
€ m
60,619
2,166
531
13,635
3,273
6,396
84,454
7,165
2
154
130
12
2,464
3.57
0.39
1.13
3.99
0.20
2.92
Year ended
31 December 2016
Interest(1) 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
91,619
2,464
98,186
2,590
(0.08)
0.62
3.95
0.59
0.60
5,071
36,608
792
5,667
48,138
30,141
13,340
91,619
(4)
228
31
33
288
288
9,728
38,894
1,629
7,474
57,725
28,056
12,405
98,186
(13)
(0.13)
0.88
12.22
0.67
1.00
341
199
50
577
577
Net interest income
2,176
2.58
2,013
2.23
(1)Negative interest expense on liabilities amounting to € 13 million (2016: € 21 million) is offset against interest expense. Negative interest income on
assets amounting to € 4 million (2016: Nil) is offset against interest income.
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Other income
Other income(1)
€791m
Business income
Other items
€524m
€267m
Dividend income
Dividend income was € 28 million in 2017, € 26 million in 2016.
€ 25 million was received on NAMA subordinated bonds in each
year.
Net trading income
The increase in net trading income was mainly due to movement
in valuations on long term customer derivative positions with a net
positive movement € 21 million in 2017 compared to € 1 million in
2017
€ m
2016
%
€ m change
2016. There was an increase in income on interest rate contracts
and debt securities of € 16 million to € 27 million in 2017. Foreign
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
Other income
391
28
100
5
524
55
4
208
267
791
395
26
68
4
493
31
10
83
124
617
-1
8
47
25
6
77
-60
151
115
28
Other income increased by
€791m
Excluding the impact of currency movements, other income
€ 174 million compared to 2016.
increased by € 180 million. This was driven by increases in both
business income of € 31 million and other items of € 143 million.
Business income
€524m
Net fee and commission income
Net fee and commission income
Customer accounts
Card income
Lending related fees
Other fees and commissions
Net fee and commission income
2017
€ m
218
77
47
49
391
2016
%
€ m change
217
83
51
44
395
-
-7
-8
11
-1
Net fee and commission income of € 391 million in 2017 decreased
by € 4 million compared to 2016. Customer accounts income
remained stable. Card income reduced by € 6 million primarily due
to the cessation of annual profit share rebates following the sale of
Visa Europe in 2016. Lending related fees reduced by € 4 million.
Other fees and commissions income increased by € 5 million
mainly due to an increase in wealth management income of
€ 3 million.
(1)Other income before exceptional items.
(2)For further detail please see pages 149 to 150.
exchange income, 87% of which is customer related, increased by
€ 1 million to € 56 million in 2017.
Other items
Other items were € 267 million in
€267m
Other items in 2017 include:
• Net profit of € 55 million on the disposal of available for sale
securities of which € 32 million related to partial sale of NAMA
2017, € 124 million in 2016.
subordinated bonds (being the gain over original cost on initial
recognition less impairment).
• The acceleration of the timing of cash flows on NAMA senior
bonds resulted in a gain of € 4 million.
• Settlements and other gains includes the
realisation / re-estimation of cash flows on loans and receivables
previously restructured(2) which resulted in income recognised of
€ 213 million. This included € 116 million of gains recognised on
a small number of legacy property cases.
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AIB Group plc Annual Financial Report 2017
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Business review - 1. Operating and financial review
Total operating expenses
Total operating expenses(1)
Cost income ratio(1)
€1,428m
48%
Staff numbers at period end of 9,720 decreased by 656 from 2016
mainly due to rationalisation in the RCB and AIB UK distribution
networks. This was partly offset by increased resourcing of loan
restructuring operations to support the non performing loan
deleveraging strategy.
2016
%
€ m change
Operating expenses
Personnel expenses
General and administrative expenses
Depreciation, impairment and
amortisation
Total operating expenses(1)
2017
€ m
711
601
116
1,428
717
566
94
1,377
Staff numbers at period end(2)
Average staff numbers(2)
9,720
10,137
10,376
10,226
General and administrative expenses
General and administration expenses increased € 35 million
compared to 2016, including an increase in investment spend
and third party resourcing for loan restructuring operations.
Depreciation, impairment and amortisation
The charge increased by € 22 million compared to 2016 as assets
created under the investment programme were brought into
operational use.
-1
6
23
4
-6
-1
Total operating expenses(1)
Total operating expenses increased
Cost income ratio(1)
€1,428m
by € 51 million compared to 2016.
Excluding the impact of currency movements, operating expenses
increased by € 61 million.
The increase in costs was driven by increased general and
administrative expenses of € 35 million and depreciation,
impairment and amortisation of € 22 million partly offset by lower
personnel expenses of € 6 million.
Personnel expenses
Personnel expenses decreased by € 6 million compared to 2016.
Reduction mainly due to lower average staff numbers and a
favourable staff grade mix partly offset by salary increases.
Costs of € 1,428 million and income
48%
income ratio(1) of 48% in 2017 compared to 52% in 2016.
The cost income ratio of 48% is enhanced by the income from
of € 2,967 million resulted in a cost
realisation / re-estimation of cash flows on loans and receivables
previously restructured of € 213 million and interest on cured
loans that was previously not recognised of € 61 million. Excluding
these items the cost income ratio was 53% in 2017.
The Group is on track to achieve a sustainable cost income
ratio(1) of less than 50% in the medium term.
(1)Before bank levies, regulatory fees and exceptional items. Cost income ratio including bank levies, regulatory fees and exceptional items was 61% in 2017
compared to 54% 2016.
(2)Staff numbers are on a full time equivalent (“FTE”) basis.
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Bank levies and regulatory fees
Total exceptional items
Total exceptional items net charge
financial institutions, the Group charge reduced to € 49 million in
IPO and capital related costs
€105m
Bank levies and regulatory fees
Irish bank levy
Deposit Guarantee Scheme
Single Resolution Fund/BRRD
Other
2017
€ m
(49)
(38)
(20)
2
2016
€ m
(60)
(35)
(18)
1
Bank levies and regulatory fees
(105)
(112)
Following the revision of the legislation on the Irish bank levy for
2017 (2016: € 60 million).
Total writeback of provisions
€121m
to € 298 million in 2016. It includes the writeback of provisions for
€ 121 million in 2017 compared
Total writeback of provisions of
impairment on loans and receivables of € 113 million and writeback
of provisions for liabilities and commitments of € 8 million in 2017.
Writeback of provisions for impairment on loans and
receivables
The net writeback of provisions of € 113 million in 2017, compared
to € 294 million in 2016, comprises of € 199 million in specific
provision writebacks partly offset by an IBNR charge of
€ 86 million. Specific provision writebacks were € 171 million in
2016 with an IBNR writeback of € 123 million.
Specific provision writeback
The key drivers of the net specific provision writeback in 2017
were writebacks (net of top ups) of € 472 million as restructuring
activity continued, partially offset by € 273 million charge on newly
impaired loans (includes € 110 million charge on re-impaired
loans). Restructuring activity is continuing across the portfolios,
albeit at lower levels, and the writebacks reflect improved cash
flows due to improved economic conditions and additional security
made available. Provisions on newly impaired loans remain
consistent with 2016 levels.
IBNR charge / writeback
The IBNR charge of € 86 million in 2017 mainly reflects an increase
in provisions on the long term arrears mortgage portfolio and the
lengthening of emergence periods on certain non-mortgage
portfolios. These were offset by releases due to continuing
increases in property prices and improving credit quality profile.
See the Risk management section on page 105 and 106 for more
detail.
Income tax charge
The effective tax rate was 15% in
€192m
The effective tax rate is influenced by the geography and the mix
2017 compared with 19% in 2016.
of profit streams which may be taxed at different rates. The higher
effective tax rate in 2016 was mainly due to a change in UK
legislation restricting the use of tax losses and tax provided on
equity transaction profits.
For further detail on the taxation charge see note 17 to the
consolidated financial statements.
€268m
to a net credit of € 207 million in 2016.
of € 268 million in 2017 compared
Total exceptional items
Gain on disposal of loan portfolios
Gain on transfer of financial instruments
Customer redress
Restitution and restructuring costs
Termination benefits
Property strategy costs
IFRS 9 costs
Profit on disposal of Visa Europe
Total exceptional items
2017
€ m
2016
€ m
33
1
(30)
(45)
(70)
(65)
(51)
(41)
-
(268)
-
17
-
(58)
(24)
-
-
-
272
207
Given the nature and materiality of these items, the associated
gain or cost was viewed as exceptional by management. For
further detail on exceptional items see page 51.
Gain on disposal of loan portfolios. A number of distressed loan
portfolios were disposed of in 2017 which resulted in a gain
recognised of € 33 million.
Customer redress. Further provision required for customer
redress and compensation in relation to the examination of
tracker mortgage related issues.
Restitution and restructuring costs include other costs associated
with the Tracker examination, other restitution, transformation,
and asset write-offs.
Termination benefits of € 70 million mainly due to rationalisation in
the RCB and AIB UK distribution networks.
Property strategy costs. As the Group implements its property
footprint strategy certain office space will become surplus.
Onerous contracts provisions have been raised for lease
commitments and other costs on this office space totalling
€ 65 million.
IPO and capital related costs include commissions and
transaction advisory fees and expenses associated with the IPO
and the implementation of the new Group holding company.
IFRS 9 costs. Implementation of IFRS 9 was a significant
undertaking in the year. These costs, amounting to € 41 million,
represent the one off exceptional costs relating to the
implementation of IFRS 9 within the Bank. Other costs associated
with IFRS 9 which are not exceptional are for the build of the
intangible modelling asset and these amount to € 28 million.
Return on tangible equity
12.3%
lower profit before tax partially offset by lower risk weighted
from 13.5% in 2016 mainly due to
ROTE decreased to 12.3% in 2017
assets.
AIB Group plc Annual Financial Report 2017
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Business review - 1. Operating and financial review
Assets
Earning loans
Impaired loans
€57.0bn
€6.3bn
Transaction lending
In addition to new term lending of € 9.4 billion there was new
transaction lending of € 1.1 billion in 2017. This is defined as
balances which are drawn down for the first time on transactional
Assets
Gross loans to customers
Provisions
Net loans to customers
60.0
Financial investments available for sale 16.3
Financial investments held to maturity
-
31 Dec 31 Dec
2016
%
€ bn change
2017
€ bn
63.3
(3.3)
-
13.8
90.1
65.2
(4.6)
60.6
15.4
3.4
1.8
14.4
95.6
-3
-27
-1
6
-
-
-4
-6
NAMA senior bonds
Other assets
Total assets
Earning loans
Earning loans, excluding the impact
€57.0bn
€ 0.7 billion, increased by € 1.6 billion compared to 31 December
of currency movements of
2016. Growth in the earning book is driven by new term lending of
€ 9.4 billion. The increase also includes € 1.2 billion of loans
upgraded to earning in the year. This growth was offset by
redemptions(1) of € 8.7 billion and new to impaired (including
re-impaired loans) of € 0.7 billion.
New lending
New lending of € 9.4 billion in 2017,
based products.
Impaired loans
Impaired loans reduced by
€6.3bn
31 December 2016. This reflects the continued implementation of
€ 2.8 billion compared to
sustainable restructure solutions for customers and improved
economic conditions. The Group also disposed of distressed loan
portfolios of € 0.7 billion. New to impaired loans (including
re-impaired loans) were € 0.7 billion in 2017.
Provisions
Specific provisions cover
€3.3bn
Provisions reduced by € 1.3 billion compared to 31 December
43%
2016 driven by restructuring, write-offs and loan portfolio sales.
Specific impairment provisions as a percentage of impaired
loans decreased to 43% at 31 December 2017 from 44% at
31 December 2016, driven by the restructure and disposal of
loans with higher provision cover. The impairment provisions
remain dependent on significant levels of future collateral
realisation.
€9.4bn
Increased demand for credit across all segments:
€ 1.0 billion higher (+13%) than 2016.
IBNR provisions were € 0.6 billion at 31 December 2017
compared to € 0.5 billion at 31 December 2016.
• RCB new lending of € 4.6 billion up 17%, including mortgage
lending up 17% and other lending up 16%. The increase in
Net loans
€60.0bn
movement of € 0.7 billion, increased by € 0.1 billion.
excluding the impact of currency
Net loans of € 60.0 billion,
mortgage lending is driven by a growing Irish market and the
Group retaining its position as the no. 1 provider of mortgage
lending in Ireland.
• WIB new lending of € 3.2 billion is up 12% driven by Corporate
Banking lending and Syndicated & International lending.
• AIB UK new lending of € 1.6 billion is up 5% (up 12% excluding
the impact of currency movements) with an increase in both AIB
GB and FTB.
Summary of movement in Loans to customers
The table below sets out the movement in loans to customers from 1 January 2017 to 31 December 2017.
Loans to customers
Opening balance (1 January 2017)
New lending volumes
New impaired loans(2)
Restructures and write-offs
Disposals
Redemptions of existing loans(1)
Other movements
Balance excluding foreign exchange movements
Foreign exchange movements
Closing balance (31 December 2017)
Earning
loans
€ bn
Impaired
loans
€ bn
Gross
loans
€ bn
Specific
provisions
€ bn
IBNR
provisions
€ bn
Net
loans
€ bn
56.1
9.4
(0.7)
1.2
0.0
(8.7)
0.4
57.7
(0.7)
57.0
9.1
-
0.7
(1.6)
(0.7)
(0.8)
(0.4)
6.3
-
6.3
65.2
9.4
-
(0.4)
(0.7)
(9.5)
-
64.0
(0.7)
63.3
(4.1)
-
(0.3)
1.0
0.4
-
0.3
(2.7)
-
(2.7)
(0.5)
-
-
-
-
-
(0.1)
(0.6)
-
(0.6)
60.6
9.4
(0.3)
0.6
(0.3)
(9.5)
0.2
60.7
(0.7)
60.0
(1)New transaction lending is netted against redemptions given the revolving nature of these products.
(2)New to impaired includes re-impaired loans.
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Assets (continued)
The tables(1) below sets out the asset quality by sector for a range of credit metrics. Further details on the risk profile of the Group and
non performing exposures are available in the Risk management section on pages 73 to 133.
Loan book sectoral profile
31 December 2017
Loans and receivables to customers
Of which: Impaired
Balance sheet provisions (specific + IBNR)
Specific provisions / Impaired loans (%)
Total provisions / Total loans (%)
12 months to 31 December 2017
Specific impairment (credit) / charge
Total impairment (credit) / charge
31 December 2016
Loans and receivables to customers
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)
Non performing loans
Non performing loans
31 December 2017
Impaired
Residential Other personal
mortgages
€ bn
€ bn
Property and
construction
€ bn
Non-property
business
€ bn
33.7
3.3
1.4
34%
4%
€ m
(111)
(101)
€ bn
35.2
4.6
2.0
38%
6%
€ m
(110)
(111)
3.1
0.4
0.2
56%
8%
€ m
(9)
(2)
€ bn
3.1
0.4
0.3
58%
9%
€ m
(11)
(22)
8.8
1.8
1.1
51%
12%
€ m
(100)
(50)
€ bn
9.4
2.7
1.5
50%
15%
€ m
(74)
(145)
17.7
0.8
0.6
54%
3%
€ m
21
40
€ bn
17.5
1.4
0.8
51%
5%
€ m
24
(16)
Residential Other personal
mortgages
€ bn
€ bn
Property and
construction
€ bn
Non-property
business
€ bn
Greater than 90 days past due but not impaired
Non impaired (unlikely to pay)
Non default
Total non performing loans
Total non performing loans / Total loans (%)
31 December 2016
Impaired
Greater than 90 days past due but not impaired
Non impaired (unlikely to pay)
Non default
Total non performing loans
3.3
0.2
0.5
0.8
4.8
14%
4.6
0.3
0.6
1.2
6.7
Total non performing loans / Total loans (%)
19%
0.4
0.1
0.0
0.1
0.6
18%
0.4
0.1
0.0
0.2
0.7
21%
1.8
0.1
0.3
0.7
2.9
33%
2.7
0.1
0.7
0.7
4.2
45%
0.8
0.2
0.1
0.8
1.9
11%
1.4
0.1
0.2
0.8
2.5
14%
Total
€ bn
63.3
6.3
3.3
43%
5%
€ m
(199)
(113)
€ bn
65.2
9.1
4.6
44%
7%
€ m
(171)
(294)
Total
€ bn
6.3
0.6
0.9
2.4
10.2
16%
9.1
0.6
1.5
2.9
14.1
22%
Non performing exposures
The Group also focuses on non performing exposures, including both loans and receivables to customers and off balance sheet
commitments, when managing the credit quality of the loan book. Non performing loans have reduced to € 10.2 billion at
31 December 2017 from € 14.1 billion at 31 December 2016. Total non performing off balance sheet commitments at
31 December 2017 amounted to € 322 million (31 December 2016: € 321 million).
(1)Percentages and certain amounts in the tables above have been rounded. Sourced from page 99 and 132 of the Risk management section and rounded
to billions.
AIB Group plc Annual Financial Report 2017
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Business review - 1. Operating and financial review
Assets (continued)
Financial investments Available for Sale (“AFS”)
AFS assets of € 16.3 billion held for liquidity and investment
purposes have increased by € 0.9 billion compared to
31 December 2016. In order to provide flexibility in managing the
overall bond portfolio, and to avail of opportunities through selling
elements of this portfolio, the Group reclassified the held to maturity
portfolio of € 3.3 billion to financial investments available for sale at
31 December 2017. The transfer was partly offset by net sales,
maturities, redemptions and purchases of € 2.4 billion.
Further detail in respect of AFS is available in note 27 to the
consolidated financial statements.
Financial investments Held to Maturity (“HTM”)
HTM assets were reclassified to financial investments AFS.
NAMA senior bonds
NAMA senior bonds were fully redeemed in 2017.
Other assets
Other assets of € 13.8 billion comprised:
• Cash and loans to banks of € 7.7 billion, € 0.2 billion lower
than 31 December 2016. This included balances with
Central Banks of € 6.4 billion, and loans and receivables to
banks of € 1.3 billion.
• Deferred taxation of € 2.7 billion, € 0.1 billion lower than
31 December 2016.
• Derivative financial instruments of € 1.2 billion, € 0.6 billion lower
than 31 December 2016.
• Remaining assets of € 2.2 billion, € 0.3 billion higher than
31 December 2016, includes € 0.14 billion proceeds awaiting
settlement on the disposal of a UK loan portfolio.
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Liabilities & equity
Customer accounts
Equity
Monetary authority funding
Monetary authority funding of € 1.9 billion was in line with
€64.6bn
€13.6bn
31 December 2016.
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
31 Dec 31 Dec
2016
%
€ bn change
2017
€ bn
Other market funding
Other market funding reduced by € 4.1 billion from € 5.8 billion at
31 December 2016 due to a reduced funding requirement
following NAMA senior bond redemptions and a reduction in both
financial investments and loans to customers.
Debt securities in issue
Debt securities reduced following maturities of € 0.4 billion in
March 2017 and € 1.7 billion in June 2017.
Other liabilities
Other liabilities of € 3.7 billion comprised:
• Subordinated liabilities of € 0.8 billion, unchanged from
31 December 2016.
2
-
-70
-33
-16
-7
4
-6
% change
95
-2
• Derivative financial instruments of € 1.2 billion, € 0.4 billion
lower than 31 December 2016.
• Remaining liabilities of € 1.7 billion, € 0.3 billion lower
than 31 December 2016.
64.6
63.5
1.9
1.7
4.6
3.7
1.9
5.8
6.9
4.4
76.5
82.5
13.1
95.6
13.6
90.1
%
93
Customer accounts
Customer accounts, excluding the
€64.6bn
€ 0.6 billion, increased by € 1.7 billion compared to
impact of currency movements of
31 December 2016. The customer accounts mix profile continued
to change in 2017 with an increase of € 3.4 billion in current
accounts offset by a reduction of € 2.3 billion in deposits primarily
corporate and treasury deposits (including repos).
The loan to deposit ratio remained stable at 93% at
31 December 2017 compared to 95% at 31 December 2016.
Equity
Equity increased by € 0.5 billion to
€13.6bn
€ 13.1 billion at 31 December 2016.
€ 13.6 billion compared to
The table below sets out the movements in the year.
Equity
Opening balance (1 January 2017)
Profit for the year
Other comprehensive income:
Cash flow hedging reserves
Available for sale securities reserves
Dividends / distributions paid
Closing balance (31 December 2017)
€ bn
13.1
1.1
(0.2)
(0.1)
(0.3)
13.6
AIB Group plc Annual Financial Report 2017
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Business review - 1. Operating and financial review
Segment reporting
Segment overview
From 1 January 2017, following realignment of Leadership Team responsibilities, the Group has been managed through the
following business segments: Retail & Commercial Banking (“RCB”)*, Wholesale, Institutional & Corporate Banking (“WIB”)*,
AIB UK* and Group. The performance in 2016 has been restated to reflect this revised 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 the Group segment. Funding and liquidity charges are based on each segment’s funding
requirements and the Group’s funding cost profile, which is informed by wholesale and retail funding costs. Income attributable to capital
is allocated to segments based on each segment’s capital requirement.
– Retail & Commercial Banking (“RCB”)
– Wholesale, Institutional & Corporate Banking (“WIB”)
– AIB UK
– Group
Page
47
48
49
50
*Within the above segments, the Group has migrated the management of the vast majority of its non-performing loans to the Financial Solutions Group
(‘‘FSG’’), a standalone dedicated workout unit which supports personal and business customers in financial difficulty, leveraging on FSG’s well resourced
operational capacity, workout expertise and skillset. FSG has developed a comprehensive suite of sustainable solutions for customers in financial difficulty.
The Group is moving into the mature stage of managing customers in difficulty and non-performing loan portfolios.
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Retail & Commercial Banking (“RCB”)
RCB contribution statement
2017
€ m
2016
%
€ m change
RCB balance sheet metrics
31 Dec
2017
€ bn
31 Dec
2016
%
€ bn change
Net interest income
Business income
Other items
Other income
Total operating income
Total operating expenses
1,435
1,273
329
204
533
320
78
398
1,968
(769)
1,671
(745)
Operating contribution before bank levies,
regulatory fees and provisions
1,199
Total provisions
Operating contribution
Associated undertakings
Loss on disposal
926
290
143
1,342
1,216
14
(1)
31
-
Contribution before exceptional items
1,355
1,247
13
3
162
34
18
3
29
-51
10
-55
-
9
Mortgages
Personal
Business
New lending
Mortgages
Personal
Business
Legacy distressed loans(1)
Gross loans
of which - earning loans
- impaired loans
Provisions
Net loans
Current accounts
Deposits
Customer accounts
2.4
0.8
1.4
4.6
32.2
3.0
8.5
0.7
44.4
38.5
5.9
(3.0)
41.4
22.6
24.0
46.6
2.0
0.7
1.2
3.9
33.3
3.0
9.2
1.1
46.6
38.7
7.9
(3.9)
42.7
19.4
23.5
42.9
17
16
15
17
-4
4
-7
-36
-5
-
-25
-23
-3
16
2
9
Net interest income
€1,435m Net interest income has increased by
€ 162 million due to the continued reduction in cost of funds
New lending
€4.6bn New lending increased by € 0.7 billion showing strong
growth across mortgages, business and personal driven by a
partly offset by the impact of further mortgage rate cuts. Net
combination of internal initiatives and an improving Irish economy.
interest income includes interest on cured loans that was
The Group remains the no. 1 mortgage provider in Ireland.
previously not recognised of € 54 million in 2017, € 65 million in
2016.
Net interest income on earning loans of € 1,361 million in 2017
increased by € 164 million from € 1,197 million in 2016.
Net interest income on impaired loans of € 74 million in 2017
reduced from € 76 million in 2016 as loan deleveraging continues
partly offset by lower cost of funds.
Other income
€533m Business income increased by € 9 million driven by
net fee and commission income of € 4 million and net trading
income of € 5 million as customer transaction activity increased.
Other items of € 204 million primarily relate to income on
realisation /re-estimation of cashflows on loans previously
restructured.
Total operating expenses
€769m Total operating expenses increased by € 24 million
driven by an increase in resourcing for loan restructuring
operations c. € 22 million and an increase in depreciation as
assets created under the investment programme are put into
operational use. This was partly offset by lower distribution
network costs.
Total provisions
€143m The key driver of the lower net writeback is the IBNR
charge of € 73 million in 2017 (writeback of € 103 million in
2016). This reflects an increase in provisions on the long term
arrears mortgage portfolio and the lengthening of emergence
periods on certain non-mortgage portfolios.
In addition to new term lending of € 4.6 billion, there was new
transaction lending of € 0.2 billion in 2017.
Gross earning loans
€38.5bn Earning loans reduced by € 0.2 billion driven by
€ 0.3 billion reduction in legacy distressed loans(1) due to
repayments. This was partially offset by an increase in personal
loans of € 0.2 billion, while business and mortgages portfolios
were in line with 31 December 2016.
Gross impaired loans
€5.9bn Gross impaired loans decreased by € 2.0 billion
driven by repayment and restructures of € 2.3 billion and loan
portfolio disposals of € 0.4 billion as loan deleveraging is
progressed. This was offset by new to impaired loans of
€ 0.6 billion.
Provisions
€3.0bn The reduction in provisions of € 0.9 billion was driven
by restructuring, write-offs and loan portfolio disposals.
Customer accounts
€46.6bn The customer accounts base continued to grow in
2017, maintaining market share while reducing overall cost of
funds.
(1)Larger legacy distressed loans that have been subject to restructuring arrangement which are managed through the loan restructuring unit in RCB.
AIB Group plc Annual Financial Report 2017
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Business review - 1. Operating and financial review
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
Operating contribution
Associated undertakings
Contribution before exceptional items
2017
€ m
2016
%
€ m change
WIB balance sheet metrics
31 Dec
2017
€ bn
31 Dec
2016
%
€ bn change
267
49
316
(91)
225
(4)
221
2
223
269
51
320
(96)
224
(23)
201
-
201
-1
-4
-1
-5
-
-83
10
-
11
Corporate
1.0
Syndicated & International
1.6
Real Estate Finance
0.5
Specialised Finance
0.1
Energy, Climate Action & Infrastructure 0.0
New lending
3.2
Corporate
4.6
Syndicated & International
3.2
Real Estate Finance
2.2
Specialised Finance
0.2
Energy, Climate Action & Infrastructure 0.1
Gross loans
of which - earning loans
- impaired loans
Provisions
Net loans
Current accounts
Deposits
Customer accounts
10.3
10.3
0.0
(0.0)
10.3
3.7
2.0
5.7
0.9
1.3
0.6
0.1
0.0
2.9
4.4
2.8
1.7
0.2
0.1
9.2
8.9
0.3
(0.1)
9.1
3.7
2.7
6.4
15
21
-14
44
-
12
5
15
27
30
37
13
16
-97
-39
13
-
-27
-12
Net interest income
€267m Net interest income decreased by € 2 million
compared to 2016. Growth in gross loans was offset by lower
New lending
€3.2bn New lending increased by € 0.3 billion (+12%)
compared to 2016, with strong growth in Syndicated &
levels of reward on customer accounts in 2017 compared to
International (+21%) and Corporate Banking (+15%).
2016.
Other income
€49m Other income decreased by € 2 million compared to
2016. This was driven by € 3 million lower customer related FX
income partly offset by € 2 million increase in income on
realisation / re-estimation of cash flows on loans and receivables
previously restructured.
Total operating expenses
€91m Total operating expenses decreased by € 5 million
due to a reduction in support costs from other areas of the Group.
Total provisions
(€4m)
compared to a charge of € 23 million in 2016.
Total net provision charge of € 4 million in 2017
In addition to new term lending of € 3.2 billion there was new
transaction lending of € 0.5 billion in 2017 mainly due to demand
from Corporate Banking customers.
Gross loans
€10.3bn Gross earning loans of € 10.3 billion at
31 December 2017 increased by € 1.4 billion compared to
€ 8.9 billion at 31 December 2016. There was an increase across
all WIB portfolios as new lending exceeded redemptions.
Gross impaired loans were nil at 31 December 2017 compared to
€ 0.3 billion at 31 December 2016.
Customer accounts
€5.7bn Customer current accounts of € 3.7 billion were in
line with 31 December 2016, while customer deposits decreased
by € 0.7 billion as part of the overall management of the customer
resources portfolio. The significant majority of the reductions were
in term deposits.
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AIB UK
AIB UK 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
Operating contribution
Associated undertakings
Profit on disposal
2017
£ m
209
61
270
154
2
(16)
140
3
1
Contribution before exceptional items
144
Contribution before exceptional items €m 164
(116)
(115)
2016
%
£ m change
AIB UK balance sheet metrics
31 Dec
2017
£ bn
31 Dec
2016
%
£ bn change
183
54
237
122
1
30
153
3
1
157
193
14
14
14
1
26
100
-
-8
-
-
-8
-15
AIB GB
FTB
New lending(1)
AIB GB
FTB
Gross loans
of which - earning loans
- impaired loans
Provisions
Net loans
Current accounts
Deposits
Customer accounts
1.2
0.3
1.5
5.2
2.4
7.6
7.2
0.4
(0.3)
7.3
5.6
3.4
9.0
1.0
0.2
1.2
5.2
2.8
8.0
7.2
0.8
(0.5)
7.5
5.2
3.7
8.9
12
10
12
-
-15
-5
-
-53
-48
-2
9
-8
2
Net interest income
£209m Net interest income increased by £ 26 million
compared to 2016 due to a reduction in the cost of funds as
New lending
£1.5bn New lending of £ 1.5 billion in 2017, increased 12%
compared to 2016 mainly driven by an increase in corporate
average loan volumes remained broadly stable.
lending in AIB GB. FTB showed positive momentum in mortgage
Other income
£61m Other income increased by £ 7 million mainly due to
a net positive movement in valuations of long-term customer
derivative positions of £ 3 million in 2017 compared to a net
lending in the year.
In addition to new term lending of £ 1.5 billion there was new
transaction lending of £ 0.3 billion in 2017.
negative movement of £ 2 million in 2016. Other income includes
net profit on disposal of AFS securities of £ 13 million, nil in 2016.
This was partly offset by lower net fee and commission income of
Gross loans
£7.6bn Gross loans of £ 7.6 billion includes earning loans of
£ 7.2 billion and impaired loans of £ 0.4 billion. Earning loans of
£ 4 million, a reduction of £ 4 million in miscellaneous business
£ 7.2 billion were in line with 31 December 2016 with strong new
income and £ 2 million mark to market loss on equity warrants in
lending of £ 1.5 billion being offset by redemptions due to excess
2017.
Total operating expenses
£116m Total operating expenses of £ 116 million were
broadly in line with 2016 reflecting cost control and management.
During 2017 AIB UK underwent a restructuring programme
resulting in a reduction in staff numbers in the second half of the
year.
Total provisions
(£16m)
was driven by two significant new impairments in the first half of
Total net provisions charge of £ 16 million in 2017
2017 offset by provision writebacks.
liquidity in the market. Impaired loans of £ 0.4 billion at
31 December 2017 have reduced from £ 0.8 billion at
31 December 2016 mainly due to disposal of loan portfolios of
£ 0.3 billion.
Customer accounts
£9.0bn Customer accounts of £ 9.0 billion at
31 December 2017, increased by £ 0.1 billion compared to
31 December 2016 with a change in mix, being weighted more
towards current accounts.
(1)New lending in 2016 has been restated by £ 0.3 billion to exclude all transaction based new lending.
AIB Group plc Annual Financial Report 2017
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Business review - 1. Operating and financial review
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
2017
€ m
236
139
375
247
103
350
(436)
(397)
(61)
(107)
-
(168)
(47)
(113)
(6)
(166)
2016
%
€ m change
Group balance sheet metrics
31 Dec
2017
€ bn
31 Dec
2016
%
€ bn change
Gross loans
0.1
Financial investments available for sale 16.3
Financial investments held to maturity
NAMA senior bonds
Customer accounts
-
-
2.2
0.1
15.4
3.4
1.8
3.9
-
6
-
-
-44
-4
35
7
10
30
-5
-
1
Net interest income
€236m Net interest income decreased by € 11 million
compared to 2016 due to lower income on NAMA senior bonds
and from the securities portfolio as balances reduced. This was
partly offset by lower cost of funds.
Other income
€139m Other income increased by € 36 million compared
to 2016 mainly due to movement in valuations of long-term
customer derivative positions with a net positive movement of
€ 16 million in 2017 compared to a net negative movement of
€ 4 million in 2016. There was an increase in income on interest
rate contracts and debt securities of € 16 million to € 27 million in
2017. There were other items of € 44 million in 2017, € 42 million
in 2016. This includes net profit on disposal of AFS securities of
€ 55 million in 2017.
Total operating expenses
€436m Total operating expenses increased by € 39 million
compared to 2016 reflecting the impact of salary inflation and an
increase in investment spend.
Bank levies and regulatory fees
€107m Bank levies and regulatory fees of € 107 million in
2017 includes the Irish bank levy € 49 million, the Deposit
Guarantee Scheme (“DGS”) € 38 million (includes credit on the
DGS legacy fund) and the Single Resolution Fund € 20 million.
Gross loans
€0.1bn Gross loans were in line with 31 December 2016.
Financial investments Available for Sale (“AFS”)
€16.3bn AFS assets of € 16.3 billion held for liquidity and
investment purposes have increased by € 0.9 billion compared to
31 December 2016. In order to provide flexibility in managing the
overall bond portfolio and to avail of opportunities through selling
elements of this portfolio, the Group reclassified the held to
maturity portfolio of € 3.3 billion to financial investments available
for sale at 31 December 2017. The transfer was partly offset by
net sales, maturities, redemptions and purchases of € 2.4 billion.
Financial investments Held to Maturity (“HTM”)
Nil
HTM assets were reclassified to financial investments AFS.
NAMA senior bonds
Nil
NAMA senior bonds were fully redeemed in 2017.
Customer accounts
€2.2bn Customer accounts have reduced by € 1.7 billion
mainly due to maturity of higher yielding term deposits and a
reduction in repos.
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Alternative performance measures
The following is a list, together with a description, of APMs used in analysing the Group’s performance, provided in accordance with the
European Securities and Markets Authority (“ESMA”) guidelines.
Average asset yield
Average cost of funds
Average interest-earning assets
Average interest-earning liabilities
CET1 Fully loaded
CET1 Transitional
Cost income ratio
Specific provision cover
Exceptional items
Leverage ratio
Liquidity coverage ratio
Loan to deposit ratio
Net interest margin
Net interest margin excluding
interest on cured loans that was
previously not recognised
Net stable funding ratio
Non performing exposures
Return on tangible equity
Interest and similar income divided by average interest-earning assets.
Interest expense and similar charges divided by average interest-earning liabilities.
Average interest-earning assets includes loans and receivables to customers, NAMA senior bonds,
financial investments available for sale, financial investments held to maturity and other interest
earning assets. Averages are based on daily balances for all categories with the exception of
loans and receivables to banks (included in other interest earning assets), which are based on a
combination of daily / monthly balances.
Average interest-earning liabilities includes deposits by banks, customer accounts, subordinated
liabilities and other interest earning liabilities. Averages are based on daily balances for customer
accounts while other categories are based on a combination of daily / monthly balances.
Total common equity tier 1 capital on a fully loaded basis divided by total risk weighted assets on a
fully loaded basis.
Total common equity tier 1 capital on a transitional basis divided by total risk weighted assets on a
transitional basis.
Total operating expenses excluding exceptional items and bank levies and regulatory fees
divided by total operating income excluding exceptional items.
Specific impairment provisions as a percentage of impaired loans.
These are items that management believe due to their size and nature distort the comparability of
performance from period to period;
- Gain on disposal of loan portfolios in reducing the Group’s level of non performing exposures.
- Gain on transfer of financial instruments. Valuation adjustments arising from transfers of customer
loans and receivables to NAMA during 2010 and 2011.
- Customer redress. Customer redress and compensation in relation to the examination of tracker
mortgage related issues.
- Restitution and restructuring costs include other costs associated with the Tracker examination, other
restitution, transformation, and asset write-offs.
- Termination benefits. The cost associated with the reduction in employees arising from the
voluntary severance programme.
- Property strategy costs. The Group is implementing a significant property strategy. This includes a
new Headquarters and a Technology Centre in Sandyford together with certain office space becoming
surplus. Costs directly associated with this strategy (e.g. onerous contracts) are deemed exceptional.
- IPO and capital related costs are mainly in connection with the IPO and the implementation of a
new AIB Group holding company.
- IFRS 9 costs. Implementation of IFRS 9 was a significant undertaking in the year. The costs
associated with the build of the intangible modelling asset have been capitalised. The revenue costs
of implementation of IFRS 9 are one off costs and given their nature are deemed exceptional.
- Profit on disposal of Visa Europe. AIB’s membership in Visa Europe was disposed of during 2016.
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.
The ratio of the stock of high quality liquid assets to expected net cash outflows over the next
30 days under a stress scenario.
Loans and receivables to customers divided by customer accounts.
Net interest income divided by average interest-earning assets.
Net interest margin excluding interest on cured loans that was previously not recognised. Cured loans
are defined as loans upgraded from impaired without incurring financial loss. This additional measure
has been disclosed given the impact of the additional income on assessing the actual performance.
The ratio of available stable funding to required stable funding over a 1 year time horizon.
Non performing exposures are defined by the European Banking Authority to include material
exposures which are more than 90 days past due (regardless of whether they are impaired) and / or
exposures in respect of which 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 the number of
days the exposure is past due.
Profit after tax from continuing operations plus movement in carrying value of deferred tax assets in
respect of prior losses, less coupons on other equity instruments, divided by targeted (13 per cent.)
CET1 capital on a fully loaded basis plus deferred tax assets recognised for unutilised tax losses in
equity. In assessing capital efficiency, ROTE reflects performance given capital requirements and the
nature and quantum of deferred tax assets recognised for unutilised tax losses in equity.
AIB Group plc Annual Financial Report 2017
51
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Business review - 1. Operating and financial review
Reconciliation between IFRS and management performance
The tables set out below are a reconciliation of each impacted line item from the most directly reconcilable IFRS line item in
consolidated financial statements.
IFRS - summary income statement
Net interest income
Other income
Total operating income
Total operating expenses
Operating profit before provisions
Writeback of provisions
Operating profit
Associated undertakings
Profit on disposal
Profit before taxation from continuing operations
Income tax charge from continuing operations
Profit for the year
Adjustments - between IFRS and management performance
Total exceptional items
Total bank levies and regulatory fees
Other income
of which exceptional items
Gain on disposal of loan portfolios
Gain on transfer of financial instruments
Profit on disposal of Visa Europe
Operating expenses
of which exceptional items
Customer redress
Restitution and restructuring costs
Termination benefits
Property strategy costs
IPO and capital related costs
IFRS 9 costs
2017
€ m
2,176
825
3,001
2016
€ m
2,013
906
2,919
(1,835)
(1,571)
1,166
121
1,287
19
-
1,306
(192)
1,114
268
105
(34)
(33)
(1)
-
407
30
45
70
65
51
41
1,348
298
1,646
35
1
1,682
(326)
1,356
(207)
112
(289)
-
(17)
(272)
194
-
58
24
-
-
-
of which bank levies and regulatory fees
105
112
Management performance - summary income statement
Net interest income
Other income
Total operating income
Total operating expenses
Operating profit before bank levies, regulatory fees and provisions
Bank levies and regulatory fees
Writeback of provisions
Operating profit
Associated undertakings
Profit on disposal
Profit from continuing operations before exceptional items
Total exceptional items
Profit before taxation from continuing operations
Income tax charge from continuing operations
Profit for the year
52
AIB Group plc Annual Financial Report 2017
2,176
791
2,967
(1,428)
1,539
(105)
121
1,555
19
-
1,574
(268)
1,306
(192)
1,114
2,013
617
2,630
(1,377)
1,253
(112)
298
1,439
35
1
1,475
207
1,682
(326)
1,356
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Business review - 2. Capital
Objectives*
The objectives of the Group’s capital management policy are to at all times comply with regulatory capital requirements and to ensure that
the Group has sufficient capital to cover the current and future risk inherent in its business and to support its future development. Detail
on the management of capital and capital adequacy risk can be found in Risk Management 3.5 on pages 164 to 165.
Regulatory capital and capital ratios
Equity
Less: Additional Tier 1 Securities
Proposed ordinary dividend
Regulatory adjustments:
Intangible assets
Cash flow hedging reserves
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
Instruments issued by subsidiaries that are given
recognition in additional tier 1 capital
Expected loss deduction
Total additional tier 1 capital
Total tier 1 capital
Tier 2 capital
Subordinated debt
Instruments issued by subsidiaries that are given
recognition in tier 2 capital
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
CRD lV
transitional basis
CRD lV
fully loaded basis
31 December 31 December 31 December 31 December
2016(1)
€ m
2016(1)
€ m
2017
€ m
2017
€ m
13,612
(494)
(326)
13,148
(494)
(250)
(569)
(257)
(196)
(150)
(829)
–
(23)
(392)
(460)
(445)
(140)
(610)
(28)
(22)
(2,024)
10,768
(2,097)
10,307
–
260
–
260
494
–
(9)
485
13,612
(494)
(326)
(569)
(257)
–
(139)
(2,764)
–
(18)
(3,747)
9,045
–
291
–
291
11,028
10,792
9,336
–
442
199
–
3
644
11,672
46,319
360
4,248
796
5
51,728
%
20.8
21.3
22.6
783
–
200
(9)
6
980
11,772
48,843
288
3,874
1,225
5
54,235
%
19.0
19.9
21.7
–
492
28
–
–
520
9,856
46,414
360
4,248
796
5
51,823
%
17.5
18.0
19.0
13,148
(494)
(250)
(392)
(460)
–
(126)
(3,050)
(46)
(16)
(4,090)
8,314
494
–
–
494
8,808
783
–
–
–
–
783
9,591
49,027
288
3,874
1,225
5
54,419
%
15.3
16.2
17.6
(1)Relates to the consolidated capital position of Allied Irish Banks, p.l.c. as at the 31 December 2016.
AIB Group plc Annual Financial Report 2017
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Page 54
Business review - 2. Capital
Capital requirements
The Group is required to maintain a CET 1 ratio of 9.525%
effective from 1 January 2018 (2017: 9%). This includes a Pillar 1
requirement of 4.5%, a Pillar 2 requirement (“P2R”) of 3.15% and
was driven by the CET1 capital movements outlined above
combined with RWA reductions offset by the introduction of a
minority interest restriction(1).
a capital conservation buffer (“CCB”) of 1.875%. The minimum
Under CRD IV, a portion of the capital reserves attributable to
requirement for the transitional total capital ratio is 13.025%
the Additional Tier 1 Securities and tier 2 capital instruments
(2017 12.5%). This requirement excludes Pillar 2 guidance (“P2G”)
issued by Allied Irish Banks, p.l.c., which exceed the minimum
which is not publicly disclosed. The transitional CET1 and total
own funds requirement, is not recognised for AIB Group plc
capital ratios at 31 December 2017 were 20.8% and 22.6 %
consolidated regulatory capital purposes. The impact on the
respectively. Based on these ratios, the Group has a very
consolidated regulatory capital will reduce if the outstanding
significant buffer over maximum distributable amount (“MDA”)
Additional Tier 1 Securities and tier 2 capital instruments issued
trigger levels.
by Allied Irish Banks, p.l.c. are redeemed.
The Group has been designated as an Other Systemically
The restriction reduced qualifying transitional tier 1 capital by
Important Institution (“O-SII”). A buffer for O-SII will be added to
€ 234 million and qualifying transitional tier 2 capital by
the minimum requirement at 0.5% from 1 July 2019, rising to 1.5%
€ 341 million.
on 1 July 2021.
During 2017, the Financial Policy Committee (UK) announced the
Risk weighted assets
Credit risk RWA reduced by € 2.5 billion (€ 2.6 billion fully
UK countercyclical capital buffer (“CCyB”) will increase to 0.5% in
loaded) during the year to 31 December 2017. Of the reduction
June 2018 and to 1% from November 2018. The Group’s minimum
€1.8 billion related to an agreement to remove a national
requirement will increase in proportion to its level of UK exposures
which equates to c. 0.2% for the Group in November 2018. Other
discretion regarding measurement of asset maturity and a
further € 0.7 billion decrease related to foreign exchange
jurisdictional CCyB in place have a negligible impact on capital
movements. Credit valuation adjustment RWA decreased by
requirements.
€ 0.4 billion. These decreases were partially offset by an
increase in operational risk RWA of € 0.4 billion reflecting the
The Central Bank of Ireland have maintained the CCyB on Irish
increased levels of income in the annual calculation and market
exposures at 0%.
risk of € 0.1 billion.
Capital ratios at 31 December 2017
Transitional ratio
The transitional CET1 ratio increased to 20.8% at 31 December
Fully loaded ratio
The fully loaded CET1 ratio increased to 17.5% at 31 December
2017 from 15.3% at 31 December 2016. The increase in the
2017 from 19.0% at 31 December 2016. The increase in the CET1
CET1 ratio is due to an increase in CET1 capital and a reduction
ratio is due to an increase in CET1 capital and a reduction in risk
in RWA.
weighted assets (“RWA”).
CET1 capital increased by € 461 million to € 10,768 million at
31 December 2017. This consisted of profit for the year of
31 December 2017. This consisted of profit for the year of
€ 1,114 million and a decrease in the capital deduction for the
€ 1,114 million, partially offset by a proposed dividend on ordinary
deferred tax asset of € 286 million offset by a proposed
shares of € 326 million, an increase in the deduction for the
dividend on ordinary shares of € 326 million, a reduction in AFS
deferred tax assets relating to unutilised tax losses of
reserves of € 132 million and an increase in intangible assets
CET1 capital increased by € 731 million to € 9,045 million at
€ 219 million due to the transitional phasing arrangements
of € 177 million.
increasing from 20% to 30% in 2017 and an increase in intangible
assets of € 177 million. Other movements in the period included an
The fully loaded tier 1 capital ratio increased to 18.0% at
increase in the recognition of unrealised gains in the AFS debt and
31 December 2017 from 16.2% at 31 December 2016. The
equity securities increasing from 60% to 80%.
fully loaded total capital ratio increased to 19.0% at
31 December 2017 from 17.6% at 31 December 2016. The
The CET1 transitional ratio, at 20.8%, is significantly in excess of
increase in the ratio was driven by the CET1 movements outlined
the minimum capital requirement.
The transitional tier 1 capital ratio increased to 21.3% at
above combined with RWA reductions offset by the introduction of
a minority interest restriction(1). The restriction reduced qualifying
fully loaded tier 1 capital by € 203 million and qualifying fully
31 December 2017 from 19.9% at 31 December 2016. The
loaded tier 2 capital by € 291 million.
transitional total capital ratio increased to 22.6% at 31 December
2017 from 21.7% at 31 December 2016. The increase in the ratio
(1)The minority interest calculation may require adjustment pending the final communication of the EBA’s position on the matter.
*Forms an integral part of the audited financial statements.
54
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Page 55
Leverage ratio
The leverage ratio is defined as tier 1 capital divided by a non-risk
AIB Group plc
In February 2017, AIB announced that it had been informed by the
adjusted measure of assets. Based on the full implementation of
Single Resolution Board (“SRB”) that the preferred strategy for the
CRD IV, the leverage ratio, under the Delegated Act implemented
Group is a single point of entry bail-in strategy through a holding
in January 2015, was 10.3% at 31 December 2017 (9.2% at
company. All new issuances of MREL eligible liabilities will be
31 December 2016).
issued by AIB Group plc.
Total exposure (transitional)
Total exposure (fully loaded)
Tier 1 capital (transitional basis)
Tier 1 capital (fully loaded)
Leverage ratio (transitional basis)
Leverage ratio (fully loaded)
31 December
On 6 December 2017, the High Court of Ireland sanctioned the
2017
€ m
92,328
90,593
11,028
9,336
11.9%
10.3%
2016
€ m
97,935
95,930
10,792
8,808
11.0%
9.2%
setup of the new Holding Company (“AIB Group plc”), which
became effective on 8 December 2017 upon the registration of
the Court Order with the Registrar of Companies.
On 13 December 2017, AIB Group plc received High Court
approval for a capital reduction of approximately € 5 billion,
involving a reduction in the nominal value of AIB Group plc’s
ordinary shares, in order to create distributable reserves at the
level of the new holding company.
Total leverage exposures (transitional) reduced by € 5.6 billion in
the year mainly driven by a reduction in the following exposures:
– Net customer loans
– NAMA senior bonds
– AFS and derivative instruments
€ 0.6 billion
€ 1.8 billion
€ 3.2 billion
Dividends
The Board proposes to pay an ordinary dividend of € 326 million or
Finalisation of Basel III
The final text of the Basel III reforms were published in
December 2017 which was less severe than initial industry
expectations. The aim of the reforms is to enhance the reliability
and comparability of risk-weighted capital ratios. Due to the
Groups’ high RWA density it is likely to be less severely impacted
by RWA floors. The Group will continue to assess the impact of the
reforms as and when they are applied to European law and
€ 0.12 per share from full year 2017 profits. This is subject to the
regulations.
approval of shareholders at the Annual General Meeting in April
2018.
The Group is actively monitoring the advancement in regulatory
frameworks and assessing potential capital impacts to ensure
that the Group maintains a strong capital position.
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IFRS 9
IFRS 9 is effective from 1 January 2018 and replaces current
impairment rules. The estimated possible impact of implementing
IFRS 9, including the impact on RWA and regulatory deductions,
would reduce the Group’s fully loaded CET1 ratio by 0.7% or an
expected CET1 ratio reduction from 17.5% to 16.8%.
The Group intends to apply transitional arrangements for
mitigating the impact of the introduction of IFRS 9 on own funds as
per Regulation (EU) 2017/2395 of the European Parliament and of
the Council. After applying IFRS 9 transitional arrangements, the
expected transitional CET1 ratio would reduce from 20.8% to
20.6%.
Minimum Requirement for Own Funds and Eligible
Liabilities (“MREL”)
The Group continues to work towards its MREL target ensuring
that there are sufficient subordinated instruments to implement
the Group’s preferred resolution strategy. The indicative MREL
target is 29.05% with MREL eligible issuance expected to be
in the range of € 3 billion to € 5 billion. The Group continues to
monitor the developments in MREL legislation.
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Page 56
Business review - 2. Capital
Ratings
AIB is currently engaging with the rating agencies to obtain a
rating for AIB Group plc. In relation to Allied Irish Banks, p.l.c. the
following ratings are applicable.
Moody’s upgraded the long term rating in June 2017, by one notch
to Baa2 (investment grade) with stable outlook. According to
Moody’s, this rating upgrade reflects a range of positive factors,
including further reduction in non-performing loans, improved
capital ratios and achievement of stable core profitability.
S&P upgraded the long term rating in January 2017, by one notch
to BBB- (investment grade) with a stable outlook. This rating action
by S&P reflects their view that economic risks have decreased for
Irish banks due to economic growth, the sustained recovery in
property prices and reducing unemployment. S&P affirmed the
long term rating in December 2017 at BBB- and changed the
outlook to positive.
Fitch upgraded the long term rating by one notch in November
2017, to BBB- (investment grade) with a positive outlook.
According to Fitch, the upgrade reflects continued improvements
in asset quality, a longer record of stable profitability and
strengthened capitalisation.
Long-term ratings
Long-term
Outlook
Investment grade
31 December 2017
Moody's
Baa2
Stable
(cid:1)(cid:1)
S&P
BBB-
Fitch
BBB-
Positive
(cid:1)(cid:1)
Positive
(cid:1)(cid:1)
Long-term ratings
Long-term
Outlook
Investment grade
Moody's
Baa3
Positive
(cid:1)(cid:1)
31 December 2016
S&P
BB+
Fitch
BB+
Positive
Positive
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Page 57
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
Financial risks:
(a) Market risk
(b) Pension risk
Operational risk
Regulatory compliance risk including conduct risk
People and culture risk
3.10
Business model risk
3.11
Model risk
Page
58
69
69
69
70
72
137
151
152
164
165
173
174
175
176
177
178
(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 which have been identified through the Material Risk Assessment process carried
out by the Group. The Group has implemented comprehensive risk management strategies in seeking to manage these risks. Further
details on the overall governance and organisational framework through which the Group manages and seeks to manage and mitigate
risk, are provided in ‘Risk management – 2. Framework’. More detailed summary disclosures in respect of the Group’s material risks are
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:
– Macroeconomic and geopolitical risks;
– Regulatory and legal risks; and
– Risks relating to business operations, governance and internal control systems.
Page 19 of this Report provides a summary of the linkages between the ‘Principal risks and uncertainties’ (set out below) to the Group’s
four Strategic Pillars and to its Material risks.
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.
Macroeconomic and geopolitical risk
The Group’s business may be adversely affected by any
deterioration in the Irish or UK economy or in global or
relevant regional economic conditions.
The Group’s business activities are almost entirely based in the
Expectations regarding geopolitical events and their impact on
the global economy remain uncertain in both the short and
medium term.
Examples of specific sources of uncertainty include:
– The existence of significant anti-austerity sentiment in certain
Irish and UK markets. A deterioration in the performance of the
eurozone countries;
Irish economy or in the European Union (EU), the United
– Conflicts in the Middle East and ongoing political tensions in
Kingdom (UK) and/or other relevant economies could adversely
North Korea;
affect the Group’s overall financial condition and performance.
– The UK’s continuing negotiations to withdraw from the EU;
Such a deterioration could result in reductions in business
– Continued political instability and deadlock in Northern Ireland
activity, lower demand for the Group’s products and services,
having an adverse impact on economic conditions in the
reduced availability of credit, increased funding costs, and
region; and
decreased asset values.
– The US administration’s policies, such as trade protectionism,
travel bans and taxation.
Deterioration in the economic and market conditions in which the
Group operates could negatively impact on the Group's income
The aforementioned geopolitical developments as well as any
and level of loan impairments and put additional pressure on the
further developments could adversely affect global economic
Group to more aggressively manage its cost base. This could
growth, heighten trading tensions and disrupt markets, which
have negative consequences for the Group to the extent that
could in turn have a material adverse effect on the Group’s
strategic investments are de-scoped or de-prioritised, and could
business, financial condition, results of operations and prospects.
increase operational risk. Market conditions are also impacted by
the competitive environment in which the Group operates.
The UK’s exit from the EU could lead to a deterioration in
Any deterioration in the UK economy, whether caused by the
which could adversely affect the Group’s business,
market and economic conditions in the UK and Ireland,
UK’s exit from the EU or otherwise, could also have an impact on
the Group’s business in the UK.
financial condition, results of operations and prospects.
Although the overall impact of the UK’s withdrawal from the EU
remains uncertain, and may remain uncertain for some time, it is
Geopolitical developments, particularly in Europe and the
expected to have a negative effect on Ireland’s GDP growth over
United States, could have repercussions that could have a
the medium term, with the UK’s future trading relationship with
negative impact on global economic growth, disrupt
the EU post-Brexit being the key consideration in this regard.
markets, and adversely affect the Group.
Geopolitical developments in recent years have given rise to
significant market volatility and, in certain instances, have had an
adverse impact on economic growth and performance globally.
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The legal and regulatory position of the Group’s operations in the
Trading book risks predominantly result from supporting client
UK may also become uncertain. If UK regulatory capital rules
businesses with small residual discretionary positions
diverge from those of the EU as a result of future changes in EU
remaining. Credit valuation adjustments (CVA) and funding
law which are not mirrored by the UK or vice versa, the Group’s
valuation adjustments (FVA) to derivative valuations arising from
regulatory burden could increase, which would likely increase
customer activity potentially have the largest trading book
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compliance costs. Depending on the nature of the agreement
derived impact on earnings.
reached between the UK and the EU on migration and
immigration (if any), the UK’s exit from the EU could also result in
Changes in foreign exchange rates, particularly the euro-sterling
restrictions on the mobility of personnel, and could create
rate, affect the value of assets and liabilities denominated in
difficulties for the Group in recruiting and retaining qualified
foreign currency and the reported earnings of the Group’s non-
employees, both in the UK and Ireland. In addition, financial
Irish subsidiaries. Any failure to manage market risks to which
institutions and other financial operations currently based in the
the Group is exposed could have a material adverse effect on its
UK may seek to relocate some operations to Ireland. This may
business, financial conditions and prospects.
result in heightened competition for suitably qualified employees,
which could adversely affect the Group’s ability to attract and
The Group’s market risk management operates under a Board
retain employees. Accordingly, the UK exiting the EU could have
approved framework and policy. The Group’s Asset and Liability
a material adverse effect on the Group’s business, financial
Committee (ALCo) reviews the Group’s market risk position and
condition, results of operations and prospects.
makes decisions on the management of the Group’s assets and
liabilities. The Group’s Treasury function actively manages
The mitigating actions for the previous three macroeconomic
market risk – proposing and executing market risk strategy and
and geopolitical risk factors are that the Group closely monitors
managing market risk on a day to day basis. The Group’s
global activities and developments, particularly in the UK, the
Capital and Liquidity function is responsible for making strategic
EU and the eurozone. Furthermore, the Group's stress testing
asset and liability management recommendations to ALCo.
and integrated planning frameworks evaluate its risk profile
The Group’s Financial Risk function provides second line
under a range of scenarios. The most severe systemic risks,
assurance on market risk, defining the market risk control
together with their associated risk mitigants are evaluated as
framework and monitoring adherence to this framework.
part of the Internal Capital Adequacy Assessment Process
The Group’s Internal Audit function provides third line assurance
(“ICAAP”).
on market risk.
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The Group faces risks associated with the level of, and
changes in, interest rates, as well as certain other market
risks.
The following market risks arise in the normal course of the
Group's banking business; interest rate risk, credit spread risk
(including sovereign credit spread risk), foreign exchange rate
risk, equity risk and inflation risk. Further details on market risk
are provided in section 3.6 of this report.
The Group's earnings are exposed to interest rate risk, including
basis risk, i.e. an imperfect correlation in the adjustment of the
rates earned and paid on different products with otherwise
similar repricing characteristics. The persistence of exceptionally
low interest rates for an extended period can adversely impact
the Group’s earnings through a compression of net interest
margin. Widening credit spreads can adversely impact the value
of the Group’s available for sale bond positions.
Interest rates also affect the affordability of the Group’s products
to customers. A rise in interest rates, without sufficient
improvements in levels of customers’ earnings, could lead to an
increase in default or re-default rates among customers with
variable rate obligations.
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Risk management – 1. Principal risks and uncertainties
Regulatory and legal risks
The Bank Recovery and Resolution Directive (“BRRD”) and
the Single Resolution Mechanish (“SRM”) Regulation
provide for resolution tools that may have a material
new regulation. Furthermore, the laws and regulations to which
the Group are already subject could change as a result of
changes in interpretation or practice by courts, regulators or
other authorities.
adverse effect on the Group.
In February 2017, the Group announced that it had been notified
The Group is incorporated and has its head office in Ireland,
and is authorised as a credit institution in Ireland by the ECB.
by the Single Resolution Board (“SRB”) that the preferred
The Group has exercised its EU “passport” rights to provide
resolution strategy for the Group consists of a single point of
banking, treasury and corporate treasury services in the United
entry bail-in at the group holding company level, which would
Kingdom through the London branch of Allied Irish Banks, p.l.c.
require the establishment of a holding company directly above
The Group must comply with FCA Conduct of Business rules in
Allied Irish Banks, p.l.c. Under a single point of entry resolution
so far as they apply to its business carried out in the United
strategy with bail-in at Group holding company level, the holding
Kingdom. In the United States, the Group is subject to federal and
company would issue external equity and debt instruments that
state banking and securities law supervision and regulation as a
would be expected to meet the minimum requirements for own
result of the banking activities conducted by Allied Irish Banks,
funds and eligible liabilities (“MREL”) purposes, whereas
p.l.c.’s branch in New York.
customer accounts would continue to be held in regulated
operating companies below the holding company level.
Systemically important banks located in the eurozone, including
AIB Group plc (the holding company) was established and was
the Group, came under the direct supervision of, and are deemed
listed on the Irish and London Stock Exchanges in
to be authorised by, the ECB since the introduction on
December 2017.
Any further changes removing impediments to resolution, to be
4 November 2014 of the Single Supervisory Mechanism (“SSM”).
The main aims of the SSM are to ensure the safety and
soundness of the European banking system and to increase
implemented in respect of the SRM Regulation and the BRRD,
financial integration and stability in Europe.
may have an effect on the Group’s business, financial condition
or prospects. Depending on the specific nature of the
While the Central Bank of Ireland (‘Central Bank’) continues to
requirements and how they are enforced, such changes could
regulate the Group in relation to certain areas including
have a significant impact on the Group’s operations, structure,
consumer protection in Ireland, the ECB with support from the
costs and/or capital requirements.
Central Bank has primary responsibility for the prudential
supervision of the Group.
The Group continues to actively engage as the SRB develops its
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, including monetary damages, fines or other
penalties, regulatory restrictions, civil litigation, criminal
prosecution and/or reputational damage.
The legal and regulatory landscape in which the Group operates
The Group faces risks associated with an uncertain and rapidly
evolving prudential regulatory environment, pursuant to which it
is required, among other things, to maintain adequate capital
resources and to satisfy specified capital ratios at all times.
The Group’s borrowing costs and capital requirements could be
affected by prudential regulatory developments, including Capital
Requirements Directive IV (“CRD IV”) and, potentially, the
CRD V/BRRD2 Proposals, which include legislative proposals
for amendments to the Capital Requirements Regulation (“CRR”)
is constantly evolving, and the burden of compliance with laws
and CRD IV.
and regulations is increasing. As new laws or regulatory
schemes are introduced, the Group may be required to invest
In March 2017, the ECB published guidance to banks subject to
significant resources in order to comply with the new legislation
its supervision on non-performing loans. The ECB’s objective in
or regulations. For example, the introduction of Payment
issuing the guidance is to drive strategic and operational focus
Services Directive 2 (“PSD2”) will result in the Group being
on the reduction of non-performing loans, together with further
required to introduce significant changes to its systems and
harmonisation and common definitions of non-performing loans
processes in order to ensure compliance, while the
and forbearance measures. Non-compliance with the guidance
implementation of International Financial Reporting Standards 9
may trigger supervisory measures that are not further specified in
(IFRS 9) requires investment in developing an IFRS 9 compliant
the guidance.
accounting system and models, as well as increased ongoing
compliance costs. The General Data Protection Regulation
Thus, the Group is required to design and implement policies
(GDPR) will take effect from 25 May 2018, and will replace the
that ensure compliance with legislation promulgated by the FCA
Data Protection Act (“DPA”) as the primary legislation governing
and the PRA in the United Kingdom and the relevant regulatory
the Group’s use of customer personal data, and will require
authorities in the United States. This may result in additional
significant investment by the Group in order to comply with this
compliance costs and require increased management attention,
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which may divert focus from other areas of its business. Adverse
technical capabilities. In recent years, enforcement of these
regulatory action or adverse judgements in litigation could result
laws and regulations against financial institutions has become
in a monetary fine or penalty, adverse monetary judgement or
more intrusive, resulting in several landmark fines against
settlement, and/or restrictions or limitations on the Group’s
financial institutions. In addition, the Group cannot predict the
operations, or could result in a material adverse effect on the
nature, scope or effect of future regulatory requirements to
Group’s reputation.
which it might be subject or the way existing laws might be
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administered or interpreted.
There is also a risk that pressures from the media, consumer
groups and/or politicians could influence the agenda of the ECB,
the Central Bank, the FCA or the PRA. For instance, a wide-
The 4th EU Anti-Money Laundering Directive (“MLD4”)
emphasises a ‘‘risk-based approach’’ to AML and CTF and
ranging review of competition within the Irish banking sector has
imposes obligations on Irish incorporated bodies to take
been commenced by the Competition and Consumer Protection
measures to compile information on beneficial ownership.
Commission (“CCPC”) as part of the current programme for the
In addition to this, the AML/CTF regulatory landscape is
Government (a similar review having been completed on the UK
constantly changing, with a series of proposed further
banking sector in 2016). As part of such a review, the Group may
amendments to MLD4 arising from events such as terrorist
be required to modify its business and the pricing of its products
attacks in Europe and the leaking of papers containing highly
to satisfy the regulatory requirements arising from the review.
sensitive information, as well as from a desire to align
European AML/CTF laws with recommendations from the
The Group may settle litigation or regulatory proceedings prior to
Financial Action Task Force.
a final judgment or determination of liability in order to avoid the
cost, management efforts or negative business, regulatory or
reputational consequences of continuing to contest liability, even
when the Group believes that it has no liability or when the
The combined impact of these changes is the 5th EU Anti-
Money Laundering Directive (“MLD5”), which was agreed by the
EU Council and Parliament in December 2017. This is expected
potential consequences of failing to prevail would be
to come into force in each member state by mid-2019.
disproportionate to the costs of settlement. Furthermore, the
The Group will need to continue to monitor and reflect the
Group may, for similar reasons, reimburse counterparties for
changes under MLD4 and MLD5 in its own policies, procedure
their losses even in situations where the Group does not believe
and practices, and to update its framework to take account of
that it is legally compelled to do so.
the risk-based approach and the specific manner in which these
requirements are transposed into national law by the
The laws and regulations to which the Group is subject may
transposing legislation in Ireland and the UK.
change, including as a result of changes in interpretation or
practice by courts, regulators or other authorities, resulting in
Although the Group has policies and procedures that it believes
higher compliance costs and resource commitments, and/or a
are sufficient to comply with applicable AML/CTF,
failure by the Group to implement the necessary changes to its
anti-corruption and sanctions rules and regulations, it cannot
business within the time period specified.
guarantee that such policies and procedures will completely
prevent situations of money laundering, terrorist financing or
The Group adopts a systematic approach to the identification,
corruption, including actions by the Group’s employees, agents,
assessment, transposition, control and monitoring of new or
third-party suppliers or other related persons for which the
changing laws and regulatory requirements. Once
Group might be held responsible. Any such events may have
implemented, a compliance monitoring team tests the
severe consequences, including litigation, sanctions, fines and
adequacy of, and adherence to, the control environment.
reputational consequences, which could have a material
The Group is subject to anti-money laundering and
terrorist financing, anti-corruption and sanctions
adverse effect on the Group’s business, financial condition,
results of operations and prospects.
regulations, and if it fails to comply with these regulations,
The Group has established robust control frameworks to identify
it may face administrative sanctions, criminal penalties
and comply with the AML/CTF, sanctions and anti-bribery laws
and/or reputational damage.
The Group is subject to laws aimed at preventing money
that apply to all of its business operations. Key aspects include
comprehensive Group policies and standards, detailed customer
laundering, anti-corruption and the financing of terrorism.
on-boarding and ongoing due diligence requirements, ongoing
Monitoring compliance with anti-money laundering (“AML”),
base and payments against relevant official sanctions lists,
counter-terrorist financing (“CTF”) and anti-corruption and
together with escalation protocols and staff training programmes.
transaction monitoring, and automated screening of the customer
sanctions rules can put a significant financial burden on banks
and other financial institutions, and requires significant
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Risk management – 1. Principal risks and uncertainties
The Group’s financial results may be negatively affected by
recognition of resources for taxation purposes has come under
changes to, or the application of, accounting standards.
The Group reports its results of operations and financial position
considerable political scrutiny recently. The Organisation for
Economic Co-Operation and Development (“OECD”), with the
in accordance with International Financial Reporting Standards
support of the G-20, has embarked on a project to address base
(“IFRS”). Changes to IFRS or interpretations thereof may cause
erosion and profits shifting (“BEPS”) by multi-national
the Group’s future reported results of operations and financial
companies, which is focused on combatting base erosion using
position to differ from current expectations, or historical results to
arrangements to generate income that is not subject to
differ from those previously reported due to the adoption of
meaningful taxation in any jurisdiction, as well as profit shifting
accounting standards on a retrospective basis. Such changes
from high tax jurisdictions to low tax jurisdictions.
may also affect the Group’s regulatory capital and ratios by
requiring the recognition of additional provisions for loss on
In August 2016, the European Court of Justice ruled that Apple
certain assets.
Inc. had received € 13 billion of illegal state aid because of its
taxation arrangements with Ireland, which permitted it to pay
The Group monitors potential accounting changes and, when
substantially less tax than it would have been required to pay
these are finalised, it determines their potential impact and
had its profits been booked in another jurisdiction. Ireland and
discloses significant future changes in its financial statements.
Apple are appealing that ruling in the European Court of Justice.
The Group has adopted an IFRS 9 methodology from January
If these types of arrangements continue to be challenged, this
2018. This will impact the Group’s reported results of operations,
could result in companies relocating from Ireland or deciding to
financial position and regulatory capital in the future. For example,
invest in other jurisdictions, which could have an adverse impact
the replacement of IAS 39 with IFRS 9 will require the Group to
on the Irish economy.
move from an incurred loss model to an expected loss model
requiring it to recognise not only credit losses that have already
occurred, but also losses that are expected to occur in the future,
The Group assesses this risk by undertaking sensitivity analysis
in its financial planning process, and monitoring financial
as is the case for the banking industry as a whole.
performance against the Group’s financial plan on a regular
The Group mitigates this risk by monitoring developments with
basis.
regard to impending accounting standards, anticipates business
Irish legislation and regulations in relation to mortgages,
impacts, and takes appropriate actions where applicable. The
as well as judicial procedures for the enforcement of
Group also mitigates this risk by holding capital resources in
mortgages, custom, practice and interpretation of such
excess of the minimum regulatory and internal requirements to
legislation, regulations and procedures, may result in higher
act as a buffer against volatility and unexpected events.
levels of default by the Group’s customers, delays in the
The Group may be adversely affected by the budgetary and
taxation policies of the Irish, UK and other governments
through changes in taxation law and policy.
The future budgetary and taxation policy of Ireland and other
Group’s recoveries in its mortgage portfolio, and increased
impairments.
Legislation and regulations introduced in 2013 to the Irish
mortgage market has had an effect on the Group’s customers’
attitudes towards their debt obligations, and hence their
measures adopted by the Irish Government or the UK
interactions with the Group in relation to their mortgages.
Government may have an adverse impact on borrowers’ ability to
repay their loans and, as a result, on the Group’s business.
