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8
Backing our
Customers
Annual Financial Report
for the financial year ended 31 December 2018
AIB Group plc
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 using the AIB, EBS and Haven brands.
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
Financial highlights
AIB in 2018
Chairman’s statement
Chief Executive’s review
Overview of the Irish economy
Our strategy
Strategy in action
Risk summary
Sustainable banking
Governance in AIB
Governance in action
UK Governance Code
Board of Directors
Executive Committee
Business Review
Operating and financial review
Capital
Risk Management
Financial Statements
1
2
4
6
10
12
14
18
20
26
30
33
34
36
40
57
Principal risks and uncertainties
Framework
Individual risk types
62
69
73
Governance and Oversight
Group Directors’ report
168
Schedule to the Group Directors’ report 171
Corporate Governance report
174
Report of the Board Audit Committee 186
192
Report of the Board Risk Committee
Report of the Nomination and
Corporate Governance Committee
196
Report of the Remuneration Committee 201
Corporate Governance
Remuneration statement
Viability statement
Internal controls
Other governance information
Supervision and regulation
205
211
212
213
214
Directors’ Responsibility Statement
Independent auditor’s 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
216
217
227
233
364
367
371
372
373
379
380
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 372.
Financial highlights
A strong financial performance in 2018
Net interest margin
2.47%
Cost income ratio 2
53%
Profit before tax
€1.25bn
New lending3
€12.1bn
Net loans
€60.9bn
Non-performing
exposures 4
€6.1bn
CET1 fully loaded
17.5%
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
Net interest margin (NIM) broadly stable with lower cost
of funds partly offset by impact of excess liquidity.
2.47%
2.50%1
53%
49%1
Stable costs year-on-year. Lower other income items
driving higher cost income ratio (CIR). Continued focus
on cost management.
€1.25bn
€1.31bn
€12.1bn
€10.5bn
€60.9bn
€60.0bn
Profit before tax is €1.25bn with steady momentum
in underlying business performance.
New lending increased 15% to €12.1bn with growth across
all segments. Mortgage lending up 16% in the year.
Growth in net loan book of €0.9bn as a result of strong
new lending. Performing loans (gross) increased €3.7bn.
2018
€6.1bn
2017
€10.2bn
Significant progress in reducing non-performing
exposures (NPEs) with a 41% reduction from €10.2bn
to €6.1bn. On track to achieve c. 5% by end of 2019.
2018
2017
17.5%
17.5%
Robust capital position with CET1 of 17.5% after proposed
ordinary dividend of €461m (17c per share). Continued
strong capital generation with profits contributing 210bps.
1. The 2017 reported NIM 2.58% is re-presented as 2.50%. The 2017 reported CIR 48% is re-presented as 49%. As per Accounting policies note 1 (f), when a financial
asset has been cured without financial loss, the Group presents previously unrecognised interest income, €44m in 2018, in ‘Net credit impairment writeback’.
To aid comparability, the Group has re-presented the 2017 comparative taking account of the new classification of this income (2017: €61m). For further details
see ‘Basis of presentation’ ‘Re-presented 2017’ on page 40.
2. Before bank levies, regulatory fees and exceptional items. CIR including these items was 63% in 2018 (2017: 61%). For exceptional items see pages 46 and 55.
3. New lending includes new term lending of €10.7bn in 2018 (2017: €9.4bn) and new transaction lending of €1.4bn in 2018 (2017: €1.1bn).
4. Non-performing exposures (NPEs) refers to non-performing loans (NPLs) and excludes €183m of off-balance sheet commitments. For further information see
pages 95 and 121.
AIB Group plc Annual Financial Report 2018
1
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements AIB in 2018
A diversified and customer-focused business with
leading market positions
Retail & Commercial
Banking (RCB)
65%
of net loans
Wholesale, Institutional
& Corporate Banking (WIB)
21%
of net loans
RCB’s key business lines include: mortgages,
consumer lending, SME lending, asset-backed
lending, wealth management, daily banking
and general insurance.
With market-leading positions in core domestic
markets in Ireland, and participation in US and
European syndicated lending markets, WIB delivers
customer-focused solutions and specialised
product requirements in private and public markets
to the bank’s larger customers.
Leading retail banking franchise
in Ireland with over 2.4m personal
and SME customers
Largest physical distribution network
in Ireland with 295 locations and a
further c. 1,000 locations through
An Post network
Leading digital bank in Ireland with
over 1.38m active digital customers
and over 940k active mobile
customers; c. 70% of personal loans
applied for online
2.4m
customers
295
locations
1.38m
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
€5.1bn
New lending
€39.7bn
Net loans
€1,003m
Operating
contribution 1
€4.8bn
New lending
€12.7bn
Net loans
€286m
Operating
contribution 1
Market offering
Leading mortgage provider
Number one mortgage provider in a growing market
enabled via AIB’s multi-brand strategy, including EBS
and Haven.
SME business
Sector-led strategy and local expertise delivering the leading
market share across key SME products, including current
accounts, deposits and loans.
Consumer business
Leading provider of financial services to personal customers
in the market, via digital innovation and relationship
management expertise. Full suite of services, including 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 & International Finance
Proven ability with strong track record and reputation.
Corporate Finance
Providing advisory services and solutions.
2
AIB Group plc Annual Financial Report 2018
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.
Just under 306,000 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 throughout
the United Kingdom: Great Britain
(14 business centres) and Northern
Ireland (15 branches, including six
business centres and a centre for
small and micro businesses)
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 123,000 active digital customers
306k
customers
29
locations
123k
digital
customers
£2.0bn
New lending
£7.4bn
Net loans
£161m
Operating
contribution 1
Market offering
Allied Irish Bank (GB)
Sector-led 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
13%
Wholesale,
Institutional &
Corporate Banking
19%
FY 2018 Total:
€1.5bn2
Retail &
Commercial
Banking
68%
In January 2019, we introduced a new operating model for
AIB, incorporating three core segments: Homes, Consumer
and Business.
For a detailed report on our performance please read the
‘Operating and financial review’ on pages 40 to 56.
1. Pre-provision operating contribution.
2. Excludes the Group segment.
AIB Group plc Annual Financial Report 2018
3
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements
Chairman’s statement
Building on positive momentum
Operationally 2018 was another successful year for AIB,
and a new management team is ready to take over.
2018 has been another successful year for
AIB in terms of business performance and
AIB’s staff have worked hard to maintain
and build on the positive momentum
since our return to profit in 2014.
However, viewed through the lens
of shareholder value it has been a
challenging year. At the start of the year
our share price was €5.50 and by the end
of the year it had fallen to €3.68, which is
a decline of 33%. For all our shareholders,
including our largest, the Irish State with
its 71% shareholding, this means the
market value of their collective investment
in AIB dropped by €4.9bn.
As a Board, since 2010, the issue of
maximising the opportunity for the State
to recover its full investment has been
a core objective. We have gone about
that by focusing on our customers and
operating as simply and efficiently as we
can. Unfortunately, despite the fact that
operationally the Group has had a good
year, we finished the year with a lower
valuation. So, the legitimate question
is why?
To explain this further we need to look
at three separate elements. Firstly, there
is the operational performance of the
Group. At the time of the IPO in 2017
“Strong financial
and operational progress
in 2018 generated a
satisfactory return on
capital during the year”
4
4
AIB Group plc Annual Financial Report 2018
AIB Group plc Annual Financial Report 2018
we set out five medium-term targets for
the Group and we are performing well
against them. Thus, the issue is not
around our core financial performance.
Secondly, global equity markets have
had a bad year, and a very poor second
half. Across Europe markets fell, with
banks generally performing worse than
the average as general investor appetite
for this risk asset class reduced. This is a
wider market and sector issue that has
affected all European banks in a
significant way, including AIB.
Thirdly, we have been experiencing
some idiosyncratic issues which relate
to Ireland in particular which continue to
dampen investor appetite for Irish listed
banks and are the final reason for the
decline in AIB’s valuation. Specifically,
the ongoing challenge around the
exercising of security over residential
and other property assets has left
investors and regulators with uncertainty
over the actual loss that needs to be
booked on these assets when in default.
This uncertainty affects the current and
future appetite for exposure to banking
assets in Ireland and also the amount of
capital that banks must hold. In addition,
the impact of continuing restrictions on
remuneration on both talent retention
and recruitment across the main
domestically owned banks is a real
concern. Investors have raised this
concern with me on many occasions.
These issues are, I know, politically and
socially difficult to resolve but, as they
stand currently, they have a real cost
and materially impact both the value
of the State’s holding in the banks and
the economic efficiency of the lending
markets that the banks operate in.
A direct impact of the remuneration
challenge was evident at our 2018 AGM
where the State voted against our
share-based remuneration proposals.
The proposals received the overwhelming
backing of AIB’s other independent
For more information on board activities during the year
see our ‘Governance in action’ section on page 30.
shareholders, with 99.77% voting in
support of the remuneration proposals.
The remuneration review that the
Minister for Finance announced around
the time of our 2018 AGM, to properly
and fully examine the issue, has yet
to conclude. Absent its findings and
a position from the Minister, we have
decided it is best not to propose new
resolutions on remuneration to the
next AGM. Even after the report and
any conclusions emerge, we will need
to consider it fully, consult with
shareholders and, as appropriate,
determine whether to make proposals
to an Extraordinary General Meeting
or wait until the next AGM in 2020.
It is worth reminding all stakeholders
that EBA rules on remuneration have
been comprehensively overhauled
and are much stricter than what was
operated in the past and provide much
better protection and alignment of
interests. They are set in such a way
that if they had been in operation in
2008 executives at that time would likely
have been writing cheques to the firm
refunding their pay. We partially operate
within these strict rules now and we
would like to be allowed to operate fully
within all aspects of them for fixed and
variable remuneration in the future.
During the latter part of 2018 both our
Executive Directors announced that they
were leaving the Group. Mark Bourke,
our CFO, tendered his resignation in
September and Bernard Byrne, our CEO,
in October. It is unusual to lose two such
senior executives in such close proximity
but this was not helped by the restrictions
and decisions referred to above. Bernard
and Mark have been a fantastic team and
the very successful IPO that they led in
2017 has enabled the Irish State to
recover a cumulative €10.8bn of its
investment up to the end of 2018
including the dividend for the year. In fact,
during 2018 there were a number of
periods in which the value of the State’s
remaining shareholding added
to all cash received to date exceeded the
original €20.8bn invested in AIB. That is a
real tribute to them both and they leave
with huge appreciation from the Board for
their contribution. I would also comment
personally on the positive nature of the
partnership I experienced working with
Bernard and Mark. We have operated
with total transparency, candour and trust
and I thank them for the comradeship
shared over the last five years.
The challenging level of staff turnover
at the senior executive level is not
sustainable. Thus, we really do need to
see the normalisation of the environment
within which AIB operates, including more
competitive remuneration policies. There
is a real concern that we currently do not
have parity with competitors. It just cannot
make sense for foreign banks, and others
who target the same talent, to be able to
pay incentives and AIB not, it just turns us
into a training ground for our competitors.
developing new products, new customer
functionality and building an AIB which is
better and stronger at the end of the year
than it was at the beginning. Our intention
is to put customers at the front and centre
of everything that we do and, to do so,
we have aligned our staff behind a core
strategic pillar: Customer First. Our Net
Promoter Scores tell us that we are making
good progress in this regard, with the
willingness of customers to recommend
our products or services to others
generally improving.
We now have a new management
team ready to take over who come
from within our own ranks. In December
2018, I had the pleasure of announcing
Colin Hunt as our proposed new CEO,
subject to the required regulatory fitness
and probity assessment process. The
regulatory assessment processes relating
to the proposed appointments of Colin
as CEO and a successor to the CFO role
are progressing well and are expected
to finalise shortly. Colin will bring a
wealth of experience to the role and
I am confident that he will lead the Group
well in the years ahead. Following the
departure of Mark Bourke with effect from
1 March 2019, and pending conclusion of
the aforementioned assessment process,
the Deputy CFO and Group Treasurer
Donal Galvin leads the finance function.
We look forward to notifying the market
of the outcome of those processes at the
earliest opportunity. We are fortunate to
have a very high-calibre internal team and
I look forward to working with them all.
The strong financial and operational
progress in 2018 generated a satisfactory
return on capital during the year and
enables us to propose an increase in the
dividend of 42% to 17 cent per ordinary
share. We wish to start paying interim
dividends at some stage to finally get
the business back on a normal dividend
footing. Such a decision will be made in
light of the Group’s performance, will take
account of the impact of any external
economic factors and will be subject to
regulatory approval.
I started my statement with a shareholder
value perspective and have reviewed
some of the main issues the Board have
been dealing with and which have
dominated our year, which is a very partial
view of AIB. Day-in, day-out AIB staff are
serving the population of Ireland with their
daily banking needs with great success,
AIB has a solid franchise in a strong
economy and it isn’t trying to do anything
it isn’t competent of doing. Banks like that
are very investable, and I am confident in
the long-term future of AIB because I am
confident in the AIB team. It is important
to remember that banks will never be ‘low
risk’ and it takes vigilance and discipline to
keep everything safe and proper. I would
like to thank AIB staff for their efforts
during 2018 and 2019 to date. This is
complicated and onerous work which
they do really well, and on most days they
even manage to do it with a big smile!
I would like to thank all the Directors for
their service and continued commitment
during the year and, in particular, for the
support they have provided to myself
and the executive team in challenging
circumstances. It is with regret that
Simon Ball, a long-serving Independent
Non-Executive Director, who would
have reached his nine-year term on the
Board during 2020, has recently noted
his intention not to stand for re-election
at this year’s AGM. Simon has played a
crucial role on the AIB Board for nearly
eight years and, on behalf of the Board,
I would like to thank him sincerely for the
significant contribution he has made to
the Group during his tenure. We have
also been planning for three other
Non-Executive Directors to leave in the
course of 2019 and you will hear more
from us when the requisite regulatory
assessment processes have concluded
for their replacements.
2019 is an important year for AIB and I
know that our new management team is
determined to further build on the success
of their most recent predecessors. We all
know that when AIB is doing well, Ireland
benefits – and that is what we are about.
Richard Pym
Chairman
28 February 2019
AIB Group plc Annual Financial Report 2018
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Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements Chief Executive’s review
Customer First strategy delivering
sustainable performance
Across all the key metrics, AIB performed well during 2018
and can face into 2019 with a positive perspective.
In this, my last report on the performance
of AIB, I am fortunate to be able to
highlight another year of strong
operational and financial performance.
Across all the key metrics by which
we judge ourselves, the business
has performed well during the year.
The quality of the balance sheet
continues to improve as we work through
our legacy non-performing exposures
(NPEs). Our 2018 net interest margin
(NIM), net interest income (NII) and
costs are on track with our medium-term
targets and our underlying capital
generation has helped us in reaching our
objective of normalising our proposed
level of annual dividend payment.
Overall the strong Irish economy and
our Customer First strategy supported
the bank’s 2018 performance. The
balance sheet grew during the year
with net loans up to €60.9bn, an
increase of €0.9bn. The inflection point
has now been well passed with net
loan growth exceeding the reduction in
non-performing exposures consistently.
Our profit before tax of €1.25bn is still
benefitting from net credits arising from
resolving of non-performing exposures
but this impact will reduce. The overall
positive performance has been reflected
in our credit ratings as AIB Group plc
“Living and fulfilling
our Purpose, to back
our customers to achieve
their dreams and ambitions,
gives us the opportunity
to create something
special in banking”
6
6
AIB Group plc Annual Financial Report 2018
AIB Group plc Annual Financial Report 2018
achieved Investment Grade from all
three rating agencies. Fitch assigned AIB
Group plc a rating of BBB- in March;
Moodys upgraded 2 notches to Baa3 in
July and S&P upgraded to BBB- in
December. This milestone was also a
reflection of our MREL execution ability
in the market. AIB completed three
successful issuances in 2018 (€1.65bn) of
c. €4bn MREL requirement.
We have continued to invest both in
terms of capital and operating capability
to get the bank to the position whereby
it can achieve its end 2019 targets.
The platform that we have built over
the last number of years, both in respect
of the infrastructure we use to run the
bank and the operating model we
deploy to enable our colleagues to serve
our customers, has been materially
enhanced in 2018. This resulted in
significant changes to our physical
property estate and also to the
operating model we use to deploy our
collective resources. The work to position
both of these was significantly
completed in 2018 and the benefits will
start to flow in 2019 and should have full
year effects from 2020 onwards.
As we have made progress addressing the
issues of the past we have developed a
clear view that the number of stakeholders
with a legitimate interest in the future
performance of the bank is now very
broad. Our long-term sustainability
depends on anticipating and working
with these stakeholder groups to ensure
a balanced set of expectations are
developed and delivered against. To
achieve this we must proactively align
our strategic capability and the necessary
resources to consider and address
stakeholders’ needs.
This means the Group must adapt
itself to this reality. This has also been
reflected in the new operating model. We
have set out a more detailed assessment
of these stakeholders in the Sustainable
Banking section of the report.
Separately we wanted to move to the
next phase of delivery against our four
strategic pillars. We are committed to
clearly (i) putting the Customer First, (ii)
operating the bank as Simply and
Efficiently as possible, (iii) intelligently
taking and managing Risk to generate
sustainable Capital, by (iv) having great
Talent working in a supportive Culture.
To do this better we have evolved the
operating model. All key strategic
decisions should start with the core
customer segments. The new model
is built around this idea. The other
functions of the bank support their
delivery to customers while also
challenging them as appropriate. To do
this we needed to move from a profit
and loss based business unit structure
to a more functional matrix structure
with clearer accountabilities which
fully embed the three lines of defence
required. We invested time making
sure we thought this through properly.
Getting to the position where it became
effective from 1 January 2019 was one
of the biggest achievements of the year.
The changes to the operating model
have resulted in us creating three new
separate ‘vertical‘ business units that
are responsible for the development
of end-to-end customer strategy and
propositions for our Homes, Business
and Consumer customers. The UK
continues to operate, at a customer
level, on a stand-alone basis. To support
the delivery to our customers we have
amalgamated all our distribution activity
with our operational and technology
functions into an enlarged horizontal
service delivery unit, called Business
& Customer Services (BCS), that serves
all our customer and operational needs.
Other key horizontal functions such
as Finance, Risk and HR support the
business verticals. Finally, and in order
to ensure that we maintain the correct
focus on each of our key stakeholders,
we have created an enhanced Customer
& Strategic Affairs function that spans
the bank and supports the CEO in
delivery of the pan-bank agenda.
The heads of these verticals and
horizontal functions are the core of
the new Executive Committee (ExCo).
An Operating Committee (OpCo) with
a broader representation of senior
leaders has also been established and
its members will be responsible for
delivering on the agreed strategy
and ensuring our key priorities are
progressed in a collaborative manner.
Our property strategy has been driven
by the need to support this operational
work. We have commenced the move
from one prime location, Bankcentre,
where almost 50% of staff work, to
a distributed model spread across
a number of smaller, more flexible
locations. We have invested heavily
in new technology to support far more
agile ways of working as requested by
our employees. We will exit Bankcentre
entirely by the end of 2020 and
Facebook will take over the campus
upon our departure. Vacating the
Bankcentre campus is a significant
development and creates a great
opportunity for AIB to continue its
evolution. We are building Centres
We created three new vertical business units
Core Segments
BUSINESS
HOMES
CONSUMER
l
s
r
e
b
a
n
E
y
e
K
BCS
Risk
Finance
Human Resources
Customer & Strategic Affairs
AIB UK
Group Internal Audit – Report to Audit Committee Chair
of Excellence in our various locations
across Dublin: Molesworth St, Central
Park, Burlington Road and Heuston
South Quarter. These developments will
enable AIB to employ new ways of
working incorporating agility, flexibility
and technology and support teams to
collaborate more effectively. We have
also implemented a new career model
that has streamlined the levels within
the organisation from 13 to seven.
We are aiming for less hierarchy and
more empowerment.
Many of the significant changes I have
referred to above are reflected in both the
operational and exceptional costs in 2018.
During the year we have also addressed
a major IFRS 9 implementation and the
significant internal and external costs of
achieving our NPE reductions.
Our total capital investment during the
period of €225m also allowed us to
complete several other key programmes.
We focused on ongoing system
resilience improvements, achieving
regulatory compliance, and enhanced
data and analytical capability to improve
the customer experience. Our
investment in technology saw the
continued roll-out of our new payments
engine, with 60% of payments migrated
by the end of the year, along with a new
Digital Business Banking Platform.
Additionally our Regulatory Programmes
saw us achieve GDPR readiness, and
CCR (Central Credit Register) compliance
with new 2018 requirements. We are
also investing in tools and services to
counteract the increasing threat of
cyber-crime. We actively manage and
continuously test cyber threats to
prevent unauthorised parties from
accessing, manipulating or acquiring
private information but cyber risks
remain a credible threat.
2018 also delivered significant customer
enhancements. Our dedicated ‘My
Mortgage’ app has made the mortgage
process easier for our customers to
navigate; they can now upload
documentation remotely and have full
visibility of where their application is in
the process. In addition we launched
Online Account Opening via the mobile
app, allowing an identification specialist
verify a customer’s passport through a
video call and, after answering some
questions, the new account is set up for
the customer. We further developed our
AIB Group plc Annual Financial Report 2018
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Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements
Chief Executive’s review continued
AI capability. This automation has
enabled efficiencies in areas that had
been traditionally resource-heavy
allowing our employees to focus on
exception-based activity that adds
further value to our customer
propositions.
Living and fulfilling our Purpose, to back
our customers to achieve their dreams
and ambitions, gives us the opportunity
to create something special in banking.
In 2018 we brought our Purpose to life
throughout the organisation by holding
over 200 workshops across the bank.
These workshops gave our people
the opportunity to really connect with
our Purpose. They shared their stories
on how they are bringing our Purpose
to life in their daily roles. 2019 will see
further embedding of our Purpose
throughout the organisation, which will
ultimately benefit our customers in the
long-term as we continue to back them.