Regulations such as the Personal Insolvency Act and the Code
of Conduct on Mortgages Arrears (“CCMA”) may result in
Furthermore, some measures may directly impact the financial
changes in customers’ attitudes, where they may be more likely
performance of the Group through the imposition of measures
to default even when they have sufficient resources to continue
such as the bank levy introduced by the Irish Government in
making payments on their mortgages. This could result in delays
Budget 2014, which during Budget 2016, the Irish Government
in the Group’s recoveries in respect of its mortgage portfolio, and
announced would be extended to 2021.
in increased impairments, which could have a material adverse
effect on its business, results of operations, financial condition
In addition, the UK Government introduced legislation restricting
and prospects.
the proportion of a bank’s taxable profit that can be offset by
certain carried forward losses to 50 per cent, effective from
During 2017, legislation was introduced in Dáil Éireann, entitled
1 April 2015. This was subsequently further reduced to 25 per
the ‘Keeping People in their Homes Bill 2017’ and ‘Mortgage
cent, effective 1 April 2016. The impact associated with these
Arrears Resolution (Family Home) Bill 2017’.
and any future changes in budgetary and taxation policies
globally could have a material adverse effect on the Group’s
financial position.In addition, multi-national corporations’
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As a result, the Government may seek to influence how credit
damage and may be subject to challenges by customers or
institutions set interest rates on mortgages, may amend the
competitors, or sanctions, fines or other actions imposed by
Personal Insolvency Act to reduce the entitlements currently
regulatory authorities. The Group’s practices may also be
afforded to mortgage holders thereunder, or may enact other
challenged under current regulations and standards. There is
legislation or introduce further regulation that affects the rights of
also a risk that pressures from the media, consumer groups
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lenders in other ways that could have a material adverse effect
and/or politicians could influence the agenda of the Central Bank
on the Group’s business, financial condition and prospects.
and the FCA.
Loan to Value (“LTV”)/Loan to Income (“LTI”) related regulatory
In addition, the Group may be subject to allegations of mis-
restrictions on residential mortgage lending could restrict the
selling of financial products, including as a result of having sales
Group’s mortgage lending activities and balance sheet growth
practices and/or reward structures in place that are subsequently
generally. The Group is required to restrict lending above 3.5
determined to have been inappropriate. This may result in
times LTI to no more than 20 per cent (for first time buyers) of the
adverse regulatory action (including significant fines) or
aggregate value of the Private Dwelling House (“PDH”) loans
requirements to amend sales processes, withdraw products or
that the Group makes in the relevant period. The restriction is
provide restitution to affected customers, any or all of which
10% for second time and subsequent buyers.
could result in the incurrence of significant costs, may require
provisions to be recorded in the financial statements, and could
These restrictions could adversely affect the level of new
adversely impact future revenues from affected products.
mortgage lending the Group can undertake and the costs of
administering its residential mortgage lending, and hence could
Changes in laws or regulations may vastly change the
have a material adverse effect on its business, results of
requirements applicable to the Group in a short period of time
operations, financial condition and prospects.
and/or without transitional arrangements. If the Group is unable
to manage these risks, its business, results of operations,
The Group’s loan book (in particular, its residential mortgage
financial condition and prospects could be materially adversely
book) could become subject to further supervision and scrutiny
affected.
by the Government, the Central Bank and the CCPC, which
could result in regulation and control of the Group’s loan book
The Group has a Conduct Risk Framework, aligned with the
and therefore result in a reduction in the Group’s level of lending,
Group Strategy, which is embedded in the organisation and
interest income and net interest margin and/or increased
provides oversight of conduct risks at Leadership Team and
operational costs.
Board level by way of two key fora:
– The Group Conduct Committee: provides the Group
The Group actively engages with all relevant industry and
Leadership team oversight of conduct through promoting and
government stakeholders, highlighting, as appropriate, the
supporting a ‘customer first’ culture, and also oversees the
intended and unintended consequences of any proposed
key conduct Risk Appetite metrics for Complaints
regulatory or legislative changes, including its impacts on
Management and Product Reviews.
customers, the Group and the industry as a whole.
– The Group Product and Proposition Committee: focus is
exclusively in product oversight and management, including
The Group is subject to conduct risk, including changes in
overseeing a rolling programme of product reviews.
laws, regulations and practices of relevant authorities and
the risk that its practices may be 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 defines
as the risk that inappropriate actions or inactions cause poor or
unfair customer outcomes or market instability. Certain aspects
of the Group’s business may be determined by regulators in
various jurisdictions or by courts not to have been conducted in
accordance with applicable local or, potentially, overseas laws
and regulations, or in a fair and reasonable manner as
determined by the local ombudsman. If the Group fails to comply
with any relevant laws or regulations, it may suffer reputational
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Risk management – 1. Principal risks and uncertainties
Risks relating to business operations,
governance and internal control systems
The Group operates in competitive markets in Ireland and the
UK, with market share and associated profits depending on a
combination of factors, including product range, quality and
The Group is subject to credit risks in respect of customers
pricing, reputation, brand performance, and relative sales and
and counterparties, including risks arising due to
distribution strength, among others.
concentration of exposures across its loan book, and any
failure to manage these risks effectively could have a
Medium term competitive risks include:
material adverse effect on its business, financial condition,
– more intense price-based competition from incumbent
results of operations and prospects.
Risks arising from changes in credit quality and the recoverability
of loans and other amounts due from customers and
counterparties are inherent in a wide range of the Group’s
businesses. In addition to the credit exposures arising from loans
to individuals, Small and Medium Enterprises (“SME’s”) and
corporates, the Group also has exposure to credit risk arising
from loans to financial institutions, its trading portfolio, financial
investments available for sale, 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
providers;
an increase in the use of intermediaries in the mortgage
market;
the emergence of new, lower-cost competitors in the Irish
mortgage market;
sustained disintermediation of traditional banks, including the
Group, from specialist and generalist product lines;
the internationalisation of supply and demand for
low-complexity products such as deposits;
the successful establishment of virtual banks; and
the introduction of PSD2, which may enable the emergence
–
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market, both because of its mortgage lending activities and its
of payment aggregators, which could in turn significantly
property and construction loan book.
reduce the relevance of traditional bank platforms and
weaken brand relationships.
Accordingly, any development that adversely affects the Irish
property market will have a disproportionate impact on the
In addition, the Central Bank is focused on the promotion of
Group. If the Group is unable to manage its credit risk effectively,
higher levels of competitive intensity in the banking market, in
its business, results of operations, financial condition and
common with regulators in other European jurisdictions.
prospects could be materially adversely affected. The Group’s
Mortgage interest rates in Ireland are higher than eurozone
monitoring of its loan portfolio is dependent on the effectiveness,
norms and this, together with the low incidence of switching
and efficient operation of its processes, including credit grading
mortgage providers, is an area of focus for the Central Bank.
and scoring systems, and there is a risk that these systems and
The entry of bank and non-bank competitors into the Group's
processes may not be effective in evaluating credit quality.
markets may put additional pressure on the Group's income
streams and, consequently, have an adverse impact on its
The Group’s credit risk management operates under a Board
financial performance.
approved framework and suite of policies. The Group’s Credit
Committee (“GCC”) monitors credit risk. The Group’s Credit Risk
The Group mitigates this risk by monitoring its performance
function provides second-line assurance, defining the credit risk
against its strategic objectives on a regular basis, by periodically
framework and monitoring compliance with this framework.
reviewing the competitive landscape, and by benchmarking its
The Group internal Audit function provides third line assurance
performance to peers.
on credit risk.
If a poor or inappropriate culture develops across the
The Group’s strategy may not be optimal and/or not
Group’s business, this may adversely impact its
successfully implemented.
The Group has identified several strategic objectives for its
business. There can be no assurance that the Group’s strategy is
performance and impede the achievement of its
strategic goals.
The Group must continuously develop and promote an
the optimal strategy for delivering returns to shareholders.
appropriate culture that drives and influences the activities of its
business and staff and its dealings with customers in relation to
The various elements of the Group’s strategy may be individually
managing and taking risks and ensuring that risk considerations
unnecessary or collectively incomplete. The Group’s strategy
continue to play a key role in business decisions. It is senior
may also prove to be based on flawed assumptions regarding
management’s responsibility to ensure that the appropriate
the pace and direction of future change across the banking
culture is embedded throughout the organisation. As was
sector.
demonstrated by many banks during the financial crisis, if an
inappropriate culture develops, then a strategy or course of
Finally, the Group may not be successful in implementing its
action could be adopted that results in poor customer outcomes.
strategy in a cost effective manner. The Group’s business,
If the Group is unable to maintain an appropriate culture, this
results of operations, financial condition and prospects could be
could have a negative impact on the Group’s business, result of
materially adversely affected if any or all of these strategy-related
operations, financial condition and prospects.
risks were to materialise.
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The Group promotes, amongst all staff, the principle of ‘doing the
The Group could also be negatively affected by an actual or
right thing’. It monitors the evolving culture through a staff
perceived deterioration in the soundness of other financial
engagement programme, iConnect, and through its performance
institutions and counterparties. This risk is sometimes referred to
management system. The performance management system
as “systemic risk” and may adversely affect financial
facilitates quality discussions with staff on ‘what’ and ‘how’ they
intermediaries, such as clearing agencies, industry payment
will achieve their objectives. As a result, initiatives continue to be
systems, clearing houses, banks, securities firms and exchanges
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undertaken at team level to improve the way we do things and
with whom the Group interacts on a daily basis.
from which we continuously identify opportunities to evolve our
culture at Group level as a competitive advantage. As further
Downgrades to the Group’s, Ireland’s sovereign or other Irish
support, the Group has implemented a Code of Conduct
bank credit ratings or outlook could impair the Group’s access to
supported by a range of employee policies, including ‘Conflicts of
private sector funding, trigger additional collateral requirements,
Interest’ and ‘Speak up’.
and weaken the Group‘s financial position.
Damage to the Group’s brand or reputation could adversely
A stable customer deposit base has allowed the Group to reduce
affect its relationships with customers, staff, shareholders
its wholesale funding requirements. This, in turn, has facilitated
and regulators.
Management aims to ensure that the Group’s brands, which
an increase in the Group’s unencumbered high quality liquid
assets. The Group has also identified certain management and
include the AIB and EBS brands in Ireland, the AIB GB brand in
mitigating actions which could be considered on the occurrence
Great Britain and the First Trust Bank brand in Northern Ireland,
of a liquidity stress event. However, in the unlikely event that the
are at the heart of its customers’ financial lives by being useful,
Group exhausted these sources of liquidity, it would be
informative, and easy to use, and by providing an exceptional
necessary to seek alternative sources of funding from monetary
customer experience. The Group’s relationships with its
stakeholders, including its customers, staff and regulators, could
authorities.
be adversely affected by any circumstance that cause real or
The Group’s funding and liquidity risk management operates
perceived damage to its brands or reputation. In particular, any
under a Board-approved framework and policy. The Group’s
regulatory investigations, inquiries, litigation, actual or perceived
ALCo reviews the Group’s funding and liquidity risk position and
misconduct or poor market practice in relation to customer-
makes decisions on the management of the Group’s assets and
related issues could damage the Group’s brands and/or
liabilities. The Group’s Treasury and Capital and Liquidity
reputation. Any damage to the Group’s brands and/or reputation
functions actively manage funding and liquidity risk – proposing
could have a material adverse effect on the Group’s business,
and executing funding strategy and managing liquidity risk on a
results of operations, financial condition or prospects.
day- to-day basis. The adequacy of the Group’s funding and
liquidity is evaluated under both forecast and stress conditions as
The Group monitors the ‘health’ of its brand and reputation by
part of the Internal Liquidity Adequacy Assessment Process
regularly seeking feedback from its customers and other
(“ILAAP”). The ILAAP process includes the identification and
stakeholders, and by tracking metrics in relation to these, e.g. the
evaluation of potential liquidity mitigants.
Net Promoter Score (“NPS”) gauges the loyalty of customer
relationships. The Group maintains open communication with all
The Group’s Financial Risk function provides second line
regulatory bodies.
assurance on funding and liquidity risk, defining the funding and
liquidity control framework, and monitoring adherence to this
Constraints on the Group’s access to funding, including a
framework. The Group’s Internal Audit function provides third-
loss of confidence by depositors or curtailed access to
line assurance on funding and liquidity risk.
wholesale funding markets, may result in the Group being
required to seek alternative sources of funding.
Conditions may arise which would constrain funding or liquidity
The Group’s risk management systems, processes,
guidelines and policies may prove inadequate for the risks
opportunities for the Group over the longer term. Currently, the
faced by its business, and any failure to properly assess or
Group funds its lending activities primarily from customer
manage the risks which it faces could cause harm to the
accounts. Consequently, a loss of confidence by depositors in the
Group, the Irish banking industry or the Irish economy, could
Group’s business.
The Group is exposed to a number of material risks that it
ultimately lead to a reduction in the availability and/or an increase
manages through its Risk Management Framework. Although
in the cost of funding or liquidity resources. Concerns around
the Group invests substantially in its risk management strategies
debt sustainability and sovereign downgrades in the eurozone
and techniques, there is a risk that these could fail to fully
could impede access to wholesale funding markets, adversely
mitigate these risks in some circumstances.
impacting the ability of the Group to issue debt securities or
regulatory capital instruments to the market. Execution risk to the
MREL issuance plan may arise, as AIB Group MREL eligible
issuance products have limited precedence, and this may result
in a lack of depth to the market and minimal investor demand.
At the same time, competitor banks across Europe will be
following a similar strategy.
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Risk management – 1. Principal risks and uncertainties
Furthermore, Senior Management are required to make complex
The Group mitigates this risk through the review and monitoring
judgements, and there is a risk that decisions made by Senior
of the design and operating effectiveness of the Model Risk
Management may not be appropriate or yield the results
Framework and supporting policies.
expected, or that Senior Management may be unable to
recognise emerging risks in order to take appropriate action in a
The Group requires approval from the ECB in order to implement
timely manner.
new IRB models or to change existing approved IRB models. It is
also subject to reviews and inspections from the ECB and other
The Group mitigates this risk by regularly reviewing the design
regulatory bodies in relation to the models, such as the Targeted
and operating effectiveness of its risk management policies and
Review of Internal Models (“TRIM”), a process being undertaken
methodologies. These reviews are supplemented in some
by the ECB in systemically important banks subject to its
instances by external review and validation.
supervision from 2017. TRIM is being undertaken to increase
harmonisation in the approaches to internal models used by
The Group uses models across many, though not all, of its
banks across the EU.
activities, and if these models prove to be inaccurate, its
management of risk may be ineffective or compromised,
The Group has a high level of criticised loans on its
and/or the value of its financial assets and liabilities may be
statement of financial position, and there can be no
overestimated or underestimated.
The Group uses models across many, though not all, of its
assurance that it will continue to be successful in reducing
the level of these loans. The management of criticised loans
activities, including, but not limited to, capital management, credit
also gives rise to risks, including vulnerability to challenges
grading, provisioning, valuations, liquidity, pricing, and stress
by customers and/or third parties, re-default, changes in the
testing. The Group also uses financial models to determine the
regulatory regime, further losses, costs, and the diversion of
fair value of 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
management attention and other resources from the Group’s
business.
The Group has a high level of criticised loans, which are defined
for sale in accordance with IFRS as adopted by the EU. Since
as loans requiring additional management attention over and
the Group uses risk measurement models based on historical
above that normally required for the loan type.
observations, there is a risk that it may underestimate or
overestimate exposure to various risks to the extent that future
Criticised loans include “watch”, “vulnerable” and “impaired”
market conditions deviate from historical experience.
loans. The Group has been proactive in managing its criticised
Furthermore, as a result of evolving regulatory requirements, the
loans, in particular through restructuring activities and the
importance of models across the Group’s business has been
Mortgage Arrears Resolution Process (“MARP”) that was
heightened, and their importance may continue to increase, in
introduced in order to comply with the Central Bank’s Code of
particular because of reforms introduced by the Basel Committee
Conduct on Mortgage Arrears (“CCMA”). The Group has reduced
on Banking Supervision, including Basel IV.
the level of criticised loans, but, there can be no assurance that
the Group will continue to be successful in reducing the level of
The Group’s credit models are subject to ongoing regulatory
its criticised loans.
reviews and inspections, which may give rise to additional capital
requirements, a replacement of Internal ratings-based (“IRB”)
The percentage of the Group’s loan portfolio which is impaired is
models for a standardised approach, or a reputational risk for
higher than the average of other European financial institutions
the Group.
and remains a main concern for the Group’s joint supervisory
team at the ECB and Central Bank in light of the implications for
CRD IV provides for the use of an IRB approach to credit risk.
the Group’s profitability, capital and senior management agenda.
Subject to certain minimum conditions and disclosure
requirements, banks that have received regulatory approval to
The monitoring of such loans can be time-consuming, and
use the IRB approach may rely on their own internal estimates or
typically requires case-by-case resolution, which may divert
risk components in determining the capital requirement for a
resources from other areas of the Group’s business.
given exposure.
If the Group’s models are not effective in estimating its exposure
affected by changes in the regulatory regime or changes in
The Group’s ability to manage criticised loans may be adversely
to various risks or determining the fair value of its financial assets
government policy.
and liabilities, or if its models prove to be inaccurate, its business,
financial condition, results of operations and prospects could be
In addition, for regulatory reporting purposes, the Group
materially adversely affected.
discloses details of its non-performing exposures, and this
includes a) loans and receivables to customers and b) off-
balance sheet commitments such as loan commitments and
financial guarantee contracts.
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The Group has extensive credit policies and strategies,
model evolves to meet customer demand and react to
implementation guidelines and monitoring structures in place to
competitive pressures. Additional change during 2018 will be
manage criticised loans and non-performing exposures.
driven by the implementation of the Group’s property
The Group regularly reviews these credit policies, as well as the
programme, with circa 2,300 employees moving to new locations
performance of criticised loans and non-performing exposures,
within Dublin – Central Park (Sandyford) and Molesworth Street.
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against financial plans.
The Group’s business is dependent on the accurate and
The Group faces operational risks – including people, cyber,
efficient processing and reporting of a high volume of complex
outsourcing, process and systems risks.
Operational risk is the risk arising from inadequate or failed
transactions across numerous and diverse products and
services. This is enabled by the high-performing information
internal processes, people and systems, or from external events.
technology (“IT”) and communications infrastructure on which
This includes legal risk, which is the potential for loss arising
the Group relies. Weaknesses or issues which may result in
from the uncertainty of legal proceedings and potential legal
these systems or processes not operating as expected could
proceedings, but excludes strategic and reputational risk.
have an adverse effect on the Group's results and on its ability
to deliver appropriate customer outcomes or to achieve its
The management of the Group's operational risks is central to
organisational objectives. This could include issues such as
the delivery of its strategic objectives. To support the
technical failures, human error, unauthorised access,
management of operational risks, the Group has a defined
cybercrime, natural hazards or disasters, or similarly disruptive
Operational Risk Framework, which sets out the principles, roles
events.
and responsibilities, governance arrangements and processes
for operational risk management across the Group. The
The Group is dependent on the performance of third-party
operational risk strategy of the Group is to adopt sound practices
in the identification, evaluation, mitigation, monitoring, assurance
service providers, and if these providers do not perform their
services or fail to provide services to the Group or renew their
and reporting of operational risks to ensure that they are within
licences with the Group, the Group’s business could be
the operational risk appetite of the Group.
disrupted and it could incur unforeseen costs.
Key Operational Risks
Currently, the Group considers an area of heightened risk to be
The Group seeks to ensure that procedures are in place to
effectively manage the relevant data protection obligations of its
people risk. People risk is the risk associated with being unable
employees and any third-party service providers, and also
to recruit and retain appropriately skilled staff to ensure the
continues to enhance security measures to help prevent
stability of the business in the long-term.
cybercrime. Notwithstanding such efforts, the Group is exposed
to the risk that personal customer data could be wrongfully lost,
Under the terms of the recapitalisation of the Group by the Irish
disclosed or stolen, as a result of human error or otherwise.
Government, the Group is required to comply with certain
executive pay and compensation arrangements, including a cap
The Group mitigates its operational risks by having detailed risk
on salaries as well as a ban on bonuses and similar incentive-
assessment and internal control requirements in relation to the
based compensation applicable to employees of Irish banks who
management of its key people, process and systems risk, and
have received financial support from the Irish Government. As a
through comprehensive and robust business continuity
result of these restrictions, and in the increasingly competitive
management arrangements. The Group continues to invest
markets in Ireland and the UK, the Group may not be able to
significantly in technology. Its IT transformation programmes are
attract, retain and remunerate highly skilled and qualified
aimed at delivering resilience, agility and a simple, efficient
personnel. The proposals set out by the Remuneration
operating model focused on improving the customer experience.
Committee in relation to a Deferred Annual Share Plan is a step
The Group has a defined Cyber Security Strategy in place,
towards helping to manage retention risk. Failure by the Group to
ensuring that the Group’s capabilities continue to secure the
staff its day-to-day operations appropriately, or to attract and
Group.
appropriately develop, motivate and retain highly skilled and
qualified personnel, could have an adverse effect on the Group’s
The Group maintains insurance policies to cover a number of
results, financial condition and prospects. In addition, employees
risk events. These include financial policies (comprehensive
have been affected by a number of developments in recent
crime/computer crime; professional indemnity/civil liability;
years, including significant headcount reductions, reductions in
employment practices liability; and directors’ and officers’
compensation and a significant level of change across the
liability) and a suite of general insurance policies to cover such
organisation, and these developments could give rise to
matters as property and business interruption, terrorism,
employee dissatisfaction and/or tensions with trade unions.
combined liability and personal accident. There can be no
assurance, however, that the level of insurance the Group
The Group’s employees are expected to continue to be affected
maintains is appropriate for the risks to its business or adequate
by change across the organisation, as the Group’s business
to cover all potential claims.
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Risk management – 1. Principal risks and uncertainties
The Group may have insufficient capital to meet increased
due to the risk that the estimated value of pension scheme
minimum regulatory requirements.
The Group is subject to minimum capital requirements as set out
liabilities may increase due to changes in actuarial assumptions.
in CRD IV and implemented under the SSM. As a result of these
Pension risk is monitored and controlled in line with the
requirements, banks in the EU have been and could continue to
requirements of the Group’s Pension Risk Framework. The
be required to increase the quantity and the quality of their
extent of the IAS 19 surplus or deficit is monitored on a monthly
regulatory capital. Given this regulatory context, and the levels
basis. In addition, the potential change in this value over a one
of uncertainty in the current economic environment, there is a
year time horizon is assessed on a monthly basis and is reported
possibility that the economic outturn over the Group's capital
versus a Group RAS watch trigger.
planning period may be materially worse than expected and/or
that losses on the Group’s credit portfolio may be above forecast
Deferred tax assets that are recognised by the Group may be
levels. Were such losses to be significantly greater than
affected by changes in tax legislation, the interpretation of
currently forecast, or capital requirements for other material risks
such legislation, or relevant practices. The Group is also
such as pension risk to increase significantly, there is a risk that
required under capital adequacy rules to deduct from its
the Group’s capital position could be eroded to the extent that it
CET1 the value of most of its deferred tax assets, which may
would have insufficient capital to meet its regulatory
requirements.
result in it being required to hold more capital.
As at 31 December 2017, the Group had € 2.7 billion of deferred
tax assets on its statement of financial position, substantially all
This risk is mitigated by evaluating the adequacy of the Group's
of which related to unused tax losses.
capital under both forecast and stress conditions as part of the
ICAAP. The Group ensures that, as part of its capital planning,
Changes in tax legislation or the interpretation of such legislation,
it maintains an appropriate buffer over the minimum regulatory
and internal capital requirements. The ICAAP process also
regulatory requirements, accounting standards or practices of
relevant authority, could adversely affect the basis for recognition
includes the identification and evaluation of potential capital
of the value of these losses. In the United Kingdom, for instance,
mitigants should this buffer come under threat.
legislation has been introduced to restrict the proportion of a
The Group faces the risk that the funding position of its
losses to 50 per cent, effective from 1 April 2015, resulting in a
defined benefit pension schemes will deteriorate, requiring it
decrease in the Group’s deferred tax asset for the year ended 31
to make additional contributions, adversely affecting its
December 2015. This was subsequently further reduced to 25
capital position.
The Group maintains a number of defined benefit pension
per cent, effective from 1 April 2016. This legislation has
adversely affected the value of the Group’s deferred tax assets in
bank’s taxable profit that can be offset by certain carried forward
schemes for certain current and former employees. These
relation to its UK operations.
defined benefit schemes were closed to future accruals from
31 December 2013. In relation to these schemes, the Group
If similar legislation were to be introduced in Ireland, this could
faces the risk that the funding position of the schemes will
have a further adverse impact on the value of the Group’s
deteriorate over the longer term. This may require the Group to
deferred tax assets, which could adversely affect the Group’s
make additional contributions, above what is already planned, to
business, results of operations, financial condition and prospects.
cover its pension obligations towards current and former
employees. Furthermore, pension deficits as reported are a
There is also a risk that the Group may not generate the future
deduction from capital under CRD IV. Accordingly, any increase
taxable profits in Ireland or in the UK necessary to support the
in the Group’s pension deficit may adversely affect its capital
current level of deferred tax assets.
position. There could also be a negative impact on industrial
relations if the funding level of the schemes were to deteriorate.
The capital adequacy rules under CRD IV also require the Group,
among other things, to deduct from its CET1 the value of most of
The Group received approval from the Pensions Authority in
its deferred tax assets, including all deferred tax assets arising
2013 in relation to a funding plan up to January 2018 with regard
from unused tax losses. This deduction from CET1 commenced
to the regulatory minimum funding standard (the MFS)
in 2015 and is to be phased in evenly over 10 years, although
requirements of the AIB Irish Pension Scheme. For the defined
this phasing may be subject to change.
benefit scheme in the UK, the Group established an asset-
backed funding vehicle to provide the required regulatory
Because of these rules, the Group may be required to hold more
funding. Nonetheless, a level of volatility associated with pension
capital in the transitional period.
funding remains, due to potential financial market fluctuations
and possible changes to pension and accounting regulations.
The Group monitors this risk by regularly reviewing the basis for
This volatility can be classified as market risk and actuarial risk.
recognition of its deferred tax assets. In addition, the Group
Market risk arises because the estimated market value of
excludes deferred tax assets, from the Group’s available capital
monitors and sets limits on its fully-loaded capital position, which
pension scheme assets may decline or their investment returns
resources.
may decrease due to market movements. Actuarial risk arises
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Risk management – 2. Framework
Introduction
The principal risks and uncertainties to which the Group is
assessments are also undertaken in response to specific
internal or external events. Reports on the Group’s risk profile
exposed are set out in the previous section. The governance and
and emerging risks are presented at each Executive Risk
organisation framework through which the Group manages and
Committee ("ERC") and Board Risk Committee ("BRC")
seeks to mitigate these risks is described below.
meeting. The ERC meets on a monthly basis.
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2.1 Risk management framework
The Group assumes a variety of risks in undertaking its business
2.3 Risk appetite
The Group’s risk appetite is defined as the amount and type of
activities. Risk is defined as any event that could damage the
risk that the Group is willing to accept or tolerate in order to
core earnings capacity of the Group, increase cash flow volatility,
deliver on its strategic and business objectives. The Group Risk
reduce capital, threaten its business reputation or viability, and/or
Appetite Statement (“RAS”) is a blend of qualitative statements
breach its regulatory or legal obligations. The Group has adopted
and quantitative limits and triggers linked to the Group's strategic
an enterprise risk management approach to identifying,
objectives.
assessing and managing risks. To support this approach, a
number of frameworks and policies approved by the Board (or
The Group RAS is reviewed and approved by the Board at least
Board delegation) are in place which set out the key principles,
annually and more often if required, in alignment with the
roles and responsibilities and governance arrangements through
business and financial planning process. The Group RAS is
which the Group’s material risks are managed and mitigated. The
cascaded down to the Group authorised bank subsidiaries and
core aspects of the Group's risk management approach are
significant business areas to ensure it is embedded throughout
described below.
the Group.
2.2 Risk identification and assessment
The Group uses a variety of approaches and methodologies to
While the Board approves the Group RAS, the Leadership Team
is accountable for ensuring that risks remain within appetite.
identify and assess its principal risks and uncertainties.
The Group’s risk profile is measured against its risk appetite and
A Material Risk Assessment (“MRA”) is undertaken on at least
adherence to the Group RAS is reported on a monthly basis to
an annual basis. The MRA identifies and assesses the most
the ERC and BRC. Should any breaches of Group RAS limits
serious material risks facing the Group in terms of their
arise, these, together with associated management action plans,
likelihood and impact. Other assessments of risk are
are escalated to the Board for review, and also reported to the
undertaken, as required, by business areas, focusing on the
Central Bank of Ireland (“CBI”)/Joint Supervisory Team ("JST"),
nature of the risk, the adequacy of the internal control
in line with the provisions of the revised Corporate Governance
environment, and whether additional management action is
Code.
required. Periodic risk
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Risk Governance Structure
Board of Directors
Board Risk
Committee
Board Audit
Committee
Remuneration
Committee
Nominations and
Corporate Governance
Committee
Sustainable
Business Advisory
Committee
Leadership Team
Group Conduct
Committee
Asset & Liability
Committee (ALCo)
Executive Risk
Committee
Group Disclosure
Committee
Market
Announcements
Committee
Arrears &
Restructuring
Priority Committee
Sustainable
Business Executive
Council
Product and
Proposition
Committee
Model Risk
Committee
Group
Credit
Committee
Operational
Risk
Committee
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Risk management – 2. Framework
2.3 Risk appetite (continued)
The Group RAS is built on the following overarching qualitative
statements:
2.4.2 Committees with risk management
responsibilities
The Board has delegated a number of risk governance
1. We have low appetite for income volatility and target steady,
responsibilities to various committees and key officers.
sustainable earnings to enable appropriate regular dividend
The diagram on the previous page summarises the current risk
payments;
committee structure of the Group.
2. We do not have an appetite for large market risk positions;
3. We accept the concentration risk arising from our focus on
The roles of the Board, the Board Audit Committee, the BRC, the
markets in Ireland and the UK. Within these markets we seek
Remuneration Committee and the Nominations and Corporate
to avoid excessive concentrations to sectors or single-names
Governance Committee are set out in the Governance and
and test repayment capacity in stress conditions;
Oversight – Corporate Governance report on pages 186 to 194.
4. We seek to attract and retain skilled staff and reward
The role of the Sustainable Business Advisory Committee
behaviour consistent with our brand values and code of
(“SBAC”) is set out on page 21 Sustainability, governance and
conduct;
risk.
5. We offer our customers transparent, consistent and fair
products and services, and always seek to deliver fair
The Leadership Team comprises the Senior Executive managers
customer outcomes;
of the Group who manage the strategic business risks of the
6. We seek to maintain the highest level of availability of key
Group. The team establishes the business strategy and risk
services for our customers;
appetite within which the Group operates.
7. We seek to comply with all relevant laws and regulations; our
business is underpinned by a strong control framework;
The role of the ERC is to foster risk governance within the
8. We hold capital in excess of regulatory requirements whilst
Group, to ensure that risks within the Group are appropriately
achieving returns on capital in line with stakeholder and
managed and controlled, and to evaluate the Group's risk
market expectations; and
appetite against the Group’s strategy. It is a sub-committee of the
9. We seek resilient, diversified funding, relying significantly on
Leadership Team chaired by the Chief Financial Officer (“CFO”),
retail deposits.
and its membership includes the CRO and Chief Operating
Officer (“COO”) and the heads of significant business areas.
Risk appetite is embedded within the Group in a number of ways,
including alignment with risk frameworks and policies, segment
The ERC's principal duties and responsibilities include reviewing
and subsidiary risk appetite statements, delegated authorities
the effectiveness of the Group’s risk frameworks and policies,
and limits, and new product approval processes. Extensive
monitoring and reviewing the Group’s risk profile, risk trends, risk
communication and the cascade of key aspects of the Group’s
concentrations and policy exceptions, and monitoring adherence
risk appetite framework, as relevant, serve to ensure that risk
to approved risk appetite and other limits. The ERC acts as a
appetite drives strategy and informs day-to-day decision-making.
parent body to both the Group Credit Committee (“GCC”) and the
Operational Risk Committee (“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
risk taking activity in the Group. The Group has adopted a ‘three
quarterly provision levels, assurance reviews and credit review
lines of defence’ framework in the delineation of accountabilities
reports; approving credit inputs to credit decisioning models, as
for risk governance. Under this model, the primary responsibility
well as reviewing and approving other credit-related matters as
for risk management lies with business line management. The
they occur. The principal responsibility of the ORC is to provide
Risk Management function together with the Compliance
oversight to ERC in relation to the current and potential future
function, headed by the Group Chief Risk Officer (“CRO”)
operational risks/profile facing the Group and operational risk
provide the second line of defence, providing independent
strategy in that regard. The ORC reviews, approves and
oversight and challenge to business line managers. The third line
recommends, as appropriate, to the ERC, the BRC and the
of defence is the Group Internal Audit function, under the Head of
Board, the Operational Risk Framework and all other operational
Group Internal Audit (“GIA”), which provides independent
policies and standards. The ORC is also responsible for
assurance to the Board Audit Committee on the effectiveness of
reviewing key operational risk assessments and mandating
the system of internal control.
related action plans, where required.
The role of the Group Conduct Committee is to promote a
sustaining customer-first culture through the oversight of conduct
across the Group’s operations, including in Republic of Ireland,
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the UK and the USA, and to monitor compliance with the Board-
information relating to the Group and its impacted subsidiary
approved Conduct Risk Appetite and policy. It is a sub-committee
entities in order to comply with insider information disclosure
of the Leadership Team chaired by the Chief Marketing Officer
obligations under the Market Abuse Regulation (“MAR”), the
(“CMO”), who is responsible for ensuring a consistent approach
Central Bank of Ireland’s Market Abuse Rules, and the Irish
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to conduct risk management across the Group.
Stock exchange Listing Rules.
The Group Conduct Committee’s principal duties include
The MAC’s principal duties include determining whether
monitoring the Group’s conduct profile to ensure it remains within
information raised is deemed to be inside information and, if so,
risk appetite, approving and monitoring the effectiveness of the
implementing and monitoring the appropriate procedure to be
Group Conduct Risk Framework, and reviewing, and approving
followed, together with assigning a business owner for each
other conduct-related matters, including reviewing the process by
inside information event. The Committee also ensures that the
which the Group and its subsidiaries identify and manage
Group issues an announcement in circumstances where an
conduct risk, reviewing the Group’s strategy to ensure customer
obligation to disclose insider information has arisen under MAR
outcomes and risks to customers are fully articulated, and
but where the Group is not yet in a position to provide full details
developing conduct training programmes. The Group Conduct
of the underlying facts. The MAC is chaired by the CFO, and its
Committee acts as a parent to the Group Product and
membership includes the CEO, the CRO, the Group General
Proposition Committee, which has delegated authority for
Counsel, the Director of Corporate Affairs, and the Group
approving the launch of products and propositions, and oversight
Treasurer.
of the Group’s overall product portfolio.
The Group Disclosure Committee (GDC) is responsible for
The role of the Asset and Liability Committe (“ALCo”) is to act as
reviewing Group financial information for compliance with the
the Group’s strategic balance sheet management forum that
legal and regulatory requirements prior to external publication,
combines a business decisioning and risk governance mandate.
and for exercising oversight of the Accounting Policies Forum,
It is a sub-committee of the Leadership Team, chaired by the
which ensures that the accounting policies adopted by the
Director of Finance (who reports directly to the CFO), and its
Group conform to the highest standards in financial reporting.
membership includes the CFO, the CRO and the heads of
The GDC is chaired by the Group Director of Finance.
significant business areas. The ALCo is tasked with
decision-making in respect of the Group’s balance sheet
The role of the Arrears and Restructuring Priority Committee
structure, including capital, liquidity, funding, interest rate risk in
(“ARPC”) is to take all decisions and actions required or
the Banking Book (“IRRBB”) from an economic value and net
deemed necessary in relation to the Group’s non-performing
interest margin perspective, foreign exchange hedging risks, and
loan exposures. It is a sub-committee of the Leadership Team,
other market risks. In ensuring sound capital and liquidity
and is chaired by the Head of Financial Solutions Group.
management and planning, the ALCo reviews and approves
models for the valuation of financial instruments, for the
The Sustainable Business Executive Council (“SBEC”) was
measurement of market and liquidity risk, for regulatory capital,
established by the Leadership Team in 2017 as an executive
and for the calculation of expected and unexpected credit losses
council supporting the SBAC in the execution of the bank’s
and stress testing. In addition, the ALCo directs the shape of the
sustainable business strategy in accordance with the approved
balance sheet through funds transfer pricing, direction on product
group strategic and financial plan.
pricing, and review and analysis of risk adjusted returns on
capital (“RAROC”).
The Council is comprised of members of the leadership team
and senior managers representing a cross-section of all the
The Model Risk Committee (“MRC”) is established under the AIB
Group’s functions, and is co-chaired by the Director of Corporate
Model Risk Framework and acts as a sub-committee of the
Affairs and the CMO.
Group ALCo. The Committee reviews and approves, or
recommends to a higher governance authority, the use of AIB
credit, operational and financial risk models. The Committee also
monitors and maintains oversight of the performance of these
models. The chair of the MRC is a member of the Risk senior
management team, and the membership of the Committee
includes representatives from Risk, Finance and relevant
business lines in the Group.
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
AIB Group plc Annual Financial Report 2017
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Risk management
3.1 Credit risk
Definition
Credit risk organisation and structure
Measurement of credit risk
Credit exposure
Credit risk management:
Credit risk monitoring
Forbearance
Loan loss provisioning
Credit profile of the loan portfolio:
Loans and receivables to customers – Residential mortgages
Loans and receivables to customers – Republic of Ireland residential mortgages
Loans and receivables to customers – United Kingdom residential mortgages
Loans and receivables to customers – Segmental analysis
Loans and receivables to customers – Large exposures
Loans and receivables to customers – Credit ratings
Financial investments available for sale
Financial investments held to maturity
Page
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130
130
134
136
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Risk management – 3. Individual risk types
3.1 Credit risk
Credit risk is the risk that the Group will incur losses as a result of a customer or counterparty being unable or unwilling to meet a
commitment that they had entered into. Credit exposure arises in relation to lending activities to customers and banks, including
‘off-balance sheet’ guarantees and commitments, the trading portfolio, financial investments available for sale, financial investments
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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.
The Group lends to personal and retail customers, commercial entities and government entities and banks. Credit risk arises on the
drawn amount of loans and receivables, and 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.
The Group 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 their obligations;
– Exposure at default (“EAD”) – the exposure to a borrower who is unable to repay their 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.
AIB Group plc Annual Financial Report 2017
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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:
Watch:
Vulnerable: Credit where repayment is in jeopardy from normal cash flows and may be dependent on other sources, or loans that are
The credit is exhibiting weakness but with the expectation that existing debt can be fully repaid from normal cash flows.
in a post impairment/restructuring phase.
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
The Group uses 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.
Information on the distribution of outstanding non-defaulted credit exposures to customers in terms of EAD, PD, LGD and EL by IRB
portfolios is disclosed in the 2017 Pillar 3 report.
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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.
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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, and the results are
reported to a model risk committee, and where appropriate, to ALCo.
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
AIB Group plc Annual Financial Report 2017
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Risk management – 3. Individual risk types
3.1 Credit risk
Measurement of credit risk (continued)
Credit risk assurance and review*
The credit management process is underpinned by an independent system of review. Assessment of the effectiveness of risk
management practices and adherence to risk controls is carried out by Credit Risk and Credit Review teams who facilitate a wide range
of assurance and review work. 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 by
rating model and portfolio.
*Forms an integral part of the audited financial statements
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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
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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 2017 and 2016:
Maximum exposure to credit risk*
Balances at central banks(3)
Items in course of collection
Trading portfolio financial assets(4)
Derivative financial instruments
Loans and receivables to banks
Loans and receivables to customers
NAMA senior bonds
Financial investments available for sale(5)
Financial investments held to maturity
Included elsewhere:
Trade receivables
Accrued interest
Financial guarantees
Loan commitments and other credit
related commitments
Amortised
cost(1)
€ m
Fair
value(2)
€ m
2017
Total
€ m
5,731
103
32
1,156
1,313
59,993
–
Amortised
cost(1)
€ m
Fair
value(2)
€ m
5,921
134
–
–
1,399
60,639
1,799
–
–
–
1,814
–
–
–
2016
Total
€ m
5,921
134
–
1,814
1,399
60,639
1,799
–
–
32
1,156
–
–
–
15,642
15,642
–
14,832
14,832
–
–
–
–
277
307
3,356
90
340
–
–
–
3,356
90
340
5,731
103
–
–
1,313
59,993
–
–
–
277
307
67,724
16,830
84,554
73,678
16,646
90,324
880
10,231
11,111
–
–
–
880
10,231
11,111
910
10,289
11,199
–
–
–
910
10,289
11,199
Total
78,835
16,830
95,665
84,877
16,646
101,523
(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 € 6,364 million (2016: € 6,519 million).
(4)Excluding equity shares of € 1 million (2016: € 1 million).
(5)Excluding equity shares of € 679 million (2016: € 605 million).
*Forms an integral part of the audited financial statements
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Risk management – 3. Individual risk types
3.1 Credit risk – Credit exposure
Credit risk mitigants*
The perceived strength of a borrower’s repayment capacity is the primary factor in granting a loan. However, AIB uses various
approaches to help mitigate risks relating to individual credits, including transaction structure, collateral and guarantees. Collateral or
guarantees are usually required as a secondary source of repayment in the event of the borrower’s default. The main types of collateral
for loans and receivables to customers are described below under the section on Collateral. Credit policy and credit management
standards are controlled and set centrally by the Credit Risk function.
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
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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 an 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
AIB Group plc Annual Financial Report 2017
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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)
In assessing the value of collateral for collectively provisioned impaired mortgage loans in the Republic of Ireland, the Group has used a
house price fall from peak of 32% Dublin and 37% non-Dublin as a base (2016: 40% and 44% respectively). This reflects a collateral
value buffer against the latest available CSO residential property price index which at 31 December 2017 showed a 25% and a 30% fall
from peak for Dublin and non-Dublin respectively (2016: 33% Dublin and 37% non-Dublin).
AIB’s buffer to the latest available CSO index remained unchanged at 10% throughout 2017.
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 2017 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 77.
Loans and receivables to customers – residential mortgages
The following table shows the estimated fair value of collateral held for the Group’s residential mortgage portfolio at 31 December 2017
and 2016:
Fully collateralised(1)
Loan-to-value ratio:
Less than 50%
50% - 70%
71% - 80%
81% - 90%
91% - 100%
Neither past
due nor
impaired
€ m
Past due
but not
impaired
€ m
9,901
8,991
4,074
2,876
1,800
282
248
98
86
55
Impaired
€ m
488
564
303
308
336
2017
Total Neither past
due nor
impaired
€ m
€ m
Past due
but not
impaired
€ m
Impaired
2016
Total
€ m
€ m
10,671
9,803
4,475
3,270
2,191
7,797
7,804
4,077
3,364
2,308
234
225
110
83
99
751
144
895
430
553
356
374
423
8,461
8,582
4,543
3,821
2,830
2,136
28,237
1,786
3,922
5,690
33,927
27,642
769
1,999
30,410
25,350
Partially collateralised
Collateral value relating to
loans over 100% loan-to-value
Total collateral value
1,695
29,337
82
851
1,005
3,004
2,782
33,192
3,760
29,110
Gross residential mortgages
29,558
869
3,293
33,720
29,730
933
4,576
35,239
Statement of financial position
specific provisions
Statement of financial position
IBNR provisions
Net residential mortgages
(1,135)
(1,135)
(1,728)
(1,728)
(283)
2,158
32,302
(274)
2,848
33,237
(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
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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
€ 19 million (2016: Nil) in its loans and receivables portfolio for which it had accepted collateral with a fair value of € 19 million.
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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 2017 amounted to € 1,156 million (2016: € 1,814 million) and those with a negative fair value
are reported as liabilities which at 31 December 2017 amounted to € 1,170 million (2016: € 1,609 million).
The enforcement of netting agreements would potentially reduce the statement of financial position carrying amount of derivative assets
and liabilities by € 534 million at 31 December 2017 (2016: € 971 million). The Group also has Credit Support Annexes (“CSAs”) in place
which provide collateral for derivative contracts. As at 31 December 2017, € 522 million (2016: € 487 million) of CSAs are included
within financial assets as collateral for derivative liabilities and € 193 million (2016: € 322 million) of CSAs are included within financial
liabilities as collateral for derivative assets (note 45 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 2017, repurchase agreements amounted to € 3 million (2016: Nil) for which the Group had accepted collateral with a
fair value of € 3 million.
Financial investments available for sale
At 31 December 2017, government guaranteed senior bank debt which amounted to € 196 million (2016: € 190 million) was held within
the available for sale portfolio.
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*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017
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Risk management – 3. Individual risk types
3.1 Credit risk – Credit risk management
Credit risk monitoring*
To manage credit risk effectively, the Group has developed and implemented processes and information systems to monitor and report
on individual credits and credit portfolios. It is the Group’s practice to ensure that adequate up to date credit management 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. 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.
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.
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.
*Forms an integral part of the audited financial statements
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3.1 Credit risk – Credit risk management
Forbearance* (continued)
Mortgage portfolio
Under the mandate of the Central Bank’s Code of Conduct on Mortgage Arrears (“CCMA”), the Group has introduced a four-step
process called the Mortgage Arrears Resolution Process, or MARP. This process aims to engage with, support and find resolution for
our mortgage customers (for their primary residence only) who are in arrears, or are at risk of going into arrears.
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The four step process is summarised as follows:
– Communications – We are here to listen, support and provide advice;
– Financial information – To allow us to understand the customer finances;
– Assessment – Using the financial information to assess the customer’s situation; and
– Resolution – We work with the customer to find a resolution.
The core objective of the process is to determine sustainable solutions that where possible, help to keep customers in their home.
This 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
AIB Group plc Annual Financial Report 2017
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Risk management – 3. Individual risk types
3.1 Credit risk – Credit risk management
Forbearance* (continued)
Non-mortgage portfolio (continued)
The restructuring process is one of structured engagement to assess the long term levels of sustainable and unsustainable debt.
The process broadly moves from an initial customer disclosure stage, through to engagement and analysis, through to an initial
proposal from the Group, followed by credit approval, documentation and drawdown. The commercial aspects of this process require
that customer affordability is viewed holistically, to include all available sources of finance for debt repayment, including unencumbered
assets.
The debt solutions provided allow the customer to enter into a performance based arrangement, typically over a five year period, which
will be characterised by the disposal of non-core assets, contribution of unencumbered assets, and contribution toward residual debt
from available cash flow. This process may result in debt write-off, where applicable.
A request for forbearance is 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’.
*Forms an integral part of the audited financial statements
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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
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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;
– A material decrease in property value; and
– A request for a forbearance measure from the borrower.
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; and
– A request for a forbearance measure from the borrower.
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; and
– A request for a forbearance measure from the borrower.
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;
– Reduction in debt service capacity;
– Reduced prospects of support from any financially responsible guarantors;
– 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;
– Reduction in net worth; and
– Country risk.
AIB Group plc Annual Financial Report 2017
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Risk management – 3. Individual risk types
3.1 Credit risk – Credit risk management
Loan loss provisioning (continued)
Specific provisions*
Specific impairment provisions arise when the recovery of a loan or group of loans is in doubt based on impairment triggers as outlined
above and an assessment that all the 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 RCB and WIB by customer connection 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 78 to 80. 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 d.a.c. which is included in RCB, 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 RCB 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 for each loan: cure;
advanced forbearance with loss; and property disposal (forced and voluntary), with different loss rates associated with each. The model
parameters are regularly reviewed and updated to reflect current data on loss history and portfolio composition.
The model parameters were refined during the year based on updated market and transactional data.
Key model parameters at 31 December 2017 for owner-occupier mortgages are as follows: cure (19%) and disposal/forbearance (81%)
(2016: cure 14% and disposal/forbearance 86%).
The corresponding buy-to-let model parameters at 31 December 2017 are as follows: cure (11%) and disposal/forbearance (89%)
(2016: cure 7% and disposal/forbearance 93%).
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 with no loss to the Group.
*Forms an integral part of the audited financial statements
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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
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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: likelihood of property disposal, haircuts; costs and time to dispose (voluntary and forced); house price fall from
peak; and loss rate on advanced forbearance.
The model parameters are reviewed at the Group Credit Committee on a quarterly basis. The main parameter changes for the year to
31 December 2017 were improvements in the CSO index and the property market fall from peak, an increase in observed cure rates,
and increases in disposal haircuts and recovery periods. Whilst each parameter is reviewed on an individual basis, the
interconectedness of the parameters within the model is taken into account. Each loan is assigned probability weighted resolution
outcomes which determine the loss amounts.
Individually insignificant – Non-mortgage portfolio (Republic of Ireland)*
The non-mortgage individually insignificant and IBNR model takes into consideration underlying security, where available, 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
AIB Group plc Annual Financial Report 2017
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Risk management – 3. Individual risk types
3.1 Credit risk – Credit risk management
Loan loss provisioning (continued)
Republic of Ireland residential mortgage portfolio – IBNR
The residential mortgage portfolio IBNR is calculated using the individually insignificant and IBNR mortgage model as described above.
The table below sets out the parameters used in the calculation of IBNR for the mortgage portfolio as at 31 December 2017 and 2016:
Exposure
€ m
16,458
7,604
1,502
344
511
2,900
Exposure
€ m
15,050
8,191
1,913
407
860
2,828
Owner-occupier
Average
PD
%
Average
LGD
%
0.5
1.8
13.8
38.0
34.6
9.1
17.3
17.7
19.5
16.9
20.0
19.6
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
1,238
1,091
223
122
147
497
Exposure
€ m
1,203
1,212
327
152
212
571
Buy-to-let
Average
PD
%
2017
Average
LGD
%
2.2
6.2
24.6
45.3
48.5
16.2
17.9
22.4
22.9
25.9
26.9
26.8
2016
Buy-to-let
Average
PD
%
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
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 130.
The IBNR is calculated as PD multiplied by LGD multiplied by Exposure (adjusted for the Emergence Period) with the PD and LGD
derived from statistical models. Cured and Forborne non-impaired loans are higher stressed and are therefore, assigned a higher PD.
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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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
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31 December 2017 and 2016:
Exposure
€ m
78
7,006
405
2,756
277
292
Average
PD
%
2017
Average
LGD
%
0.1
0.7
4.5
12.2
16.7
15.7
45.9
37.6
39.9
33.7
31.0
31.8
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
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 130.
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.
Cured and > 90 days past due but not impaired loans are higher stressed and, therefore, assigned a higher PD.
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)
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, incorporating management judgement, 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 2017, there was no change made to the Republic of
Ireland emergence period for mortgages (12 months) however, the emergence period in the non-mortgage portfolio was increased from
8 months to 12 months reflecting the impact of economic uncertainty on the restructured and SME portfolios. The emergence period for
credit cards and corporate portfolios remains 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 related 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 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.
Reversal 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
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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
vintage, 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 32% Dublin
and 37% 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) (2016: 40% and 44% respectively).
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 2017 is estimated to result in movements in provisions of c. € 14 million (€ 11 million specific provision and € 3 million
IBNR) (2016: c. € 19 million (€ 16 million specific and € 3 million IBNR)).
A 1% change in the haircut on disposal for Dublin properties would result in a movement in provisions of c. € 4 million (€ 3 million
specific provisions and € 1 million IBNR) (2016: € 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. € 10 million (€ 8 million specific
provisions and € 2 million IBNR) (2016: € 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 0.5% (blended rate of owner-occupier/buy-to-let) or c. € 5 million (2016: 0.7% or c. € 10 million).
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 0.8% (blended rate of owner-occupier/buy-to-let) or c. € 9 million (2016: 0.5% or c. € 7 million).
For € 3.1 billion of the total impaired loans (€ 0.8 billion mortgages and € 2.3 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 € 26 million (€ 11 million mortgages and € 15 million non-mortgages) (2016: € 40 million (€ 16 million mortgages and
€ 24 million non-mortgages)); and
–
If anticipated cash receipt timelines moved out by 1 year, the impact on impairment provisioning would be an increase of
€ 45 million ( € 15 million mortgages and € 30 million non-mortgages) (2016: € 56 million (€ 18 million mortgages and
€ 38 million non-mortgages)).
An IBNR provision is made for impairments that have been incurred but are not 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. € 12 million in IBNR provisions
(2016: c. € 14 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. € 21 million (2016: c. € 22 million).
For the Republic of Ireland non-mortgage portfolio, the impact on impairment provisions of a 1% favourable change in the average PD
would be a decrease in impairment provisions of c. € 39 million (2016: c. € 26 million).
For the Republic of Ireland collective mortgage provision model, the impact on impairment provisions of a 1% favourable change in the
average PD would be a decrease in impairment provisions of c. € 37 million (2016: € 57 million).
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017
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Risk management – 3. Individual risk types
3.1 Credit risk – Credit profile of the loan portfolio
AIB Group’s customer loan portfolio comprises loans (including overdrafts), instalment credit and finance lease receivables. An overdraft
provides a demand credit facility combined with a current account. Borrowings occur when the customer's drawings take the current
account into debit. The balance may, therefore, fluctuate with the requirements of the customer. Although overdrafts are contractually
repayable on demand (unless a fixed term has been agreed), provided the account is deemed to be satisfactory, full repayment is not
generally demanded without notice.
The following tables show for the financial years ended 31 December 2017 and 2016 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.
Total
Analysed geographically(1)
2017
Republic
of Ireland
€ m
United
Kingdom
€ m
Rest of the
World
€ m
1,716
363
989
6,150
3,688
617
132
2,084
32,103
2,895
50,737
97
305
533
2,505
1,387
305
196
1,886
1,566
226
9,006
5
49
868
165
472
430
150
1,404
51
1
3,595
%
2.9
1.1
3.8
13.9
8.7
2.1
0.8
8.5
53.3
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
Provisions for impairment:
Specific
IBNR
Total statement of financial position
(1)Based on country of risk.
€ m
1,818
717
2,390
8,820
5,547
1,352
478
5,374
33,720
3,122
63,338
55,425
1,583
6,330
63,338
(2,722)
(623)
59,993
The credit portfolio is diversified within each of its geographic markets by spread of locations, industry classification and individual
customer. At 31 December 2017, residential mortgages in the Republic of Ireland (51%) and property and construction (10%) represent
the largest concentrations within the portfolio (2016: 51% and 10% respectively). No other industry or loan category in any geographic
market accounts for more than 10% of the Group’s total loan portfolio.
*Forms an integral part of the audited financial statements
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Total
Analysed geographically(1)
2016
Republic
of Ireland
€ m
United
Kingdom
€ m
Rest of the
World
€ m
1,661
245
873
6,566
3,748
535
169
2,160
33,334
2,806
52,097
93
155
487
2,675
1,243
338
219
2,382
1,849
294
9,735
19
59
669
153
448
532
296
1,164
56
–
3,396
%
2.7
0.7
3.1
14.4
8.3
2.2
1.1
8.8
54.0
4.7
100.0
3.1 Credit risk – Credit profile of the loan portfolio
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:
Specific
IBNR
Total statement of financial position
(1)Based on country of risk.
€ 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
(4,047)
(542)
60,639
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AIB Group plc Annual Financial Report 2017
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Risk management – 3. Individual risk types
3.1 Credit risk – Credit profile of the loan portfolio
2017
Analysed geographically(1)
United
Kingdom
€ m
Rest of the
World
€ m
Republic
of Ireland
€ m
100
25
54
1,531
384
14
4
215
3,125
347
5,799
1
11
6
242
33
–
–
7
149
15
464
–
–
–
30
–
–
10
8
19
–
67
2016
Analysed geographically(1)
United
Kingdom
€ m
Rest of the
World
€ m
Republic
of Ireland
€ m
117
31
60
2,094
554
37
3
237
4,331
383
7,847
4
1
16
554
72
1
9
50
221
49
977
–
–
–
76
55
–
132
25
24
–
312
Total
€ m
101
36
60
1,803
417
14
14
230
3,293
362
6,330
Total
€ m
121
32
76
2,724
681
38
144
312
4,576
432
9,136
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 county of risk.
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 country of risk.
*Forms an integral part of the audited financial statements
94
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3.1 Credit risk – Credit profile of the loan portfolio
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 country of risk.
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 country of risk.
Total
€ m
32
12
49
914
211
8
11
147
1,135
203
2,722
623
3,345
Total
€ m
40
11
53
1,350
305
34
94
180
1,728
252
4,047
542
4,589
2017
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Analysed geographically(1)
United
Kingdom
€ m
Rest of the
World
€ m
Republic
of Ireland
€ m
31
8
43
734
198
8
3
137
1,085
190
2,437
1
4
6
159
13
–
–
8
42
13
246
–
–
–
21
–
–
8
2
8
–
39
2016
Analysed geographically(1)
United
Kingdom
€ m
Rest of the
World
€ m
Republic
of Ireland
€ m
37
10
44
996
267
33
3
151
1,626
217
3,384
3
1
9
327
27
1
3
25
93
35
–
–
–
27
11
–
88
4
9
–
524
139
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AIB Group plc Annual Financial Report 2017
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Risk management – 3. Individual risk types
3.1 Credit risk – Credit profile of the loan portfolio
The following table analyses loans and receivables to customers by segment showing asset quality and impairment provisions for the
financial years ended 31 December 2017 and 2016:
Gross loans and receivables
to customers*
Residential mortgages:
Owner-occupier
Buy-to-let
Other personal
Property and construction
Non-property business
RCB
€ m
28,332
3,840
32,172
2,888
3,448
5,927
WIB
€ m
5
23
28
43
3,048
7,203
AIB
UK
€ m
1,327
193
1,520
186
2,324
4,493
Total
44,435
10,322
8,523
Group
2017
Total
€ m
€ m
–
–
–
5
–
53
58
29,664
4,056
33,720
3,122
8,820
17,676
63,338
RCB
€ m
28,624
4,784
33,408
2,768
4,403
6,025
WIB
€ m
7
29
36
102
2,499
6,520
AIB
UK
€ m
1,564
231
1,795
230
2,492
4,800
Group
2016
Total
€ m
€ m
–
–
–
–
–
30,195
5,044
35,239
3,100
9,394
150
17,495
46,604
9,157
9,317
150
65,228
Analysed as to asset
quality(1)
Satisfactory
Watch
Vulnerable
Impaired
1,691
5,277
5,897
12
364
8
332
345
425
Total criticised loans
12,865
384
1,102
31,570
9,938
7,421
58
48,987
30,397
8,588
7,363
114
46,462
–
–
–
–
%
–
–
2,035
5,986
6,330
2,441
5,858
7,908
14,351
16,207
%
23
10
%
35
17
28
310
231
569
%
6
3
€ m
€ m
€ m
€ m
–
–
–
%
–
–
–
2,722
623
3,345
3,462
453
3,915
%
43
53
5
%
44
50
8
%
4
–
€ m
2
45
47
%
25
588
–
%
13
5
€ m
232
53
285
%
55
67
3
€ m
€ m
€ m
(10)
12
2
%
17
1
18
%
–
–
–
%
€ m
(199)
86
€ m
(183)
(103)
(113)
(286)
%
%
532
461
961
1,954
%
21
10
€ m
516
56
572
%
54
60
6
€ m
(31)
(6)
(37)
%
–
–
36
36
%
24
24
3,001
6,629
9,136
18,766
%
29
14
€ m
€ m
25
–
25
%
69
69
17
€ m
8
–
8
%
4,047
542
4,589
%
44
50
7
€ m
(171)
(123)
(294)
%
44
33
77
%
19
33
1
€ m
35
(14)
21
%
Total loans percentage
Criticised loans/total loans
Impaired loans/total loans
Statement of financial
position
Specific provisions
IBNR provisions
%
29
13
€ m
2,488
525
Total impairment provisions
3,013
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
%
42
51
7
€ m
(206)
73
(133)
%
Impairment (credit)/charge/
average loans
(0.29)
0.02
0.20
–
(0.18)
(0.60)
(0.23)
(0.37)
2.12 (0.44)
(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 74.
*Forms an integral part of the audited financial statements
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3.1 Credit risk – Credit profile of the loan portfolio
Gross loans and receivables to customers reduced by 3% or € 1.9 billion in 2017. While there was an increase in the level of new
lending to € 9.4 billion in the year, this was offset by loan redemptions of € 9.5 billion, disposals of € 0.7 billion, restructures and
write-offs of € 0.4 billion and a currency impact of € 0.7 billion.
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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 (53% of gross
loans) and property and construction (14%). In addition, there is a non-property business lending portfolio (28%) which is spread
across a number of sub-sectors and a personal loan portfolio (5%);
–
Improved demand for credit resulted in new lending of € 9.4 billion in 2017 (2016: € 8.4 billion) spread across most sectors and
included € 2.4 billion mortgage and € 2.2 billion non-mortgage in RCB, € 3.2 billion in WIB, € 1.6 billion in AIB UK;
– The quantum of impaired loans reduced by € 2.8 billion in 2017 (a decrease of 31%). The reduction was driven primarily by the
continued progress in working with customers in restructuring their facilities. This restructuring activity with associated write-offs
reduced impaired loans by € 1.6 billion. In addition, redemptions and repayments of impaired loans by customers amounted to
€ 0.8 billion with a further reduction of € 0.7 billion due to sales of portfolios of distressed impaired loans;
– As a result of the restructuring activity and the reduction in impaired loans, the overall credit quality profile has shown a significant
improvement. Criticised loans (including impaired) have reduced from 29% of total loans at 31 December 2016 to 23% at
31 December 2017; and
– The net writeback of specific impairment provisions of € 199 million in 2017 compared to a writeback of € 171 million in 2016.
The key drivers of the net writeback continues to be restructuring activity, offset by provisions on newly impaired loans and which
has remained consistent with 2016 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 82 to 84 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. € 1.3 billion of loans restructured out of impairment during the year with a
further € 0.3 billion of impaired loans written off (including non-contracted write-offs) (2016: € 1.5 billion and € 1.8 billion respectively).
Provision writebacks*
There was a total provision net writeback of € 113 million in 2017 compared to a net write back of € 294 million in 2016. Specific
provision writebacks (net of top-ups) during the year were € 472 million (equivalent to c. 5.2% of opening impaired loans)
(2016: € 452 million and 3.5%). These writebacks were split into mortgages € 176 million (2016: € 205 million); other personal
€ 67 million (2016: € 53 million); property and construction € 144 million (2016: € 143 million); and non-property business lending
€ 85 million (2016: € 51 million). These writebacks were partially offset by specific provisions amounting to € 273 million on newly
impaired loans (2016: € 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 provision charge in 2017 was € 86 million (2016: a release of € 123 million). The charge was impacted by a number of factors
including an increase in provisions on the long term arrears mortgage portfolio and the lengthening of emergence periods on some
non-mortgage portfolios in light of the relatively benign credit environment. These were partly offset by releases of IBNR due to the
continuing increases in property prices throughout 2017, and the improving credit quality profile of the ‘business as usual’ and post
restructuring portfolios.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017
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Risk management – 3. Individual risk types
Risk management – 3. Individual risk types
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 € 4.4 billion or 24%, and have
decreased from 29% of total loans at 31 December 2016, to 23% at 31 December 2017. The improving credit quality is driven by the
level of new business in the year combined with the reduction in the criticised portfolio arising from the restructuring process and
disposals of distressed loans.
Residential mortgages
At 31 December 2017, residential mortgages accounted for 53% of gross loans and receivables to customers (€ 33.7 billion), with the
loans mainly located in the Republic of Ireland (95%) (see page 109) and the remainder in the United Kingdom (see page 118).
The portfolio consists of 88% owner-occupier loans and 12% buy-to-let.
In the Republic of Ireland, total loans in arrears by value decreased by 20% during 2017, a decrease of 12% in the owner-occupier
portfolio and a decrease of 37% in the buy-to-let portfolio. By number of customers, these decreases were 15%, 9% and 30%
respectively. This decrease in arrears can be mainly attributed to the restructuring of the portfolio and the improving economic conditions
and was also impacted by the sale of a portfolio of distressed mortgages. 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 109 to 117 and the United
Kingdom mortgage portfolio on pages 118 to 124.
Other personal
At 31 December 2017, the other personal portfolio amounted to € 3.1 billion (5% of gross loans and receivables to customers). 93% of
loans relate to RCB, 6% to AIB UK and 1% in WIB. The portfolio comprises € 2.2 billion in loans and overdrafts and € 0.9 billion in credit
card facilities. Strong levels of new lending at € 0.8 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. The satisfactory element of the portfolio increased
from 73% in 2016 to 77% in 2017.
Further detailed disclosures in relation to the other personal portfolio are provided on page 125.
Property and construction
At 31 December 2017, the property and construction portfolio amounted to € 8.8 billion (14% of gross loans and receivables to
customers). 39% of loans relate to RCB, 35% to WIB and the remaining 26% to AIB UK. The portfolio comprises of 71% investment
loans (€ 6.2 billion), 21% land and development loans (€ 1.9 billion) and 8% other property and construction loans (€ 0.7 billion).
Overall, the portfolio reduced by € 0.6 billion or 6% during 2017. This reduction is due primarily to the continuing impact of restructuring
and to write-offs, amortisations and repayments resulting from asset disposals by customers which was offset by new business written
of € 1.2 billion.
Further detailed disclosures in relation to the property and construction portfolio are provided on pages 126 and 127.
Non-property business
At 31 December 2017, the non-property business portfolio amounted to € 17.7 billion (28% of gross loans and receivables to
customers). 41% of loans relate to WIB, 34% to RCB and 25% to AIB UK. 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 (11% of the portfolio), licensed
premises (4% of the portfolio), retail/wholesale (14% of the portfolio) and other services (31% of the portfolio). Satisfactory loans
increased from 80% at 31 December 2016 to 85% at 31 December 2017 continuing the positive trend experienced in 2016. The level of
criticised loans reduced by 23%, mainly due to a reduction of € 0.5 billion in impaired loans.
Further detailed disclosures in relation to the non-property business portfolio are provided on pages 128 and 129.
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3.1 Credit risk – Credit profile of the loan portfolio
Impairment provisions
Specific impairment provisions as a percentage of impaired loans decreased from 44% at 31 December 2016 to 43% at 31 December
2017. 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.
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IBNR provisions of € 0.6 billion were held at 31 December 2017 compared to € 0.5 billion at 31 December 2016. The level of IBNR
reflects a conservative estimate of unidentified incurred loss within the portfolio.
The income statement provision writeback of € 113 million in 2017 compared to a provision writeback of € 294 million in 2016.
Income statement specific provisions include € 273 million from new impairments and a € 472 million writeback of provisions (net of
top-ups) as described above.
Asset quality
The following table profiles the asset quality of the Group’s loans and receivables at 31 December 2017 and 2016:
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
Residential
mortgages
Other
personal
€ m
29,558
869
3,293
33,720
(1,135)
(283)
(1,418)
32,302
€ m
2,604
156
362
3,122
(203)
(43)
(246)
2,876
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
Property Non-property
business
and
construction
€ m
€ m
16,521
283
872
17,676
(470)
(147)
(617)
€ m
15,729
362
1,404
17,495
(717)
(131)
(848)
6,742
275
1,803
8,820
(914)
(150)
(1,064)
7,756
6,308
362
2,724
9,394
(1,350)
(99)
(1,449)
7,945
17,059
59,993
Property Non-property
business
and
construction
€ m
2017
Total
€ m
55,425
1,583
6,330
63,338
(2,722)
(623)
(3,345)
2016
Total
€ m
54,265
1,827
9,136
65,228
(4,047)
(542)
(4,589)
16,647
60,639
Gross loans and receivables to customers reduced by 3% to € 63.3 billion in 2017. The reduction was due to loan redemptions of
€ 9.5 billion, and the sale of portfolios of distressed loans of € 0.7 billion, restructures and write-offs of € 0.4 billion and the impact of
currency movements of € 0.7 billion, all offset by new lending of € 9.4 billion. The satisfactory portfolio grew by € 2.5 billion (5%) in the
year (including currency movements).
*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
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 2017, are classified as repayable within
one year. Approximately 10% 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
year
Within 1 After 1 year
but within 5
years
€ m
€ m
10,036
3,788
63
13,887
After 1 year
but within 5
years
€ m
9,260
3,603
109
10,186
1,154
10
11,350
Within 1
year
€ m
12,838
1,858
11
14,707
After 5
years
€ m
34,504
3,597
–
38,101
After 5
years
€ m
33,668
3,881
–
12,972
37,549
2017
Total
€ m
54,726
8,539
73
63,338
2016
Total
€ m
55,766
9,342
120
65,228
parameters.
Republic of Ireland
United Kingdom
Rest of the World
Total
Fixed
rate
€ m
5,662
753
–
6,415
Fixed
rate
€ m
Variable
rate
€ m
49,064
7,786
73
56,923
Variable
rate
€ m
Total
€ m
54,726
8,539
73
63,338
Total
€ m
Republic of Ireland ......................4,734 ..............51,032 ..............55,766
United Kingdom ..............................793 ................8,549 ................9,342
Rest of the World ................................– ..................120 ..................120
Total
5,527
59,701
65,228
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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
RCB
WIB
AIB UK
Group
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
RCB
WIB
AIB UK
Group
As a percentage of
total gross loans
1–30 days
€ m
31–60 days
€ m
29
1
13
94
52
3
1
27
453
24
55
752
688
6
58
–
752
%
1.19
10
4
1
28
4
–
–
6
114
5
14
186
163
2
21
–
186
%
0.29
1–30 days
€ m
31–60 days
€ m
40
6
8
144
72
4
1
40
469
27
55
866
781
11
74
–
866
%
1.33
7
–
1
28
12
1
1
20
131
5
15
221
185
3
33
–
221
%
0.34
61–90 days 91–180 days 181–365 days
€ m
€ m
€ m
2
–
1
12
4
–
–
3
56
3
8
89
78
–
11
–
89
%
0.14
5
–
1
32
5
2
–
6
49
–
7
107
89
1
17
–
107
%
0.17
8
–
1
32
10
–
–
3
52
–
16
122
117
–
5
–
122
%
0.19
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
121
3
9
–
133
%
0.20
8
–
–
38
8
–
–
8
63
–
15
140
126
8
6
–
140
%
0.21
31 December 2017
Total
€ m
> 365 days
€ m
24
2
2
77
19
–
–
34
145
–
24
327
314
4
8
1
327
%
0.52
78
7
19
275
94
5
1
79
869
32
124
1,583
1,449
13
120
1
1,583
%
2.50
31 December 2016
Total
€ m
> 365 days
€ m
31
–
2
99
26
3
–
23
136
–
27
347
330
9
8
–
347
%
0.53
95
7
13
362
128
9
2
108
933
35
135
1,827
1,646
34
147
–
1,827
%
2.80
The figures reported are inclusive of overdrafts, bridging loans and cases with expired limits.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 101
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Page 102
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 2017, loans past due but not impaired reduced by € 0.2 billion to € 1.6 billion or 2.5% of total loans and receivables to
customers (2016: € 1.8 billion or 2.8%).