Daily user interactions
2018
1.2M
Mobile
Interactions
12K
Kiosk/Tablet
Logins
251K
Internet
Banking
Logins
Over 1.8m
daily
interactions
18K
Contact
Centre
Calls
101K
Branch
Transactions
298K
ATM
Interactions
2013
148K
Mobile
Interactions
208K
Internet
Banking
Logins
880K
daily
interactions
18K
Contact
Centre
Calls
77K
Branch
Transactions
432K
ATM
Withdrawals
The needs of our customers are at the
heart of what we do. Positively we saw
increases across our Net Promoter
Scores (NPS) in 2018. Our personal
relationship NPS increased by 14 points
from Q4 2017 to +35 in Q4 2018. In 2018
we started to measure Homes NPS and
saw an increase from +42 in Q1 2018 to
+50 in Q4 2018. Our SME Micro Score
increased by seven points to +57 in Q4
2018, which is the highest level since
measurement of SME journeys began.
These NPS increases highlight the
improvements we have made in
delivering a better banking experience
for our customers.
The momentum in our employee
engagement journey continued into
2018 and I was pleased to see our
employee engagement score, through
our iConnect survey, continue on a
positive trajectory this year. 89% of
employees completed the survey,
a 1% increase on last year and the
results saw an increase in scores
across all of the questions, confirming
continued positive momentum. We are
now in the 72nd percentile of Gallup’s
worldwide database which is a fantastic
achievement. When we started our
engagement journey in 2013 we had
three actively disengaged employees for
every one that was engaged. We now
have 17 engaged employees for every
one that is actively disengaged which
demonstrates the significant progress
made over the last five years.
Our diversity and inclusion journey has
broadened significantly over the last 18
months. We continue to build awareness
and momentum across our resource
groups for Pride, Abilities, Women, Men,
Families and Roots. We now have an
outcome-focused strategy that is clear on
what we are aiming to achieve with clear
accountabilities and timelines. We can see
that we are continuing to create better
outcomes for our people, our customers
and our stakeholders through improved
decision-making, greater innovation and
a stronger culture. Women currently
account for 38.7% of our overall
management population and we are
striving to improve on this, to achieve
a target of 40% by the end of 2019.
The key elements of the strong Irish
economy supported our performance
in 2018. Brexit related issues, however,
presented challenges. From a balance
sheet perspective we saw growth in our
net loan book of €0.9bn as a result of
strong new lending. In 2018 gross
performing loans increased by €3.7bn
and c. 98% of our new lending was of
strong or satisfactory credit quality. This
has contributed to 83% of AIB’s loan
book being of strong or satisfactory
quality by the end of 2018 (up from 77%
in 2017). We saw growth in new lending
in our corporate, mortgage and
personal market. New lending of
€12.1bn in 2018 was up from €10.5bn in
2017. This includes new term lending of
€10.7bn and new transactional lending,
such as revolving credit facilities (RCFs),
of €1.4bn. Corporate term lending was
up 24% and transactional lending was
up 26% from 2017 levels. Mortgage
lending was up 16% and personal
lending was up 5% despite the backdrop
of an increasingly competitive market
and a constrained supply of new
housing. Brexit uncertainty contributed
to a slower SME market with SME
lending down 5% compared to the same
Employee engagement journey
Average mean score for Gallup clients
AIB
3.96
3.89
4.08
3.96
3.80
3.65
+0.12%
4.22
4.00
4.34
4.07
n
a
e
M
d
n
a
r
G
3.65
3.15
Wave 1
5th
Wave 2
22nd
Wave 3
43rd
Wave 4
52nd
Wave 5
62nd
Wave 6
72nd
Percentile
Source: Company information.
Average mean score for Gallup clients
AIB
8
AIB Group plc Annual Financial Report 2018
3.96
3.89
4.08
3.96
3.80
3.65
n
a
e
M
d
n
a
r
G
3.65
3.15
Wave 1
5th
+0.12%
4.22
4.00
4.34
4.07
Wave 2
22nd
Wave 3
43rd
Wave 4
52nd
Wave 5
62nd
Wave 6
72nd
Percentile
Number of active online & mobile users – active at year-end
(Millions)
Number of customer transactions completed
via online & mobile channels (Millions)
2014
2015
2016
2017
2018
0.96
1.04
1.14
1.26
1.38
2014
2015
2016
2017
2018
24.7
26.9
30.6
36.3
44.5
period last year. In our UK business, while
still impacted by Brexit concerns, we saw
growth in new lending, up 9% from 2017
levels but our balance sheet remained
static year-on-year.
To prepare for Brexit we continue to
support our customers and we have
a full suite of lending supports from
working capital to long term funding
and specialised lending supports. We
developed Brexit Ready Check to help
support SME customers in understanding
their business exposure to Brexit. Our 26
Brexit Advisors understand the challenges
and opportunities presented by Brexit,
and they are focused on supporting
customers to manage their business
through Brexit.
We continue to pursue a strategy of
working with our customers to achieve
positive outcomes to their financial
difficulties. Our non-performing
exposures balance fell by €4.1bn (41%)
since year-end December 2017 to €6.1bn.
We are making steady progress and are
on track to achieve NPE levels of c. 5% by
the end of this year.
Total costs for the year, excluding
exceptionals, at €1.4bn have increased by
c. €20m on 2017. Our cost income ratio
was 53%. Our medium-term target
remains to get this below 50%.
Our strong financial performance
demonstrates that our business continues
to achieve robust underlying profitability,
is well capitalised, has increased new
lending and reduced non-performing
loan balances, while at the same time,
maintaining cost discipline and investing
in its future. We will continue to face
headwinds and challenges however
the strong financial performance of the
business equips us to deal with these,
as and when they arise.
While we have made good progress
in terms of legacy issues, plenty of
challenges still exist, some new and some
old. For example, the Tracker Mortgage
Examination programme is materially
complete with close out activities now
underway during 2019 and we are
working closely with the Central Bank
of Ireland in terms of their enforcement
process. We know that issues can and
do continue to emerge from the past
and when they do we are committed
to dealing with them in a transparent
and fair way for our customers.
Conclusion and outlook
Our sound capital base, comfortably
above minimum regulatory
requirements, gives us the ability
to support our customers, to grow
our business and to reward our
shareholders. We have a stable funding
model and an improving credit profile,
which enabled us, in 2018, to deliver
good financial returns leading to
a growing capital return to our
shareholders. I am pleased that the
Board is, today, proposing a dividend
payment for the full year 2018 of €461m.
Including this dividend the State, our
largest shareholder, will have received
c. €10.8bn in capital, fees, dividends,
coupons and levies to date.
Now that we are reaching a normalised
dividend level with a significant increase
to 17 cent per share the focus on returning
surplus capital will move to the fore as
the NPE element of our balance sheet
continues to normalise over the next year.
The bank can face into 2019 with a
positive perspective. The Irish economy
remains strong and the key metrics
around economic growth and
employment currently remain supportive.
Brexit clearly presents a risk for both our
core Irish market and our UK position.
However AIB has a great team working at
all levels of the organisation. The business
has invested well in its technology and
customer initiatives and this is evident in
our strong market shares across the key
segments. Our new operating model
should support these positions. There
are other complexities and challenges
including the necessary enhancements
to meet continuously rising regulatory
prudential and conduct agendas, as well
as cyber risks. The return of inflation in our
core market will also present challenges.
The regulatory assessment process relating
to the proposed appointments of Colin
Hunt as CEO and the selected successor
to the CFO role are progressing and are
expected to finalise shortly. As I step down,
I want to thank all the employees at AIB;
from my fellow Board members to the
employees who serve our customers both
directly and indirectly for their support
to me over the last number of years.
They have helped make AIB such a
wonderful place to have the honour of
being CEO. And finally I want to thank
and acknowledge the great support of our
Chairman Richard Pym and our departing
colleague Mark Bourke. They were
incredibly supportive yet forthright critics
when I needed it most. Thank you all and
I wish you every success in 2019.
Bernard Byrne
Chief Executive Officer
28 February 2019
AIB Group plc Annual Financial Report 2018
9
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements Overview of the Irish economy
The economy in the Republic of Ireland is well placed
ahead of uncertain Brexit outcomes
Housing
completions
+25%
Employment
+3%
Core retail sales
+4%
Modified Final Domestic Demand*
(Volume, 3 Qrt Mov Avg, YoY % Change)
Construction Investment*
(Volume, 3 Qrt Mov Avg, YoY % Change)
%
8
6
4
5
0
-2
-4
-6
%
30
20
10
0
-10
-20
Q3 2011
Q3 2012
Q3 2013
Q3 2014
Q3 2015
Q3 2016
Q3 2017
Q3 2018
Q3 2011
Q3 2012
Q3 2013
Q3 2014
Q3 2015
Q3 2016
Q3 2017
Q3 2018
Source: CSO via Thomson Datastream.
Source: CSO via Thomson Datastream.
* Charts refer to the Republic of Ireland economy only.
Economic overview
Recent years have seen stronger than
expected growth by the Irish economy.
This has been led by robust export
growth, but there has also been a strong
expansion in domestic demand,
including business investment,
construction and consumer spending.
The Irish economy performed better
than expected again in 2018. Latest
National Accounts data show that GDP
grew by 7% 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 underlying activity is
‘modified final domestic demand’, which
excludes factors such as intellectual
property rights and aircraft leasing. This
grew by 5% in the first three quarters of
2018. Meanwhile, the ESRI has put the
underlying growth rate of the economy
at close to 5% in 2018.
Housing
Construction continued to rebound,
with output up by 17% in the first three
quarters of 2018. Housing output
continued to rise steadily, albeit from
10
AIB Group plc Annual Financial Report 2018
low levels. Housing commencements
rose by 28% to 22,500 in 2018.
Housing completions, as reported by the
CSO, rose by 25% to over 18,000 units in
2018, up from 14,400 the previous year.
There was a sharp increase in planning
permissions in 2018, with the number up
by almost 70% in Q3 from 2017 levels.
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,
though, moderated over the course of
last year, easing to 6.5% year-on-year
by December, with rents up by 6.4%
in December also.
Exports and consumer spending
Exports maintained their strong uptrend
in 2018, with total exports rising by over
9% in the first three quarters of the year,
helped by a strong performance by
the multi-national sector, most notably
computer services and pharmaceuticals.
Consumer spending rose by over 3% in
the first three quarters of the year. New
car sales were depressed by second-
hand imports from the UK. However,
core retail sales (i.e. excluding the motor
trade) maintained their robust growth
rate, rising by close to 4% in 2018.
Consumer price inflation remained
very subdued reflecting global trends,
competitive pressures in the retail sector
and the strength of the euro against
sterling. The Harmonised Index of
Consumer Prices (HICP) rose by 0.7%
in 2018, well below inflation in the
Eurozone, the UK and the US.
Employment
The Irish labour market remained strong
last year, with employment expanding
by almost 3%. Jobs growth was evident
across most sectors of the economy,
with particularly strong employment
gains in construction and a range
of service sectors. Meanwhile, the
unemployment rate fell to 5.7% in the
second half of 2018, down from 6.2%
at end 2017.
“Jobs growth was evident across most sectors of the
economy, with particularly strong employment gains
in construction and a range of service sectors”
Core Retail Sales*
(Volume, YoY % Change)
Employment/Unemployment*
Unemployment rate: (%) LHS
Employment (‘000): RHS
%
8
4
0
-4
%
18
16
14
12
10
8
6
4
(’000)
2300
2200
2100
2000
1900
1800
1700
Q4 2011
Q4 2012
Q4 2013
Q4 2014
Q4 2015
Q4 2016
Q4 2017
Q4 2018
Q4 2011
Q4 2012
Q4 2013
Q4 2014
Q4 2015
Q4 2016
Q4 2017
Q4 2018
Source: CSO via Thomson Datastream.
Source: CSO via Thomson Datastream.
Lending activity
The ongoing recovery in housing activity
was reflected in good growth in mortgage
lending. It recorded a strong 20% increase
in 2018, totalling €8.7bn for the year, up
from €7.3bn in 2017 and €5.7bn in 2016.
However, this is still some way short of the
level of lending that would be associated
with a more normalised housing market.
There was little change in new lending
to the SME sector in the first three
quarters of 2018, which was held back
by the uncertainty around Brexit. Central
Bank data show new lending to the SME
sector (excluding financial intermediation
and property related services) amounted
to almost €2.5bn to the end of September,
up 0.5% on the corresponding period
of 2017.
Brexit
To date, there has been limited impact
on the Irish economy from Brexit, but it
remains a major concern. The associated
weakness of sterling has clearly
impacted those trading with the UK,
as well as the number of British tourists
coming to Ireland. However, Irish
companies have become used to
dealing with a weak and volatile sterling
during most of the past decade. SME
lending, though, was held back by Brexit
uncertainty in 2018.
England at 1.2% for 2019, assuming that
the UK has an orderly departure from
the EU.
At the time of writing, the UK Government
is asking the EU to make some changes
in relation to the Irish backstop in the
Withdrawal Agreement, in order to
help get the exit deal through the UK
parliament. The Agreement allows for
an orderly departure by the UK from
the EU at the end of March 2019, as it
includes a transition period that would
keep the current trading agreements
largely in place until at least the end of
2020. If needs be, the UK is likely to seek
and be granted an extension to Article 50
by the EU to avoid a no-deal hard Brexit
at the end of March. This would delay
Brexit for a period of time.
UK economy overview and outlook
The UK economy has been impacted by
Brexit. The pace of growth weakened in
2017 and slowed further in 2018 as high
inflation and slower employment growth
weighed on consumer spending, and
the uncertainty around Brexit held back
investment. GDP growth in 2018 is
estimated at 1.4%, down from 1.7% in
2017, and well below the average rate
of 2.3% in the period 2013-2016. GDP
growth is forecast by the Bank of
Outlook for the Irish economy
Most forecasters see economic growth
in Ireland slowing to around 4.0%-4.5%
in 2019, taking into account the UK’s
departure from the EU, a softening in
global growth and a slower pace of job
creation as the economy moves towards
full employment. However, this would
still be a very good growth performance
by the Irish economy.
Leading indicators of activity have
softened in recent months, but continue
to point to good prospects for the
economy. Growth should be
underpinned by continuing low interest
rates, rising employment and incomes,
the ongoing rebound in construction
activity as well as a more expansive
stance to fiscal policy. This should result
in a strong rise in new lending activity
in 2019. However, this is all predicated
on the assumption that a disorderly
hard Brexit and a marked slowdown
in the world economy are avoided in
the coming year.
AIB Group plc Annual Financial Report 2018
11
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements Our strategy
How we measure our progress
Our strategy comprises four pillars: Customer First, Simple & Efficient, Risk & Capital and Talent
& Culture. Under each of these pillars we have set medium-term financial and non-financial
targets. Each of these pillars and the targets within them, along with our progress towards
those targets, is outlined below.
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.
Progress in 2018
• Sustained NPS improvement across Relationship (Personal,
SME and Complaints) and Transaction – Homes (Mortgage
Success, Declines and Drawdowns).
• Mortgage customer experience programme delivered
the ‘My Mortgage’ web app and the ‘Express’ mortgage
journey.
• Launched Fitbit Pay, the latest offering added to our Digital
Wallet collection, in addition to Apple Pay and Google Pay.
• Launched new-to-bank account opening capability via
smartphone; new customers can now open an AIB account
in minutes.
• Launched the AIB Brexit Ready Check, which produces
a tailored report of areas for customers to consider in
preparing for Brexit.
Progress in 2018
• Operationalised our property strategy, locating 1,800
employees in Central Park and confirming two further new
locations in 10 Molesworth St and Heuston South Quarter.
• Delivered leading biometric capabilities in facial recognition
on mobile, as well as voice recognition across telephony.
• Improved performance: roll-out of a new Digital Business
Banking Platform, a new Treasury Platform and a new
payments engine.
• AIB UK was the first bank in the world to certify conformance
to the Open Banking Security Profile, a global standard for
securing API communications for financial services.
• Delivered a 10% increase year-on-year in customers using
our digital channels, with a 20% increase in mobile users
specifically.
Outcomes
2018
Financial and
non-financial
targets 1
Personal 35
24
SME
Home
SME
50
57
50+
50+
60+
Measure
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
Measure
Channel trends
% number of our
active customers
transacting digitally
Cost income ratio (CIR) 2
Financial benchmark of
efficiency
Outcomes
2018
Financial and
non-financial
targets 1
57%
62%+
53%
Robust and
efficient
operating
model CIR <
50%
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.
Includes proposed dividend for full-year 2018.
12
AIB Group plc Annual Financial Report 2018
“In this, my last report on the performance of AIB, I am fortunate
to be able to highlight another year of strong operational and
financial performance. Across all the key metrics by which we
judge ourselves, the business has performed well during the year.”
Bernard Byrne, CEO
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.
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.
Progress in 2018
• Strong capital generation with profits contributing 210bps.
• Investment Grade achieved for AIB Group plc.
• Three successful MREL issuances, including an inaugural
dollar transaction of $750m which was oversubscribed with
a diversified investor base.
• Continued strong momentum in the reduction of non-
performing exposures, with a 41% reduction year-on-year, from
€10.2bn to €6.1bn.
• RAROC calculator launched and training provided to ensure
the best possible decision-making support.
Progress in 2018
• Continued improvement in employee engagement scores,
now in the 72nd percentile of Gallup’s worldwide database
with a grand mean of 4.34 out of 5.
• Successful cascade of summits and workshops aimed
at embedding our Purpose, finishing the year with an
inaugural ‘Purpose Day’.
• Launched our Leading with Purpose Programme (LPP) and
Emerging Leaders Programme (ELP).
• Achieved a 86% participation rate in the first year of
Appreciate, our peer-to-peer employee recognition
programme.
Outcomes
2018
€10.8bn 3
12.4%
17.5%
9.6% of
gross loans
Financial and
non-financial
targets 1
Repay State
investment
of €20.8bn
in full
Target
returns of
10%+
Strong
capital base
with CET1 of
13%
c. 5%
2.47%
Strong and
stable NIM
2.40%+
Measure
Cash paid to State
Cash paid to the Irish
State, including value
received through the IPO
Return on tangible equity
(ROTE) 2
A measure of how well
the bank deploys capital
to generate earnings
growth
CET1 ratio (fully loaded) 2
A measure of our ability
to withstand financial
stress and remain solvent
Non-performing
exposures (NPEs)
Measures the credit
quality of our loan stock
Net interest margin
(NIM) 2
A measure of the
difference between
the interest income
generated and the
amount of interest paid
out relative to (interest-
earning) assets
• Achieved Distinction in Inclusion and Diversity at the HRD
Awards, and named Employer of Choice at the Women in
Finance Awards.
Outcomes
2018
Financial and
non-financial
targets 1
38.7%
40%
Measure
Diversity
Women as % of all
management
Engagement
Employee engagement
relative to Gallup
client population
72nd
percentile
Top quartile
AIB Group plc Annual Financial Report 2018
13
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements Strategy in action
Customer First
Everyday banking
In 2018 we launched new-to-bank
account opening capability via
smartphone. This unique capability
means that new customers can now
open an AIB account in minutes using
just their smartphone.
In 2018 we added AIB Fitbit Pay to our
Digital Wallet collection, in addition to
both Apple Pay and Google Pay options.
Fitbit Pay uses existing contactless
functionality to make payments with a
Fitbit device – no wallet or smartphone
necessary. AIB also became the first Irish
bank to offer customers the ability to
purchase travel insurance through the
mobile banking application.
We continued to reward loyalty via
the AIB Everyday Rewards programme,
offering customers cash back on a
range of different purchases with
selected retail partners. A total of c.
€1.5m was rewarded in cash back
savings to customers during 2018.
Backing belief
AIB Group has a 32% share of the
mortgage market in the Republic of
Ireland, extending c. €2.8bn in new
mortgage loans in 2018.
Our AIB brand offers the lowest
Standard Variable Rates (SVR), passing
on variable rate reductions to both new
and existing SVR customers. In May,
as part of our dual brand strategy,
EBS announced significant reductions
across all its fixed mortgage rates for
new and existing Private Dwelling Home
mortgage customers while continuing to
provide a cashback offer. All fixed rates
from 1 to 5 years were reduced to 3%.
During 2018 we focused on simplifying
and streamlining our mortgage process
under our Mortgage Customer Experience
(MCX) programme. The vision of the
MCX programme is to create a more
convenient, faster and simpler mortgage
process enabled by increased digital
capability and an expert community of
Homes Consultants. We created the
Homes Centre of Excellence (HCoE),
developed an ‘Express’ mortgage journey,
which is currently being rolled out, and
introduced the ‘My Mortgage’ web app,
which enables customers to upload
documents, download bank form
Ger Leahy, Tillage farmer
and AIB customer
14
14
AIB Group plc Annual Financial Report 2018
AIB Group plc Annual Financial Report 2018
templates, send to and receive messages
from AIB, and view their mortgage
application status.
In February, we launched a new €100m
social housing development fund:
dedicated funding for developers with
housing projects sold to local authorities
or large Approved Housing Bodies.
Together with our support for affordable
housing schemes this underscores our
commitment to operate as a key
stakeholder in all aspects of the
residential sector.
Supporting business
SMEs in Ireland receive valuable insights
via the AIB Outlook Report series.
AIB Outlook Reports published in 2018
included the following: Licenced
Premises (Pubs), Transport and Logistics,
Nursing Homes, Retail Pharmacy and
Energy Efficiency. In addition, we also
published insight reports for the Agri
market, including two editions of Agri
Matters and Young Farmer Bytes.
Throughout 2018, over 250 business
owners completed the first AIB Women
in Enterprise programme, assisting them
in scaling and growing their businesses.
AIB Corporate Banking provides finance
to larger corporates and other entities
across the country. One example from
2018 was the Cork Container Terminal
in Ringaskiddy, a key growth enabler for
the entire Munster region. AIB joined with
the European Investment Bank and the
Ireland Strategic Investment Fund (ISIF)
in creating an innovative and award-
winning financing structure for the Port
of Cork Company.
Getting Brexit-ready
We supported our customers in preparing
for the potential impacts of Brexit, with 26
Brexit Advisors available countrywide,
backed in turn by 500 business advisors.
Initiatives in 2018 included: the provision
of €122m from the €300m SBCI Brexit
Loan fund; the quarterly Brexit Sentiment
Index, tracking customer sentiment and
concerns; and the AIB Brexit Ready
Check, which produces a tailored report
of areas for customers to consider in
preparing for Brexit.