Residential mortgage loans which were past due but not impaired at 31 December 2017, amounted to € 0.9 billion. This represents 55%
of total loans which were past due but not impaired (2016: € 0.9 billion or 51%). 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 favourable economic
environment.
Property and construction loans which were past due but not impaired represent 17% or € 0.3 billion of total loans which were past due
but not impaired (2016: 20% or € 0.4 billion), with non-property business at 18% or € 0.3 billion (2016: 20% or € 0.4 billion) and other
personal at 10% or € 0.1 billion (2016: 9% or € 0.2 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
102
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Page 103
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 2017 and 2016:
A
n
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l
R
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v
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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 2017
Specific provision cover percentage
33,720
3,122
36,842
8,820
17,676
26,496
63,338
10
12
10
20
5
10
10
978
228
1,206
1,685
683
2,368
3,574
2,315
134
2,449
118
189
307
2,756
3,293
362
3,655
1,803
872
2,675
6,330
1,655
1,067
2,722
%
46
%
39
%
43
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 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
2017
Specific impairment
provisions
% of
impaired
loans
Total
€ m
1,135
203
1,338
914
470
1,384
2,722
34
56
37
51
54
52
43
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
Specific impairment provisions as a percentage of impaired loans decreased from 44% at 31 December 2016 to 43% at 31 December
2017. The decrease occurred in collectively assessed loans where the cover decreased from 41% at 31 December 2016 to 39% at
31 December 2017. The cover on individually assessed loans also decreased slightly to 46%.
The decrease in provision cover was impacted by the writeoff and/or disposal of loans which had a higher provision cover and had the
impact of reducing overall cover for the remaining portofolio.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 103
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Page 104
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 2017 and
2016:
At 1 January
Exchange translation adjustments
(Credit)/charge to income statement – customers(1)
Amounts written off(2)
Disposals
Recoveries of amounts written off
in previous years(2)
At 31 December 2017
Total provisions are split as follows:
Specific
IBNR
Amounts include:
Residential
mortgages
Other
personal
€ m
2,002
(9)
(101)
(286)
(190)
2
1,418
1,135
283
1,418
€ m
290
(1)
(2)
(30)
(11)
–
246
203
43
246
Loans and receivables to customers (note 24 to the consolidated financial statements)
At 1 January
Exchange translation adjustments
(Credit) to income statement – customers
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)
Property Non-property
business
and
construction
€ m
1,449
(12)
(50)
(190)
(134)
1
1,064
914
150
1,064
2,649
(73)
(145)
(985)
3
1,449
1,350
99
1,449
€ m
848
(4)
40
(210)
(69)
12
617
470
147
617
€ m
1,326
(19)
(16)
(450)
7
848
717
131
848
Property Non-property
business
and
construction
€ m
2017
Total
€ m
4,589
(26)
(113)
(716)
(404)
15
3,345
2,722
623
3,345
3,345
3,345
2016
Total
€ m
6,832
(130)
(294)
(1,829)
10
4,589
4,047
542
4,589
4,589
4,589
(1)Geographic split by country of risk: Republic of Ireland a credit of € 142 million, United Kingdom a charge of € 17 million and rest of the world a charge of
€ 12 million.
(2)For geographical and sector split, see page 107.
*Forms an integral part of the audited financial statements
104
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Page 105
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 2017 and 2016:
A
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Specific provisions – Individually significant
– Individually insignificant
IBNR
Total provisions for impairment (credit)/charge on loans
and receivables to customers
Writeback of provisions for liabilities and commitments
Total
Specific provisions – Individually significant
– Individually insignificant
IBNR
RCB
€ m
(176)
(30)
73
(133)
RCB
€ m
(163)
(20)
(103)
WIB
€ m
(10)
–
12
2
WIB
€ m
27
8
(14)
Total provisions for impairment (credit)/charge on loans
and receivables to customers
(286)
21
Writeback of provisions for impairment on financial
investments available for sale
Writeback of provisions for liabilities and commitments
Total
AIB
UK
€ m
30
(13)
1
18
AIB
UK
€ m
(26)
(5)
(6)
(37)
Group
€ m
–
–
–
–
Group
€ m
8
–
–
8
2017
Total
€ m
(156)
(43)
86
(113)
(8)
(121)
2016
Total
€ m
(154)
(17)
(123)
(294)
(2)
(2)
(298)
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AIB Group plc Annual Financial Report 2017 105
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Page 106
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 (credit)/charge provisions/writeback of provisions for the financial
years ended 31 December 2017 and 2016:
RCB
WIB
AIB UK
Group
Total
Residential
mortgages
€ m
(91)
(1)
(9)
–
Other
€ m
(42)
3
27
–
2017
Total
€ m
(133)
2
18
–
Residential
mortgages
€ m
Other
€ m
2016
Total
€ m
(110)
(176)
(286)
–
(1)
–
21
(36)
8
21
(37)
8
(101)
(12)
(113)
(111)
(183)
(294)
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 2017 and 2016:
RCB
WIB
AIB UK
Group
Total
Residential
mortgages
bps
(28)
(233)
(58)
–
(29)
Other
bps
(32)
2
37
–
(4)
2017
Total
bps
(29)
2
20
–
(18)
Residential
mortgages
bps
(32)
–
(10)
–
(31)
Other
bps
(126)
23
(44)
212
(59)
2016
Total
bps
(60)
23
(37)
212
(44)
A net writeback of € 113 million in 2017 compared to a net writeback of € 294 million in 2016. The writeback comprises of € 199 million
in specific provision writebacks offset by an IBNR charge of € 86 million (2016: € 171 million net writeback in specific provision
writebacks and a release of IBNR provisions of € 123 million).
The specific provision writeback of € 199 million is split into a € 472 million writeback net of top-ups and a charge of € 273 million on
newly impaired loans (2016: € 171 million, € 452 million and € 281 million respectively). Restructuring activity is continuing across the
portfolios, albeit at lower levels, which reflects economic improvements (residential and commercial asset price increase) and additional
security made available to the Group. The quantum of new impairments across the different portfolios remains within expected risk
levels.
The IBNR provision charge in 2017 was € 86 million (2016: a release of € 123 million). The charge was impacted by a number of factors
including an increase in provisions on the long term arrears mortgage portfolio and the lengthening of emergence periods on some
non-mortgage portfolios in light of the relatively benign credit environment. These were partly offset by releases of IBNR due to the
continuing increases in property prices throughout 2017, and the improving credit quality profile of the ‘business as usual’ and post
restructuring portfolios.
In RCB, the provision writeback of € 133 million comprises a specific provision writeback of € 206 million and an IBNR charge of
€ 73 million. This compares to a specific provision writeback of € 183 million and an IBNR release of € 103 million in 2016.
The writeback was primarily due to the positive impact of debt restructuring activities which exceeded new impairments and additional
provisions on existing impaired loans.
In AIB UK, the provision charge of € 18 million comprises a specific provision charge of € 17 million and an IBNR charge of € 1 million.
This compares to a specific provision writeback of € 31 million and an IBNR release of € 6 million in 2016. The provision charge was
driven by two significant new impairments in the first half of 2017 offset by provision writebacks.
In WIB, the provision charge of € 2 million comprises a specific provision writeback of € 10 million and an IBNR charge of € 12 million.
This compares to a specific provision charge of € 35 million and an IBNR release of € 14 million in 2016.
In Group, there was no provision impact for 2017 compared to a provision charge of € 8 million in 2016.
106
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Page 107
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 2017 and 2016:
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R
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v
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w
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IRELAND
Agriculture
Energy
Manufacturing
Property and construction
Distribution
Transport
Financial
Other services
Personal – Residential mortgages
– Other
UNITED KINGDOM
Agriculture
Manufacturing
Property and construction
Distribution
Transport
Financial
Other services
Personal – Residential mortgages
– Other
REST OF THE WORLD
Energy
Property and construction
Distribution
Financial
Other services
Personal – Residential mortgages
TOTAL
(1)By country of risk
Loans written off
Recoveries of loans
previously written off
2017(1)
€ m
2016(1)
€ m
2017(1)
€ m
2016(1)
€ m
–
0.9
5.9
127.2
47.6
25.6
–
48.6
280.1
20.0
555.9
0.1
0.5
46.3
17.1
24.4
3.0
–
4.2
9.7
105.3
–
16.5
11.7
20.7
4.3
1.4
54.6
47.4
5.2
28.9
703.2
169.0
16.6
1.5
108.7
158.9
207.4
0.1
–
–
–
4.5
–
0.8
4.0
1.8
–
1,446.8
11.2
0.2
11.5
268.3
43.1
0.1
1.6
5.8
21.3
5.9
357.8
4.6
13.1
–
0.1
6.0
0.7
24.5
–
–
0.3
0.1
–
–
2.1
–
–
2.5
0.1
0.2
0.4
–
0.4
–
1.1
0.1
–
0.1
0.6
–
0.1
0.6
5.1
–
–
6.6
–
1.8
2.0
–
–
–
–
–
–
3.8
–
–
–
–
–
–
–
715.8
1,829.1
14.8
10.4
Write-offs in 2017, as a percentage of gross loans and receivables at 1 January 2017, were 1.1% compared to 2.6% in 2016.
These include all write-offs, both full and partial and write-offs not contracted with customers of c. € 0.2 billion.
AIB Group plc Annual Financial Report 2017 107
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Page 108
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 € 33.7 billion at 31 December 2017, with the majority (95%) relating to residential mortgages in the
Republic of Ireland and the remainder relating to the United Kingdom. This compares to € 35.2 billion at 31 December 2016, of which
95% related to residential mortgages in the Republic of Ireland. The split of the residential mortgage portfolio was owner-occupier
€ 29.7 billion and buy-to-let € 4 billion (2016: owner-occupier € 30.2 billion and buy-to-let € 5.0 billion).
Statement of financial position provisions of € 1.4 billion were held at 31 December 2017, split € 1.1 billion specific and € 0.3 billion IBNR
(31 December 2016: € 2.0 billion, split € 1.7 billion specific and € 0.3 billion IBNR).
There was an impairment provision credit of € 101 million to the income statement in 2017 comprising a € 111 million specific writeback and a
€ 10 million IBNR charge (2016: € 111 million provision credit comprising € 110 million specific writeback and a € 1 million IBNR release).
This section provides the information listed below in relation to residential mortgages.
Republic of Ireland residential mortgages – pages 109 to 117
– 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 118 to 124
– 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.
108
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Page 109
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 2017 and 2016:
A
n
n
u
a
l
R
e
v
e
w
i
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
28,337
2,556
2,423
2,277
793
188
%
34.8
€ m
(32)
29
(3)
Buy-to-let
€ m
3,863
1,005
982
888
309
90
%
34.8
€ m
(72)
(17)
(89)
2017*
Total
€ m
32,200
3,561
3,405
3,165
Owner-
occupier
€ m
28,631
3,176
3,042
2,898
1,102
1,042
278
%
34.8
€ m
(104)
12
(92)
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
1,647
266
%
37.6
€ m
(111)
2
(109)
(1)Includes all impaired loans whether past due or not.
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*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 109
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Page 110
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 € 32.2 billion at 31 December 2017 compared to € 33.4 billion at
31 December 2016. 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 2017 were € 2.4 billion, of which 97% related to owner-occupier, whilst
the weighted average indexed loan-to-value for new residential mortgages was 68%. New lending in 2017 increased by 17% compared
to 2016 driven by the favorable macro-economic conditions.
The split of the residential mortgage portfolio is 88% owner-occupier (€ 28.3 billion) and 12% buy-to-let (€ 3.9 billion) and comprised
33% tracker rate (€ 10.5 billion), 57% variable rate (€ 18.3 billion) and 10% fixed rate mortgages (€ 3.4 billion). The proportion of the
total residential mortgage portfolio in negative equity decreased from 20% at 31 December 2016 (€ 6.7 billion) to 10% at 31 December
2017 (€ 3.1 billion) reflecting the increase in residential property prices in Ireland during 2017 and loan amortisation, whilst the quantum
of negative equity in the portfolio reduced from € 1.0 billion to € 0.4 billion.
Residential mortgage arrears
Total loans in arrears by value decreased by 20% during 2017 down from € 4.2 billion to € 3.4 billion, a decrease of 12% in the owner-
occupier portfolio and a decrease of 37% in the buy-to-let portfolio in the year. By number of customers, these decreases were 15%,
9% and 30% respectively. The 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 2017 fell by 11% compared to 2016.
Total loans in arrears greater than 90 days at 6.1% at 31 December 2017 decreased from 7.2% at 31 December 2016 and remain below
the industry average of 8.1%(1). For the owner-occupier portfolio, loans in arrears greater than 90 days at 4.9% were below the industry
average of 6.9%. For the buy-to-let portfolio, loans in arrears greater than 90 days at 14.8% were below the industry average of 15.1%.
Forbearance
Residential mortgages subject to forbearance measures decreased by € 1.2 billion from 31 December 2016 to € 4.7 billion at
31 December 2017, compared to an increase of € 0.5 billion in the 12 months to 31 December 2016. This decrease arose from
c. € 1billion of mortgages exiting forbearance in the year, having met the forbearance and probation terms. This was 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 137 to 150.
Impairment provisions
Impaired loans decreased from € 4.4 billion at 31 December 2016 to € 3.2 billion at 31 December 2017, a decrease of € 1.2 billion or
28%. The decrease arose from the sale of a portfolio of distressed mortgages (€ 0.4 billion) and also due to restructuring, write-offs,
repayments and redemptions.
There was a specific provision writeback of € 104 million in 2017 compared to a € 111 million writeback in 2016. This can be split into a
charge for new impairments of € 63 million and a writeback of provisions (net of top-ups) of € 167 million. The writeback was mainly due
to the impact of restructuring and loans curing from impairment as a result of improvements in the general economic environment,
improved employment opportunities and growth in residential property prices. The specific provision cover level decreased from 38% at
31 December 2016 to 35% at 31 December 2017. The decrease was primarily due to write offs and the disposal of a distressed
mortgage portfolio in the year.
An IBNR charge in 2017 of € 12 million compares to a charge of € 2 million in 2016, mainly due to changes in the mortgage model and
the time to disposal parameter.
Specific provisions of € 0.6 billion were held against the forborne impaired portfolio of € 1.7 billion providing cover of 32%. In relation to
the non-impaired forborne portfolio of € 3.0 billion, of which € 0.2 billion is on an interest only arrangement, IBNR impairment provisions
of € 0.1 billion were held at 31 December 2017.
(1)Source: Central Bank of Ireland (“CBI”) Residential Mortgage Arrears and Repossessions Statistics at 30 September 2017, based on numbers of accounts.
110
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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 2017 and 2016:
A
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u
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l
R
e
v
e
w
i
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
2017
Total
Total
Impaired
Total
Impaired
Number
Balance
€ m
Number
Balance
€ m
Number
Balance
€ m
Number
Balance
€ m
2017*
2016*
2,472
925
2,474
3,377
4,393
4,991
7,787
11,804
16,272
22,944
30,178
29,712
28,971
18,862
13,137
3,938
5,781
5,088
7,047
9,849
11,414
12,764
78
30
54
106
184
270
529
916
1,580
2,584
4,147
4,322
4,231
2,558
1,786
520
797
712
1,040
1,530
1,954
2,272
345
134
196
266
386
395
660
1,044
1,650
2,651
4,057
4,180
3,311
1,324
507
74
9
6
20
14
7
1
12
5
8
18
26
33
61
112
209
394
679
720
574
214
82
11
1
1
2
2
1
0
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
–
–
254,180
32,200
21,237
3,165
260,120
33,444
27,118
4,382
A significant element (€ 15.3 billion or 47%) of the € 32.2 billion residential mortgage portfolio was originated between 2005 and 2008, of
which 15% (€ 2.4 billion) was impaired at 31 December 2017. This cohort was impacted by reduced household income and increased
unemployment rates in the years during the financial crisis, and where property prices had decreased from a peak in 2007. 12% of the
residential mortgage portfolio was originated before 2005 of which 13% was impaired at 31 December 2017, while the remaining 41% of
the portfolio was originated from 2009 onwards, of which 2% was impaired at 31 December 2017.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 111
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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 2017. The CSO Residential Property Price Index for October 2017 reported that national residential property prices were
24% lower than their highest level in early 2007 and reported an annual increase in residential property prices of 12% for the twelve
months to October 2017.
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 2017 and 2016:
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
Weighted average indexed loan-to-value(1):
Stock of residential mortgages at financial year end
New residential mortgages issued during the year
Impaired residential mortgages
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
%
8,888
8,422
3,895
2,799
1,797
1,810
463
200
63
31.4
29.7
13.7
9.9
6.4
6.4
1.6
0.7
0.2
Buy-to-let
2017*
Total
€ m
1,220
1,015
418
348
294
270
137
112
49
%
31.6
26.3
10.8
9.0
7.6
7.0
3.5
2.9
1.3
€ m
10,108
9,437
4,313
3,147
2,091
2,080
600
312
112
%
31.4
29.3
13.4
9.8
6.5
6.4
1.9
1.0
0.3
28,337
100.0
3,863
100.0
32,200
100.0
63.6
67.9
92.2
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
68.8
55.6
87.8
Buy-to-let
%
21.5
20.7
10.2
9.6
10.0
12.8
7.8
5.4
2.0
€ m
1,036
996
489
461
484
618
377
258
94
64.2
67.5
91.0
2016*
Total
%
23.5
24.5
13.0
11.0
8.1
11.3
6.0
1.9
0.7
€ m
7,842
8,185
4,351
3,678
2,720
3,765
2,019
645
239
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
81.9
56.4
101.2
73.8
68.4
102.7
(1)Weighted average indexed loan-to-values are the individual indexed loan-to-value calculations weighted by the mortgage balance against each property.
9% of the total owner-occupier and 13% of the total buy-to-let mortgages were in negative equity at 31 December 2017 (excluding
unsecured) compared to 18% and 26% respectively at 31 December 2016. The weighted average indexed loan-to-value for the total
residential mortgage portfolio was 64% at 31 December 2017 compared to 74% at 31 December 2016, 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
112
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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
A
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R
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loan-to-value ratios at 31 December 2017 and 2016:
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
2017*
Total
€ m
8,364
7,853
3,622
2,514
1,520
1,367
115
30
9
%
32.9
30.9
14.3
9.9
6.0
5.4
0.5
0.1
–
€ m
1,010
797
304
249
197
139
55
40
11
%
36.0
28.4
10.9
8.9
7.0
5.0
2.0
1.4
0.4
€ m
9,374
8,650
3,926
2,763
1,717
1,506
170
70
20
%
33.2
30.7
13.9
9.8
6.1
5.3
0.6
0.3
0.1
25,394
100.0
2,802
100.0
28,196
100.0
Owner-occupier
Buy-to-let
2016*
Total
€ m
6,395
6,697
3,553
2,919
1,917
2,527
989
61
11
%
25.5
26.7
14.2
11.6
7.7
10.1
4.0
0.2
–
€ m
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
The proportion of residential mortgages that was neither past due nor impaired and in negative equity at 31 December 2017 (excluding
unsecured) decreased to 6% compared to 15% at 31 December 2016, reflecting residential property price increases during the year,
coupled with amortisation of the loan portfolio.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 113
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Risk management – 3. Individual risk types
Risk management – 3. Individual risk types
3.1 Credit risk – Credit profile of the loan portfolio
Loan-to-value ratios of Republic of Ireland residential mortgages (index linked) that were greater than 90 days past
due and/or impaired
The following table profiles the Republic of Ireland residential mortgages that were greater than 90 days past due and/or impaired by the
indexed loan-to-value ratios at 31 December 2017 and 2016:
Owner-occupier
Buy-to-let
Total
€ m
381
419
207
230
239
389
337
168
53
%
15.7
17.3
8.5
9.5
9.9
16.1
13.9
6.9
2.2
€ m
186
196
105
91
91
125
80
71
37
%
18.9
20.0
10.7
9.2
9.3
12.8
8.1
7.2
3.8
€ m
567
615
312
321
330
514
417
239
90
2017*
Total
residential
mortgage
portfolio
%
16.7
18.1
9.2
9.4
9.7
15.1
12.2
7.0
2.6
€ m
10,108
9,437
4,313
3,147
2,091
2,080
600
312
112
%
31.4
29.3
13.4
9.8
6.5
6.4
1.9
1.0
0.3
2,423
100.0
982
100.0
3,405
100.0
32,200
100.0
Owner-occupier
Buy-to-let
Total
€ 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
2016*
Total
residential
mortgage
portfolio
%
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
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 2017 (34%) decreased compared to 31 December 2016 (47%). This reflects the increase in residential property
prices during 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 Republic of Ireland residential mortgages
The following table profiles the asset quality of the Republic of Ireland residential mortgage portfolio at 31 December 2017 and 2016:
A
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Neither past due nor impaired
Past due but not impaired
Impaired - provisions held
Gross residential mortgages
Provisions for impairment
Owner-
occupier
€ m
25,394
666
2,277
28,337
(981)
27,356
Buy-to-let
€ m
2,802
173
888
3,863
(399)
3,464
2017*
Total
€ m
28,196
839
3,165
32,200
(1,380)
30,820
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
The percentage of the portfolio which is neither past due nor impaired increased at 31 December 2017 to 88% from 84% at
31 December 2016.
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 2017 and
2016:
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
387
91
42
28
30
88
666
Total gross residential mortgages
28,337
Buy-to-let
€ m
56
15
8
16
21
57
173
3,863
2017*
Total
€ m
443
106
50
44
51
145
839
Owner-
occupier
€ m
386
96
38
34
35
75
664
32,200
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
33,444
Loans past due but not impaired at 31 December 2017 decreased by 7% when compared to 31 December 2016, driven by the improved
economic environment and continued increased focus on the management of early arrears.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 115
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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 2017 and 2016:
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
382
89
41
28
30
87
€ m
54
15
8
16
20
52
657
165
2017*
Total
€ m
436
104
49
44
50
139
822
Owner-
occupier
Buy-to-let
€ m
372
91
37
33
34
73
640
€ m
68
25
29
24
25
53
224
2016*
Total
€ m
440
116
66
57
59
126
864
The collateral value for the past due but not impaired portfolio was 98% of the outstanding loan balances at 31 December 2017, an
increase from 96% at 31 December 2016.
Republic of Ireland residential mortgages that were impaired
The following table profiles the Republic of Ireland residential mortgages that were impaired at 31 December 2017 and 2016:
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
398
100
51
44
107
137
1,440
2,277
28,337
Buy-to-let
€ m
153
26
20
13
30
50
596
888
2017*
Total
€ m
551
126
71
57
137
187
2,036
3,165
3,863
32,200
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
33,444
Impaired loans decreased by € 1.2 billion in 2017 due to restructuring, distressed portfolio sales, cures and write-offs. In addition, the rate
of new impairment continued to slow significantly compared to 2016 driven by an improved economic environment. Of the residential
mortgage portfolio that was impaired at 31 December 2017, € 0.6 billion or 17% was not past due (31 December 2016:
€ 0.8 billion or 19%), of which € 0.5 billion was subject to forbearance measures at 31 December 2017 (31 December 2016: € 0.7 billion).
*Forms an integral part of the audited financial statements
116
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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
A
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continues to be recognised on the statement of financial position.
The number (stock) of properties in possession at 31 December 2017 and 2016 is set out below:
Owner-occupier
Buy-to-let
Total
2017*
Balance
outstanding
€ m
145
11
156
Stock
602
53
655
Stock
691
104
795
2016*
Balance
outstanding
€ m
172
24
196
(1)The number of residential properties in possession relates to those held as security for residential mortgages only.
The stock of residential properties in possession decreased by 140 properties in 2017. This decrease relates to the disposal of 203
properties (31 December 2016: 187 properties) which were offset by the addition of 112 properties (31 December 2016: 273 properties).
In addition, a further 49 properties were removed from the stock in 2017 as part of the sale of a portfolio of distressed mortgages.
Republic of Ireland residential mortgages – repossessions disposed of
The following table analyses the disposals of repossessed properties for the years ended 31 December 2017 and 2016:
Number of Outstanding Gross sales
proceeds
balance at
disposals
on
repossession
disposal
date
€ m
€ m
187
16
203
48
4
52
30
2
32
Number of
disposals
Outstanding
balance at
repossession
date
€ m
Gross sales
proceeds
on
disposal
€ m
170
17
187
42
4
46
20
2
22
Costs
to
sell
€ m
3
–
3
Costs
to
sell
€ m
2
–
2
2017*
Loss on
sale(1)
€ m
21
2
23
2016*
Loss on
sale(1)
€ m
24
2
26
Owner-occupier
Buy-to-let
Total
Owner-occupier
Buy-to-let
Total
(1)Before specific impairment provisions.
The disposal of 203 residential properties in the Republic of Ireland resulted in a total loss on disposal of € 23 million at 31 December
2017 (before specific impairment provisions) and compares to 31 December 2016 when 187 residential properties were disposed of
resulting in a total loss of € 26 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
AIB Group plc Annual Financial Report 2017 117
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Page 118
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 years ended 31 December 2017
and 2016:
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
1,327
129
115
109
29
5
%
27.2
Buy-to-let
€ m
193
19
19
19
4
–
%
19.4
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.
(6)
(2)
(8)
(1)
–
(1)
2017*
Total
€ m
1,520
148
134
128
33
5
%
26.1
2017*
€ m
(7)
(2)
(9)
Owner-
occupier
€ m
1,564
181
169
161
62
7
%
38.6
Buy-to-let
€ m
231
34
33
33
19
1
%
56.1
€ m
€ m
(1)
(3)
(4)
2
–
2
2016*
Total
€ m
1,795
215
202
194
81
8
%
41.5
2016*
€ m
1
(3)
(2)
The UK mortgage portfolio is predominantly based in Northern Ireland (73% of total) with the remainder located in Great Britain.
The portfolio decreased in sterling terms by c.12% on the financial year end December 2016. Due to the impact of currency movements,
the portfolio decreased by c.15% in euro terms.
Impaired loans reduced by 34% during the last 12 months and were significantly impacted by the sale of a portfolio of distressed
mortgages.
The improved UK domestic economic position has continued to have a positive impact on mortgage arrears. Total loans in arrears
greater than 90 days has reduced to 8.8% of the total portfolio (2016: 11.2%).
Statement of financial position specific provisions of € 33 million were held at 31 December 2017 and provided cover of 26% for
impaired loans (2016: € 81 million, providing cover of 42%).
Statement of financial position IBNR provisions of € 5 million were held at 31 December 2017, down from € 8 million at 31 December
2016, reflecting an improvement in estimated incurred loss in the non-impaired portfolio.
*Forms an integral part of the audited financial statements
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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 2017 and 2016:
A
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R
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Total
Impaired
Total
Impaired
2017*
2016*
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
2017
Total
Number
Balance
€ m
Number
Balance
€ m
925
298
311
561
639
663
1,038
1,495
1,687
2,307
3,123
2,638
1,085
474
238
116
126
244
342
223
198
434
20
6
6
17
17
21
43
73
95
167
290
346
136
41
22
9
12
23
46
35
29
66
32
4
11
38
24
55
58
102
136
206
230
227
82
17
13
–
1
1
–
–
–
–
1
–
–
1
1
2
3
4
10
15
25
40
18
3
5
–
–
–
–
–
–
–
Number
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
–
Balance
€ m
Number
Balance
€ m
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
–
–
–
–
–
–
–
19,165
1,520
1,237
128
21,201
1,795
1,716
194
The majority (€ 0.9 billion or 62%) of the € 1.5 billion residential mortgage portfolio in the UK was originated between 2005 and 2008.
10% (€ 0.1 billion) of mortgages from this period were impaired as at 31 December 2017, driven by the financial crisis in 2008 leading to
unemployment and reduced disposable incomes, and the rapid reduction in house prices experienced following the peak in 2007. 20% of
the portfolio was originated before 2005 of which 7% was impaired at 31 December 2017, and the remaining 18% of the portfolio was
originated since 2009 of which 3% was impaired at 31 December 2017. The improving impairment profile in recent years is reflective of
more responsible lending practices and affordability regulations introduced following the financial crisis.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 119
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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 2017. The index for Quarter 3 2017
reported the UK annual rate of house price growth at 2.0%.
In Northern Ireland (which includes 73% of the UK residential mortgage portfolio), the Nationwide HPI for Quarter 3 2017 reported an
increase of 2.4% for the twelve months to the end of Quarter 3 2017.
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 2017 and 2016:
United Kingdom
Less than 50%
50% to 70%
71% to 80%
81% to 90%
91% to 100%
101% to 120%
121% to 150%
Greater than 150%
Unsecured
Total
Weighted average indexed loan-to-value(1):
Stock of residential mortgages at financial year end
New residential mortgages issued during the year
Impaired residential mortgages
United Kingdom
Less than 50%
50% to 70%
71% to 80%
81% to 90%
91% to 100%
101% to 120%
121% to 150%
Greater than 150%
Unsecured
Owner-occupier
€ m
%
504
330
137
107
83
88
47
25
6
38.0
24.9
10.3
8.0
6.2
6.7
3.5
1.9
0.5
Buy-to-let
2017*
Total
€ m
58
36
25
16
17
25
8
7
1
%
30.2
18.4
12.9
8.4
8.7
13.0
4.2
3.5
0.7
€ m
562
366
162
123
100
113
55
32
7
%
37.0
24.0
10.6
8.1
6.6
7.5
3.6
2.1
0.5
1,327
100.0
193
100.0
1,520
100.0
63.9
77.9
97.1
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
71.2
79.8
113.5
Buy-to-let
%
27.4
15.9
9.0
10.2
9.0
12.7
7.3
3.7
4.8
€ m
63
37
21
24
21
29
17
8
11
64.8
77.9
99.5
2016*
Total
%
34.5
22.1
10.7
7.9
6.1
8.1
5.9
2.7
2.0
€ m
619
397
192
143
110
145
105
48
36
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
75.7
69.7
114.7
68.6
72.0
109.0
(1)Weighted average indexed loan-to-values are the individual indexed loan-to-value calculations weighted by the mortgage balance against each property.
12% of the total owner-occupier and 21% of the total buy-to-let mortgages were in negative equity at 31 December 2017 (excluding
unsecured), compared to 16% and 24% respectively at 31 December 2016, impacted by low interest rates and a sustained increase in
house prices, coupled with amortisation of the loan portfolio. The weighted average indexed loan-to-value for the total residential
mortgage portfolio was 64.8% at 31 December 2017 compared to 68.6% at 31 December 2016, again reflecting the increase in
residential property prices and overall improved domestic economic factors. The significant reduction in the unsecured element is mainly
attributable to a portfolio sale of unsecured distressed mortgages.
*Forms an integral part of the audited financial statements
120
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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
A
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at 31 December 2017 and 2016:
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
470
307
124
99
67
75
36
11
%
39.5
25.8
10.4
8.3
5.6
6.4
3.0
1.0
€ m
56
34
24
14
16
23
5
1
%
32.6
19.5
13.6
8.3
9.1
13.6
2.9
0.4
2017*
Total
%
38.6
25.0
10.8
8.3
6.1
7.3
3.0
0.9
€ m
526
341
148
113
83
98
41
12
1,189
100.0
173
100.0
1,362
100.0
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
Residential mortgages that were neither past due nor impaired and in negative equity at 31 December 2017 decreased in comparison to
31 December 2016, in part as a result of the increase in residential property prices in the year, as well as the amortisation of the loan
portfolio. 11% of residential mortgages that were neither past due nor impaired were in negative equity at 31 December 2017 compared
with 14% at 31 December 2016.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 121
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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 2017 and 2016:
Owner-occupier
Buy-to-let
Total
€ m
21
21
12
6
13
12
11
13
6
%
18.2
18.4
10.0
5.5
11.1
10.3
9.3
11.6
5.6
€ m
2
1
1
2
1
2
3
6
1
%
10.2
7.9
6.2
9.7
4.6
7.1
14.8
32.5
7.0
€ m
23
22
13
8
14
14
14
19
7
%
17.1
17.0
9.5
6.0
10.2
9.8
10.1
14.5
5.8
2017*
Total
residential
mortgage
portfolio
€ m
562
366
162
123
100
113
55
32
7
%
37.0
24.0
10.6
8.1
6.6
7.5
3.6
2.1
0.5
115
100.0
19
100.0
134
100.0
1,520
100.0
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
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
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
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 2017 (34%), decreased in comparison to 31 December 2016 (35%). This arose from the increases in
residential property prices and the overall improved domestic economic factors.
*Forms an integral part of the audited financial statements
122
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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 2017 and 2016:
A
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R
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United Kingdom
Neither past due nor impaired
Past due but not impaired
Impaired - provisions held
Gross residential mortgages
Provisions for impairment
Owner-
occupier
€ m
1,189
29
109
1,327
(34)
1,293
Buy-to-let
€ m
173
1
19
193
(4)
189
2017*
Total
€ m
1,362
30
128
1,520
(38)
1,482
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
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 2017 and 2016:
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
9
8
6
5
1
–
29
1
–
–
–
–
–
1
2017*
Total
€ m
10
88
64
53
12
–3
30
Owner-
occupier
€ m
10
30
Buy-to-let
€ m
2
1
–
–
–
–
3
2016*
Total
€ m
12
9
4
3
2
3
33
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 2017
and 2016:
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
9
8
6
5
1
–
29
1
–
–
–
–
–
1
2017*
Total
€ m
10
87
63
53
12
–3
30
Owner-
occupier
€ m
10
28
Buy-to-let
€ m
2
1
–
–
–
–
3
2016*
Total
€ m
12
8
3
3
2
3
31
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 123
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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 2017 and 2016:
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
24
9
3
4
6
12
51
109
3
1
1
–
2
1
11
19
193
2017*
Total
€ m
27
10
4
4
8
13
62
128
1,520
Owner-
occupier
€ m
Buy-to-let
€ m
26
7
5
2
8
17
96
161
1,564
3
1
–
–
2
3
24
33
231
2016*
Total
€ m
29
8
5
2
10
20
120
194
1,795
Total gross residential mortgages
1,327
At 31 December 2017, the level of residential mortgages that were impaired was 8.4% and has decreased from 10.8% as at
31 December 2016.
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 2017 and 2016 is set out below:
Owner-occupier
Buy-to-let
Total
Stock
13
14
27
2017*
Balance
outstanding
€ m
3
2
5
Stock
37
11
48
2016*
Balance
outstanding
€ m
9
2
11
(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 2017, and has reduced from 48 properties at December 2016 to
27 properties.
United Kingdom residential mortgages – repossessions disposed of
The disposal of 53 residential properties in possession resulted in a loss on disposal of € 5 million before specific impairment
provisions (2016: disposal of 60 properties resulting in a loss on disposal of € 5 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
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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 2017 and 2016:
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RCB
€ m
WIB AIB UK
€ m
€ m
Group
€ m
2017*
Total
€ m
RCB
€ m
WIB
€ m
AIB UK
€ m
Group
€ m
Analysed as to asset quality
Satisfactory
2,203
42
162
Watch
Vulnerable
Impaired
Total criticised loans
Total gross loans and
87
249
349
685
receivables
2,888
Total loans percentage
Criticised loans/total loans
Impaired loans/total loans
%
24
12
–
1
–
1
43
%
2
–
5
6
13
24
186
%
13
7
5
–
–
–
–
5
%
–
–
Statement of financial position
€ m
€ m
€ m
€ m
Specific provisions
IBNR provisions
Total impairment provisions
Provision cover percentage
Specific provisions/impaired loans
Total provisions/impaired loans
Total provisions/total loans
190
40
230
%
54
66
8
Income statement –
–
–
–
%
–
–
–
13
3
16
%
100
123
9
–
–
–
%
–
–
–
–
–
–
–
–
–
%
–
–
2,412
1,995
96
161
92
256
362
710
110
279
384
773
–
4
2
6
10
13
46
69
3,122
2,768
102
230
%
23
12
€ m
203
43
246
%
56
68
8
%
28
14
€ m
218
34
252
%
57
66
9
%
6
2
%
30
20
€ m
€ m
€ m
–
–
–
%
–
–
–
34
4
38
%
74
83
17
–
–
–
%
–
–
–
2016*
Total
€ m
2,252
120
296
432
848
3,100
%
27
14
€ m
252
38
290
%
58
67
9
(credit)/charge
€ m
€ m
€ m
€ m
€ m
€ m
€ m
€ m
€ m
€ m
Specific
IBNR
Total impairment (credit)/charge
(8)
8
–
%
–
–
–
%
(1)
(1)
(2)
%
–
–
–
%
(9)
7
(2)
%
(21)
(7)
(28)
%
12
(2)
10
%
(2)
(2)
(4)
%
–
–
–
%
(11)
(11)
(22)
%
Impairment (credit)/charge/
/average loans
(0.01)
–
(0.83)
–
(0.07)
(0.46)
6.67
(1.06)
–
(0.63)
The other personal lending portfolio of € 3.1 billion comprises € 2.2 billion in loans and overdrafts and € 0.9 billion in credit card facilities
(31 December 2016: € 3.1 billion, € 2.2 billion and € 0.9 billion respectively).
An increase in demand for personal loans was observed during the period and was due to both the favourable economic environment
and AIB’s service offering, especially increased online approval through internet and mobile credit application activity. The strong level of
new lending at € 0.8 billion evident in 2017 is 15% higher than in 2016, and was offset by redemptions and repayments.
The portfolio experienced a € 0.1 billion reduction in criticised loans in 2017 (16%). At 31 December 2017, € 0.7 billion or 23% of the
portfolio was criticised of which impaired loans amounted to € 0.4 billion (31 December 2016: € 0.8 billion or 27% and € 0.4 billion).
At 31 December 2017, the specific provision cover decreased from 58% to 56% impacted by the write-off of impaired balances with a
high provision cover which were predominately low value retail loans on which recovery options had been exhausted. The income
statement provision writeback of € 2 million compares to a € 22 million writeback in 2016. Specific provisions on new impairments
amounted to € 58 million (2016: € 42 million) which were off-set by a writeback of € 67 million (net of top-ups) (2016: € 53 million).
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 125
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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
The following table analyses property and construction lending by segment showing asset quality and impairment provisions for the
financial years ended 31 December 2017 and 2016:
Investment:
Commercial investment
Residential investment
Land and development:
Commercial development
Residential development
Contractors
Housing associations
RCB
€ m
2,002
571
2,573
275
485
760
115
–
WIB
€ m
AIB UK(1)
€ m
2,375
124
2,499
216
253
469
80
–
881
249
1,130
427
223
650
287
257
2017*
Total
€ m
5,258
944
6,202
918
961
1,879
482
257
RCB
€ m
2,612
716
3,328
324
638
962
113
–
WIB
€ m
AIB UK
€ m
2,053
102
2,155
100
162
262
82
–
1,533
233
1,766
20
277
297
170
259
2016*
Total
€ m
6,198
1,051
7,249
444
1,077
1,521
365
259
Total gross loans and receivables
3,448
3,048
2,324
8,820
4,403
2,499
2,492
9,394
2,758
1,932
Analysed as to asset quality
Satisfactory
Watch
Vulnerable
Impaired
Total criticised loans
Total loans percentage
Criticised loans/total loans
Impaired loans/total loans
Statement of financial position
Specific provisions
IBNR provisions
Total impairment provisions
Provision cover percentage
Specific provisions/impaired loans
Total provisions/impaired loans
Total provisions/total loans
679
142
1,052
1,575
2,769
%
80
46
€ m
761
104
865
%
48
55
25
–
290
–
290
%
10
–
€ m
–
26
26
%
–
–
1
Income statement – (credit)/charge
€ m
€ m
Specific
IBNR
Total impairment (credit)/charge
Impairment (credit)/charge
(85)
26
(59)
%
(1)
20
19
%
5,369
206
1,442
1,803
3,451
%
39
20
€ m
914
150
1,064
%
51
59
12
€ m
(100)
50
(50)
%
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)
%
4,437
378
1,855
2,724
4,957
%
53
29
€ m
1,350
99
1,449
%
50
53
15
€ m
(74)
(71)
(145)
%
64
100
228
392
%
17
10
€ m
153
20
173
%
67
76
7
€ m
(14)
4
(10)
%
/average loans
(1.55)
0.65
(0.38)
(0.56)
(2.63)
0.04
(0.48)
(1.38)
(1)In 2017, AIB UK implemented a new range of sector codes to bring them into alignment with the rest of the Group. This resulted in € 0.6 billion reported in
the ‘Investment’ sector in 2016 being reclassified as ‘Land and development’ and ‘Contractors’ in the above table for 2017.
*Forms an integral part of the audited financial statements
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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. The portfolio is comprised of 71% investment
loans (€ 6.2 billion), 21% land and development loans (€ 1.9 billion) and 8% other property and construction loans (€ 0.7 billion).
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AIB UK accounts for 26% of the total property and construction portfolio.
Overall, the portfolio reduced by € 0.6 billion or 6% during 2017. 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 € 0.9 billion (34%) during 2017.
There was a writeback of specific provisions net of top-ups of € 144 million (5% of opening impaired loans) mainly due to the improved
economic environment and the restructuring process. This was partially off-set by provisions for new impairments which amounted to
€ 44 million.
Investment
Investment property loans amounted to € 6.2 billion at 31 December 2017 (2016: € 7.2 billion) of which € 5.3 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. € 2.6 billion (42%) of the investment property portfolio relates to RCB, € 2.5 billion (40%) to WIB,
and with the remaining € 1.1 billion (18%) in AIB UK.
Total impairment provisions as a percentage of total loans is 9%, and is down from 12% at 31 December 2016. The impairment charge
to the income statement was € 2 million on the investment property element of the property and construction portfolio compared to a
writeback of € 67 million in 2016, with the increase largely due to the lengthening of emergence periods.
Land and development
At 31 December 2017, land and development loans amounted to € 1.9 billion (2016: € 1.5 billion). € 1.2 billion of this portfolio related to
loans in RCB and WIB, with the remaining € 0.7 billion in AIB UK.
€ 0.8 billion of the land and development portfolio was criticised at 31 December 2017 (2016: € 1.1 billion), including € 0.6 billion of
loans which were impaired (2016: € 0.8 billion) and on which the Group had € 0.4 billion in statement of financial position specific
provisions, providing cover of 60% (2016: € 0.5 billion and 61%). The impairment writeback of € 53 million to the income statement
compares to a writeback of € 79 million in 2016.
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AIB Group plc Annual Financial Report 2017 127
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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
The following table analyses non-property business lending by segment showing asset quality and impairment provisions for the financial
years ended 31 December 2017 and 2016:
Gross loans and receivables
to customers
Agriculture
Distribution:
Hotels
Licensed premises
Retail/wholesale
Other distribution
Other services
Other
Total gross loans and
€ m
1,568
496
401
1,071
133
2,101
1,380
878
Analysed as to asset quality
Satisfactory
Watch
Vulnerable
Impaired
Total criticised loans
Total loans percentage
Criticised loans/total loans
Impaired loans/total loans
3,658
209
1,252
808
2,269
%
38
14
RCB
WIB
AIB(1) Group
UK
€ m
€ m
2017*
Total
€ m
1,818
1,938
680
2,550
379
5,547
5,374
4,937
RCB
WIB
€ m
1,531
508
386
1,090
127
2,111
1,435
948
€ m
148
1,012
155
885
121
2,173
1,897
2,302
AIB
UK
€ m
94
791
–
364
–
1,155
2,368
1,183
Group
2016*
Total
€ m
€ m
–
–
–
–
–
–
6
144
1,773
2,311
541
2,339
248
5,439
5,706
4,577
–
–
–
–
–
–
1
52
€ m
168
915
156
974
135
82
527
123
505
111
2,180
2,111
2,744
1,266
1,882
1,263
receivables
5,927
7,203
4,493
53
17,676
6,025
6,520
4,800
150
17,495
7,118
4,126
53
14,955
3,333
6,339
4,184
114
13,970
413
1,436
872
2,721
327
1,296
1,069
2,692
12
65
8
85
%
1
–
192
119
56
367
%
8
1
–
–
–
–
%
–
–
%
15
5
€ m
470
147
617
%
54
71
3
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)
%
%
45
18
€ m
587
77
664
%
55
62
11
€ m
24
(41)
(17)
%
Statement of financial position
€ m
€ m
€ m
€ m
Specific provisions
IBNR provisions
Total impairment provisions
Provision cover percentage
Specific provisions/impaired loans
Total provisions/impaired loans
Total provisions/total loans
435
103
538
%
54
67
9
2
19
21
%
25
263
–
33
25
58
%
59
104
1
–
–
–
%
–
–
–
Income statement – charge/
(credit)
Specific
IBNR
Total impairment charge/
(credit)
Impairment charge/(credit)
€ m
€ m
€ m
€ m
€ m
(9)
26
17
%
(9)
(7)
(16)
%
39
–
39
%
–
–
–
%
21
19
40
%
/average loans
0.28
(0.23)
0.83
0.00
0.23
(0.28)
0.16
(0.31)
2.12
(0.08)
(1)In 2017, AIB UK implemented a new range of sector codes to bring them into alignment with the rest of the Group. This resulted in € 0.2 billion in 2016
being reclassified within ‘Distribution’ in the above table for 2017.
*Forms an integral part of the audited financial statements
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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 and Medium Enterprises (“SME”) which are reliant on the domestic economies
in which they operate and larger corporate and institutional borrowers which are impacted by global economies. There was increased
credit demand across all segments and in most subsectors resulting in new lending of € 4.9 billion in the year to 31 December 2017
(31 December 2016: € 4.1 billion), an increase of 18%. This new lending was offset by amortisation, restructuring activity and sterling
depreciation, resulting in an overall increase of € 0.2 billion or 1% in the portfolio. The portfolio amounted to 28% of total loans and
receivables at 31 December 2017, with the majority of the exposure to Irish borrowers with the UK and USA being the other main
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Satisfactory loans and receivables increased continuing the positive trend experienced in 2016, with new drawdowns exceeding
amortisation and repayment coupled with upward grade migration through improved performance. The level of criticised loans reduced
from € 3.5 billion at 31 December 2016 to € 2.7 billion at 31 December 2017, mainly due to a reduction of € 0.5 billion (38%) in impaired
loans as a result of restructuring activity and portfolio disposals.
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 2017, with the dairy sector recovering as the positive
momentum in milk prices continued. Downward pressure on prices exists in non-dairy sectors;
– The hotels sub-sector comprises 11% of the portfolio. This sector continued to perform well in the 2017, helped by a stronger local
economy. There has been a net growth in tourist numbers despite a decline in visitors from UK. Valuations for hotels have continued
to increase, with a number of foreign investors and fund managers competing for available properties. Additional supply from
extensions to existing hotels and some new hotel developments are now coming on stream, mainly in key urban areas;
– The licensed premises sub-sector comprises 4% of the portfolio. This sector continues to perform strongly in key urban centres, but
outside the main cities, trading performance continues to be more challenging;
– The retail/wholesale sub-sector (14% of the portfolio) was broadly stable in 2017; there are still some areas of stress, in particular in
rural areas and some sub sectors; and
– The other services sub-sector comprises 31% 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 has
continued to perform well in 2017.
In the table on the preceding page, there is a category of “Other” totalling € 4.9 billion (28% of the portfolio). This category includes a
broad range of sub-sectors such as energy, manufacturing, transport and financial.
The Republic of Ireland continued to show strong economic growth during 2017. Notwithstanding this continued strong economic
performance, there are still challenges. In particular, there is heightened economic uncertainty and increased foreign exchange volatility
since the UK voted in favour of Brexit in 2016. The medium-term outlook for the UK economy remains uncertain as Brexit negotiations
between the UK and the EU continues.
WIB includes € 3.2 billion (31 December 2016: € 2.8 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. At 31 December 2017, 99.6% of the syndicated and international lending
portfolio is in a satisfactory grade. 66% of the customers in this portfolio are domiciled in the USA, 6% in the UK, and 28% in the Rest of
the World (primarily Europe) (31 December 2016: 76% in the USA, 5% in the UK and 19% in the Rest of the World (primarily Europe)
respectively). The largest industry sub-sectors within the portfolio include healthcare, business services and telecoms.
The income statement provision charge in 2017 was € 40 million compared to a writeback of € 16 million in 2016.
IBNR provisions increased from € 131 million at 31 December 2016 to € 147 million or from 0.8% to 0.9% of non-impaired loans and
receivables, in line with the evolving nature of the performing portfolios and the lengthening of emergence periods.
The specific provision cover increased from 51% at 31 December 2016 to 54% at 31 December 2017, impacted by write-offs of
provisions for loans with lower provision cover.
Specific provisions on new impairments amounted to € 106 million (2016: € 75 million) which were off-set by a writeback (net of top-ups)
of € 85 million (2016: € 51 million). The writebacks amounted to 6% of opening impaired loans and was driven by the improved
economic environment and the ongoing restructuring programme.
AIB Group plc Annual Financial Report 2017 129
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Risk management – 3. Individual risk types
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 2017, the Group’s top 50 exposures amounted to € 4.3 billion, and accounted for 6.7% (2016: € 4.5 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 € 146 million (2016: € 83 million). No single customer exposure exceeded regulatory requirements.
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 73 to 76. These lower credit quality loans are referred to as ‘Criticised
loans’ and include Watch, Vulnerable and Impaired, and are defined on page 74.
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 or past due but not impaired are further classified into ‘Good upper, Good lower, Watch and
Vulnerable’, which are defined as follows:
Good upper: Strong credit with no weakness evident. Typically includes elements of the residential mortgages portfolio combined
with strong corporate and commercial lending.
Good lower: Satisfactory credit with no weakness evident. Typically includes new business written and existing satisfactorily
performing exposures across all portfolios.
Watch:
Vulnerable:
The credit is exhibiting weakness but with the expectation that existing debt can be fully repaid from normal cash flows.
Credit where repayment is in jeopardy from normal cash flows and may be dependent on other sources, or loans that
are in a post impairment/restructuring phase.
*Forms an integral part of the audited financial statements
130
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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 2017 and 2016 is set out below:
A
n
n
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R
e
v
e
w
i
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
Impairment provisions
Total
Residential
mortgages
€ m
17,564
8,657
1,033
2,304
29,558
3
27
291
548
869
3,293
33,720
Other Property and Non-property
business
€ m
personal construction
€ m
€ m
227
2,135
69
173
2,604
3
47
23
83
156
362
3,122
205
5,123
187
1,227
6,742
–
41
19
215
275
1,803
8,820
1,861
13,012
384
1,264
16,521
1
81
29
172
283
872
17,676
Residential
mortgages
€ m
Other
personal
€ m
Property and Non-property
business
construction
€ m
€ m
15,937
9,811
1,575
2,407
29,730
5
50
281
597
933
4,576
35,239
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
2017
Total
€ m
19,857
28,927
1,673
4,968
55,425
7
196
362
1,018
1,583
6,330
63,338
(3,345)
59,993
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
The above table shows reductions in the watch, vulnerable and impaired (i.e.’criticised’) categories across all asset classes in 2017.
The increase in ‘good’ grade categories was driven by new lending partially offset by pay-downs. Loans reduced in total by € 1.9 billion
from 31 December 2016 (a decrease of 3%) representing a net increase in ‘good’ loans of € 2.5 billion and a decrease in ‘criticised’ of
€ 4.4 billion.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 131
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Risk management – 3. Individual risk types
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 46 to the financial statements.
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 103) and greater than 90 days past due but not impaired (page 101). 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 2017 and 2016 is set out below:
Total gross loans and receivables
33,720
3,122
8,820
17,676
63,338
Residential
mortgages
€ m
Other Property and Non-property
business
€ m
personal construction
€ m
€ m
2017*
Total
€ m
(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
3,293
246
1,277
4,816
14%
362
47
145
554
18%
1,803
141
1,005
2,949
33%
872
122
881
1,875
11%
6,330
556
3,308
10,194
16%
2016*
Total
€ m
Total gross loans and receivables
(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
Residential
mortgages
€ m
35,239
Other
personal
€ m
3,100
Property and Non-property
business
construction
€ m
€ m
9,394
17,495
65,228
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%
9,136
620
4,316
14,072
22%
Total non-performing off-balance sheet commitments
(b) Total non-performing off-balance sheet commitments amounted to € 322 million (2016: € 321 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.
*Forms an integral part of the audited financial statements
132
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3.1 Credit risk – credit profile of the loan portfolio
Credit ratings (continued)
Continued momentum in 2017 in reducing the stock of non-performing loans resulted in a reduction from € 14.1 billion (22% of total
gross loans at 31 December 2016) to € 10.2 billion (16% at 31 December 2017), a decrease of € 3.9 billion or 28%. This reduction was
achieved through case by case restructuring, cash redemptions and strategic initiatives.
The reductions were evident across all the components and asset classes with reductions noted in impaired, loans greater than 90 days
past due and loans in a probationary period (which are included in the “neither past due nor impaired and/or less than 90 days past due”
category).
AIB adopts a conservative approach to probation loans and for some categories holds a two year probation period (EBA rules on
probation requires a minimum of one year since forbearance was granted). AIB’s approach is subject to on-going review.
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 2017 and 2016 is set out below:
AAA/AA
A/A-
BBB+/BBB/BBB-
Sub investment
Unrated
Total
AAA/AA
A+/A/A-
BBB+/BBB/BBB-
Sub investment
Unrated
Total
Bank
€ m
4,430
961
164
–
94
5,649
Bank
€ m
4,901
847
186
11
5
5,950
Corporate
€ m
Sovereign
€ m
1,867
7,139
1,982
–
–
2,440
10,456
2,028
–
–
–
3
36
17
–
56
–
27
19
21
–
67
Corporate
€ m
Sovereign
€ m
10,988(1)
295
16,988
Other
€ m
295
–
–
–
–
2017
Total
€ m
6,592
8,103
2,182
17
94
Other
€ m
446
–
–
–
–
2016
Total
€ m
7,787
11,330
2,233
32
5
14,924(1)
446
21,387
(1)Includes supranational banks and government agencies. In 2016, this category also included NAMA senior bonds and financial investments held to
maturity, both of which had NIL balances at 31 December 2017.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 133
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Risk management – 3. Individual risk types
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 2017 and 2016:
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
7,021
2,406
161
1,368
278
16
4,336
56
–
15,642
679
2017*
Unrealised
Unrealised
gross gains gross losses
€ m
€ m
646
124
5
40
–
–
79
–
–
894
467
(6)
–
(1)
(4)
(8)
–
(1)
–
–
(20)
(3)
Fair
value
€ m
5,114
2,706
230
1,719
433
12
4,551
47
20
14,832
605
Unrealised
gross gains
€ m
2016*
Unrealised
gross losses
€ m
458
148
8
64
–
–
102
–
3
783
448
(13)
(6)
(1)
(1)
(8)
–
(1)
–
–
(30)
(2)
(32)
16,321
1,361
(23)
15,437
1,231
(1)Includes NAMA subordinated bonds with a fair value of € 466 million (31 December 2016: € 466 million) of which unrealised gains amount to € 423 million
(31 December 2016: € 419 million).
The following table categorises the available-for-sale debt securities portfolio by contractual residual maturity and weighted average
yield at 31 December 2017 and 2016:
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
1,071
51
–
305
–
–
133
1
–
Total ............................................................
1,561
4.7
1.1
–
1.2
–
–
0.9
(0.1)
–
3.6
3,400
1,380
117
694
–
–
3,787
49
–
9,427
4.5
1.8
2.5
1.2
–
–
0.7
0.9
–
2.3
2,166
975
44
123
10
–
416
4
–
3,738
2.4
1.4
1.7
1.5
2.0
–
0.5
1.0
–
1.9
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
2017
After 10 years
€ m Yield %
384
–
–
246
268
16
–
2
–
916
1.4
–
–
2.3
1.8
0.1
–
1.5
–
1.8
2016
After 10 years
€ m Yield %
328
–
–
80
433
12
–
–
–
1.3
–
–
2.2
1.9
0.2
–
–
–
853
1.7
*Forms an integral part of the audited financial statements
134
AIB Group plc Annual Financial Report 2017
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3.1 Credit risk – Financial investments available for sale
The following tables analyse the available for sale portfolio by geography at 31 December 2017 and 2016:
Government securities
Republic of Ireland
Italy
France
Spain
Netherlands
Germany
Belgium
Austria
United Kingdom
Slovakia
Czech Republic
Poland
Saudi Arabia
Asset backed securities
United States of America
Republic of 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
7,021
Euro
government
€ m
–
2017*
Non Euro
government
€ m
–
Irish
Government
€ m
5,114
Euro
government
€ m
–
2016*
Non Euro
government
€ m
–
–
–
–
–
–
–
–
–
–
–
–
–
907
122
1,075
195
56
23
28
–
–
–
–
–
7,021
2,406
–
–
–
–
–
–
–
62
–
12
44
43
161
–
–
–
–
–
–
–
–
–
–
–
–
928
269
1,100
254
93
–
30
–
32
–
–
–
5,114
2,706
2017*
Total
€ m
278
16
294
Euro
€ m
471
569
712
443
315
394
661
234
300
297
31
57
24
18
25
4,551
Euro
€ m
2017*
Non Euro
€ m
423
529
516
553
335
372
728
198
282
289
30
57
24
–
–
4336
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
76
–
36
89
29
230
2016*
Total
€ m
433
12
445
2016*
Non Euro
€ m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 135
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Risk management – 3. Individual risk types
3.1 Credit risk
Financial investments available for sale
Debt securities
Debt securities available for sale (“AFS”) increased from a fair value of € 14.8 billion (nominal € 14.1 billion) at 31 December 2016 to
€ 15.6 billion (nominal € 14.9 billion) at 31 December 2017. An increase in Irish Government securities of € 1.9 billion was the main driver.
This was offset by reductions in collateralised mortgage obligations (€ 0.2 billion), supranational banks and government agencies
(€ 0.4 billion) and euro bank securities (€ 0.2 billion).
Within the € 1.9 billion increase in Irish Government Securities, the reclassification from the held to maturity securities portfolio contributed
€ 3.2 billion (nominal € 2.9 billion). Sales, maturities and redemptions amounted to € 1.3 billion (nominal € 1.2 billion).
The external ratings profile remained relatively static with total investment grade ratings now at 100% (2016: 99%). The breakdown by
ratings was AAA: 27% (2016: 31%); AA: 13% (2016: 18%); A: 47% (2016: 37%); BBB: 13% (2016: 13%); and sub investment grade 0%
(2016: 1%).
Republic of Ireland securities
The fair value of Irish debt securities amounted to € 7.5 billion at 31 December 2017 (2016: € 5.6 billion) and consisted of sovereign debt
€ 7.0 billion (2016: € 5.1 billion), senior unsecured bonds of € 0.2 billion (2016: € 0.2 billion) and covered bonds of € 0.2 billion
(2016: € 0.3 billion).
United Kingdom securities
The fair value of United Kingdom securities amounted to € 0.6 billion at 31 December 2017 (2016: € 0.5 billion) and consisted of
sovereign debt € 0.1 billion (2016: € 0.1 billion), senior unsecured bonds of € 0.1 billion (2016: € 0.1 billion) and covered bonds of
€ 0.4 billion (2016: € 0.3 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 € 2.4 billion (2016: € 2.7 billion). This decrease was largely due to net sales and maturities and included reductions in French
government securities of € 0.1 billion.
Bank securities
At 31 December 2017, the fair value of bank securities of € 4.3 billion (2016: € 4.5 billion) included € 2.8 billion in covered bonds
(2016: € 3 billion), € 1.3 billion in senior unsecured bank debt (2016: € 1.3 billion) and € 0.2 billion in government guaranteed senior bank
debt (2016: € 0.2 billion). The bank debt was diversified across banks in 13 countries with the largest exposure to Canadian banks
(€ 0.7 billion).
Asset backed securities
Asset backed securities decreased to € 0.3 billion (2016: € 0.4 billion).
Equity securities
The fair value of NAMA subordinated bonds was € 466 million (106.69% of nominal € 437 million). In 2016, the fair value was
€ 466 million being 99.02% of nominal of € 474 million. During 2017, the Group disposed of € 34 million in nominal value.
Financial investments held to maturity
The Group’s held to maturity portfolio was reclassified as available for sale in order to provide flexibility in managing the overall bond
portfolio and to avail of opportunities through selling elements of this portfolio.
At 1 January
Amortisation of fair value gain
IAS 39 reclassification out (note 27)
At 31 December
*Forms an integral part of the audited financial statements
136
AIB Group plc Annual Financial Report 2017
2017
€ m
3,356
(122)
(3,234)
–
2016
€ m
3,483
(127)
–
3,356
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3.2 Additional credit risk information – Forbearance*
The Group’s forbearance initiatives are detailed on pages 82 to 84 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 2017 and 2016:
A
n
n
u
a
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R
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v
e
w
i
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
17,038
8,080
804
1,148
27,070
384
1,528
1,912
Other Property and Non-property
business
€ m
personal construction
€ m
€ m
226
1,802
57
75
2,160
100
218
318
204
5,090
137
541
5,972
139
1,349
1,488
1,860
12,893
348
569
15,670
180
545
725
2017
Total
€ m
19,328
27,865
1,346
2,333
50,872
803
3,640
4,443
Total non-forborne loans and receivables
to customers
28,982
2,478
7,460
16,395
55,315
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
526
577
229
1,156
2,488
485
1,765
2,250
Total forborne loans and receivables to customers
4,738(1)
1
333
12
98
444
56
144
200
644
1
33
50
686
770
136
454
590
1
119
36
695
851
103
327
430
529
1,062
327
2,635
4,553
780
2,690
3,470
1,360
1,281
8,023
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O
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F
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a
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c
a
i
Total gross loans and receivables to customers
33,720
3,122
8,820
17,676
63,338
Weighted average interest rate of forborne
loans and receivables to customers
(1)Republic of Ireland: € 4,692 million and United Kingdom: € 46 million.
%
2.3
%
6.7
%
2.9
%
3.6
%
3.0
The Republic of Ireland residential mortgage forbearance portfolio is profiled in more detail on pages 138 to 145 and further detail on the
non-mortgage forbearance portfolio is included on pages 146 to 150.
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 € 100 million in 2017 (2016: € 140 million). At 31 December 2017, the net
carrying value of impaired loans was € 3,608 million (2016: € 5,089 million) which included forborne impaired mortgages of
€ 1,199 million (2016: € 1,535 million) and forborne impaired non-mortgages of € 496 million (2016: € 680 million).
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*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 137
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Page 138
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 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
Total non-forborne loans and receivables
to customers
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
Residential
mortgages
€ m
Other
personal
€ m
Property and Non-property
business
construction
€ m
€ m
15,364
9,099
1,236
903
26,602
414
2,236
2,650
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
29,252
2,485
7,448
15,912
55,097
573
712
339
1,504
3,128
519
2,340
2,859
5,987(1)
1
275
22
126
424
61
130
191
615
–
40
64
1,083
1,187
159
600
759
1,946
9,394
%
3.0
1
152
83
766
1,002
131
450
581
575
1,179
508
3,479
5,741
870
3,520
4,390
1,583
10,131
17,495
65,228
%
3.5
%
2.9
Total gross loans and receivables to customers
35,239
3,100
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
Republic of Ireland residential mortgages
The Group has introduced a Mortgage Arrears Resolution Process (“MARP”) for dealing with mortgage customers in difficulty or likely to
be in difficulty. The core objectives of this process is 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. It includes long-term forbearance solutions which have been devised
to assist existing Republic of Ireland primary residential mortgage customers in difficulty.
Further details on MARP together with available forbearance strategies in operation to assist borrowers who have difficulty in meeting
repayment commitments are set out on page 83.
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
138
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Page 139
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:
A
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n
u
a
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R
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v
e
w
i
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
Disposals
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)
Disposals
Adoption of EBA forbearance definition
At 31 December
Number
29,865
2,973
(6,691)
–
–
(1,000)
–
(87)
7
–
25,067
Number
9,509
415
(530)
–
–
(1,544)
–
(78)
(7)
(521)
–
7,244
2017
Balance
€ m
4,274
438
(899)
(209)
95
(91)
(8)
(53)
2
–
3,549
2017
Balance
€ m
1,657
54
(91)
(130)
28
(219)
(7)
(45)
(2)
(102)
–
1,143
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
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
1,657
Number
2017
Balance
Number
2016
Balance
39,374
3,388
(7,221)
–
–
(2,544)
–
(165)
(521)
–
32,311
€ m
5,931
492
(990)
(339)
123
(310)
(15)
(98)
(102)
–
4,692
37,340
4,464
(4,576)
–
–
(1,561)
–
(41)
–
3,748
39,374
€ m
5,481
641
(700)
(329)
130
(153)
(7)
(22)
–
890
5,931
(1)Accounts closed during year due primarily to customer repayments and redemptions.
(2)Includes contracted and non-contracted write-offs in 2017 and 2016.
The stock of loans subject to forbearance measures decreased by € 1.2 billion since 31 December 2016 to € 4.7 billion at 31 December
2017 driven by customers exiting forbearance having met their forbearance terms, and lower numbers of customers seeking new
forbearance solutions which is reflective of improving customer ability to meet their mortgage terms.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 139
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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 definition of forbearance, which complies with the definition of Forbearance prescribed by the EBA, loans subject to
forbearance measures remain in forbearance stock for a period of two years from the date forbearance is granted regardless of the
forbearance type. Therefore, cases that receive a short-term forbearance measure, such as interest only, and return to a full principal
and interest repayment schedule at the end of the interest only period, will remain in the stock of forbearance for at least two years.
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 2017 and 2016:
Republic of Ireland owner-occupier
Interest only
Reduced payment
Payment moratorium
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
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
5,008
973
1,984
258
756
191
325
22
10,744
1,477
1,284
1,848
380
1,036
1,318
234
135
287
13
159
143
41
Loans neither > 90
days in arrears
nor impaired
Number Balance
€ m
2017
Loans > 90 days
in arrears and/or
impaired
Number
Balance
€ m
2,537
399
1,713
71
6,784
1,005
1,360
183
855
1,220
177
359
74
292
9
918
108
213
4
130
133
31
2,471
574
271
187
3,960
279
488
197
181
98
57
397
117
33
13
559
27
74
9
29
10
10
25,067
3,549
16,304
2,271
8,763
1,278
Total
Number
Balance
€ m
Loans neither > 90
days in arrears
nor impaired
Number Balance
€ m
2017
Loans > 90 days
in arrears and/or
impaired
Number
Balance
€ m
1,641
500
269
837
725
2,108
446
118
293
8
20
279
306
103
41
113
50
378
72
20
13
1
2
44
725
248
98
412
86
1,013
353
48
183
8
18
90
7,244
1,143
3,282
131
52
16
57
10
176
50
7
4
1
2
15
521
916
252
171
425
639
1,095
93
70
110
–
2
189
3,962
175
51
25
56
40
202
22
13
9
–
–
29
622
*Forms an integral part of the audited financial statements
140
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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
A
n
n
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a
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R
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v
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w
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Republic of Ireland – Total
Interest only
Reduced payment
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 neither > 90
days in arrears
nor impaired
Number Balance
€ m
2017
Loans > 90 days
in arrears and/or
impaired
Number
Balance
€ m
6,649
1,473
2,253
837
983
12,852
1,730
1,966
673
1,044
1,338
513
32,311
1,062
294
366
113
72
1,855
207
307
26
160
145
85
4,692
3,262
647
1,811
412
157
7,797
1,358
1,408
366
863
1,238
267
19,586
490
126
308
57
19
1,094
158
220
8
131
135
46
2,792
3,387
826
442
425
826
5,055
372
558
307
181
100
246
572
168
58
56
53
761
49
87
18
29
10
39
12,725
1,900
(1)Included in ‘Other’ are: € 35 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 € 4 million relating to affordable mortgage solutions whereby
customers agree to pay an amount that is affordable.
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*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 141
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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 owner-occupier
Number
Balance
€ m
Number
Balance
€ m
Number
Balance
€ m
Total
Loans neither > 90
days in arrears
nor impaired
2016
Loans > 90 days
in arrears and/or
impaired
Interest only
Reduced payment
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
5,214
1,030
1,526
2
303
796
213
241
–
38
13,494
1,888
1,857
3,066
510
1,163
1,453
247
212
474
28
182
157
45
2,627
401
1,279
2
103
8,401
1,521
2,420
269
993
1,392
212
379
74
208
–
13
2,587
629
247
–
200
1,122
5,093
176
377
7
153
151
36
336
646
241
170
61
35
417
139
33
–
25
766
36
97
21
29
6
9
29,865
4,274
19,620
2,696
10,245
1,578
Republic of Ireland buy-to-let
Number
Balance
€ m
Number
Balance
€ m
Number
Balance
€ m
Total
Loans neither > 90
days in arrears
nor impaired
2016
Loans > 90 days
in arrears and/or
impaired
Interest only
Reduced payment
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
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
956
356
116
817
101
1,279
482
53
193
8
26
76
189
83
15
116
13
243
72
9
5
1
3
7
9,509
1,657
4,463
756
1,034
223
414
191
378
703
92
25
53
59
1,736
321
137
85
110
–
1
257
5,046
38
28
20
–
–
42
901
*Forms an integral part of the audited financial statements
142
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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
A
n
n
u
a
l
R
e
v
e
w
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Republic of Ireland – Total
Interest only
Reduced payment
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
Loans neither > 90
days in arrears
nor impaired
2016
Loans > 90 days
in arrears and/or
impaired
Number
Balance
€ m
Number
Balance
€ m
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
3,583
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
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
(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.
A key feature of the forbearance portfolio is the level 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 € 0.7 billion accounted for 14% of the total forbearance portfolio
at 31 December 2017 (2016: € 1 billion, 17%). Following restructure, loans are reported as impaired for a probationary period of at least
12 months (unless a larger individually assessed case).
Arrears capitalisation continues to be the largest category of forbearance solutions which at 31 December 2017 accounted for 40% by
value of the total forbearance portfolio (31 December 2016: 41%). While actually decreasing year on year, a high proportion of the
arrears capitalisation portfolio (41% by value) is greater than 90 days in arrears and/or impaired, a decrease from 44% at 31 December
2016. The majority of arrears capitalisations that are impaired, excluding legal cases, are performing in line with agreed terms and
should exit forbearance, subject to EBA probationary criteria. Impaired loans in this category included c. 2,000 cases which are in a
legal process and are expected to remain impaired pending conclusion of that process.