Strategy in action
Simple & Efficient
A streamlined property strategy
Our property strategy aims to provide
a modern workplace that promotes
collaboration and flexibility and ensures
we have the right teams in the right places
to deliver for our customers. In 2018,
we announced our intention to exit
Bankcentre, our headquarters since 1979.
As such, we located 600 employees in
2 Burlington Rd and 1,800 employees
in Central Park, our new premise in
Leopardstown, Co. Dublin. We also
announced two further locations:
10 Molesworth St and Heuston South
Quarter (HSQ). From 2019, 10 Molesworth
St will deliver an industry-leading
corporate headquarters while HSQ
will be home to support functions.
Digitally-enabled banking
AIB is the market leader in digitally-
enabled banking in Ireland. At the end
of 2018, we had 1.38m active digital
customers, representing a 10% increase
year-on-year. 940k of these are active
mobile customers, representing
significant year-on-year growth of 20%.
Investment in 2018 focused on ongoing
system resilience, regulatory compliance,
productivity improvements, and enhanced
data and analytical capability to improve
customer satisfaction. In 2018, we
delivered leading biometric capabilities in
facial recognition on the mobile channel,
as well as voice recognition across
telephony. We have also delivered
significant efficiencies in the back office,
enhancing service capability.
Resilient and agile
2018 was a big year for system and
process updates across the banking
industry. We continued the roll-out of
our new payments engine, with 60% of
payments migrated by the end of the
year, along with a new Digital Business
Banking Platform. We now have 80% of
our Treasury business working off our
new platform.
Protecting customers
As part of protecting our customers’
data, we invest heavily in tools and
services to counteract the increasing
threat of cybercrime. We partner with
other institutions across Europe to foster
an open, knowledge-sharing and
mutual protection culture. We actively
manage and continuously test cyber
threats to prevent unauthorised parties
from accessing, manipulating or
acquiring private information.
In order to achieve GDPR readiness we
implemented changes to build on the
data protection safeguards we already
had in place, thus further enhancing
transparency, security and accountability.
Central Park, AIB’s new
central office in Leopardstown,
Co. Dublin
A new era in banking
The introduction of the Payment
Services Directive II (PSD2) in Europe
and Open Banking in the UK in early
2018 allows customers to grant third
party companies access to their financial
data. It also enables third parties to
initiate payments from a customer’s
account. Subsequent regulation has
followed, with banks increasing the
capabilities that third parties can utilise
for consenting customers. AIB met the
January 2018 deadline to be compliant
with these standards and our digital
architecture has allowed us to securely
open our platforms for customers to
take full advantage of this new banking
paradigm if they wish. AIB UK was
the first bank in the world to certify
conformance to the Open Banking
Security Profile, a global standard
for securing API communications for
financial services.
AIB Group plc Annual Financial Report 2018
15
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements Mullinalaghta St Columba’s in action
against Kilmacud Crokes during the
AIB Leinster GAA Football Senior
Club Championship Final 2018
Strategy in action
Risk & Capital
Strong performance
As a Group, we are generating and
distributing capital while maintaining a
strong capital base (fully loaded CET1
ratio of 17.5%).
Our funding model is both stable and
low cost. The net stable funding ratio
was 125%, with a liquidity coverage ratio
of 128% at year-end. The loan to deposit
ratio stands at 90%. Earning loans have
increased due to growth in new lending.
Strengthened risk management
Risk-adjusted return on capital (RAROC)
is the framework AIB uses to make
consistent and informed decisions,
adjusting the return from lending with
all associated costs of that lending, and
expressing that return in relation to capital
required. In 2018, the bank implemented
a new RAROC calculator to ensure we
have the best possible decision-making
support. While the new RAROC calculator
only directly impacts a small cohort of
colleagues, its principles sit behind all
of our grid or branded pricing.
16
AIB Group plc Annual Financial Report 2018
Value creation
AIB has consistently delivered strong
organic capital generation over the last
three years. This has enabled substantial
repayments to the State, including
ordinary dividend payments in 2018.
The State, the largest shareholder, will
have received c. €10.8bn in capital, fees,
dividends, coupons and levies to date.
As the Group reaches more normalised
annual dividend levels, our focus moves
to returning excess capital.
MREL issuances and rating upgrades
In 2018, AIB Group plc completed three
successful MREL issuances and secured
upgrades from the Rating Agencies.
The three MREL trades totalled €1.65bn of
our c. €4bn MREL issuance requirement.
In October, AIB Group plc issued its
inaugural dollar MREL transaction. This
was a $750m, five-year transaction at
a spread of 1.75% over US Treasury
Government bond yields with a fixed
coupon of 4.75%.
A key milestone this year was achieving
Investment Grade credit rating for AIB
Group plc from all three rating agencies.
This was a reflection of the strong
progress in reducing NPEs and also our
MREL execution ability in the market.
Fitch assigned AIB Group plc a rating
of BBB- in March; Moodys upgraded
2 notches to Baa3 in July and S&P
upgraded to BBB- in December.
Strategy in action
Talent & Culture
Cultural review
The Irish Banking Culture Board (IBCB)
was established by CEOs and executives
from the five retail banks in Ireland in
2018 following a Central Bank of Ireland
(CBI) review of the sector. In AIB, we
have been on a journey of cultural
change for some time, focusing on
becoming a truly customer-focused
organisation. We look forward to having
a key role in rebuilding trust and
confidence in the Irish banking industry.
On 6 December, we held our first
Purpose Day – a day of celebrating our
customers. As part of Purpose Day, AIB
hosted 10 Customer Christmas Markets
in central offices and branches located
in Dublin (Bankcentre, Central Park,
Adelaide Rd and Blanchardstown
branch), Waterford (Dungarvan and
The Quay branches), Kilkenny (High
Street branch), Cork (66 South Mall),
Limerick (106/108 O’Connell St) and
Belfast (First Trust Centre).
A Purpose-led organisation
Our Purpose is to back our customers
to achieve their dreams and ambitions.
It is not just our leaders who make this
Purpose real, it’s every one of us who
make it real every day. For our Purpose
to be effective as a way of successfully
managing and steering our business,
it must be integrated into everything
we do.
As such, in 2018, AIB employees took
part in a Purpose Workshop in order to
understand why our Purpose matters,
and to connect with it in a meaningful
and practical way. The Executive
Committee members got ‘Out & About’,
visiting branches and locations in Ireland
and the UK to understand how AIB
employees are living our Purpose across
the Group.
2018 was the first year of activity to really
embed our Purpose, with more planned
for 2019 and further years.
Employee engagement
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.
Since 2013, when we first partnered
with international engagement experts
Gallup, our engagement levels have
consistently increased. In 2018, we
reached the 72nd percentile of the
worldwide Gallup database –
compared to the 5th percentile in 2013
– and achieved our highest participation
rate of 89%. In addition, our ratio
of engaged employees to actively
disengaged employees is now 17:1,
compared to 0.3:1 in 2013.
Recognising and attracting talent
In 2018, AIB launched Appreciate,
our new peer-to-peer recognition
programme, allowing our people to
reward colleagues on their team, a
project or any fellow employee across
the bank. Appreciate allows us to
“In 2018, we reached
the 72nd percentile
of the worldwide
Gallup database
and achieved our
highest participation
rate of 89%.”
recognise success and encourage
behaviours that are really important
to our business as all awards are linked
to our brand values. Since its launch in
April, over 20,000 Appreciate awards
have been granted.
The graduate hiring programme saw
another increase in 2018, with over 80
talented graduates joining AIB teams
across the bank. As for our leaders, in
2018, two development initiatives were
launched in order to retain and nurture
talent: Emerging Leaders Programme
and Leading with Purpose Programme.
Diversity & inclusion
In 2018, AIB was recognised with the
Distinction in Inclusion and Diversity at the
HRD Awards and as Employer of Choice
in the 2018 Women in Finance Awards.
We held our second annual Diversity &
Inclusion Week in March, during which
all AIB employees were encouraged to
Pledge for Inclusion. Our people walked
in the Dublin, Belfast and New York
Pride Marches. During Deaf Awareness
Week, Internal Communications
committed to including subtitles on all
videos made internally. Our Mentor Her
programme provided mentorship to
50 women in the Group. And AIB joined
other employers in Ireland to launch
the Open Doors initiative, aiming to
increase access to the labour market
for marginalised groups.
In 2018, employees took part
in purpose workshops during
the summer months
LEGIBILITY
AIB Group plc Annual Financial Report 2018
17
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
We apply an enterprise risk management
approach to identify, assess and manage
risks in AIB. 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 (Business Lines)
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 (Risk & Compliance) sets the
frameworks and policies for managing
specific risk areas, approves all large
credit exposures, provides advice and
guidance in relation to the risk and also
provides independent review, challenge
and 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
• Group Risk Committee (Executive Risk
Committee in 2018)
• Asset & Liability Committee
• Operational Risk Committee
• Group Credit Committee
Risk appetite
The Board approves AIB’s Risk Appetite
Statement (RAS), which is an articulation
of the Group’s tolerance and philosophy
for risk-taking. The RAS is aligned to our
strategy in protecting risk and capital,
18
AIB Group plc Annual Financial Report 2018
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.
Viability of the Group
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
principal risks facing the Group over the
next three years to 31 December 2021.
The assessment considered the current
financial performance, funding and
liquidity management and capital
management of the Group and the
governance and organisation framework
through which the Group manages and
seeks where possible to mitigate risk. 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.
On the basis of the above, the Directors
believe, taking into account the Group’s
current position, and subject to the
identified principal risks, the Group will
be able to continue in operation and
meet its liabilities as they fall due over
the three-year period of assessment.
The full Viability Statement, including
details of the key processes in place
during the year which support the
Director’s assessment, is set out in the
Governance and Oversight section of
this report on pages 168 to 214.
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.
For more information, see our ‘Risk
management’ section on pages 61 to 166.
Risk management
in practice
We perform a top-down Material Risk Assessment (MRA) process to ensure all material risks to
which AIB is exposed are identified. 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 management framework and policy architecture.
The following table summarises the linkage between AIB’s material risks and the principal risks and uncertainties (see pages 62 to
68 for more details).
Strategic Pillars primarily impacted
Customer
First
Simple &
Efficient
Risk &
Capital
Talent &
Culture Principal risks and uncertainties
Material risk
Business
model
3
3
3
Credit
3
3
3
Financial
Capital
Adequacy
Funding
& Liquidity
Regulatory
Compliance
Restructure
Execution
Conduct
People
& Culture
Operational
Model
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
3
• Deterioration in the Irish or UK economy or in global economic conditions
• Geopolitical developments, particularly in Europe and the US
• Brexit and the UK
•
• The Group’s strategy may not be optimal and/or not successfully implemented
• Damage to the Group’s brand
• Risk of inadequate or non-effective Group risk management systems
Impact of budgetary and taxation policies of the Irish, UK and other governments
Impact of budgetary and taxation policies of the Irish, UK and other governments
Impact of Irish legislation and regulations in relation to mortgages
• Deterioration in the Irish or UK economy or in global economic conditions
• Brexit and the UK
•
•
• Credit risks, including concentration risk
• Damage to the Group’s brand
• Risk of inadequate or non-effective Group risk management systems
• Risk that the funding position of its defined benefit pension schemes will deteriorate
• Geopolitical developments, particularly in Europe and the US
• Market risk
• Damage to the Group’s brand
• Risk of inadequate or non-effective Group risk management systems
Impact of the high level of criticised loans
•
• The Group may have insufficient capital to meet increased minimum regulatory requirements
• Risk that the funding position of its defined benefit pension schemes will deteriorate
•
•
• Credit risks, including concentration risk
• Damage to the Group’s brand
• Risk of inadequate or non-effective Group risk management systems
Impact of changes in legislation affecting deferred tax assets
Impact of Bank Recovery and Resolution Directive
Impact of Bank Recovery and Resolution Directive
•
• Damage to the Group’s brand
•
• Risk of inadequate or non-effective Group risk management systems
Impact of constraints on the Group’s access to funding
3
3
3
3
Impact of laws and regulations, regulatory actions, fines and litigation
Impact of Anti-Money Laundering and terrorist financing regulations
•
•
• Damage to the Group’s brand
• Risk of inadequate or non-effective Group risk management systems
Impact of the high level of criticised loans
Impact of Irish legislation and regulations in relation to mortgages
•
•
• Damage to the Group’s brand
• Risk of inadequate or non-effective Group risk management systems
Impact of a poor or inappropriate culture across the Group
• Conduct risk
•
• Damage to the Group’s brand
• Risk of inadequate or non-effective Group risk management systems
Impact of a poor or inappropriate culture across the Group
• People Risk (including retention of staff in key senior management roles)
•
• Damage to the Group’s brand
• Risk of inadequate or non-effective Group risk management systems
• Operational risks, cyber, outsourcing, fraud, process and systems risks
• Damage to the Group’s brand
• Risk of inadequate or non-effective Group risk management systems
• Risk that the models used are inaccurate
• Damage to the Group’s brand
• Risk of inadequate or non-effective Group risk management systems
AIB Group plc Annual Financial Report 2018
19
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements Sustainable banking
Backing a sustainable future
Our Purpose is to back our customers to achieve their dreams and ambitions.
We want to create long-term value in our business as well as the economies
and communities in which we operate. By doing so, we will continue to merit
our social licence to operate.
Our five
stakeholder
groups
Customers
Employees
Investors
Government & Society
Regulator
Understanding our role
We are working to become a truly
sustainable bank that is not only
profitable but also considerate of our role
in society and the impact of our activities.
As the leading bank in Ireland, our
success is inextricably linked to the health
of the Irish economy and the financial
well-being of our customers. We are
committed to delivering on our role and
embedding a sustainable culture at every
level of our business.
Continuing to rebuild trust among our
five stakeholder groups – our customers,
our people, investors, government/
society and regulators – is key to
ensuring long-term sustainability. We
are actively listening and responding to
our stakeholders. In 2018 we made solid
progress in many ways across AIB.
How we govern sustainably
The Office of Sustainable Business
(OSB) comprises a small, dedicated team
that works across the bank to provide
direction and focus for our sustainability
agenda. The OSB also supports our CEO
and the Executive Committee on the
development of our approach. This work
is overseen by the Sustainable Business
Advisory Committee (SBAC), which
provides guidance and advice to the
Board of Directors.
Rachel Botsman, award-winning expert
on trust, at AIB’s second Sustainability
Conference in October
20 AIB Group plc Annual Financial Report 2018
AIB Group plc Annual Financial Report 2018
20
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, as
we detail in our Risk Management
section on page 61 to 166. It also
means anticipating and planning for
environmental risk. We recognise the
need to align our operational and
lending risk frameworks, policies and
practices to environmental, social and
governance (ESG) principles. This will
continue to be a focus for 2019.
Our progress in 2018
Stakeholders
• Completed an extensive materiality
exercise, with 1,376 individuals
contributing from our five stakeholder
groups identifying our key material
topics and macroeconomic issues.
• Hosted our second Sustainability
Conference in October with over 400
stakeholders joining the conversation.
• Continued progress in how we handle
complaints with the centralisation of
complaints resulting in faster resolution
times: from 27 to 13 days for complex
complaints.
Reporting
• Published our second Sustainability
Report, externally assured by Deloitte
and reporting to globally recognised
standards (Global Reporting initiative,
GRI core option).
Risk
• Reviewed over 30 risk policies
against the ISO 26000 Social
Responsibility standard.
Environment
• Signed up to the Low Carbon Pledge,
committing to reduce AIB’s carbon
emissions by 50% by 2030.
• Sponsored the Sustainable Nation/
Climate KIC inaugural Climate Week
in November.
• Maintained our Climate A-rated status
on the Carbon Disclosures Project
(CDP), the only Irish company to
achieve this.
We are not complacent; we know we
must listen to all of our stakeholders’
feedback and continue to enhance how
we respond to them – in both
behaviours and outcomes.
Engaging with our stakeholders
In 2018, we conducted an exercise among nearly 1,400 individuals
representing our five stakeholder groups to identify the material topics
and macroeconomic issues of most importance to them.
We asked our stakeholders:
“In your opinion, what actions
can be undertaken within the
bank to continue to rebuild
trust through responsible
banking practices and
operations?”
We compared the choices of our people
with responses from our external
stakeholders and made the 14 material
topics of greatest significance to both
groups our priority focus. These material
topics form the basis of our Global
Reporting Initiative (GRI) report, as
detailed in the GRI Index appendix
of our Sustainability Report.
Macroeconomic issues
We also wanted to know which
macroeconomic issues – taking in social,
environmental and economic themes –
are most important to our stakeholders.
So we asked them:
“What are the social,
environmental and economic
issues that you believe AIB
is best placed to address?”
We conducted interviews with our
CEO and members of the Executive
Committee and held workshops with
internal and external stakeholders to
validate the outputs from this exercise.
We then formatted our Sustainability
Report around the 11 chosen
macroeconomic issues, illustrating how
we are addressing each in our business
and operations.
We asked individuals representative of
our five stakeholder groups what are
the things we can do – behaviours and
actions – to rebuild their trust in AIB.
With 1,376 responses, we identified the
key material topics and macroeconomic
issues that were most important. This
exercise was then validated both
internally, by the Office of Sustainable
Business (OSB), and externally, by KPMG.
The outputs of this exercise continue to
inform our sustainability agenda internally
and our external reporting, forming the
basis of our second Sustainability Report,
which was published in June 2018. We
published both a detailed and summary
report, which are available for download
on aib.ie/sustainability.
Material topics
Our stakeholders were asked to choose
from a range of material topics that are
relevant to AIB’s operations, and to rank
these topics in terms of their importance
in rebuilding trust in the bank.
Our top material topics
identified by stakeholders.
1. Making our services and
products transparent to
consumers
2. Engaging with all our
stakeholders regularly
3. Protecting our customers’
privacy and data
4. Pricing our products and
services fairly
8. Providing business
leadership and vision
9. Maintaining a profitable and
financially sustainable
business
10. Complying with laws,
codes and regulations
11. Providing responsible
services and products
5. Improving our customer
12. Managing our business risks
experience and satisfaction
levels
effectively
13. Our business culture and
6. Talent attraction, retention
ethical behaviour
and development
7. Employee engagement and
satisfaction
14. The stability, security and
continuity of our business
services
Macroeconomic issues
identified by stakeholders.
1. Housing
2. Digitalisation
3. Business and personal
lending
4. Entrepreneurship
5. Food production and
sustainable agriculture
6. Brexit
7. Low-carbon economy
8. Financial literacy
9. Skills and training
10. Managing debt
11. Ageing population
For more information,
see our Sustainability Report
at aib.ie/sustainability
AIB Group plc Annual Financial Report 2018
21
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements Sustainable banking continued
Listening and responding to our stakeholders:
environment
In our materiality exercise our stakeholders identified their most
important macroeconomic issues, which will be detailed in our 2018
Sustainability Report. Among these was the transition to a low-carbon
economy. Some of the many ways we are supporting this issue are
outlined below.
Our actions on climate change
To support the transition to a low-
carbon economy we have established a
lending centre of excellence, covering
energy, climate action and infrastructure
with a particular focus on supporting
Ireland’s decarbonisation. In 2018, we
continued to support the development
of low-carbon initiatives across our
portfolio including investment in wind,
solar and biomass.
We are committed to conducting our
business and operations as energy-
efficiently as possible, reducing our
carbon footprint and striving to achieve
continuous improvement in energy
performance.
Reducing our carbon emissions
For all our major programmes, energy
consumption impact is considered part
of the investment appraisal. Our new
corporate headquarters at 10
Molesworth Street will be the first
newly-constructed office in Ireland
to achieve platinum accreditation
through the Leadership in Energy and
Environmental Design (LEED) system
of rating for sustainability. LEED is the
most widely used green building rating
system in the world.
In 2011 we set ourselves a target to
reduce our Scope 1 & 2 CO2 emissions
by 33% by 2020 (using 2009 as our base
year). By 2017 – the most recently
available data – our overall carbon
emissions were 29,525 tCO2eq, a
decrease of 10% year-on-year and 35%
against our 2009 baseline, meaning we
reached our target three years ahead
of plan. We are committed to continual
improvement and our approach is
guided by the energy management
standard ISO 50001. Our success in
reducing emissions is delivered through
our extensive energy management
programme and coordinated energy
reduction approach.
Our CO2 emissions
Total CO2 emissions
Total Scope 1
Total Scope 2
Total Scope 3
20171
29,524.8
5,159.6
15,663.1
8,702.1
20091,2
(Baseline)
45,868.6
11,514.2
21,271.9
13,082.4
Emissions in tonnes of CO2 equivalent in line with the GHG Protocol: A Corporate
Accounting and Reporting Standard and Defra Voluntary Reporting Guidelines.
Scope 1 emissions: Include Fuels combustion, AIB’s fleet, Fugitive emissions.
Scope 2 emissions: Calculated using a location-based methodology and includes
consumption of all purchased electricity.
Scope 3 emissions: Calculated for the following relevant Scope 3 categories: purchased
goods and services, capital goods, waste generated in operations, business travel and
employee commuting3.
A third-party verification (ISO 14064-3) was completed for all reported emissions.
Low carbon pledge
In 2018 we signed the Business in the
Community’s Low Carbon Pledge, the
first dedicated pledge generated by Irish
business to set industry standards on
sustainability and reduce carbon usage.
Signatories to the pledge recognise that,
in order to reach the global carbon
reduction targets set in the Paris
Agreement and maintain global
temperatures at less than 2oC below
pre-industrial levels, business must play
a role. All signatories to the pledge
commit to reducing their Scope 1 & 2
greenhouse gas emission intensity by
50% by 2030.
Sustainable business practices
In 2018, we continued to develop and
roll out initiatives that deliver more
sustainable operations. This includes
reducing waste by eliminating single-
use plastics and non-recyclable coffee
cups from our catering operations and
procuring 100% renewable electricity to
power our operations across Ireland and
the UK.
Climate change leadership
The CDP Climate A list report highlights
companies around the world that lead
in environmental performance and
climate change action. In 2018, AIB was
included on this list for the second year
in a row, recognising our commitment
to action against climate change.
1. Reporting period: 1 January to 31 December.
2. Restated to improve the accuracy of reporting and reflect improved methodology in calculation of all categories of emissions reported.
3. More information regarding all our 2017 Scope emissions can be found in our latest CDP report.
22
AIB Group plc Annual Financial Report 2018
Listening and responding to our stakeholders: society
Our stakeholders also told us how we can continue to rebuild their trust
in us: through our leadership in key societal challenges and our own
changing culture and behaviours.
Societal challenges
We continued to address many of the
key challenges our stakeholders told us
they wanted us to focus on in 2018.
Highlights include:
• AIB financed over 4,700 new-build
homes in addition to over 500 social
housing properties.
• We supported customers managing
the impact of Brexit through our 26
Brexit Advisors, dedicated reports
and the AIB Brexit Ready Check.
• Our Future Sparks programme and
event in April promoted inclusion and
entrepreneurship and attracted over
5,500 second-level students from
230 schools.
• Our on-going support of Ireland’s
SME businesses with €1.272bn in
new lending to business.
For further details on these activities,
see Customer First on page 14.
These issues and more will be further
expanded in our Sustainability Report
2018, published in Q2 2019.
Finance & regulation
Our lending teams in the UK and Ireland
provide finance to support the transition
to a low-carbon economy and to
respond to the most pressing of social
issues, such as the current housing crisis
in Ireland.
As we do this, we are conscious of the
evolving environmental, social and
governance (ESG) regulatory agenda
and the need to comply with new
requirements when they come on
stream. We are contributing to the
evolution of this regulation through
consultation on proposed EU regulation
for sustainable finance and in the
roundtable discussions in the UK on
PRA’s consultation process for their
proposed new supervisory statement
on climate-related financial risks.
Backing a sustainable future
We held our second AIB Sustainability
Conference in October. Over 400
stakeholders joined us in a unique
setting @ Point Square to progress
the conversation about the need
for business to embrace a changing
macroeconomic environment in order
to be truly sustainable. Throughout the
morning, we used the analogy of the
cycle of the seasons to align with cycle
of sustainable business growth: planning
and investing through winter; planting in
spring; nurture in summer; and harvest
in autumn. Our speakers included John
Mackey, CEO of Wholefoods, and
Rachel Botsman from the Oxford Saïd
Business School, who ended the
conference on the theme of trust.
Culture review
The Central Bank of Ireland (CBI) culture
review of Irish banks, completed in the
summer of 2018, provided us with a
great opportunity to pause and reflect
on our cultural journey and take input
from a number of sources to determine
our next steps and key actions as we
evolve. Aligning behind our Purpose is
one way everyone working in AIB can
have a clear focus on our customers.
For details on how we are embedding
our Purpose, see Talent & Culture on
page 17.
Conduct & ethics
Our Code of Conduct establishes the
principles that guide our decisions and
actions. It calls on each of us collectively
and individually to always do the right
thing; to act honestly and transparently.
Our Code of Conduct framework
includes a Conflicts of Interests policy
and a new Anti-Bribery and Corruption
policy, which we launched in 2018.
We expect everyone working in AIB
to live by our Code and annual training
on it is a mandatory requirement,
completion of which is overseen by
senior management. Within our
performance review process, known as
Aspire, employees are required to attest
to the Code. Our Code sets out that
we don’t partner with or buy from
organisations which we know to breach
human rights or fair practices. We
require our key suppliers to attest to the
Code, as well as other key policies and/
or clauses applicable, including our Data
Protection Policy and Environmental
Policy, and where relevant to
conform to the UK Modern
Slavery Act.
The AIB Future Sparks event promoted
inclusion and entrepreneurship
AIB Group plc Annual Financial Report 2018
AIB Group plc Annual Financial Report 2018
23
23
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements
Sustainable banking continued
Our non-financial statement
Our non-financial statement is intended to comply with the European Union (Disclosure of Non-
Financial and Diversity Information by certain large undertakings and groups) Regulations 2017.
The table below, and the summary
information in it, is intended to help our
stakeholders understand our position on
key non-financial matters. This builds on
existing reporting in our annual
Sustainability Report, which is reported
in accordance with the Global Reporting
Initiative (GRI) standards and the Carbon
Disclosures Project (CDP). Our
Sustainability Report 2018 will be
published in Q2 2019.
For more information, including
policies we publish externally, see:
aib.ie/sustainability
Information about our activities, policy outcomes and
approach to risk management
Listening and responding to our stakeholders: environment, page 22
See our CDP report on aib.ie/sustainability
Risk Management, pages 61 to 166
Listening and responding to our stakeholders: society, page 23
Talent & Culture, page 17
Simple & Efficient, page 15
Report of the Board Audit Committee, pages 186 to 191
Group Directors report, pages 168 to 170
Our communities, page 25
See our Board Diversity Policy on aib.ie/content/dam/aib/
investorrelations/docs/about-aib/corporate-governance/board-
diversity-policy.pdf
Risk Management, pages 61 to 166
Listening and responding to our stakeholders: society, page 23
See AIB Group plc Modern Slavery Statement 2018 on aibgb.co.uk/
help-and-guidance/important-information/modern-slavery-
statement
See our Health and Safety report on aib.ie/sustainability
Risk Management, pages 61 to 166
Listening and responding to our stakeholders: society, page 23
See our General Statement on Anti-Money Laundering and Counter
Terrorism Financing on group.aib.ie/legal
Risk Management, pages 61 to 166
Reporting requirement
Policies
Environmental matters
• Environmental Policy
• Energy Policy
Social and employee
matters
• Code of Conduct
• Recruitment Policy1
• Data Protection Policy1
• Speak Up Policy
• Diversity & Inclusion Code,
Policies on Leaves and Flexible
Working 1, Board Diversity Policy
Respect for human rights
• Code of Conduct
• Strategic Sourcing and Supplier
Management Policy 1
Bribery and corruption
• Code of Conduct
• Anti-Bribery & Corruption Policy
• Conflict of Interests Policy
• Anti-Money Laundering and
Countering the Financing of
Terrorism Policy 1
Reporting requirement
Key information
Description of our
business model
Inside front cover
AIB in 2018, pages 2 and 3
Principal risks relating to:
• Environmental matters
• Social and
employee matters
• Respect for
human rights
Regulatory and legal risks, pages 63 and 64
Risks relating to business operations, governance and internal control systems, pages 65 to 68
Regulatory and legal risks, pages 63 and 64 and Risks relating to business operations, governance and
internal control systems, pages 65 to 68
• Bribery and corruption
Regulatory and legal risks, pages 63 and 64
These risks are managed within our overall risk management approach. They are linked to our strategic
pillars on page 19.
Policy due diligence
Risk Management, pages 61 to 166
Non-financial key
performance indicators
Environmental matters
CDP Rating, page 22
Social and employee matters
Diversity and employee engagement: see Talent & Culture,
page 17
Respect for human rights
Bribery and corruption
Mandatory requirement for annual completion of Code
of Conduct training: see Conduct & ethics, page 23
Mandatory requirement for annual completion of Code
of Conduct training: see Conduct & ethics, page 23
1. Some of our policies are not published externally.
24
AIB Group plc Annual Financial Report 2018
Aoibheann O’Brien and Iseult Ward,
founders of FoodCloud, an AIB key
community partner
Our communities
2018 saw the launch of AIB Together, a bank-wide community
programme introducing volunteer leave for every employee.
In March 2018, we launched AIB
Together, a bankwide community
programme focusing on core themes of
Youth & Education and Entrepreneurship.
Significantly, AIB Together also introduced
volunteer leave, enabling our employees
to each take two days’ volunteering per
year to support local charities and
community organisations.
Our key community partners in the AIB
Together programme are FoodCloud
and Soar.
FoodCloud is a multi-award-winning
social enterprise that enables the
redistribution of surplus food from the
food industry to the charity sector, with
a vision for a world where no good food
goes to waste. It has redistributed over
20 million kilos of food to over 9,500
charitable groups across Ireland and the
UK, the equivalent of over 45 million
meals. In addition to financial support,
AIB employees volunteer with
FoodCloud and its associated charities,
donating over 1,000 hours since the
launch of AIB Together. In 2018, AIB
volunteers packed food that benefitted
25,000 individuals through 55,000 food
packs, and over 350,000 meals have
been prepared using products packed
by AIB volunteers.
Soar is a collective movement for young
people, creating and delivering early
intervention-preventative wellness
workshops for young people from all
backgrounds aged between 12 and 18
years. Its workshops aim to empower
young people to thrive, believe in
themselves and fulfil their true potential.
Soar has worked with over 27,000
young people since 2012 and saw a 55%
increase from 2017 to 2018 in young
people reached.
Time and again, employees across the
Group get together to arrange a variety of
events and initiatives that raise much-
needed funds for charities close to their
hearts. 2018 was no different, with a few
examples being: employees and
customers in the Clonakilty branch rowed
50km – from Clonakilty to Marymount
– on two rowing machines raising funds
for the Marymount Hospice; winners of
the inaugural AIB Dublin Charity Golf Cup
ensured their prize money went to Spina
Bifida Ireland; our Direct Service teams in
Naas and Airside held a fundraising raffle
for Éist Cancer Support Centre in Carlow;
employees from across the bank joined
Junior Achievement Ireland (JAI) in
facilitating educational opportunities for
young people; and, once again, teams in
AIB Technology took part in the annual
Techies for Temple Street initiative.
Our GAA partnership
AIB has partnered with the GAA, Ireland’s
largest community organisation, in various
guises for more than 30 years. Since 1991
we have sponsored the All-Ireland Club
Championships, a competition we are
very proud of. We are proud sponsors of
the All Ireland Football Championship,
giving us the opportunity to engage with
the 1,700 GAA clubs and communities
in Ireland all year round.
In May 2018, AIB reaffirmed our
commitment to the GAA with another
five-year sponsorship agreement to the
end of 2022. Our partnership now
incorporates: Title Sponsor of the Club
Championships in Hurling, Football and
Camogie, across Junior, Intermediate
and Senior Levels; and Sponsor of the
Senior Football Championships.
The AIB GAA Home Insurance Offering
contributed €50 to any GAA club
nationwide when a new home
insurance policy was purchased by a
member or supporter of that club. The
offer ran from October 2016 to October
2018, with an overall investment of
€140,000 from AIB funds into grassroots
clubs, along with €1,000 jersey vouchers
allocated to 12 clubs.
In December 2018, AIB presented
the Jack and Jill Foundation with
a cheque for €11,000, the result of
a surplus from the AIB GAA Home
Insurance Offering. The donation will
provide over 680 home nursing hours
for children who are born with or
develop severe neuro developmental
delay up to the age of five.
AIB Group plc Annual Financial Report 2018
25
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements Governance in AIB
AIB’s Board is collectively responsible for the long-term, sustainable success
of the Group and ensuring there is a clear and cohesive corporate governance
structure in place. The Board is fully aware of the importance of its role and
is committed to upholding and fostering an environment of sound corporate
governance standards.
Richard Pym
Chairman
“The ExCo has
primary authority
and responsibility
for the day-to-day
operations and
strategic development
of AIB Group”
AIB’s corporate governance standards
are implemented by way of a
comprehensive and coherent suite of
frameworks, policies, procedures and
standards covering corporate
governance as well as business and
financial planning and risk management
activities. These are supported by a
strong tone from the top on expected
culture and behaviours. Such standards
are overseen by the Nomination and
Corporate Governance Committee,
which reports regularly to the Board.
We have established internal
arrangements that ensure compliance
with relevant statutory and regulatory
requirements as well as best-practice
standards and guidelines. Our corporate
governance framework underpins
effective decision-making and
accountability and forms the basis upon
which we strive to conduct our business
and engage with our customers and
other stakeholders.
This framework was applied effectively
during 2018, particularly with regard
to succession planning, as outlined later
in this report. The strength of AIB’s
corporate governance practices and
standards facilitated the Board in making
timely, well-informed decisions.
Examples of how our corporate
governance structures have operated
during 2018 are detailed in the
‘Governance in Action’ section on
page 30.
The following pages provide a
high-level account of how AIB applied
the key principles of the UK Corporate
Governance Code 2016 (the UK Code)
during 2018. An index of specific
references to compliance with the
UK Code is outlined on page 33.
Please read in conjunction with
our ‘Corporate Governance
report’ on page 174.
Corporate structure
AIB Group plc is the holding company
of AIB Group and is an Irish registered
company that has securities listed on the
26
AIB Group plc Annual Financial Report 2018
main markets of the Euronext Dublin and
London Stock Exchanges. Allied Irish
Banks, p.l.c. (AIB Bank) continues to be the
principal operating and regulated financial
services company and the only direct
subsidiary of the holding company.
The Board and Board Committees of the
holding company and AIB Bank comprise
the same Directors, with Board and Board
Committee meetings for these companies
being held concurrently.
Corporate governance
As a listed company, AIB Group plc is
subject to the provisions of the 2016
UK Code, to the listing rules of the
Exchanges, including the Irish Corporate
Governance Annex to the Euronext
Dublin Stock Exchange Rules, the
Disclosure & Transparency Rules of the
London Stock Exchange and the Central
Bank of Ireland’s Transparency Rules.
The Central Bank of Ireland (CBI)
Corporate Governance Requirements for
Credit Institutions 2015 imposes standards
upon all credit institutions licensed or
authorised by the CBI. As the primary
banking subsidiary of the holding
company, AIB Bank is subject to these
requirements and additional requirements
outlined for High Impact Designated
Institutions. AIB Bank is also subject to the
corporate governance requirements for
institutions deemed ‘Significant’ for the
purposes of the European Capital
Requirements Directive (CRD IV). Where
appropriate, all corporate governance
requirements and related policies and
practices are applied across the holding
company and AIB Bank.
Our leadership structure
Our Board
Our 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 (SID) and Deputy
Chairman. Biographies for each Director
can be found on pages 34 and 35.
The Nomination and Corporate
Governance Committee is responsible
for monitoring the composition of the
Board and ensuring appropriate
succession plans are in place.
During the second half of 2018,
significant succession planning activities
took place, with three long-serving
Non-Executive Directors departing
in 2019. These activities included the
commencement of rigorous searches
to identify suitable candidates of high
calibre with the necessary skills and
experience to succeed:
• Ms Catherine Woods, whose
nine-year term concludes in October
2019. We searched for a candidate
who can add value generally to the
Board as a Non-Executive Director
while also taking on Ms Woods’
current role of Board Audit
Committee Chairman.
• Mr Jim O’Hara, whose nine-year term
also concludes in October 2019. We
searched for a candidate who can
add value generally to the Board as
a Non-Executive Director while also
taking on Mr O’Hara’s current role of
Remuneration Committee Chairman.
• Mr Peter Hagan, whose seven-year
term concludes in July 2019. We
searched for a candidate with a skill
set in the areas of risk management
and investment banking. A separate
process is also underway to appoint
a current Member of the Board Risk
Committee as its Chairman in place
of Mr Hagan.
Each of these processes require
consultation with the Minister for
Finance as well as submission of
applications to the CBI and the
European Central Bank (ECB) for fitness
and probity assessment processes, prior
to final Board approval.
In addition to these activities, during
2018 the Minister for Finance made
nominations for the appointment of
Directors as permitted under the
Relationship Framework between AIB and
the Irish State. Any such appointments
also require the submission of fitness and
probity applications to the CBI and the
European Central Bank.
Market announcements will be made
upon conclusion of these processes,
in line with the applicable Listing Rules,
unless a proposed appointment has
been deemed inside information under
the Market Abuse Regulation, in which
case market announcements would be
treated accordingly.
As announced previously, during late
2018, the two current Executive
Directors, Mr Bernard Byrne, Chief
Executive Officer (CEO), and Mr Mark
Bourke, Chief Financial Officer (CFO),
informed the Board of their intention to
step down from their roles in early 2019.
On 14 December 2018, Dr Colin Hunt
was announced as the Board’s proposed
successor to the role of CEO and
Executive Director. The regulatory
assessment processes relating to
Dr Hunt’s proposed appointments and a
successor to the CFO role respectively are
progressing well and are expected to
finalise shortly.
In addition, it was announced on
27 February 2019, that Mr Simon Ball, a
long-serving Independent Non-Executive
Director, who would have reached his
nine-year term on the Board during 2020,
has noted his intention not to stand for
re-election at this year’s Annual General
Meeting (AGM).
AIB Group Board
Board Audit
Committee
Board Risk
Committee
Remuneration
Committee
Nomination and
Corporate
Governance
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
See page 186 for
further information
See page 192 for
further information
Remuneration
policies and practices,
remuneration of
Chairman, CEO,
Executive Directors,
ExCo and other
senior management
Board composition,
committee
membership,
corporate
governance policies
and practices, and
succession planning
See page 201 for
further information
See page 196 for
further information
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
See page 28 for
further information
Board Committee
Board Committee
Board Committee
Board Committee
Advisory Committee
AIB Group plc Annual Financial Report 2018
27
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements Governance in AIB continued
Our Committees
Board Committees
The Board has established a number of
Board Committees, as identified in the
table on page 27. The purpose of each
Committee is detailed in their specific
terms of reference. The Board retains
ultimate responsibility for the decisions
taken by its Committees. Further details
are in the Corporate Governance Report
which can be found on pages 174 to 185.
Sustainable Business Advisory
Committee
The Sustainable Business Advisory
Committee (SBAC) is an advisory
committee to the Board. Its membership
includes Non-Executive Directors and
members of senior management. Since
its establishment in 2016, SBAC has
continued to enhance AIB’s focus on
building a long-term sustainable business.
The Board has recently reaffirmed AIB’s
sustainability agenda as a priority for 2019
and beyond. Further details on our work
on sustainability can be found on pages
20 and 25.
Executive Committee
Up to 31 October 2018, AIB’s most senior
executive committee was the Leadership
Team. The introduction of the new
operating model provided a timely
opportunity to review our executive
governance structures and ensure
alignment with the following areas of
focus: (i) becoming a single, purpose-led
organisation, (ii) ensuring high standards
and customer values are at the heart of
decision-making, (iii) driving our values and
strategy, and ensuring these are aligned
with our culture, and (iv) empowering
managers in order to allow our most senior
leaders to focus on strategy, culture,
people and performance matters.
The review resulted in the establishment
of a refocused Executive Committee
(ExCo) in November 2018. The ExCo has
primary authority and responsibility for
the day-to-day operations and strategic
development of AIB.
The ExCo works with and advises the
CEO, ensuring a collaborative approach
to decision-making and collective
ownership of strategy development
and implementation.
Biographies for each ExCo member can
be found on pages 36 and 37.
28
AIB Group plc Annual Financial Report 2018
Diversity
Our Board recognises the benefits of
diversity and embraces these benefits
among its own members, with regard to
diversity of skills, experience, background,
gender and other qualities. The objective
of the Board Diversity Policy is to achieve
the most appropriate blend and balance
of diversity possible over time, with focus
remaining at all times on identifying the
most suitable candidates to oversee the
significant financial service activities and
related requirements of AIB.
Under the Capital Requirements
Directive, we are required to specifically
address the under-represented gender
on our Board. In the case of AIB,
and many other organisations, the
under-represented gender is female.
Prior to the original Policy in 2015, there
was one female on the Board. When
the Policy was introduced and up until
July 2018, the Policy stated the Board’s
objective of achieving or exceeding 25%
female representation on the Board.
This target was exceeded in January
2018 and the Policy now aims to seek a
minimum of 30% female representation
on the Board by the end of 2020. As at
31 December 2018, the percentage
of females on the Board was 27%.
The Board is confident that it will
achieve the new target.
The Policy and stated diversity targets are
provided to external search firms who
may be engaged in searches for potential
new Board members, with the intention
being to ensure a diverse selection of
credible candidates for consideration.
They are also provided to the Minister for
Finance to facilitate his considerations
when appointing nominees to the Board.
Unless otherwise advised, all Directors
are subject to re-election by shareholders
at the AGM and will be subject to annual
re-election thereafter. The Board’s view of
the continued suitability of each Director
is provided to shareholders to support
their decision in advance of the AGM.
The Board’s composition remains under
continuous review.
Leadership
There is a clear division of responsibilities
between the Chairman, responsible for
leadership of the Board and ensuring its
effectiveness, and the CEO, responsible
for running the business.
The Board is committed to providing a
clear tone from the top on culture and
expected behaviours. Further information
is included in the Governance in Action
section on page 30 to 32.
Non-Executive Directors constructively
challenge and assist the ExCo in
developing proposals on strategy and
other material topics. Meetings are held
by the Non-Executive Directors without
the executives being present at least
annually and ad hoc as required.
As part of the annual effectiveness
evaluation, during 2018, led by the Senior
Independent Director, the Board met
without the Chairman present to appraise
the Chairman’s performance. Similarly,
the Non-Executive Directors met without
the executive present to appraise the
CEO’s performance.
In order to discharge their responsibilities
effectively, Directors are expected to
allocate sufficient time to their role on
the Board. A minimum annual time
commitment is agreed with each
Non-Executive Director. Each Director is
required to adhere to limitations on other
external directorships and to seek prior
approval should they wish to take on any
additional external roles. In accordance
with EBA and SMA Guidelines,
enhancements were introduced during
2018 to the oversight and assessment
mechanisms relating to suitability and
time commitment.
Directors are expected to attend and to be
well prepared for all Board and Committee
meetings, while also making time to
ensure their continued understanding of
the business, engage with executives and
regulators, and complete relevant training.
Our Directors have proven themselves to
be committed, affording the appropriate
time for their duties.
An overview of the number of scheduled
and out-of-course meetings held and
attended by each Director can be found
on page 34 and 35. If, due to exceptional
circumstances, a Director is unable to
attend a meeting, they ensure that their
views are made known 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. Having conducted
a successful external evaluation in 2017,
facilitated by Lintstock and reported in the
Annual Financial Report 2017, an internal
evaluation was carried out in 2018. The
2018 internal evaluation was led by the
Chairman and was facilitated by Lintstock
through formal questionnaires. The
provision of these questionnaires and
production of a consolidated report by
Lintstock on the outcome of that aspect
of the internal evaluation process allowed
us to ascertain the progress made
between the two evaluations.