In 2017, out of course repayments by customers on restructured mortgage loans resulted in the recognition of an additional € 4 million in
the income statement.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 143
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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 – 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 2017 and 2016:
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
190
55
28
22
21
61
377
Buy-to-let
€ m
33
7
5
11
17
32
2017
Total
€ m
223
62
33
33
38
93
Owner-
occupier
€ m
194
60
24
20
24
50
Buy-to-let
€ m
46
18
10
19
20
29
2016
Total
€ m
240
78
34
39
44
79
105
482
372
142
514
Loans subject to forbearance and past due but not impaired decreased by € 32 million in 2017 with later arrears (greater than 90 days in
arrears) increasing by € 2 million. The proportion of the portfolio past due but not impaired increased slightly to 10.3% at 31 December
2017 (2016: 8.7%).
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 2017 and 2016:
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
335
88
41
37
84
108
481
1,174
Buy-to-let
€ m
117
21
17
8
24
39
336
562
2017
Total
€ m
452
109
58
45
108
147
817
Owner-
occupier
€ m
491
116
51
43
102
127
554
1,736
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
Impaired loans subject to forbearance decreased by € 0.6 billion in 2017. Statement of financial position specific provisions of
€ 0.6 billion were held against the forborne impaired portfolio at 31 December 2017 (2016: € 0.8 billion), providing cover of 32%
(2016: 35%), while the income statement specific provision charge was € 76 million for the year (2016: € 101 million).
Within the impaired portfolio of € 1.7 billion at 31 December 2017, € 0.5 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 € 1.2 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.
*Forms an integral part of the audited financial statements
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3.2 Additional credit risk information – Forbearance*
Republic of Ireland residential mortgages (continued)
Residential mortgages subject to forbearance measures by indexed loan-to-value ratios
The following table profiles the Republic of Ireland residential mortgage portfolio that was subject to forbearance measures by the
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indexed loan-to-value ratios at 31 December 2017 and 2016:
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
838
895
425
383
350
444
167
33
14
Buy-to-let
€ m
263
250
126
118
117
129
71
56
13
2017
Total
€ m
1,101
1,145
551
501
467
573
238
89
27
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
3,549
1,143
4,692
4,274
1,657
5,931
Negative equity in the residential mortgage portfolio in the Republic of Ireland that was subject to forbearance measures at
31 December 2017 was 18% of the owner-occupier portfolio (2016: 29%) and 22% of the buy-to-let portfolio (2016: 37%), due primarily
to the continued increase in property prices in 2017 and loan repayments.
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Risk management – 3. Individual risk types
3.2 Additional credit risk information – Forbearance*
Non-mortgage
The following table analyses 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 139:
Other
personal
€ m
Property and
construction
€ m
Non-property
business
€ m
608
188
(4)
–
(81)
(48)
(22)
641
1,862
157
(36)
–
(21)
(553)
(98)
1,311
1,527
130
(22)
(3)
(136)
(175)
(85)
1,236
3,188
Other
personal
€ m
Property and
construction
€ m
Non-property
business
€ m
7
1
–
(1)
(3)
(1)
–
3
84
9
(2)
(12)
(8)
(19)
(3)
49
56
19
(1)
(7)
(3)
(17)
(2)
45
Other
personal
€ m
Property and
construction
€ m
Non-property
business
€ m
615
189
(4)
–
(81)
(49)
(25)
(1)
–
644
1,946
1,583
166
(36)
–
(23)
(565)
(106)
(19)
(3)
149
(22)
(3)
(137)
(182)
(88)
(17)
(2)
1,360
1,281
3,285
2017
Total
€ m
3,997
475
(62)
(3)
(238)
(776)
(205)
2017
Total
€ m
147
29
(3)
(20)
(14)
(37)
(5)
97
2017
Total
€ m
4,144
504
(62)
(3)
(241)
(796)
(219)
(37)
(5)
Republic of Ireland
At 1 January
Additions
Fundamental restructures - valuation adjustments
Write-offs
Expired arrangements
Closed accounts
Movements in the stock of forbearance loans
At 31 December
United Kingdom
At 1 January
Additions
Expired arrangements
Closed accounts
Movements in the stock of forbearance loans
Disposals
FX adjustments
At 31 December
Total
At 1 January
Additions
Fundamental restructures - valuation adjustments
Write-offs
Expired arrangements
Closed accounts
Movements in the stock of forbearance loans
Disposals
FX adjustments
At 31 December
*Forms an integral part of the audited financial statements
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3.2 Additional credit risk information – Forbearance*
Non-mortgage (continued)
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)
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*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)
The following table sets out an analysis of non-mortgage forbearance solutions at 31 December 2017 and 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
Payment moratorium
Arrears capitalisation
Term extension
Fundamental restructure
Restructure
Asset disposals
Other
Total
Property and construction
Interest only
Reduced payment
Payment moratorium
Arrears capitalisation
Term extension
Fundamental restructure
Restructure
Asset disposals
Other
Total
Non-property business
Interest only
Reduced payment
Payment moratorium
Arrears capitalisation
Term extension
Fundamental restructure
Restructure
Asset disposals
Other
Total
Total non-mortgage forbearance
37
20
161
15
171
44
151
42
3
644
120
69
9
35
120
582
296
92
37
1,360
122
54
23
21
135
455
408
32
31
1,281
3,285
18
9
157
5
158
26
89
7
2
471
43
43
4
13
68
424
168
55
19
837
86
23
12
4
113
377
244
19
20
898
2,206
8
3
–
1
4
1
7
5
–
29
15
9
3
1
4
18
12
6
1
69
7
5
1
1
4
5
30
2
1
56
154
11
8
4
9
9
17
55
30
1
144
62
17
2
21
48
140
116
31
17
454
29
26
10
16
18
73
134
11
10
327
925
7
5
3
2
6
7
28
7
1
66
35
7
1
10
31
42
53
13
8
200
18
16
2
9
11
25
72
6
4
163
429
2017
Specific
provision
cover %
%
69.6
63.1
65.0
23.2
70.8
42.1
50.7
24.9
67.7
46.4
54.4
43.4
51.1
45.7
65.4
30.3
45.6
43.8
44.4
43.9
61.0
63.5
20.4
55.1
61.3
34.3
53.9
56.0
37.8
49.9
46.4
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 83 and 84.
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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3.2 Additional credit risk information – Forbearance*
Non-mortgage (continued)
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
Payment moratorium
Arrears capitalisation
Term extension
Fundamental restructure
Restructure
Asset disposals
Other
Total
Property and construction
Interest only
Reduced payment
Payment moratorium
Arrears capitalisation
Term extension
Fundamental restructure
Restructure
Asset disposals
Other
Total
Non-property business
Interest only
Reduced payment
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
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Specific
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%
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
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At 31 December 2017, non-mortgage loans subject to forbearance amounted to € 3.3 billion, of which € 0.9 billion is impaired with
specific provision cover of 46%. The majority of these forborne loans are in property and construction (€ 1.4 billion) and non-property
business (€ 1.3 billion). Within non-mortgage forbearance categories, ’Fundamental restructure’ (€ 1.1 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’.
*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 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 2017, approximately € 0.2 billion of main facilities were
recognised following the derecognition of € 0.5 billion of impaired loans with related impairment provisions of € 0.2 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, the Group keeps under review the likelihood of any additional cash
flows arising on the secondary facilities. There remains significant uncertainty over the crystallisation of such additional cash flows
through asset sales in excess of those initially estimated that would be applied to secondary facilities over an extended period. In the
case of other restructured lending, additional cash flows materialising either through trading conditions or other sources of income are
equally uncertain.
In 2017, additional cashflows received resulted in income of € 137 million being recognised (2016: € 82 million) as asset sales were
particularly strong during the year. Furthermore, significant future cash flows have now been estimated for a small number of complex
cases with secondary facilities which has resulted in these facilities having a revised carrying value at 31 December 2017 of € 72 million
(2016: Nil). This reflects the reassesment of future cashflows and/or higher valuations on collateral.
At 31 December 2017, the carrying value of the main facilities in fundamental restructures, including buy-to-let mortgages, amounted to
€ 1.2 billion (2016: € 1.5 billion).
The gross carrying value of main facilities that rely principally on the realisation of collateral (property assets held as security) is as
follows:
– Buy-to-let € 111 million which have associated contractual secondary facilities of € 144 million
(2016: € 169 million and € 204 million respectively).
– Property and construction of € 466 million which has associated contractual secondary facilities of € 1,676 million
(2016: € 809 million and € 2,129 million respectively). These are further analysed as:
– Commercial real estate primary facilities of € 374 million which have associated contractual secondary facilities of € 873 million
(2016: € 703 million and € 1,237 million respectively).
–
Land and development primary facilities of € 92 million which have associated contractual secondary facilities of € 803 million
(2016: € 106 million and € 892 million respectively).
The gross carrying value of non-property business lending and other personal lending where fundamental restructures have been
granted amounts to € 478 million. These have associated secondary facilities of € 724 million (2016: € 496 million and € 778 million
respectively).
The ‘Restructure’ category (€ 0.9 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 may yet qualify for a ‘Fundamental restructure’ following ongoing 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 2017, the stock of non-mortgage forbearance loans reduced by € 859 million with new forborne borrowers (€ 504 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.
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AIB has reduced its impaired loans from € 29 billion at December 2013 to € 6.3 billion as at 31 December 2017. A significant element of
this reduction was through a customer debt restructuring programme. 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. This approach has, and will continue to, materially improve the Group’s asset quality, and lower its overall risk profile, and
strengthen its solvency.
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 the restructuring process. All restructured loans are managed in line with AIB’s overall credit management practices.
The Group has credit policies and strategies, implementation guidelines and monitoring structures in place to manage its loan portfolios,
including restructured 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.
The Group remains focused on reducing impaired loans to a level more in line with normalised European peer levels and will continue to
implement sustainable solutions for customers, where feasible, who engage with the Group. The Group continues to review all options
in relation to reducing impaired loans including sales and strategic initiatives.
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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. For Funding and Liquidity Risk, the first line comprises of the
Finance and Treasury functions. The Group’s Finance department 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 providing the necessary information for the
management of the Group’s liquidity gap and the efficient management of the liquidity buffer by Treasury. This involves the
identification, measurement and reporting of funding and liquidity risk 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 as part of
ILAAP.
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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
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on-going basis.
At 31 December 2017, the Group held € 27 billion (2016: € 30 billion) in qualifying liquid assets/contingent funding of which € 8 billion
(2016: € 12 billion) was not available due to repurchase, secured loans and other restrictions. The available Group liquidity pool
comprises the remainder and is held to cover contractual and stress outflows. As at 31 December 2017, the Group liquidity pool was
€ 19 billion (2016: € 18 billion). During 2017, the liquidity pool ranged from € 16 billion to € 21 billion and the average balance was
€ 19 billion.
(1)A qualifying liquid asset (“QLA”) is an asset that can be readily converted into cash, either with the market or with the monetary authorities, and where
there is no legal, operational or prudential impediments to their use as liquid assets.
Composition of the Group liquidity pool
The following table shows the composition of the Group’s liquidity pool at 31 December 2017 and 2016:
Cash and deposits with central banks
Total government bonds
Other:
Covered bonds
Other
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
2017
High Quality Liquid Assets
(HQLA) in the liquidity pool
Level 2
€ bn
Level 1
€ bn
Liquidity pool
€ bn
(1)
1.5
9.6
3.3
4.6
7.9
19.0
–
9.2
3.0
4.4
7.4
16.6
3.7(1)
9.4
2.5
0.3
2.8
15.9
–
0.1
0.8
0.2
1.0
1.1
Liquidity pool
€ bn
Liquidity pool
available
(ECB eligible)
€ bn
2016
High Quality Liquid Assets
(HQLA) in the liquidity pool
Level 2
€ bn
Level 1
€ bn
1.9(1)
9.0
1.8
5.0
6.8
17.7
–
8.9
1.7
4.9
6.6
15.5
3.9(1)
8.9
1.4
1.4
2.8
15.6
–
–
0.4
0.1
0.5
0.5
(1)For Liquidity Coverage Ratio (“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 (cash held with the Bank of England) can qualify up to the
amount of 30 days 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 2017
Liquidity pool at 31 December 2016
EUR
€ bn
18.3
17.3
GBP
€ bn
0.1
0.1
USD
€ bn
0.6
0.3
Other
€ bn
–
–
Total
€ bn
19.0
17.7
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.
AIB Group plc Annual Financial Report 2017 153
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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 government guaranteed bonds. AIB’s liquidity buffer increased in 2017
by € 1.3 billion which was predominantly due to a decrease in the funding requirement following a reduction in customer loans and an
increase in customer deposits which was partially offset by wholesale maturities that occurred during the year.
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 the Board approved
survival limit is 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 formulation of 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. 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 these requirements.
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 132% at 31 December 2017 (31 December 2016: 128%). The minimum LCR requirement in 2017 was 80%
ìncreasing to 100% at 1 January 2018. AIB Group has fully complied with the requirement.
A minimum NSFR requirement of 100% is scheduled to be introduced from 1 January 2018 and AIB is awaiting further developments in
this regard. At 31 December 2017, the Group had an estimated NSFR of 123% (31 December 2016: 119%).
*Forms an integral part of the audited financial statements
154
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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.
All figures included in the table are averages of 12 month end LCRs from January to December 2017.
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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
Total
unweighted
value
(average)
€ m
2017
Total
weighted
value
(average)
€ m
16,923
2016
Total
weighted
value
(average)
€ m
16,251
21,099
13,257
–
20,115
224
–
362
–
9,927
445
1,329
98
758
940
1,796
20,716
11,738
–
16,880
369
–
401
220
10,012
–
1,415
37
1,736
123
1,896
1,065
1,892
–
8,938
224
66
362
–
827
328
89
13,791
13
443
206
662
€ m
16,923
13,129
%
129(1)
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)
The month-end LCR ranged from 118% to 137% with the average being 129% in the twelve months to 31 December 2017 (2016: 123%).
The average HQLA for the twelve months ended 31 December 2017 was c. € 16,923 million of which government securities constituted
59% (2016: 71%). Average cash outflows were € 13,791 million of which non-operational deposits constituted 65% (2016: 58%).
The outflows relating to undrawn commitments as a percentage of total cash outflows remained constant at 6%. Average cash inflows
were € 662 million with fully performing exposures constituting 67% (2016: 83%).
(1)LCR = Total HQLA/total net cash outflows
AIB Group plc Annual Financial Report 2017 155
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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 reduce 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 2017 and 2016:
Customer accounts
Current accounts
Deposits:
Demand
Time
Repurchase agreements
Total
31 December 2017
%
€ bn
64.6
74
31 December 2016
%
€ bn
63.5
69
3
1
–
4
–
1
17
100
2.8
0.8
–
3.6
–
1.0
14.4
87.2
2.9
90.1
7.0
0.7
0.2
5.2
0.5
1.0
13.9
92.0
3.6
95.6
2017
€ m
31,107
13,466
18,792
199
63,564
8
1
–
5
1
1
15
100
2016
€ m
27,003
12,076
22,294
525
61,898
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 accounts by currency:
Customer deposits by currency
Euro
US dollar
Sterling
Other currencies
Total
*Forms an integral part of the audited financial statements
156
AIB Group plc Annual Financial Report 2017
2017
€ m
51,773
1,642
11,065
92
64,572
31 December
2016
€ m
50,220
1,887
11,294
101
63,502
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3.4 Funding and liquidity risk
Funding structure (continued)
Customer deposits represent the largest source of funding for the Group with the core retail franchises and accompanying deposit base
in both the Republic of Ireland and the UK providing a stable and reasonably predictable source of funds. Customer accounts increased
by € 1.1 billion in 2017. This was mainly due to a € 1.6 billion increase in Euro deposits. There was an underlying growth in GBP
deposits of £ 0.1 billion (€ 0.2 billion) which was offset by a reduction in the value of GBP of € 0.4 billion due to currency movements.
In addition, the reduction in the euro/US$ exchange rate accounted for € 0.2 billion. The Group’s loan to deposit ratio at 31 December
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2017 was 93% (2016: 95%).
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.
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 2017
(2016: € 1.9 billion).
In the 12 months to 31 December 2017, the Group did not issue any term wholesale debt in light of the Group’s strong funding position.
Outstanding asset covered securities (ACS) decreased from € 5.2 billion at 31 December 2016 to € 3.7 billion at 31 December 2017 due
to contractual maturities. During the year, € 0.5 billion in securities issued by two of the Group’s securitisation vehicles, Emerald
Mortgages No. 4 Public Limited Company and Tenterden Funding p.l.c., were redeemed. In November 2017 Emerald Mortgages No 4
Public Limited Company filed notice to liquidate the company.
AIB Group plc became the group holding company on 8 December 2017. In advance of this, the Group had considered plans for the
issuance of MREL debt in the Group’s funding and liquidity strategy.
Composition of wholesale funding*
At 31 December 2017, total wholesale funding outstanding was € 9 billion (2016: € 15 billion). € 2 billion of wholesale funding matures in
less than one year (2016: € 8 billion). € 7 billion of wholesale funding has a residual maturity of over one year (2016: € 7 billion)
including € 1.9 billion of TLTRO II drawings.
Outstanding wholesale funding comprised € 7 billion in secured funding (2016: € 13 billion) and € 2 billion in unsecured funding
(2016: € 2 billion).
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*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 157
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Risk management – 3. Individual risk types
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AIB Group plc Annual Financial Report 2017
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Page 159
3.4 Funding and liquidity risk
Currency composition of wholesale debt
At 31 December 2017, 89% (31 December 2016: 93%) of wholesale funding was in euro with the remainder held in GBP and USD.
AIB manages cross-currency refinancing risk to foreign exchange cash-flow limits.
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Deposits by central banks and banks
Senior debt
ACS/ABS
Subordinated liabilities and other capital instruments
Total wholesale 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 wholesale funding
% of total funding
EUR
€ bn
2.6
1.0
3.6
0.8
8.0
%
88.9
EUR
€ bn
7.0
–
1.0
5.6
0.8
14.4
%
93.5
GBP
€ bn
0.2
–
–
–
0.2
%
2.2
GBP
€ bn
0.3
–
–
0.1
–
0.4
%
2.6
USD
€ bn
0.8
–
–
–
0.8
%
8.9
USD
€ bn
0.4
0.2
–
–
–
0.6
%
3.9
31 December 2017
Total
Other
€ bn
€ bn
–
–
–
–
–
%
–
3.6
1.0
3.6
0.8
9.0
%
100
31 December 2016
Total
Other
€ bn
€ bn
–
–
–
–
–
–
%
–
7.7
0.2
1.0
5.7
0.8
15.4
%
100
Encumbrance
An asset is defined as encumbered if it has been pledged as collateral, 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 financial investments available for sale portfolio.
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 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 Allied Irish Banks, p.l.c. and other Group entities (e.g. EBS d.a.c. and AIB
Group (UK) p.l.c.) is an element of the Group’s liquidity management processes.
AIB Group plc Annual Financial Report 2017 159
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Page 160
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 2017 and 2016:
Loans and receivables to banks
Loans and receivables to customers
Financial investments available for sale:
Debt securities
Equity securities
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
1,313
59,993
15,642
679
12,435
90,062
€ m
1,229
9,380
1,820
–
183
12,612
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
2017
Unencumbered assets
Not readily
Readily
available available and
not available
for collateral
€ m
€ m
84
10,798
13,822
–
3,450
28,154
–
39,815
–
679
8,802
49,296
2016
Unencumbered assets
Not readily
Readily
available and
available
not available
for collateral
€ m
€ m
101
9,632
1,257
9,070
–
3,118
–
11
39,159
–
–
605
–
12,535
52,310
20,134
23,178
The Group had an encumbrance ratio of 14% at 31 December 2017 which has decreased 7% over the year due mainly to a reduction in
the funding requirement of the Group (2016: 21%). The encumbrance level is based on the amount of assets that are required in order
to meet regulatory and contractual commitments. However, 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 2017, € 10,798 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 (2016: € 9,632 million). The remaining loan assets in this category amounting to € 39,815 million, whilst
unencumbered, are not regarded as being available in support of liquidity management at present on account of not being in covered
bond and securitisation structures (2016: € 39,159 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.
160
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Page 161
3.4 Funding and liquidity risk
Encumbrance (continued)
The following table analyses the asset encumbrance of loans and receivables to customers at 31 December 2017 and 2016:
Mortgages (residential mortgage backed securities)
Other
Total
Mortgages (residential mortgage backed securities)
Other
Total
Assets(1)
€ bn
19.5
0.7
20.2
Externally
issued
notes
€ bn
3.6(2)
–
3.6
Assets(1)
€ bn
20.7
0.8
21.5
Externally
issued
notes
€ bn
5.7(2)
–
5.7
Other
secured
funding
€ bn
2.1(3)
–
2.1
Other
secured
funding
€ bn
1.8(3)
–
1.8
2017
Retained
notes(4)
€ bn
3.6
–
3.6
2016
Retained
notes(4)
€ bn
3.3
–
3.3
(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)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 2017, the Group had excess collateral within its asset backed funding
programmes that could readily be used to issue additional bonds of € 4.1 billion (2016: € 3.2 billion).
Interbank repurchase agreements and ECB refinancing operations
The following table analyses the interbank repurchase agreements and ECB refinancing operations as at 31 December 2017 and 2016:
Less than
1 month
€ bn
1 month to
3 months
€ bn
Over
3 months
€ bn
1
–
1
–
–
–
–
2
2
Highly liquid
Less liquid
Maturity profile
2017
Total
€ bn
1
2
3
Less than
1 month
€ bn
1 month to
3 months
€ bn
Over
3 months
€ bn
3
–
3
2
–
2
–
2
2
2016
Total
€ bn
5
2
7
Credit ratings
AIB is currently engaging with the rating agencies to obtain a rating for AIB Group plc. The ratings for Allied Irish Banks, p.l.c. are as
follows:
– S&P long-term "BBB-" and short-term "A-3";
– Fitch long-term "BBB-" and short-term "F3"; and
– Moody's long-term "Baa1" for deposits and "Baa2" for senior unsecured debt and short-term “Prime 2” for deposits and "Prime 2" 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.
AIB Group plc Annual Financial Report 2017 161
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Page 162
Risk management – 3. Individual risk types
3.4 Funding and liquidity risk
Financial assets and financial liabilities by contractual residual maturity*
Repayable
on demand
Financial assets
Trading portfolio financial assets(1)
Derivative financial instruments(2)
Loans and receivables to banks(3)
Loans and receivables to customers(3)
NAMA senior bonds
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(1)
Derivative financial instruments(2)
Debt securities in issue
Subordinated liabilities and other capital instruments
Other financial liabilities
€ m
–
–
1,306
8,125
–
–
–
–
9,431
241
47,168
–
3
–
–
1,061
48,473
Repayable
on demand
Financial assets
Derivative financial instruments(2)
Loans and receivables to banks(3)
Loans and receivables to customers(3)
NAMA senior bonds
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(1)
Derivative financial instruments(2)
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
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
2017
Total
€ m
€ m
€ m
€ m
–
77
6
671
–
118
–
736
1,608
1,332
10,727
–
58
–
–
–
12,117
3 months or
less but not
repayable
on demand
€ m
124
11
899
1,799
53
–
430
3,316
5,349
12,133
–
74
546
–
–
18,102
–
64
1
2,554
–
1,443
–
–
4,062
167
4,880
–
39
500
–
–
5,586
18
326
–
13,887
–
9,427
–
–
23,658
1,900
1,666
4
369
3,065
–
–
7,004
14
689
–
38,101
–
4,654
–
–
32
1,156
1,313
63,338
–
15,642
–
736
43,458
82,217
–
131
26
701
1,025
793
–
2,676
3,640
64,572
30
1,170
4,590
793
1,061
75,856
2016
Total
1 year or less
but over
3 months
5 years or
less but
over 1 year
Over
5 years
€ m
€ m
€ m
€ m
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
(1)Trading portfolio financial assets and 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. Trading portfolio financial assets are
shown excluding equity shares.
(2)Shown by maturity date of contract.
(3)Shown gross of provisions for impairment.
(4)Excluding equity shares.
*Forms an integral part of the audited financial statements
162
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Page 163
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
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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 2017
and 2016:
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
Financial liabilities
Deposits by central banks and banks
Customer accounts
Derivative financial instruments
Debt securities in issue
Subordinated liabilities and other
capital instruments
Other financial liabilities
Repayable
on demand
€ m
241
47,168
–
–
–
–
1,061
48,470
Repayable
on demand
€ m
333
42,453
–
–
–
442
43,228
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
2017
Total
€ m
€ m
€ m
€ m
1,342
10,792
–
73
33
–
–
168
4,901
–
195
538
31
–
1,900
1,685
4
497
3,197
117
–
–
132
26
454
1,043
958
–
3,651
64,678
30
1,219
4,811
1,106
1,061
12,240
5,833
7,400
2,613
76,556
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
€ m
€ m
150
6,065
334
1,864
31
–
1,900
2,921
809
3,004
130
–
€ m
–
106
486
1,808
1,019
–
2016
Total
€ m
7,728
63,762
1,705
7,255
1,180
442
18,217
8,444
8,764
3,419
82,072
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 163
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Page 164
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.
The undiscounted cash flows potentially payable under guarantees and similar contracts
Contingent liabilities
Commitments
Contingent liabilities
Commitments
Payable on
demand
€ m
880
10,231
11,111
Payable on
demand
€ m
910
10,289
11,199
3 months
or less but
not repayable
on demand
€ 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
31 December 2017
Over
Total
5 years
€ m
€ m
€ m
–
–
–
–
–
–
–
–
–
€ m
880
10,231
11,111
1 year or less
but over
3 months
5 years
or less but
over 1 year
31 December 2016
Over
Total
5 years
€ m
€ m
€ m
–
–
–
–
–
–
–
–
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€ m
910
10,289
11,199
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.
Risk identification and assessment
The key processes through which capital adequacy risk is evaluated are the Internal Capital Adequacy Assessment Process (“ICAAP”)
and quarterly stress tests, both of which are subject to supervisory review and evaluation. The key stages in the ICAAP process are as
follows:
– A Risk Appetite Statement is reviewed and approved by the Board annually which contains lending and other limits to mitigate
against the risk of excessive leverage;
– Business Strategy is set consistent with risk appetite which underpins the annual financial planning process;
– Performance against plan and risk appetite is monitored monthly;
– An annual material risk assessment which identifies all relevant (current and anticipated) risks and those that require capital
adequacy assessment;
– Financial Planning drives the level 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;
– Scenario analysis and 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. Stress testing is also applied to assess the viability of management actions in the ICAAP, the
Capital Contingency Plan and the Recovery Plan;
– Reverse stress tests are undertaken to determine scenarios that could lead to a pre-defined breach of capital ratios;
– 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 and internal capital requirements.
*Forms an integral part of the audited financial statements
164
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3.5 Capital adequacy risk* (continued)
The Board reviews and approves the ICAAP on an annual basis and is also responsible for signing a Capital Adequacy Statement
attesting that the Board has reviewed and is satisfied with the capital adequacy of the Group.
The ICAAP process is supported by a programme of quarterly stress testing which serves to ensure that the Group’s assessment of
capital adequacy is dynamic and responsive to changes in such factors as balance sheet size, business mix and the macro-economic
and financial market outlook.
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Risk management and mitigation
The ICAAP is fully integrated and embedded in the strategic, financial and risk management processes of the Group. This is facilitated
through capital planning, the setting of risk appetite and risk adjusted performance monitoring. In addition to the Capital Plan, a Capital
Contingency Plan is in place which identifies and quantifies actions which are available to the Group in order to mitigate against the
impact of a stress event. Trigger points at which these actions will be considered are also identified. A further set of triggers and capital
options are set out in the Group’s Recovery Plan, which presents the actions available to the Group to restore viability in the event of
extreme stress. Finally, the Group has an approved capital allocation mechanism in place which seeks to ensure that capital is allocated
on a risk-adjusted basis.
The Group uses Risk Adjusted Return on Capital (“RAROC”) for capital allocation purposes and as a behavioural driver of sound risk
management. The use of RAROC for portfolio management and in lending decisions continues to be an area of focus and a key
consideration for pricing of lending products, both at portfolio level and individually for large transactions.
Risk monitoring and reporting
The Group monitors its capital adequacy on a monthly basis when a capital reporting pack is presented to senior executive and Board
Committees setting out the evolution of the Group’s capital position. The output of quarterly stress tests is reviewed by the Group’s
Asset and Liability Committee (ALCo) and on an annual basis an ICAAP Report is produced which is a comprehensive analysis of the
Group’s capital position in base and stress scenarios over a three year horizon. This document is reviewed and approved by the Board
and is submitted to the Joint Supervisory Team, where it forms the basis of their Supervisory Review and Evaluation Process (SREP).
Further detail on the Group’s capital management, together with its overall capital position can be found in the Capital Management
section of the AFR.
3.6 Financial risks*: (a) Market risk
Market risk refers to the risk of income and capital losses arising from adverse movements in wholesale market prices. The Group
assumes market risk through the following wholesale market risk factors: interest rates, foreign exchange rates, equity prices, inflation
rates and credit spreads. Changes in customer behaviours and the relationship between wholesale and retail rates give rise to changes
in the Group’s exposure to market risk factors and are therefore also an important component of market risk.
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.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 165
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Risk management – 3. Individual risk types
3.6 Financial risks*: (a) Market risk (continued)
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 exists within 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 Finance
and Treasury functions.
Finance 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 the 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.
Group Internal Audit provides third line assurance on market risk.
Market risk in the Group is transferred to and managed by Treasury, subject to Finance 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 AFS portfolio, IRRBB and trading risk are managed by
separate 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 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.
(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
166
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3.6 Financial risks*: (a) Market risk (continued)
The following table sets out financial assets and financial liabilities at 31 December 2017 and 2016 subject to market risk analysed
between trading and non-trading portfolios, showing the principal market risks to which the assets and liabilities are exposed:
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Market risk measures
Trading Non-trading
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portfolios
€ m
€ m Risk factors
Assets subject to market risk
Cash and balances at central banks
Trading portfolio financial assets
6,364
33
–
33
6,364
Interest rate, foreign exchange
–
Equity, interest rate,
credit spreads
Derivative financial instruments
1,156
613
543
Interest rate, foreign exchange,
Loans and receivables to banks
Loans and receivables to customers
Financial investments available for sale
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
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
*Forms an integral part of the audited financial statements
credit spreads, equity, inflation
swap rates
1,313
Interest rate, foreign exchange
59,993
Interest rate, foreign exchange
16,321
Interest rate, foreign exchange,
credit spreads, equity
3,640
Interest rate
64,572
Interest rate, foreign exchange
–
Interest rate, credit spreads
507
Interest rate, foreign exchange,
credit spreads, equity, inflation
swap rates
4,590
Interest rate, credit spreads
793
Interest rate, credit spreads
–
–
–
–
–
30
663
–
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1,313
59,993
16,321
3,640
64,572
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4,590
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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
–
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–
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6,519
Interest rate, foreign exchange
–
Equity
1,014
Interest rate, foreign exchange,
credit spreads, equity
1,399
Interest rate, foreign exchange
60,639
Interest rate, foreign exchange
1,799
Interest rate
15,437
Interest rate, credit spreads,
equity
3,356
Interest rate, credit spreads
7,732
Interest rate, foreign exchange
63,502
Interest rate, foreign exchange
861
748
Interest rate, foreign exchange,
credit spreads, equity
–
–
6,880
Interest rate, credit spreads
791
Interest rate, credit spreads
AIB Group plc Annual Financial Report 2017 167
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Risk management – 3. Individual risk types
3.6 Financial risks*: (a) Market risk (continued)
Interest rate sensitivity
The net interest rate sensitivity of the Group at 31 December 2017 and 2016 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
168
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A6 Risk 3
AR 2017 pages 155-182:Layout 1 28/02/2018
19:27
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AIB Group plc Annual Financial Report 2017
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3.6 Financial risks*: (a) Market risk (continued)
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:
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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
2017
€ m
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(165)
2016
€ m
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(110)
The above sensitivity table is computed under the assumption that all market rates (Euribors/Swaps) move upwards in parallel,
however, for upward rates only, the ECB refinancing rate increases by 50% of the market rates. In 2016, the equivalent sensitivity
numbers were produced under the assumption that all rates, including the ECB refinancing rate, moved up and down by 100bps.
The reported income sensitivity to a +100bp interest rate move under this assumption was +€ 110m. If an assumption of the full +100
basis points was applied to the ECB refinancing rate for 2017, the sensitivity figure would increase from +€ 129 million to +€ 174 million.
The interest rate sensitivity of the Group has increased during the year as a result of balance sheet change and reductions in strategic
interest rate hedges being made throughout 2017.
The above analysis is subject to certain simplifying assumptions such as all interest rate movements occurring simultaneously.
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)
2016
2017
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€ m
VaR (banking book)
2016
2017
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€ m
Total VaR
2017
€ m
2016
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0.2
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The following table sets out the VaR for foreign exchange rate and equity risk for the years to 31 December 2017 and 2016:
1 day holding period:
Average
High
Low
At 31 December
Foreign exchange rate risk
Equity risk
VaR (trading book)
2016
2017
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VaR (trading book)
2016
2017
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0.09
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0.03
0.03
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The low level of VaR in the trading book throughout 2017 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 risk existing in the Group’s
banking book.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 171
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Risk management – 3. Individual risk types
3.6 Financial risks*: (a) Market risk (continued)
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.
The table below shows the sensitivity of the Group’s fully loaded CET1 ratio to a hypothetical and sustained 100 basis point (“100bp”)
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
2017
(0.18%)
0.17%
31 December
2016
(0.17%)
0.16%
The above analysis is subject to certain simplifying assumptions such as GBP/EUR and USD/EUR foreign exchange rates moving in the
same direction and at the same time.
*Forms an integral part of the audited financial statements
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3.6 Financial risks*: (b) 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.
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The Group maintains a number of defined benefit pension schemes for current and former employees, further details of which are
included in note 33 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.
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.
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Risk management – 3. Individual risk types
3.7 Operational risk
Operational risk is the risk of loss resulting 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 which is the Group’s Governance, Risk
and Compliance (“GRC”) System. SHIELD, was introduced during 2017 and it provides the customer facing business areas, Risk,
Compliance and Internal Audit with one consistent view of the Risks, Controls, Actions and Events across the Group. AIB received a
global award for ‘Excellence in Implementation’ of the SHIELD system in October 2017. SHIELD underpins an enhanced risk culture
focused on ensuring better customer outcomes while helping to safeguard, protect and support the Group. 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 provide mitigants for the more significant risks. Monitoring processes are in place at business unit 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; continuity and resilience; operational risk event reporting policies) to ensure an effective and
consistent approach to operational risk management across the Group.
An important element of the Group’s operational risk management framework is the on-going monitoring of risks, control deficiencies
and weaknesses, including 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.
The Group’s Operational Risk management framework establishes the approach to be taken by a business area when proposing new
customer products and propositions. This ensures that risks arising from the implementation of new customer products are considered
and appropriately mitigated, as required.
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 management so as to enable 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 operational risk event data for
the Group. The reporting of operational risk events 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 risk events on a regular basis.
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3.7 Operational risk (continued)
Business units are required to review and update their assessment of operational risks on a regular basis. Operational risk teams
undertake review and challenge assessments of the business unit risk assessments. In addition, assurance teams which are
independent of the business, undertake reviews of the operational controls as part of a combined regulatory/compliance/operational risk
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3.8 Regulatory compliance risk including 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 AIB Group cause poor and unfair outcomes for its
customers or market instability. A 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 first culture aligned
to AIB’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
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 RCAs 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 ensure that Regulatory Compliance is suitably independent from business activities and that it is
adequately resourced.
The primary role of the Regulatory Compliance function is to provide direction and advice to enable management to discharge its
responsibility for managing the Group’s compliance risks. The principal compliance risk mitigants are risk identification, assessment,
measurement and the establishment of suitable controls at business level. In addition, the Group has insurance policies that cover certain
consequences of risk events which fall under the regulatory compliance umbrella, subject to policy terms and conditions.
AIB Group plc Annual Financial Report 2017 175
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Risk management – 3. Individual risk types
3.8 Regulatory compliance risk including conduct risk (continued)
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 dates are agreed. The implementation of these action plans is monitored by Regulatory
Compliance.
Regulatory Compliance report to the Chief Risk Officer 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 People and culture risk
People and culture are essential components in realising an organisation’s strategic ambitions. An effective culture is built around a
general principle of people “doing the right thing” for all stakeholders, including customers, employees and regulators.
People and culture risk is the risk to achieving the Group’s strategic objectives as a result of an inability to recruit, retain or develop
resources, or as a result of behaviours associated with low levels of employee engagement. It also includes the risk that the business,
financial condition and prospects of the Group are materially adversely affected as a result of inadvertent or intentional behaviours or
actions taken or not taken by employees that are contrary to the overall strategy, culture and values of the Group.
Risk identification and assessment
The Group identifies and reviews employee satisfaction and engagement, indicators of culture, through the AIB staff engagement
programme, iConnect, which is facilitated by Gallup on an annual basis. In 2017, the survey was updated to reflect measures on our
culture ambition of Accountability, Collaboration, Trust, Diversity and Inclusion and Safe to Speak. Initiatives are undertaken at team
level to continuously identify opportunities for further employee engagement. Engagement scores have continued to improve on an
annual basis since the staff engagement programme inception in 2013.
In 2016, the Group launched the Aspire Performance Management Programme (“Aspire”) to facilitate quality performance discussions
with staff that contribute to delivering the Group’s strategic ambitions. Aspire is designed to allow employees identify “What” personal
and business objectives are to be achieved and “How” they will behave in the delivery of those objectives. The Board assesses the
Aspire outputs on a half year and year end basis. Aspire allows the Group embrace the right behaviours and outcomes with equal
weighting, to achieve the Group’s strategic ambition.
Risk management and mitigation
In 2017 the Group launched its ‘Purpose’, which is supported and embedded by a clear set of ‘customer first’ values. These values drive
and influence activities of all employees, guiding the Group’s dealings with customers, each other and all stakeholders.
The Group’s Code of Conduct, incorporating the Risk Culture Principles, places great emphasis on the integrity of employees and
accountability for both actions taken and inaction. The Code sets out how employees are expected to behave in terms of the business,
customer and employee. The Code is supported by a range of employee policies, including ‘Conflicts of Interest’ and ‘Speak up’.
The Group has a Disciplinary Policy which clearly lays out the consequences of inappropriate behaviours.
The Group’s ‘Speak Up’ Policy and process also provides those working for the Group with a protected channel for raising concerns,
which is at the heart of fostering an open and transparent working culture.
The Group’s iLearn training portal, provides employees with dedicated and bespoke curricula that allow teams and individuals to invest
in themselves and, therefore, the organisation.
*Forms an integral part of the audited financial statements
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3.9 People and culture risk (continued)
Risk monitoring and reporting
The Group has made significant steps in increasing engagement and awareness of the Group’s Risk management activities by
embedding the Risk Appetite Statement in Policies and Frameworks of the Group. The Risk Appetite Statement contains clear
statements of intent as to the Group’s appetite for taking and managing risk, including people and culture risk. It ensures that the Group
monitors and reports against key people and culture metrics when tracking people and culture risk and change.
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Internal Audit include people and culture risk on their annual plan of activities, the outputs of which are reviewed by the Board.
The Group, through the Board Audit Committee, reports and monitors issues raised through a number of channels including Conflicts
of Interest, Disciplinary Policy and Speak Up Policy. The Board monitors and reviews progress and oversight of senior management in
relation to our people and culture ambitions through a number of datasets including iConnect, the Strategy Scorecard and a new
prototype Culture Dashboard.
3.10 Business model risk
Business model risk is defined as the risk of not achieving the agreed strategy or approved business plan either as a result of an
inadequate implementation plan, or failure to execute the implementation plan as a result of inability to secure the required investment,
or due to factors in the economic, political or competitive environment. Business model risk also includes the risk of implementing an
unsuitable strategy, or maintaining an obsolete business model, in light of known internal and external factors.
Risk identification and assessment
AIB identifies and assesses business model 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 underlying 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 income statement, 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 model 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.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2017 177
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Risk management – 3. Individual risk types
3.10 Business model 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 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 Model risk
Model Risk is defined as the risk of adverse consequences from risk-based business and strategic decisions founded on incorrect or
misused model assumptions, outputs and reports. Model risk is comprised of two elements, firstly, operational risk - the risk of losses
relating to the development, implementation or improper use of models for decision making (e.g. product pricing, evaluation of financial
instruments, monitoring of risk limits) and secondly, capital impact which is the risk relating to the underestimation of own funds
requirements by models used within the Group for those purposes.
Risk identification and assessment
The Board has ultimate accountability for ensuring that the models used by the Group are fit for purpose and meet all jurisdictional
regulatory and accounting standards and, within that, for the facilitation of organisational structures to implement and manage the IRB
framework. It is also responsible for ensuring that there are appropriate policies in place relating to capital assessment, measurement
and allocation. Operating to the principles outlined in the Model Risk Framework (the Framework) supports the Group’s strategic
objectives and provides comfort to the AIB Board on the integrity and completeness of the model risk governance.
Risk management and mitigation
The Group mitigates model risk by having a framework, policies and standards in place in relation to model development, operation, and
validation together with suitable resources. The Model Risk Management Framework is designed to ensure that model risk in the Group
is properly identified and managed across each step of the model lifecycle within an appropriate control framework. The Framework,
which is aligned to the Group Risk Appetite Framework and the Risk Management Framework, describes the key processes undertaken
and reports produced in support of the Framework.
Models are built and validated by suitably qualified analytical personnel, informed by relevant business and finance functions. Models
are built using the best available data, both internal and external, using international industry standard techniques.
All models are validated by an appropriately qualified team, which is independent of the model build process.
Group Internal Audit act as the “third line of defence” providing independent assurance to the Audit Committee and the Board 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.
Risk monitoring and reporting
The Model Risk Committee acts as a sub-committee of the Group Asset and Liability Committee and reviews and approves the use, or
recommends to a higher governance authority, the use of AIB credit, operational and financial risk models. It also monitors and
maintains oversight of the performance of these models.
During 2017, the Group constructed its suite of expected credit loss models to meet the requirements of IFRS 9 ‘Financial Instruments’.
As a material risk, the status of model risk is reported on a monthly basis in the CRO report.
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Governance and oversight
– Group Directors’ report
– Schedule to the Group Directors’ report
– Corporate Governance report
– Report of the Board Audit Committee
– Report of the Board Risk Committee
– Report of the Nomination and Corporate Governance Committee
– Report of the Remuneration Committee
– Corporate Governance Remuneration statement
– Viability statement
– Internal controls
– Other governance information
– Supervision and Regulation
Page
180
183
186
195
200
204
207
220
223
223
225
226
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AIB Group plc Annual Financial Report 2017 179
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Governance and oversight –
Group Directors’ report for the financial year ended 31 December 2017
The Directors of AIB Group plc (‘the Company’) present their first
report and the audited financial statements for the financial year
Directors Compliance Statement
As required by section 225(2) of the Companies Act 2014, the
ended 31 December 2017. The Directors’ Responsibility
Directors acknowledge that they are responsible for securing
Statement is shown on page 229.
the Company's compliance with its relevant obligations (as
defined in section 225(1)). The Directors confirm that:
During 2017, the Company became the new holding company of
(a)
a compliance policy statement (as defined in section
AIB Group. This change was approved by the shareholders of
225(3)(a)) has been drawn up that sets out the
Allied Irish Banks, p.l.c. at an Extraordinary General Meeting on
Company’s policies and, in the directors’ opinion, is
3 November 2017 and sanctioned by the High Court on
appropriate to ensure compliance with the company’s
8 December 2017. Allied Irish Banks, p.l.c. continues to be the
relevant obligations;
principal operating and regulated financial services company in
(b)
appropriate arrangements or structures that are, in the
AIB Group.
directors' opinion, designed to secure material compliance
with the relevant obligations have been put in place; and
For the purpose of this report ‘AIB Group’ or ‘the Group’
(c)
a review of those arrangements or structures has been
comprises Allied Irish Banks, p.l.c. and its subsidiaries up to
8 December 2017 and from 8 December 2017 onwards, AIB
Group plc and its subsidiaries (including Allied Irish Banks, p.l.c.)
Results
The Group’s profit attributable to the ordinary shareholders of the
Company amounted to € 1,114 million and was arrived at as
shown in the consolidated income statement on page 239.
Dividend
The Board is recommending a dividend of EUR 0.12 per share
payable on 4 May 2018 to shareholders on the Company’s
register of members at the close of business on 23 March 2018.
During 2017, Allied Irish Banks, p.l.c. paid a final dividend of
€ 0.0921 per share on 9 May 2017 to its ordinary shareholders
who were on the register of members at the close of business on
24 March 2017. Following the establishment of the Company, the
shares previously held by shareholders in Allied Irish Banks, p.l.c.
were exchanged, on a one-for-one basis, for new shares in the
Company.
Going concern
The financial statements for the financial year ended 31
December 2017 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 their assessment, the Directors considered a wide
range of information relating to present and future conditions.
These included financial plans covering the period 2018 to 2020
approved by the Board in December 2017, liquidity and funding
forecasts, and capital resources projections, all of which were
prepared under base and stress scenarios.
In addition, the Directors considered the principal risks and
uncertainties which could materially affect the Group’s future
business performance and profitability and which are outlined on
pages 58 to 68 in the ‘Risk management’ section of this report.
180
AIB Group plc Annual Financial Report 2017
conducted in the financial year to which this report relates.
Capital
Information on the structure of the Company’s share capital,
including the rights and obligations attaching to each class of
shares, is set out in the Schedule on pages 323 to 325 and in
note 41 to the consolidated financial statements.
Accounting policies
The principal accounting policies, together with the basis on
which the financial statements have been prepared, are set out
in note 1 to the consolidated financial statements.
Review of principal activities
The statement by the Chairman on pages 4 to 5, the review by
the Chief Executive Officer on pages 6 to 9, and the operating
and financial review on pages 35 to 52 contain an overview of
the development of the business of the Group during the year,
of recent events, and of likely future developments.
Directors
On incorporation, Garreth O’Brien and David Joseph Lydon of
McCann Fitzgerald Solicitors were appointed to the Company,
and resigned on 21 September 2017.
Following due process and consideration, including in relation
to the independence criteria under the Central Bank of Ireland’s
Corporate Governance Requirements for Credit Institutions
2015 and the UK Corporate Governance Code, the following
Board change to the Company occurred with effect from the
dates shown:
– Richard Pym, Dr Michael Somers, Simon Ball, Mark
Bourke, Bernard Byrne, Thomas (Tom) Foley, Peter Hagan,
Carolan Lennon, Brendan McDonagh, Helen Normoyle,
James (Jim) O’Hara, Catherine Woods were each
appointed on 21 September 2017, and
– Dr Michael Somers resigned as an Independent Non-
Executive Director of the Company on 31 December 2017.
From 21 September 2017 onwards, the composition of the
Boards of the Company and Allied Irish Banks, p.l.c were, and
shall continue to be, mirrored.
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The names of the Directors, together with a short biographical
note on each Director, are provided on pages 28 to 29
The appointment and replacement of Directors, and their powers,
are governed by law and the Constitution of the Company, and
information on these is set out on page 184.
Directors’ and Secretaries’ Interests in the Share
Capital
The interests of the Directors and the Group Company Secretary
in the share capital of the Company are shown in the Directors’
Remuneration report on pages 220 to 222.
Directors’ Remuneration
The Group’s policy with respect to Directors’ remuneration is
included in the Directors’ Remuneration report on pages 210 to 211.
Details of the total remuneration of the Directors in office during
2017 and 2016 are shown in the Remuneration report on pages 220
to 222.
Substantial Interests in the Share Capital
The following substantial interests in the Ordinary Share Capital
were notified to the Company on 12 December 2017:
–
Ireland Strategic Investment Fund 71.12% (registered in the
name of BNY Custodial Nominees (Ireland) Limited, a
professional nominee for the benefit of the Minister for Finance).
Corporate Governance
The Directors’ Corporate Governance report is set out on pages 186
to 194 and forms part of this report. Additional information, disclosed
in accordance with the European Communities (Takeover Bids
(Directive 2004/25/EC)) Regulations 2006, is included in the
Schedule to the Report of the Directors on pages 183 to 185.
In accordance with Section 167 of the Companies Act 2014, the
Directors confirm that a Board Audit Committee is established.
Details on the Board Audit Committee’s membership and activities
are shown on pages 195 to 199.
Principal Risks and Uncertainties
Information concerning the principal risks and uncertainties
facing the Group, as required under the terms of the
European Accounts Modernisation Directive (2003/51/EEC)
(implemented in Ireland by the European Communities
(International Financial Reporting Standards and Miscellaneous
Amendments) Regulations 2005), is set out in the Risk
Management section on pages 58 to 68.
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Branches outside the State
The Company has not established any branches since
incorporation. However, the Company’s prinicipal operating
subsidiary, Allied Irish Banks, p.l.c., 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 United States of America.
Disclosure Notice under Section 33AK of the Central
Bank Act 1942
During 2017, the Group did not receive a Disclosure Notice
under Section 33AK of the Central Bank Act 1942.
Auditors
The Auditors, Deloitte, were appointed to the Group on 20 June
2013 following Shareholder approval at the 2013 Annual
General Meeting on that date. Furthermore, Deloitte were
appointed as auditors of the Company on 21 September 2017
and shall hold office until the conclusion of the first annual
general meeting of the Company pursuant to section 382 of the
Companies Act 2014 at which time their continued appointment
will be proposed to the shareholders for approval. Deloitte have
indictated willingness to continue in office in accordance with
section 383(2) of the Companies Act 2014.
Statement of relevant audit information
Each of the persons who is a director at the date of approval of
this report confirms that:
Political Donations
The Directors have satisfied themselves that there were no political
(a) so far as the director is aware, there is no relevant audit
information of which the company’s auditor is unaware; and
contributions since incorporation that require disclosure under the
(b) the director has taken all the steps that he/she ought to
Electoral Act 1997.
Accounting Records
The measures taken by the Directors to secure compliance with
have taken as a director in order to make himself/ herself
aware of any relevant audit information and to establish that
the company’s auditor is aware of that information.
the Company's obligation to keep adequate accounting records
This confirmation is given and should be interpreted in
include the use of appropriate systems and procedures,
accordance with the provisions of section 330 of the Companies
incorporating those set out within ‘Internal controls’ in the
Act 2014.
Corporate Governance report on page 223, and the
employment of competent persons. The accounting records are
kept at the Company’s Registered Office at AIB Bankcentre,
Ballsbridge, Dublin 4, Ireland, and at the principal addresses
outlined on page 385.
AIB Group plc Annual Financial Report 2017 181
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Governance and oversight –
Group Directors’ report for the financial year ended 31 December 2017
Other information
Other information relevant to the Director’s Report may be found in the following pages of the Report:
2017 Financial Highlights
Page
1
Financial risk management objectives and policies of the Group and the Company
58 to 178
Own shares
Non-adjusting events after the reporting period
326
370
The Directors’ Report for the year ended 31 December 2017 comprises these pages and the sections of the Report referred to under
‘Other information’ above, which are incorporated into the Directors’ Report by reference.
Richard Pym
Chairman
28 February 2018
Bernard Byrne
Chief Executive Officer
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Governance and oversight –
Schedule to the Group Directors’ report
for the financial year ended 31 December 2017
Additional information required to be contained in the
Company, nor to exercise the voting rights attached to such
Directors’ Annual Report by the European Communities
share, and, if the shareholder holds 0.25% or more of the issued
(Takeover Bids (Directive 2004/25/EC)) Regulations 2006.
Ordinary Shares, the Directors will be entitled to withhold
As required by these Regulations, the information contained
below represents the position of the Company as of 31
December 2017.
Capital Structure
The authorised share capital of the Company is €2,500,025,000
divided into 4,000,000,000 Ordinary Shares of € 0.625 each
(‘Ordinary Shares’) and 40,000 Subscriber Shares of € 0.625
each. The issued share capital of the company is 2,714,381,237
Ordinary Shares and 40,000 Subscriber Shares of € 0.625 each.
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; and
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 within 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 period specified, the
shareholder shall not be entitled to attend meetings of the
payment of any dividend payable on such shares, and the
shareholder will not be entitled to transfer such shares except by
sale through a Stock Exchange to a bona fide unconnected third
party. Such sanctions will cease to apply after not more than
seven days from the earlier of receipt by the Company of notice
that the member has sold the shares to an unconnected third
party or due compliance, to the satisfaction of the Company, with
the notice served as provided for above.
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 Ordinary Shares,
and there is no requirement to obtain the approval of the
Company, or of other holders of 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
lodgment of a transfer with the Company, in the following cases:
(i) a lien held by the Company on the shares;
(ii) 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) 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 that 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 Employee Share Schemes
The AIB Approved Employee 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.
Following the establishment of the Company, the shares
previously held in trust in Allied Irish Banks, p.l.c. were
exchanged, on a one-for-one basis, for new shares in the
Company.
AIB Group plc Annual Financial Report 2017 183
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Governance and oversight –
Schedule to the Group Directors’ report
for the financial year ended 31 December 2017
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 one-
when the Chairman puts the resolution at issue to a vote of the
third) are obliged to retire from office at each Annual General
meeting. A vote decided by a show of hands is taken forthwith. A
Meeting on the basis of the Directors who have been longest
vote taken on a poll for the election of the Chairman or on a
in office since their last appointment. While not obliged to do
question of adjournment is also taken forthwith, and a poll on any
so, the Directors have, in recent years, adopted the practice
other question is taken either immediately or at such time (not
of all (those wishing to continue in office) offering themselves
being more than thirty days from the date of the meeting at which
for re-election at the Annual General Meeting.
the poll was demanded or directed) as the Chairman of the
– A person is disqualified from being a Director, and their office
meeting directs. Where a person is appointed to vote for a
as a Director ipso facto vacated, in any of the following
shareholder as proxy, the instrument of appointment must be
circumstances:
received by the Company not less than forty-eight hours before
–
if at any time the person has been adjudged bankrupt or
the time appointed for holding the meeting or adjourned meeting
has made any arrangement or composition with his or
at which the appointed proxy proposes to vote, or, in the case of
her creditors generally;
a poll, not less than forty-eight hours before the time appointed
for taking the poll.
Rules Concerning Amendment of the Company’s
Constitution
As provided in the Companies Act 2014, the Company may, by
special resolution, alter or add to its Constitution. A resolution is a
special resolution when it has been passed by not less than
three-fourths of the votes cast by shareholders entitled to vote
and voting in person or by proxy, at a general meeting at which
not less than twenty-one clear days’ notice specifying the
–
–
–
–
–
if found to be mentally disordered in accordance with
law;
if the person be prohibited or restricted by law from being
a Director;
if, without prior leave of the Directors, he or she be
absent from meetings of the Directors for six successive
months (without an alternate attending) and the Directors
resolve that his or her office be vacated on that account;
if, unless the Directors or a court otherwise determine, he
or she be convicted of an indictable offence;
if he or she be requested, by resolution of the Directors,
intention to propose the resolution as a special resolution, has
to resign his or her office as Director on foot of a
been duly given. A resolution may also be proposed and passed
unanimous resolution (excluding the vote of the Director
as a special resolution at a meeting of which less than twenty-
concerned) passed at a specially convened meeting at
one clear days’ notice has been given if it is so agreed by a
which every Director is present (or represented by an
majority in number of the members having the right to attend and
alternate) and of which not less than seven days’ written
vote at any such meeting, being a majority together holding not
notice of the intention to move the resolution and
less than ninety per cent in nominal value of the shares giving
specifying the grounds therefor has been given to the
that right.
Director; or
Rules Concerning the Appointment and Replacement
of Directors of the Company
– Other than in the case of a casual vacancy, Directors are
–
if he or she has reached an age specified by the
Directors as being that at which that person may not be
appointed a Director or, being already a Director, is
required to relinquish office and a Director who reaches
appointed on a resolution of the shareholders at a general
the specified age continues in office until the last day of
meeting, usually the Annual General Meeting.
the year in which he or she reaches that age.
– No person, other than a Director retiring at a general meeting
–
In addition, the office of Director is vacated, subject to any
is eligible for appointment as a Director without a
right of appointment or reappointment under the Company’s
recommendation by the Directors for that person’s
Constitution, if:
appointment unless, not less than forty-two days before the
–
not being a Director holding for a fixed term an executive
date of the general meeting, written notice by a shareholder
office in his or her capacity as a Director, he or she
duly qualified to be present and vote at the meeting of the
resigns their office by a written notice given to the
intention to propose the person for appointment, and notice
Company, upon the expiry of such notice; or
in writing signed by the person to be proposed of willingness
–
being the holder of an executive office other than for a
to act, if so appointed, have been given to the Company.
fixed term, the Director ceases to hold such executive
– A shareholder may not propose himself or herself for
office on retirement or otherwise; or
appointment as a Director.
– The Directors have the power to fill a casual vacancy or to
appoint an additional Director (within the maximum number
–
–
the Director tenders his or her resignation to the
Directors and the Directors resolve to accept it; or
the Director ceases to be a Director pursuant to any
of Directors fixed by the Company in a general meeting), and
provision of the Company’s Constitution.
any Director so appointed holds office only until the
– Notwithstanding anything in the Company’s Constitution or in
conclusion of the next Annual General Meeting following his
any agreement between the Company and a Director, the
appointment, when the Director concerned shall retire, but
Company may, by Ordinary Resolution of which extended
shall be eligible for reappointment at that meeting.
notice has been given in accordance with the Companies
Act, remove any Director before the expiry of his or her
period of office.
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– The Minister for Finance has the power to nominate two Non-
Executive Directors in accordance with the Relationship
Framework between the Group and the State and certain
provisions as outlined therein. The Relationship Framework
is available on the Group’s website at
http://aib.ie/investorrelations.
The powers of the Directors
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 may 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.
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Governance and oversight –
Corporate Governance report
Corporate Governance arrangements and practices
During 2017, the Company became the new holding company of
controls, and remuneration policies and practices which are
consistent with and promote sound and effective risk
AIB Group. This change was approved by the shareholders of
management; and
Allied Irish Banks, p.l.c. at an Extraordinary General Meeting on 3
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a strong and functionally independent internal audit.
November 2017 and sanctioned by the High Court on 8
December 2017. Allied Irish Banks, p.l.c. continues to be the
principal operating and regulated financial services company in
Statements of Compliance
Central Bank of Ireland’s Corporate Governance
AIB Group.
For the purpose of this report, which discusses corporate
Requirements for Credit Institutions 2015 and European
Union (Capital Requirements) Regulations 2014
Allied Irish Banks, p.l.c. is subject to the Central Bank of Ireland’s
governance arrangements, ‘AIB Group’ or ‘the Group’ comprises
Corporate Governance Requirements for Credit Institutions 2015
Allied Irish Banks, p.l.c. and its subsidiaries up to 8 December
(the ‘2015 Requirements’ which is publically available on
2017 and, from 8 December 2017 onwards, AIB Group plc and its
www.centralbank.ie), which impose minimum core standards upon
subsidiaries (including Allied Irish Banks, p.l.c.)
all credit institutions licensed or authorised by the Central Bank of
Ireland (the ‘Central Bank’), including compliance with those
AIB Group’s Governance Framework (the “Framework”)
requirements specifically relating to ‘high impact institutions’ and
underpins effective decision-making and accountability, and is the
additional corporate governance obligations on credit institutions
basis on which the Group conducts its business and engages with
deemed significant for the purposes of the European Union
customers and stakeholders. It ensures that organisation and
(Capital Requirements) Regulations 2014 (‘CRD’) (S.I. 158/2014
control arrangements are appropriate to the governance of the
which is publically available on www.irishstatutebook.ie). While
Group’s strategy and operations, and to the mitigation of related
the Company is not strictly required to comply with the 2015
material risks.
Requirements on a standalone basis, due to the fact that the
governance structures of the Company and Allied Irish Banks,
The Framework reflects the statutory and regulatory obligations
p.l.c. are mirrored, compliance with the 2015 Requirements is
that apply to the Group, best practice corporate governance
assured across the Group as a whole.
standards and guidelines, Irish company law, various corporate
governance codes and regulations, the listing rules for listed
During 2017, the Group was compliant with the 2015
securities on the main markets of the Irish Stock Exchange and
Requirements and CRD, save for the requirement that “there shall
the London Stock Exchange, European Banking Authority (“EBA”)
be a person appointed the Chief Risk Officer (‘CRO’) with distinct
Guidelines, and, in relation to the UK businesses, UK company
responsibility for the risk management function and for
law. Further details on the Group’s governance practices are
maintaining and monitoring the effectiveness of the credit
available on http://aib.ie/investorrelations.
AIB Group’s governance arrangements include:
institution’s risk management system”. During the period from 8
January to 23 April 2017, the search for a preferred candidate for
appointment to the role of Chief Risk Officer of the Group was
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a Board of Directors of sufficient size and expertise, the
underway following the departure of the former incumbent.
majority of whom are independent non-Executive Directors, to
Ms Deirdre Hannigan was appointed to the role of Chief Risk
oversee the operations of the Group;
Officer on 24 April 2017. During the interim period, while no formal
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a Chief Executive Officer to whom the Board has delegated
appointment was made, appropriate arrangements were in place
responsibility for the day-to-day running of the Group,
to manage and oversee the risk function, with such arrangements
ensuring an effective organisational structure, the
clearly reported to the Board and the Regulator. The Chairman of
appointment, motivation and direction of Senior Executive
the Board Risk Committee, and indeed other senior individuals in
Management and, for operational management, the
the Group. committed additional time to overseeing the risk
compliance and performance of all the Group’s businesses;
function during that time.
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a Leadership Team comprising strong and diverse
management capabilities;
a clear organisational structure with well-defined, transparent
and consistent lines of responsibility;
UK Corporate Governance Code 2016 and Irish
Corporate Governance Annex
The Group is subject to the provisions of the UK Corporate
a well-documented and executed framework for the
Governance Code 2016 (the ‘2016 UK Code’ which is publically
delegation of authority;
available on www.frc.org.uk). During 2017, the Group applied the
a framework and policy architecture which comprises a
main principles and complied with all provisions of the 2016 UK
comprehensive,a coherent suite of frameworks, policies,
Code other than in instances related to remuneration, and
procedures and standards covering business and financial
particularly regarding certain provisions contained in Section D.1
planning, corporate governance and risk management;
of the 2016 UK Code where, due to the Agreements in place with
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effective structures and processes to identify, manage,
the Irish State, the Remuneration Committee and the Board are
monitor and report the risks to which the Group is or might be
restricted in their ability to set remuneration for all Executive
exposed;
Directors and the Chairman, including pension rights and any
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adequate internal control mechanisms, including sound
compensation payments, or to design Executive Directors
administrative and accounting procedures, IT systems and
remuneration packages to promote the long-term success of the
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Group. The Group has continued to apply the 2016 UK Code
The Board is responsible for corporate governance,
since its financial year end. The lack of autonomy with regard to
encompassing leadership, direction and control of the AIB Group,
remuneration is of ongoing concern to the Board.
and is accountable to shareholders for financial performance.
During 2017, the Board comprised a Chairman (who was
As you will see from the Corporate Governance Remuneration
independent on appointment), 10 Non-Executive Directors,
Report, the Group has been working on designing a short term
(reduced to 9 Non-Executive Directors on the retirement of Dr
retention tool to somewhat mitigate the heightened retention risk
Somers), and 2 Executive Directors. The Board deems the
which currently exists arising from these restrictions until such
appropriate number of Directors to meet the requirements of the
time as the Group is able to return to normalised remuneration
business to be between 10 and 14. The names of the Directors,
practices. In designing this tool, the Group has ensured that the
with brief biographical notes, are provided on pages 28 to 29.
performance elements underpinning the plan reflect the strategic
objectives of the Group, are consistent with the medium term
The role of the Chairman is separate from the role of the Chief
targets and commitments previously communicated to the market,
Executive Officer, with clearly-defined responsibilities attaching to
and are appropriately stretching to reflect the quantum of
each; these are set out in writing and agreed by the Board. The
remuneration potential, in line with the UK Code requirements.
Chairman has overall responsibility for the leadership of the Board
Additional obligations apply to the Group under the Irish
Officer manages and leads the business.
Corporate Governance Annex (publically available on www.ise.ie),
which applies to relevant Irish companies with a primary listing on
While arrangements have been made by the Directors for
the Main Securities Market of the Irish Stock Exchange. The
delegating the management, organisation and administration of
Group is fully complaint with the Irish Corporate Governance
the Group’s affairs, the following matters are included in a
and for ensuring its effectiveness, while the Chief Executive
Annex.
schedule of matters specifically reserved for decision by the
Board:
This report, along with the Directors’ Responsibility Statement, the
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to retain primary responsibility for corporate governance
Corporate Governance Remuneration Statement, the Risk
within the Group at all times and oversee the efficacy of
Governance section of the Risk Management Framework report
governance arrangements;
and the statement on Internal Control, which can be found on
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to determine the Group's strategic objectives and policies, and
pages 70, 220, 223 and 229, respectively, sets out the approach
to ensure that the necessary financial and human resources
to governance in practice, to the work of the Board and its
and operational capabilities are in place for the Group to meet
Committees, and explains how the Group applied the principles of
its objectives;
the 2016 UK Code during 2017.
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to approve the annual financial plan, interim and annual
Leadership
The Group is headed by an effective Board which is collectively
financial statements, operating and capital budgets, major
acquisitions and disposals, risk appetite limits, designated
frameworks and relevant policies;
responsible for the long-term success of the Group and is
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to approve expenditure in excess of certain limits in
supported by the Leadership Team, the most senior executive
accordance with the Board-approved delegated authority
committee of the Group.
framework;
The Board
Since 21 September 2017, the composition of the Boards of the
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to review and approve related party transactions under the
applicable Listing Rules;
to approve Class 1 transactions under the applicable Listing
Company and Allied Irish Banks, p.l.c. have been, and will
Rules and to recommend Class 2 transactions to
continue to be, mirrored, and together they are responsible for the
shareholders;
corporate governance of the Group as a whole. References
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to convene a general meeting to allow shareholders to vote
herein to ‘the Board’ are made in respect of both the Board of the
on any matter reserved specifically for shareholder approval,
Company and Allied Irish Banks, p.l.c. simultaneously, unless
as determined under relevant legislation and / or Listing
otherwise indicated.
Rules;
From incorporation to 21 September 2017, the Directors of the
Company were Garreth O’Brien and David Joseph Lydon,
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to approve dividend policy and declare/recommend dividends
to shareholders;
to appoint the Chairman of the Board, Board Directors, Chief
representing McCann Fitzgerald Solicitors, who were responsible
Executive Officer and Members of the Leadership Team, to
for the incorporation of the entity. From 21 September 2017, the
address related succession planning, and to approve, where
Directors of the Company were Richard Pym, Dr Michael Somers,
appropriate, the removal of persons in charge of Control
Simon Ball, Mark Bourke, Bernard Byrne, Tom Foley, Peter
Functions;
Hagan, Carolan Lennon, Brendan McDonagh, Helen Normoyle,
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to endorse the appointment of people who may have a
Jim O’Hara and Catherine Woods.
material impact on the risk profile of the Group, and to monitor
on an ongoing basis their appropriateness for the role;
The Company subsequently became the holding company of the
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to render an account of the Group's activities to its
Group on 8 December 2017.
shareholders;
AIB Group plc Annual Financial Report 2017 187
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Governance and oversight –
Corporate Governance report
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to protect the assets of the Group, taking into account the
normal channels of Chairman or Chief Executive Officer have
interests of the shareholders and the employees in general,
failed to resolve, or for which such contact is considered by the
with appropriate regard for the interests of other stakeholders;
shareholder(s) concerned to be inappropriate. She acts as a
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to put in place and monitor procedures designed to ensure
conduit for the views of other Non-Executive Directors, where
that the Group complies with the law and good corporate
required, and conducts the Chairman’s annual performance
citizenship.
appraisal. Ms Woods was appointed to the role of Senior
Independent Non-Executive Director of the Group with effect from
The Board is responsible for approving high-level policy and
30 January 2015. Ms Woods’ biographical details are available on
strategic direction in relation to the nature and scale of risk that
page 28.
the Group is prepared to assume in order to achieve its strategic
objectives. The Board ensures that an appropriate system of
internal controls is maintained and that effectiveness is reviewed.
Specifically, the Board:
Deputy Chairman
Ms Catherine Woods replaced Dr Michael Somers as Deputy
Chairman of the Group on 1 January 2018. Dr Somers held the
role of Deputy Chairman since June 2010. Ms Woods will ensure
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sets the Group’s Risk Appetite, incorporating risk limits;
continuity of Chairmanship during any change of chairmanship.
approves designated Risk Frameworks, incorporating risk
She will support the Chairman in representing and acting as a
strategies, policies, and principles;
spokesperson for the Board. She deputises for the Chairman and
approves stress testing and capital plans under the Group’s
is available to the Board for consultation and advice.
Internal Capital Adequacy Assessment Process (“ICAAP”);
and
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approves other high-level risk limits as required by the Credit,
Capital, Liquidity and Market Risk policies.
Independent Non-Executive Directors
As an integral component of the Board, Independent Non-
Executive Directors represent a key layer of oversight of the
activities of the Group. It is essential for Independent Non-
The Board receives regular updates on the Group’s risk profile
Executive Directors to scrutinise the performance of management
through the Chief Risk Officer’s monthly report, and relevant
in meeting agreed objectives and to monitor reporting on
updates from the Chairman of the Board Risk Committee. An
performance. They should bring an independent viewpoint to the
overview of the Board Risk Committee’s activities is detailed on
deliberations of the Board that is objective and independent of the
pages 200 to 203.
activities of the management and of the Group. Biographical
details for each of the Independent Non-Executive Directors are
The Group has received significant support from the State in the
available on pages 28 to 29.
context of the financial crisis because of its systemic importance
to the Irish financial system. Following reduction in its
shareholding during 2017, the State holds 71.12% of the issued
Chief Executive Officer (CEO)
Mr Bernard Byrne manages the Group on a day-to-day basis and
ordinary shares of the Company. The relationship between the
makes decisions on matters affecting the operation, performance
Group and the State as shareholder is governed by a Relationship
and strategy of the Group’s business. He has established a
Framework. Within the Relationship Framework, with the
Leadership Team which, under his stewardship, has responsibility
exception of a number of important items requiring advance
for the day-to-day management of the Group’s operations and
consultation with or approval by the State, the Board retains
assists and advises the CEO in reaching decisions on the Group’s
responsibility and authority for all of the operations and business
strategy, governance and internal controls, and performance and
of the Group in accordance with its legal and fiduciary duties and
risk management. Mr Byrne was appointed Chief Executive
retains responsibility and authority for ensuring compliance with
Officer of the Group with effect from 29 May 2015. His
the regulatory and legal obligations of the Group.
biographical details are available on page 29.