Details of the full 2018 evaluation process,
along with progress made in addressing
any findings identified during the 2017
external evaluation, can be found on
pages 183 and 184.
In addition to the questionnaire process,
the Chairman held meetings with
individual Directors to discuss their
individual effectiveness and the Board’s
effectiveness more generally. Reviews
of the Chairman’s effectiveness and that
of the CEO were also formally conducted
during 2018.
We consider the independence of
our Non-Executive Directors annually,
using the independence criteria set out
in the UK Code and the CBI’s Corporate
Governance Requirements for Credit
Institutions 2015, having regard for
the co-terminus appointments of the
Directors to the Board of AIB Bank
and the holding company. Any actual,
potential or perceived conflicts of interest
and certain behaviours that are essential
in order to be considered independent
are also continually monitored.
We currently exceed the necessary
minimum ratio of independent Directors
required on the Board, as determined by
the UK Code. Excluding the Chairman,
80% of the Board is deemed
independent, with the other 20%
representing 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 AIB’s position and
prospects, performance, business model
and strategy. The Board Audit Committee
and the Board Risk Committee regularly
conduct a detailed review of AIB’s risk
management, internal control systems,
financial record and reporting systems
and provide reports for the Board’s
consideration. These matters are dealt
with throughout this report, in particular
on pages 186 to 195.
0.23% voted against it. This reflected
previous announcements, where
institutional shareholders and proxy
advisers recognised the need for a
fit-for-purpose remuneration policy in
the interests of all those invested in AIB.
Remuneration
The Board fully appreciates its obligation
to ensure that remuneration promotes
the long-term sustainable success of
AIB. The Board also acknowledges
that there should be a formal and
transparent procedure for developing
policy, with all Directors exercising
independent judgement and discretion
when authorising remuneration
outcomes, taking account of Group
and individual performance and wider
circumstances.
As you will see later in this report,
the Group’s Remuneration Policy is
governed by restrictions contained
in the Subscription and Placing
Agreements in place with the Irish State.
In light of this, AIB is unable to
implement a competitive, market-
aligned compensation and benefit
structure to retain and incentivise key
executives. The need for meaningful
change in this area was highlighted
in our IPO prospectus and continually
throughout 2018. The resignation of
a number of senior executives during
2018, including the CEO and CFO,
supports the Board’s reported concerns.
Heightened people risk and the
continuing limitations on the Board’s
ability to exercise its authority and
discretion over remuneration, in line
with EBA Guidelines on Sound
Remuneration Policies, remains of
utmost concern to the Board.
At the 2018 AGM, the advisory vote
on the Remuneration Policy put to
shareholders was not carried. Under
the UK Code, where a significant portion
of votes have been cast against a
resolution, we are required to explain,
when announcing the results of voting,
what actions we intend to take to
understand the reasons behind the
vote result. We reported at that time that
the Minister for Finance, as majority
shareholder on behalf of the Irish State,
represented 76.09% of the total votes
cast. Of the remaining 23.91% of
shareholders who voted, 99.77% voted
for the Remuneration Policy, while
We welcomed the Minister’s intention
in 2018 to establish a review on banking
remuneration practices, which is
consistent with the Board’s objectives
to address the elevated risk associated
with the current remuneration structure.
Our ability to retain and attract the skills
necessary to maximise value for all
shareholders, including the taxpayer,
is in part dependent on our ability to
compete with the remuneration
practices of other employers.
Accordingly, we look forward to the
conclusion of the Minister’s review of
banking remuneration practices and will
continue to engage with shareholders
on this matter.
Engagement
Our Chairman and other Board
representatives, including the CEO and
CFO, 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.
We engaged with investors frequently and
productively throughout 2018.
The SID is also available to shareholders
should they wish to meet and discuss
AIB matters. During 2018, Ms Woods
met with shareholders in her capacity
as SID to discuss matters including
management changes following the
announcements of the imminent
departures of the CEO and CFO.
Reports on investor relations activity,
along with regular reports of changes
in holdings of substantial shareholders
and on share price movements, are
provided to the Board. Along with
other planned events for the investor
community, the AGM provides a good
opportunity for the Board to engage
with a broader group of shareholders.
AIB Group plc Annual Financial Report 2018
29
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements Governance in action
Sound corporate governance standards are paramount to ensuring effective Board
decision-making. The Board is fully aware of the importance of its role and is committed
to upholding high standards and seeking continual enhancements. Here are some
examples, at a high level, of where strong corporate governance standards were
demonstrated throughout the year.
Succession planning
Recognising the level of anticipated
change to Board membership due
to the length of tenure of current
Independent Non-Executive Directors,
the Nomination and Corporate
Governance Committee worked with
the Group Company Secretary to
enhance the existing Board succession
plan and create a rolling three-year
Board Succession Plan. The formulation
of this plan included considerations such
as: the skill set of the Board as a whole;
the core skills of those Directors nearing
the end of their terms; the collective
suitability of the Board; and diversity.
The Committee dedicated extensive
time to the plan, reviewing job
descriptions and required skill sets for
the upcoming roles, assessing potential
search firms, reviewing candidate lists,
conducting interviews and deliberating
as to the most appropriate and suitable
candidates for the roles.
Importantly, candidate specifications
noted that, as a member of the Board,
candidates would be required to promote
AIB’s purpose, values, strategy and culture
ensuring their alignment and continually
working to enhance focus on these
areas across the Group. On meeting
candidates, the Committee also
considered whether they were of
sufficient calibre and would enhance the
Board’s overall effectiveness, facilitating
the Board in fostering a culture where
a commitment to high standards and
customer values is at the heart of
decision-making.
In deciding on the most appropriate
candidates for each role, the Committee
assessed what skills the potential
candidates would contribute, and how
those skills would sit in the collective
suitability of the Board.
Throughout 2018, five Non-Executive
Director searches were conducted and
will hopefully conclude successfully in
early- to mid-2019, following a full
fitness and probity assessment of
proposed candidates by the Regulator.
Succession planning at executive level,
led by the Chief Executive Officer (CEO)
in conjunction with Group Human
Resources and overseen by the
Committee, was also a core focus in
2018. The work completed on executive
succession planning to date and the
continued monitoring of same by the
Committee meant that the Group was
well placed to react appropriately and
initiate robust assessment and search
processes upon the announcements
of the resignation of the CEO and
Chief Financial Officer (CFO). Immediate
actions taken in response to the earlier
notification of the CFO’s intended
resignation included the appointment
of a Deputy CEO and Deputy CFO.
Successors for appointment to the roles
of CEO and CFO have also been
identified and the regulatory approval
process is ongoing. It is testament to the
Group’s succession planning processes
and focus on developing our employees
that a pool of credible, high-calibre,
internal candidates were available for
consideration as part of the succession
processes.
Overseeing strategy development
During the 2017 Board effectiveness
evaluation, the Board requested that
additional time be allocated on its
agenda in order to consider strategy,
including the longer-term outlook, the
impact of changing technology and the
competitive landscape. In response, and
as part of the intended evolution of the
wider integrated and focused strategic
programme under the direction of the
CEO and the Head of Group Strategy,
dedicated time was allocated at Board
meetings to focus on strategic items.
In May 2018, significant time was spent
reviewing progress against the strategy
agreed in late 2017, framing the agenda
for the strategic considerations to take
place over the remainder of the year,
culminating in a robust full-day strategy
session in November 2018.
This annual strategy session built on
progress made at similar annual strategy
sessions in recent years, and provided
an open and interactive session for the
Board and the executive team. The
session concentrated on AIB’s strategic
priorities and the strategic plans
supporting each of the new business
areas of Homes, Business and Consumer
(introduced as part of the new operating
model on 1 January 2019). The content
of the session was framed by AIB’s four
strategic pillars, with a focus on culture,
conduct and sustainability throughout.
Consideration was given to risk appetite,
drivers of European banking change,
customer and societal evolution and
related implications, digital evolutions
and strategic options available to AIB.
The Board and members of the
executive team openly debated these
matters
and leveraged the broad range of
experience represented at the session
in developing the strategic programme
for 2019.
30
AIB Group plc Annual Financial Report 2018
“The Board’s review and challenge of the proposed
new operating model was central to its overall
design and finalisation.”
Nationality
Executive vs Non-Executive Directors
Directors Age
Irish (8)
British (2)
American (1)
Non-Executive Directors (9)
Executive Directors (2)
51-55 years
56-60 years
61-65 years
66-70 years
Board Diversity by Tenure
0-3 years 3-6 years
6-9 years
The consistent message relayed during
the session was the need to ensure
continued focus on the Group’s
Customer First strategic pillar and the
clear commitment to fulfil AIB’s purpose.
Integrating the new operating model
AIB’s operating model was reviewed
throughout 2018 to ensure it remained
fit for purpose and was focused on
delivering for the customer in a simple
and efficient manner. The Board
provided input into and constructive
challenge to a new operating model
prior to its approval and agreement in
mid-2018. Following completion of
regulatory fitness and probity
assessment processes, it was approved
and announced in November 2018,
becoming effective on 1 January 2019.
This operating model was rolled out in
tandem with developments in AIB’s
property strategy, evolving agile working
environments and a revised career
model, all of which are positive
developments in modernising,
enhancing and simplifying our
operations.
Tone from the top
Culture was top of mind for the Board
throughout 2018 and, following the
2018 effectiveness evaluation process,
was specifically included as a Board
priority.
In April 2018, the Chairman hosted a
Tone from the Top event attended by
the full Board and senior leaders from
across the Group. The event saw each
Director speaking openly about their
experiences and their respective views
of AIB. Directors shared their respective
expectations of management across a
number of matters, including culture,
the need for openness and the
escalation of any issues of concern, and
the role of the Board to constructively
challenge management. Management
had the opportunity to submit questions
in advance and raise questions on the
day, with Directors openly responding
to the audience.
While the operating model did not
result in a change to the Board and its
governance structures specifically, the
Board’s review and challenge of the
proposed new model was central to its
overall design and finalisation. Key areas
of consideration by the Board included:
the appropriateness of the design in
the context of customers and conduct;
the effective operation of the three lines
of defence; the risk management and
internal control framework; and the
desire to modernise the business. The
Nomination and Corporate Governance
Committee considered the executive
appointments to the Executive
Committee and the heads of the newly
identified business areas. The Board
received regular updates on progress,
including a risk assessment of the
operating model’s implementation
and progress in addressing any areas
requiring greater focus.
Read more details in our Committee Reports in the
Governance and Oversight section on pages 168 to 214.
AIB Group plc Annual Financial Report 2018
31
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements Governance in action continued
A similar event will be held in 2019 to
ensure the appropriate tone is set by
the Board and to provide a positive
opportunity for two-way engagement
and communication between the Board
and a wider management cohort.
The Board welcomed the Central Bank
of Ireland (CBI) review in 2018 of
Behaviour and Culture in the Banking
Industry and Directors were kept abreast
of events by management as the review
progressed. CBI representatives
attended the December 2018 Board
meeting, which provided a welcome
opportunity for the Board to engage
on the topic of culture, to hear directly
from the CBI and understand their
expectations in terms of the Board’s role
in culture within the industry. The Board
understands and fully appreciates that
culture is about the behaviours that
are encouraged and embedded across
the Group as well as ensuring the
implementation of robust conduct,
risk management and internal control
frameworks, processes and controls.
The Board also welcomed the
establishment of the Irish Banking
Culture Board (IBCB) in 2018, which is a
progressive step in seeking to enhance
the culture across the industry as
a whole.
The IBCB conducted a survey of
employees across the Irish banks in
2018. The outcome of this survey is
under consideration in the context of
the wider cultural programme of work
underway across AIB. This includes
internal employee surveys to gauge
how best to leverage the outcomes
of the survey and progress positively
for the benefit of employees and other
stakeholders.
Enhanced Board focus on culture
continues as part of the 2019 Board
work programme.
Sustainability conference keynote
speaker John Mackay, CEO of
Wholefoods Market, with AIB Chairman
Richard Pym, CEO Bernard Byrne and
Director Helen Normoyle
32
32
AIB Group plc Annual Financial Report 2018
AIB Group plc Annual Financial Report 2018
UK Corporate Governance Code
The table below outlines where you can find our disclosures on how AIB has applied the main
principles of the UK Corporate Governance Code 2016 (2016 Code).
We welcome the introduction of the
new UK Corporate Governance Code
2018 (2018 Code), which brings a
sharper focus to key issues including the
importance of a having a clear purpose
and culture, the value of stakeholder
engagement, and the evolution and
continued importance of Board
composition and succession planning.
The ethos of the updated 2018 Code
is aligned with AIB’s focus on ensuring
long-term sustainability and taking
meaningful action to continue to hold
a social licence to operate. Given
developments in these important areas
of focus during 2018, the Board is
satisfied that AIB is well positioned to
continue to enhance performance and
deliver meaningful compliance with key
aspects of 2018 Code during 2019.
Under the Listing Rules and the
Irish Corporate Governance Annex,
companies are required to apply
the main principles of the 2018 Code
and report to shareholders on how
they have done so. Our Statement
of Compliance with the 2018 Code
is on page 174.
Code Principle
A. Leadership
Section
Page
Every company should be headed by an effective board which is collectively responsible for the long-term
success of the company.
• Demonstrating leadership through
corporate governance
There should be a clear division of responsibilities at the head of the company between the running of the
board and the executive responsibility for the running of the company’s business. No one individual should
have unfettered powers of decision.
• Leadership
• Demonstrating leadership through
corporate governance
The chairman is responsible for leadership of the board and ensuring its effectiveness on all aspects of its role.
• Key roles and responsibilities
As part of their role as members of a unitary board, non-executive directors should constructively challenge
and help develop proposals on strategy.
• Leadership
• Overseeing strategy development
• Key roles and responsibilities
B. Effectiveness
The board and its committees should have the appropriate balance of skills, experience, independence and
knowledge of the company to enable them to discharge their respective duties and responsibilities effectively.
There should be a formal, rigorous and transparent procedure for the appointment of new directors to the board.
All directors should be able to allocate sufficient time to the company to discharge their responsibilities effectively.
All directors should receive induction on joining the board and should regularly update and refresh their skills
and knowledge.
The board should be supplied in a timely manner with information in a form and of a quality appropriate
to enable it to discharge its duties.
The board should undertake a formal and rigorous annual evaluation of its own performance and that of its
committees and individual directors.
• Board of Directors
• Balance and independence
• Diversity
• Succession planning
• Board appointments
• Leadership
• Terms of appointment and time commitment
• Our professional development and training
programme
Induction and professional development
•
• How our Board meetings work
• Effectiveness
• Board effectiveness
• 2018 internal evaluation
All directors should be submitted for re-election at regular intervals, subject to continued satisfactory performance.
• Terms of appointment and time commitment
C. Accountability
The board should present a fair, balanced and understandable assessment of the company’s position and
prospects.
• Report of the Board Audit Committee
• Viability Statement
The board is responsible for determining the nature and extent of the principal risks it is willing to take in achieving
its strategic objectives. The board should maintain sound risk management and internal control systems.
The board should establish formal and transparent arrangements for considering how they should apply the
corporate reporting and risk management and internal control principles and for maintaining an appropriate
relationship with the company’s auditors.
• Risk Management – 2. Framework
• Report of the Board Risk Committee
•
Internal controls
• Risk Management – 2. Framework
• Report of the Board Audit Committee
• Report of the Board Risk Committee
•
Internal controls
D. Remuneration
Executive directors’ remuneration should be designed to promote the long-term success of the company.
Performance-related elements should be transparent, stretching and rigorously applied.
• Remuneration
• Report of the Remuneration Committee
• Corporate Governance Remuneration Statement
There should be a formal and transparent procedure for developing policy on executive remuneration and
for fixing the remuneration packages of individual directors. No director should be involved in deciding his
or her own remuneration.
• Remuneration
• Report of the Remuneration Committee
• Corporate Governance Remuneration Statement
E. Relations with Shareholders
There should be a dialogue with shareholders based on the mutual understanding of objectives. The board
as a whole has responsibility for ensuring that a satisfactory dialogue with shareholders takes place.
• Engagement
• Shareholder interaction
The board should use general meetings to communicate with investors and to encourage their participation.
• Engagement
• Shareholder interaction
175
28
175
176
28
30
176
34
183
185
30
182
28
182
180
182
178
28
183
183
182
186
211
69
192
212
69
186
192
212
29
201
205
29
201
205
29
185
29
185
AIB Group plc Annual Financial Report 2018
33
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements
Board of Directors
Richard Pym
Non-Executive
Chairman (69)
Catherine Woods
Senior Independent
Non-Executive
Director, Deputy
Chairman (56)
Simon Ball
Non-Executive Director
(58)
Tom Foley
Non-Executive Director
(65)
Peter Hagan
Non-Executive Director
(70)
Carolan Lennon
Non-Executive
Director (52)
Nationality
British
Date of appointment
13 October 2014 Chairman
Designate
1 December 2014 Chairman
Committee membership
(as at 31 December 2018)
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
that 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. Richard
was appointed as Chairman
in 2014.
Key external appointments
None
Irish
British
Irish
American
Irish
Irish
Irish
13 October 2010
13 October 2011
13 September 2012
26 July 2012
26 October 2016
17 December 2015
13 October 2010
27 October 2016
24 June 2011
29 May 2014
A R N
R R N
A
A R
R S
A R N S
A R R
None
None
Catherine is 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.
Catherine was appointed
Senior Independent
Non-Executive Director
in January 2015 and
subsequently Deputy
Chairman of the Board
on 1 January 2018.
Simon has previously held
the roles of Chairman of
Anchura Group Limited
and Non-Executive Deputy
Chairman and Senior
Independent Director of
Cable & Wireless
Communications plc. Simon
has also served as Group
Finance Director of 3i Group
plc and the Robert Fleming
Group. As 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. Simon
is Senior Independent
Director on the board of
Commonwealth Games
England and a Non-
Executive Director of
Birmingham Organising
Committee for the 2022
Commonwealth Games
Limited.
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 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.
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 and FDS Inc. 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 of the US
subsidiaries of IBRC. He is
at present a consultant in
the fields of financial service
litigation and regulatory
change.
Prior to her current role of
CEO of Eir, Carolan held
a variety of executive roles
in Eir Limited, including
Managing Director of open
eir, 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 and the Irish
Management Institute.
Chairman, Beazley Insurance
d.a.c.
Non-Executive Director,
Beazley p.l.c.
Non-Executive Director,
BlackRock Asset
Management Ireland Limited
Board member,
Commonwealth Games
England
Non-Executive Director,
Birmingham Organising
Committee for the 2022
Commonwealth Games
Limited
Non-Executive Director,
Intesa Sanpaolo Life d.a.c.
None
GCM Grosvenor Alternative
Funds Master ICAV
GCM Grosvenor Alternative
Funds ICAV
Chief Executive Officer of Eir
Sits on the Council of Patrons
for Special Olympics Ireland
Helen Normoyle
Jim O’Hara
Brendan McDonagh
Bernard Byrne
Mark Bourke
Non-Executive Director
Non-Executive Director
Non-Executive Director
Chief Executive
Officer, Executive
Director (50)
Chief Financial Officer,
Executive Director (52)
(51)
Nationality
Irish
Date of appointment
(68)
Irish
(60)
Irish
Helen is currently Marketing
Jim is a former Vice President
Brendan started his banking
Bernard started his
Director of Boots UK and
of Intel Corporation and
career with HSBC in 1979,
career in 1988 in
Ireland. She started her
General Manager of Intel
working across Asia, Europe
PricewaterhouseCoopers
career working for one of
Ireland, where he was
and North America, where
before moving in 1994
Europe’s leading market
responsible for Intel’s
he held various roles such
to ESB International as
research agencies,
technology and
as Group Managing Director
Commercial Director for
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
Infratest+GfK, based in
manufacturing group in
for HSBC Holdings Inc,
International Investments.
from IFG Group plc where
Germany. Helen moved to
Ireland. He is a past President
membership of the HSBC
In 1998 he joined IWP
he held a number of senior
Motorola, where she held
of the American Chamber of
Group Management Board
International plc as Finance
roles, including Group Chief
senior positions as Director
Commerce in Ireland and
and CEO of HSBC North
Director, and later Deputy
Executive Officer, Deputy
of Marketing and Director of
former board member of
America Holdings Inc.
CEO. In 2003, Bernard
Global Consumer Insights
Enterprise Ireland and Fyffes
Brendan is a former Director
joined ESB as Group
Chief Executive Officer
and Finance Director.
and Product Marketing.
plc. Jim has acted as a
of Ireland’s National Treasury
Finance Director. Before his
Mark began his career at
In 2003, Helen moved to
Non-Executive Director of
Management Agency. He
appointment as Chief
PricewaterhouseCoopers
Ofcom, the UK’s Telecoms
a number of indigenous
was previously the Executive
Executive Officer of AIB in
in 1989 and is a former
and Communications
technology start-up
Regulator, as Director of
companies.
Chairman of Bank of N.T.
Butterfield & Son Limited.
Committee membership
(as at 31 December 2018)
S
Expertise
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.
May 2015, Bernard was an
partner in international tax
Executive Director on the
services with PwC US in
AIB Board and held various
California. He is a member
executive positions such as
of Chartered Accountants
Chief Financial Officer and
Ireland and the Irish
Taxation Institute. Mark
announced his intention to
resign from AIB Group in
September 2018 and will
depart on 1 March 2019.
Director of Personal,
Business and Corporate
Banking. Bernard was
President of Banking and
Payments Federation
Ireland until December
2016 and President of the
Institute of Banking Ireland
until March 2018. Bernard
announced his resignation
from AIB Group in October
2018 and will depart in
early 2019.