Key Roles and Responsibilities
Chairman
Mr Richard Pym leads the Board ensuring its effectiveness,
Executive Directors
Executive Directors have executive functions in the Group in
addition to their Board duties. The role of Executive Directors, led
setting its agenda, ensuring that the Directors receive adequate,
by the Chief Executive Officer, is to propose strategies to the
accurate and timely information, facilitating the effective
Board and, following a challenging Board scrutiny, to execute the
contribution of the Non-Executive Directors, ensuring the proper
agreed strategies to the highest possible standards. The Board
induction of new Directors, the on-going training and development
currently has two Executive Directors: the CEO, who is referenced
of all Directors, and reviewing the performance of individual
above; and the Chief Financial Officer, Mr Mark Bourke.
Directors. Mr Pym was appointed as Chairman of the Group in
Mr Bourke’s biographical details are available on page 29.
October 2014. Mr Pym currently has no other external directorship
commitments. His biographical details are available on page 28.
Leadership Team
The Leadership Team is the most senior executive committee of
Senior Independent Director
As Senior Independent Director, Ms Catherine Woods is available
the Group, and is accountable to the Chief Executive Officer.
Subject to the financial and risk limits set by the Board, and
to shareholders, if they have concerns, which contact through the
excluding those matters which are reserved specifically for the
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Board, the Leadership Team under the stewardship of the Chief
are structured to facilitate open discussion, debate and challenge.
Executive Officer has responsibility for the day-to-day
Through his opening remarks, the Chairman sets the focus of
management of the Group’s operations. It assists and advises the
each meeting. In the rare event of a Director being unable to
Chief Executive Officer in reaching decisions on the Group’s
attend a meeting, the Chairman discusses the matters proposed
strategy, governance and internal controls, and performance and
with the Director concerned, seeking their support and/or
risk management. Biographical details of each of the Leadership
feedback accordingly. The Chairman subsequently represents
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Team Members are available on pages 30 to 31.
those views at the meeting.
Group Company Secretary
The Directors have access to the advice and services of the
In total, three meetings of the Board of the Company were held
from from 8 December 2016, the date of the Company’s
Group Company Secretary, who is responsible for advising the
incorporation, to 21 September 2017.
Board, through the Chairman, on all governance matters,
ensuring that Board procedures are followed and that applicable
During that time, the Directors of the Company were Garreth
rules and regulations are complied with. The Group Company
O’Brien and David Joseph Lydon, representing McCann
Secretary facilitates information flows within the Board and its
Fitzgerald Solicitors, and the meetings related to non-material
Committees, and among Senior Executive Management. The
post incorporation events which included changing the name of
Group Company Secretary communicates with shareholders as
the Company and an application to the Irish Stock Exchange for
appropriate and ensures due regard is paid to their interests. Both
a legal entity identifier number.
the appointment and removal of the Group Company Secretary is
a matter for the Board as a whole.
The Directors of Allied Irish Banks, p.l.c. were appointed to the
Company on 21 September 2017. From 21 September 2017 to
Mr Robert Bergin and Ms Sarah McLaughlin were appointed as
joint Group Company Secretaries of Allied Irish Banks, p.l.c. in
8 December 2017, two Board meetings were held at which the
business of the meetings related to the terms of the corporate
October 2016. Mr Robert Bergin stepped down on 21 September
reorganisation, pursuant to which the Company would be
2017 and Ms Sarah McLaughlin became the sole Group
introduced as the holding company of the Group. All directors
Company Secretary with immediate effect.
were in attendance at those meetings.
Board Meetings
The Chairman sets the agenda for each Board meeting. The
Thereafter, the Board of the Company held one scheduled
meeting, concurrent with the Board meeting of Allied Irish
Directors are provided with relevant papers in advance of the
Banks, p.l.c. in December 2017, during which the business of
meetings to enable them to consider the agenda items, and are
AIB Group was considered, with all Directors in attendance.
encouraged to participate fully in the Board’s deliberations. The
Chairman ensures Board agendas, and the meetings themselves
Prior to 8 December 2017, attendance at the meetings of Allied Irish Banks, p.l.c. are counted as attendance for the purposes of the
table below. Thereafter, concurrent meetings of the Company and Allied Irish Banks, p.l.c. are counted as a single attendance. In total,
fourteen scheduled meetings and six additional out of course meetings were held during 2017. Attendance at Board Committees is
reported in the respective Committee reports, which appear later in this report.
Name
Directors
Richard Pym
Simon Ball
Mark Bourke
Bernard Byrne
Tom Foley
Peter Hagan
Carolan Lennon
Brendan McDonagh
Helen Normoyle
Jim O’Hara
Dr Michael Somers
Catherine Woods
Board
(scheduled)
Board
(out of course)
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14
14
14
14
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14
14
14
B
14
14
14
14
14
14
14
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6
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B
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6
6
5
6
6
4
6
6
Column A indicates the number of scheduled meetings held during 2017 which the Director was eligible to attend; Column B indicates
the number of meetings attended by each Director during 2017.
AIB Group plc Annual Financial Report 2017 189
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Two additional meetings were held during 2017, attended by the Chairman, the Chief Executive Officer and the Chief Financial Officer
under delegated authority from the Group Board. The business of these meetings related to the Initial Public Offering and the corporate
reorganisation, respectively.
During 2017, the Non-Executive Directors met on occasion in the absence of the Executive Directors, in accordance with good
governance standards. A number of Non-Executive Directors are also Non-Executive Directors of the Group’s other material regulated
subsidiary companies, namely AIB Group (UK) p.l.c., AIB Mortgage Bank, EBS d.a.c. and EBS Mortgage Finance.
Non-Executive Directors see attendance at Board and Committee meetings as only one part of their role. In addition to the annual
schedule of Board and Committee meetings, the Non-Executive Directors undertake a full programme of activities each year, including
regularly meeting with senior management and spending time increasing their understanding of the business through site visits, formal
briefing sessions or attendance at events, including those relating to staff or customers, and meetings with the Regulator.
Generally, a Board training session and a Board dinner are held prior to each scheduled Board meeting. This allows the Directors greater
time to discuss their views, ensuring that there is sufficient time for the Board to discuss matters of a material nature at Board meetings.
Some of these pre meetings are for Non-Executive Directors only, while some include the full Board and, on occasion, members of the
Leadership Team and external guests.
Board Focus in 2017
Below is a high level overview of a number of matters considered by the Board during 2017:
Financial
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2018 Budget
Strategy
– Progress implementing Group’s
Culture and Values
– Updates on talent and culture
– Strategic/Financial Plan 2018 –
2017-2019 strategy
2020
– UK EU referendum outcome
– Sustainability Report
– Staff engagement
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2016 results and analyst
– Future environment and business
– Customer First activities
presentations
– Approval of dividend
model and 2018-2020 strategy and
integrated financial planning
_ Funding and Liquidity Policy
– Property strategy
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ICAAP / ILAAP
IFRS 9 Programme
Regular Agenda Items
– Business performance update and outlook
– Balanced scorecard performance
– Financial performance update and outlook
– Risk Management
– Tracker Mortgage Review Programme
– Non-Performing Loans
– Chairman's activities
– Board Committee activities
Additional Items
– Initial public offering and related activities, including
Prospectus, the Group’s risk factors and the Group’s
Financial Position and Prospects procedures review
Introduction of the Company as the new holding company
of the Group
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rGovernance and Shareholders
– Board effectiveness
Regulatory
– Regulatory Updates
– Chairman’s performance review
– Regulatory inspections
Risk Management
– Group risk appetite statement
– Risk Policies and Frameworks
– Board Diversity Policy
– Corporate Governance
Frameworks
– AML and CTF updates
– Senior Management retention risk
– Market Abuse Regulation policies
–
IRB Model Programme
and practices
– Group Recovery Plan
–
Investor Relations activities
– Related Party Lending
– AGM briefing
– Subsidiary Governance
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Effectiveness
Board Appointments
The review of the appropriateness of the composition of the
Board and Board Committees is a continuous process, and
recommendations are made based on merit and objective
criteria, having regard to the collective skills, experience and
diversity requirements of the Board.
In addressing appointments to the Board, a role profile for the
proposed new directors is prepared by the Group Company
Secretary on the basis of the criteria laid down by the Nomination
and Corporate Governance Committee, taking into account the
existing skills and expertise of the Board and the anticipated time
commitment required. Often, as required, the services of
experienced third-party professional search firms are retained for
Non-Executive Director appointments. The retention of such
search firms is at the discretion of and approved by the
Nomination and Corporate Governance Committee.
Prior to all recommendations for appointment of a given
candidate, 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 Nomination and Corporate Governance Committee.
percentage of females on the Board remained at or exceeded
25 per cent. At 1 January 2018, the percentage of females on
the Board stood at 27 per cent.
The Board Diversity Policy and monitoring of performance
relative to targets set out therein is a matter for the Nomination
and Corporate Governance Committee, which discusses
progress relative to the agreed targets in its Committee report
on page 204. A copy of the Board Diversity Policy which applies
to the Group is available on the Group’s website at:
https://aib.ie/investorrelations/about-aib/corporate-governance.
The Board Sustainable Business Advisory Committee, which is
described on page 21, is tasked with considering and advising
on AIB Group’s policies relating to employee diversity.
Induction and professional development
There is an induction process in place for new Directors, the
contents of which vary 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, continuous
professional development is in place for Non-Executive
Directors.
The Relationship Framework specified by the Minister for
Finance, which governs the relationship between AIB Group 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 before appointing, reappointing
or removing the Chairman or Chief Executive Office, and to
consult with the Minister in accordance with the procedure in
respect of all other Board appointments proposed.
Terms of appointment and time commitment
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.
Appointments to the Boards of AIB Group plc and Allied Irish
Banks, p.l.c. are co-terminous.
A Board-approved Policy for the Assessment of the Suitability of
Members of the Board, which outlines the Board appointment
process, is in place, and is in accordance with applicable
European Banking Authority Guidelines.
Diversity
Employee diversity and inclusion in AIB Group is addressed
through policy, practices and values which recognise that a
productive workforce comprises different work styles, cultures,
generations, genders and ethnic backgrounds, and which oppose
all forms of unlawful or unfair discrimination. The efficacy of
related policy and practices and the embedding of the Group’s
values is overseen by the Board.
The Board recognises and embraces the benefits of diversity
among its own Members, including the 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. In October 2016, the
Board met its initial target to ensure the percentage of females
on the Board reached or exceeded 25 per cent by the end of
2016. Thereafter, the Board’s aim was to ensure that the
Following appointment, in accordance with the requirements of
the Company’s Constitution, Directors are required to retire at
the next Annual General Meeting (‘AGM’), may go forward for
reappointment, and are subsequently required to make
themselves available for reappointment at intervals of not more
than three years. The Company’s first AGM is scheduled for
25 April 2018. All Directors of Allied Irish Banks, p.l.c. retired
from office at the AGM held in 2017 and offered themselves for
reappointment. This practice will continue from 2018 onwards
for AIB Group plc.
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 on request to
members of the Company for inspection during business hours
from the Group Company Secretary.
AIB Group plc Annual Financial Report 2017 191
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Non-Executive Directors are required to devote such time as is
necessary for the effective discharge of their duties. The
estimated minimum time commitment set out in the terms of
appointment is 30 to 60 days per annum, including attendance
at Committee meetings. The time devoted to the Group’s
business by the Non-Executive Directors is, in reality,
considerably more than the minimum requirements.
Before being appointed, Directors disclose details of their other
significant commitments and give a broad indication of the time
absorbed by such commitments. 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
Secretary, and, in certain cases, the Central Bank of Ireland,
must be sought.
Balance and Independence
Responsibility has been delegated by the Board to the
Nomination and Corporate Governance Committee for ensuring
an appropriate balance of experience, skills and independence
on the Board. Non-Executive Directors are appointed so as to
provide strong, effective leadership and appropriate challenge to
executive management.
The independence of each Director is considered by the
Nomination and Corporate Governance Committee prior to
appointment, and is reviewed annually thereafter. It has been
determined that all Non-Executive Directors in office during 2017,
namely Mr Simon Ball, Mr Tom Foley, Mr Peter Hagan,
Ms Carolan Lennon, Mr Brendan McDonagh, Ms Helen
Normoyle, Mr Jim O’Hara, Mr Richard Pym, Dr Michael Somers
(who has since retired) and Ms Catherine Woods, are
independent in character and judgement and free from any
business or other relationship with the Group that could affect
their judgement.
Conflicts of Interest
The Board approved Code of Conduct and Conflicts of Interest
Policy sets out how actual, potential or perceived conflicts of
interest are to be evaluated, reported and managed to ensure
that Directors act at all times in the best interests of the Group
and its stakeholders.
Executive Directors, as employees of the Group, are also subject
to the Group’s Code of Conduct and Conflicts of Interests Policy
for employees.
Access to Advice
There is a procedure in place to enable the Directors to take
independent professional advice, at the Group’s expense. The
Group holds insurance cover to protect Directors and Officers
against liability arising from legal actions brought against them in
the course of their duties.
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AIB Group plc Annual Financial Report 2017
Board Effectiveness
The Chairman of the Board leads the annual review of the
Board’s effectiveness and that of its Committees and individual
Directors with the support of the Nomination and Governance
Committee, which he also chairs. The annual evaluation is
facilitated externally at least once every three years.
The objective of these evaluations is to review past performance
with the aim of identifying any opportunities for improvement,
determining whether the Board and its Committees are as a
whole effective in discharging their responsibilities and, in the
case of individual Directors, to determine whether each Director
continues to contribute effectively and to demonstrate
commitment to the role.
2017 External Evaluation
An external effectiveness evaluation of the Group Board was
conducted during 2017, and an overview of that evaluation
is outlined below.
During 2018, an external firm, Lintstock, facilitated the external
effectiveness review of the Board’s performance and provided
opinion on the performance of the Board against peers.
Lintstock is an independent external consultancy agency with
no other connection to AIB Group. In order to ensure that high
quality feedback was received, in addition to an online
questionnaire, the review was based on face-to-face interviews
with the Directors, the Group Company Secretary, as well as
meetings with key members of senior management who
attended Board Committees and were responsible for key
finance, risk and/or control functions.
The review sought the Directors’ views on a range of topics
including Board composition and expertise, Board culture and
dynamics, the Board’s calendar and agenda, the quality and
timeliness of information, strategy and operational matters, risk
management and internal control, succession planning, human
resource management, and priorities.
As part of the process, the Chairman met with each Director to
review their individual performance. These reviews included a
discussion of the Director’s individual contributions and
performance at the Board and relevant Board Committees, the
conduct of Board meetings, the performance of the Board as a
whole and its Committees, compliance with Director-specific
provisions of the relevant Central Bank Code, the requirements
of the Central Bank’s Fitness and Probity Regulations, and
other specific matters which the Chairman and/or Directors
wished to raise. The performance of the Chairman was also
assessed during the review, with the Board meeting to discuss
the outcome of the review of the Chairman’s performance held
in his absence.
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2017 External Evaluation (continued)
A report on the findings of the full review was presented to the
Board and the Committees, and the outcome of the review was
positive. In addition, Lintstock representatives met with the
Board informally to discuss the review in more detail, and the
Directors sought further insights as to how the Board compared
to international peers on numerous matters.
The review Report and the subsequent discussions between
Lintstock and the Board concluded that the performance of the
Board, its Committees, the Chairman and each of the Directors
continues to be effective, with all Directors demonstrating
commitment to their roles. The Chairman was commended for
his leadership and effectiveness as a public ambassador for the
Group. The time committed by the Directors to the Group was
in fact noted as significant relative to peers.
During the evaluation, many Directors commented favourably
on the performance of the Board as a whole, describing it as
hardworking, appropriately challenging, and highly engaged.
Recommendations from the 2017 review, each of which is being
acted upon, included:
– Volume of Board/Committee papers: The most common
observation by Directors concerned the volume of
documentation and information which they received.
Directors would like to receive more concise reports with
clearer signposting of the key issues;
– Conduct of Board/Committees: Several Directors said that
they would value more time in agendas for discussion,
while recognising the pressures on meeting time and the
significant body of work that Committees, in particular the
Risk and Audit Committees, are expected to undertake;
– Culture: Directors are keen to take a more leading role in
the continued enhancement of the organisation’s culture –
which is deeply customer-focused, with a clear emphasis
on setting the ‘tone from the top’; and
– Strategy: Potential alternative approaches to the time the
Board sets aside each year to focus solely on strategy,
including consideration of the longer-term horizon and the
impact of changing technology and the competitive
landscape.
A summary of the Board’s progress against the
actions arising from the 2016 internal effectiveness
review are set out below:
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Development of people, talent and culture:
A higher level of focus was applied to people, talent and culture
during 2017, with a significant portion of the Leadership Team’s
time spent on people and talent, following which updates in
respect of related initiatives were presented to the Nomination
and Corporate Governance Committee. Culture is considered by
the Board and Committees in many guises, and continued and
increased focus is expected during 2018.
The appropriateness of the current Board skillset and
experience, including in the context of succession planning:
The Nomination and Corporate Governance Committee
developed a longer-term succession plan during 2017, having
regard for existing Directors’ tenures, key roles requiring advance
planning to ensure appropriate and timely appointments and
related induction, and the experience, diversity and skills profile
that befits the Board of a Group of this nature.
Continuing to improve the quality of documentation and
clarity of information provided to the Board:
The Directors have acknowledged the improvement in the quality
of reporting to the Board during 2017 in terms of the clarity of
documentation and information contained therein, and continue
to actively encourage and challenge Management to deliver more
succinct reports with focus on key messages.
A more forward looking approach in the development of the
Group’s strategy:
The materials presented at and the approach taken to the
Board’s consideration of strategy during 2017, culminating in a
very successful Board and Leadership Team offsite in November
2017, were highly commended by the Board. The Leadership
Team along with the dedicated Group Strategy function continue
to work to enhance this engagement.
Enhancing the professional development and training
provided to Directors:
A significant amount of training and development opportunities
were provided to the Board during 2017, with the topics covered
including Anti-Money Laundering and Counter Terrorist
Financing, Sustainability, Cyber Risk, IFRS 9, Regulatory
Reporting and the internal capital adequacy assessment process
(ICAAP) and the internal liquidity adequacy assessment process
(ILAAP). A robust and professional approach to the programme
of training and development for Directors is currently being
developed for roll-out during 2018 and beyond.
AIB Group plc Annual Financial Report 2017 193
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Shareholder interaction
The Board recognises and values greatly the need to deliver a
programme of engagement that offers all shareholders the
opportunity to receive Group communications and to share their
views with the Board.
The Group’s website enables access to documents and
communications as soon as they are published, including in
relation to shareholder meetings.
With support from the Board and Leadership Team Members,
Investor Relations has primary responsibility for managing and
developing the Group’s external relationships with existing and
potential institutional equity investors and analysts. In addition to
this direct shareholder engagement, Investor Relations provides
regular reports to the Leadership Team and Board on key
market issues and shareholder concerns.
The Group Company Secretary engages with retail
shareholders and, with support from the Company's Registrar,
Computershare Investor Services, deliver the Group’s
shareholder services, including in relation to shareholder
meetings. Group Secretariat provides feedback to the Board
and appropriate Committees to ensure the views of retail
shareholders are received and considered, where applicable.
The Annual General Meeting (“AGM”) is an opportunity for
shareholders to hear directly from the Board on the Group’s
performance and strategic direction, and importantly, to ask
questions. Details in relation to the 2018 AGM along with other
shareholder-related information can be found on page 225.
Governance and oversight –
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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 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
the Group’s website at http://aib.ie/investorrelations.
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 Board has established a Sustainable Business Advisory
Committee, comprising Non-Executive Directors and Leadership
Team 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 the Group 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 20 to 24.
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, Board Risk Committee,
Nomination and Corporate Governance Committee and the
Remuneration Committee are presented later in this Report.
The Committee reports reflect the activities of the Committees of
Allied Irish Banks, p.l.c. during the year to 8 December 2017, and
the Company’s Committees held after that date, when it was part
of the AIB Group, at which the business of the Group was
discussed.
194
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Letter from Catherine Woods,
Chairman of the Board Audit Committee
Dear Shareholder,
conjunction with the Group Head of Internal Audit, we identified
seven key themes for focused attention, responsibility for each of
which was assigned to a specific member of the executive
leadership team. Building on the significant progress made in
2016, I am pleased to report that management continued to
make progress in 2017 across each of the themes: Compliance
Risk Management, including Anti Money Laundering, Key
person/Succession/Handover, IT Governance Change and Third
Party Management, Oversight of subsidiaries and branches,
including emphasis on AIB Group (UK) p.l.c. and the New York
Branch, Assurance Framework for Prudential Regulatory
Reporting, and Credit. The Committee accepted the Group Head
of Internal Audit’s recommendation during the year to transfer the
Conduct theme to business as usual in light of the significant
progress made.
On behalf of the Board Audit Committee (the “Committee”), I am
pleased to introduce the Board Audit Committee Report (the
Recognising the substantial improvement made across a
“Report”) on the Committee’s activities for the financial year
number of the themes during the course of 2017, the
ended 31 December 2017.
Committee will endeavour to focus on new relevant themes
during the course of 2018.
The Committee is appointed by the Board to assist the Board in
fulfilling its oversight responsibilities in relation to:
During 2017, the Committee focused substantial time on
−
−
the quality and integrity of the Group’s accounting policies,
overseeing the Group’s preparedness for and assessing the
financial and narrative reports, and disclosure practices;
impact of the implementation of International Financial
the effectiveness of the Group’s internal control, risk
Reporting Standard 9 (IFRS 9). The Committee considered and
management, and accounting and financial reporting
approved the necessary policies and key decisions to ensure
systems;
implementation of IFRS 9 by the effective date of 1 January
−
the adequacy of arrangements by which staff may, in
2018, and will continue to receive updates on IFRS 9 and its
confidence, raise concerns about possible improprieties in
implications for the Group’s financial reporting requirements
matters of financial reporting or other matters;
during 2018.
−
the independence and performance of the Internal and
External Auditors.
Another important programme of particular area of emphasis
during 2017 was the programme responsible for the
During 2017, the Committee continued to focus on oversight of
development and implementation of Internal Ratings Based
financial reporting, including the 2016 Annual and 2017 Half-Year
Models (“IRB”), which was managed concurrently with and was
financial reports, and related policies and practices. Overseeing
interdependent to a large degree on the IFRS 9 programme.
financial reporting requires an assessment of key accounting
The Committee recognises its role in ensuring adequate
judgements and related risks and disclosures, each of which are
support and resources are in place to ensure effective delivery
discussed in detail with management and the external Auditor
of the requirements and to appropriately challenge
(the “Auditor”). The Committee ensures a robust review and
Management and receive assurances as to progress being
challenge to enable it to recommend to the Board that the
made. Significant attention will continue to be applied to model
financial reports are a fair, balanced and understandable
development during 2018.
assessment of the Group’s position and prospects.
The Committee is tasked with overseeing the adequacy of
Another area of primary attention is overseeing the effectiveness
arrangements by which staff may, in confidence, raise concerns
of internal controls, including those related to the financial
about possible improprieties in matters of financial reporting or
reporting process. In undertaking its assessment, the Committee
other matters, and receive regular updates from Management
considers regular reports and presentations throughout the year
on the adequacy and effectiveness of internal policies and
from the Auditor, Group Internal Audit, Finance, and Risk
practices in that regard. The Committee and the Board ensure
Management, together with business management reports and
Management continually seek to enhance, and promote
updates on specific actions being undertaken to further
employee awareness, of these policies. As we look towards
strengthen the control environment.
2018, having regard for the importance of staff having access to
appropriate facilities to ‘speak up’ and being encouraged to do
The Committee recognises and acknowledges the vital role that it
so, the Committee intends to concentrate in greater detail on
has in ensuring the Group operates a strong control environment.
oversight of these policies and how they are implemented and
In the 2016 Committee Report, I reported that the Committee had
communicated across the Group.
decided to make an effort on proactively discussing control
issues on a thematic and holistic basis rather than only dealing
The Group remains committed to addressing legacy issues and
with individual control issues reactively. To that end, in
control failings of the past, and on returning the Group to a
AIB Group plc Annual Financial Report 2017 195
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more normalised control environment. I am happy to report that
the Head of Group Internal Audit has reported on the continued
improvement in Management’s awareness and addressing of
any issues identified with regard to the control environment
during 2017. In over 90% of audits carried out in the year,
Management were able to demonstrate satisfactory knowledge
of risks and the strength of controls in their respective business
areas. One of the key drivers in the continued progress with
respect to management awareness has been the introduction of
the Shield system, which has enabled better evidence of first
and second line risk assessment and measurement. The
control environment ratings applied to audit reviews conducted
by Group Internal Audit are within the normal industry range,
and Group Internal Audit are of the view that the control
environment was adequately robust during 2017.
The Members of the Committee, and a record of their meeting
attendance during 2017 and details of the Committee’s other
considerations during 2017, are outlined in the full Report below.
I and a number of my fellow Committee Members met with
representatives of the Group’s Regulator on a one-to-one basis
during the year. The Committee remains focused on regulatory
matters, along with our colleagues on the Board Risk Committee
and, of course, the wider Board.
The Committee held private Member only meetings both before
and after the Committee meetings from time to time and also met
privately with each of the Group Head of Internal Audit, the
External Auditor and members of management including the
Chief Risk Officer and Chief Financial Officer (“CFO”) during
2017.
I also continued my practice of meeting with the External Auditor,
the Group Head of Internal Audit and other members of the
Leadership Team, as appropriate, on a regular basis throughout
the year.
I would like to welcome Mr. Roger Perkins, who was appointed
Chairman to the AIB Group (UK) p.l.c. Board Audit Committee in
April 2017. He has already attended the Group’s Audit Committee
during 2018 to report on his positive observations of the control
environment to date.
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,
and copies of the Committees minutes were shared with the full
Board.
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 demonstrated throughout
2017.
Catherine Woods
Committee Chairman
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Report of the Board Audit Committee
Membership and meetings
The Board Audit Committee comprises of four independent Non-
Activities
The following, whilst not intended to be exhaustive, is a summary
of the activities undertaken by the Committee in the past year in
Executive Directors. The Board is satisfied that the Committee is
the discharge of its responsibilities:
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appropriately constituted in the context of the UK Corporate
Governance Code and other requirements, in particular, those
regarding the need for recent and relevant financial experience
The Committee:
–
reviewed the Group’s 2016 annual and 2017 interim financial
and competence. Mr Peter Hagan and Ms Catherine Woods are
statements for 31 March 2017 and 30 June 2017 prior to
also members of the Board Risk Committee, the common
membership of which is considered important in facilitating
approval by the Board; details of the significant
considerations in relation to the 2016 annual accounts were
effective governance across all finance, risk and internal control
outlined in the 2016 Annual Financial Report;
matters. Biographical details of each of the Members are outlined
–
reviewed the Group’s accounting policies and practices; the
on pages 28 to 29.
minutes of the Group Disclosure Committee (an Executive
Committee whose role is to ensure the compliance of AIB
A total of eight scheduled meetings of the Committee were held
Group financial information with the legal and regulatory
during 2017. Meetings are attended by the Chief Financial Officer
requirements prior to external publication); the effectiveness
and relevant Internal Audit, Finance, Legal and Compliance
of internal controls; the findings, conclusions and
executives along with the External Auditor. At least twice during
recommendations of the Auditors and Group Internal Auditor;
the year, the Committee meets in private session with the
–
in the context of reviewing the financial statements, engaged
Auditor, and separately with the Head of Group Internal Audit.
The Chairman and Members of the Committee, together with
their attendance at scheduled meetings, are shown below:
with Management in respect of accounting matters, and
considered matters where management judgement was
important to the results and financial position of the Group,
the most significant of which related to:
–
the level of provisions for impairment on loans and
Members: Ms Catherine Woods (Chairman), Mr Tom Foley, Mr
receivables and other liabilities and commitments as at
Peter Hagan, Mr Jim O’Hara
31 December 2017;
Member attendance during 2017:
Catherine Woods
Jim O’Hara
Peter Hagan
Tom Foley
A
8
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8
B
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Column A indicates the number of Committee meetings held
during 2017 which the Member was eligible to attend; Column B
indicates the number of meetings attended by each Member
during 2017.
Performance Evaluation
An external performance evaluation of the Committee was
–
–
–
–
–
the level of IAS 37 provisions including onerous leases
and customer redress as at 31 December 2017;
disclosures required with regard to the adoption of
International Financial Reporting Standard 9 (IFRS 9);
the accounting considerations and treatments relating to
engagement with customers in financial difficulty and
associated loan restructuring activity;
recognition policy of deferred tax assets in Ireland and
the UK;
considered key judgements regarding potential
discretionary increases to pensions in payment in the
Group’s main Irish schemes; and
–
retirement benefit obligations and related accounting
treatment and disclosure requirements.
conducted during 2017, in line with the corporate governance
In addressing these issues, the Committee considered and
requirements of every three years. This was a comprehensive
challenged the appropriateness of Management’s judgements
exercise, with all of the Committee members interviewed after
and estimates, and sought additional information if required.
submitting written responses to a survey. The evaluation
The Auditors were present during such discussions and, where
concluded that the Committee continued to operate effectively,
appropriate, the views of the Auditors on the Management’s
with minor enhancements recommended. These are currently
approach were sought. The Committee satisfied itself that
being considered with regard to the Committee’s training and
Management’s estimates, judgements and disclosures were
ongoing development on matters of relevance to its remit and
appropriate and in compliance with the financial reporting
enhanced focus on the Group’s ‘speak up’ policy. The outcome
standards. A detailed analysis of significant accounting
of the evaluation was shared with the Board.
Roles and Responsibilities
The Committee’s primary responsibilities are set out in the terms
judgments and estimates is provided in note 2 to the
consolidated financial statements. The Committee:
–
provided advice to the Board in respect of the Annual
Financial Report, confirming that the Committee is satisfied
of reference, which are reviewed annually by the Committee and
that the Annual Financial Report for the financial year ended
approved by the Board. The terms of reference are available on
31 December 2017, taken as a whole, is fair, balanced and
the website at http://aib.ie/investorrelations.
understandable and provides the information necessary for
AIB Group plc Annual Financial Report 2017 197
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shareholders to assess the Group’s performance, business
effective delivery capability, with a diverse and skilled team which
model and strategy;
is consistently achieving its audit plan. Furthermore, Group
reviewed the scope of the independent audit, and the
Internal Audit clearly demonstrates its independence and is
findings, conclusions and recommendation of the Auditors;
recognised as a robust value-adding third line of defence. Group
satisfied itself through regular reports from the Group Head of
Internal Audit will continue to focus on self-identified
Internal Audit, the Chief Financial Officer the Chief Risk
improvements during the course of 2018.
–
–
Officer and the Auditors, that the system of internal controls
over financial reporting was effective;
–
received regular updates from Group Internal Audit, including
External Auditor
In 2013, we tendered for a new statutory auditor, and this
reports detailing Internal Audit reports issued during the
resulted in the appointment of Deloitte as the Group’s Auditor.
previous period, control issues identified, and related
The next tendering process for a new Group’s Auditor will be no
remediating actions;
later than in 2023. The current lead Audit Partner, Gerard
–
received reports from human resources senior management
Fitzpatrick, will step down in early 2018, in accordance with the
regarding the operation of the Code of Conduct/Speak up
rotation requirements under the EU Directive. A new Lead Audit
Policy process, through which staff of the company may in
Partner has been identified for the 2018 Audit.
confidence raise concerns about possible improprieties in
matters of financial reporting or other matters;
The Committee provided oversight in relation to the Auditor’s
–
received updates from Management on progress on key
effectiveness and relationship with the Group, including
programmes, including IFRS 9 implementation and IRB
agreeing the Auditor’s terms of engagement, remuneration and
model development;
monitoring the independence and objectivity of the Auditors. To
–
reviewed the minutes of all meetings, receiving further
help ensure the objectivity and independence of the Auditors,
clarification on issues when required, and met with and
received annual reports from the AIB UK Audit Committee
the Committee has established a policy on the engagement of
the Auditors to supply non-audit services, which outlines the
Chairman; and
types of non-audit fees for which the use of Auditors is pre-
–
held informal confidential consultations during the year
approved and for which specific approval from the Committee is
separately with the External Auditor, the Chief Risk Officer
required before they are contracted, and those from which the
and the Group Head of Internal Audit, in each case with only
Auditor is excluded. That policy was updated to ensure
Non-Executive Directors present.
Internal Audit
The Committee provided assurance to the Board regarding the
compliance with the EU Audit Reform during 2016 (see note 16
to the consolidated financial statements). Further details can be
found on the company’s website at http://aib.ie/investorrelations
independence and performance of the Group Internal Audit
In addition, the Committee provided oversight in monitoring the
function. The Committee considered and approved the annual
effectiveness of the policy, for the employment of individuals
audit plan, with reference to the principal risks of the business
previously employed by the Auditor. The Committee received
and the adequacy of resources allocated to the function.
updates on the application of the policy including the number of
Throughout the year, the Chairman of the Committee met with
former employees of the external auditor currently employed in
Group Internal Audit management between scheduled meetings
senior management positions in the Group, and facilitated its
of the Committee to discuss forthcoming agendas for Committee
considerations as to the Auditor’s independence and objectivity
meetings and material issues arising, and the Committee met
in respect of the audit. The policy was established in 2016 in
with the Group Head of Internal Audit in a confidential session
accordance with the EU Audit Regulations 537/2014 and
during 2017, in the absence of Management. The Group Head of
Directive 2014/56/EU, and no changes were made to the policy
Internal Audit has unrestricted access to the Chairman of the
during 2017.
Board Audit Committee.
The Committee is responsible for making recommendations in
the annual and interim financial statements and the Auditor’s
relation to the Group Head of Internal Audit, including on
findings and the conclusions and recommendations arising from
appointment, replacement and remuneration, in conjunction with
the half yearly review and annual audit. The Committee,
the Remuneration Committee, and confirming the Group Head of
through consideration of the work undertaken, confidential
The Committee considered the detailed audit plan in respect of
Internal Audit’s independence.
discussions with the Auditor, feedback received from
Management in respect to the audit process and through its
During 2017, an external quality assessment of the Group
annual evaluation of the Committee’s effectiveness, which
Internal Audit Function was conducted by a qualified independent
incorporated questions regarding the external audit process,
reviewer from outside the organisation, in accordance with the
satisfied itself with regards to the Auditor’s effectiveness,
Professional Standards 1312 of the Chartered Institute of Internal
independence and objectivity.
Auditors (“CIA”) International Standards for the Professional
Practice of Internal Auditing. The reviewer reported that the
The Committee met with the Auditor in confidential session
Function had an appropriate vision, strong leadership, an
twice during 2017 in the absence of Management, and the
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Committee Chairman met with the Auditor between scheduled
meetings of the Committee to discuss material matters.
On the basis of all the above, and the Committee’s
determination of the Auditor’s effectiveness, independence and
objectivity, the Committee recommends that Deloitte should be
reappointed as the Auditors at the Annual General Meeting on
25 April 2018.
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Governance and oversight –
Report of the Board Risk Committee
Letter from Peter Hagan,
Chairman of the Board Risk Committee
Dear Shareholder,
of whom attend meetings of the Committee. Other individuals,
including the Chairman of AIB Group (UK) p.l.c and members of
management, including the Group Chief Compliance Officer, also
attend meetings by invitation, when appropriate.
The principal focus of the Committee continues to evolve year on
year. Whilst Credit Risk, Compliance, Conduct Risk and Market
Risk continue to occupy a significant portion of the Committee’s
agenda, this year, Model Risk, as well as the Execution Risk
associated with major change programmes across the
organisation, came to the fore as a key consideration for the
Committee. The effective implementation of a new Internal
Ratings Based model and the IFRS 9 accounting standard were
areas of focus and concern for both the Board Risk Committee
and the Board Audit Committee. The pace of change which is
On behalf of the Board Risk Committee (‘the Committee’), I am
required to ensure readiness for such requirements has been a
pleased to report on the Committee’s activities during the
considerable challenge for Management, however, the clear
financial year ended 31 December 2017.
commitment and dedication of the Leadership Team and
Management across the organisation has enabled considerable
I would like to start by acknowledging the continued valuable
progress to be made in a risk conscious fashion, and led to the
contribution made by Dr Michael Somers to the Committee this
achievement of a number of significant milestones, in line with
year, following his previous five year tenure as Chairman of the
the established, demanding regulatory timelines.
Committee. Dr Somers resigned from the Board of Directors and
the Committee on 31 December 2017, and I would like to thank
The Committee also spent a substantial amount of time this year
him for his contribution and wish him well in his future endeavors.
tracking the continuing regulatory agenda; a number of
constructive regulatory engagements and inspections took place
This year, we were pleased to welcome Ms Carolan Lennon to
throughout the year, and the resultant actions from the Single
the Committee. Ms Lennon’s management experience and
Supervisory Mechanism Risk Mitigation Programme were
commercial acumen has enabled her to fully contribute to quality
brought before the Committee for review and approval. It is
deliberation and discussion from the outset of her appointment.
hoped that this positive engagement with the Group’s Regulators
In addition, her skill set complements well the expertise of Ms
will continue throughout 2018, with ongoing enhancements to the
Catherine Woods, Mr Simon Ball and Mr Brendan McDonagh,
risk and control environment in the Group as a result.
who remain members of the Committee.
While the Committee has a wide remit, its primary roles and
is a key priority for the organisation. To this end, the process of
responsibilities are:
setting an accurate and appropriate Risk Appetite has continued
–
providing assistance and advice to the Board in relation to
to be a Groupwide objective, and is an iterative process into
current and potential future risks facing the Group and risk
which input is provided from all business segments and key
strategy in that regard, including the Group’s risk appetite
Group Subsidiary entities, in line with the Risk Appetite
Continuous embedding of a strong risk culture across the Group
and tolerance, with a view to ensuring that the Board is
Framework.
equipped to fulfil its oversight responsibilities in relation to
these;
Key areas of focus for the Committee during 2017 included
– assessing the effectiveness of the Group’s risk management
consideration of:
infrastructure;
– the risk appetite statement and the ongoing monitoring of
– monitoring compliance with relevant laws, regulation
performance against agreed risk metrics;
obligations and relevant codes of conduct;
– the review of risk-related policies and frameworks;
– reviewing the Group’s risk profile, risk trends, risk
– the Group’s readiness for the implementation of IFRS 9;
concentrations and risk policies; and
– the Group’s recovery and resolution planning;
– considering and acting upon the implications of reviews of
– the Group’s capital and liquidity position, with particular
risk management undertaken by Group Internal Audit and/or
reference to the Internal Capital Adequacy Assessment
external third parties.
Process (“ICAAP”) and Internal Liquidity Adequacy
Assessment Process (“ILAAP”); and
The responsibilities of the Committee are discharged through its
– updates received on significant credit activity across the
meetings, and through commissioning, receiving and considering
organisation.
reports from the Chief Risk Officer, the Chief Credit Officer, the
Throughout the reporting period, through discussion with, and
Chief Financial Officer and the Group Head of Internal Audit, all
challenge to, Management, the Committee satisfied itself that
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the key risks facing the organisation were being appropriately
managed, with relevant mitigants in place and appropriate
actions taken, where necessary.
Further details on the Committee’s activities, Members of the
Committee and their record of attendance at meetings during
2017 are outlined in the full report below.
To ensure that all Directors are aware of the Committee’s work, I
provided an update to the Board following each meeting on the
key topics considered by the Committee. I am satisfied that the
skills and experience of the Committee Members enable the
Committee to provide the independent risk oversight it is tasked
with, while maintaining a constructive relationship with
Management.
The Committee's focus in 2018 will be to ensure that the Group's
risk culture, risk appetite, policies, procedures and management
controls are sufficiently robust to support its ongoing financial
progress.
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
In 2017, the Board Risk Committee comprised six independent
during 2017.
during 2017 which the Member was eligible to attend; Column B
indicates the number of meetings attended by each Member
Non-Executive Directors whom the Board determined have the
collective skills and relevant experience to enable the Committee
to discharge its responsibilities. To ensure co-ordination of the
work of the Board Risk Committee with the risk related
considerations of the Board Audit Committee, Mr Peter Hagan
and Ms Catherine Woods are also members of the Board Audit
Committee. This common membership provides effective
oversight of relevant risk and finance issues. In addition, to
ensure that remuneration policies and practices are consistent
with and promote sound and effective risk management,
common membership between the Board Risk Committee and
the Remuneration Committee is maintained. To this end, Mr
Simon Ball was appointed to the Remuneration Committee on
28 January 2017, following the departure of Mr Peter Hagan from
the Remuneration Committee. Biographical details of each of the
Members are outlined on pages 28 to 29.
The Committee met on nine occasions during 2017. All meetings
were attended by the Chief Financial Officer, the Chief Risk
Officer, the Group Head of Internal Audit, the Lead Audit Patner
from our External Auditor, Deloitte, and on occasion by the Chief
Executive Officer. Other senior executives also attended by
invitation, where appropriate. Following the resignation of Mr
Dominic Clarke in January 2017, Ms Deirdre Hannigan was
appointed as Chief Risk Officer on 24 April 2017. In the interim
period, the appropriate necessary arrangements were made to
ensure adequate cover of the responsibilities of the role. Since
her appointment, the Chief Risk Officer has attended all
meetings of the Committee, has had unrestricted access to the
Chairman of the Board Risk Committee, and has met once in
confidential session with the Committee, in the absence of other
management. Additionally, the Committee also met with the
Group Chief Compliance Officer, the Group Head of Internal
Audit, the Chief Financial Officer and the Chief Credit Officer on
one occasion each, in the absence of Management, during the
year.
The Chairman and Members of the Committee, together with
their attendance at scheduled meetings, are shown below.
Performance evaluation
An external evaluation of the Committee’s performance was
conducted in 2017. While identifying some areas for potential
enhancement, the overall results concluded that the Committee
continued to operate in an effective manner and had made
improvements in a number of areas, as identified in the 2016
evaluation process. Areas for improvement which were identified
through the review are under consideration, and targeted plans
for improvement will be rolled out in 2018.
Role and responsibilities
The Board Risk Committee assists the Board in proactively
fostering sound risk governance within the Group through
ensuring that risks are appropriately identified and managed, and
that the Group’s strategy is informed by, and aligned with, the
Board approved risk appetite. The Committee’s Terms of
Reference are available on the Group’s website at
http://aib.ie/investorrelations.
Activities
The following, while not intended to be exhaustive, is a summary
of the key items considered, reviewed and/or approved or
recommended by the Committee during the year:
− the Group’s risk management infrastructure, including actions
taken to strengthen the Group’s risk management
governance, people skills, operational and system
capabilities, and business continuity planning;
− regular reports from the Chief Risk Officer which provide an
overview of key risks, including funding and liquidity, capital
adequacy, credit risk, market risk, regulatory risk, business
risk, conduct risk, cyber risk and related mitigants;
− periodic reports and presentations from Management and the
Chief Credit Officer regarding the credit quality, performance,
provision levels and outlook of key credit portfolios within the
Group;
− items of a risk and compliance-related nature, including:
(a) governance and organisational frameworks;
(b) the risk appetite framework and risk appetite statement;
(c) the funding and liquidity policy, strategy and related
Members: Mr Peter Hagan, Chairman, Mr Simon Ball, Dr Michael
stress tests;
Somers (Resigned 31 December 2017), Ms Catherine Woods,
(d) risk frameworks and policies, including those relating to
Mr Brendan McDonagh and Ms Carolan Lennon (appointed 26
April 2017).
(i) credit and credit risk,
(ii) capital management,
(iii) financial risk, including market risk, and
Member attendance during 2017:
(iv) conduct risk;
Simon Ball
Peter Hagan
Carolan Lennon
Brendan McDonagh
Dr Michael Somers
Catherine Woods
A
9
9
6
9
9
9
B
9
9
6
9
9
9
(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:
Column A indicates the number of Committee meetings held
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(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
updates on significant credit transactions;
(d) the structure and operation of the Compliance function;
and
− regulatory developments, including business preparedness,
Recovery and Resolution planning and Management’s
proposed plans to address actions required under the Single
Supervisory Mechanism Risk Mitigation Programme, and
progress against these.
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AIB Group plc Annual Financial Report 2017 203
Governance and oversight – Report of the Nomination
and Corporate Governance Committee
Letter from Richard Pym, Chairman of the Nomination and
The Board also places strong emphasis on ensuring the
Corporate Governance Committee
Dear Shareholder,
On behalf of the Nomination and Corporate Governance
Committee (‘the Committee’), I am pleased to introduce the
Report of the Committee’s activities for the financial year ended
31 December 2017.
development of a diverse and inclusive culture across the Group,
with particular focus on better gender diversity across senior
management roles. This is evidenced in a 25% gender target for
the Leadership Team, which has been met, and a 40% gender
target at manager level which has been set for achievement
during 2018. This is underpinned by a range of policies and
initiatives within the Group focusing on four key levers for
change: raising awareness; improving the talent pipeline;
creating a more agile work environment; and minding the gap
between career and family absences. Progress on this objective
is monitored by the Board.
The Members of the Committee and a record of their meeting
attendance during 2017 are outlined in the full report below.
A key priority for the Committee is to keep the composition of the
Richard Pym,
Board and its Committees under review and to make appropriate
Committee Chairman
recommendations to the Board. Along with considering the
appropriateness of the skills, experience and diversity profile of
the Board, the Committee considers the future needs of the
Board having regard for the Group’s strategy and the tenure of
existing Directors to ensure that an appropriate succession plan
is in place.
Another important role for the Committee is to ensure the
adequacy of succession planning, including contingency
arrangements, for the Leadership Team, which was an area of
significant focus during the year under review. 2017 was a very
successful year for the Group, which achieved a primary listing
on the Irish Stock Exchange and a premium listing in London.
This success is due in no small part to the strength of the
Leadership Team, whose continued commitment is
acknowledged by the Committee and the Board, particularly in
light of the Group’s compensation levels, which compare
adversely to local corporate and international banking peers.
As I have previously highlighted, the legislative compensation
restrictions that apply to the Group are a matter of concern to the
Committee and the Board in the context of the Group’s ability to
continue to retain and attract key staff.
Diversity in its broadest sense is pivotal when considering Board
and Leadership Team composition and related succession plans.
Under certain EU regulations, we are required to focus on
addressing the under-represented gender on the Board. During
2016, we achieved our initial aim of reaching a minimum of 25%
female representation on the Board, with representation at 27%
in January 2018. 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 on the skills and
experience the individual can bring to the Board.
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Report of the Nomination and Corporate Governance
Committee
Membership and meetings
The Nomination and Corporate Governance Committee
–
to review Board and Senior Executive succession planning to
include reviewing the policy on Board selection and the
appointment of senior management and making
recommendations to the Board in that regard; and
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comprised five Independent Non-Executive Directors during
–
to review and assess the adequacy of the Company’s
2017, reduced to four when Dr Somers retired on 31 December
corporate governance policies and practices.
2017.
The Board has determined that the Members of the Committee
Group’s website at: https://aib.ie/investorrelations
The Committees’s terms of reference can be found on the
have the collective skills and experience to enable the
Committee to discharge its responsibilities.
Activities
During the year the Committee considered a number of issues
Biographical details of each of the Members are outlined on
relating to the Group’s governance arrangements. It assisted the
pages 28 to 29.
Chairman in keeping the composition of the Board and its
Committees under review and leading the appointment process
The Committee met on seven occasions during 2017. The
for nominations to the Board. The Committee’s activities are
Chairman and Members of the Committee, together with their
summarised below.
attendance at scheduled meetings, are shown below.
Members: Mr Richard Pym (Chairman), Mr Simon Ball, Dr
Michael Somers (Member to 31 December 2017), Mr Jim O’Hara
Planning
–
consideration of and recommendations with regard to Board
Board and Board Committee Composition and Succession
and Ms Catherine Woods.
Member attendance during 2017:
Richard Pym
Simon Ball
Jim O’Hara
Dr Michael Somers
Ms Catherine Woods
A
6*
7
7
7
7
B
6*
7
7
7
7
and Board Committee composition in anticipation of the
conclusion of Dr Somers’ term of appointment and, in
particular, his successor as Deputy Chairman;
–
engagement of Merc Partners to facilitate the search for a
new Non-Executive Director to join the Board during 2018
and commence preparation to succeed the current Board
Audit Committee (“BAC”) Chair upon conclusion of her nine-
year term in 2019; Merc Partners have been engaged by the
Group for a number of executive and Director searches in
recent years but have no other relationship with the Group;
Column A indicates the number of Committee meetings held
–
development of a longer-term succession plan, taking into
during 2017 which the Member was eligible to attend; Column B
account current and future skillset and experience profile
indicates the number of meetings attended by each Member
requirements, to ensure future Directors are identified and
during 2017.
inducted in a timely manner to allow appropriate succession
and ensure a continued high-calibre Board composition
*During 2017, the Committee met to consider the re-appointment
appropriate to the business of the Group;
of Mr. Richard Pym as Chairman for a further three years.
–
assessment of the independence of Directors of the Board
Mr Pym was not in attendance and the meeting was chaired by
against certain criteria, including whether Directors were
the Senior Independent Director.
Committee role and responsibilities
The principal purpose of the Committee is:
demonstrably independent and free of relationships and
other circumstances that could affect their judgement, and
whether they met criteria set out in applicable UK and Irish
regulations; and
–
to review the size, structure and composition of the Board,
–
review of the continued appropriateness of the Board
including its numerical strength, the ratio of Executive to
Diversity Policy and monitoring of progress against agreed
Non-Executive Directors, the balance of skills, knowledge
targets.
and experience of individual Members of the Board and of
the Board collectively, and the diversity and service profiles
of the Directors, and to make recommendations to the Board
Board Appointments
Whilst no appointments occurred during the year, the Board
with regard to any changes considered appropriate;
reviewed the Policy for Assessment of the Suitability of Members
–
to identify persons who, having regard to the criteria laid
of the Board, which outlines the board appointment process and
down by the Board, and in accordance with the Policy for the
is developed in accordance with European Banking Authority
Assessment of the Suitability of Members of the Board,
(EBA) Guidelines, including by ensuring that the Policy was
appear suitable for appointment to the Board; the Committee
appropriate in the context of new EBA and European Securities
evaluates the suitability of such persons and makes
and Markets Authority (ESMA) guidelines on the matter, which
appropriate recommendations to the Board;
become effective from June 2018.
AIB Group plc Annual Financial Report 2017 205
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Governance and oversight – Report of the Nomination
and Corporate Governance Committee
Leadership Team Succession Planning
–
consideration of appointments to the Leadership Team,
particularly the Chief People Officer and the Chief Risk
Officer, in conjunction with the Board Risk Committee; and
–
Leadership Team succession planning generally, to ensure
that appropriate short-term contingency plans, longer-term
succession plans and any interim development plans for
identified talent were in place.
Re-appointment of the Chairman
Having regard for the positive outcome of the effectiveness
evaluation of the Chairman, conducted as part of the broader
external Board effectiveness evaluation, and having consulted
with the Minister for Finance under the terms of the Relationship
Framework, the Committee met without Mr. Pym present to
consider his re-appointment as Chairman of the Board for a
further three year period to October 2020, which was
recommended to and approved by the Board in October 2017.
Corporate Governance
On the subject of Corporate Governance, the Committee
considered and, where appropriate, approved or recommended
to the Board:
–
–
–
the development of a Group Subsidiary Governance
Framework;
regular corporate governance updates from the Company
Secretary;
the corporate governance arrangements and related policies
and practices of AIB Group, on relisting to the main London
and Irish Stock Exchanges and on the introduction of the
new Holding Company; and
–
the Group’s compliance with corporate governance
requirements and related policies and practices.
Performance Evaluation
An external performance evaluation of the Board was conducted
during 2017, and included a review of the Committee. The review
concluded that the Committee continued to operate in an efficient
manner, with the Committee Members emphasising the
importance of continued focus during 2018 on Leadership Team
and Board succession planning and on disclosure requirements
of the Group arising from its listing on the main Exchanges.
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Governance and oversight –
Report of the Remuneration Committee
Letter from Jim O’Hara, Chairman of the Remuneration
achievement of Group strategic objectives. This will likely result in
Committee
Dear Shareholder,
the loss of key members of the senior management team
which, in turn, may lead to a change in the strategic ambition
and direction of the Group.
During 2017, the Committee spent a significant amount of time,
in formal and informal meetings with management and external
remuneration consultants, seeking to address this risk.
Arising from these discussions, the Committee is proposing to
introduce an appropriate incentive plan with the key objective of
creating long term sustainable value for customers and
shareholders while also facilitating the retention of key executives
and safeguarding the Group’s capital, liquidity and risk positions.
The plan will be designed to enable the State to recover the
As Chairman of the Remuneration Committee, I am pleased to
value of its investment in the Group.
introduce this report on the Committee’s activities during 2017.
The Members of the Committee, and their record of attendance
transparent Deferred Annual Share Plan (‘the Plan’) to retain,
at meetings during 2017, are outlined in the full report below.
incentivise and align senior executives with the creation of long
The proposed construct of the plan will be a simple and
On behalf of the Board, the Remuneration Committee has
responsibility for:
term sustainable value and the achievement of other financial
and strategic objectives. It is intended that awards will be 100%
deferred into shares with no cash element and that awards will
–
–
–
–
recommending Group remuneration policies and practices to
vest over a three to five year timeframe. The State’s opportunity
the Board;
to recover the value of its investment in the Group will act as a
ensuring that the remuneration policy and practices are
final condition prior to any vesting or payout of awards under the
subject to an annual central and independent internal review;
Plan.
the remuneration of the Chairman of the Board (which matter
is considered in his absence);
It is envisaged that awards will be based on prior year
determining the remuneration of the Chief Executive Officer,
performance using a balanced scorecard of financial, non-
other Executive Directors, and the other members of the
financial and personal measures designed to achieve the
Leadership Team, under advice to the Board; including the
strategic priorities of the Group. Eligible participants will include
Heads of Risk, Compliance, Group Internal Audit and the
the CEO, Leadership Team Members and other key executives
Group Company Secretary;
who are considered critical to the delivery of the Group’s strategic
–
reviewing the remuneration of Identified Staff, who are
objectives. Awards will not exceed 100% of fixed pay. All
individuals classified as ‘material risk takers’ in accordance
aspects of the Plan will be designed in full compliance with
with the EU Capital Requirements Directive (CRD IV)
CRD IV and associated EBA Guidelines on sound remuneration
Remuneration Guidelines of the European Banking Authority
policies.
(‘EBA Guidelines’);
–
performance-related and share-based incentive schemes,
The Committee recognises that the construct of the Plan is non-
when appropriate.
standard in nature with significant focus on current strategic
priorities while maximising value for all shareholders. It is further
The Group’s Remuneration Policy continues to be governed by
acknowledged that remuneration outcomes for senior executives
restrictions contained in certain agreements in place with the Irish
will not deliver market competitive remuneration and, in light of
State connected to the State’s recapitalisation of the Group in
current levels of fixed pay, will likely be positioned well below
2010 and 2011 (‘Agreements’). In light of these restrictions, as
market peers. Whilst not a long term retention tool, the
reported in previous years, the Group is unable to implement a
Committee considers that the design of the Deferred Annual
competitive market driven compensation and benefit structure to
Share Plan should somewhat mitigate the heightened retention
retain and incentivise key executives. This remains a key risk for
risk which currently exists until such time as the Group is able to
the future stability and performance of the Group and is of utmost
return to normalised remuneration practices.
concern to the Committee and the Board as a whole.
The Board’s concerns were outlined in the IPO Prospectus which
which is being put to the Shareholders for a non-binding advisory
highlighted the impact of the absence of market based pay and
vote at the forthcoming AGM. The Plan and its implementation is
short and long term variable incentive schemes on the Group’s
subject to formal approval by the State’s Minister for Finance
ability to align the remuneration of key executives with the
which will be sought over the coming months.
Information on the proposed Plan is contained on page 214,
AIB Group plc Annual Financial Report 2017 207
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Governance and oversight –
Report of the Remuneration Committee
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.
During 2017, the Remuneration Committee used the services of
Willis Towers Watson (“WTW”) for advice on market based
remuneration and practices for senior executives. WTW are
solely focused on Human Resources and remuneration
consultancy and have no other relationship with the Group.
Key areas of focus for the Committee in 2017 included:
- Review of future variable incentive plan designs with the
primary objective of safeguarding the retention of key
executives and the delivery of the Group’s strategic
objectives;
-
Assessment of the key risks impacting the Group’s current
remuneration structure and practices;
- Review of the composition and remuneration components of
Identified Staff;
- Ongoing compliance with relevant statutory disclosures,
regulatory requirements and guidelines;
- Review of the quantum and structure of remuneration of
Executive Directors and members of the Leadership Team
against comparative peer groups in the external market;
- Consideration of the continued risk and adverse impact of
remuneration restrictions on the Group arising from the State
Agreements, including the cap on pay which specifically
relates to the CEO.
- Review of the Group’s Remuneration Policy, including the
process for the identification of Material Risk Takers;
- Review of the duties and responsibilities of the Committee in
accordance with the requirements of CRD IV and EBA
Guidelines on sound remuneration practices.
Further detail on the Committee’s activities during 2017 is
included in the Committee’s full report.
As Chairman, I have ensured that all Directors are kept up to
date on the work of the Committee through the provision of
periodic updates at Board meetings. I would like to acknowledge
the valuable input of my colleagues on the Committee to its
effective operation and thank them for their endeavors during
2017.
Jim O’Hara
Chairman of the Remuneration Committee
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Report of the Remuneration Committee
Membership and Meetings
The Remuneration Committee comprises 4 Independent Non-
Performance Evaluation
An external performance evaluation of the Board was conducted
during 2017 which included a review of the Committee. While
Executive Directors whom the Board is satisfied possess the
identifying some areas for potential enhancement, the overall
required knowledge and experience to enable the Committee to
results concluded that the Committee continued to operate in an
operate effectively. To ensure that remuneration policies and
effective manner, with greater engagement with the external
practices are consistent with and promote sound and effective
remuneration consultants desired and ensured during the latter
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risk management, common membership between the
half of 2017.
Remuneration Committee and the Board Risk Committee is
maintained, with Mr Simon Ball being a member on both
committees.
Roles and Responsibilities
The Committee’s primary responsibilities are described in its
terms of reference which are reviewed annually with any
Biographical details of each of the Members are outlined on
proposed amendments submitted to the Board for approval. A
pages 28 to 29.
copy of the terms of reference is available on the Group’s website
at http://aib.ie/investorrelations.
The Committee met on seven occasions during 2017. Meetings
are attended by the Chief People Officer, the Head of Pensions
and Reward, the Chief Executive Officer and, where relevant, by
Director’s remuneration
Details of the total remuneration of the Directors in office during
other Senior Management on the invitation of the Chairman. The
2017 and 2016 are shown in the Directors’ Remuneration report
Chief Risk Officer previously received an annual invitation to
on pages 220 and 221. It should be noted that where an
attend the Remuneration Committee but the Committee has
Executive Director holds a Non-Executive Directorship at an
agreed that she will be a permanent attendee at all future
meetings.
External Company, they do not receive a fee. Limitations on such
external directorships are outlined in CRD IV and both of the
Group’s Executive Directors are fully compliant with those
The Chairman and Members of the Committee, together with
limitations.
their attendance at scheduled meetings, are shown below.
Members: Mr Jim O’Hara (Chairman), Mr Simon Ball, Mr Tom
Foley, Mr Richard Pym.
Member attendance during 2017: A
7
Simon Ball
Tom Foley
Jim O’Hara
Richard Pym
7
7
7
B
7
7
6*
7
Column A indicates the number of Committee meetings held
during 2017 which the Member was eligible to attend; Column B
indicates the number of meetings attended by each Member.
*In the absence of Mr O’Hara, who was absent due to illness, the
meeting was chaired by Mr Foley.
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Governance and oversight –
Corporate Governance Remuneration statement
Remuneration Constraints
The Group has been required to comply with certain executive
The Group undertakes an annual review of the Remuneration
Policy to ensure that remuneration policies and practices are
pay and compensation restrictions following the Group’s
operating as intended, are consistently applied and are compliant
recapitalisation by the Irish Government in 2010 and 2011.
with regulatory requirements. The annual review is informed by
These restrictions include a cap on salaries and allowances in
appropriate input from the Group’s risk, compliance and internal
the amount of € 500,000 per annum and a ban on the
audit functions. At the request of the Remuneration Committee,
introduction of any new bonus or incentive schemes, allowances
the Remuneration Policy was comprehensively revised during
or other fringe benefits. They apply to all directors, senior
2016 in order to align it to the Group’s customer first values,
management, employees and service providers across the
longer term strategy and current remuneration practices.
Group. Additionally, Irish taxation legislation applies an excess
Following review in 2017, there were no significant changes
tax charge on certain remuneration, such as bonus payments,
made to the Remuneration Policy.
paid to employees of financial institutions in Ireland that have
received financial support from the State.
In light of the Group’s intention to introduce a new Deferred
Annual Share Plan, as outlined in the following pages, the
The application of these constraints has made attracting and
Directors now believe that it is an appropriate time to put a
retaining high calibre and specialist staff a significant challenge
revised Remuneration Policy to a non-binding vote of
for the Group. Accordingly, the Group now seeks to introduce
shareholders at the forthcoming AGM.
variable pay, in the form of a Deferred Annual Share Plan, details
of which are outlined in detail on pages 214 to 217.
The Remuneration Policy is governed by the Remuneration
Remuneration Policy and Governance
The Group aims to reward employees fairly and competitively in
order to attract, motivate and retain the right calibre of individuals
Committee on behalf of the Board. The Remuneration Committee
advises and makes recommendations to the Board on the design
and ongoing implementation of the Remuneration Policy,
including the process for the identification of material risk takers.
to support the Group’s future success and growth. The Group’s
The Remuneration Committee’s governance role in this respect is
remuneration policies and practices are designed to foster a truly
outlined in the Committee’s Terms of Reference.
customer focussed culture, to create long term sustainable value
for our customers and stakeholders, to attract, develop and retain
the best people and to safeguard the Group’s capital, liquidity
European Banking Authority (EBA) Guidelines
The EBA Guidelines on sound remuneration policies came into
and risk positions. The Group Remuneration Policy is the
effect on 1 January 2017. The key objectives of the guidelines
governing framework which underpins all remuneration policies,
are to ensure that remuneration policies promote sound and
practices and procedures. The scope of the Remuneration Policy
effective risk management, do not provide incentives for
includes all financial benefits available to employees and applies
excessive risk taking and are aligned with the long-term interests
to all employees of the Group, including Executive Directors,
of the Group.
senior executives and material risk takers.
The Remuneration Policy reflects the relevant provisions of the
The Remuneration Policy sets out the Group’s key remuneration
EBA Guidelines as they apply to the Group’s current
principles which shape the Group’s policies and practices. These
remuneration practices and the requirements of the Senior
include simplicity, transparency, fairness, performance alignment,
Managers Regime in respect of the Group’s UK activities. In the
external market positioning and strong risk management. The
absence of variable incentive schemes, there was little scope in
Remuneration Policy also sets out the key components of the
practice to apply the provisions of the EBA Guidelines pertaining
Group’s current remuneration structure together with the
to variable remuneration. The Remuneration Policy incorporates
functional responsibilities for governance and the remuneration
the provisions of the EBA Guidelines in relation to the ongoing
approach for key groups of individuals, including non-executive
design, implementation and governance of remuneration.
directors, senior executives, material risk takers, employees in
control functions and all other employees. While the
Remuneration Policy is designed to fully comply with the
Pillar 3 and Other Remuneration Disclosures
The Group publishes additional remuneration disclosures in the
provisions of EU and national regulatory requirements, the
annual Group Pillar 3 Report. These disclosures provide further
application of market aligned remuneration policies and practices
details in relation to the Group’s decision making process and
is constrained by the additional remuneration restrictions
governance of remuneration, the link between pay and
introduced by the Irish Government which, in turn, preclude the
performance, the remuneration of those employees whose
Group from aligning the remuneration of key executives and
professional activities are considered to have a material impact
other key employees with the achievement of longer term
on the Group’s risk profile and the key components of the
customer, financial and strategic priorities.
Group’s remuneration structure. The Group Pillar 3 Report 2017
will be available on the Group website.
210
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EBA remuneration benchmarking requirements require the Group
to disclose remuneration data in respect of material risk takers
Reward Structure and Operation in 2017
During 2017, the Group continued to operate within the
and high earners (those earning above € 1 million) to the Central
parameters of existing remuneration constraints. Individual
Bank of Ireland. The Group continued to comply with these
remuneration across the Group was principally comprised of fixed
reporting requirements during 2017. There were no employees
pay elements, encompassing base salary, allowances and
whose total remuneration exceeded € 1 million during 2017.
employer pension contributions. The Group endeavoured to
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apply base salary fairly and competitively according to the size
Identified Staff and Risk Oversight
The Group maintains a list of those staff whose professional
and level of responsibilities attaching to individual roles.
Allowances principally consisted of non-pensionable cash
activities are considered to have a material impact on the Group’s
allowances that are designed to reflect benefits and allowances
risk profile (“Identified Staff”). The Group’s process, including
generally available in the external market. The Group operates
relevant criteria, for determining Identified Staff forms an
addendum to the Group Remuneration Policy. The list of
defined contribution pension schemes which followed the closure
of all Group defined benefit schemes to future accrual on
Identified Staff is reviewed annually by the Remuneration
31 December 2013. Further details in respect of the Group’s fixed
Committee. Further details in relation to the composition and
pay elements are provided in the table below.
remuneration of Identified Staff are set out in the remuneration
disclosures in the Group’s Pillar 3 Report.
Increases in base salary were performance based, determined
by performance against each individual’s objectives which, in
A key principle of the Remuneration Policy is the promotion of a
turn, reflect the Group’s strategy, goals and values. Such
strong risk management culture and risk-taking which is aligned
increases were awarded following the annual pay review
to the Group Risk Appetite Statement. The Remuneration
process, through promotion and, in exceptional cases, through
Committee is supported by the Group Chief Risk Officer in its
assessment of the key risks that should be considered in the
context of the Group’s remuneration structure. The Chief Risk
out-of-course increases to retain business critical staff and key
skills.
Officer reviews the list of Identified Staff while the Risk and
Performance based salary increases of between 0% and 3.25%
Compliance functions provide input to the annual review of the
were awarded to employees (excluding Leadership Team
Remuneration Policy. The focus on risk is further strengthened by
members) in April 2017 under the annual pay review process.
requiring all employees to have a specific risk objective in their
This followed the conclusion of a two year agreement with
performance management plan.
Performance Management
In line with the Group’s Talent and Culture strategic priority, the
employee representatives arising from the recommendation of
the Workplace Relations Commission. Accordingly, similar
increases will be applied in April 2018.
Board continued to focus on building a strong culture which
No increases were awarded to Executive Directors or Leadership
aligned with the Group’s brand values. The Board set out in 2017
Team members under the annual pay review. All remuneration
to ensure that employees who exhibit the Group’s brand values,
decisions were predicated on supporting the Group’s strategy,
resulting in positive risk and conduct outcomes, were rewarded
financial performance and within budgetary parameters.
accordingly. The Group’s brand values provide the behavioural
framework for how employees work, interact with each other and
The remuneration of Executive Directors and members of the
serve the customer.
Leadership Team is determined and approved by the
Remuneration Committee on behalf of the Board but is heavily
The Group’s performance management system plays a critical
constrained by the remuneration limits set by the State
role in aligning individual objectives with the Group’s overall
Agreements.
strategy, financial and non-financial goals and brand values.
During 2017, each employee’s behavioural rating informed a pay
There were no general short or long term variable incentive
matrix which directly impacted the level of base pay increase
schemes or share incentive schemes in operation during 2017.
awarded under the annual pay review. Consequently,
The Group operates two local business variable commission
performance outcomes, based on a combined assessment of
schemes. These schemes are designed to protect the rights and
‘What’ objectives and ‘How’ behaviours, determine individual
interests of customers via customer centric performance criteria,
increases in remuneration and provide a transparent link
the prevention of conflicts of interest and the assessment and
between performance and remuneration.
mitigation of risks to the customer. The maximum amount
payable to any individual per year is € 20,000.
AIB Group plc Annual Financial Report 2017 211
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Governance and oversight –
Corporate Governance Remuneration statement
Fixed Pay Elements
The principal fixed pay design elements are outlined below:
Pay Element Rationale and alignment
to Strategy
Design and Operation
Performance Assessment and
Maximum Potential Value
Base Salary
To attract, motivate and
retain the right calibre of
individuals to support the
(cid:39)(cid:396)(cid:381)(cid:437)(cid:393)(cid:859)(cid:400) (cid:296)(cid:437)(cid:410)(cid:437)(cid:396)(cid:286) (cid:400)(cid:437)(cid:272)(cid:272)(cid:286)(cid:400)(cid:400) (cid:258)(cid:374)(cid:282)
growth.
Base salary is designed to reflect
individual experience,
contribution and the size and
level of responsibilities attached
to each role.
Increases in base salary are
performance based, following an
(cid:258)(cid:400)(cid:400)(cid:286)(cid:400)(cid:400)(cid:373)(cid:286)(cid:374)(cid:410) (cid:381)(cid:296) (cid:286)(cid:258)(cid:272)(cid:346) (cid:349)(cid:374)(cid:282)(cid:349)(cid:448)(cid:349)(cid:282)(cid:437)(cid:258)(cid:367)(cid:859)(cid:400)
achievements against their
objectives.
Base salaries are typically
reviewed annually as part of the
annual pay review process with
increases taking effect from 1st
April.
Increases in base salary will
generally reflect increases
awarded to all employees under
the annual performance based
pay review.
Increases may occasionally arise
based on an assessment of an
(cid:349)(cid:374)(cid:282)(cid:349)(cid:448)(cid:349)(cid:282)(cid:437)(cid:258)(cid:367)(cid:859)(cid:400) (cid:272)(cid:381)(cid:374)(cid:410)(cid:396)(cid:349)(cid:271)(cid:437)(cid:410)(cid:349)(cid:381)(cid:374) (cid:410)(cid:381) (cid:396)(cid:381)(cid:367)(cid:286)(cid:853)
market competitiveness and level
of responsibilities.
Base salaries of all employees,
including Executive Directors, are
managed in accordance with
existing remuneration
restrictions.
The annual base salary for each
Executive Director is set out in the
Directors Remuneration Report.