Key external appointments
and Ireland
Marketing Director, Boots UK
Chairman, Decawave Limited
Non-Executive Director, Audit
None
None
(resigned from role in July
Committee Chairman and
2018 but continues to act as
member of the Risk and
a director of related
subsidiary entity)
Nomination Committees of
UK Asset Resolution Limited
Non-Executive Director,
Wisetek Solutions Limited
Serves on the Advisory Board
of the Trinity College Dublin
Business School, and on the
Board of The Ireland Funds,
Ireland Chapter
Chairman, PEAL Investment
Advisory Limited
34
AIB Group plc Annual Financial Report 2018
Richard Pym
Non-Executive
Chairman (69)
Catherine Woods
Simon Ball
Tom Foley
Peter Hagan
Carolan Lennon
Senior Independent
Non-Executive Director
Non-Executive Director
Non-Executive Director
Non-Executive
(58)
(65)
(70)
Director (52)
Non-Executive
Director, Deputy
Chairman (56)
Irish
British
Irish
American
Irish
Helen Normoyle
Non-Executive Director
(51)
Jim O’Hara
Non-Executive Director
(68)
Brendan McDonagh
Non-Executive Director
(60)
Bernard Byrne
Chief Executive
Officer, Executive
Director (50)
Mark Bourke
Chief Financial Officer,
Executive Director (52)
Nationality
Irish
Date of appointment
Irish
Irish
Irish
Irish
13 October 2014 Chairman
13 October 2010
13 October 2011
13 September 2012
26 July 2012
26 October 2016
17 December 2015
13 October 2010
27 October 2016
24 June 2011
29 May 2014
Committee membership
(as at 31 December 2018)
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 as 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.
A R N S
A R R
None
None
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. Jim has acted as a
Non-Executive Director of
a number of indigenous
technology start-up
companies.
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.
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. Mark
announced his intention to
resign from AIB Group in
September 2018 and will
depart on 1 March 2019.
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 on 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 and President of the
Institute of Banking Ireland
until March 2018. Bernard
announced his resignation
from AIB Group in October
2018 and will depart in
early 2019.
Nationality
British
Date of appointment
Designate
1 December 2014 Chairman
Committee membership
(as at 31 December 2018)
R N
Expertise
A R N
R R N
A
A R
R S
Richard is a Chartered
Catherine is former Vice
Simon has previously held
Tom qualified as a
Peter is former Chairman
Prior to her current role of
Accountant with extensive
President and Head of the
the roles of Chairman of
Chartered Accountant with
and CEO of Merrill Lynch’s
CEO of Eir, Carolan held
experience in financial
services. He is a former
Chairman of UK Asset
JPMorgan European Banks
Anchura Group Limited
PricewaterhouseCoopers
US commercial banking
a variety of executive roles
Equity Research Team,
and Non-Executive Deputy
and has extensive
subsidiaries and was also
in Eir Limited, including
where her mandates
Chairman and Senior
experience within financial
a Director of Merrill Lynch
Managing Director of open
Resolution Limited, the entity
included the recapitalisation
Independent Director of
services. He is a former
International Bank (London),
eir, Acting Managing Director
that manages the run-off of
of Lloyds of London and
Cable & Wireless
Executive Director of KBC
Merrill Lynch Bank (Swiss),
Consumer and Chief
the UK government-owned
the re-privatisation of
Communications plc. Simon
Bank Ireland and has held
ML Business Financial
Commercial Officer. Prior
closed mortgage books of
Scandinavian banks.
has also served as Group
a variety of senior
Services and FDS Inc. Peter
to joining Eir, she held a
Bradford & Bingley plc and
Catherine is a former
Finance Director of 3i Group
management and board
has held various executive
number of senior roles in
NRAM Limited. Richard is a
director of An Post, a former
plc and the Robert Fleming
positions with KBC in Ireland
positions across the
Vodafone Ireland, including
former Chairman of Nordax
member of the Electronic
Group. As a Chartered
and the UK. During the
international banking
Consumer Director and
Bank AB (publ), The
Communications Appeals
Accountant, he has held a
financial crisis, Tom was a
industry, including Vice
Marketing Director. Carolan
Co-operative Bank plc,
Panel and a former Finance
series of senior finance and
member of the Nyberg
Chairman and
is a former Non-Executive
Brighthouse Group plc and
Expert on the government
operational roles at Dresdner
Commission of Investigation
Representative Director of
Director of the DIT
Halfords Group plc. He is a
adjudication panel
Kleinwort Benson, and was
into the Banking Sector and
the Aozora Bank (Tokyo) and
Foundation and the Irish
former Non-Executive
overseeing the rollout of the
Director General, Finance,
the Department of Finance
a Director of each of the US
Management Institute.
Director of The British Land
National Broadband Scheme.
for HMG Department for
Expert Group on Mortgage
subsidiaries of IBRC. He is
Company plc, Old Mutual plc
Catherine was appointed
Constitutional Affairs. Simon
Arrears and Personal Debt.
at present a consultant in
the fields of financial service
litigation and regulatory
change.
and Selfridges plc. Richard
Senior Independent
was appointed as Chairman
Non-Executive Director
in 2014.
in January 2015 and
subsequently Deputy
Chairman of the Board
on 1 January 2018.
is Senior Independent
Director on the board of
Commonwealth Games
England and a Non-
Executive Director of
Birmingham Organising
Committee for the 2022
Commonwealth Games
Limited.
Key external appointments
None
Chairman, Beazley Insurance
Board member,
Non-Executive Director,
None
d.a.c.
Commonwealth Games
Intesa Sanpaolo Life d.a.c.
Non-Executive Director,
Beazley p.l.c.
Non-Executive Director,
BlackRock Asset
Management Ireland Limited
England
Non-Executive Director,
Birmingham Organising
Committee for the 2022
Commonwealth Games
Limited
GCM Grosvenor Alternative
Funds Master ICAV
GCM Grosvenor Alternative
Funds ICAV
Chief Executive Officer of Eir
Sits on the Council of Patrons
for Special Olympics Ireland
Key external appointments
Marketing Director, Boots UK
and Ireland
Chairman, Decawave Limited
(resigned from role in July
2018 but continues to act as
a director of related
subsidiary entity)
Non-Executive Director, Audit
Committee Chairman and
member of the Risk and
Nomination Committees of
UK Asset Resolution Limited
None
None
Non-Executive Director,
Wisetek Solutions Limited
Serves on the Advisory Board
of the Trinity College Dublin
Business School, and on the
Board of The Ireland Funds,
Ireland Chapter
Chairman, PEAL Investment
Advisory Limited
Key to Committee membership
A Board Audit Committee
R Board Risk Committee
R Remuneration Committee
N Nomination and Corporate Governance Committee
S Sustainability Business Advisory Committee
AIB Group plc Annual Financial Report 2018
35
Business ReviewAnnual ReviewGovernance and OversightRisk ManagementGeneral InformationFinancial Statements Executive Committee
Triona Ferriter (48)
Chief People Officer
Donal Galvin (45)
Deputy CFO and
Group Treasurer
Deirdre Hannigan (58)
Chief Risk Officer
Donal has worked in
domestic and international
financial markets over
the last 20 years. Prior
to joining AIB in 2013, 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 a Managing
Director in Dutch
Rabobank, where his
responsibilities included
managing its London and
Asian Global Financial
Markets business as well
as being Treasurer of
Rabobank International.
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 operating at
a senior management
level within both US
multinational and
indigenous Irish
companies. Before
working in the banking
sector, her previous
roles supported diverse
business functions,
including manufacturing,
shared services and
retail, mainly in the
pharmaceutical sector.
Triona has broad
experience in driving
high-performance
cultures and leadership,
and is a qualified
Mechanical Engineer
and a business and
executive coach. Prior
to joining AIB in 2017,
she was a European
Executive Director with
MSD, a multinational
Pharmaceutical
organisation.
Tom Kinsella (49)
Managing Director,
Homes
Tom joined AIB in
November 2012 as Group
Marketing Director
and was appointed
Chief Marketing Officer
and Leadership Team
member in 2015. In his
current role, to which
he was appointed in
November 2018, Tom has
responsibility for meeting
the Homes needs of all
our customers across AIB,
EBS and Haven brands.
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.
Colin Hunt (48)
Managing Director,
Corporate, Institutional
& Business Banking
(and CEO Designate)
Colin joined AIB in August
2016 as Managing
Director of Wholesale and
Institutional Banking (WIB).
Prior to joining AIB, he
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. In
December 2018, Colin was
proposed as AIB’s next
Chief Executive Officer.
36
AIB Group plc Annual Financial Report 2018
Robert Mulhall (45)
Managing Director,
Consumer Banking
Brendan O’Connor (53)
Managing Director,
AIB Group (UK) plc
Jim O’Keeffe (51)
Chief Customer & Strategic
Affairs Officer
Tomás O’Midheach (49)
Chief Operating Officer
and Deputy CEO
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 nearly 25 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. He
was appointed Head of
Financial Solutions Group
in 2015 with responsibility
for developing a strategy
to support customers in
financial difficulty, which
resulted in a significant
reduction in NPLs in the
period to 2018. He was
appointed to his current
role in November 2018.
Robert’s career in AIB
has spanned almost 25
years, covering a variety
of roles up to senior
executive management
level including leadership
of Consumer Banking.
He has overseen areas
such as digital channels
innovation, retail banking
distribution, customer
relationship management,
business intelligence,
strategic marketing and
development, as well
as sales management
and operations. Outside
of AIB, Robert 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 and subject
matter expertise 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
Executive Committee. Their biographies can be found on page 35.
AIB Group plc Annual Financial Report 2018
37
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Business review
1. Operating and financial review
2. Capital
Page
40
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Business review - 1. Operating and financial review
Basis of presentation
The operating and financial review is prepared using IFRS and non-IFRS measures to analyse the Group’s performance, providing
comparability year on year. These performance measures are consistent with those presented to the Board and Executive Committee.
Non-IFRS measures include management and regulatory performance measures which are considered Alternative Performance
Measures (“APMs”). APMs arise where 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 55. These measures should be considered in conjunction with IFRS measures as set out in the
consolidated financial statements from page 227. A reconciliation between the IFRS and management performance summary income
statements is set out on page 56.
Figures presented in the operating and financial review may be subject to rounding and thereby differ to the risk management section
and financial statements.
In 2018, the Group implemented the requirements of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with
Customers for the first time and, as permitted, has elected not to restate prior periods (comparative figures are presented on an IAS 39
and IAS 18 basis).
Re-presented 2017
As set out in note 1 (f) Accounting policies ‘Interest income and expense recognition’, when a financial asset is no longer credit
impaired or has been repaid in full (i.e. cured without financial loss), the Group presents previously unrecognised interest income as a
reversal of credit impairment/ recovery of amounts previously written-off. (The Group policy prior to the adoption of IFRS 9 was to
recognise such income in interest income).
To aid comparability in the operating and financial review, the Group has re-presented the 2017 comparative taking account of the new
classification of this income. Accordingly, € 61 million of income in 2017 was reclassified from ‘Net interest income’ and is now included
in ‘Net credit impairment writeback’.
Basis of calculation
Percentages are calculated on absolute numbers and therefore may differ from the percentages based on rounded numbers. The
impact of currency movements are calculated by comparing the results for the current reporting period to results for the comparative
period re-translated at exchange rates for the current reporting period.
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Overview of income statement
The table below presents the Group’s management performance summary income statement. This summary income statement should
be considered in conjunction with IFRS measures as set out in the consolidated financial statements from page 227. A reconciliation
between the IFRS and management performance summary income statements is set out on page 56.
Originally
presented
2017
€ m Management performance - summary income statement
2,176 Net interest income
524
Business income
267 Other items
791 Other income
2,967
Total operating income
(711) Personnel expenses
(601) General and administrative expenses
(116) Depreciation, impairment and amortisation
(1,428) Total operating expenses
2018
€ m
2,100
501
125
626
2,726
(730)
(580)
(138)
(1,448)
1,539 Operating profit before bank levies, regulatory fees, impairment and provisions
1,278
(105) Bank levies and regulatory fees
113 Net credit impairment writeback
8 Writeback of provisions for liabilities and commitments
1,555 Operating profit
19
Associated undertakings
-
Profit on disposal of property
1,574
Profit from continuing operations before exceptional items
33 Gain on disposal of loan portfolios
1 Gain on transfer of financial instruments
(30) Customer redress
(45) Restitution and restructuring costs
(70) Termination benefits
(65) Property strategy costs
(41)
IFRS 9 and associated regulatory costs
-
Loss on disposal of business activities
(51)
IPO and capital related costs
(268) Total exceptional items
1,306
Profit before taxation from continuing operations
(192)
Income tax charge from continuing operations
1,114
Profit for the year
(82)
204
-
1,400
12
2
1,414
147
1
(49)
(91)
(21)
(81)
(51)
(22)
-
(167)
1,247
(155)
1,092
Re-presented
2017
€ m
%
change
2,115
524
267
791
2,906
(711)
(601)
(116)
(1,428)
1,478
(105)
174
8
1,555
19
-
1,574
33
1
(30)
(45)
(70)
(65)
(41)
-
(51)
(268)
1,306
(192)
1,114
-1
-4
-53
-21
-6
3
-3
19
1
-14
-22
17
-
-10
-37
-
-10
-
-
-
-
-
-
-
-
-
-
-5
-19
-2
AIB Group plc Annual Financial Report 2018
41
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Business review - 1. Operating and financial review
Net interest income
Net interest income
Net interest margin
€2,100m
2.47%
Net interest income
Interest income(1)
Interest expense(1)
Net interest income
Average interest earning assets
NIM(2)
NIM - previous basis (see below)
2018
€ m
2,330
(230)
2,100
84,846
%
2.47
2.53
2017
%
€ m change
2,403
(288)
2,115
84,454
-3
-20
-1
-
% Change
2.50
-0.03
2.58
-0.05
Average asset yield of 275 bps in 2018 was 10 bps lower than
2017. This reflected a change in the portfolio mix with increased
volumes of loans and advances to banks, and reduced investment
securities volumes. Yields on investment securities also
decreased as higher yielding assets were sold or matured. Yields
on loans and advances to customers decreased to 342 bps in
2018 from 347 bps in 2017. This was driven by mortgage rate
reductions in 2017, partly offset by the reducing tracker mortgage
book (average volume € 1.4 billion lower than 2017).
Interest expense
Interest expense of € 230 million in 2018 decreased by
€ 58 million compared to 2017, driven by lower average rates on
customer accounts. Interest expense includes € 16 million interest
received in respect of ECB TLTRO funds borrowed since 2016.
Net interest income
Net interest income of € 2,100 million
Net interest margin
€2,100m
Lower income on investment securities was offset by a reduction in
was broadly stable compared to 2017.
interest expense.
2.47%
The material drivers of the NIM movement include:
• Increase in volumes of loans and advances to banks driven by
NIM decreased 3 bps to 2.47% in
2018 from 2.50%(2) in 2017.
Interest income
Interest income of € 2,330 million in 2018 decreased by € 73 million
• Decrease in yields on loans and advances to customers,
c. -3 bps impact, primarily due to mortgage rate reductions in
compared to 2017 mainly driven by a reduction in investment
2017.
securities volumes and yields, and lower yields on loans and
• Decrease in volumes and yields of investment securities
advances to customers following mortgage rate reductions in 2017.
c. -2bps impact.
excess liquidity levels c. -6 bps impact.
Average interest earning assets of € 84.8 billion in 2018 increased
from € 84.5 billion in 2017. An increase in loans and advances to
Partly offset by:
• Decrease in rates on customer accounts c. +9 bps impact.
banks of € 2.3 billion was partly offset by a reduction in investment
securities of € 1.6 billion and a reduction in NAMA senior bonds of
NIM - previous basis
The reported NIM in 2017 of 2.58% included the benefit of
€ 0.5 billion. Loans and advances to customers were broadly stable
previously unrecognised interest income when a financial asset is
with the positive impact of new lending partly offset by continued
no longer credit impaired or has been repaid in full (i.e. cured
redemptions and deleveraging of non-performing loans.
without financial loss). If the 2017 policy had been applied in 2018,
NIM would increase from the reported NIM of 2.47% to 2.53%.
(1)Negative interest income on assets amounting to € 11 million in 2018 (2017: € 4 million) is offset against interest income. Negative interest expense on
liabilities amounting to € 25 million in 2018 (2017: € 13 million) is offset against interest expense.
(2)Re-presented 2017 NIM 2.50% excludes previously unrecognised interest income when a financial asset is no longer credit impaired or has been repaid in
full (i.e. cured without financial loss).
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Net interest income (continued)
Average balance sheet
The table below provides a summary of the Group’s average balance sheet, volumes and rates.
Assets
Year ended
31 December 2018
Interest(1) Average
rate
%
€ m
Average
balance
€ m
Loans and advances to customers
60,879
2,082
NAMA senior bonds
Investment securities
Loans and advances to banks
Average interest earning assets
Non-interest earning assets
Total average assets
Liabilities & equity
Deposits by banks
Customer accounts
Subordinated liabilities
Other debt issued
Trading portfolio financial liabilities less assets
Average interest earning liabilities
Non-interest earning liabilities
Equity
Total average liabilities & equity
-
15,313
8,654
84,846
7,176
-
226
22
2,330
92,022
2,330
2,771
36,670
794
5,220
3
45,458
32,986
13,578
92,022
2
151
32
45
-
230
230
3.42
-
1.47
0.26
2.75
0.06
0.41
3.98
0.87
-
0.51
Year ended
31 December 2017
Interest(1) Average
rate
%
€ m
Average
balance
€ m
60,619
2,105
531
16,908
6,396
84,454
7,165
2
284
12
2,403
91,619
2,403
3.47
0.39
1.68
0.20
2.85
5,071
36,608
792
5,659
8
48,138
30,141
13,340
91,619
(4)
(0.08)
0.62
3.95
0.59
-
0.60
228
31
33
-
288
288
Net interest income
2,100
2.47
2,115
2.50
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(1)Negative interest income on assets amounting to € 11 million in 2018 (2017: € 4 million) is offset against interest income. Negative interest expense on
liabilities amounting to € 25 million in 2018 (2017: € 13 million) is offset against interest expense.
AIB Group plc Annual Financial Report 2018
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Business review - 1. Operating and financial review
Other income
Other income(1)
€626m
Business income
Other items
€501m
€125m
Net fee and commission income of € 457 million in 2018 increased
by € 8 million compared to 2017. Customer accounts and card
income increased by € 6 million and € 8 million respectively,
driven by higher volumes of transactions. Lending related fees
decreased by € 2 million, with a decrease in other fees and
commissions of € 4 million.
Dividend income
Dividend income was € 26 million in 2018, € 28 million in 2017.
In 2018, € 23 million was received on NAMA subordinated bonds,
2017
%
€ m change
compared to € 25 million received in 2017.
Other income
Net fee and commission income(2)
Dividend income
Net trading income(2)(3)
Miscellaneous business income
Business income
2018
€ m
457
26
17
1
501
449
28
42
5
524
Net profit on disposal of investment
securities
Net gain on equity investments
measured at FVTPL(4)
Economic hedges of equity investments(3)
Net gain on loans and advances to
customers measured at FVTPL(4)
Realisation/ re-estimation of cash
flows on restructured loans
Settlements and other losses
15
55
41
(14)
84
-
(1)
125
626
-
-
-
213
(1)
267
791
Other items
Other income
Other income(1)
€626m
2
-7
-60
-80
-4
-
-
-
-
-
-
-53
-21
Net trading income(2)(3)
Net trading income decreased by € 25 million compared to 2017
mainly due to a reduction of € 13 million in the valuations of long
term customer derivative positions, a reduction in income on
foreign exchange contracts, and a reduction in income on interest
rate contracts and debt securities.
Other items
Other items were € 125 million in
€125m
Other items in 2018 included:
2018, € 267 million in 2017.
• Net profit of € 15 million on the disposal of investment securities.
• Net gain on equity investments measured at FVTPL of
€ 41 million. A partial hedge of the equity investments generated
a net loss of € 14 million, of which € 10 million related to a total
return swap.
• Net gain on loans and advances to customers measured at
FVTPL of € 84 million. This represents income recognised on
restructured loans.
Other income decreased by
Other items in 2017 included:
€ 165 million compared to 2017 driven
• Net profit of € 55 million on the disposal of investment securities.
by decreases in business income of € 23 million and other items of
• Realisation/ re-estimation of cash flows on restructured loans
€ 142 million. Net fee and commission income was broadly stable
which resulted in income recognised of € 213 million. This
included € 116 million of gains recognised on a small number of
complex legacy property cases.
2017
%
€ m change
compared to 2017.
Business income
€501m
Net fee and commission income(2)
Net fee and commission income
Customer accounts(2)
Card income
Lending related fees
Customer related foreign exchange(2)
Other fees and commissions
2018
€ m
211
85
45
71
45
Net fee and commission income
457
449
205
77
47
71
49
3
10
-4
-
-8
2
(1)Other income before exceptional items.
(2)Customer related foreign exchange income of € 58 million was reported at 31 December 2017 in ‘Net trading income’. Customer related foreign exchange
branch commissions of € 13 million were reported at 31 December 2017 in ‘Customer accounts’ in ‘Net fee and commission income’. Both are now
reported in ‘Customer related foreign exchange’ in ‘Net fee and commission income’ in both periods. See note 8 ‘Net fee and commission income’ and
note 9 ‘Net trading income’ of the consolidated financial statements.
(3)Economic hedges of equity investments are reported in ‘Net trading income’ in the consolidated financial statements. See note 9 ‘Net trading income’.
(4)On 1 January 2018, the Group implemented the requirements of IFRS 9 Financial Instruments. Financial assets that do not meet the criteria for amortised
cost or fair value through other comprehensive income (“FVOCI”) are measured at fair value through profit or loss (“FVTPL”). Gains or losses on such
assets are recognised in the consolidated income statement.
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Total operating expenses
Total operating expenses(1)
Cost income ratio(1)
€1,448m
53%
2017
%
€ m change
Operating expenses
Personnel expenses
General and administrative expenses
Depreciation, impairment and
amortisation
Total operating expenses(1)
2018
€ m
730
580
138
1,448
711
601
116
1,428
Staff numbers at year end(2)
Average staff numbers(2)
9,831
9,801
9,720
10,137
General and administrative expenses
General and administrative expenses decreased € 21 million
compared to 2017, with decreases in professional fees spend and
third party resourcing.
Depreciation, impairment and amortisation
The charge increased by € 22 million compared to 2017 as assets
created under previous investment programmes were
commissioned to operational use.