Cash allowances for managers
an(cid:282) (cid:286)(cid:454)(cid:286)(cid:272)(cid:437)(cid:410)(cid:349)(cid:448)(cid:286)(cid:400) (cid:396)(cid:258)(cid:374)(cid:336)(cid:286) (cid:296)(cid:396)(cid:381)(cid:373) (cid:934)(cid:1011)(cid:853)(cid:1004)(cid:1004)(cid:1004)
(cid:410)(cid:381) (cid:934)(cid:1006)(cid:1004)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:393)(cid:286)(cid:396) (cid:258)(cid:374)(cid:374)(cid:437)(cid:373)(cid:856)
(cid:4)(cid:367)(cid:367)(cid:381)(cid:449)(cid:258)(cid:374)(cid:272)(cid:286)(cid:400) (cid:381)(cid:296) (cid:437)(cid:393) (cid:410)(cid:381) (cid:934)(cid:1007)(cid:1004)(cid:853)(cid:1004)(cid:1004)(cid:1004) (cid:258)(cid:396)(cid:286)
payable to Executive Directors
and members of the Leadership
Team.
A standard contribution of 10% of
base salary plus an additional
matching contribution of up to
8%, depending on the age of the
employee.
Executive Directors and members
of the Leadership Team are
entitled to an employer pension
contribution of up to 20% of base
salary.
Base salaries of Executive
Directors and members of the
Leadership Team are reviewed
annually by the Remuneration
Committee on behalf of the
Board.
Non-pensionable cash
allowances are provided to
eligible managers and executives
according to their respective
grades.
Additional allowances include
location allowances, payable in
the UK to employees below
management level.
Employees are entitled to
(cid:393)(cid:258)(cid:396)(cid:410)(cid:349)(cid:272)(cid:349)(cid:393)(cid:258)(cid:410)(cid:286) (cid:349)(cid:374) (cid:410)(cid:346)(cid:286) (cid:39)(cid:396)(cid:381)(cid:437)(cid:393)(cid:859)(cid:400)
Defined Contribution Scheme
with a monthly contribution
based on a percentage of base
salary.
Executive Directors and
members of the Leadership
Team are also entitled to
participate in the Defined
Contribution Scheme.
In the UK, employees may elect
to receive cash in lieu of their
pension contribution.
Allowances
To provide a contribution to
market aligned benefits and
allowances generally available
in the market.
Pension
To enable employees plan for
an appropriate standard of
living in retirement.
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Fixed Pay Elements (continued)
Pay Element Rationale and alignment
to Strategy
Design and Operation
Performance Assessment and
Maximum Potential Value
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Other
Benefits
To provide affordable benefits
in accordance with general
market practice.
The Group does not operate a
company car scheme.
Executive Directors and members
of the Leadership Team may
occasionally avail of the use of a
pool car and driver.
Benefits include medical
insurance (UK employees only),
income protection, death-in-
service cover and free banking
services.
Additional benefits including,
but not limited to, relocation
costs, (tax advice,
accommodation and flight
allowances) may be provided in
line with market practice.
The Remuneration Committee
retains the right to provide
additional benefits subject to
current remuneration
restrictions.
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Governance and oversight –
Corporate Governance Remuneration statement
Remuneration of Executive Directors
The remuneration of Executive Directors in 2017 comprised of
opportunity to recover the value of its investment in the Group will
act as a final condition prior to any vesting or payout of awards
base salary, taxable benefits and pension contributions. Taxable
under the Plan. The Plan also provides for a downward risk
benefits represent a non-pensionable cash allowance in lieu of
adjustment at the discretion of the Remuneration Committee.
company car and other contractual benefits. Pension
contributions represent agreed payments to a defined
All aspects of the Plan will be designed in full compliance with the
EU Capital Requirements Directive and associated EBA
contribution scheme. The remuneration of Executive Directors is
Guidelines on sound remuneration policies and the relevant
reviewed annually by the Remuneration Committee on behalf of
national regulations in each of the Group’s operating jurisdictions.
the Board.
The Group sought third-party advice on regulatory compliance
matters related to the Plan.
There were no changes to the remuneration of the Chief
Executive Officer or Chief Financial Officer during 2017. In line
It is envisaged that the Plan will contribute to the retention of key
with the cap on salaries and allowances imposed by existing
executives by providing them with a degree of visibility over
remuneration restrictions, the Chief Executive Officer was paid a
awards and future payouts. Incentive awards will be 100%
base salary of € 500,000 per annum. An additional pension
deferred into shares over a 5 year period (7 for UK executives)
contribution amounting to € 100,000 (20%) was made to a
with no cash element. There will be no upfront payment with
defined contribution scheme. The Remuneration of the Chief
vesting of 33% per year occurring on a pro-rata basis between
Financial Officer comprised of base salary of € 470,000 and a
years 3 and 5. Additional holding periods of one year will apply to
non-pensionable cash allowance of € 30,000. Pension
all vested awards. Awards will be made annually based on the
contribution of € 94,000 (20%) was also made to a defined
prior year performance using the performance elements set out
contribution scheme.
above.
There were no bonuses, shares or other incentive schemes paid
The design of the Plan incorporates the remuneration principles,
or awarded to Executive Directors in 2017.
Proposed Introduction of a Deferred Annual Share
Plan for 2018
Following the Group’s successful return to the equity markets in
which apply to all employees of the Group, and which are
included in the Group’s Remuneration Policy. In particular, these
include simplicity, transparency, fairness, performance alignment,
external market positioning and strong risk management.
2017, the Group proposes to take the first step in its journey to
The Plan will apply to all Executive Directors, members of the
more normalised remuneration practices. As outlined in the IPO
Leadership Team and, at the discretion of the Remuneration
Prospectus, the Group now seeks to follow up on its commitment
Committee, other senior executives who are considered critical to
to better align the reward of the senior executive team with the
the delivery of the Group’s strategic objectives. It is intended that
objectives of creating long-term sustainable value for customers
the first awards under the Plan will be awarded in 2019 for the
and shareholders while simultaneously safeguarding the Group’s
performance year 2018. The principal design elements are
capital, liquidity and risk positions. As an initial step in aligning
outlined in the following table.
investor risk with executive remuneration, the Remuneration
Committee proposes the introduction of a regulatory compliant
Deferred Annual Share Plan (the ‘Plan’). The performance
elements underpinning the Plan reflect the strategic objectives of
the Group, are consistent with the medium term targets and
commitments previously communicated to the market, and are
appropriately stretching to reflect the quantum of remuneration
potential. The proposed changes to the Remuneration Policy will
be subject to a non-binding advisory vote at the Group’s AGM in
April and will be subject to formal approval of the State’s Minister
for Finance which will be sought in the coming months. More
background, context and details of the Plan are provided below.
The performance metrics which underpin the Plan will reflect the
current strategic priorities of the Group, and include material
reductions in non-performing loans; creating operating
efficiencies evidenced by a lower cost-to-income ratio; delivering
a minimum return on tangible equity; an individual executive
specific performance metric; and a composite risk metric taken
directly from the Group’s Risk Scorecard. Particular focus will be
placed on developing a strong, customer centric culture and on
driving positive customer and conduct outcomes. The State’s
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Deferred Annual Share Plan Elements
Pay
Element
Rationale and alignment
to Strategy
Design and Operation
Performance Assessment and
Maximum Potential Value
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Deferred
Annual
Share Plan
Strategy
To align the remuneration of
senior executives with the
creation of long term
sustainable value for
customers and shareholders
while also safeguarding the
(cid:39)(cid:396)(cid:381)(cid:437)(cid:393)(cid:859)(cid:400) (cid:272)(cid:258)(cid:393)(cid:349)(cid:410)(cid:258)(cid:367)(cid:853) (cid:367)(cid:349)(cid:395)(cid:437)(cid:349)(cid:282)(cid:349)(cid:410)(cid:455) (cid:258)(cid:374)(cid:282)
risk positions.
To facilitate the retention of
key executives.
To enable the State to recover
the value of its investment in
the Group. Any vesting and
payouts of awards will be
contingent upon this.
Alignment
Full malus and clawback
provisions will apply, in
accordance with regulatory
requirements, to further
support long term alignment
(cid:449)(cid:349)(cid:410)(cid:346) (cid:400)(cid:346)(cid:258)(cid:396)(cid:286)(cid:346)(cid:381)(cid:367)(cid:282)(cid:286)(cid:396)(cid:400)(cid:859) (cid:349)(cid:374)(cid:410)(cid:286)(cid:396)(cid:286)(cid:400)(cid:410)(cid:400)(cid:856)
Design criteria will ensure
that voluntary leavers are
disadvantaged to non-leavers
to encourage retention and
alignment.
All outstanding awards will
immediately lapse in full if
further State aid is required.
Overview
A simple and transparent Deferred
Annual Share Plan with awards and
payouts delivered in shares with no
cash element.
Maximum Award
The maximum annual share
awards for all participants,
including Executive Directors, is
100% of fixed pay.
Deferral Arrangements
Awards will be fully deferred into
shares over a 5 year period (UK
based participants - 7 years) with no
upfront component.
The achievement of challenging
and appropriately stretching
performance targets will result in
an annual award of up to 100% of
fixed pay.
Participants
Eligible participants will include
Executive Directors, members of the
Leadership Team and other senior
executives, at the discretion of the
Remuneration Committee, who are
considered critical to the delivery of
the (cid:39)(cid:396)(cid:381)(cid:437)(cid:393)(cid:859)(cid:400) strategic objectives.
Performance Period
Awards will be based on
performance in a single financial
year with the addition of long-term
restrictions on vesting and payout.
Performance Measures Principles
Performance measures, selected
from the Group(cid:859)(cid:400) (cid:17)(cid:258)(cid:367)(cid:258)(cid:374)(cid:272)(cid:286)(cid:282)
Scorecard, will consist of both
financial and non-financial measures
(including risk related measures), in
(cid:367)(cid:349)(cid:374)(cid:286) (cid:449)(cid:349)(cid:410)(cid:346) (cid:410)(cid:346)(cid:286) (cid:39)(cid:396)(cid:381)(cid:437)(cid:393)(cid:859)(cid:400) (cid:400)(cid:410)(cid:396)(cid:258)(cid:410)(cid:286)(cid:336)(cid:349)(cid:272)
business plan and enabling the State
to recover its investment in full.
Performance Period
Awards will be made based on an
assessment of the prior year
performance.
Performance Measures
Performance measures will
incorporate a balanced scorecard
of financial and non-financial
measures, including specific risk
and personal performance
measures.
Financial measures will be in line
with published financial targets
with particular focus on reducing
non-performing loan exposures,
increasing cost efficiencies and
maximising shareholder return.
Risk related measures will be
(cid:400)(cid:286)(cid:367)(cid:286)(cid:272)(cid:410)(cid:286)(cid:282) (cid:296)(cid:396)(cid:381)(cid:373) (cid:410)(cid:346)(cid:286) (cid:39)(cid:396)(cid:381)(cid:437)(cid:393)(cid:859)(cid:400) (cid:90)(cid:349)(cid:400)(cid:364)
Scorecard while personal
measures will form part of each
(cid:349)(cid:374)(cid:282)(cid:349)(cid:448)(cid:349)(cid:282)(cid:437)(cid:258)(cid:367)(cid:400)(cid:859) (cid:393)(cid:286)(cid:396)(cid:296)(cid:381)(cid:396)(cid:373)(cid:258)(cid:374)(cid:272)(cid:286)
management plan and include a
(cid:373)(cid:349)(cid:454) (cid:381)(cid:296) (cid:862)(cid:449)(cid:346)(cid:258)(cid:410)(cid:863) (cid:381)(cid:271)(cid:361)(cid:286)(cid:272)(cid:410)(cid:349)(cid:448)(cid:286)(cid:400) (cid:258)(cid:374)(cid:282)
(cid:862)(cid:346)(cid:381)(cid:449)(cid:863) (cid:271)(cid:286)(cid:346)(cid:258)(cid:448)(cid:349)(cid:381)(cid:437)(cid:396)(cid:258)(cid:367) (cid:373)(cid:286)(cid:258)(cid:400)(cid:437)(cid:396)(cid:286)(cid:400)(cid:856)
AIB Group plc Annual Financial Report 2017 215
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Governance and oversight –
Corporate Governance Remuneration statement
Deferred Annual Share Plan Elements (continued)
Pay
Element
Rationale and alignment
to Strategy
Design and Operation
Performance Assessment and
Maximum Potential Value
Deferred
Annual
Share Plan
(cid:894)(cid:272)(cid:381)(cid:374)(cid:410)(cid:859)(cid:282)(cid:895)
Vesting of Awards
Vesting of deferred awards will occur
on a pro-rata, annual basis between
years 3 and 5 post-award (33% of the
award vesting in years 3, 4 and 5).
An additional 1 year holding period
will apply to all awards post-vesting
in accordance with regulatory
requirements.
There will be no vesting or payout of
awards unless the State has been in
a position to recover the value of its
investment in the Group.
Forfeiture Provisions
Awards will be subject to malus
provisions prior to vesting and
clawback post-vesting, applied in
accordance with regulatory
provisions.
Leavers
Bad Leavers, dismissed for reasons of
cause or conduct, will automatically
forfeit all unvested awards.
Good Leavers, including voluntary
leavers, retirement, redundancy, or
any dismissal not for cause, will
retain unvested awards which will
continue to vest under the 5 year
profile and will remain subject to full
malus and clawback provisions.
Voluntary leavers will be treated as
(cid:862)(cid:39)(cid:381)(cid:381)(cid:282) (cid:62)(cid:286)(cid:258)(cid:448)(cid:286)(cid:396)(cid:400)(cid:863) (cid:410)(cid:381) (cid:396)(cid:286)(cid:272)(cid:381)(cid:336)(cid:374)(cid:349)(cid:400)(cid:286) (cid:410)(cid:346)(cid:286)
necessity to retain key executives
and skills in the short to medium
term.
Voluntary leavers who leave within
two years from the end of the
performance year will be subject to a
reduction in the retained unvested
award(s) on a monthly pro-rata basis
over the 3 years from the start of the
performance year.
Performance measures will be
fixed for the performance years
2018 and 2019 and will be
reassessed for the year 2020 and
beyond.
Targets will be set annually by the
Remuneration Committee.
Risk and Control Underpins
Overall performance will be
subject to Risk and Control
underpins which may lead to
downward adjustments.
Performance Weightings
Weightings for 2018 will be
applied to each measure as
determined by the Remuneration
Committee.
The weightings will be fixed for
the year 2018 and may be
amended in 2019 and beyond to
ensure ongoing strategic
alignment.
Any changes to performance
measures or weightings, as
outlined above, will be at the
discretion of the Remuneration
Committee.
Further details on metrics are
provided in Table 1.
Pre-Grant and Pre-Vest
Assessment
Pre-grant and pre-vest tests,
subject to Risk and Control
underpins, to consider
performance in the round against
what would reasonably have
been expected, will be applied.
Further detail is provided below.
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Deferred Annual Share Plan Elements (continued)
Pay
Element
Rationale and alignment
to Strategy
Design and Operation
Performance Assessment and
Maximum Potential Value
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Deferred
Annual
Share Plan
(cid:894)(cid:272)(cid:381)(cid:374)(cid:410)(cid:859)(cid:282)(cid:895)
Dividends and Distributions
Participants will have no entitlement
to dividends, dividend equivalents or
other distributions which precede
the date of vesting of an award.
Plan Vehicle
The Plan will be managed through an
appropriate vehicle which will
purchase and hold the shares prior
to vesting.
Regulatory Compliance
The Plan is designed in full
compliance with EU and national
regulatory requirements.
Performance Thresholds
Minimum performance
thresholds must be achieved
before a participant is eligible for
an award. Awards will vary
between 0% and 100%,
proportionate to the level of
achievement.
Disclosure
The specific performance
measures, targets and their
assessment will be disclosed in
the annual remuneration report
for the relevant performance
year.
Remuneration Committee
Discretion
The Remuneration Committee
will assess performance annually
against the targets set to
determine the level of
achievement.
The Remuneration Committee
will have discretion to vary
performance measures to reflect
significant once-off items that
occur during the performance
period. Full disclosure of these
adjustments will be made in the
annual remuneration report for
the relevant year, subject to
commercial sensitivity.
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Governance and oversight –
Corporate Governance Remuneration statement
Performance Metrics Detail
The financial performance measures underpinning the Plan
Ex-Ante Award Adjustment Process
– There will be an ongoing assessment of the Group’s risk
reflect the strategic objectives of the Group, are consistent with
profile both at the overall Group level, as well as for material
the medium term targets and commitments previously
business units, so as to inform the Remuneration Committee
communicated to the market, and are appropriately stretching to
in making an objective decision on any requirement for
reflect the quantum of remuneration potential. They reflect the
downward adjustments to incentive awards prior to grant
short to medium term strategic priorities for the Group and
(“Ex-Ante”);
include the following:
– This will be informed by an assessment of the Risk
– The reduction of non-performing loans to market and
Scorecard and also an assessment of specific risks not
regulatory acceptable levels;
captured in the Scorecard analysis, including key emerging
– Delivering appropriate top line growth and operating
issues likely to present themselves over the next year; and,
efficiencies evidenced by reducing the Group’s cost-to-
– Awards may be adjusted from 100% to Nil in response to
income ratio; and,
specific risk and conduct events which include, but are not
– Demonstrating market acceptable returns on shareholder
limited to, significant lapses of risk management, significant
tangible equity.
The non-financial measures include a risk scorecard which is
designed to ensure the achievement of the Group’s financial
targets are sustainable and executed in a risk appropriate
manner. The individual performance measure will appropriately
deterioration in the risk position of the Group, and/or
individual misconduct.
Ex-Post Award Adjustment Process (Malus and
Clawback):
–
In the event that Ex-Ante adjustments are not sufficient in
capture the contribution of individual executives to the
terms of amount and/or timing of an identified failure in risk
performance of the Group based on a combined assessment of
“what” objectives and “how” behaviours.
management and/or conduct, the Remuneration Committee
also retains the discretion to reduce or fully cancel
outstanding unvested awards (through the use of Malus
Table 1 below summarises the weightings of these financial and
provision) and if necessary, to recoup awards which have
non-financial measures:
Table 1
Performance Metrics and Initial Weightings
Financial Measures:
– Non-Performing Exposures (NPE)
– Cost Income Ratio
– Return on Tangible Equity (RoTE)
Non-Financial Measures:
– Risk Scorecard
–
Individual Performance
already vested (through use of Clawback provision);
– Examples of situations in which the Malus and/or Clawback
provisions may be exercised include but are not limited to:
– Evidence of misconduct or serious error by the staff
Total 60%:
member (e.g. breach of code of conduct and other
20%
20%
20%
internal rules, especially concerning risks);
– Significant downturn in the financial performance of the
individual’s business unit and/or of the Group;
– Significant failure in risk management in the individual’s
Total 40%:
business unit and/or the Group;
25%
15%
– Significant increases in the Group’s or business unit’s
economic or regulatory capital base;
– Any regulatory sanctions where the conduct of the
– The Performance Metrics are proposed for awards with
identified staff member contributed to the sanction;
respect to performance years 2018 and 2019 and will be
– Note that an additional Malus provision applicable under the
re-assessed for years 2020 and beyond;
Deferred Annual Share Plan design requires that Group
– The Weightings for each Performance Metric are proposed
achieve its objective of enabling the State to recover its
for the 2018 Performance Year only and so may be amended
investment in the Group. Non-satisfaction of this provision will
for future periods to ensure appropriate alignment;
result in the cancellation of the award tranches prior to
– The specific performance measures, targets and their
vesting;
assessment will be disclosed retrospectively in the annual
– The State investment may be repaid in a variety of ways
remuneration report for the relevant performance year; and,
including, for example, direct repayment, ordinary dividends,
– The Non-Financial measures including the Risk Scorecard
and Individual Performance assessment will include a focus
on compliance with risk practices, compliance practices, and
governance procedures.
share buybacks, sale of shares by the State, or the increased
net asset value of the Group(1) to support the future share
price and potential future sale of shares by the State. The
Remuneration Committee must be satisfied that the State
investment is/or was repayable in full before any awards
under the Plan will be available for vesting for any participant;
– The Malus and Clawback provisions will apply through to the
end of the deferral and holding periods.
(1)Based on current legislation and accounting convention.
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Ex-Ante and Ex-Post Adjustments in Case of Risk Management or Conduct issue:
Ex-Ante Adjustment:
Ex-Post Adjustment: Malus
Ex-Post Adjustment: Clawback
Reduction of Current Year Incentive
(incl. to Nil)
Reduction (incl. to Nil) of
Outstanding Unvested Award(s)
Recoupment of Vested (Already
paid) Awards
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Shareholding Requirements
In order to further align the interests of executives and shareholders,
it is the intention of the Group to introduce meaningful executive
shareholding guidelines as soon as commercially practical. This
will be reviewed in light of the continuation of the Excess Bank
Remuneration Charge which results in an effective tax rate of 89%.
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Governance and oversight –
Corporate Governance Remuneration statement
Directors’ remuneration*
The following tables detail the total remuneration of the Directors in office during 2017 and 2016:
Remuneration
Executive Directors
Mark Bourke
Bernard Byrne
Non-Executive Directors
Simon Ball
Tom Foley(2)
Peter Hagan
Carolan Lennon
Brendan McDonagh
Helen Normoyle
Jim O’Hara
Richard Pym(1(a))
(Chairman)
Dr Michael Somers
(Deputy Chairman resigned 31 December 2017)
Catherine Woods
Former Directors
Declan Collier(2)
Anne Maher(5)
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)
2017
Total
€ 000
€ 000
€ 000
€ 000
€ 000
470
500
970
30
–
30
94
100
194
594
600
1,194
93
90
95
74
76
75
106
365
110
150
1,234
45
38
38
49
93
128
95
74
76
75
106
365
110
150
1,272
49
45
11
1,377
(1)Fees paid to Non-Executive Directors in 2017 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.;
(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 AIB Group plc and Allied Irish Banks, p.l.c., as applicable, 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 and Collier earned fees as quoted during 2017;
(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.
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Directors’ remuneration* (continued)
Remuneration
Executive Directors
Mark Bourke
Bernard Byrne
Non-Executive Directors
Simon Ball
Tom Foley
Peter Hagan
Carolan Lennon
(Appointed 27 October 2016)
Brendan McDonagh
(Appointed 27 October 2016)
Helen Normoyle
Jim O’Hara
Richard Pym
(Chairman)
Dr Michael Somers
(Deputy Chairman)
Catherine Woods
Former Directors
Declan Collier
Stephen L Kingon
(Resigned 31 October 2016)
Anne Maher
David Pritchard
(Resigned 29 February 2016)
Other
Total
Directors’
fees
Parent and Irish
subsidiary
companies
€ 000
Directors’
fees
AIB Group
(UK) p.l.c.
€ 000
85
90
95
13
15
73
103
365
111
146
1,096
39
40
40
56
47
16
Salary
Annual
taxable
benefits
Pension
contribution
2016
Total
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€ 000
€ 000
€ 000
€ 000
467
500
967
30
–
30
93
100
193
590
600
1,190
85
130
95
13
15
73
103
365
111
146
1,136
56
47
39
16
13
2,497
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Governance and oversight –
Corporate Governance Remuneration statement
Directors’ remuneration* (continued)
Interests in shares
The beneficial interests of the Directors and the Joint Company
Share options
No share options were granted or exercised during 2017, and
there were no options to subscribe for ordinary shares
Secretaries in office at 31 December 2017, and of their spouses
outstanding in favour of the Executive Directors or Group
and minor children, in the Company’s ordinary shares are as
Company Secretary at 31 December 2017.
Performance shares
There were no conditional grants of awards of ordinary shares
outstanding to Executive Directors or the Group Company
Secretary at 31 December 2017.
Apart from the interests set out above, the Directors and
Group Company Secretary in office at 31 December 2017,
and their spouses and minor children, have no other interests
in the shares of the Company.
There were no changes in the interests of the Directors and
the Group Company Secretary shown above between
31 December 2017 and 28 February 2018.
The year end closing price of the Company’s ordinary shares
on the Main Market of the Irish Stock Exchange was € 5.50
per share.
From 1 January 2017 to the date of the the IPO, the share
price range for Allied Irish Banks, p.l.c. was € 4.90 to € 9.20.
Following the IPO, the share price range for Allied Irish Banks,
p.l.c./AIB Group plc, as appropriate, was € 4.65 to € 5.75.
Service contracts
There are no service contracts in force for any Director with
the Company or any of its subsidiaries.
follows:
Ordinary shares
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
(Resigned 31 December 2017)
Catherine Woods
Group Company Secretaries:
Sarah McLaughlin
Robert Bergin
(to 8 December 2017)
**or date of appointment, if later
31 December
2017
1 January
2017**
5,000
2,000
2,000
2,501
8,000
2,000
10,000
2,000
–
2,000
–
24,000
2
–
–
–
–
1
–
–
–
–
–
–
–
–
2
–
The following table sets out the beneficial interests of the
Directors and Leadership Team (Senior Executive Officers,
excluding the Group Company Secretary) members of AIB as
a group (including their spouses and minor children) at
31 December 2017:
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
59,584
***
***The total ordinary shares in issue at 31 December 2017, was
2,714,381,237.
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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 2020. 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
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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 35 to 56, and the governance and organisation framework through which the Group
manages and seeks, where possible, to mitigate risk, as described on pages 69 to 71. 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 58 to 68.
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
decision-making and risk governance mandate.
– There is a centralised risk control function headed by the
CRO, who is responsible for ensuring that risks are identified,
measured, monitored and reported on, and for reporting on
risk mitigation actions.
– The Risk function is responsible for establishing and
embedding risk management frameworks, ensuring that
material risk policies are reviewed, and reporting on
adherence to risk limits as set by the Board of Directors.
AIB Group plc Annual Financial Report 2017 223
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Governance and oversight –
Viability statement / Internal controls
Executive risk management and controls (continued)
– The Group’s risk profile is measured against its risk appetite
on a monthly basis, and exceptions are reported to the ERC
and BRC through the monthly CRO report. Material breaches
of risk appetite are escalated to the Board and reported to the
Central Bank of Ireland/SSM.
– The centralised Credit function is headed by a Chief Credit
Officer, who reports to the CRO.
– There is an independent Compliance function which provides
advisory services to the Group and monitors and reports on
conduct of business and financial crime compliance, on
forthcoming regulations across the Group, and on
Management’s focus on compliance matters.
– There is an independent Group Internal Audit function, which
is responsible for independently assessing the effectiveness
of the Group’s corporate governance, risk management and
internal controls, and which reports directly to the Chairman
of the BAC.
– AIB employees who perform Pre-Approved Controlled
functions/Controlled functions meet the required standards as
outlined in AIB’s Fitness and Probity programme.
For further information on the Risk management framework of the
Group, see pages 69 to 71 of this report.
In the event that material failings or weaknesses in the systems
of risk management or internal control are identified, the relevant
Leadership Team member is required to attend the relevant
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 underway.
Taking this and all other information as outlined above into
consideration, 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 participate
shareholders and other stakeholders to stay informed about
in the proceedings. At the AGM, it is practice to give a brief
matters affecting their interests. In addition to this and the Annual
update on the Group’s performance and developments of interest
Financial Report, which is available on the Group’s website at
for the year to date. Separate resolutions are proposed on each
http://aib.ie/investorrelations and sent in hard copy to those
separate issue and voting is conducted by way of poll. The votes
shareholders who request it, the following communication tools
for, against, and withheld, on each resolution, including proxies
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are used by the Group:
lodged, are subsequently published on the Group’s website.
Proxy forms provide the option for shareholders to direct their
Shareholders’ Report
The Shareholders’ Report (‘the Report’) is a summary version of
proxies to withhold their vote. It is usual for all Directors to attend
the AGM and to be available to meet shareholders before and
AIB’s Annual Financial Report. This Report, which covers AIB’s
after the meeting. The Chairman of the Board Committees are
performance in the previous year, is sent to shareholders who
available to answer questions about the Committee’s activities. A
have opted to receive it instead of the full Annual Financial
help desk facility is available to shareholders attending. The
Report. This summary report does not form part of the Annual
Company’s 2018 AGM is scheduled to be held on 25 April 2018,
Financial Report and is referred to for reference purposes only.
at the RDS Concert Hall, Merrion Road, Ballsbridge, Dublin 4,
and it is intended that Notice of the Meeting will be posted to
shareholders at least 20 working days before the meeting, in
accordance with UK code requirements.
Website
The Group’s website, http://aib.ie/investorrelations, contains, for
the years since 2000, the Annual Financial Report, the Interim
Report/Half-yearly Financial Report, and the Annual Report on Form
20-F for the 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 2017, the Group continued to work with its
regulators, which include the European Central Bank (“ECB”); the
United Kingdom
During 2017, AIB Group (UK) p.l.c. continued to prioritise
Central Bank of Ireland (“CBI”), the Prudential Regulation
compliance with its regulatory obligations in Great Britain and
Authority (“PRA”) and the Financial Conduct Authority (“FCA”) in
Northern Ireland, and will remain focused on this throughout
the United Kingdom (“UK”); and the New York State Department
2018.
of Financial Services (“NYSDFS”) and the Federal Reserve Bank
of New York in the United States of America (“USA”), to focus on
ensuring compliance with existing regulatory requirements
together with the management of regulatory change.
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
In 2017, AIB Group plc became the holding company of Allied
implemented compliantly, taking into consideration UK regulatory
Irish Banks, p.l.c. (the principal operating company of AIB Group)
guidance. The approach to implementation of European
and as such AIB Group plc is now subject to consolidated
Regulation will be reviewed in light of Brexit and any impact
supervision with respect to Allied Irish Banks, p.l.c. and other
Brexit might have on the applicability of such regulations to
credit institutions and investment firms in the Group.
AIB Group (UK) p.l.c.
Current climate of regulatory change
The level of regulatory change remained high in 2017 as the
As further regulatory reforms continue to emerge from the
regulators, AIB Group (UK) p.l.c. will continue to focus on the
management of regulatory change and its compliance
regulatory landscape for the banking sector continued to evolve.
obligations.
The Group is committed to proactively identifying regulatory
obligations arising in each of the Group’s operating markets in
Ireland, the UK and the USA and ensuring the timely
implementation of regulatory change.
In addition, AIB Group (UK) p.l.c will focus on the
implementation of the retail banking market investigation order
(2017) (the “Order”). The Order will provide for remedies to
market-wide issues identified as part of the Competition and
Markets Authority’s Retail Banking Market Investigation into
Throughout 2017, cross-functional programmes were put in place
the Personal Current Accounts and SME Banking markets in
to ensure that the Group met its new regulatory requirements. In
the UK.
particular, the Group focused on the EU directive on the
prevention of the use of the financial system for the purpose of
money laundering and terrorist financing (the “4th AML
Directive”), the recast EU directive on payment services in the
internal market (known as PSD2), the EU directive on the
comparability of fees related to payment accounts, payment
United States
Compliance with federal and state banking laws and
regulations
During 2017, AIB’s state-licensed branch in New York
account switching and access to payment accounts with basic
continued to prioritise compliance with its regulatory
features (known as the Payment Account Directive), and the
obligations in the USA, and will remain focused on this
Markets in Financial Instruments Directive (“MIFID II”).
throughout 2018. In particular, it will continue to monitor
The level of regulatory change is expected to remain high in
2010.
In addition, particular focus will be given to the new
2018. In particular, the Group will focus on the implementation of
Transaction Monitoring and Filtering Programme Regulation
PSD2, the EU directive on security of network and information
and the new Cybersecurity Regulation from the NYSDFS.
ongoing business activities with regard to the Dodd Frank Act
systems, the EU General Data Protection Regulation (“GDPR”),
the 4th and 5th 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.
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Financial statements
1 Directors’ Responsibility Statement
2 Independent Auditors’ Report
3 Consolidated financial statements
4 Notes to the consolidated financial statements
5 AIB Group plc company financial statements
6 Notes to AIB Group plc company financial statements
Page
229
230
239
245
371
374
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Financial statements
This page has been intentionally left blank
228
AIB Group plc Annual Financial Report 2017
Directors’ Responsibility Statement
The following statement which should be read in conjunction with the statement of Auditor’s 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.
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Company law requires the Directors to prepare Group and Company financial statements for each financial year. Under that law, the
Directors are required to prepare the Group financial statements in accordance with International Financial Reporting Standards
(“IFRSs”) as adopted by the EU and have elected to prepare the Company financial statements in accordance with IFRSs as adopted
by the EU and as applied in accordance with the provisions of the Companies Act 2014.
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
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 and corporate governance requirements, the Directors are also
responsible for preparing the Directors’ Report and the reports relating to the Directors’ remuneration and corporate governance that
comply with that law and the relevant listing rules of the Irish Stock Exchange and the UK Listing Authorities.
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 whose names and functions are listed on pages 28 to 29 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 adopted by the EU, give a true and fair view of the state of
the Group's affairs as at 31 December 2017 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 2017;
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
28 February 2018
Bernard Byrne
Chief Executive Officer
AIB Group plc Annual Financial Report 2017 229
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Independent Auditors’ Report
Independent auditors’ report to the members of AIB Group plc
Report on the audit of the financial statements
Opinion on the financial statements of AIB Group plc (the ‘Company’)
In our opinion the Group and Company financial statements:
–
–
give a true and fair view of the assets, liabilities and financial position of the Group and Company as at 31 December 2017 and of
the profit of the Group for the financial year then ended; and
have been properly prepared in accordance with the relevant financial reporting framework and, in particular, with the requirements
of the Companies Act 2014 and as regards the Group financial statements, Article 4 of the IAS Regulation.
The financial statements we have audited comprise:
The Group financial statements:
–
–
–
–
–
–
the Consolidated Income Statement;
the Consolidated Statement of Comprehensive Income;
the Consolidated Statement of Financial Position;
the Consolidated Statement of Cash Flows;
the Consolidated Statement of Changes in Equity; and
the related notes 1 to 60, including a summary of significant accounting policies as set out in note 1.
The Company financial statements:
–
–
–
–
the Statement of Financial Position;
the Statement of Changes in Equity;
the Statement of Cash Flows; and
the related notes a to f, including a summary of significant accounting policies as set out in note a.
The relevant financial reporting framework that has been applied in their preparation is the Companies Act 2014 and International
Financial Reporting Standards (IFRS) as adopted by the European Union (“the relevant financial reporting framework”).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (Ireland) (ISAs (Ireland)) and applicable law. Our
responsibilities under those standards are described below in the “Auditor's responsibilities for the audit of the financial statements”
section of our report.
We are independent of the Group and Company in accordance with the ethical requirements that are relevant to our audit of the
financial statements in Ireland, including the Ethical Standard issued by the Irish Auditing and Accounting Supervisory Authority (IAASA),
as applied to public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
–
Loan impairment and restructuring;
– Deferred tax asset;
– Defined benefit obligations; and
– Provisions for customer redress and related matters.
Within this report, any new key audit matters are identified with
and any key audit matters
which are the same as the prior year are identified with
.
Materiality
We determined materiality for the Group to be € 66 million which is approximately 5% of Profit Before
Tax (“PBT”).
230
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Scoping
We focused our Group audit scope primarily on the audit work in five 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 93% of the Group’s net assets and
96% of the Group’s total operating income.
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Significant changes
in our approach
There were no significant changes in our approach which we feel require disclosure.
Conclusions relating to principal risks, going concern and viability statement
We have nothing to report in respect of the following information in the annual report, in relation to which ISAs (Ireland) require us to report
to you whether we have anything material to add or draw attention to:
–
–
–
the disclosures on pages 58 to 68 to the annual report that describe the principal risks and explain how they are being managed or
mitigated;
the directors’ confirmation in the annual report on page 180 that they have carried out a robust assessment of the principal risks facing
the Group and the Company, including those that would threaten its business model, future performance, solvency or liquidity;
the directors’ statement on page 180 in the financial statements about whether the directors considered it appropriate to adopt the
going concern basis of accounting in preparing the financial statements and the directors’ identification of any material uncertainties to
the Group’s and the Company’s ability to continue to do so over a period of at least twelve months from the date of approval of the
financial statements;
– whether the directors’ statement relating to going concern required under the Listing Rules in accordance with Listing Rule 6.8.3(3) is
materially inconsistent with our knowledge obtained in the audit; or
–
the director's explanation on page 223 in the annual report as to how they have assessed the prospects of the Group and the
Company, 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 and the Company 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.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements
of the current financial year and include the most significant assessed risks of material misstatement (whether or not due to fraud) we
identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing
the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and
in forming our opinion thereon, and we do not provide a separate opinion on these matters.
Loan impairment and loan restructuring Loan impairment and loan restructuring
Loan impairment and loan restructuring
Key audit matter
description
There is a risk that provisions for impairment of loans and receivables of € 3,345 million (2016: € 4,589 million)
do not represent an appropriate estimate of the losses incurred. This includes the risk that the estimate of
cashflows on restructuring cases is not appropriately measured. The determination of appropriate provisions
requires a significant amount of management judgment over key assumptions and relies on available data.
The Group has disclosed in note 1 (ae), as required by IAS 8, estimated information regarding the possible
transition effect of the adoption of IFRS 9 from 1 January 2018.
Please also refer to page 197 (Audit Committee Report), page 261(Accounting Policy – Impairment of
financial assets), Note 1 (ae) – Prospective accounting changes, Note 2 – Critical accounting judgements and
estimates and Note 25 – Provisions for impairment on loans and receivables.
AIB Group plc Annual Financial Report 2017 231
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Independent Auditors’ Report
How the scope of our
audit responded to the
key audit matter
Deferred tax asset
Key audit matter
description
We undertook an assessment of the provisioning practices to compare them with the requirements of IFRS.
We evaluated the design and tested the operating effectiveness of controls over:
–
–
–
–
–
–
–
impairment identification and calculation;
credit management processes;
new lending;
restructuring transactions;
front line credit monitoring and assessment;
collective and latent impairment models, including source data controls and calculations; and
the work of the credit review function.
Our testing of controls included an evaluation of IT system controls, management review controls and
governance controls.
In examining both sample loan cases and models, we challenged management on the judgments made
regarding the application of triggers, status of restructures, collateral valuation and realisation time frames;
and examined the credit risk functions analysis of data at a portfolio level.
We tested samples of the data used in the models, 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.
We evaluated the disclosures made in the financial statements. In particular, we focused on challenging manage-
ment that the disclosures were sufficiently clear in highlighting the significant uncertainties that exist in respect of
loan impairment provisioning and the sensitivity of the provisions to changes in the underlying assumptions.
We have examined the disclosure required under IAS 8 of the estimated transition effect of IFRS 9.
Based on the evidence obtained, we found that the data and assumptions used by management in loan
impairment provisioning are within a range we consider to be reasonable.
The risk relates to the incorrect recognition or measurement of deferred tax assets. Deferred tax assets of
€ 2,907 million (2016: € 3,050 million) are recognised for unutilised 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 197 (Audit Committee Report), page 254 (Accounting Policy – Deferred taxation), Note 2 –
Critical accounting judgements and estimates and Note 32 - Deferred taxation.
How the scope of our
audit responded to the
key audit matter
We have evaluated the design of controls over the preparation of financial plans and budgets.
We assessed whether the level of forecasted profits were appropriate by challenging both the growth,
profitability and economic assumptions. We reviewed 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 where possible. We
reviewed management’s analysis of their consideration of the “more likely than not” test and reviewed the
sensitivity analysis disclosed.
Based on the evidence obtained, we found that the assumptions used by management in the recognition of
deferred tax assets are within a range we consider to be reasonable.
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Defined benefit obligations
Key audit matter
description
The risk is that the recognition and measurement of defined benefit obligations of € 5,694 million
(2016: € 6,153 million) is inappropriate.
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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, pension in payment increases and inflation rates.
Please refer to page 197 (Audit Committee Report), page 253 (Accounting Policy – Employee benefits),
and Note 2 – Critical accounting judgements and estimates and Note 33 – Retirement benefits.
How the scope of our
audit responded to the
key audit matter
We evaluated the design of controls over the completeness and accuracy of data extracted and supplied to
the Group’s actuary, which is used in the valuation of the Group’s defined benefit obligations. We also
evaluated the design of the controls for determining the actuarial assumptions and the approval of those
assumptions by Management.
We have utilised Deloitte actuarial specialists as part of our team to assist us in evaluating the
appropriateness of actuarial assumptions with particular focus on discount rates, pension in payment
increases and inflation rates.
Our work included inquiries with Management and their actuaries to understand the processes and
assumptions used in calculating retirement benefit liabilities. We benchmarked ecomonic and demographic
assumptions against market data and assessed management adjustments to market assumptions for
company and scheme specific information. For scheme specific assumptions we considered the scheme
rules, historic practice and other information relevant to the selection of the assumption.
We evaluated and assessed the adequacy of disclosures made in the financial statements, including
disclosures of the assumptions and sensitivity of the defined benefit obligation to changes in the underlying
assumptions.
Based on the evidence obtained, we concluded that the data and assumptions used by Management in the
actuarial valuations for defined benefit obligations are within a range we consider to be reasonable.
Provisions for customer redress and related matters
Key audit matter
description
The risk that the recognition, measurement and disclosure of provisions for customer redress and related
matters (included within Note 39 – Provisions for liabilities and commitments of € 103 million
(2016: € 153 million)) are inappropriate for allegations of mis-selling of financial products, allegations of
overcharging and breach ofcontract and/or regulation including provisions for Tracker Mortgage Examinations.
The measurement of provisions for these issues is highly judgemental and involves the use of several
management assumptions including the identification of relevant impacted customers and related redress
costs. There is also a risk that these known and emerging issues may not be appropriately disclosed in the
financial statements.
Please refer to page 197 (Audit Committee Report), page 266 (Accounting Policy – Non-credit risk
provisions), Note 2 – Critical accounting judgements and estimates and Note 39 - Provisions for liabilities
and commitments.
How the scope of our
audit responded to the
key audit matter
We have evaluated the design and tested the 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 reviewed the
correspondence with regulators and legal advice obtained. We also considered regulatory developments and
management’s interactions with regulators.
AIB Group plc Annual Financial Report 2017 233
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Independent Auditors’ Report
Given the inherent uncertainty in the calculation of conduct provisions and their judgemental nature, we
evaluated the disclosures made in the financial statements. We challenged management on these disclosures,
in particular that they are sufficiently clear in highlighting the exposures that remain, significant uncertainties
that exist in respect of the provisions and the sensitivity of the provisions to changes in the underlying
assumptions.
Based on the evidence obtained, we found that the assumptions used by management in measurement of
provisions for customer redress and related matters are within a range we consider to be reasonable.
Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not
to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any
of the risks described above, and we do not express an opinion on these individual matters.
Our application of materiality
We define materiality as the magnitude of misstatement that makes it probable that the economic decisions of a reasonably
knowledgeable person, relying on the financial statements, would be changed or influenced. We use materiality both in planning the
scope of our audit work and in evaluating the results of our work.
We determined materiality for the Group to be € 66 million which is approximately 5% of Profit Before Tax (“PBT”). We have considered
PBT to be the critical component for determining materiality given the continued profitability within the Group, PBT is recognised as one
of the critical components within the financial statements relevant to members of the Group in assessing financial performance. We have
considered quantitative and qualitative factors such as understanding the entity and its environment, history of mistatetements,
complexity of the company and the reliability of control environment.
We agreed with the Board Audit Committee that we would report to them any audit differences in excess of € 3.3 million, as well as
differences below that threshold which, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee
on material disclosure matters that we identified when assessing the overall presentation of the financial statements.
An overview of the scope of our audit
We determined the scope of our Group audit 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 by 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.
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An overview of the scope of our audit (continued)
Based on that assessment, we focused our Group audit scope primarily on the audit work in AIB Group plc and the four legal entities as
disclosed in Note 47 to the consolidated financial statements all of which were 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 93% of the Groups’ net assets and 96% of the Group’s total operating income. In addition, audits will be performed for statutory
purposes for all legal entities.
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.
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 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:
Total Operating Income
Net assets
Full audit scope
96%
Specified audit procedures
3%
Review at group level
1%
Full audit scope
93%
Specified audit procedures
5%
Review at group level
2%
Other information
The directors are responsible for the other information. The other information comprises the information included in the Annual Financial
Report other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover the
other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion
thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise
appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to
determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If,
based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to
report that fact.
We have nothing to report in this regard.
AIB Group plc Annual Financial Report 2017 235
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Independent Auditors’ Report
Other information (continued)
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other
information and to report as uncorrected material misstatements of the other information where we conclude that those items meet
the following conditions:
– Fair, balanced and understandable- the statement given by the directors that they consider the annual report and financial
statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to
assess the Group’s and the Company’s performance, business model and strategy, is materially inconsistent with our knowledge
obtained in the audit; or
– Audit Committee reporting- the section describing the work of the Board Audit Committee does not appropriately address matters
communicated by us to the Board Audit Committee; or
– Directors’ statement of compliance with the UK Corporate Governance Code and the Irish Corporate Governance Annex- the
parts of the directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate
Governance Code and the Irish Corporate Governance Annex containing provisions specified for review by the auditor in
accordance with Listing Rule 6.8.3(7) and Listing Rule 6.8.3(9) do not properly disclose a departure from a relevant provision of
the UK Corporate Governance Code or the Irish Corporate Governance Annex.
Responsibilities of Directors
As explained more fully in the Directors’ Responsibility Statement, 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, and for
such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group and Company’s ability to continue as a
going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Group and Company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (Ireland) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial
statements.
As part of an audit in accordance with ISAs (Ireland), we exercise professional judgment and maintain professional scepticism
throughout the audit. We also:
–
Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and
perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis
for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as
fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
– Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group and Company’s internal
control.
– Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related
disclosures made by the directors.
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Auditor’s responsibilities for the audit of the financial statements (continued)
– Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group and
Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw
attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to
modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of the auditor’s report. However,
future events or conditions may cause the entity (or where relevant, the Group) to cease to continue as a going concern.
– Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the
financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
– Obtain sufficient appropriate audit evidence regarding the financial information of the business activities within the Group to
express an opinion on the (consolidated) financial statements. The Group auditor is responsible for the direction, supervision and
performance of the Group audit. The Group auditor remains solely responsible for the audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal control that the auditor identifies during the audit.
This report is made solely to the 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 company’s members those matters we are required to state to them in
an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have
formed.
Report on other legal and regulatory requirements
Opinion on other matters prescribed by the Companies Act 2014
Based solely on the work undertaken in the course of the audit, we report that:
– We have obtained all the information and explanations which we consider necessary for the purposes of our audit.
–
In our opinion the accounting records of the Company were sufficient to permit the financial statements to be readily and properly
audited.
– The Company Statement of Financial Position is in agreement with the accounting records.
–
In our opinion the information given in the directors’ report is consistent with the financial statements and the directors’ report has
been prepared in accordance with the Companies Act 2014.
Corporate Governance Statement
We report, in relation to information given in the Corporate Governance Statement on pages 186 to 194 that, in our opinion the
information given in the Corporate Governance Statement pursuant to subsections 2(c) and (d) of section 1373 Companies Act 2014
is consistent with the company’s statutory financial statements in respect of the financial year concerned and such information has
been prepared in accordance with section 1373 of the Companies Act 2014.
Based on our knowledge and understanding of the company and its environment obtained in the course of the audit, we have not
identified any material misstatements in this information.
In our opinion, based on the work undertaken during the course of the audit, 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.
AIB Group plc Annual Financial Report 2017 237
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Independent Auditors’ Report
Matters on which we are required to report by exception
Based on the knowledge and understanding of the Group and the Company and its environment obtained in the course of the audit,
we have not identified material misstatements in the directors' report.
We have nothing to report in respect of the provisions in the Companies Act 2014 which require us to report to you if, in our opinion,
the disclosures of directors’ remuneration and transactions specified by law are not made.
The Listing Rules of the Irish Stock Exchange require us to review six specified elements of disclosures in the report to shareholders
by the Board of Directors’ Remuneration Committee. We have nothing to report in this regard.
Other matters which we are required to address
Following the recommendation of the Board Audit Committee of Allied Irish Banks, p.l.c., we were appointed at the Annual General
Meeting on 20 June 2013 to audit the financial statements for the financial year ended 31 December 2013 and subsequent financial
periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 5 years,
covering the years ending 2013 to 2017.
Following the corporate restructure, as disclosed in Note 3 to the financial statements, we were appointed on 21 September 2017 to
audit the financials statements of AIB Group plc for the financial year ended 31 December 2017 and subsequent financials periods.
The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 1 year, covering the year
ending 2017.
The non-audit services prohibited by IAASA’s Ethical Standard were not provided and we remained independent of the company in
conducting the audit.
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISA
(Ireland) 260.
Gerard Fitzpatrick
For and on behalf of Deloitte
Chartered Accountants and Statutory Audit Firm
Deloitte & Touche House, Earlsfort Terrace, Dublin 2
Dublin
28 February 2018
Notes: An audit does not provide assurance on the maintenance and integrity of the website, including controls used to achieve this,
and in particular on whether any changes may have occurred to the financial statements since first published. These matters are the
responsibility of the directors but no control procedures can provide absolute assurance in this area.
Legislation in Ireland governing the preparation and dissemination of financial statements differs from legislation in other jurisdictions.
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Consolidated income statement
for the financial year ended 31 December 2017
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 on disposal of loans and receivables
Other operating income
Other income
Total operating income
Administrative expenses
Impairment and amortisation of intangible assets
Impairment and depreciation of property, plant and equipment
Total operating expenses
Operating profit 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 and joint venture
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
Continuing operations
Notes
5
6
7
8
8
9
10
11
12
30
31
25
14
39
29
15
17
18(a)
18(b)
*As reported in the 2016 consolidated financial statements of Allied Irish Banks, p.l.c.
2017
€ m
2,481
(305)
2,176
28
436
(45)
97
32
277
825
3,001
(1,694)
(83)
(58)
(1,835)
1,166
113
–
8
1,287
19
–
1,306
(192)
2016*
€ m
2,611
(598)
2,013
26
430
(35)
71
11
403
906
2,919
(1,462)
(70)
(39)
(1,571)
1,348
294
2
2
1,646
35
1
1,682
(326)
1,114
1,356
39.7c
39.7c
48.6c
47.9c
AIB Group plc Annual Financial Report 2017 239
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Consolidated statement of comprehensive income
for the financial year ended 31 December 2017
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
attributable to owners of the parent
*As reported in the 2016 consolidated financial statements of Allied Irish Banks, p.l.c.
2017
€ m
1,114
2016*
€ m
1,356
–
24
24
(53)
(203)
(132)
(388)
(364)
(1)
103
102
(168)
106
(359)
(421)
(319)
750
1,037
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AIB Group plc Annual Financial Report 2017
Consolidated statement of financial position
as at 31 December 2017
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
Retirement benefit liabilities
Other liabilities
Accruals and deferred income
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
20
21
22
23
24
26
27
28
29
30
31
32
33
34
35
36
22
37
32
33
38
39
40
41
41
43
2017
€ m
6,364
103
8
33
1,156
1,313
59,993
–
16,321
–
80
569
321
418
5
2,736
459
183
90,062
3,640
64,572
30
1,170
4,590
68
97
87
824
348
231
793
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
95,622
7,732
63,502
–
1,609
6,880
18
81
158
973
484
246
791
76,450
82,474
1,697
–
11,421
13,118
494
13,612
90,062
1,696
1,386
9,572
12,654
494
13,148
95,622
*As reported in the 2016 consolidated financial statements of Allied Irish Banks, p.l.c.
Richard Pym
Chairman
28 February 2018
Bernard Byrne
Chief Executive Officer
Mark Bourke
Chief Financial Officer
Sarah McLaughlin
Group Company Secretary
AIB Group plc Annual Financial Report 2017 241
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A8 Finan stats
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Page 242
Consolidated statement of cash flows
for the financial year ended 31 December 2017
Cash flows from operating activities
Profit before taxation for the year from continuing operations
Notes
Adjustments for:
– Non-cash and other items
– Change in operating assets
– Change in operating liabilities
– Taxation refund/(paid)
Net cash (outflow)/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 business
Disposal of property, plant and equipment
Additions to intangible assets
Investments in associated undertakings and joint venture
Disposal of joint venture
Dividends/distribution received from associated
undertakings and joint venture
Net cash inflow from investing activities
Cash flows from financing activities
Redemption of Contingent Capital Notes
Dividends paid on ordinary shares
Distribution paid on other equity interests
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
51
51
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27
31
15
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51
*As reported in the 2016 consolidated financial statements of Allied Irish Banks, p.l.c.
(1)Excludes non-cash acquisition of € 65 million.
(2)Excludes non-cash disposal consideration of € 84 million
2017
€ m
2016*
€ m
1,306
1,682
(5)
1,963
(4,693)
19
(1,410)
(266)
6,507
(4,588)
(106)
3,229
(1,419)
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3,499
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(81)
76
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(37)
(31)
(318)
78
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7,058
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(55)
1
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–
–
40
723
(1,600)
–
(37)
(191)
(1,828)
2,124
5,672
(632)
7,164
242
AIB Group plc Annual Financial Report 2017
A8 Finan stats
AR 2017pages 213-224:Layout 1
28/02/2018
19:20
Page 243
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Notes to the consolidated financial statements
Page
247
Note
32 Deferred taxation
33 Retirement benefits
Note
1
2
3
4
5
6
7
8
9
Accounting policies
Critical accounting judgements
and estimates
Corporate restructuring
Segmental information
Interest and similar income
Interest expense and similar charges
Dividend income
Net fee and commission income
Net trading income
10
Profit on disposal/transfer of loans
and receivables
11 Other operating income
12
13
Administrative expenses
Share-based compensation schemes
14 Writeback of provisions for impairment on
financial investments available for sale
Profit on disposal of business
Auditors’ fees
Taxation
Earnings per share
15
16
17
18
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 and
joint venture
Intangible assets
Property, plant and equipment
275
279
281
285
285
286
286
286
286
287
287
288
288
288
289
290
292
293
293
293
294
300
301
302
302
303
306
306
308
309
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34 Deposits by central banks and banks
35 Customer accounts
36
Trading portfolio financial liabilities
37 Debt securities in issue
38 Other liabilities
39
40
Provisions for liabilities and commitments
Subordinated liabilities and other capital
instruments
41
Share capital
42 Own shares
43 Other equity interests
44 Capital reserves and capital redemption
reserves
45 Offsetting financial assets and financial
liabilities
Page
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326
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328
46 Memorandum items: contingent liabilities
and commitments, and contingent assets
332
47
Subsidiaries and consolidated
structured entities
48 Off-balance sheet arrangements and
transferred financial assets
49 Classification and measurement of
financial assets and financial liabilities
Fair value of financial instruments
Statement of cash flows
50
51
52 Related party transactions
53 Commitments
54
Employees
55 Regulatory compliance
56
57
Financial and other information
Average balance sheets and interest rates
58 Dividends
59 Non-adjusting events after the reporting
period
60
Approval of financial statements
335
336
340
342
351
353
365
366
367
367
368
370
370
370
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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 and equity
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)
(z)
Intangible assets
Impairment of property, plant and equipment,
goodwill and intangible assets
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
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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
AIB Group plc (‘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. AIB Group plc is registered under the Companies Act 2014 as a public limited
company under the company number 594283 and is the holding company of the Group.
The consolidated financial statements for the year ended 31 December 2017 include the financial statements of AIB Group plc and its
subsidiary undertakings, collectively referred to as the ‘Group’, where appropriate, including certain special purpose entities and the
Group’s interest in associates using the equity method of accounting and are prepared to the end of the financial period. The Group is
and has been primarily involved in retail and corporate banking.
AIB Group plc was incorporated on 8 December 2016. At 31 December 2016, the Company had no subsidiaries and was not the parent
company of the Group. On 8 December 2017, Allied Irish Banks, p.l.c. was acquired by AIB Group plc and as a result, Allied Irish Banks,
p.l.c. is now a 100% subsidiary of AIB Group plc. The consolidated financial statements incorporate the acquired entity’s (Allied Irish
Banks, p.l.c.) results as if both entities, AIB Group plc and Allied Irish Banks, p.l.c. had always been combined and reflect both entities
full year’s results. See basis of consolidation below. Further details are disclosed in note 3 ‘Corporate restructuring’.
The corresponding amounts for 2016 reflect the combined results of both entities, even though the transaction did not occur until the
current year. Given that the net assets of AIB Group plc were € 1 at 31 December 2016, the comparative numbers disclosed are
therefore, the 2016 consolidated financial statements of Allied Irish Banks, p.l.c. which was the parent company of the Group at that
date.
(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 adopted by the European Union (“EU”) and applicable for the financial year
ended 31 December 2017. 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 the holding company’s separate statements of financial position, the consolidated and the holding company’s separate
statements of cash flows, and the consolidated and the holding company’s separate 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
AIB Group plc Annual Financial Report 2017 247
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(c) Basis of preparation (continued)
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 275 to 278.
Going concern
The financial statements for the financial year ended 31 December 2017 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 2017, the Group adopted amendments to standards and interpretations which had an
insignificant impact on these annual financial statements.
(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.
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1 Accounting policies (continued)
(d) Basis of consolidation
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
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the sum of:
–
–
–
the acquisition date fair value of assets transferred by the Group;
liabilities incurred by the Group to the former owners of the acquiree; and
the equity interests issued by the Group in exchange for control of the acquiree.
Acquisition related costs are recognised in the income statement as incurred.
Goodwill is measured as the excess of the sum of:
–
–
–
–
the fair value of the consideration transferred;
the amount of any non-controlling interests in the acquiree; and
the fair value of the acquirer’s previously held equity interest in the acquiree, if any; less
the net of the acquisition date fair value of the identifiable assets acquired and liabilities assumed.
The Group commonly acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of
individuals, trusts, retirement benefit plans and other institutions. These assets, and income arising thereon, are excluded from the
financial statements, as they are not assets of the Group.
Non-controlling interests
For each business combination, the Group recognises any non-controlling interest in the acquiree either:
–
–
at fair value; or
at their proportionate share of the acquiree’s identifiable net assets.
For changes in the Group’s interest in a subsidiary that do not result in a loss of control, the Group adjusts the carrying amounts of the
controlling and non-controlling interests to reflect the changes in their relative interests in the subsidiary. The difference between the
change in value of the non-controlling interest and the fair value of the consideration paid or received is recognised directly in equity and
attributed to the equity holders of the parent.
Common control transactions
The Group accounts for the acquisition of businesses or investments in subsidiary undertakings between members of the Group at
carrying value at the date of the transaction unless prohibited by company law or IFRS. This policy also applies to the acquisition of
businesses by the Group of other entities under the common control of the Irish Government. Where the carrying value of the acquired
net assets exceeds the fair value of the consideration paid, the excess is accounted for as a capital contribution (accounting policy
(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.
A business combination involving entities under common control is excluded from the scope of IFRS 3 Business Combinations where
the combining entities or businesses are controlled by the same party both before and after the combination. In accounting for common
control business combinations, the Group, in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
uses its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. In making this
judgement, the Group considers the requirements in IFRSs dealing with similar and related issues. In addition, the Group reviews the
AIB Group plc Annual Financial Report 2017 249
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(d) Basis of consolidation
Common control transactions (continued)
most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards
in so far as these do not conflict with the IFRS framework. In this regard, the Group takes into account FRS 102 ‘The Financial
Reporting Standard applicable in the UK and Republic of Ireland’ on group reconstructions and merger accounting as issued by the
Financial Reporting Council. Accordingly, the consolidated financial statements incorporate the acquired entity’s (Allied Irish Banks,
p.l.c.) results as if both entities, AIB Group plc and Allied Irish Banks, p.l.c. had always been combined and reflect both entities full year’s
results.
Details of the acquisition of Allied Irish Banks, p.l.c. by AIB Group plc and the accounting as a common control transaction are set out in
note 3 ‘Corporate restructuring’.
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.
AIB Group plc Annual Financial Report 2017 251
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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.
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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 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.
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 the income statement 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.
AIB Group plc Annual Financial Report 2017 253
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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.
(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.
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1 Accounting policies (continued)
(m) Financial assets (continued)
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.
Any held to maturity investments reclassified as available for sale are transferred at the carrying value on the date of transfer and are
subsequently measured at fair value and accounted for as available for sale.
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.
AIB Group plc Annual Financial Report 2017 255
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(n) Financial liabilities and equity
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.
AIB Group plc Annual Financial Report 2017 257
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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 were 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 (m), (f) and (t)).
These bonds were fully repaid during 2017.
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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:
–
–
–
hedges of the fair value of recognised assets or liabilities or firm commitments (‘fair value hedge’); or
hedges of the exposure to variability of cash flows attributable to a recognised asset or liability, or a highly probable forecasted
transaction (‘cash flow hedge’); or
hedges of a net investment in a foreign operation.
When a financial instrument is designated as a hedge, the Group formally documents the relationship between the hedging instrument
and hedged item as well as its risk management objectives and its strategy for undertaking the various hedging transactions. The Group
also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging
transactions are highly effective in offsetting changes in fair values or cash flows of the hedged items.
The Group discontinues hedge accounting when:
a)
b)
c)
it is determined that a derivative is not, or has ceased to be, highly effective as a hedge;
the derivative expires, or is sold, terminated, or exercised;
the hedged item matures or is sold or repaid; or
d) a forecast transaction is no longer deemed highly probable.
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.
AIB Group plc Annual Financial Report 2017 259
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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.
AIB Group plc Annual Financial Report 2017 261
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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. The Group 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.
AIB Group plc Annual Financial Report 2017 263
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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 principal operating 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.
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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
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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.
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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 and
Subscriber 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 they become irrevocable having already been approved for payment by the Board of Directors.
The interim dividend may be cancelled at any time prior to the actual payment.
Dividends declared after the end of the reporting date are disclosed in note 58.
Other equity interests
Other equity interests include 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 43). Distributions on the AT1s are
recognised in equity when approved for payment by the Board of Directors.
Warrants to acquire a fixed number of the company shares for a fixed amount of currency are classified as equity instruments and are
recognised on initial recognition at the fair value of consideration received.
Other capital reserves
Other capital reserves represent transfers from retained earnings in accordance with relevant legislation.
Capital contributions
Capital contributions represent the receipt of non-refundable considerations arising from transactions with the Irish Government
(note 44). These contributions comprise both financial and non-financial net assets. The contributions are classified as equity and may
be either distributable or non-distributable. Capital contributions are distributable if the assets received are in the form of cash or another
asset that is readily convertible to cash, otherwise, they are treated as non-distributable. Capital contributions arose during 2011
from (a) EBS transaction; (b) Anglo transaction; (c) issue of contingent capital notes; and (d) non-refundable receipts from the Irish
Government and the NPRFC.
The capital contribution from the EBS transaction is treated as non-distributable as the related net assets received 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 repaid
these bonds, the proceeds received were deemed to be distributable and the relevant amount was transferred from the capital
contribution account to revenue reserves. All NAMA senior bonds were fully repaid at 31 December 2017.
The Group issued contingent convertible capital notes to the Irish Government (note 40) 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 are distributable. These are included in
revenue reserves.
AIB Group plc Annual Financial Report 2017 267
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(ab) Equity (continued)
Capital redemption reserves
The capital redemption reserves arose in 2015 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.
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.
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.
Revenue reserves
Revenue reserves represent retained earnings of the parent company, subsidiaries and associated undertakings together with amounts
transferred from issued share capital, share premium and capital redemption reserves following Irish High Court approval. They also
include amounts arising from the capital reduction which followed the ‘Scheme of Arrangement’ undertaken by the Group in December
2017 (note 3).
The cumulative surplus/deficit within the defined benefit pension schemes and other appropriate adjustments are included in/offset
against revenue reserves.
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.
Merger reserve
Under the Scheme of Arrangement (“the Scheme”) approved by the High Court on 6 December 2017 which became effective on
8 December 2017, a new company, AIB Group plc (‘the Company’), was introduced as the holding company of AIB Group. AIB Group plc
is a recently incorporated public limited company registered in Ireland. The share capital of Allied Irish Banks, p.l.c., other than a single
share owned by AIB Group plc, was cancelled and an equal number of new shares were issued by the Company to the shareholders of
Allied Irish Banks, p.l.c. The difference between the carrying value of the net assets of Allied Irish Banks, p.l.c. entity on acquisition by
the Company and the nominal value of the shares issued on implementation of the Scheme was accounted for as a merger reserve
(note 44). Impairment losses arising from AIB Group plc’s investment in Allied Irish Banks, p.l.c. will be charged to the profit or
loss account and transferred to the merger reserve in so far as a credit balance remains in the merger reserve.
In the consolidated financial statements of AIB Group plc, the transaction was accounted for under merger accounting. Accordingly,
the carrying value of the investment in Allied Irish Banks, p.l.c. by AIB Group plc is eliminated against the share capital and share
premium account in Allied Irish Banks, p.l.c. and the merger reserve in AIB Group plc resulting in a negative merger reserve.
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1 Accounting policies (continued)
(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.
(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.
(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:
Annual improvements cycles/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 and 2015-2017 cycle. Whilst certain of these have yet to be endorsed by the EU, they
are expected to be effective from either 1 January 2018 or 1 January 2019, depending on the amendment.
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.
IFRIC 23 Uncertainty over Income Tax Treatments
IFRIC 23 Interpretation on ‘Uncertainty over Income Tax Treatments’ which was issued in June 2017 clarifies how to apply the recognition
and measurement requirements in IAS 12 when there is uncertainty over income tax treatments that have yet to be accepted by the tax
authorities.
The Interpretation specifically addresses the following:
– Whether an entity considers uncertain tax treatments separately;
–
The assumptions an entity makes about the examination of tax treatments by taxation authorities;
– How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and
– How an entity considers changes in facts and circumstances.
Effective date: Annual periods beginning on or after 1 January 2019.
IFRIC 22 and IFRIC 23 are expected to have an insignificant effect on the financial statements.
AIB Group plc Annual Financial Report 2017 269
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(ae) Prospective accounting changes (continued)
IFRS 9 Financial Instruments
With effect from 1 January 2018, IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement.
IFRS 9 includes a revised classification and measurement model, a forward looking expected credit loss (“ECL”) impairment methodology
and modifies the approach to hedge accounting. 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;
–
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.
Impairment
– Requires more timely recognition of expected credit losses using a three stage approach. For financial assets where there has been no
significant increase in credit risk since origination, a provision for 12 months expected credit losses is required. For financial assets
where there has been a significant increase in credit risk or where the asset is credit impaired, a provision for full lifetime expected
losses is required;
–
The assessment of whether credit risk has increased significantly since origination is performed for each reporting period by
considering the change in risk of default occurring over the remaining life of the financial instrument, rather than by considering an
increase in expected credit loss;
–
The assessment of credit risk, and the estimation of expected credit loss, are required to be unbiased and probability-weighted, and
should incorporate all available information which is relevant to the assessment, including information about past events, current
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.
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.
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1 Accounting policies (continued)
(ae) Prospective accounting changes (continued)
IFRS 9 Financial Instruments
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Assessment of IFRS 9 impacts for AIB Group
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 varying aspects of IFRS 9 are operational with effect from 1 January 2018, i.e. the date of initial application
and this programme is currently transitioning to ‘business as usual’.
The Group is not restating prior periods as allowed in IFRS 9, paragraph 7.2.15. However, as required by this paragraph, if prior periods
are not restated, the Group is recognising any difference arising between IAS 39 carrying amounts and IFRS 9 carrying amounts at 1
January 2018 in opening retained earnings (or in other comprehensive income, as applicable) at 1 January 2018.
The business model assessment test was performed as at the date of initial application. This classification applies retrospectively. The
Group assessed whether the financial assets met the conditions for recognising a change in the classification/measurement basis at that
date.
Impairment losses will be measured at the date of initial application under the ‘expected credit loss model’ set out in IFRS 9.
The Group will apply IFRS 9 as issued at 1 January 2018 and will early adopt the amendments to IFRS 9 on the same date.
Based on assessments undertaken to date, the total estimate of the possible impact net of tax on transition is € 295 million representing a
reduction in revenue reserves and other comprehensive income, principally due to the impairment requirements. The estimated possible
impact on capital is discussed in the ‘Capital’ section of this report on page 55.
The Group will continue to refine this estimate during the transition period as new processes and systems are deployed and embedded.
The Group will report formally on its IFRS 9 implementation in the first half year 2018.
Set out below is a summary of the impacts of IFRS 9 together with policy choices selected by the Group where relevant:
Classification and measurement
Classification and measurement of financial assets will not result in any significant changes for the Group.
In general:
–
–
–
loans and advances 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 fair value through other comprehensive income
(“FVOCI”); and
equity securities will continue to be measured at fair value, however, for one equity instrument held for strategic purposes, the Group
has elected to present changes in fair value in other comprehensive income. All other equity securities held at 31 December 2017 will
be measured under IFRS 9 at fair value through profit or loss. Under IAS 39, all equity securities, apart from a small number held in the
trading book, were classified as available for sale with fair value movements reported in ‘other comprehensive income’.
The business model assessment which was carried out on the portfolio did not result in any change to the current measurement basis at
the Group level.
In relation to SPPI testing which was carried out on the financial instruments portfolio, a small number of instruments, mainly loans and
receivables to customers, failed 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 immaterial.
The Group has not currently opted to designate any financial assets at fair value through profit or loss as permitted by IFRS 9 when certain
conditions are met.
The Group’s classification of financial liabilities is unchanged. The Group measures financial liabilities at amortised cost subsequent to
initial recognition. Given that the Group does not fair value its own debt, there is no impact as a result of changes required under IFRS 9.
The Group has set up governance structures for the on-going validation of its business models and for ensuring that financial instruments
failing the SPPI test are correctly identified at initial recognition.
AIB Group plc Annual Financial Report 2017 271
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(ae) Prospective accounting changes (continued)
IFRS 9 Financial Instruments
Assessment of IFRS 9 impacts for AIB Group
Impairment
The new impairment requirements in IFRS 9 are based on an expected credit loss model and replace the IAS 39 incurred loss model.
The key policy principles are summarised below.
Significant increase in credit risk
The Group’s assessment of significant increase in credit risk is determined based on both quantitative and qualitative criteria.
The quantitative criteria measure the change in credit risk arising from changes in the probability of default since origination. The Group
has determined thresholds for significant increase in credit risk on both a percentage and absolute change in lifetime probability of default
(“PD”) relative to the PD at initial recognition. The Group will periodically review the quantitative criteria to ensure that they remain valid.