Cost income ratio(1)
Costs of € 1,448 million and income
53%
income ratio of 53% in 2018 compared to 49%(3) in 2017. The
increase in the cost income ratio was mainly due to lower other
of € 2,726 million resulted in a cost
3
-3
19
1
1
-3
income. This was driven by a lower net gain on loans and
advances to customers measured at FVTPL compared to the
realisation/ re-estimation of cash flows on restructured loans in
2017 and lower net profit on disposal of investment securities.
Total operating expenses(1)
Total operating expenses of
€1,448m
€ 20 million compared to 2017. The increase in expenses was
€ 1,448 million increased by
driven by increased depreciation, impairment and amortisation of
€ 22 million, and higher personnel expenses of € 19 million partly
offset by lower general and administrative expenses of € 21 million.
Personnel expenses
Personnel expenses increased by € 19 million compared to 2017.
This increase was due to the impact of both salary inflation and
reduced numbers of staff working on capital projects, partly offset by
the impact of lower average staff numbers. There was also a charge
for a past service cost with regard to an increase in pensions in
payment.
Average staff numbers decreased across the Group by 336
compared to 2017.
(1)Before bank levies, regulatory fees and exceptional items. Cost income ratio including these items was 63% in 2018 (2017: 61%).
(2)Staff numbers are on a full time equivalent (“FTE”) basis.
(3)Re-presented 2017 cost income ratio 49% excludes previously unrecognised interest income when a financial asset is no longer credit impaired or has
been repaid in full (i.e. cured without financial loss).
AIB Group plc Annual Financial Report 2018
45
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Business review - 1. Operating and financial review
Bank levies and regulatory fees
Total exceptional items
€82m
€167m
Bank levies and regulatory fees
Irish bank levy
Deposit Guarantee Scheme
Single Resolution Fund/ BRRD(1)
Other
Bank levies and regulatory fees
2018
€ m
(49)
(16)
(18)
1
(82)
2017
€ m
(49)
(38)
(20)
2
(105)
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
Deposit Guarantee Scheme (“DGS”) € 16 million in 2018 included
writebacks of € 16 million in relation to amounts previously
IFRS 9 and associated regulatory costs
Loss on disposal of business activities
expensed under the legacy scheme.
IPO and capital related costs
Total exceptional items
2018
€ m
147
1
(49)
(91)
(21)
(81)
(51)
(22)
-
(167)
2017
€ m
33
1
(30)
(45)
(70)
(65)
(41)
-
(51)
(268)
Net credit impairment writeback
€204m
There was a net credit impairment writeback of € 204 million in
These gains/ costs were viewed as exceptional by management.
For further detail on exceptional items see page 55.
Gain on disposal of loan portfolios. A number of loan portfolios
2018. This included € 120 million recoveries of amounts previously
were disposed of in 2018 which resulted in a gain of € 147 million
written-off and € 89 million writeback in relation to loans to
(includes € 21 million net gain on loans and advances to
customers. This writeback was due to changes in cash flow
customers measured at FVTPL).
assumptions, recoveries and repayments, which were driven by
Gain on transfer of financial instruments. Valuation adjustments
increased security values and improved business cash flows
on previous transfers of financial assets to NAMA.
associated with the stronger economic environment in Ireland. The
Customer redress. Further provision required for redress and
recoveries of amounts previously written-off included € 44 million
compensation in relation to tracker mortgage and other customer
previously unrecognised interest income on financial assets that
redress.
are no longer credit impaired or have been repaid in full (i.e. cured
Restitution and restructuring costs associated with the payment of
without financial loss).
customer redress, customer write-offs, restructuring programmes
In 2017 there was a net provision writeback of € 174 million.
and asset write-offs.
Termination benefits mainly relate to the cost of the voluntary
See the Risk management section on page 107 for more
severance programme in AIB UK and support functions.
information.
Income tax charge
€155m
The effective rate was 12.4% in 2018 compared to 14.7% in 2017.
Property strategy costs associated with the implementation of the
Group property strategy including the exit from Bankcentre.
IFRS 9 and associated regulatory costs represent exceptional
expenditure related to the embedding of IFRS 9 and associated
regulatory requirements of the Group.
Loss on disposal of business activities relates to the recycling of
The effective tax rate is influenced by the geographic mix of profit
cumulative unrealised foreign currency gains and losses following
streams which may be taxed at different rates. In addition, the 2018
repatriation of part of the capital of foreign subsidiaries which
rate reflected a tax deduction for equity distributions in current and
have ceased trading.
prior years. For further information see note 19 ‘Taxation’ of the
IPO and capital related costs in 2017 include commissions and
consolidated financial statements.
transaction advisory fees and expenses associated with the IPO
and the implementation of the new Group holding company.
Return on tangible equity
12.4%
ROTE 12.4% in 2018 was broadly in line with ROTE of 12.3% in
2017.
(1)Bank Recovery and Resolution Directive.
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Assets
Net loans to customers
New term lending
€60.9bn
€10.7bn
New transaction lending
New transaction lending of € 1.4 billion in 2018, € 0.3 billion higher
(26%) than 2017 due to continued demand for transaction lending
products, primarily revolving credit facilities.
Assets
Gross loans to customers
Loss allowance
Net loans to customers
Investment securities
Loans and advances to banks
Other assets
Total assets
31 Dec
2018
€ bn
1 Jan 31 Dec
2018(1)
2017
€ bn
€ bn
New term lending, together with new transaction lending,
amounted to € 12.1 billion in 2018 compared to € 10.5 billion in
62.9
(2.0)
60.9
16.9
8.0
5.7
91.5
63.3
(3.6)
59.7
16.3
7.7
6.1
63.3
(3.3)
60.0
16.3
7.7
6.1
2017.
Non-performing loans
€6.1bn
1 January 2018. The reduction reflects redemptions of
by € 3.5 billion compared to
Non-performing loans decreased
€ 1.3 billion, loan portfolio sales of € 1.1 billion and write-offs and
89.8
90.1
restructuring activity (including non-contracted write-offs) of
€ 1.0 billion.
Net loans to customers
Loss allowance
Non-performing loan cover
€60.9bn
€ 59.7 billion at 1 January 2018. New term lending of € 10.7 billion
by € 1.2 billion compared to
Net loans of € 60.9 billion increased
€2.0bn
The loss allowance of € 2.0 billion at 31 December 2018
27%
exceeded redemptions of € 9.2 billion (including € 1.3 billion
redemptions on non-performing loans).
decreased from € 3.6 billion at 1 January 2018 reflecting customer
write-offs, loan portfolio sales, and the impact of a stronger
New term lending
€10.7bn
2017 due to an increased demand for credit:
New term lending of € 10.7 billion in
2018, € 1.3 billion higher (13%) than
• RCB new term lending of € 4.9 billion up 7%, including mortgage
lending up 16% with other lending broadly in line. The increase in
mortgage lending is driven by a growing Irish mortgage market.
• WIB new term lending of € 4.0 billion up 24% driven primarily by
real estate finance and syndicated lending.
• AIB UK new term lending of € 1.8 billion up 9% (up 10% excluding
the impact of currency movements) primarily driven by FTB.
economic environment driving increased security values and
improved business cash flows.
Non-performing loan cover
The loss allowance cover rate on non-performing loans of 27% at
31 December 2018 decreased from 33% at 1 January 2018.
Summary of movement in loans to customers
The table below sets out the movement in loans to customers from 31 December 2017 to 31 December 2018.
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Gross loans (closing balance 31 December 2017)
Harmonisation of definition of default at 1 January 2018(2)
Gross loans (opening balance 1 January 2018)
New term lending
Redemptions of existing loans(3)
Disposals
Write-offs and restructures
Net movement from non-performing
Foreign exchange movements
Other movements
Gross loans (closing balance 31 December 2018)
Loss allowance
Net loans (closing balance 31 December 2018)
Performing Non-performing
loans
€ bn
loans
€ bn
Loans to
customers
€ bn
53.1
0.6
53.7
10.7
(7.9)
-
-
0.4
0.1
(0.2)
56.8
(0.4)
56.4
10.2
(0.6)
9.6
-
(1.3)
(1.1)
(1.0)
(0.4)
-
0.3
6.1
(1.6)
4.5
63.3
-
63.3
10.7
(9.2)
(1.1)
(1.0)
-
0.1
0.1
62.9
(2.0)
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(1)The ‘Consolidated statement of financial position’ as at 1 January 2018, has been restated to reflect the adoption of IFRS 9 and IFRS 15 which apply with
effect from 1 January 2018. For further information see note 1 (c) ‘Basis of preparation’ and note 3 ‘Transition to IFRS 9‘ of the consolidated financial
statements.
(2)Non-performing loans were revised from € 10.2 billion at 31 December 2017 to € 9.6 billion at 1 January 2018 reflecting the implementation and
harmonisation of a new definition of default policy which aligns to accounting standards and EBA guidelines. For further information see page 121.
(3)New transaction lending is netted against redemptions given the revolving nature of these products.
AIB Group plc Annual Financial Report 2018
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Business review - 1. Operating and financial review
Assets (continued)
The tables below summarise the credit profile of the loan portfolio by asset class and include a range of credit metrics that the Group
uses in managing the portfolio. Further information on the risk profile of the Group and non-performing loans is available in the Risk
management section on pages 62 to 166.
Residential Other personal
mortgages
€ bn
€ bn
Property and
construction
€ bn
Non-property
business
€ bn
Loan portfolio profile
31 December 2018
Gross loans to customers
Of which: Stage 3
Total loss allowance
Non-performing loans
Total loss allowance non-performing loans
Loss allowance cover non-performing loans (%)
1 January 2018
Non-performing loans(1)
Total loss allowance non-performing loans
Loss allowance cover non-performing loans (%)
28%
31 December 2017
Loans and receivables to customers
Of which: Impaired
Balance sheet provisions (specific + IBNR)
Specific provisions/ Impaired loans (%)
Total provisions/ Total loans (%)
€ bn
33.7
3.3
1.4
34%
4%
Non-performing loans
31 December 2018
Collateral disposals
Unlikely to pay (including > 90 days past due)
Non-performing loans probation
Total non-performing loans
Total non-performing loans/ Total loans (%)
31 December 2017
Impaired
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 (%)
14%
32.3
3.0
0.7
3.3
0.6
20%
€ bn
4.6
1.3
0.2
2.7
0.4
3.3
10%
€ bn
3.3
0.2
0.5
0.8
4.8
3.1
0.3
0.2
0.4
0.2
50%
€ bn
0.5
0.3
49%
€ bn
3.1
0.4
0.2
56%
8%
7.9
1.2
0.5
1.4
0.4
29%
€ bn
2.8
1.0
36%
€ bn
8.8
1.8
1.1
51%
12%
19.6
1.0
0.6
1.0
0.4
36%
€ bn
1.7
0.6
37%
€ bn
17.7
0.8
0.6
54%
3%
0.1
0.3
-
0.4
11%
€ bn
0.4
0.1
0.0
0.1
0.6
18%
0.4
0.9
0.1
1.4
18%
€ bn
1.8
0.1
0.3
0.7
2.9
33%
0.1
0.7
0.2
1.0
5%
€ bn
0.8
0.2
0.1
0.8
1.9
11%
Residential Other personal
mortgages
€ bn
€ bn
Property and
construction
€ bn
Non-property
business
€ bn
Total
€ bn
62.9
5.5
2.0
6.1
1.6
27%
€ bn
9.6
3.2
33%
€ bn
63.3
6.3
3.3
43%
5%
Total
€ bn
0.8
4.6
0.7
6.1
10%
€ bn
6.3
0.6
0.9
2.4
10.2
16%
Investment securities
Investment securities of € 16.9 billion held for liquidity and
Other assets
Other assets of € 5.7 billion comprised:
investment purposes have increased by € 0.6 billion compared to
• Deferred tax assets of € 2.7 billion, in line with
31 December 2017.
31 December 2017.
Loans and advances to banks
Loans and advances to banks of € 8.0 billion were € 0.3 billion
higher than 31 December 2017. Excess liquidity, driven by
increased current accounts and proceeds from the issuance of debt
and loan portfolio disposals, was partly offset by loan book growth
and increased investment securities.
• Derivative financial instruments of € 0.9 billion, € 0.3 billion
lower than 31 December 2017.
• Remaining assets of € 2.1 billion broadly in line with
31 December 2017.
(1)Non-performing loans were revised from € 10.2 billion at 31 December 2017 to € 9.6 billion at 1 January 2018 reflecting the implementation and
harmonisation of a new definition of default policy which aligns to accounting standards and EBA guidelines. For further information see page 121.
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Liabilities & equity
Customer accounts
Equity
€67.7bn
€13.9bn
Liabilities & equity
Customer accounts
Deposits by central banks/ banks
Debt securities in issue
Other liabilities
Total liabilities
Equity
Total liabilities & equity
Loan to deposit ratio
31 Dec
2018
€ bn
1 Jan 31 Dec
2018(1)
2017
€ bn
€ bn
67.7
0.8
5.7
3.4
77.6
13.9
91.5
%
90
64.6
64.6
3.6
4.6
3.7
3.6
4.6
3.7
76.5
76.5
13.3
89.8
%
92
13.6
90.1
%
93
Debt securities in issue
Debt securities of € 5.7 billion increased by € 1.1 billion from
€ 4.6 billion at 31 December 2017 following MREL issuance
of two Senior EUR trades and one Senior USD trade. This
completes € 1.65 billion of the Group’s MREL requirement of
c. € 4 billion. This was partly offset by the maturity of Asset
Covered Securities (“ACS”) of € 0.5 billion.
Other liabilities
Other liabilities of € 3.4 billion comprised:
• Subordinated liabilities of € 0.8 billion, unchanged from
31 December 2017.
• Derivative financial instruments of € 0.9 billion, € 0.3 billion
lower than 31 December 2017.
• Remaining liabilities of € 1.7 billion, in line with
31 December 2017.
Equity
€13.9bn
€ 13.3 billion at 1 January 2018.
Equity of € 13.9 billion increased
by € 0.6 billion compared to
Customer accounts
Customer accounts, increased by
The table below sets out the movements in the year.
€67.7bn
31 December 2017. Current accounts increased by € 3.7 billion
€ 3.1 billion compared to
reflecting continued strong economic activity and c. € 1 billion inflow
Equity
€ bn
13.6
Closing balance (31 December 2017)
Impact of adopting IFRS 9 and IFRS 15 at 1 January 2018 (0.3)
as a result of a competitor exiting the market.
Opening balance (1 January 2018)
Profit for the year
The loan to deposit ratio decreased to 90% at 31 December 2018
Other comprehensive income:
compared to 93% at 31 December 2017 driven by increased levels
Investment securities reserves
of customer accounts.
Deposits by central banks/ banks
Deposits by central banks/ banks of € 0.8 billion decreased by
€ 2.8 billion from 31 December 2017 driven by the repayment of
TLTRO funds of € 1.9 billion and a reduced requirement for repos
for liquidity management purposes.
Cash flow hedging reserves/ other
Dividends/ distributions paid
Closing balance (31 December 2018)
13.3
1.1
(0.3)
0.2
(0.4)
13.9
(1)The ‘Consolidated statement of financial position’ as at 1 January 2018, has been restated to reflect the adoption of IFRS 9 and IFRS 15 which apply with
effect from 1 January 2018. For further information see note1 (c) ‘Basis of preparation’ and note 3‘Transition to IFRS 9‘ of the consolidated financial
statements.
AIB Group plc Annual Financial Report 2018
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Business review - 1. Operating and financial review
Segment reporting
Segment overview
The Group was managed through the following business segments: Retail & Commercial Banking (“RCB”)*, Wholesale, Institutional &
Corporate Banking (“WIB”)*, AIB UK* and Group during 2018. As set out in the ‘Basis of presentation’ on page 40, to aid comparability,
the Group has re-presented the 2017 segments’ performance statements whereby previously unrecognised interest income on a
financial asset that is no longer credit impaired or has been repaid in full (i.e. cured without financial loss) has been reclassified from
‘Net interest income’ and is now included in ‘Net credit impairment writeback’.
Segment allocations
The segments’ performance statements include all income and direct costs before exceptional items and exclude certain overheads
which are managed centrally, the costs of which 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
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*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 skill set. FSG has developed a comprehensive suite of sustainable solutions for customers in financial difficulty.
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Retail & Commercial Banking (“RCB”)
RCB contribution statement
2018
€ m
2017
%
€ m change
RCB balance sheet metrics
Net interest income
Business income
Other items
Other income
Total operating income
Total operating expenses
1,346
1,381
336
71
407
329
204
533
1,753
1,914
(750)
(769)
Operating contribution before bank levies,
regulatory fees, impairment and provisions 1,003
Net credit impairment writeback
241
1,145
187
Writeback of provisions for liabilities
and commitments
Operating contribution
Associated undertakings
Loss on disposal
-
10
1,244
1,342
10
-
14
(1)
Contribution before exceptional items
1,254
1,355
-3
2
-65
-24
-8
-2
-12
29
-
-7
-29
-
-7
Mortgages
Personal
Business
New term lending
New transaction lending
Mortgages
Personal
Business
Legacy distressed loans(2)
Gross loans
Loss allowance
Net loans
Current accounts
Deposits
Customer accounts
31 Dec 31 Dec
2017
%
€ bn change
2018
€ bn
2.8
0.8
1.3
4.9
0.2
2.4
0.8
1.4
4.6
0.2
16
5
-6
7
-5
31 Dec
2018
€ bn
1 Jan 31 Dec
2018(1)
2017
€ bn
€ bn
30.8
3.0
7.2
0.5
41.5
(1.8)
39.7
25.6
24.7
50.3
32.2
32.2
3.0
8.5
0.7
44.4
(3.2)
41.2
22.6
24.0
46.6
3.0
8.5
0.7
44.4
(3.0)
41.4
22.6
24.0
46.6
Net interest income
€1,346m Net interest income has decreased by
€ 35 million in 2018 reflecting the impact of lower loan volumes
New term lending
€4.9bn New term lending € 4.9 billion up 7%, driven by
growth in mortgage lending as activity in the mortgage market
due to redemptions and deleveraging of non-performing loans
increases.
and the impact of reductions in mortgage rates. These were
partly offset by the positive impact of new lending growth and
New transaction lending of € 0.2 billion in 2018, down 5% from
lower cost of deposits.
2017.
Other income
€407m Business income increased by € 7 million driven by
increased net fee and commission income due to higher volumes
of transactions. Other items of € 71 million primarily related to a
net gain on loans and advances to customers measured at
FVTPL of € 63 million. In 2017 other items of € 204 million
primarily related to realisation/ re-estimation of cash flows on
loans previously restructured.
Total operating expenses
€750m Total operating expenses decreased by € 19 million
driven by a decrease in professional fees spend and third party
Net loans
€39.7bn Net loans decreased by € 1.5 billion compared to
1 January 2018 driven by the disposal of non-performing loan
portfolios of € 0.6 billion, and redemptions and write-offs in the
non-performing loan book. Performing loans increased by
€ 0.4 billion.
Loss allowance
€1.8bn The loss allowance of € 1.8 billion at
31 December 2018 decreased by € 1.4 billion from € 3.2 billion at
1 January 2018 reflecting customer write-offs, loan portfolio sales,
and the impact of a stronger economic environment driving
resourcing. This was partly offset by an increase in depreciation
increased security values and improved business cash flows.
as assets created under previous investment programmes were
commissioned to operational use.
Net credit impairment writeback
€241m There was a net credit impairment writeback of
€ 241 million in 2018. This was due to changes in cash flow
Customer accounts
€50.3bn Customer accounts increased by € 3.7 billion
compared to 31 December 2017 with increased current accounts
of € 3.0 billion. The increase reflected continued strong economic
activity and c. € 1 billion inflow as a result of a competitor exiting
assumptions, recoveries and repayments, which were driven by
the market.
increased security values and improved business cash flows
associated with the stronger economic environment in Ireland. In
2017 there was a net provision writeback of € 187 million.
(1)The ‘Consolidated statement of financial position’ as at 1 January 2018, has been restated to reflect the adoption of IFRS 9 which applies with effect from
1 January 2018. For further information see note 1 (c) ‘Basis of preparation’ and note 3 ‘Transition to IFRS 9‘ of the consolidated financial statements.
(2)Larger legacy distressed loans that have been subject to restructuring arrangements and are managed through the loan restructuring unit in RCB.
AIB Group plc Annual Financial Report 2018
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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, impairment and provisions
Net credit impairment writeback/ (losses)
Provisions for liabilities and commitments
Operating contribution
Associated undertakings
Contribution before exceptional items
2018 2017
%
€ m € m change
312
74
386
264
49
313
(100)
(91)
286
(16)
-
222
1
(2)
270
221
-
2
270
223
18
51
23
10
29
-
-
22
-
21
WIB balance sheet metrics
New term lending
New transaction lending
Gross loans
Loss allowance
Net loans
Current accounts
Deposits
Customer accounts
31 Dec 31 Dec
2017
%
€ bn change
2018
€ bn
4.0
0.8
3.2
0.5
24
54
31 Dec
2018
€ bn
1 Jan 31 Dec
2018(1)
2017
€ bn
€ bn
12.8
(0.1)
12.7
4.2
1.5
5.7
10.3
(0.0)
10.3
10.3
(0.0)
10.3
3.7
2.0
5.7
3.7
2.0
5.7
Net interest income
€312m Net interest income increased by € 48million
compared to 2017. The increase was driven by strong lending
New term lending
€4.0bn New term lending increased by € 0.8 billion
compared to 2017. The growth was primarily driven by syndicated
growth, particularly in syndicated lending and real estate finance.
lending up € 0.4 billion where markets remained active in Europe
Other income
€74m Other income increased by € 25 million compared to
2017. The increase was largely driven by other items including a
and the US, and in real estate finance up € 0.4 billion which
benefitted from a small number of large transactions in the Irish
market.
net gain on equity investments measured at FVTPL and anet
New transaction lending of € 0.8 billion in 2018, € 0.3 billion higher
gain on loans and advances to customers measured at FVTPL.
(54%) than 2017 driven by demand from corporate customers.
Total operating expenses
€100m Total operating expenses increased by € 9 million
compared to 2017. The increase was primarily driven by
Net loans
€12.7bn Net loans of € 12.7 billion at 31 December 2018
increased by € 2.4 billion compared to € 10.3 billion at
increased personnel costs to support growth in the business.