The qualitative criteria is the measure that reflects the change in credit risk of a financial asset based on the Group’s credit management
and the individual characteristics of the financial asset. The qualitative assessment is not model driven and seeks to capture any
deterioration or improvement in credit quality that may not have been already captured by the quantitative criteria. The qualitative
assessment reflects pro-active credit management. The Group’s key qualitative criteria are summarised as:
– A credit downgrade resulting in enhanced case management and monitoring;
–
–
Forbearance has been provided to the customer and the loan is in a probationary period and whilst the terms have been modified the
loan has not been derecognised; and
The Group has adopted 30 days past due as its backstop for determining a significant increase in credit risk.
Definition of Default
The definition of credit impairment (stage 3) is aligned with the Group’s definition of default, with the exception of restructured loans that
resulted from meeting derecognition criteria are classified as stage 1 at the point of restructure. The Group identifies defaults by using a
number of characteristics, which may occur sequentially or simultaneously. The two key criteria resulting in a classification of default are:
– Where the Group considers a credit obligor to be unlikely to pay his/her credit obligations in full without realisation of collateral,
regardless of the existence of any past-due amount; and
–
The credit obligor is 90 days or more past due on any material credit obligation.
Inputs to measurement of Expected Credit Losses
The key inputs to the models in the measurement of expected credit losses (‘ECLs’) are:
– Probability of Default (PD): The PD model estimates the probability of an account defaulting within 12 months from observation or,
where significant increase in credit risk has occurred, over its residual life;
–
Loss Given Default (LGD): The LGD model estimates the loss on an exposure if the account were to default within (a) the following
12 months or (b) over the residual contractual maturity;
– Exposure at Default (EAD): The EAD model calculates the expected EAD at date of default in the next 12 months, or over the life of
the loan where significant credit deterioration has occurred; and
– Prepayment (PP): The PP model estimates the probability a customer prepaying the exposure.
Models have been developed for the following key portfolios:
– Mortgages;
– Retail (e.g. Loans, Overdrafts, Credit Cards, Asset Finance);
– Non-Retail (e.g. CRE, SME, Corporate); and
– Bank and Sovereign
In addition, management judgement taking account of alternative scenarios relating to specific portfolios have been incorporated into the
ECL estimates.
The Group continues to use discounted cash flows (DCFs), predominantly for non-retail exposures, as a key input to the estimation of
weighted average ECLs. DCFs represent the best estimate of loss taking account of forward looking information, base case economic
conditions and case specific attributes. Scalars are applied to the resultant outputs to reflect a probability weighted outcome.
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1 Accounting policies (continued)
(ae) Prospective accounting changes (continued)
IFRS 9 Financial Instruments
Assessment of IFRS 9 impacts for AIB Group
Forward looking macroeconomic scenarios
The Group uses macroeconomic scenarios for IFRS 9 that are consistent with those used for financial planning and stress testing
purposes as they reflect the Group’s view of possible outcomes at a point in time without introducing undue conservatism.
Low credit risk portfolios
Financial assets held within the bank and sovereign portfolios are practically all investment grade. The standard contains a practical
expedient that, if a financial instrument has low credit risk, then an entity is allowed to assume at the reporting date that no significant
increase in credit risk has occurred. Accordingly, the Group has recognised an impairment allowance based on 12-month ECLs for such
low risk instruments.
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.
Disclosures/other
A significant suite of reporting requirements have been 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 have been aligned
so as to assist comparability. In addition, a suite of transitional disclosure templates have been prepared and will be populated and
published as relevant during 2018.
Briefings to the business and various stakeholders throughout the Group have taken place and will continue.
Amendments to IFRS 9 ‘Prepayment Features with Negative Compensation’
Under the current IFRS 9 requirements, the SPPI condition is not met if the lender has to make a settlement payment in the event of
termination by the borrower (also referred to as early repayment gain).
In October 2017, the IASB issued an amendment to IFRS 9 titled ‘Prepayment Features with Negative Compensation’. This amends the
existing requirements in IFRS 9 regarding termination rights in order to allow an entity to measure certain prepayable financial assets with
so-called negative compensation (also known as two way break clauses) at amortised cost (or, depending on the business model, at fair
value through other comprehensive income) even in the case of negative compensation payments.
Prior to this amendment, financial assets with this negative compensation feature would have failed the SPPI test and be mandatorily
measured at fair value through profit or loss. The calculation of this compensation payment must be the same for both the case of an early
repayment penalty and the case of an early repayment gain.
The amendment will be effective for annual periods beginning 1 January 2019, with early adoption permitted. The Group expects to early
adopt this amendment on 1 January 2018 which is the date of transition to IFRS 9. The amendment will not have a material impact on the
Group’s consolidated financial statements.
The amendments have yet to be endorsed by the EU.
AIB Group plc Annual Financial Report 2017 273
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(ae) Prospective accounting changes (continued)
IFRS 15 Revenue from Contracts with Customers
IFRS 15, which was issued in May 2014 including amendments/clarifications to IFRS 15 issued in September 2015 and April 2016
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 was rolled out where the various types of revenue streams were identified and analysed. However, due to the nature
of these revenue streams, no significant change to the currently reported amounts in the Group’s financial statements were highlighted as
a result of the analysis. Accordingly, it is expected that any impact will be minimal on retained earnings on transition at 1 January 2018.
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, the Group will not be restating the opening balance of retained
earnings.
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.
IFRS 16 will impact the Group as it is the lessee of a number of properties which are classified under IAS 17 as operating leases. The
Group is currently assessing its impact, and it is estimated that assets and liabilities in the statement of financial position will increase by
approximately € 0.5 billion to € 0.6 billion on implementation. Whilst the overall impact of IFRS 16 will be neutral on the income statement
over the life a lease, its implementation will result in a higher charge in the earlier years following implementation with a lower charge in
later years.
The Group will avail of certain practical expedients on transition. The Group will not apply the requirements of IFRS 16 to short-term
leases, i.e. those at the commencement of a lease that have a lease term of 12 months or less. Likewise, the Group will not capitalise
leases where the underlying asset when new is of low value.
On transition, the Group will apply this standard retrospectively for leases previously classified as operating leases and will recognise the
cumulative effect of applying the standard as an adjustment to the opening balance of retained earnings at the date of initial application.
Lease liabilities will be measured at the present value of the remaining lease payments discounted at the Group’s incremental borrowing
rate at the date of initial application. The right-of-use assets will be measured at an amount equal to the lease liabilities. For right-of-use
assets that are impaired on transition, the Group will avail of the practical expedient allowed by the standard and rely on its assessment of
whether leases are onerous as an alternative to performing an impairment review. Accordingly, it will adjust the right-of-use asset at the
date of initial application by the amount of any provision for onerous leases recognised in the statement of financial position immediately
before the date of initial application.
Effective date: Annual periods beginning on or after 1 January 2019.
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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 the Group’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.
Loan impairment
The Group’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 2017 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 the 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 the Group’s segments
assess and approve their provisions and provision adequacy on a quarterly basis. These provisions are in turn reviewed and approved
by the Group Credit Committee on a quarterly basis with final 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 carrying value of the loans and the present value of estimated future cash flows discounted at the original
effective interest rates. Specific provisions are created for cases that are individually significant (i.e. above certain thresholds), and also
collectively for assets that are not individually significant.
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 90 and 91 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 during the financial crisis. 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.
AIB Group plc Annual Financial Report 2017 275
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Notes to the consolidated financial statements
2 Critical accounting judgements and estimates (continued)
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 90 and 91 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.
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:
– AIB as a Pillar Bank, with a strong Irish franchise;
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the absence of any expiry dates for Irish and UK tax losses;
turnaround evident in the financial performance over the past four years and the continuing growth in the Irish economy since 2014;
external forecasts for Ireland, and the UK economies which indicate continued economic growth through the period of the
medium–term financial plans;
the success of the IPO in June 2017, reflecting market confidence in the strategy of the Group and its long term financial prospects;
introduction of the bank resolution framework under the BRRD and the establishment of AIB Group plc as the new holding
company of the Group provides greater confidence in relation to the future viability of Allied Irish Banks, p.l.c. (as the principal
operating bank subsidiary) as there are now effective tools in place that should facilitate its recapitalisation in a future crisis; and
–
the non-enduring nature of the loan impairments at levels which resulted in the losses in prior years (2009-2013).
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2 Critical accounting judgements and estimates (continued)
Deferred taxation (continued)
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 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
– 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 in 2012 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 2018 to 2020 undertaken by the Group in the second half of 2017. 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 2018 to 2020. 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 less than 20 years for the deferred tax asset (€ 2.8 billion) to be utilised. Furthermore, under this scenario, it is
expected that 51% of the deferred tax asset will be utilised within 10 years and 89% utilised within 15 years (2016: 52%). In 2016, it was
estimated that 83% would be 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, the Group has concluded that the recognition of deferred tax
assets in its UK subsidiary be limited to the amount projected to be realised within a time period of 15 years. This is the timescale within
which the Group believes that it can assess the likelihood of its UK profits arising as being more likely than not. The deferred tax asset
for unutilised tax losses in the UK amounts to £ 111 million at 31 December 2017.
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 € 2,907 million of which € 2,781 million relates to Irish tax losses and € 126 million relates to UK tax losses. IAS
12 does not permit a company to apply present value discounting to its deferred tax assets or liabilities, regardless of the estimated
timescales over which those assets or liabilities are projected to be realised. The Group’s deferred tax assets are projected to be
realised over a long timescale, benefiting from the absence of any expiry date for Irish or UK tax losses. As a result, the carrying value
of the deferred tax assets on the statement of financial position does not reflect the economic value of those assets.
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.
AIB Group plc Annual Financial Report 2017 277
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Notes to the consolidated financial statements
2 Critical accounting judgements and estimates (continued)
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.
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 33 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 39 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.
Basis of consolidation
For third party acquisitions, assets acquired and liabilities assumed are measured at their acquisition date fair values.
In accounting for common control business combinations, the Group, in accordance with IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors uses its judgement in developing and applying an accounting policy that results in information that is
relevant and reliable. In making this judgement, the Group considers the requirements in IFRSs dealing with similar and related issues.
This approach was applied in relation to AIB Group plc becoming the holding company of the Group. The Group has concluded that the
consolidated financial statements should incorporate the acquired entity’s (Allied Irish Banks, p.l.c.) results as if both entities, AIB Group
plc and Allied Irish Banks, p.l.c. had always been combined and reflect both entities full year’s results.
278
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3 Corporate restructuring
The Single Resolution Board’s preferred resolution strategy for the AIB Group consists of a single point of entry via a holding company.
Implementation of this preferred resolution strategy would require the introduction of a new AIB Group holding company.
In order to comply with this requirement, Allied Irish Banks, p.l.c. undertook a corporate restructuring which comprised three principal
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elements:
(a) Scheme of Arrangement;
(b) Admission to Listing; and
(c) AIB Group plc capital reduction.
(a) Scheme of Arrangement
The Scheme of Arrangement (‘the Scheme’) involved the establishment of a new group holding company, AIB Group plc
(‘the Company’), directly above Allied Irish Banks, p.l.c.
The Company was incorporated on 8 December 2016 as a public limited company under the Companies Act 2014 under the name
RPML 1966 Holdings plc. It changed its name to AIB Group plc on 5 September 2017. At 31 December 2016, the Company had no
subsidiaries.
Acquisition of Allied Irish Banks, p.l.c. by AIB Group plc
On 8 December 2017, Allied Irish Banks, p.l.c. was acquired by AIB Group plc.
Under a Scheme of Arrangement, approved by the shareholders of Allied Irish Banks, p.l.c. at an Extraordinary General Meeting held on
3 November 2017 and sanctioned by the High Court on 8 December 2017, 2,714,381,237 Allied Irish Banks, p.l.c. ordinary shares of
nominal value € 0.625 per share were cancelled and AIB Group plc issued 2,714,381,237 ordinary shares of nominal value € 2.47 per
share to the shareholders of Allied Irish Banks, p.l.c. for the shares cancelled. On the same date, Allied Irish Banks, p.l.c.. issued
2,714,381,237 ordinary shares of nominal value € 0.625 per share to AIB Group plc. Allied Irish Banks p.l.c. is now a 100% subsidiary of
AIB Group plc.
The Scheme of Arrangement was accounted for as follows in respect of AIB Group plc:
Company financial statements
The ordinary shares in Allied Irish Banks, p.l.c. that were acquired by AIB Group plc are reflected in the standalone statement of
financial position of AIB Group plc at the book value of those shares at 8 December 2017 based on the company statement of financial
position of Allied Irish Banks, p.l.c. i.e. the net asset value (‘NAV amount’) having satisfied the conditions of IAS 27, paragraph 13.
In accordance with the Companies Act 2014, Section 72, the difference between the NAV amount and the aggregate nominal value of
new ordinary shares issued by AIB Group plc is treated as an unrealised profit, a ‘merger reserve’. As required by Section 72, no share
premium is created.
The Company’s financial statements are from the period of incorporation on 8 December 2016 to 31 December 2017.
Consolidated financial statements
AIB Group plc was set up for the purpose of meeting regulatory requirements designed to facilitate future bank resolutions. The
introduction of AIB Group plc as the new holding company with exactly the same shareholders as the previous parent, Allied Irish Banks,
p.l.c. is a common control transaction. This business combination has been presented similar to that for a reverse acquisition where the
existing parent, Allied Irish Banks, p.l.c. is determined to be the accounting acquirer. The consolidated financial statements incorporate
the acquired entity’s (Allied Irish Banks, p.l.c.) results as if both entities, AIB Group plc and Allied Irish Banks, p.l.c. had always been
combined and reflect both entities full year’s results.
Whilst the consolidated financial statements are issued under the name of the legal parent, AIB Group plc, these are, in effect, a
continuation of the financial statements of the legal subsidiary, Allied Irish Banks, p.l.c. with one adjustment, which is to adjust
retroactively the accounting acquirer’s legal capital to reflect the legal capital of the accounting acquiree, AIB Group plc. Although AIB
Group plc was only incorporated on 8 December 2016 and did not become a Group company until 8 December, 2017, the comparative
numbers for the year to 31 December 2016 disclosed in these consolidated financial statements are those of the accounting acquirer,
Allied Irish Banks, p.l.c.
AIB Group plc Annual Financial Report 2017 279
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Notes to the consolidated financial statements
3 Corporate restructuring (continued)
Consolidated financial statements
In adopting this accounting approach, which is in accordance with IFRS as adopted by the EU, the Company has applied the exemption
in Section 118(4) of the Companies Act 2014 to for the purpose of presenting pre-acquisition distributable reserves of the acquired legal
subsidiary as revenue profits and losses in the consolidated financial statements. This exemption applies to shares in a subsidiary held
by a holding company where the shares were acquired in a transaction to which Section 72 of the Companies Act 2014 applies.
(b) Admission to Listing
The ordinary shares of AIB Group plc were admitted to the main markets for listed securities on the Irish Stock Exchange and the
London Stock Exchange on 11 December 2017 following the Scheme of Arrangement becoming effective (note 3). The listing by Allied
Irish Banks, p.l.c. on the Irish and London Stock Exchanges which had followed the IPO in June 2017 was cancelled on this date. See
note 52 ‘Related Party Transactions – Relationship with the Irish Government’.
(c) AIB Group plc capital reduction
AIB Group plc received High Court approval for a capital reduction. The capital reduction was necessary in order to create distributable
reserves in AIB Group plc entity which are required for, amongst other things, to pay dividends to shareholders.
This involved the reduction of the nominal value of the ordinary shares from € 2.47 per share to € 0.625 per share. The capital reduction
which created € 5,008 million in distributable reserves became effective on 14 December 2017.
Warrant agreement
A new warrant instrument (the “AIB Group plc Warrant Instrument”) was issued pursuant to which the Minister for Finance was issued
warrants to subscribe for AIB Group plc shares on the same terms and conditions as the Allied Irish Banks, p.l.c. warrants. This became
effective on 8 December 2017, i.e. upon the Scheme of Arrangement becoming effective (note 3). Allied Irish Banks, p.l.c. had issued
warrants to the Minister on 4 July 2017 to subscribe for 271,166,685 ordinary shares of Allied Irish Banks, p.l.c. in accordance with the
terms of the Warrant Agreement approved by shareholders in December 2015. These warrants issued by Allied Irish Banks, p.l.c. were
cancelled on 8 December 2017 (note 52) ‘Related party transactions’.
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4 Segmental information
Segment overview
From 1 January 2017, following realignment of Leadership Team responsibilities, the Group is being managed through the following
business segments: Retail & Commercial Banking (“RCB”), Wholesale, Institutional & Corporate Banking (“WIB”), AIB UK and Group.
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The performance for 2016 has been restated to reflect this revised 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 the Group segment. Funding and liquidity charges are based on each segment’s funding
requirements and the Group’s funding cost profile, which is informed by wholesale and retail funding costs. Income attributable to capital
is allocated to segments based on each segment’s capital requirement.
Retail & Commercial Banking* (“RCB”)
RCB is Ireland’s leading provider of retail and commercial banking products and services based on its market shares across key
products with approximately 2.4 million personal and SME customers. RCB offers retail banking services through three brands, AIB, EBS
and Haven, and commercial banking services through the AIB brand. It has the largest physical distribution network of any bank in Ireland,
comprising 297 locations as well as a partnership with An Post through which it offers certain banking services at approximately 1,000
locations in Ireland. Complementing its physical infrastructure, RCB is the number one digital channel distribution in Ireland with
approximately 1.3 million active digital customers, with over 60% of key products sold via digital channels.
Wholesale, Institutional & Corporate Banking* (“WIB”)
WIB provides wholesale, institutional and corporate banking services to the Group’s largest customers and customers requiring specific
sector or product expertise. WIB serves customers through a relationship driven model with a sector specialist focus comprising corporate
banking, real estate finance, energy, climate action and infrastructure. In addition to traditional credit products, WIB offers corporate
customers foreign exchange and interest rate risk management products, cash management products, trade finance, mezzanine finance,
structured and specialist finance, equity investments and corporate finance. WIB teams are based in Dublin and New York. WIB’s activities
in New York comprise syndicated and international finance activities.
AIB UK*
AIB UK offers retail and business banking services in two distinct markets, Northern Ireland, where it operates under the trading name of
First Trust Bank, and Great Britain, where it operates as Allied Irish Bank (GB). AIB UK has over 322 thousand retail, corporate and
business customers with over 119 thousand active digital customers.
First Trust Bank is a long established bank in Northern Ireland which now operates out of 15 branches including six co-located business
centres. It provides full banking services, including mobile, online, post office and traditional banking, to business and personal customers.
Allied Irish Bank (GB) is a niche specialist business bank, supporting businesses in Great Britain for over 40 years. It operates out of
15 locations in key cities across Great Britain targeting mid-tier corporates in local geographies. Banking services include: lending;
treasury; trade facilities; asset finance; invoice discounting and day-to-day transactional banking.
Group
The Group segment comprises wholesale treasury activities, Group control and support functions. Treasury manages the Group’s liquidity
and funding position and provides customer treasury services and economic research. The Group control and support functions include
business and customer services, marketing, risk, compliance, audit, finance, legal, human resources and corporate affairs.
*Within the above segments, the Group has migrated the management of the vast majority of its non-performing loans to the Financial Solutions Group
(‘‘FSG’’), a standalone dedicated workout unit which supports personal and business customers in financial difficulty, leveraging on FSG’s well resourced
operational capacity, workout expertise and skillset. FSG has developed a comprehensive suite of sustainable solutions for customers in financial difficulty.
The Group is moving into the mature stage of managing customers in difficulty and non-performing loan portfolios.
AIB Group plc Annual Financial Report 2017 281
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Notes to the consolidated financial statements
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AIB Group plc Annual Financial Report 2017 283
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Notes to the consolidated financial statements
4 Segmental information (continued)
Other amounts – statement of financial position
Loans and receivables to customers
Customer accounts
Loans and receivables to customers
Customer accounts
RCB
41,422
46,552
RCB
42,689
42,869
WIB
€ m
10,275
5,654
WIB
€ m
9,080
6,384
AIB UK
Group
€ m
8,238
10,182
AIB UK
€ m
8,745
10,350
€ m
58
2,184
Group
€ m
125
3,899
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
Republic of
Ireland
€ m
United
Kingdom
€ m
Rest of the
World
€ m
2,621
27
2,648
374
(24)
350
6
(3)
3
Republic of
Ireland
€ m
United
Kingdom
€ m
Rest of the
World
€ m
2,399
188
2,587
509
(185)
324
11
(3)
8
2017
Total
€ m
59,993
64,572
2016
Total
€ m
60,639
63,502
2017
Total
€ m
3,001
–
3,001
2016
Total
€ m
2,919
–
2,919
Revenue from external customers comprises interest and similar income and interest expense and similar charges (notes 5 and 6), and
all other items of income (notes 7 to 11).
Geographic information
Non-current assets(3)
Geographic information
Non-current assets(3)
Republic of
Ireland
€ m
United
Kingdom
€ m
Rest of the
World
€ m
844
45
1
Republic of
Ireland
€ m
717
United
Kingdom
€ m
31
Rest of the
World
€ m
1
2017
Total
€ m
890
2016
Total
€ m
749
(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.
284
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5 Interest and similar income
Interest on loans and receivables to customers
Interest on loans and receivables to banks
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
2017
€ m
2,166
16
2
154
130
2,468
13
2,481
2016
€ m
2,248
18
11
182
131
2,590
21
2,611
Interest income includes a credit of € 191 million (2016: a credit of € 193 million) transferred from other comprehensive income in
respect of cash flow hedges and is included within ‘Interest on loans and receivables to customers’.
Interest income reported above, calculated using the effective interest method, relates to financial assets not carried at fair value
through profit or loss.
Interest income recognised on impaired loans amounts to € 100 million (2016: € 140 million). Further details are set out in page 137
‘Additional credit risk information - Forbearance’.
The Group presents interest resulting from negative effective interest rates on financial liabilities as interest income, rather than as offset
against interest expense.
6 Interest expense and similar charges
Interest on deposits by central banks and banks
Interest on customer accounts
Interest on debt securities in issue
Interest on subordinated liabilities and other capital instruments
Negative interest on assets
Interest expense and similar charges
2017
€ m
8
229
33
31
301
4
305
2016
€ m
8
341
50
199
598
–
598
Interest expense includes a charge of € 72 million (2016: a charge of € 75 million) transferred from other comprehensive income in
respect of cash flow hedges and is included within ‘Interest on customer accounts’.
Included within interest expense is a charge of € 7 million (2016: a charge of € 17 million) in respect of the Irish Government’s
Eligible Liabilities Guarantee (“ELG”) Scheme.
Interest expense reported above, calculated using the effective interest method, relates to financial liabilities not carried at fair value
through profit or loss.
The Group presents interest resulting from negative effective interest rates on financial assets as interest expense, rather than as offset
against interest income.
AIB Group plc Annual Financial Report 2017 285
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Notes to the consolidated financial statements
7 Dividend income
Dividend income amounting to € 28 million (2016: € 26 million) relates to income from equity shares held as financial investments
available for sale of which € 25 million relates to NAMA subordinated bonds (2016: € 25 million).
8 Net fee and commission income
Retail banking customer fees
Credit related fees
Insurance commissions
Fee and commission income
Fee and commission expense(1)
2017
€ m
370
41
25
436
(45)
391
2016
€ m
364
41
25
430
(35)
395
(1)Fee and commission expense includes ATM expenses of € 5 million (2016: € 5 million) and credit card commissions of € 29 million (2016: € 18 million).
Fees and commissions which are an integral part of the effective interest rate are recognised as part of interest and similar income
(note 5) or interest expense and similar charges (note 6).
9 Net trading income
Foreign exchange contracts
Interest rate contracts and debt securities(1)
Credit derivative contracts
Equity securities, index contracts and warrants(2)
2017
€ m
2016
€ m
56
48
(4)
(3)
97
55
13
–
3
71
(1)Includes a gain of € 21 million (2016: gain of € 1 million) in relation to XVA adjustments.
(2)Includes € 2 million mark to market loss on equity warrants (2016: gain of € 3 million).
The total hedging ineffectiveness on cash flow hedges reflected in the consolidated income statement amounted to Nil (2016: Nil).
10 Profit on disposal of loans and receivables
The following table sets out details of the profit on disposal of loans and receivables:
Profit/(loss) on disposal of loans and receivables to customers
Provision writeback on NAMA loan transfers
Total
2017
€ m
31
1
32
2016
€ m
(6)
17
11
286
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11 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(2)
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(3)
Miscellaneous operating income(4)
2017
€ m
18
(11)
48
4
–
213
5
277
2016
€ m
90
(59)
272
10
1
85
4
403
(1)The majority of the loss on termination of hedging swaps relates to the disposal of available for sale debt securities. In addition, it includes a € 1 million
charge transferred from other comprehensive income in respect of cash flow hedges (2016: € 2 million).
(2) Includes € 32 million gain on part disposal of NAMA subordinated bonds (2016: € 272 million relates to the disposal of the equity interest in Visa Europe).
(3)See page 150 in the ‘Risk management’ section for information on realisation/re-estimation of cash flows on restructured loans.
(4)Miscellaneous operating income includes:
– Foreign exchange gains € 1 million (2016: a gain of € 1 million).
12 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
2017
€ m
2016
€ m
567
70
79
62
12
790
105
799
904
563
24
79
59
17
742
112
608
720
1,694
1,462
(1)In 2017, a charge of € 70 million (2016: € 24 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 defined contribution charge of € 72 million (2016: € 71 million); a credit of € 1 million relating to defined benefit expense
(2016: charge of € 2 million); and a long term disability payments charge of € 8 million (2016: € 6 million). For details of retirement benefits, see note 33.
(3)Other personnel expenses include staff training, recruitment and various other staff costs.
Personnel expenses of € 33 million (2016: € 22 million) were capitalised as part of the cost of intangible assets.
The average number of employees for 2017 and 2016 is set out in note 54 ’Employees’.
AIB Group plc Annual Financial Report 2017 287
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Notes to the consolidated financial statements
13 Share-based compensation schemes
Employees’ Profit Sharing Scheme
The Group 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.
Income statement expense
The expense arising from share-based payment transactions amounted to Nil for the financial year ended 31 December 2017 (2016: Nil).
14 Writeback of provisions for impairment on financial investments available for sale
Debt securities (note 27)
15 Profit on disposal of business
Profit on disposal of business amounted to Nil (2016: € 1 million).
2017
€ m
–
–
2016
€ m
2
2
288
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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 relating to the audit of the Group financial statements in the
categories set out below. Both years presented are on that basis.
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Auditors’ fees (excluding VAT):
Audit of Group financial statements
Other assurance services
Other non-audit services
Taxation advisory services
2017
€ m
2016
€ m
2.2
5.6(1)
0.9
–
8.7
2.0
0.7
1.9
–
4.6
(1)Deloitte were appointed as Reporting Accountant for the Group with regard to the applications of listing to the Main Securities Market of the Irish Stock
Exchange. All work was completed in 2017 and fees paid are included as part of ‘Other assurance services’.
All the above amounts were paid to the Group Auditors for services provided to subsidiaries of the Group including Allied Irish
Banks, p.l.c.
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)
2017
€ m
0.41
2016
€ m
0.54
AIB Group plc Annual Financial Report 2017 289
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Notes to the consolidated financial statements
17 Taxation
AIB Group plc 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
2017
€ m
2016
€ m
(10)
–
(10)
(26)
(4)
(30)
(40)
(13)
(2)
(137)
–
(152)
(192)
(98)
–
(98)
(32)
16
(16)
(114)
(28)
5
(97)
(92)
(212)
(326)
14.7%
19.4%
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:
2017
%
€ m
1,306
2016
%
€ m
1,682
(163)
12.5
(210)
12.5
(10)
(25)
3
3
(12)
18
–
–
(6)
–
0.8
1.8
(0.2)
(0.2)
0.9
(1.4)
–
–
0.5
–
(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
(192)
14.7
(326)
19.4
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’.
290
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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 (losses)/gains taken to other comprehensive income
Total
Available for sale securities reserves
Fair value (gains) transferred to income statement
Fair value (losses) taken to other comprehensive income
Total
Gross
€ m
Tax
€ m
–
–
25
25
(53)
(53)
(118)
(116)
(234)
(66)
(82)
(148)
–
–
(1)
(1)
–
–
16
15
31
7
9
16
2017
Net
€ m
–
–
24
24
Gross
€ m
Tax
€ m
2016
Net
€ m
–
–
(1)
(1)
(1)
(1)
127
127
(24)
(24)
103
103
(53)
(53)
(168)
(168)
–
–
(168)
(168)
(102)
(101)
(203)
(59)
(73)
(132)
(116)
235
119
(362)
(116)
(478)
15
(28)
(13)
99
20
119
(101)
207
106
(263)
(96)
(359)
AIB Group plc Annual Financial Report 2017 291
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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 own shares held.
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 own shares held, 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
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
Profit attributable to ordinary shareholders of the parent from continuing operations (note 18 (a))
Dilutive effect of CCN’s interest charge
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
2017
€ m
1,114
(37)
1,077
2016
€ m
1,356
(37)
1,319
Number of shares (millions)
2,714.4
2,714.4
EUR 39.7c
EUR 48.6c
2017
€ m
1,077
–
1,077
2016
€ m
1,319
157
1,476
Number of shares (millions)
2,714.4
–
2,714.4
2,714.4
365.5
3,079.9
EUR 39.7c
EUR 47.9c
The ordinary shares are included in the weighted average number of shares on a time apportioned basis.
Warrants
Following the Initial Public Offering (“IPO”) and the Group’s admission on 27 June 2017 to the main markets for listed securities on the
Irish Stock Exchange and the London Stock Exchange, the Group issued warrants on 4 July 2017 to the Minister for Finance to subscribe
for 271,166,685 ordinary shares of Allied Irish Banks, p.l.c.
This warrant agreement was replaced by a new warrant instrument (the “AIB Group plc Warrant Instrument”) pursuant to which the
Minister for Finance was issued warrants to subscribe for AIB Group plc shares on the same terms and conditions as the Allied Irish
Banks, p.l.c. warrants. The new warrant agreement with AIB Group plc became effective on 8 December 2017, i.e. upon the Scheme of
Arrangement becoming effective (note 3). Allied Irish Banks, p.l.c. warrants were cancelled on this date.
The warrants are exercisable during the period commencing 27 June 2018 and ending 27 June 2027 (see note 41 for further detail).
These warrants were not included in calculating the diluted earnings per share as they were antidilutive.
Contingent capital notes
In July 2011, Allied Irish Banks, p.l.c. issued € 1.6 billion in contingent capital notes (“CCNs”). These notes were mandatorily redeemable
and convertible into 640 million ordinary shares if the Core Tier 1 capital ratio fell below 8.25%. These incremental shares were included
in calculating the diluted per share amounts for 2016. On 28 July 2016, Allied Irish Banks, p.l.c. redeemed the CCNs at their nominal
amount.
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19 Distributions on equity shares and other equity interests
Ordinary shares – dividends paid
Other equity interests – distribution
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€ m
250
37
2016
€ m
–
37
Final dividends are not accounted for until they have been approved at the Annual General Meeting of shareholders or in the case of
the interim dividend, when they become irrevocable having already been approved for payment by the Board of Directors. The interim
dividend may be cancelled at any time prior to the actual payment.
On 27 April 2017, a final dividend of € 0.0921 per ordinary share, amounting in total to € 250 million for 2016, was approved at the Annual
General Meeting of Allied Irish Banks, p.l.c. and subsequently paid on 9 May 2017. No dividends were paid on the ordinary shares in 2016.
During 2017, a distribution amounting to € 37 million was paid on the Additional Tier 1 securities (2016: € 37 million) (note 43).
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Property(1)
Total disposal groups and non-current assets held for sale
(1)Includes property surplus to requirements and repossessed assets.
21 Trading portfolio financial assets
Debt securities
Equity shares
Of which listed:
Debt securities
Of which unlisted:
Equity shares
2017
€ m
8
8
2016
€ m
11
11
2017
€ m
2016
€ m
32
1
33
32
1
33
–
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 2017 and 2016:
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
2017
€ m
53,465
1,094
(1,092)
4,882
29
(34)
715
33
(35)
130
–
(9)
59,192
1,156
(1,170)
2016
€ m
64,882
1,692
(1,485)
4,968
73
(79)
1,036
49
(45)
–
–
–
70,886
1,814
(1,609)
(1)Interest rate, exchange rate, equity and credit derivative contracts are entered into for both hedging and trading purposes.
(2)At 31 December 2017, 55% of fair value relates to exposures to banks (2016: 64%).
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.
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22 Derivative financial instruments (continued)
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:
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€ m
€ m
5 years +
€ m
2017
Total
€ m
< 1 year
€ m
1 < 5 years
€ m
5 years +
€ m
2016
Total
€ m
Residual maturity
Notional principal amount
Positive fair value
18,742
21,862
141
326
18,588
689
59,192
1,156
21,833
27,243
350
470
21,810
994
70,886
1,814
The 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
2016
€ m
2017
€ m
Positive fair value
2017
€ m
2016
€ m
57,005
1,938
249
59,192
68,605
2,007
274
70,886
743
398
15
1,156
1,334
460
20
1,814
AIB Group plc Annual Financial Report 2017 295
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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, any changes in market value directly affect
reported income for a given period.
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.
Market risk within the banking book is also controlled through limits approved by the Board and monitored by an independent second
line risk function.
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 interest rate 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 2017 and 2016, 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 2017 and 2016. A description of how the fair values of derivatives are determined is set out in note 50.
Notional
principal
amount
€ m
2017
Fair values
Assets
Liabilities
€ m
€ m
Notional
principal
amount
€ m
2016
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
6,180
373
391
6,944
1,855
1,855
7,474
7,474
507
27
–
534
17
17
–
–
(544)
(27)
–
(571)
(16)
(16)
–
–
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)
–
–
Total interest rate derivatives
16,273
551
(587)
15,107
678
(737)
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
4,852
30
4,882
–
623
623
130
130
29
–
29
–
33
33
–
–
(34)
–
(34)
–
(33)
(33)
(9)
(9)
4,961
7
4,968
2
1,034
1,036
–
–
73
–
73
2
47
49
–
–
(79)
–
(79)
–
(45)
(45)
–
–
Total derivatives held for trading
21,908
613
(663)
21,111
800
(861)
AIB Group plc Annual Financial Report 2017 297
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Notes to the consolidated financial statements
22 Derivative financial instruments (continued)
Derivatives held for hedging
Derivatives designated as fair value hedges – OTC
Interest rate swaps
Total derivatives designated as fair value
hedges – OTC
Notional
principal
amount
€ m
11,740
11,740
Derivatives designated as fair value hedges – OTC –
central clearing
Interest rate swaps
Total interest rate fair value hedges – OTC –
central clearing
Equity derivatives – OTC
Equity total return swaps
Total equity derivatives – OTC
1,670
1,670
92
92
2017
Fair values
Assets
Liabilities
€ m
€ m
Notional
principal
amount
€ m
2016
Fair values
Assets
Liabilities
€ m
€ m
14,523
227
(387)
14,523
227
(387)
1,218
1,218
23
23
(2)
(2)
92
92
33
33
–
–
(253)
(253)
(2)
(2)
(2)
(2)
Total derivatives designated as fair value hedges
13,502
125
(257)
15,741
250
(389)
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
14,540
1,192
15,732
8,050
8,050
23,782
37,284
59,192
341
62
403
15
15
418
543
(183)
(2)
(185)
(65)
(65)
(250)
(507)
1,156
(1,170)
24,704
2,589
27,293
6,741
6,741
34,034
49,775
70,886
619
130
749
15
15
(254)
(61)
(315)
(44)
(44)
764
1,014
1,814
(359)
(748)
(1,609)
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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
40
57
Between 1
and 2 years
€ m
Between 2
and 5 years
€ m
More than
5 years
€ m
22
34
179
44
215
38
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
2017
Total
€ m
456
173
2016
Total
€ m
288
241
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
40
98
Between 1
and 2 years
€ m
Between 2
and 5 years
€ m
More than
5 years
€ m
22
51
179
64
215
47
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
2017
Total
€ m
456
260
2016
Total
€ m
288
311
Ineffectiveness reflected in the income statement that arose from cash flow hedges at 31 December 2017 amounted to Nil
(31 December 2016: Nil).
Pay fixed cash flow hedges are used to hedge the cash flows on variable rate liabilities and 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 2017 was a
charge € 203 million (2016: a gain of € 106 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 50. The net mark to market on fair value hedging derivatives, excluding accrual and risk adjustments at 31 December 2017 is
negative € 133 million (2016: negative € 179 million) and the net mark to market on the related hedged items at 31 December 2017 is
positive € 151 million (2016: positive € 176 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 45.
AIB Group plc Annual Financial Report 2017 299
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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
2017
€ m
536
777
1,313
2016
€ m
587
812
1,399
3
–
2017
€ m
713
598
2
1,313
2016
€ m
269
1,127
3
1,399
(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 € 527 million (2016: € 494 million) placed with derivative counterparties in
relation to net derivative positions and placed with repurchase agreement counterparties (note 45).
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
€ 3 million (2016: Nil). The fair value of collateral sold or repledged amounted to Nil (2016: Nil). 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
2017
€ m
62,024
19
1,287
8
(3,345)
59,993
8,126
2016
€ m
63,975
–
1,173
80
(4,589)
60,639
11,112
5
–
The unwind of the discount on the carrying amount of impaired loans amounted to € 100 million (2016: € 140 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 € 19 million (2016: Nil) that it is permitted to
sell or repledge in the absence of default by the owner of the collateral. In addition, loans and receivables to customers include cash
collateral amounting to Nil (2016: € 11 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 provisions for impairment on loans and receivables (note 25).
2017
€ m
520
833
17
1,370
(91)
8
1,287
504
769
14
1,287
23
674
2016
€ m
472
757
21
1,250
(81)
4
1,173
457
698
18
1,173
27
668
AIB Group plc Annual Financial Report 2017 301
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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)
2017
€ m
4,589
(26)
(113)
(716)
(404)
15
3,345
2,722
623
3,345
3,345
3,345
2016
€ m
6,832
(130)
(294)
(1,829)
–
10
4,589
4,047
542
4,589
4,589
4,589
26 NAMA senior bonds
During 2010 and 2011, the Group 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
2017
€ m
1,799
2
(1,805)
4
–
2016
€ m
5,616
11
(3,838)
10
1,799
On initial recognition of the NAMA senior bonds, the Group made certain assumptions as to the timing of expected repayments. These
assumptions underpinning the repayments and their timing were subject to continuing review. Accordingly, in 2017, a gain of € 4 million
was recognised following the acceleration of repayments by NAMA (2016: a gain of €10 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 was € 1,807 million. The bonds were fully repaid during 2017.
At 31 December 2016, € 729 million of NAMA senior bonds were pledged to central banks and banks (note 34).
302
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27 Financial investments available for sale
The following table sets out the carrying value (fair value) of financial investments available for sale at 31 December 2017 and 2016 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
646
124
5
40
–
–
79
–
894
423
44
467
(6)
–
(1)
(4)
(8)
–
(1)
–
(20)
–
(3)
(3)
640
124
4
36
(8)
–
78
–
874
423
41
464
16,321
1,361
(23)
1,338
(169)
1,169
Unrealised
gross
gains
€ m
Unrealised
gross
losses
€ m
Net unrealised
gains/
(losses)
€ m
Tax
effect
€ m
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
(105)
769
(53)
(11)
(64)
370
30
400
2017
Net
after
tax
€ m
560
109
3
33
(4)
–
68
–
2016
Net
after
tax
€ m
390
124
6
55
(4)
–
88
–
3
(80)
(15)
(1)
(3)
4
–
(10)
–
(55)
(18)
(1)
(8)
4
–
(13)
–
–
(91)
662
(52)
(5)
(57)
367
22
389
A
n
n
u
a
l
R
e
v
e
w
i
i
B
u
s
n
e
s
s
R
e
v
e
w
i
i
R
s
k
M
a
n
a
g
e
m
e
n
t
G
o
v
e
r
n
a
n
c
e
a
n
d
O
v
e
r
s
g
h
t
i
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
G
e
n
e
r
a
l
I
n
f
o
r
m
a
t
i
o
n
Fair
value
€ m
7,021
2,406
161
1,368
278
16
4,336
56
15,642
466
213
679
Fair
value
€ m
5,114
2,706
230
1,719
433
12
4,551
47
20
14,832
466
139
605
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
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
15,437
1,231
(32)
1,199
(148)
1,051
AIB Group plc Annual Financial Report 2017 303
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Notes to the consolidated financial statements
27 Financial investments available for sale (continued)
The following table sets out an analysis of movements in financial investments available for sale:
At 1 January
Exchange translation adjustments
Purchases/acquisitions
Sales/disposals
Maturities
IAS 39 reclassification in(1) (note 28)
Writeback of provisions for impairment
Amortisation of discounts net of premiums
Movement in unrealised (losses)/gains
At 31 December
Of which:
Listed
Unlisted
Debt
securities
€ m
Equity
securities
€ m
14,832
(77)
1,347
(1,991)
(1,457)
3,234
–
(93)
(153)
15,642
15,642
–
15,642
605
–
72
(51)
–
–
–
–
53
679
16
663
679
Debt
securities
€ m
Equity
securities
€ m
2017
Total
€ m
15,437
(77)
1,419
(2,042)
(1,457)
3,234
–
(93)
(100)
15,708
(1)
2,463
(3,100)
(93)
–
2
(110)
(37)
16,321
14,832
15,658
663
16,321
14,832
–
14,832
2016
Total
€ m
16,489
(1)
2,542
(3,377)
(93)
–
2
(110)
(15)
15,437
14,832
605
15,437
781
–
79
(277)
–
–
–
–
22
605
–
605
605
(1)Financial investments held to maturity with a carrying value of € 3,234 million were reclassified at 31 December 2017 to financial investments available for
sale (Irish Government securities). The fair value on reclassification was € 3,301 million.
304
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27 Financial investments available for sale (continued)
The following table sets out at 31 December 2017 and 2016, 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:
A
n
n
u
a
l
R
e
v
e
w
i
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
Non Euro government securities
Supranational banks and government agencies
Collateralised mortgage obligations
Euro bank securities
Total debt securities
Equity securities
Equity securities – other
Total
–
–
187
–
–
187
1
188
150
26
56
252
88
572
19
591
Investments
with
unrealised losses
of less than
12 months
€ m
Investments
with
unrealised losses
of more 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
Fair value
Total
€ m
150
26
243
252
88
759
20
779
Unrealised
losses
of less
than
12 months
€ m
–
–
(3)
–
–
(3)
–
(3)
Fair value
Total
€ m
286
294
30
75
411
152
1,248
22
1,270
Unrealised
losses
of less
than
12 months
€ m
(13)
(6)
(1)
(1)
(4)
(1)
(26)
–
(26)
2017
Unrealised losses
Total
Unrealised
losses
of more
than
12 months
€ m
(17)
(20)
(3)
(20)
(3)
(23)
2016
Unrealised losses
Total
Unrealised
losses
of more
than
12 months
€ m
€ m
(6)
(1)
(4)
(8)
(1)
€ m
(13)
(6)
(1)
(1)
(8)
(1)
(30)
(2)
(32)
(6)
(1)
(1)
(8)
(1)
–
–
–
–
(4)
–
(4)
(2)
(6)
Available for sale financial investments with unrealised losses have been assessed for impairment based on the credit risk profile of the
counterparties involved. There was no impairment charge recognised in 2017 (2016: a writeback of € 2 million was recognised as set out
in note 14).
AIB Group plc Annual Financial Report 2017 305
i
B
u
s
n
e
s
s
R
e
v
e
w
i
i
R
s
k
M
a
n
a
g
e
m
e
n
t
G
o
v
e
r
n
a
n
c
e
a
n
d
O
v
e
r
s
g
h
t
i
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
G
e
n
e
r
a
l
I
n
f
o
r
m
a
t
i
o
n
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Notes to the consolidated financial statements
28 Financial investments held to maturity
The following table sets out an analysis of movements in financial investments held to maturity:
At 1 January
Amortisation of fair value gain
IAS 39 reclassification out (note 27)
At 31 December
2017
€ m
3,356
(122)
(3,234)
–
2016
€ m
3,483
(127)
–
3,356
In order to provide flexibility in managing the overall bond portfolio and to avail of opportunities through selling elements of this portfolio,
the Group reclassified its held to maturity portfolio (government bonds) to financial investments available for sale at 31 December 2017.
29 Interests in associated undertakings
Included in the income statement is the contribution net of tax from investments in associated undertakings and joint venture as follows:
Income statement
Share of results of associated undertakings and joint venture
Reversal of impairment of associated undertakings
Share of net assets including goodwill
At 1 January
Income for the year
Dividends/distribution received from associated undertakings and joint venture(2)
Investments in associated undertakings/joint venture(3)
Disposal of joint venture(4)
Reversal of impairment of associated undertakings
At 31 December(5)
Disclosed in the statement of financial position within:
Interests in associated undertakings
Of which listed on a recognised stock exchange
2017
€ m
19
–
19(1)
2017
€ m
65
19
(9)
81
(76)
–
80
80
–
2016
€ m
27
8
35(1)
2016
€ m
70
27
(40)
–
–
8
65
65
–
(1)Includes AIB Merchant Services € 17 million and Greencoat Renewables plc € 2 million (2016: AIB Merchant Services € 22 million and Aviva Undershaft
Five Limited € 5 million profit and an impairment reversal of € 8 million).
(2)Includes dividends/distribution received from AIB Merchant Services € 7 million (2016: € 16 million) Greencoat Renewables plc € 2 million and Aviva
Undershaft Five Limited Nil (2016: € 24 million).
(3)Includes investment amounting to € 76 million in Greencoat Renewables plc and a capital contribution of € 5 million to Zolter Services d.a.c., the holding
company of First Merchant Processing (Ireland) d.a.c., trading as AIB Merchant Services.
(4)The Group disposed of its interest in Greencoat Renewables plc in 2017 for € 76 million.
(5)Includes the Group’s investments in AIB Merchant Services, Aviva Undershaft Five Limited. Aviva Undershaft Five Limited, with a carrying value of
€ 2 million, is in the process of being liquidated.
During 2017, the Group entered a joint arrangement whereby it invested € 76 million by way of loan notes (profit participating and fixed
rate notes) in Greencoat Renewables plc. This investment was accounted for as a joint venture under IFRS 11. Following a subsequent
IPO, the Group disposed of its interest and invested € 15 million in the ordinary share capital of the company which was accounted for
as an available for sale equity investment.
306
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29 Interests in associated undertakings (continued)
The following is the principal associate company of the Group at 31 December 2017 and 2016:
Name of associate
Principal activity
Place of incorporation
and operation
A
n
n
u
a
l
R
e
v
e
w
i
Proportion of ownership
interest and voting power
held by the Group at
2016
%
2017
%
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, AIB Group plc 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 2017 or 2016.
Change in the Group’s ownership interest in associates
During 2017, the Group invested € 76 million in Greencoat Renewables plc (a joint venture) and disposed of this investment following an
IPO as outlined above. Other than this, 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.
AIB Group plc Annual Financial Report 2017 307
i
B
u
s
n
e
s
s
R
e
v
e
w
i
i
R
s
k
M
a
n
a
g
e
m
e
n
t
G
o
v
e
r
n
a
n
c
e
a
n
d
O
v
e
r
s
g
h
t
i
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
G
e
n
e
r
a
l
I
n
f
o
r
m
a
t
i
o
n
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Notes to the consolidated financial statements
30 Intangible assets
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)
Transfers in/out
At 31 December
Carrying value at 31 December
Cost
At 1 January
Additions
Transfers in/(out)
Exchange translation adjustments
At 31 December
Amortisation/impairment
At 1 January
Amortisation for the year
Impairment for the year
Exchange translation adjustments
At 31 December
Carrying value at 31 December
Software
externally
purchased
€ m
Software
Software
internally
under
generated construction
€ m
€ m
Other
2017
Total
€ m
€ m
311
15
–
(3)
–
323
287
15
–
(3)
(6)
293
30
580
116
120
(21)
(1)
794
381
61
1
(21)
6
428
366
173
130
(120)
–
–
183
4
–
6
–
–
10
173
3
–
–
–
–
3
3
–
–
–
–
3
–
Software
externally
purchased
€ m
Software
internally
generated
€ m
Software
under
construction
€ 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
–
1,067
261
–
(24)
(1)
1,303
675
76
7
(24)
–
734
569
2016
Total
€ m
895
173
–
(1)
1,067
606
55
15
(1)
675
392
(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 53.
308
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31 Property, plant and equipment
Cost
At 1 January
Transfers in/(out)
Additions
Held for sale
Amounts written off(1)
Exchange translation adjustments
At 31 December
Depreciation/impairment
At 1 January
Depreciation charge for the year
Impairment charge for the year
Held for sale
Amounts written off(1)
Exchange translation adjustments
At 31 December
Carrying value at 31 December
Freehold
€ m
217
1
1
(3)
–
(1)
215
72
5
–
(2)
–
(1)
74
141
Property
Long
Leasehold
leasehold under 50 years
€ m
€ m
92
–
–
(3)
(1)
–
88
37
2
15
(1)
(1)
–
52
36
132
4
3
–
(1)
(1)
137
87
8
1
–
(1)
–
95
42
Equipment
€ m
524
5
12
–
(1)
(1)
539
433
25
2
–
(1)
(1)
458
81
Assets
under
construction
€ m
21
(10)
10
–
–
–
21
–
–
–
–
–
–
–
21
(1)Relates to assets which are no longer in use with a NIL carrying value.
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
Freehold
€ m
217
3
1
–
(4)
217
73
(4)
6
–
(3)
72
145
Property
Long
leasehold
€ m
Leasehold
under 50 years
€ m
91
2
–
–
(1)
92
34
2
2
–
(1)
37
55
121
7
6
–
(2)
132
82
–
7
–
(2)
87
45
Equipment
€ m
491
4
35
(1)
(5)
524
412
2
24
(1)
(4)
433
91
Assets
under
construction
€ m
25
(16)
13
–
(1)
21
–
–
–
–
–
–
21
2017
Total
€ m
986
–
26
(6)
(3)
(3)
1,000
629
40
18
(3)
(3)
(2)
679
321
2016
Total
€ m
945
–
55
(1)
(13)
986
601
–
39
(1)
(10)
629
357
The carrying value of property occupied by the Group for its own activities was € 217 million (2016: € 242 million), excluding those held as
disposal groups and non-current assets held for sale. Property leased to others by the Group had a carrying value of € 1 million
(2016: € 3 million).
Future capital expenditure in relation to both property plant and equipment and intangible assets is set out in note 53.
AIB Group plc Annual Financial Report 2017 309
A
n
n
u
a
l
R
e
v
e
w
i
i
B
u
s
n
e
s
s
R
e
v
e
w
i
i
R
s
k
M
a
n
a
g
e
m
e
n
t
G
o
v
e
r
n
a
n
c
e
a
n
d
O
v
e
r
s
g
h
t
i
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
G
e
n
e
r
a
l
I
n
f
o
r
m
a
t
i
o
n
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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
2017
€ m
–
17
4
2,907
18
2,946
(36)
(43)
(4)
(12)
(145)
(67)
(307)
2016
€ m
–
27
6
3,050
22
3,105
(67)
(40)
(12)
(12)
(161)
(66)
(358)
2,639
2,747
2,736
(97)
2,639
2,828
(81)
2,747
For each of the years ended 31 December 2017 and 2016, 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
2017
€ m
2,747
(2)
46
(152)
2,639
2016
€ m
2,897
(19)
81
(212)
2,747
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 276 to 277. Information on the regulatory capital treatment of deferred tax assets is included in
‘Principal risks and uncertainties’ on page 68.
At 31 December 2017, recognised deferred tax assets on tax losses and other temporary differences, net of deferred tax liabilities,
totalled € 2,639 million (2016: € 2,747 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 2017 of € 2,535 million (2016: € 2,651 million) are expected to be recovered after more than
12 months.
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32 Deferred taxation (continued)
For the Group’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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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 at 31 December 2017 of € 122 million
(2016: € 122 million); overseas tax (UK and USA) on unused tax losses of € 3,090 million (2016: € 3,315 million); and foreign tax
credits for Irish tax purposes of € 3 million (2016: € 3 million). Of these tax losses totalling € 3,212 million for which no deferred tax is
recognised: € 26 million expire in 2032; € 37 million expire in 2033; € 24 million expire in 2034; and € 5 million expire 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 (2016: Nil).
Deferred tax recognised directly in equity amounted to Nil (2016: 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
Total comprehensive income for the year
Attributable to:
Owners of the parent
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
Gross
Tax
Net of tax
€ m
1,306
(53)
(234)
(148)
25
896
€ m
(192)
–
31
16
(1)
(146)
€ m
1,114
(53)
(203)
(132)
24
750
2017
Net amount
attributable
to owners of
the parent
€ m
1,114
(53)
(203)
(132)
24
750
896
(146)
750
750
Gross
Tax
Net of tax
€ m
1,682
(168)
119
(478)
127
–
€ m
(326)
–
(13)
119
(24)
(1)
€ m
1,356
(168)
106
(359)
103
(1)
2016
Net amount
attributable
to owners of
the parent
€ m
1,356
(168)
106
(359)
103
(1)
Total comprehensive income for the year
1,282
(245)
1,037
1,037
Attributable to:
Owners of the parent
1,282
(245)
1,037
1,037
AIB Group plc Annual Financial Report 2017 311
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Notes to the consolidated financial statements
33 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%.
An additional matched employer contribution, subject to limits based on age bands of 2%, 5% or 8% is also paid into the schemes.
The total cost in respect of the DC schemes for 2017 was € 72 million (2016: € 71 million). This cost is included in administrative
expenses (note 12).
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 16,430 members comprising 3,974 pensioners and 12,456 deferred members as at 31 December
2017. Within the deferred members, there are over 1,569 members who are currently employed by the Group who had joined the Group
prior to December 1997 and were not part of a hybrid pension arrangement.
A 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 8,185 members have benefits accrued from 2007 to 2013 under the hybrid
arrangements.
In addition, there are over 258 members of the EBS Defined Benefit Schemes who are currently employed by the 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, had contributions amounting to € 40 million remaining at 31 December 2017.
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33 Retirement benefits (continued)
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 are set out in the Risk section on page 173 of this report.
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Valuations
Independent actuarial valuations for the AIB Group Irish Pension Scheme (‘Irish scheme’) and the AIB Group UK Pension Scheme
(‘UK scheme’) 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 the Projected Unit Credit Method. The next actuarial
valuations of the Irish and UK schemes as at 30 June 2018 and 31 December 2017, will be completed by no later than 31 March 2019
and 31 December 2018, respectively.
Contributions
The total contributions to all the defined benefit pension schemes operated by the Group in the year ended 31 December 2018 are
estimated to be € 64 million. Payments in the year to 31 December 2017 amounted to € 64 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.
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 2017 and 2016. 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(1)
Discount rate
Inflation assumptions(2)
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
2017
%
0.00
2.07
1.35
3.10
2.50
3.10
2016
%
0.00
1.90
1.25
3.20
2.70
3.20
0.00 – 2.10
2.10 – 3.55
1.35 – 3.10
0.00 – 3.20
1.90 – 4.15
1.70 – 3.20
(1)Having taken actuarial and external legal advice, the Board determined that the funding of discretionary increases in pensions in payment is a decision to
be made by the Board annually. Accordingly, the long term rate of increases of pensions in payment is Nil.
(2)The inflation assumption applies to the revaluation of deferred members’ benefits up to their retirement date.
AIB Group plc Annual Financial Report 2017 313
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Notes to the consolidated financial statements
33 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 Group’s
financial circumstances and ability to pay; the views of the Trustees; the Group’s commercial interests and any competing obligations to
the State. The Group completed this process for 2018 and after carefully considering all the relevant interests and factors decided that
funding of discretionary increases to pensions in payment was appropriate for 2018. Funding will be provided to enable the Trustee to
grant an increase of 0.35% in 2018. The increase in the Irish schemes’ liabilities is estimated to not exceed € 10 million.
In 2017, the Board decided that funding of discretionary increases 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 2019, in early 2019.
Mortality assumptions
The life expectancies underlying the value of the scheme liabilities for the Irish and UK schemes at 31 December 2017 and 2016 are
shown in the following table:
Life expectancy - years
Retiring today age 63
Retiring in 10 years at age 63
Males
Females
Males
Females
2017
25.1
27.0
26.0
28.0
2017
25.1
27.0
26.0
28.0
24.9
27.0
26.1
28.2
25.7
27.9
26.8
29.1
Irish scheme
2016
UK scheme
2016
The mortality assumptions for the Irish and UK schemes were updated in 2017 to reflect emerging market experience. The table shows
that a member of the Irish scheme retiring at age 63 on 31 December 2017 is assumed to live on average for 25.1 years for a male
(25.1 years for the UK scheme) and 27.0 years for a female (27.0 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 2017 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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33 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 2017 and 2016:
Defined
benefit
obligation
Asset
Fair
value of
ceiling/
scheme minimum
2017
Net
defined
benefit
funding(1) (liabilities)
assets
€ m
€ m
(252)
(5)
(5)
8
–
2
(1)
1
Defined
benefit
obligation
Fair
value of
scheme
assets
€ m
(6,343)
€ m
6,197
–
(178)
–
(178)
–
177
(1)
176
At 1 January
Included in profit or loss
Past service cost
Interest (cost) income
Administration costs
Included in other comprehensive income
Remeasurements gain/(loss):
– Actuarial gain/(loss) arising from:
– Experience adjustments
– Changes in demographic
assumptions
– Changes in financial assumptions
– Return on scheme assets excluding
assets
€ m
6,413
–
129
(1)
128
€ m
(6,153)
–
(122)
–
(122)
(36)
41
137
–
–
–
interest income
–
164
– Asset ceiling/minimum funding
adjustments
(36)
79
–
–
–
(10)
(160)
–
470
41
137
164
Asset
ceiling/
minimum
2016
Net
defined
benefit
funding(1) (liabilities)
assets
€ m
€ m
(146)
–
(1)
(1)
(2)
79
(10)
(160)
470
(281)
(281)
25(2)
(252)
(252)
127(2)
Translation adjustment on
non-euro schemes
Other
Contributions by employer
Benefits paid
(281)
52
194
–
387
387
(54)
110
64
(387)
(323)
At 31 December
(5,694)
6,328
(538)
(2)
23
64
–
64
96
(252)
198
107
–
261
261
(228)
242
59
(261)
(202)
(6,153)
6,413
(252)
(30)
97
59
–
59
8
31 December
2017
€ m
31 December
2016
€ m
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)
174
9
183
(40)
(26)
(21)
(87)
96
159
7
166
(80)
(56)
(22)
(158)
8
(1)In recognising the net surplus or deficit on 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 € 24 million (2016: € 103 million) see page 291.
AIB Group plc Annual Financial Report 2017 315
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Notes to the consolidated financial statements
33 Retirement benefits (continued)
Scheme assets
The following table sets out an analysis of the scheme assets:
2017
€ m
114
79
169
129
143
297
153
166
198
39
40
1,413
12
1,425
1,274
1,166
2,440
–
2,440
261
(45)
24
494
1
242
100
37
626
240
1
1,765
1,765
365
3
6,328
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
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 at 31 December
(1)Located in Europe.
(2)A quoted market price in an active market is not available.
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33 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
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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
(180)
52
113
192
(49)
(113)
(52)
52
(34)
55
(49)
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Maturity of the defined benefit obligation
The weighted average duration of the Irish scheme at 31 December 2017 is 17.4 years and of the UK scheme at 31 December 2017 is
19 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 312, the Group executed a series of agreements in
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 a regular income payable quarterly 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 2018 (2017: £ 19.1 million). In
addition, if the 31 December 2032 actuarial valuation of the UK scheme reveals a deficit, the scheme will receive a termination payment
equal to the lower of that deficit or £ 60 million (note 48).
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 2017, the Group contributed € 8 million (2016: € 6 million) towards insuring this benefit. This amount is included in administrative
expenses (note 12).
AIB Group plc Annual Financial Report 2017 317
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Notes to the consolidated financial statements
34 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
2017
€ m
1,900
500
2,400
901
–
339
1,240
3,640
2016
€ m
1,900
12
1,912
4,973
150
697
5,820
7,732
–
–
(1)Eurosystem refinancing operations are credit facilities from the Eurosystem secured by a fixed charge over securities.
Securities sold under agreements to repurchase (note 48) 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, other marketable securities and eligible assets. These agreements are completed under market standard
Global Master Repurchase Agreements. Repurchase agreements with the ECB are completed under a Master Repurchase Agreement.
Deposits by central banks and banks include cash collateral at 31 December 2017 of € 166 million (2016: € 268 million) received from
derivative counterparties in relation to net derivative positions (note 45) and also from repurchase agreement counterparties.
Financial assets pledged
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
Of which:
Government securities
Other securities(1)
Central
banks
€ m
3,462
–
3,462
Banks
€ m
954
696
258
2017
Total
€ m
4,416
696
3,720
Central
banks
€ m
3,293
498
2,795
Banks
€ m
5,239
3,891
1,348
2016
Total
€ m
8,532
4,389
4,143
(1)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.
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35 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
2017
€ m
33,179
14,007
17,305
81
64,572
28,977
35,595
64,572
2016
€ m
29,721
12,663
20,496
622
63,502
25,748
37,754
63,502
191
271
(1)At 31 December 2017, the Group had pledged government available for sale securities with a fair value of € 71 million (2016: € 220 million) and
non-government available for sale securities with a fair value of € 12 million (2016: € 420 million) as collateral for these facilities (see note 45 for further
information).
Customer accounts include cash collateral of € 34 million (2016: € 60 million) received from derivative counterparties in relation to net
derivative positions (note 45).
At 31 December 2017, the Group’s five largest customer deposits amounted to 1% (2016: 3%) of total customer accounts.
AIB Group plc Annual Financial Report 2017 319
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Notes to the consolidated financial statements
36 Trading portfolio financial liabilities
Debt securities:
Government securities
For contractual residual maturity see ‘Risk management’ – 3.4 Liquidity risk.
37 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
Analysis of movements in debt securities in issue
At 1 January
Issued during the year
Repurchased
Matured
Amortisation of discounts net of premiums
Exchange translation adjustments
At 31 December
2017
€ m
30
30
2017
€ m
1,000
3,590
4,590
–
4,590
2017
€ m
6,880
412
–
(2,686)
–
(16)
4,590
2016
€ m
–
–
2016
€ m
1,000
5,733
6,733
147
6,880
2016
€ m
7,001
1,389
(9)
(1,500)
1
(2)
6,880
In 2017, the Group issued debt securities amounting to € 412 million under the short-term commercial paper programme. In 2016,
issuances related to covered bonds € 1,000 million and € 389 million under the short-term commercial paper programme. Debt
securities matured or repurchased amounted to € 2,686 million (2016: € 1,509 million) of which € 450 million related to the redemption
of debt securities issued by the securitisation vehicles, Emerald Mortgages No. 4 Public Limited Company and Tenterden Funding p.l.c.
2017
€ m
333
109
19
43
320
824
2016
€ m
366
122
10
146
329
973
(note 48).
38 Other liabilities
Notes in circulation
Items in transit
Creditors
Fair value of hedged liability positions
Other
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39 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
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
47
–
(3)
2(2)
(10)(2)
(5)
31
Liabilities
and
charges
€ m
49
–
–
2(2)
(4)(2)
–
47
NAMA(1)
provisions
Onerous
contracts
Legal
Other
claims provisions
€ m
2
–
–
–
(1)(1)
–
1
€ m
12
–
–
52(3)
(1)(3)
(4)
59
€ m
32
4
–
7(3)
(4)(3))
(2)
€ m
153
(4)
(1)
60(3)
(18)(3)
(87)
37
103
NAMA(1)
provisions
Onerous
contracts
Legal
claims
Other
provisions
€ m
39
(12)
–
14(1)
(31)(1)
(8)
2
€ m
13
–
(1)
43)
(2)(3)
(2)
12
€ m
32
–
(1)
6(3)
(4)(3)
(1)
32
€ m
249
–
(6)
56(3)
(15)(3)
(131)
153
2017
Total
€ m
246
–
(4)
121
(34)
(98)
231(4)
2016
Total
€ m
382
(12)
(8)
82
(56)
(142)
246(4)
(a) Other provisions
Includes the provisions for customer redress and related matters noted above, other restitution provisions, and miscellaneous
provisions.
Provisions for customer redress and related matters
In 2015, the Group created a provision of € 105 million related to the expected outflow for customer redress and compensation 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 (Tracker Mortgage Examination). Over the past
two years € 95 million of this provision was utilised as over 4,100 customers were redressed and compensated.
The Group announced on 20 December 2017 that following the completion of an ongoing review c. 900 additional accounts which were
no longer on a tracker were deemed impacted and c.4,000 additional accounts which were never on a tracker rate would also be paid
compensation.
The Group has determined that a further € 30 million provision is required bringing the amount of provisions for customer redress and
compensation at 31 December 2017 to € 40 million to cover payments to these additional customers as well as the remaining customers
that had yet to receive redress and compensation by 31 December 2017. The final redress and compensation is subject to independent
third party assurance and is also subject to assessment and challenge by the Central Bank, notwithstanding the advanced stage of the
examination process in the Group.
The Group also created a provision of € 85 million with regard to ‘Other costs’ in 2015, of which € 68 million has been utilised to date. A
further € 10 million has also been provided at 31 December 2017, bringing the provision for ‘Other costs’ to € 27 million as of this date.
(b) Onerous contracts
Arising from a revised property strategy, the Group will exit certain office space. In this regard, the Group has made an onerous lease
provision amounting to € 52 million for the unavoidable costs which are expected to arise. The provision takes into account the
contractual outflows from minimum lease rentals payable, estimated outflows in connection with sub-letting these properties and
estimates of other costs, offset by the estimated rental income expected to be received over the minimum lease contract period.
(1)NAMA income statement charge/(credit) relates to ongoing valuation adjustments in relation to loans previously transferred to NAMA (note 10).
(2)Included in writeback of provisions for liabilities and commitments in income statement.
(3)Included in ‘Other general and administrative expenses’ (note 12).
(4)The total provisions for liabilities and commitments expected to be settled within one year amount to € 150 million (2016: € 141 million).
AIB Group plc Annual Financial Report 2017 321
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Notes to the consolidated financial statements
40 Subordinated liabilities and other capital instruments
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
2017
€ m
2016
€ m
750
9
33
1
793
793
2017
€ m
793
750
8
32
1
791
791
2016
€ m
791
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, the Group 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 the Group 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 the Group. These instruments will amortise to their nominal value in the period to their
maturity in 2035.
€ 1.6bn Contingent Capital Tier 2 Notes
The € 1.6bn Contingent Capital Tier 2 Notes matured on 28 July 2016 and were redeemed at their nominal value of € 1.6 billion.
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41 Share capital
The following sets out the history of the share capital of AIB Group plc (previously RPML 1966 Holdings plc) from the date of
incorporation to 31 December 2017.
On 8 December 2016, RPML 1966 Holdings plc was incorporated with an authorised share capital of € 25,000 divided into 40,000
ordinary shares of nominal value € 0.625 each and an issued share capital on this date of € 1.25 comprising two fully paid-up ordinary
shares of € 0.625 each.
On 21 February 2017, a further 39,998 ordinary shares of € 0.625 each were issued to satisfy requirements for a public limited
company. These share were fully paid-up and rank pari-passu with the existing ordinary shares in issue.
On 5 September 2017, RPML 1966 Holdings plc changed its name to AIB Group plc.
Following shareholder resolutions passed on 6 October 2017, the authorised share capital was increased to € 9,880,025,000 divided
into 4,000,000,000 ordinary shares of € 2.47 each and 40,000 ordinary shares of € 0.625 each.
Pursuant to the Scheme of Arrangement described in note 3 ‘Corporate restructuring’, on 8 December 2017, 2,714,381,237 ordinary
shares in Allied Irish Banks, p.l.c. were cancelled and on the same date Allied Irish Banks, p.l.c. issued 2,714,381,237 ordinary shares of
nominal value € 0.625 per share to AIB Group plc making AIB Group plc the parent company of Allied Irish Banks, p.l.c. On the same
date, AIB Group plc issued 2,714,381,237 ordinary shares of nominal value € 2.47 per share to the former shareholders of Allied Irish
Banks, p.l.c. The 40,000 ordinary shares of € 0.625 each were converted into Subscriber Shares with no voting or income rights and
only limited rights on a return of capital on the Scheme of Arrangement becoming effective.
Subsequent to the issue by AIB Group plc of 2,714,381,237 ordinary shares of nominal value € 2.47 per share, AIB Group plc petitioned
the High Court for a capital reduction in order to create distributable reserves in the accounts of AIB Group plc. This involved the
reduction of the nominal value of the ordinary shares from € 2.47 per share to € 0.625 per share. The capital reduction which created
€ 5,008 million in distributable reserves became effective on 14 December 2017 (note 3).
Following the Scheme of Arrangement and the capital reduction becoming effective, the Company revised the authorised share capital
to € 2,500,025,000 divided into 4,000,000,000 ordinary shares of € 0.625 each and 40,000 Subscriber Shares of € 0.625 each.
The Subscriber Shares will be redeemed at par and cancelled in 2018.
Authorised
Ordinary share capital
Subscriber Shares of € 0.625 each
Ordinary shares of € 0.625 each
Total
Issued and fully paid
Ordinary share capital
On incorporation
Issued to satisfy requirements for a public limited company
Ordinary shares of € 0.625 each
Impact of corporate restructure
Ordinary shares of € 2.47 each
Reduction in company capital from € 2.47 per share to € 0.625 per share
At 31 December
Subscriber Shares of € 0.625 each
Ordinary shares of € 0.625 each
Total
(1)Converted into Subscriber Shares
AIB Group plc
31 December 2017
Number of
shares
€
40,000
25,000
4,000,000,000
2,500,000,000
4,000,040,000
2,500,025,000
2(1)
1
39,998(1)
24,999
2,714,381,237
6,704,521,655
(5,008,033,382)
40,000
25,000
2,714,381,237
1,696,488,273
2,714,421,237
1,696,513,273
AIB Group plc Annual Financial Report 2017 323
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Notes to the consolidated financial statements
41 Share capital (continued)
The table above is summarised as follows:
Authorised
Ordinary share capital
Issued
Ordinary share capital
AIB Group plc
31 December 2017
Number of
shares
m
€ m
4,000.0
2,500
2,714.4
1,697
Information with regard to the share capital of Allied Irish Banks, p.l.c., the parent company of the Group at 31 December 2016 is given
for comparative purposes (note 1(a)).
Authorised
Ordinary share capital
Ordinary shares of € 0.625 each
Issued
Ordinary share capital
Ordinary shares of € 0.625 each
Allied Irish Banks, p.l.c.
31 December 2016
Number of
shares
m
€ m
4,000.0
2,500
2,714.4
1,696
Stock Exchange listing
Following the IPO in June 2017, Allied Irish Banks, p.l.c. ordinary shares were admitted to the main markets for listed securities on the
Irish Stock Exchange and the London Stock Exchange on 27 June 2017 (Note 52 ‘Related Party Transactions – Relationship with the
Irish Government’). This listing by Allied Irish Banks, p.l.c. on the Irish and London Stock Exchanges was cancelled on 11 December
2017 following the Scheme of Arrangement becoming effective. The ordinary shares of AIB Group plc were admitted to the main
markets for listed securities on the Irish Stock Exchange and the London Stock Exchange on 11 December 2017 (note 3).
Other – Warrants
On 26 April 2017, the Minister for Finance (‘the Minister’) issued a Warrant Creation Notice requiring AIB to issue warrants to the
Minister five business days after re-admission of AIB’s ordinary shares to a regulated market. On 4 July 2017, AIB issued warrants to the
Minister to subscribe for 271,166,685 ordinary shares of Allied Irish Banks, p.l.c. in accordance with the terms of the Warrant Agreement
approved by shareholders in December 2015. The exercise price for the warrants is € 8.80 per ordinary share and the warrants are
exercisable during the period commencing 27 June 2018 and ending 27 June 2027.
This warrant instrument was replaced by a new warrant instrument (the “AIB Group plc Warrant Instrument”) pursuant to which the
Minister for Finance was issued warrants to subscribe for AIB Group plc shares on the same terms and conditions as the Allied Irish
Banks, p.l.c. warrants. The new warrant instrument with AIB Group plc became effective on 8 December 2017, i.e. upon the Scheme of
Arrangement becoming effective (note 3). Allied Irish Banks, p.l.c. warrants were cancelled on this date.
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41 Share capital (continued)
Structure of the Company’s share capital
The following table shows the structure of the Company’s share capital as at 31 December 2017:
Class of share
Ordinary share capital
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Share premium
The following table shows the share premium in the consolidated financial statements at 31 December 2017 and 2016:
At 31 December
2017
€ m
–(1)
2016
€ m
1,386(2)
(1)Relates to AIB Group plc. No share premium arose on the issuance of ordinary shares by AIB Group plc from the date of incorporation to 31 December
2017.
(2)Relates to Allied Irish Banks, p.l.c. The share premium in Allied Irish Banks, p.l.c. at 31 December 2016 is disclosed for comparative purposes.
Capital resources
The following table shows the Group’s capital resources at 31 December 2017 and 2016:
Equity
Dated capital notes (note 40)
Total capital resources
2017
€ m
13,612
793
14,405
2016
€ m
13,148
791
13,939
AIB Group plc Annual Financial Report 2017 325
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Notes to the consolidated financial statements
42 Own shares
Employee share schemes and trusts
In the past, the Group sponsored a number of employee share schemes whereby purchases of shares were made in the open market to
satisfy commitments under the various schemes.
At 31 December 2017, 5,820 shares (2016: 5,820 shares) were held by trustees with a carrying value of € 23 million (2016: € 23 million),
and a market value of € 0.032 million (2016: € 0.029 million). The carrying value is deducted from revenue reserves while the shares
continue to be held by the Group. There were no transactions with regard to ‘Own shares’ during the year.
43 Other equity interests
At beginning and end of period
2017
€ m
494
2016
€ m
494
Additional Tier 1 Perpetual Contingent Temporary Write-down Securities
In 2015, Allied Irish Banks, p.l.c. 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 the Group’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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44 Capital reserves, merger reserve and capital redemption reserves
Capital reserves
At 1 January
Transfer to revenue reserves:
Anglo business transfer
CCNs issuance (note 40)
At 31 December
(1)Relates to the acquisition of EBS d.a.c.
Capital
contribution
reserves
€ m
Other
capital
reserves
€ m
1,021
178
(66)
–
(66)
955(1)
–
–
–
2017
Total
€ m
1,199
(66)
–
(66)
Capital
contribution
reserves
€ m
Other
capital
reserves
€ m
2016
Total
€ m
1,382
178
1,560
(285)
(76)
(361)
–
–
–
(285)
(76)
(361)
178
1,133
1,021
178
1,199
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The capital contribution reserves which arose from the acquisition of Anglo deposit business and EBS and the issue of CCNs were
non-distributable on initial recognition. The capital contribution reserves which arose on (a) the Anglo business transfer and (b) the
CCNs issuance are now deemed to be distributable and have been transferred in full to revenue reserves as they have met the
conditions for distribution outlined in accounting policy (ab) in note 1.
Merger reserve
Merger reserve
At end of year
2017
€ m
(3,622)
2016
€ m
N/A
Under the Scheme of Arrangement (“the Scheme”) approved by the High Court on 6 December 2017 which became effective on
8 December 2017, a new company, AIB Group plc (‘the Company’), was introduced as the holding company of AIB Group. AIB Group plc
is a recently incorporated public limited company registered in Ireland. The share capital of Allied Irish Banks, p.l.c., other than a single
share owned by AIB Group plc, was cancelled and an equal number of new shares were issued by the Company to the shareholders of
Allied Irish Banks, p.l.c. The difference between the carrying value of the net assets of Allied Irish Banks, p.l.c. entity on acquisition by
the Company and the nominal value of the shares issued on implementation of the Scheme amounting to € 6,235 million was accounted
for as a merger reserve (note 3).
In the consolidated financial statements of AIB Group plc, the transaction was accounted for under merger accounting. Accordingly,
the carrying value of the investment in Allied Irish Banks, p.l.c. by AIB Group plc is eliminated against the share capital and share
premium account in Allied Irish Banks, p.l.c. and the merger reserve in AIB Group plc resulting in a negative merger reserve of
€ 3,622 million.
Capital redemption reserves
At beginning and end of year
2017
€ m
14
2016
€ m
14
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Notes to the consolidated financial statements
45 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 cover 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
€ 534 million at 31 December 2017 (2016: € 971 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 2017, € 522 million (2016: € 487 million) of CSAs are included within
financial assets and € 193 million (2016: € 322 million) of CSAs are included within financial liabilities.
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45 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 2017 and 2016:
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
Deposits by central banks and banks –
Note
Securities sold under agreements
to repurchase
Customer accounts –
Securities sold under agreements
to repurchase
Derivative financial instruments
34
35
22
Total
Gross
Net
amounts of amounts of
financial
recognised
assets
financial
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
776
–
776
(534)
(193)
1,703
(1,700)
19
–
2,498
(1,700)
3
19
798
(3)
(19)
(556)
–
–
(193)
Gross
Net
amounts of amounts of
financial
recognised
liabilities
financial
presented
assets
in the
amounts of offset in the
statement
statement
recognised
financial of financial of financial
position
liabilities
€ m
€ m
Gross
€ m
Related amounts not
offset in the statement
of financial position
Financial
collateral
(including
cash
collateral)
pledged
€ m
Financial
position instruments
€ m
2017
Net
amount
€ m
49
–
–
49
2017
Net
amount
€ m
2,601
(1,700)
901
(928)
81
1,098
3,780
–
–
(1,700)
81
1,098
2,080
(83)
(534)
(1,545)
1
–
(522)
(521)
(26)
(2)
42
14
AIB Group plc Annual Financial Report 2017 329
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Notes to the consolidated financial statements
45 Offsetting financial assets and financial liabilities (continued)
Gross
amounts of
recognised
financial
liabilities
offset in the
statement
of financial
position
€ m
Net
amounts of
financial
assets
presented
in the
statement
of financial
position
€ m
Related amounts not
offset in the statement
of financial position
Financial
collateral
(including
cash
collateral)
received
€ m
Financial
instruments
€ m
–
1,316
(971)
(322)
(350)
(350)
–
1,316
–
(971)
–
(322)
Gross
amounts of
recognised
financial
assets
€ m
1,316
350
1,666
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
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
Deposits by central banks and banks –
Note
Securities sold under agreements
to repurchase
Customer accounts –
Securities sold under agreements
to repurchase
Derivative financial instruments
34
35
22
Total
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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45 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 2017 and 2016:
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
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
3
19
–
–
Net amounts
of financial
assets presented
in the statement
of financial position
€ m
Line item in
statement of
financial position
776
Derivative financial instruments
Loans and receivables to banks
Carrying
amount in
statement
of financial
position
€ m
1,156
1,313
2017
Financial
assets not
in scope of
offsetting
disclosures
€ m
380
1,310
Loans and receivables to customers
59,993
59,974
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
2017
Financial
liabilities not
in scope of
offsetting
disclosures
€ m
901
Deposits by central banks and banks
3,640
2,739
81
1,098
Customer accounts
Derivative financial instruments
64,572
1,170
64,491
72
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
Loans and receivables to banks
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 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
AIB Group plc Annual Financial Report 2017 331
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Notes to the consolidated financial statements
46 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
2017
€ m
2016
€ m
612
268
880
63
7,543
2,625
10,231
11,111
527
383
910
62
7,760
2,467
10,289
11,199
(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)An original maturity of more than 1 year.
Concentration of exposure
Republic of Ireland
United Kingdom
United States of America
Total
Contingent liabilities
Commitments
2017
€ m
607
184
89
880
2016
€ m
661
145
104
910
2017
€ m
8,619
1,612
–
10,231
2016
€ m
8,540
1,744
5
10,289
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46 Memorandum items: contingent liabilities and commitments, and contingent assets (continued)
The credit ratings of contingent liabilities and commitments at 31 December 2017 and 2016 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
Total
2017
€ m
4,228
6,389
90
250
154
2016
€ m
3,231
7,145
383
268
172
11,111
11,199
Legal proceedings
The 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 the 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 the Group.
Contingent liability/contingent asset - NAMA
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.
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.
AIB Group plc Annual Financial Report 2017 333
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Notes to the consolidated financial statements
46 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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47 Subsidiaries and consolidated structured entities
The following are the material subsidiary companies of the Group at 31 December 2017 and 2016:
Name of company
Principal activity
Place of
incorporation
Allied Irish Banks, p.l.c.
A direct subsidiary of AIB Group plc
Republic of Ireland
and the principal operating company
of the Group and holds the majority
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
– a licensed bank
Registered
Office
Bankcentre,
Ballsbridge,
Dublin 4,
Ireland.
Bankcentre,
Ballsbridge,
Dublin 4,
Ireland.
EBS d.a.c.
Mortgages and savings
– a licensed bank
Republic of Ireland
The EBS Building,
2 Burlington Road,
Dublin 4,
Ireland.
AIB Group (UK) p.l.c. trading
Banking and financial services
Northern Ireland
92 Ann Street,
as Allied Irish Bank (GB) in
– a licensed bank
Belfast BT1 3AY
Great Britain and First Trust
Bank in Northern Ireland
The proportion of ownership interest and voting power held by AIB Group plc in Allied Irish Banks, p.l.c. is 100%. All subsidiaries of Allied
Irish Banks, p.l.c. being the immediate subsidiary of AIB Group plc, are wholly owned and there are no non-controlling interests in these
subsidiaries. Practically all subsidiaries in the 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.
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 (liquidator appointed);
– Emerald Mortgages No. 5 d.a.c.;
– Mespil 1 RMBS d.a.c.;
– Tenterden Funding p.l.c. (funding transaction terminated in June 2017);
– AIB PFP Scottish Limited Partnership.
Further details on these SPEs are set out in note 48.
There are no contractual arrangements that could require AIB Group plc or its subsidiaries to provide financial support to the consolidated
structured entities listed above. During the period, neither AIB Group plc 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.
AIB Group plc Annual Financial Report 2017 335
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Notes to the consolidated financial statements
48 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 principal forms 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, the Group 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.
The Group controls certain special purpose entities which were set-up to support its funding activities. Details of these special purpose
entities are set out below under the heading ‘Special purpose entities’. The Group 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
The Group 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 shares held by trustees are set out in note 42 ‘Own shares’.
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 34) and ‘Customer accounts’ (note 35). 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 34 and 35. 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
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48 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 37). 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
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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 37). 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’). Tenterden was consolidated into the Group’s financial
statements. The liability in respect of cash received by Tenterden from the external investors was included within ‘Debt securities in
issue’ (note 37) in the statement of financial position. In June 2017, Tenterden redeemed all outstanding notes and this funding
transaction was terminated.
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 2017 is Nil (2016: € 615 million). The carrying amount of the bonds issued by Emerald 4 to
third party investors amounted to Nil (2016: € 399 million). On 15 December 2016, Emerald 4 announced to the Irish Stock Exchange
that it had received notice from its sponsoring entity (EBS d.a.c.) of its intention to refinance loan notes on 15 March 2017 which
Emerald 4 held. Consequent upon this, Emerald 4 used the redemption proceeds from the EBS loan notes to fully redeem its bonds at
par. A liquidator was appointed to Emerald 4 on 18 December 2017.
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 2017 is € 1,084 million (2016: € 1,189 million). Bonds were issued by Emerald 5 to EBS d.a.c. but these are not shown in
the Group’s financial statements as they 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 2017 is € 684 million (2016: € 734 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.
AIB Group plc Annual Financial Report 2017 337
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Notes to the consolidated financial statements
48 Off-balance sheet arrangements and transferred financial assets (continued)
The following table summarises the carrying value and fair value of financial assets at 31 December 2017 and 2016 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
Sale and repurchase agreements/
similar products
2,718(1) (2)
Covered bond programmes
€ m
982(1)
Residential mortgage backed
6,543(3)
3,590
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
2,718
€ m
982
6,245
3,728
Fair value
of associated
liabilities
held by
Group
companies
€ m
–
–
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
Securitisations
9,521(3)
822
5,265
468
–
–
420
6,229
5,745
8,682
800
5,459
449
–
–
398
2017
Net
fair value
position
€ m
1,736
2,517
2016
Net
fair value
position
€ m
484
3,223
(47)
(1)See notes 34 and 35.
(2)Includes € 1,681 million of assets pledged in relation to securities lending arrangements (2016: € 345 million).
(3)The asset pools € 18 billion (2016: € 19 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 the Group companies. The € 6,543 million (2016: € 9,521 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 the 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 the
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 the Group.
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48 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.
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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 2017, the Group recognised € 0.8 million
(cumulative € 6.1 million) (2016: € 1 million (cumulative € 5.3 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 exposure to loss, if any, 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 2017, the Group recognised € 2 million
(cumulative € 88 million) (2016: € 4 million (cumulative € 86 million)) in the income statement for the servicing of financial assets
transferred to NAMA.
AIB Group plc Annual Financial Report 2017 339
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Notes to the consolidated financial statements
49 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 2017 and 2016:
At fair value through
profit and loss
At fair value
through equity
At amortised cost
2017
Total
Fair value
hedge
derivatives
€ m
Cash flow
hedge
derivatives
€ m
Available
for sale
securities
€ m
Loans
and
receivables
€ m
Other
€ m
€ m
633(1)
–
–
–
–
–
–
736
1,369
3,640
64,572
–
–
4,590
793
1,061
6,364
103
33
1,156
1,313
59,993
16,321
736
86,019
3,640
64,572
30
1,170
4,590
793
1,061
74,656
75,856
Financial assets
Cash and balances at central banks
Items in the course of collection
Trading portfolio financial assets
Derivative financial instruments
Loans and receivables to banks
Loans and receivables to
customers
Financial investments available
for sale
Other financial assets
Held for
trading
€ m
–
–
33
613
–
–
–
–
–
–
–
–
–
–
125
418
–
–
–
–
–
–
–
–
–
–
–
–
–
–
16,321
–
5,731
103
–
–
1,313
59,993
–
–
646
125
418
16,321
67,140
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
–
–
30
663
–
–
–
–
–
–
–
–
–
257
250
–
–
–
–
–
–
(1)Comprises cash on hand.
693
257
250
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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49 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
2016
Total
Other
€ 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
598(1)
–
–
–
–
–
–
–
–
–
430
6,519
134
1
1,814
1,399
60,639
1,799
15,437
3,356
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
AIB Group plc Annual Financial Report 2017 341
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Notes to the consolidated financial statements
50 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).
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. The Group 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 inputs.
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.
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 2017.
The methods used for calculation of fair value in 2017 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 (2016: 60%).
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50 Fair value of financial instruments (continued)
The Group 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
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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 349. 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
2017 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.
AIB Group plc Annual Financial Report 2017 343
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Notes to the consolidated financial statements
50 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 (including amounts awaiting settlement on the
dispoal of financial assets totalling € 142 million) 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 46. 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 2017 and 2016:
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50 Fair value of financial instruments (continued)
Financial assets measured at fair value
Trading portfolio financial assets
Debt 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
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
Subordinated liabilities and other capital instruments
Other financial liabilities
(1)Comprises cash on hand.
(2)Includes residential and commercial mortgages.
Carrying amount
Fair value
Fair value hierarchy
€ m
Level 1
€ m
Level 2
€ m
Level 3
€ m
33
1,094
29
33
9,588
1,368
294
4,336
56
679
32
–
–
–
9,588
1,368
278
4,336
56
16
1
667
29
33
–
–
16
–
–
1
–
427
–
–
–
–
–
–
–
662
2017
Total
€ m
33
1,094
29
33
9,588
1,368
294
4,336
56
679
17,510
15,674
747
1,089
17,510
6,364
103
1,313
32,424
27,569
59,993
736
68,509
30
1,092
34
35
9
1,200
839
2,801
33,179
14,007
17,305
81
4,590
793
1,061
74,656
633(1)
–
–
–
–
–
–
5,731
–
536
–
–
–
–
633
6,267
30
–
–
–
–
30
–
–
–
–
–
–
4,653
819
–
5,472
–
973
34
35
9
1,051
500
1,905
–
–
–
–
108
78
–
–
103
777
30,865
27,318
58,183
736
59,799
–
119
–
–
–
119
339
901
33,179
14,007
17,348
81
–
–
1,061
6,364
103
1,313
30,865
27,318
58,183
736
66,699
30
1,092
34
35
9
1,200
839
2,806
33,179
14,007
17,348
81
4,761
897
1,061
2,591
66,916
74,979
AIB Group plc Annual Financial Report 2017 345
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a
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m
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G
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a
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d
O
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s
g
h
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a
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S
t
a
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e
m
e
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Page 346
Notes to the consolidated financial statements
50 Fair value of financial instruments (continued)
Carrying amount
Fair value
Fair value hierarchy
Level 2
€ m
Level 1
€ m
Level 3
€ m
€ m
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
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
–
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
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
598(1)
–
–
–
–
–
–
3,439
–
4,037
–
–
–
–
–
–
–
–
–
–
6,733
6,391
147
791
442
–
766
–
79,347
7,157
2,686
69,905
79,748
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..
346
AIB Group plc Annual Financial Report 2017
A10 Notes 31-50
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Page 347
50 Fair value of financial instruments (continued)
Significant transfers between Level 1 and Level 2 of the fair value hierarchy
There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy for the years ended 31 December 2017 and
2016.
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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:
At 1 January
Transfers into Level 3(1)
Transfers out of 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
Financial assets
Financial liabilities
2017
Derivatives Available for
sale equity
securities
€ m
€ m
509
2
(7)
(74)
–
(74)
–
(3)
(3)
–
–
–
427
604
–
–
–
48
48
5
–
5
56
(51)
–
662
Total
Derivatives
Total
€ m
1,113
2
(7)
(74)
48
(26)
5
(3)
2
56
(51)
–
1,089
€ m
161
–
–
(30)
–
(30)
–
(9)
(9)
–
–
(3)
119
€ m
161
–
–
(30)
–
(30)
–
(9)
(9)
–
–
(3)
119
(1)Transfers between levels of the fair value hierarchy are recognised at the end of the reporting period during which the change occurred.
Net transfers out of Level 3 are a function of the observability of inputs into instrument valuations.
Transfers into level 3 arose as the measurement of fair value for a particular agreement relied mainly on unobservable data.
AIB Group plc Annual Financial Report 2017 347
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A10 Notes 31-50
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Page 348
Notes to the consolidated financial statements
50 Fair value of financial instruments (continued)
Reconciliation of balances in Level 3 of the fair value hierarchy
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
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
(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.
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 2017 and 2016:
Net trading income – gains
2017
€ m
46
46
2016
€ m
136
136
348
AIB Group plc Annual Financial Report 2017
A10 Notes 31-50
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Page 349
50 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 2017 and 2016 in
measuring financial instruments categorised as Level 3 in the fair value hierarchy:
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Fair Value
31 December 31 December
Financial
instrument
UncollateralisedAsset
customer
Liability
derivatives
2017
€ m
427
119
2016 Valuation
€ m technique
509 CVA
161
Range of estimates
Significant
unobservable
input
LGD
PD
31 December
2017
41% – 65%
(Base 53%)
0.6% – 1.3%
31 December
2016
47% – 67%
(Base 54%)
0.8% – 1.6%
FVA
Funding spreads
(0.3%) to 0.3%
(0.6%) to 0.5%
(Base 0.9% 1 year PD)
(Base 1.2% 1 year PD)
NAMA
subordinated
bonds
Asset
466
466 Discounted
cash flows
Discount rate
Maturity date
2.79% – 6.0%
(Base 3.98%)
No longer
considered a
7.21% – 9%
(Base 7.21%)
March 2019 –
March 2020
significant
(Base March 2020)
unobservable
input
Visa Inc.
Series B
Preferred
Stock
Asset
92
70 Quoted market Final conversion
0% – 90%
0% –100%
price (to which rate
a discount has
been applied)
Uncollaterised customer derivatives
The fair value measurement sensitivity to unobservable inputs at 31 December 2017 ranges from (i) negative € 39 million to positive
€ 23 million for CVA (31 December 2016: negative € 37 million to positive € 23 million) and (ii) negative € 7 million to positive € 6 million
for FVA (31 December 2016: negative € 12 million to positive € 15 million).
A number of other derivatives are subject to valuation methodologies which use unobservable inputs. As the variability of the valuation is
not greater than € 1 million in any individual case or collectively, the detail is not disclosed here.
Nama subordinated bonds
The fair value measurement sensitivity to unobservable discount rate ranges from negative € 18 million to positive € 12 million at
31 December 2017 (31 December 2016: negative € 22 million to positive € 7 million).
Visa Inc. Series B Preferred Stock
In June 2016, the Group received Series B Preferred Stock in Visa Inc. with a fair value of € 65 million as part consideration for its holding
of shares in Visa Europe. The 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.
– Valuation technique: Quoted market price of Visa Inc. Class A Common Stock to which a discount has been applied for the illquidity
and the conversion rate variability of the preferred stock of Visa Inc. i.e. a 45% haircut (2016: 50%). This was converted at the year
end exchange rate.
– Unobservable input: Final conversion rate of Visa Inc. Series B Preferred Stock into Visa Inc. Class A Common Stock.
– Range of estimates: Estimates range from (a) no discount for conversion rate variability with a discount for illiquidity only; to
(b) 100% discount for conversion rate variability.
AIB Group plc Annual Financial Report 2017 349
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Page 350
Notes to the consolidated financial statements
50 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 e.g. a higher/lower discount relating to conversion rate variability in the
valuation methodology at 31 December 2017 and 2016:
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
2017
Effect on income
statement
Favourable Unfavourable
€ m
€ m
Effect on other
comprehensive income
Favourable Unfavourable
€ m
€ m
28
–
28
1
1
(44)
(59)
(103)
(2)
(2)
–
54
54
–
–
–
(49)
(49)
–
–
2016
Level 3
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)
–
–
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.
350
AIB Group plc Annual Financial Report 2017
A11 Notes 51-60
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Page 351
51 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 loans and receivables
Dividends received from equity securities
Dividends/distribution received from associated undertakings
and joint venture
Associated undertakings and joint venture
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 (income)/expense
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 restructured loans
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
2017
€ m
–
(32)
(28)
(9)
(19)
(113)
–
(8)
95
(1)
141
31
–
(66)
11
(4)
213
(72)
(17)
(137)
46
31
(64)
28
(36)
(5)
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)
(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.
AIB Group plc Annual Financial Report 2017 351
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a
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A11 Notes 51-60
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Page 352
Notes to the consolidated financial statements
51 Statement of cash flows (continued)
Change in operating assets(1)
Change in items in course of collection
Change in trading portfolio financial assets
Change in derivative financial instruments
Change in loans and receivables to banks
Change in loans and receivables to customers
Change in NAMA senior bonds
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
Change in notes in circulation
2017
€ m
28
(32)
43
114
10
1,805
(5)
1,963
2017
€ m
(4,029)
1,697
30
(2,274)
(84)
(33)
2016
€ m
7
–
125
769
1,286
3,838
482
6,507
2016
€ m
(6,115)
1,884
(86)
(118)
(94)
(59)
(4,693)
(4,588)
(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(1)
2017
€ m
6,364
694
7,058
2016
€ m
6,519
645
7,164
(1)Included in ‘Loans and receivables to banks’ total of € 1,313 million (2016: € 1,399 million) set out in note 23.
The Group is required by law to maintain balances with the Bank of England. At 31 December 2017, these amounted to € 536 million
(2016: € 566 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.
352
AIB Group plc Annual Financial Report 2017
A11 Notes 51-60
AR 2017 pages 327-346:A11
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Page 353
52 Related party transactions
Related parties in the Group include the parent company, AIB Group plc, subsidiary undertakings, 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. The immediate holding company and controlling party is AIB Group plc with its
registered office at Bankcentre, Ballsbridge, Dublin 4. AIB Group plc became the group holding company on 8 December 2017 following
a Scheme of Arrangement approved by shareholders at an Extraordinary General Meeting of Allied Irish Banks, p.l.c. held on
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3 November 2017 (note 3).
(a) Transactions with Group and subsidiary undertakings
(i) Transactions with AIB Group plc
Under the Scheme of Arrangement noted above, 2,714,381,237 Allied Irish Banks, p.l.c. ordinary shares of nominal value € 0.625 per
share were cancelled on 8 December 2017 and AIB Group plc issued 2,714,381,237 ordinary shares of nominal value € 2.47 per share
to the shareholders of Allied Irish Banks, p.l.c. for every Allied Irish Banks, p.l.c. share cancelled. On the same date, Allied Irish Banks,
p.l.c. issued 2,714,381,237 ordinary shares of nominal value € 0.625 per share to AIB Group plc. Allied Irish Banks, p.l.c. is now a
wholly owned subsidiary of AIB Group plc.
There were no other transactions between AIB Group plc and Allied Irish Banks, p.l.c. and its subsidiary and associated undertakings
during 2017.
Initial Subscribers Deed of Release and Indemnity
AIB Group plc, Allied Irish Banks, p.l.c. and MFSD Holding Limited and MFSD Nominees Limited (the latter two entities being the “AIB
Group plc Initial Subscribers”) entered into a deed of release and indemnity dated 21 September 2017 whereby, amongst other things
(a) AIB Group plc agreed to effect the redemption at par and cancellation of the AIB Group plc Subscriber Shares within 12 months of
the date of the deed; (b) AIB Group plc and the Initial AIB Group plc Subscribers agreed that the proceeds payable to the Initial AIB
Group plc Subscribers on redemption of certain of the AIB Group plc Subscriber Shares will be set-off against the amounts owing by
the Initial AIB Group plc Subscribers in connection with their original subscription for the AIB Group plc Subscriber Shares by way of
undertaking to pay, which shall represent satisfaction in full of their respective obligations in connection with such redemption and
subscription; and (c) AIB Group plc and Allied Irish Banks, p.l.c. have agreed to release the AIB Group plc Initial Subscribers from,
and indemnify (on a joint and several basis) the AIB Group plc Initial Subscribers against, any claims or liability arising out of, or in
connection with, any action taken or omission made by an AIB Group plc Initial Subscriber in its capacity as a shareholder of AIB
Group plc or the holding by the AIB Group plc Initial Subscriber of shares in AIB Group plc or any action taken or omission made on
the part of any AIB Group plc Initial Subscriber connected to the Scheme (note 41 for further details on Subscriber Shares).
(ii) Transactions between subsidiary undertakings
Banking transactions between Group subsidiaries are entered into in the normal course of business. These include loans, deposits,
provisions of derivative contracts, foreign currency contracts and the provision of guarantees on an ‘arm’s length basis’. In 2017, a
review was completed of pricing arrangements between Allied Irish Banks, p.l.c. and certain Irish subsidiaries. Arising from this review,
new pricing agreements were signed and implemented during 2017. The new agreements reflect OECD guidelines on transfer pricing
which are the internationally accepted principles in this area, and take account of the functions, risks and assets involved. In accordance
with IFRS 10, ‘Consolidated Financial Statements’, transactions between subsidiaries have been eliminated on consolidation.
(b) 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 Allied Irish Banks, p.l.c. 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 48).
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 48).
AIB Group plc Annual Financial Report 2017 353
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Notes to the consolidated financial statements
52 Related party transactions (continued)
(c) IAS 24 Related Party Disclosures
The following disclosures are made in accordance with the provisions of IAS 24 Related Party Disclosures. Under IAS 24, Key
Management Personnel (“KMP”) are defined as comprising Executive and Non-Executive Directors together with Senior Executive
Officers, namely, the members of the Leadership Team (see pages 28 to 31). As at 31 December 2017, the Group had 22 KMP
(2016: 21 KMP).
(i) Compensation of Key Management Personnel
Details of compensation paid to KMP are provided below. The figures shown include the figures separately reported in respect of
Directors’ remuneration on pages 220 to 222.
Short-term compensation(1)
Post-employment benefits(2)
Termination benefits(3)
Total
2017
€ m
6.7
0.8
–
7.5
2016
€ m
6.7
0.8
0.3
7.8
(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 Group.
(2)Comprises payments to defined benefit or defined contribution pension schemes, in accordance with actuarial advice, to provide post-retirement
pensions. The Group’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 the Group during 2016.
(ii) Transactions with Key Management Personnel
Loans to KMP and their close family members 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
Directors and Senior Executive Officers are made 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 aggregrate amounts outstanding, in respest of all loans, quasi loans and credit transactions between the Group and KMP, as
defined above, together with members of their close families and entities controlled by them are shown in the following table:
Loans outstanding
At 1 January
Loans issued during the year
Loan repayments during the year/change of KMP/other
At 31 December
2017
€ m
5.23
0.13
(0.67)
4.69
2016
€ m
4.68
1.90
(1.35)
5.23
Total commitments outstanding refers to the total of any undrawn amounts on credit cards and/or overdraft facilities provided to KMP.
Total commitments outstanding as at 31 December 2017 were € 0.28 million (2016: € 0.27 million).
Deposit and other credit balances held by KMP and their close family members as at 31 December 2017 amounted to € 6.89 million
(2016: € 6.23 million).
354
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52 Related party transactions (continued)
(d) Companies Act 2014 disclosures
(i) Loans to Directors
The following information is presented in accordance with the Companies Act 2014. For the purposes of the Companies Act disclosures,
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Director means the Board of Directors and any past Directors who are Directors during the relevant period.
Two Directors, namely Garreth O’Brien and David Joseph Lydon, were appointed on incorporation of the company. These Directors
subsequently resigned on 21 September 2017 when the current AIB Directors were appointed. Relevant information as required by the
Companies Act 2014 in relation to these two Directors is provided in Note f ‘Related party transactions’ in AIB Group plc company
financial statements on page 376.
Excluding the above two Directors, there were 12 Directors in office during the year, 9 of whom availed of credit facilities (2016: 8). 5 of
the 9 Directors who availed of credit facilities had balances outstanding at 31 December 2017 (2016: 6).
Details of transactions with Directors for the year ended 31 December 2017 are as follows:
Balance at
31 December
2016
€ 000
Amounts
advanced
during
2017
Amounts
repaid
during
2017
Balance at
31 December
2017
€ 000
Mark Bourke:
Loans
Overdraft/credit card*
Total
Interest charged during the year
Maximum debit balance during the year**
Simon Ball:
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**
Dr Michael Somers:
Loans
Overdraft/credit card*
Total
Interest charged during the year
Maximum debit balance during the year**
515
–
515
–
–
–
–
2
2
–
2
2
–
2
2
–
–
–
–
–
–
–
–
–
–
2
2
–
–
–
49
–
49
–
–
–
–
–
–
–
–
–
–
–
–
466
–
466
5
515
–
–
–
–
1
–
–
–
–
2
–
3
3
–
10
–
2
2
–
2
AIB Group plc Annual Financial Report 2017 355
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Notes to the consolidated financial statements
52 Related party transactions (continued)
(d) Companies Act 2014 disclosures
(i) Loans to Directors (continued)
Catherine Woods:
Loans
Overdraft/credit card*
Total
Interest charged during the year
Maximum debit balance during the year**
Balance at
31 December
2016
€ 000
Amounts
advanced
during
2017
Amounts
repaid
during
2017
Balance at
31 December
2017
€ 000
59
–
59
–
–
–
10
–
10
50
–
50
1
59
Richard Pym had a credit card facility which was not used during the year. Helen Normoyle and Jim O’Hara also held overdraft facilities
which were not used during the year. Simon Ball had a credit card facility which held an opening and closing balance of under € 500 at
the beginning and end of the reporting period. However, the maximum debit balance exceeded €1,000 during the year, and has been
reported in the preceding table.
Bernard Byrne, Peter Hagan and Brendan McDonagh had no facilities with the Group during 2017.
As at 31 December 2017, guarantees entered into by Catherine Woods in favour of the Group amounted to € 0.024 million. No amounts
were paid or liability incurred in fulfilling the guarantee.
No impairment charges or provisions have been recognised during 2017 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.
Details of transactions with Directors for the year ended 31 December 2016 are as follows:
Balance at
31 December
2015
€ 000
Amounts
advanced
during
2016
Amounts
repaid
during
2016
Balance at
31 December
2016
€ 000
563
–
563
–
–
–
–
–
–
–
–
–
48
–
48
–
–
–
515
–
515
6
563
–
2
2
–
4
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**
356
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Page 357
52 Related party transactions (continued)
(d) Companies Act 2014 disclosures
(i) Loans to Directors (continued)
Balance at
31 December
2015
€ 000
Amounts
advanced
during
2016
Amounts
repaid
during
2016
Balance at
31 December
2016
€ 000
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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**
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**
–
3
3
–
–
–
–
–
–
–
3
3
69
–
69
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
10
–
10
–
2
2
–
12
–
–
–
–
1
–
–
–
–
1
–
2
2
–
3
59
–
59
1
69
No impairment charges or provisions were recognised during the year in respect of any of the above loans or facilities and all interest
that fell due on all of these loans or facilities was 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.
AIB Group plc Annual Financial Report 2017 357
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Notes to the consolidated financial statements
52 Related party transactions (continued)
(d) Companies Act 2014 disclosures
(ii) Connected persons
The aggregate of loans to connected persons of Directors in office at 31 December 2017, as defined in Section 220 of the Companies
Act 2014, are as follows (aggregate of 26 persons; 2016: 26 persons):
Loans
Overdraft/credit card*
Total
Interest charged during the year
Maximum debit balance during the year**
Balance at
31 December
2017
€ 000
Balance at
31 December
2016
€ 000
1,755
70
1,825
2,050
79
2,129
58
2,361
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.
(iii) Aggregate balance of loans and guarantees held by Directors and their connected persons
The aggregate balance of loans and guarantees held by Directors and their connected persons as at 31 December 2017 represents less
than 0.02% of the net assets of the Group (2016: 0.02%).
(e) 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 during 2010 and 2011, AIB is
under the control of the Irish Government. However, following the Initial Public Offering (“IPO”) in June 2017, the Government’s share-
holding reduced from 99.9% to 71.12% of the issued ordinary share capital (see below).
AIB enters into normal banking transactions with the Irish Government and many of its controlled bodies on an arm’s length basis. In
addition, other transactions include the payment of taxes, pay related social insurance, local authority rates, and the payment of
regulatory fees, as appropriate.
Following the crisis in the Irish banking sector and the stabilisation measures adopted since 2008, the involvement of the Irish
Government in AIB and in other Irish banks has been and continues to be considerable. This involvement is outlined below.
Rights and powers of the Irish Government and the Central Bank of Ireland
The Irish Minister for Finance (‘the Minister’) and the Central Bank of Ireland (“the Central Bank”) have significant rights and powers over
the operations of AIB (and other financial institutions) arising from the various stabilisation measures. These rights and powers
relate to, inter alia:
– The acquisition of shares in other institutions;
– Maintenance of solvency ratios and compliance with any liquidity and capital ratios that the Central Bank, following consultation
with the Minister, may direct;
– The appointment of non-executive directors and board changes;
– The appointment of persons to attend meetings of various committees;
– Restructuring of executive management responsibilities, strengthening of management capacity and improvement of governance;
– Declaration and payment of dividends;
– Restrictions on various types of remuneration;
– Buy-backs or redemptions by the Group of its shares;
– The manner in which the Group extends credit to certain customer groups; and
– Conditions regulating the commercial conduct of AIB, having regard to capital ratios, market share and the Group’s balance sheet
growth.
In addition, various other initiatives such as strategies/codes of conduct for dealing with mortgage and other consumer/business loan
arrears are set out in the Risk management section of this report.
358
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52 Related party transactions (continued)
(e) Summary of relationship with the Irish Government
The relationship of the Irish Government with AIB is outlined under the following headings:
– Capital investments;
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– Guarantee schemes;
– NAMA;
– Funding support;
– Relationship Framework; and
– AIB Restructuring Plan
The significant changes since 31 December 2016 that affected AIB’s relationship with the Irish Government are: Equity holdings;
Issue of warrants to the Minister for Finance; and Relationship Framework.
– Capital investments
In the years since 2008, the Irish Government has implemented a number of recapitalisation measures to support the Irish banking
system including AIB Group. Certain of this capital invested in AIB Group has since been repaid, restructured or reorganised. The
relevant capital transactions and/or capital investments outstanding at 31 December 2017 and 2016 are as follows:
Equity holdings
At 31 December 2016, the Irish Government, through the Ireland Strategic Investment Fund (“ISIF”), held 2,710,821,149 ordinary
shares in AIB with a nominal value of € 0.625 per share (99.9% of the total issued ordinary share capital). Following the Initial
Public Offering (“IPO”) to certain institutional and retail investors in June 2017, the Irish Government sold 780,384,606 of these
ordinary shares (28.75% of the issued ordinary share capital). The Irish Government now holds 1,930,436,543 ordinary shares in
AIB Group plc (71.12% of total).
Shares in AIB Group plc are now traded on the Irish and London Stock Exchanges which followed the Scheme of Arrangement
becoming effective (note 3).
Under the 2011 Placing Agreement between AIB, the Minister, the NPRFC and the NTMA, AIB agreed to effect and/or facilitate, at
its own expense, the placing or offer to the public or the admission to trading of the ordinary shares owned by the Minister. In this
regard, AIB paid € 12 million in the financial year to 31 December 2017 on behalf of the Minister in respect of commissions
payable to underwriters and intermediaries and € 4 million for transaction advisory fees and expenses incurred by the Minister and
the underwriters in connection with the IPO.
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. 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 (note 40).
Capital contributions
On 28 July 2011, capital contributions totalling € 6.054 billion were made by the Irish State to AIB for nil consideration.
AIB Group plc Annual Financial Report 2017 359
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Notes to the consolidated financial statements
52 Related party transactions (continued)
(e) Summary of relationship with the Irish Government
Issue of warrants to the Minister for Finance
As part of the 2015 Capital Reorganisation, AIB entered into a Warrant Agreement with the Minister and granted the Minister the
right to receive warrants to subscribe for additional ordinary shares.
On 26 April 2017, the Minister exercised his rights under the Warrant Agreement by issuing a Warrant Notice to AIB requiring it to
issue warrants to the Minister to subscribe for such number of ordinary shares representing 9.99% in aggregate of the issued share
capital of the company at admission of the ordinary shares to the Official Lists and to trading in accordance with the Listing Rules on
the main markets for listed securities of the Irish Stock Exchange and the London Stock Exchange.
Following the admission to listing on the Irish Stock Exchange and the London Stock Exchange, AIB issued warrants to the Minister
on 4 July 2017 to subscribe for 271,166,685 ordinary shares of AIB representing 9.99% of the issued share capital. The exercise
price for the warrants is 200% of the Offer Price of € 4.40 per ordinary share, the Offer Price being the price in euro per ordinary
share which was payable under the IPO. This price may be adjusted in accordance with the terms of the Warrant Instrument and the
warrants will be capable of exercise by the holder of the warrants during the period commencing on 27 June 2018 and ending on
27 June 2027.
In accordance with the terms of the Warrant Agreement, no cash consideration was payable by the Minister to AIB in respect of the
issue of the warrants.
Under the corporate restructure outlined in note 3, this warrant instrument was replaced by a new warrant instrument (the “AIB
Group plc Warrant Instrument”) pursuant to which the Minister for Finance was issued warrants to subscribe for AIB Group plc
shares on the same terms and conditions as the Allied Irish Banks, p.l.c. warrants. The new warrant agreement with AIB Group plc
became effective on 8 December 2017, i.e. upon the Scheme of Arrangement becoming effective (note 3). Allied Irish Banks, p.l.c.
warrants were cancelled on this date.
– 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
2017 amounted to € 143 million (31 December 2016: € 1.1 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 years to the 31 December 2017 and
31 December 2016, are set out in note 6. 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 10, 26 and 27. The NAMA senior bonds were fully repaid during 2017. In addition, the Group disposed
of € 34 million in nominal value of the NAMA subordinated bonds during 2017.
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 46.
360
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52 Related party transactions (continued)
(e) Summary of relationship with the Irish Government
– NAMA (continued)
Investment in National Asset Management Agency Investment d.a.c. (“NAMAIL”)
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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 2017: € 11.8 million; 31 December 2016: € 11 million), with the
remainder invested on behalf of clients.
– Funding support
The Group has availed of Targeted Long Term Refinancing Operation II (“TLTRO II”) funding from the ECB, through the Central
Bank. At 31 December 2017, the amounts outstanding, totalling € 1.9 billion (31 December 2016: € 1.9 billion for TLTRO) are
included in ‘Deposits by central banks and banks’ in the table below. See note 34 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.
– 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. The Relationship Framework was amended and restated on 12 June 2017. Furthermore, the AIB Group plc Relationship
Framework was put in place on 8 December 2017 in subsitution for the Relationship Framework dated 12 June 2017.Under the
relationship frameworks, 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 and AIB’s management team.
– 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.
AIB 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 were aligned to AIB’s
operational plans and were supportive of AIB’s return to viability.
The plan covered the period from 2014 to 2017.
AIB Group plc Annual Financial Report 2017 361
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Notes to the consolidated financial statements
52 Related party transactions (continued)
(e) Summary of relationship with the Irish Government
Balances held with the Irish Government and related entities
The following table outlines the balances held at 31 December 2017 and 2016 with Irish Government entities(1) together with the
highest balances held at any point during the year.
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/
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
Balance
2017
Highest(2)
balance held
€ m
€ m
Balance
2016
Highest(2)
balance held
€ m
€ m
1,162
19
–
–
7
–
7,487
8,675
3,452
1,529
3,618
63
10
32
9
1,799
8,936
–
–
21
19
1,799
8,936
12,304
–
7
965
82
5,619
9,337
Balance
2017
Highest(2)
balance held
€ m
€ m
Balance
2016
Highest(2)
balance held
€ m
€ m
1,900
499
19
–
–
2,418
2,346
1,172
48
14
–
1,912
806
–
18
–
2,736
2,950
1,020
86
55
1,600
a
b
c
d
e
f
g
(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.
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 2017 was € 549 million (2016: € 529 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
and were fully repaid during 2017.
d Financial investments available for sale/held to maturity comprise € 7,021 million (2016: € 8,470 million) in Irish Government
securities held in the normal course of business and NAMA subordinated bonds which have a fair value at 31 December 2017 of
€ 466 million (2016: € 466 million) detailed above under ‘NAMA’.
e This relates to funding received from the ECB through the Central Bank which is detailed under ‘Funding Support’ above.
f
Includes € 360 million (2016: € 325 million) borrowed from the Strategic Banking Corporation of Ireland (“SBCI”), the ordinary share
capital of which is owned by the Minister for Finance.
g Redeemed on 28 July 2016 (note 40).
All other balances, both assets and liabilities are carried out in the ordinary course of banking business on normal terms and
conditions.
362
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52 Related party transactions (continued)
(e) Summary of relationship with the Irish Government
Local government(1)
During 2017 and 2016, 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.
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During 2017 and 2016, 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.
The following balances were outstanding in total to these financial institutions at 31 December 2017 and 2016:
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)
2017
€ m
1
2
423
1
1
–
2016
€ m
1
3
471
89
4
–
(1)The highest balance in loans and receivables to banks amounted to € 17 million in respect of funds placed during the year (2016: € 501 million).
(2)The highest balance in deposits by central banks and banks to these financial institutions amounted to € 302 million in respect of funds received during the
year (2016: € 369 million).
(3)There were no customer deposits held with these financial institutions during 2017. The highest balance in customer deposits held with these financial
institutions in 2016 amounted to € 17 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.
AIB Group plc Annual Financial Report 2017 363
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Notes to the consolidated financial statements
52 Related party transactions (continued)
(e) Summary of relationship with the Irish Government
Investment in Greencoat Renewables plc
The Group and ISIF jointly invested in Greencoat Renewables plc (“Greencoat”) during 2017 to fund the purchase of windfarms in
Ireland. The Group and ISIF each invested € 76 million in loan notes (note 29) which were accounted for as a joint venture by the
Group. Following the initial public offering by Greencoat in July 2017, the Group was repaid the loan notes at their carrying value
together with accrued interest amounting to € 2 million which was accounted for as a distribution. In addition, the Group received
€ 0.6 million in fee income from Greencoat. The Group then invested € 15 million in the ordinary share capital of the company (5.56%
of the total) which is accounted for as an available for sale equity.
Irish bank levy
The bank levy, introduced on certain financial institutions in 2014, was extended to 2021 in Finance Act 2016. The levy is calculated
based on each financial institution’s Deposit Interest Retention Tax (“DIRT”) payment in a base year. This base year changes every two
years with 2015 being the base year for 2017 and 2018. The current levy rate is 59% of the DIRT payment for 2015 and is chargeable
on this basis for each of the years 2017 and 2018 inclusive. The rate of the levy will be reviewed by Revenue with every change in the
base year in order to maintain the annual yield at approximately € 150 million. The annual levy paid by the Group for 2017 and reflected
in administrative expenses (Note 12) in the income statement amounted to € 49 million (2016: € 60 million).
(f) Indemnities
The Group 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.
364
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53 Commitments
Capital expenditure
Estimated outstanding commitments for capital expenditure
not provided for in the financial statements
Capital expenditure authorised but not yet contracted for
2017
€ m
5
50
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
2017
€ m
69
72
71
68
62
331
673
2016
€ m
9
38
2016
€ m
62
58
55
53
51
268
547
The Group holds a number of significant operating lease arrangements in respect of branches and the headquarter locations. The
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 18 years. The average lease length outstanding
until a break clause in the lease arrangements is approximately 7 years with the final contractual remaining terms ranging from 1 year to
21 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
€ 6 million (2016: € 2 million).
Operating lease payments recognised as an expense for the year were € 68 million (2016: € 65 million). Sublease income amounted
to Nil (2016 : Nil).
During 2017, the Group entered into two lease agreements for which gross rentals payable over the minimum lease terms of 12 years
and 15 years respectively, amounted to € 151 million.
Included in the € 673 million in the table above are minimum lease payments amounting to € 114 million for which an onerous lease
provision has been created.
AIB Group plc Annual Financial Report 2017 365
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Notes to the consolidated financial statements
54 Employees
The following table shows the geographical analysis of average employees for 2017 and 2016:
Average number of staff (Full time equivalents)
Republic of Ireland
United Kingdom
United States of America
Total
2017
8,840
1,244
53
2016
8,797
1,376
53
10,137
10,226
A new operating structure was implemented in 2017, with staff numbers reported under the new segments. Prior period numbers have
not been restated under the new segment structure.
RCB
WIB
AIB UK
Group(1)
Total
2017
5,403
278
941
3,515
10,137
AIB Ireland
AIB UK
Group & International(2)
2016
5,436
1,064
3,726
10,226
(1)Group includes wholesale treasury activities, central control and support functions. The support functions include business and customer services,
marketing, risk, compliance, audit, finance, legal, human resources and corporate affairs.
(2)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, heman resources and corporate affairs).
The average number of employees for 2017 and 2016 set out above excludes employees on career breaks and other unpaid long
term leaves.
Actual full time equivalent numbers at 31 December 2017 were 9,720 (2016: 10,376).
366
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55 Regulatory compliance
During the years ended 31 December 2017 and 2016, the Group, and Allied Irish Banks, p.l.c. and its regulated subsidiaries complied
with their externally imposed capital ratios.
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56 Financial and other information
Operating ratios
Operating expenses/operating income
Other income/operating income
Net interest margin(1)
Performance measures
Return on average total assets
Return on average ordinary shareholders’ equity(2)
2017
%
61.1
27.5
2.58
1.2
8.4
2016
%
53.8
31.0
2.23
1.4
11.1
(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 (2016: € 494 million).
Rates of exchange
€ /$*
Closing
Average
€ /£*
Closing
Average
2017
2016
1.1993
1.1299
0.8872
0.8767
1.0541
1.1069
0.8562
0.8196
*Throughout this report, US dollar is denoted by $ and Pound sterling is denoted by £.
Currency information
Euro
Other
Assets
2016
€ m
76,885
18,737
95,622
2017
€ m
71,801
18,261
90,062
Liabilities and equity
2016
€ m
2017
€ m
71,543
18,519
90,062
77,392
18,230
95,622
AIB Group plc Annual Financial Report 2017 367
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Notes to the consolidated financial statements
57 Average balance sheets and interest rates(1)
The following table shows interest rates prevailing at 31 December 2017 and 2016 together with average prevailing interest rates, gross
yields, spreads and margins for the years ended 31 December 2017 and 2016:
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)
Interest rates at
31 December
2017
%
0.13
(0.37)
(0.33)
0.50
0.50
0.52
–
2016
%
0.13
(0.37)
(0.32)
0.25
0.26
0.37
0.00
Average interest rates for
years ended 31 December
2016
%
2017
%
0.13
0.16
(0.37)
(0.33)
(0.34)
(0.26)
0.29
0.30
0.36
–
2.92
2.32
2.58
0.40
0.41
0.50
0.01
2.87
1.87
2.23
(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.
368
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57 Average balance sheets and interest rates (continued)
In the income statement, the Group presents interest resulting from negative effective interest rates on financial assets as interest
expense. Similarly, interest resulting from negative effective interest rates on financial liabilities is presented as interest income.
In the table below, negative interest expense on liabilities amounting to € 13 million (2016: € 21 million) is offset against interest
expense and negative interest income on assets amounting to € 4 million (2016: Nil) is offset against interest income.
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The following table shows the average balances and interest rates of interest earning assets and interest bearing liabilities for the years
ended 31 December 2017 and 2016.
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
Trading portfolio financial liabilities less assets
Deposits by central banks and banks
Customers accounts
Other debt issued
Subordinated liabilities
Average interest earning liabilities
Non-interest earning liabilities
Total average liabilities
Equity
Total average liabilities and equity
Average
balance(1)
€ m
–
6,396
60,619
531
13,635
3,273
84,454
7,165
91,619
8
5,071
36,608
5,659
792
48,138
30,141
78,279
13,340
91,619
Interest
Year ended
31 December 2017
Average
rate
%
€ m
–
12
2,166
2
154
130
2,464
2,464
–
(4)
228
33
31
288
288
288
–
0.2
3.6
0.4
1.1
4.0
2.9
2.7
–
(0.1)
0.6
0.6
3.9
0.6
0.4
0.3
Average
balance
€ m
–
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
Interest
Year ended
31 December 2016
Average
rate
%
€ m
–
18
2,248
11
182
131
2,590
2,590
–
(13)
341
50
199
577
577
577
–
0.3
3.6
0.3
1.2
3.8
2.9
2.6
–
(0.1)
0.9
0.7
12.2
1.0
0.7
0.6
(1)Average interest earning assets are based on daily balances for all categories with the exception of loans and receivables to banks, which are based on a
combination of daily / monthly balances. Average interest earning liabilities are based on daily balances for customer accounts while other categories are
based on a combination of daily / monthly balances. The balance sheets included in the averages were: at 31 December 2017, 2016 and 2015 - as
audited; and at 31 March 2017, 30 June 2016 and 30 June 2017 - as reviewed by the independent auditor.
AIB Group plc Annual Financial Report 2017 369
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Notes to the consolidated financial statements
58 Dividends
On 9 May 2017, following approval by the shareholders at the Annual General Meeting held on 27 April 2017, Allied Irish Banks, p.l.c.
paid a final dividend of € 0.0921 per ordinary share amounting in total to € 250 million. The financial statements for the year ended
31 December 2017 reflect this in shareholders’ equity as an appropriation of distributable reserves.
The Board is recommending that a final dividend of € 0.12 per ordinary share amounting in total to € 326 million be paid on 4 May 2018.
The financial statements for the financial year ended 31 December 2017 do not reflect this which will be accounted for in shareholders’
equity as an appropriation of distributable reserves in 2018.
No dividends were paid on ordinary shares during the financial year ended 31 December 2016.
59 Non-adjusting events after the reporting period
No significant non-adjusting events have taken place since 31 December 2017.
60 Approval of financial statements
The financial statements were approved by the Board of Directors on 28 February 2018.
370
AIB Group plc Annual Financial Report 2017
AIB Group plc company statement of financial position
as at 31 December 2017
Assets
Investment in subsidiary undertaking
Total assets
Equity
Share capital
Merger reserve
Revenue reserves
Total equity
Richard Pym
Chairman
28 February 2018
Notes
b
c
d
e
2017
€ m
12,940
12,940
1,697
6,235
5,008
12,940
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Bernard Byrne
Chief Executive Officer
Mark Bourke
Chief Financial Officer
Sarah McLaughlin
Group Company Secretary
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AIB Group plc Annual Financial Report 2017 371
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AIB Group plc company statement of cash flows
for the financial period from incorporation 8 December 2016 to 31 December 2017
Cash flows from operating activities
Profit before taxation for the period
Net cash inflow from operating activities
Cash flows from investing activities
Net cash outflow from investing activities
Cash flows from financing activities
Net cash inflow from financing activities
Change in cash and cash equivalents
Closing cash and cash equivalents
2017
€ m
–
–
–
–
–
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AIB Group plc Annual Financial Report 2017
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AIB Group plc company statement of changes in equity
for the financial period from incorporation 8 December 2016 to 31 December 2017
At 8 December 2016
Transactions with owners, recorded directly in equity
Contributions by and distributions to owners
Ordinary shares issued to satisfy requirements for a
public limited company(1)
Impact of corporate restructuring
Investment in Allied Irish Banks, p.l.c.(2) (note b)
Reduction in company capital (note e)
Total contributions by and distribution to owners
Total comprehensive income for the period
Profit/(loss)
Other comprehensive income
Total comprehensive income for the period
Share
capital
€ m
Merger
reserve
€ m
Revenue
reserves
€ m
Total
€ m
–
–
–
–
6,705
(5,008)
1,697
6,235
–
6,235
–
–
–
–
–
–
–
–
–
–
–
5,008
5,008
–
–
–
–
–
–
12,940
–
12,940
–
–
–
–
At 31 December 2017
1,697
6,235
5,008
12,940
(1)Issue of 39,998 ordinary shares of € 0.625 each.
(2)Issue of shares in return for the investment in Allied Irish Banks, p.l.c. on 8 December 2017. The investment of € 12,940 million represents the net book
value of Allied Irish Banks, p.l.c. as at 8 December 2017.
AIB Group plc Annual Financial Report 2017 373
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Notes to AIB Group plc company financial statements
Background
AIB Group plc is a company domiciled in Ireland. AIB Group plc's registered office address is Bankcentre, Ballsbridge, Dublin 4, Ireland.
AIB Group plc was incorporated as RPML 1966 Holdings plc on 8 December 2016. On 5 September 2017, RPML 1966 Holdings plc
changed its name to AIB Group plc. Further details on AlB Group plc's 'Corporate restructuring' are set out in note 3 to the
consolidated financial statements.
a Accounting policies
Where applicable, the accounting policies adopted by AlB Group plc ('the parent company' or 'the Company') are the same as those of
the Group as set out in note 1 to the consolidated financial statements on pages 247 to 274.
The parent company financial statements and related notes set out on pages 371 to 376 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 period from incorporation on 8 December 2016 to 31 December 2017. They also comply with those parts of the Companies
Act 2014 applicable to companies reporting under lFRS 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 275 to 278.
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. AIB Group plc did not trade during the period from incorporation,
being 8 December 2016 to 31 December 2017, and received no income and incurred no expenditure. Consequently, for the period from
incorporation on 8 December 2016 to 31 December 2017 AlB Group plc made neither a profit nor loss.
374
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b Investment in subsidiary undertaking
At 8 December 2016
Additions
At 31 December 2017
2017
€ m
–
12,940
12,940
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On 8 December 2017, AlB Group plc acquired the entire ordinary share capital of Allied Irish Banks, p.l.c. other than a single share
already owned by AIB Group plc. Under a Scheme of Arrangement, approved by the shareholders of Allied Irish Banks, p.l.c. at an
Extraordinary General Meeting held on 3 November and sanctioned by the High Court on 8 December 2017, 2,714,381,237 Allied Irish
Banks, p.l.c. ordinary shares of nominal value € 0.625 per share were cancelled and AIB Group plc issued 2,714,381,237 ordinary shares
of nominal value € 2.47 per share to the shareholders of Allied Irish Banks, p.l.c. for every Allied Irish Banks, p.l.c. share cancelled. On
the same date, Allied Irish Banks, p.l.c. issued 2,714,381,237 ordinary shares of nominal value € 0.625 per share to AIB Group plc.
The ordinary shares in Allied Irish Banks, p.l.c. that were acquired by AIB Group plc are reflected in AIB Group plc company's statement
of financial position at the book value of those shares at the date of acquisition (€ 12,940 million). This book value was based on Allied
Irish Banks, p.l.c. company's statement of financial position at the date of acquisition on 8 December 2017, i.e. the net asset value, having
satisfied the conditions of IAS 27, paragraph 13.
Allied Irish Banks, p.l.c. is now a 100% subsidiary of AIB Group plc. Its issued share capital is denominated in ordinary shares.
Further details on the ‘Corporate restructuring’ are set out in note 3 to the consolidated financial statements.
Allied Irish Banks, p.l.c. is a financial services company incorporated and registered in Ireland. It is the parent company of a number of
subsidiaries, both credit institutions and others, all of which are 100% owned. It operates predominantly in Ireland, providing a
comprehensive range of services to retail customers, as well as business and corporate customers. Allied Irish Banks, p.l.c. and its
subsidiaries offer a full suite of products for retail customers, including mortgages, personal loans, credit cards, current accounts,
insurance, pensions, financial planning, investments, savings and deposits. Its products tor business and corporate customers include
finance and loans, business current accounts, deposits, foreign exchange and interest rate risk management products, trade finance
products, invoice discounting, leasing, credit cards, merchant services, payments and corporate finance.
Allied Irish Banks, p.l.c. together with its principal subsidiaries in the Republic of Ireland, AIB Mortgage Bank, EBS d.a.c. and EBS
Mortgage Finance, are regulated by the Central Bank of Ireland/Single Supervisory Mechanism. Its principal subsidiary outside the
Republic of Ireland, AIB Group (UK) p.l.c., is regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
c Share capital
The share capital of AIB Group plc is detailed in note 41 to the consolidated financial statements, all of which relates to AIB Group plc.
d Merger reserve
At 31 December
2017
€ m
6,235
Under the Scheme of Arrangement ("the Scheme") approved by the High Court on 6 December 2017 which became effective on
8 December 2017, a new company, AIB Group plc ('the Company'), was introduced as the holding company of AIB Group. AIB Group plc
is a recently incorporated public limited company registered in Ireland. The share capital of Allied Irish Banks, p.l.c., other than a single
share owned by AIB Group plc, was cancelled and an equal number of new shares were issued by the Company to the shareholders of
Allied Irish Banks, p.l.c. The difference between the carrying value of the net assets of Allied Irish Banks, p.l.c. entity on acquisition by
the Company and the nominal value of the shares issued on implementation of the Scheme amounting to € 6,235 million was accounted
for as a merger reserve (note 3 to the consolidated financial statements).
e Reduction in company capital
Subsequent to the issue by AIB Group plc of 2,714,381,237 ordinary shares of nominal value € 2.47 per share, AIB Group plc
petitioned the High Court for a capital reduction in order to create distributable reserves in the accounts of AIB Group plc. This involved
the reduction of the nominal value of the ordinary shares from € 2.47 per share to € 0.625 per share. The capital reduction which created
€ 5,008 million in distributable reserves became effective on 14 December 2017 (note 3 to the consolidated financial statements).
AIB Group plc Annual Financial Report 2017 375
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Notes to AIB Group plc company financial statements
f Related party transactions
Related parties of AIB Group plc include subsidiary undertakings, associated undertakings, joint undertakings, post-employment benefit
schemes, Key Management Personnel and connected parties. The Irish Government is also considered a related party by virtue of its
effective control of AIB Group plc.
Related party transactions are detailed in note 52 to the consolidated financial statements.
In addition, two Directors, namely Garreth O’Brien and David Joseph Lydon were appointed on incorporation of the company. These
Directors subsequently resigned on 21 September 2017 when the current AIB Directors were appointed. In relation to these two Directors,
they received no compensation, had no equity interest in and had no facilities from either the Company or AIB Group during the relevant
period.
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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
AIB Group plc is an Irish-registered company. Its ordinary shares are traded on the primary listing segment of the official list of the Irish
Stock Exchange and the premium listing segment of the Official List of the London 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 1,930,436,543 ordinary shares of € 0.625 each in the share capital of AIB Group plc
(71.12% of total issued ordinary shares).
Financial calendar
Annual General Meeting: 25 April 2018, at the RDS, Ballsbridge, Dublin 4.
Interim results
The unaudited Half-Yearly Financial Report 2018 will be announced towards the end of July/early August 2018 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
AIB Group plc Annual Financial Report 2017 377
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General information
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 58 to 68
in the 2017 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 58 to 68 of
the 2017 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.
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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.
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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).
Collateralised
bond obligation/
collateralised debt
A collateralised bond obligation (“CBO”)/collateralised debt obligation (“CDO”) is an investment vehicle (generally an SPE) which
allows third party investors to make debt and/or equity investments in a vehicle containing a portfolio of loans and bonds with certain
common features. In the case of synthetic CBOs/CDOs, the risk is backed by credit derivatives instead of the sale of assets (cash
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).
AIB Group plc Annual Financial Report 2017 379
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Glossary of terms
Commercial
paper
Commercial
property
Common equity
tier 1 capital
(“CET 1”)
Common equity
tier 1 ratio
Concentration
risk
Contractual
maturity
Contractual
residual maturity
Credit default
swaps
Credit
derivatives
Credit risk
Credit risk
mitigation
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.
The highest quality form of regulatory capital under Basel III that comprises ordinary shares issued and related share premium,
retained earnings and other reserves excluding cash flow hedging reserves, and deducting specified regulatory adjustments.
Common equity tier 1 ratio – A measurement of a bank’s common equity tier 1 capital expressed as a percentage of its total
risk-weighted assets.
Concentration risk is the risk of loss from lack of diversification, investing too heavily in one industry, one geographic area or one
type of security.
The period when a scheduled payment is due and payable in accordance with the terms of a financial instrument.
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.
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.
The risk that one party to a financial instrument will cause a financial loss to the other party by failing to discharge an obligation.
Techniques 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
annex
Credit support annex (“CSA”) provides credit protection by setting out the rules governing the mutual posting of collateral. CSAs
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
adjustment
Credit valuation adjustment (“CVA “) is an adjustment to the valuation of OTC derivative contracts to reflect the creditworthiness of
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.
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Debt
restructuring
This is the process whereby customers in arrears, facing cash flow or financial distress, renegotiate the terms of their loan
agreements in order to improve the likelihood of repayment. Restructuring may involve altering the terms of a loan agreement
including a partial write down of the balance. In certain circumstances, the loan balance may be swapped for an equity stake in the
counterparty.
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Assets on the Group’s balance sheet representing certificates of indebtedness of credit institutions, public bodies and other
undertakings.
Debt securities
in issue
Liabilities of the Group which are represented by transferable certificates of indebtedness of the Group to the bearer of the
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.
Guarantee
An undertaking by the Group/other party to pay a creditor should a debtor fail to do so.
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.
AIB Group plc Annual Financial Report 2017 381
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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.
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 Capital
Adequacy
Assessment
Process
Internal Capital Adequacy Assessment Process (“ICAAP”): The Group’s own assessment, through an examination of its risk profile
from regulatory and economic capital perspectives, of the levels of capital that it needs to hold.
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 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.
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.
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.
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
ratio
This is the ratio of loans and receivables expressed as a percentage of customer accounts, as presented in the statement of
financial position.
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.
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.
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.
Loss Given Default
The expected or actual loss in the event of default, expressed as a percentage of ‘exposure at default’.
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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.
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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
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.
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.
Private equity
investments
Probability of
Default
Regulatory
capital
Equity securities in operating companies not quoted on a public exchange, often involving the investment of capital in private
companies.
Probability of Default (“PD”) is the likelihood that a borrower will default on an obligation to repay.
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.
AIB Group plc Annual Financial Report 2017 383
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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
assets
Risk weighted assets (“RWAs”) are a measure of assets (including off-balance sheet items converted into asset equivalents e.g.
credit lines) which are weighted in accordance with prescribed rules and formulas as defined in the Basel Accord to reflect the risks
inherent in those assets.
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
entity
Special purpose entity (“SPE”) is a legal entity which can be a limited company or a limited partnership created to fulfil narrow or
specific objectives. A company will transfer assets to the SPE for management or use by the SPE to finance a large project thereby
achieving a narrow set of goals without putting the entire firm at risk. This term is used interchangeably with SPV (special purpose
vehicle).
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.
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.
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.
384
AIB Group plc Annual Financial Report 2017
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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AIB Commercial Finance Limited
Bankcentre, Ballsbridge,
Dublin 4.
Telephone: + 353 1 667 0233
AIB Corporate Banking (GB)
St Helen’s, 1 Undershaft,
London EC3A 8AB.
Telephone: + 44 207 090 7130
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
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.
AIB Group plc Annual Financial Report 2017 385
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E
Earnings per share
Employees
Exchange rates
F
Fair value of financial instruments
Finance leases and hire purchase
contracts
Financial and other information
Financial assets and financial
liabilities by contractual
residual maturity
Financial calendar
Financial investments
Page
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366
367
322
301
367
162
377
M
Market risk
Memorandum items: contingent
liabilities and commitments
and contingent assets
Model risk
N
NAMA senior bonds
Net fee and commission income
Net trading income
Nomination and Corporate
Page
165
332
178
302
286
286
Governance Committee
204
Non-adjusting events after the
reporting period
370
available for sale
134 and 293
Notes to the financial statements 245
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 and similar income
Interest expense and similar charges
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
306
163
239
137
172
378
152
379
248
179
198
239
230
308
285
285
165
169
335
358
152
300
301
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
Pension risk
People and culture risk
Principal addresses
Profit/(loss) on disposal/transfer
of loans and receivables
Property, plant and equipment
Prospective accounting changes
Provision for impairment on
financial investments
available for sale
Provisions for impairment on
loans and receivables
Provisions for liabilities
and commitments
336
328
35
174
326
320
287
326
173
176
385
286
309
269
288
302
321
Index
A
Page
Accounting policies
Administrative expenses
Annual General Meeting
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 model risk
C
Capital adequacy risk
Capital
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
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
Directors’ responsibilities
statement
Disposal groups and non-current
assets held for sale
Disposal of businesses
Distributions on equity shares
Dividend income
Dividends
247
287
377
370
306
289
369
195
194
172
177
164
53
317
317
4
6
365
189
332
327
186
130
72
275
367
319
320
310
318
294
28
223
xx
xx
293
288
293
286
370
386
AIB Group plc Annual Financial Report 2017
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R
Regulatory capital and capital ratios
Regulatory compliance
Regulatory compliance including
Page
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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 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
175
353
180
151
312
69
69
69
69
57
223
183
281
288
323
242
240
243
241
377
322
335
226
290
293
320
336
223
377
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AIB Group plc Annual Financial Report 2017 387
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AIB is a financial services group operating predominantly
in the Republic of Ireland. We provide a comprehensive
range of services to retail, business and corporate customers,
and hold market-leading positions in key segments in the
Republic of Ireland.
AIB also operates in Great Britain, as Allied Irish Bank (GB),
and in Northern Ireland, under the trading name
of First Trust Bank.
Our purpose, as a financial institution, is to back our
customers to achieve their dreams and ambitions.
For more detailed information on our structure
and business units, see pages 2 and 3.
Contents
Annual Review
A strong performance in 2017
AIB at a glance
Chairman’s statement
Chief Executive’s review
Overview of the Irish economy
Our strategy
Strategy in action
Risk summary
Sustainable banking
Governance at a glance
Board of Directors
Leadership Team
Governance in action
Business Review
Operating and financial review
Capital
1
2
4
6
10
12
14
18
20
26
28
30
32
35
53
Risk Management
Financial Statements
Principal risks and uncertainties
Framework
Individual risk types
58
69
73
Governance and Oversight
180
183
186
195
200
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
204
Corporate Governance Committee
Report of the Remuneration Committee 207
Corporate Governance Remuneration
statement
Viability statement
Internal controls
Other governance information
Supervision and regulation
210
223
223
225
226
Directors’ Responsibility Statement
Independent auditors’ report
Consolidated financial statements
Notes to the consolidated
financial statements
AIB Group plc company financial
statements
Notes to AIB Group plc company
financial statements
General Information
Shareholder information
Forward-looking statements
Glossary of terms
Principal addresses
Index
229
230
239
245
371
374
377
378
379
385
386
This Annual Financial Report contains forward-looking statements with respect to certain of the Group’s plans and its current
goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives.
See page 378.
Annual Review:
Print management:
Custodian Consultancy
Unit 517 Grants Rise, Greenogue Business Park,
Rathcoole, Dublin 24, D24 R9YX
The paper used in this production has been sourced from a sustainably managed forest.
© AIB GROUP 2018
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Backing our
customers
Annual Financial Report 2017
AIB Group plc
Bankcentre, PO Box 452, Dublin 4, Ireland
T: + 353 (1) 660 0311 / group.aib.ie
AIB Group plc
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