1 January 2018. The increase was primarily driven by syndicated
lending up € 1.4 billion and real estate finance up € 0.6 billion.
Net credit impairment writeback/ (losses)
(€16)m There was a net credit impairment loss of
€ 16 million in 2018. This was driven by additional expected
credit losses arising from growth in the loan portfolio since
Customer accounts
€5.7bn Current accounts of € 4.2 billion were € 0.5 billion
higher than 31 December 2017. Current accounts increased while
31 December 2017 and a lower level of impairment writebacks in
deposits decreased by € 0.5 billion.
2018. In 2017 there was a net provision writeback of € 1 million.
(1)The ‘Consolidated statement of financial position’ as at 1 January 2018, has been restated to reflect the adoption of IFRS 9 which applies with effect from
1 January 2018. For further information see note 1 (c) ‘Basis of preparation’ and note 3 ‘Transition to IFRS 9‘ of the consolidated financial statements.
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AIB UK
AIB UK contribution statement
2018 2017
%
£ m £ m change
AIB UK balance sheet metrics
Net interest income
Other income
Total operating income
Total operating expenses
Operating contribution before bank levies,
regulatory fees, impairment and provisions
Bank levies and regulatory fees
Net credit impairment losses
Operating contribution
Associated undertakings
Profit on disposal
Contribution before exceptional items
Contribution before exceptional items €m
224
45
269
206
61
267
(108)
(116)
161
1
(18)
151
2
(13)
144
140
2
2
148
168
3
1
144
164
9
-26
1
-7
7
-50
38
3
-33
100
3
2
AIB GB
FTB
New term lending
New transaction lending
AIB GB
FTB
Gross loans
Loss allowance
Net loans
Current accounts
Deposits
Customer accounts
31 Dec 31 Dec
2017
%
£ bn change
2018
£ bn
1.2
0.4
1.6
0.4
1.2
0.3
1.5
0.3
3
43
10
10
31 Dec
2018
£ bn
1 Jan 31 Dec
2018(1)
2017
£ bn
£ bn
5.4
2.2
7.6
(0.2)
7.4
5.8
3.1
8.9
5.2
2.4
7.6
(0.3)
7.3
5.6
3.4
9.0
5.2
2.4
7.6
(0.3)
7.3
5.6
3.4
9.0
Net interest income
£224m Net interest income increased by £ 18 million
compared to 2017 due to margin expansion following UK base
New term lending
£1.6bn New term lending of £ 1.6 billion in 2018, increased
by 10% compared to 2017 driven by business lending in FTB.
rate increases in November 2017 and August 2018.
Other income
£45m Other income decreased by £ 16 million compared to
2017. Net fee and commission income was in line with 2017. Net
profit on disposal of investment securities was nil in 2018
compared to £ 13 million in 2017. Loss on disposal of loans was
£ 4 million in 2018 compared to nil in 2017.
Total operating expenses
£108m Total operating expenses decreased by £ 8 million
compared to 2017 driven by lower staff numbers, following the
implementation of a new operating model in 2017.
Net credit impairment losses
(£18m)
£ 18 million in 2018. In 2017 there was a net provision charge
There was a net credit impairment loss of
of £ 13 million.
New transaction lending of £ 0.4 billion in 2018, £ 0.1 billion higher
(10%) than 2017.
Net loans
£7.4bn Net loans of £ 7.4 billion increased by £ 0.1 billion
compared to 1 January 2018.
Customer accounts
£8.9bn Customer accounts of £ 8.9 billion at
31 December 2018 decreased from £ 9.0 billion in 2017.
(1)The ‘Consolidated statement of financial position’ as at 1 January 2018, has been restated to reflect the adoption of IFRS 9 which applies with effect from
1 January 2018. For further information see note 1 (c) ‘Basis of preparation’ and note 3 ‘Transition to IFRS 9‘ of the consolidated financial statements.
AIB Group plc Annual Financial Report 2018
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Business review - 1. Operating and financial review
Group
Group contribution statement
2018 2017
%
€ m € m change
Group balance sheet metrics
Net interest income
Other income
Total operating income
Total operating expenses
Operating contribution before bank levies,
regulatory fees, impairment and provisions
Bank levies and regulatory fees
Contribution before exceptional items
188
94
282
236
139
375
(477)
(436)
(195)
(83)
(278)
(61)
(107)
(168)
-20
-32
-25
9
220
-22
65
Gross loans
Investment securities
Customer accounts
31 Dec
2018
€ bn
1 Jan 31 Dec
2018(1)
2017
€ bn
€ bn
0.1
16.9
1.7
0.1
16.3
2.2
0.1
16.3
2.2
Net interest income
€188m Net interest income decreased by € 48 million
compared to 2017 mainly due to lower income from the
Investment securities
€16.9bn Investment securities of € 16.9 billion held for
liquidity and investment purposes increased by € 0.6 billion
investment securities portfolio, as yields and average balances
compared to 31 December 2017.
decreased, and higher cost of debt issuances in 2018.
Customer accounts
€1.7bn Customer accounts decreased by € 0.5 billion
compared to € 2.2 billion at 31 December 2017 mainly due to
maturity of term deposits and a reduction in repos.
Other income
€94m Other income decreased by € 45 million compared to
2017 due to lower net profit on disposal of investment securities,
a reduction in valuations of long-term customer derivative
positions and lower income on non-customer foreign exchange
contracts.
Total operating expenses
€477m Total operating expenses increased by € 41 million
compared to 2017 reflecting the impact of salary inflation and an
increase in depreciation as assets created under previous
investment programmes were commissioned to operational use
partly offset by lower average staff numbers in support functions.
There was also a charge for a past service cost with regard to an
increase in pensions in payment.
Bank levies and regulatory fees
€83m Bank levies and regulatory fees of € 83 million in
2018 included the Irish bank levy € 49 million, Deposit Guarantee
Scheme € 16 million (included writebacks of € 16 million) and the
Single Resolution Fund € 18 million.
(1)The ‘Consolidated statement of financial position’ as at 1 January 2018, has been restated to reflect the adoption of IFRS 9 which applies with effect from
1 January 2018. For further details see note 1 (c) ‘Basis of preparation’ and note 3 ‘Transition to IFRS 9‘ of the consolidated financial statements.
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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 rate
Average balance
CET1 Fully loaded
CET1 Transitional
Cost income ratio
Non-performing loan cover
Exceptional items
Loan to deposit ratio
Net interest margin
Net interest margin - previous
basis
Non-performing exposures
Interest income/ expense for average balance sheet categories divided by corresponding average
balance.
Average balances for interest-earning assets are based on daily balances for all categories with the
exception of loans and advances to banks, which are based on a combination of daily/ monthly balances.
Average balances for interest-earning liabilities are based on a combination of daily / monthly balances,
with the exception of customer accounts which are based on daily 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, bank levies and regulatory fees divided by total
operating income excluding exceptional items.
Loss allowance on non-performing loans as a percentage of non-performing loans.
These are items that management view as distorting comparability of performance from period to period;
- Gain on disposal of loan portfolios in reducing the Group’s level of non-performing loans. This includes
gain on disposals and net gain on other financial assets measured at FVTPL.
- Gain on transfer of financial instruments. Valuation adjustments on previous transfers of financial assets
to NAMA.
- Customer redress. Customer redress and compensation in relation to tracker mortgage and other
customer redress.
- Restitution and restructuring costs associated with the payment of customer redress, customer
write-offs, restructuring programmes and asset write-offs.
- Termination benefits. The cost associated with the reduction in employees arising from the voluntary
severance programme.
- Property strategy costs associated with the implementation of the Group’s property strategy
e.g. onerous lease contracts and impairment of assets. It includes a new Headquarters along with the
exit from Bankcentre.
- IFRS 9 and associated regulatory costs. The revenue costs of embedding IFRS 9 and associated
regulatory requirements of the Group.
- Loss on disposal of business activities. The repatriation of part of the capital of foreign subsidiaries
which have ceased trading resulting in the transfer of a pro-rata amount of the foreign currency
cumulative translation reserve to the income statement.
- IPO and capital related costs relate to the IPO and the implementation of a new AIB Group holding
company in 2017.
Net loans and advances to customers divided by customer accounts.
Net interest income divided by average interest-earning assets. (Net interest income in 2017 has been
re-presented for comparability purposes).
Net interest income including previously unrecognised interest income when a financial asset is no
longer credit impaired or has been repaid in full (i.e. cured without financial loss) divided by average
interest-earning assets.
Non-performing exposures as defined by the European Banking Authority, include loans and advances to
customers and off-balance sheet commitments such as loan commitments and financial guarantee
contracts.
Return on tangible equity (ROTE) Profit after tax from continuing operations plus reduction 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.
Management performance -
summary income statement
A reconciliation between the IFRS and management performance summary income statements is set out
on page 56. Given the impact of the adjustments, the following line items in the management
performance summary income statement are considered APMs:
• Net interest income (2017 only)
• Other income
• Total operating income
• Total operating expenses
• Operating profit before bank levies,
regulatory fees, impairment and provisions
• Bank levies and regulatory fees
• Net credit impairment writeback (2017 only)
• Operating profit
• Profit on disposal (2018 only)
• Profit from continuing operations before exceptional items
• Total exceptional items
AIB Group plc Annual Financial Report 2018
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Business review - 1. Operating and financial review
Reconciliation between IFRS and management performance summary income statements
A reconciliation of management performance measures to the directly related IFRS measures, providing their impact in respect of
specific line items, and the overall summary income statement is below. Given the impact of the adjustments, the line items as listed in
‘Management performance - summary income statement’ in the APMs on page 55 are considered APMs.
IFRS - summary income statement
Net interest income
Other income
Total operating income
Total operating expenses
Operating profit before impairment losses and provisions
Net credit impairment writeback
Writeback of provisions for liabilities and commitments
Operating profit
Associated undertakings
Profit/ (loss) on disposal
Profit before taxation from continuing operations
Income tax charge from continuing operations
Profit for the year
Adjustments - between IFRS and management performance
2018
€ m
2,100
774
2,874
(1,823)
1,051
204
-
1,255
12
(20)
1,247
(155)
1,092
2017
€ m
2,176
825
3,001
(1,835)
1,166
113
8
1,287
19
-
1,306
(192)
1,114
of which: interest on cured loans(1)
-
-
(61)
(61)
Net interest income
Other income
of which: exceptional items
Gain on disposal of loan portfolios
Gain on transfer of financial instruments
(147)
(1)
82
49
91
21
81
51
-
-
22
Total operating expenses
of which: bank levies and regulatory fees
of which: exceptional items
Customer redress
Restitution and restructuring costs
Termination benefits
Property strategy costs
IFRS 9 and associated regulatory costs
IPO and capital related costs
Net credit impairment writeback
of which: interest on cured loans(1)
Loss on disposal
of which: exceptional items
Loss on disposal of business activities
Management performance - summary income statement
Net interest income
Other income
Total operating income
Total operating expenses
Operating profit before bank levies, regulatory fees, impairment and provisions
Bank levies and regulatory fees
Net credit impairment writeback
Writeback of provisions for liabilities and commitments
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
(148)
82
(33)
(1)
105
(34)
105
30
45
70
65
41
51
61
-
302
61
-
Re-presented
2017
€ m
2,115
791
2,906
(1,428)
1,478
(105)
174
8
1,555
19
-
1,574
(268)
1,306
(192)
1,114
293
-
22
2018
€ m
2,100
626
2,726
(1,448)
1,278
(82)
204
-
1,400
12
2
1,414
(167)
1,247
(155)
1,092
(1)IFRS 9 requires previously unrecognised interest income to be presented as a reversal of credit impairment/ recovery of amounts previously written-off,
when a financial asset is no longer credit impaired or has been repaid in full (i.e. cured without financial loss). As the Group policy prior to the adoption of
IFRS 9 was to recognise such income in net interest income, the 2017 figures have been re-presented for comparability purposes.
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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 page 154.
Regulatory capital and capital ratios
Equity
Less: Additional Tier 1 Securities
Proposed ordinary dividend
Regulatory adjustments:
Intangible assets
Cash flow hedging reserves
IFRS 9 CET 1 transitional add-back
Investment securities reserves
Pension
Deferred tax
Expected loss deduction
Other
Total common equity tier 1 capital
Additional tier 1 capital
Instruments issued by subsidiaries that are given
recognition in additional tier 1 capital
Total additional tier 1 capital
Total tier 1 capital
Tier 2 capital
Instruments issued by subsidiaries that are given
recognition in tier 2 capital
Expected loss deduction/Credit provisions
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
31 December 31 December
2017
€ m
2018
€ m
CRD lV
fully loaded basis
31 December 31 December
2017
€ m
2018
€ m
13,858
(494)
(461)
(682)
(285)
298
–
(183)
(1,079)
(21)
(42)
(1,994)
10,909
13,612
(494)
(326)
(569)
(257)
–
(196)
(150)
(829)
–
(23)
(2,024)
10,768
235
235
260
260
11,144
11,028
415
–
–
415
442
199
3
644
11,559
11,672
46,209
371
4,624
392
–
46,319
360
4,248
796
5
13,858
(494)
(461)
(682)
(285)
–
–
(183)
(2,697)
(21)
(42)
(3,910)
8,993
316
316
9,309
531
–
–
531
9,840
46,052
371
4,624
392
–
13,612
(494)
(326)
(569)
(257)
–
–
(139)
(2,764)
–
(18)
(3,747)
9,045
291
291
9,336
492
28
–
520
9,856
46,414
360
4,248
796
5
51,596
51,728
51,439
51,823
%
21.1
21.6
22.4
%
20.8
21.3
22.6
%
17.5
18.1
19.1
%
17.5
18.0
19.0
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018
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Business review - 2. Capital
Capital requirements
At 31 December 2018, the Group’s CET1 requirement of 9.725%,
Under CRD IV, a portion of the capital reserves attributable to
the Additional Tier 1 Securities and tier 2 capital instruments
comprised of a Pillar 1 requirement of 4.5%, Pillar 2 requirement
issued by Allied Irish Banks, p.l.c., which exceed the minimum
(“P2R”) of 3.15%, a Capital Conservation Buffer (“CCB”) of
own funds requirement, is not recognised for AIB Group plc
1.875% and a 1% UK Countercyclical Capital Buffer (“CCyB”)
consolidated regulatory capital purposes. The impact on the
requirement that equated to a Group requirement of 0.2%.
consolidated regulatory capital will reduce if the outstanding
Additional Tier 1 Securities and tier 2 capital instruments issued
The Group’s CET1 requirement increases to 11.55% in 2019 due
by Allied Irish Banks, p.l.c. are redeemed. As at 31 December
to the fully phased CCB requirement rising to 2.5% (effective
2018, the restriction reduced qualifying fully loaded tier 1
1 January 2019), the implementation of the Irish CCyB of 1.0% of
capital by € 178 million and qualifying fully loaded tier 2 capital
Irish exposures (equates to a 0.7% Group requirement) effective
by € 254 million.
from 5 July 2019 and as the Group is designated as an Other
Systemically Important Institution (“O-SII”) a 0.5% buffer applies
from 1 July 2019, (rising to 1.0% on 1 July 2020 and 1.5% on
1 July 2021).
Transitional
The transitional CET1 ratio increased to 21.1% at 31 December
2018 from 20.8% at 31 December 2017, and is significantly in
excess of the minimum capital requirement.
The minimum requirement for the total capital ratio was 13.225%
at 31 December 2018 and rises to 15.05% in 2019. This
This increase is driven by the expiration of the transitional
requirement excludes Pillar 2 guidance (“P2G”) which is not
arrangements with regard to the deduction for unrealised gains
publicly disclosed.
on investment securities in 2018.
The transitional CET1 and total capital ratios at 31 December
The transitional total capital ratio decreased to 22.4% at
2018 are 21.1% and 22.4% respectively. Based on these ratios,
31 December 2018 from 22.6% at 31 December 2017. This is
the Group has a very significant buffer over maximum
driven by the removal of the Tier 2 add-back for standardised
distributable amount (“MDA”) trigger levels.
IBNR due to the implementation of IFRS 9 and the expiration of
the transitional arrangement for minority interest.
IFRS 9 – 1 January 2018
The impact of implementing IFRS 9, includes effects on revenue
As at 31 December 2018, the minority interest restriction
reserves, risk weighted assets (“RWAs”) and regulatory
reduced qualifying transitional tier 1 capital by € 260 million and
deductions. The Group applies the transitional arrangements for
qualifying transitional tier 2 capital by € 370 million.
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 these arrangements, the
transitional CET1 ratio remained at 20.8% on 1 January 2018,
Risk weighted assets
Fully Loaded
RWAs reduced by € 0.4 billion during the year to 31 December
with the fully loaded CET1 ratio reducing by 0.5% from 17.5% to
2018. Credit risk reduced by € 0.4 billion, while credit valuation
17.0%.
Capital ratios at 31 December 2018
Fully Loaded
The fully loaded CET1 ratio remained at 17.5% at 31 December
2018 (17.5% on 31 December 2017).
adjustment risk RWAs also reduced by € 0.4 billion. These
decreases were partially offset by an increase in operational
risk RWAs of € 0.4 billion (reflecting the increased levels of
income in the annual calculation).
The movement in credit risk RWA consisted of new lending of
€ 7.7 billion which was offset by asset sales, redemptions and
Fully loaded CET1 capital decreased by € 52 million to € 8,993
other balance sheet movements of € 7.5 billion. Improvements
million at 31 December 2018. This was primarily driven by profit
in credit grades reduced credit RWAs by € 0.6 billion.
for the year of € 1,092 million offset by the impact of implementing
IFRS 9 of € 267 million, a reduction in investment debt securities
reserves of € 289 million, a proposed ordinary dividend of € 461
Transitional
Transitional RWAs reduced by € 0.1 billion. € 0.4 billion is in
million and an increase in intangibles and other capital
relation to the movements in fully loaded RWA described
adjustments of € 127 million.
The fully loaded total capital ratio(1) increased to 19.1% at
31 December 2018 from 19.0% at 31 December 2017.
above. This was offset by a c. € 0.3 billion increase resulting
from the Group’s application of the transitional arrangements
for mitigating the impact of the introduction of IFRS 9 on own
funds. RWA is driven by the exposure net of ECL for certain
portfolios, and the amount of ECL recognised is lower after the
application of the transitional arrangements.
(1)The restriction (in respect of minority interests) calculation may require adjustment pending the final communication of the EBA’s position on the matter.
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Targeted Review of Internal Models (TRIM)
The Group is engaging with the ECB as part of the ECB’s
Dividends
The Board proposes to pay an ordinary dividend of € 0.17 per
Targeted Review of Internal Models (TRIM) on Irish Mortgages
share totalling € 461 million from full year 2018 profits. This is
and other lending. The Group has yet to receive a final TRIM
subject to shareholder approval at the Annual General Meeting
report on its IRB Irish Mortgages which would allow it to calculate
in April 2019.
the likely increase in RWAs for this portfolio.
Leverage ratio
The leverage ratio is defined as tier 1 capital divided by a non-risk
Minimum Requirement for Own Funds and Eligible
Liabilities (“MREL”)
In 2018, the Group has completed € 1.65 billion of its estimated
adjusted measure of assets. Based on the full implementation of
c. € 4 billion issuance requirement. The Group continues to
CRD IV, the leverage ratio, under the Delegated Act implemented
work towards its MREL target to ensure that there is sufficient
in January 2015, was 10.1% at 31 December 2018 (10.3% at
loss absorption and recapitalisation capability. The Single
31 December 2017).
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
2018
€ m
94,086
92,467
11,144
9,309
11.8%
10.1%
2017
€ m
92,328
90,593
11,028
9,336
11.9%
10.3%
Resolution Board (“SRB”) set the Group’s 2021 MREL target at
16.50%(1) of Total Liabilities and Own Funds which is aligned to
the previously indicated target of 28.04% of RWAs. The Group
continues to monitor the developments in the SRB’s MREL
Policy.
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 Group’s high RWA density it is likely to be less
Total leverage exposures (transitional) increased by € 1.8 billion
severely impacted by RWA floors. The Group will continue to
in the year mainly driven by increases in net customer loans of
assess the impact of the reforms as and when they are applied
€ 0.9 billion and investment securities € 0.4 billion.
to European law and regulations.
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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(1)Subject to ongoing review by the SRB.
AIB Group plc Annual Financial Report 2018
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Business review - 2. Capital
Ratings
AIB Group plc
AIB Group plc has achieved investment grade with all three rating
Allied Irish Banks, p.l.c.
Moody’s upgraded its rating by two notches to A3 with positive
agencies, Moody’s, Fitch and Standard & Poor’s (S&P).
outlook. This upgrade is driven by the significant improvement
in asset quality in 2017 and 2018.
Moody’s initially assigned AIB Group plc a rating of Ba2 with a
positive outlook in March 2018. In July 2018, they upgraded AIB
S&P upgraded its rating in July 2018 to BBB with positive
Group plc by two notches to Baa3 (Investment Grade), remaining
outlook and in December 2018 S&P upgraded one notch to
on positive outlook reflecting MREL execution ability and
BBB+ (Investment grade) with a stable outlook.
significant improvement in asset quality.
S&P initially assigned AIB Group plc a rating of BB+ with a positive
outlook in March 2018 and reaffirmed in July 2018. In December
2018, post Banking Industry Country Risk Assessment (BIRCA)
review, S&P upgraded AIB Group plc one notch to BBB-
(Investment grade).
Fitch initially assigned AIB Group plc a rating of BBB- (Investment
grade) with a positive outlook in March 2018. In November 2018,
Fitch reaffirmed the rating.
Long-term ratings
Long-term
Outlook
Investment grade
31 December 2018
Moody's
Baa3
Positive
(cid:1)(cid:1)
S&P
BBB-
Stable
(cid:1)(cid:1)
Fitch
BBB-
Positive
(cid:1)(cid:1)
31 December 2018
Long-term ratings
Long-term
Outlook
Investment grade
Moody's
A3
Positive
(cid:1)(cid:1)
S&P
BBB+
Stable
(cid:1)(cid:1)
Fitch
BBB-
Positive
(cid:1)(cid:1)
Long-term ratings
Long-term
Outlook
Investment grade
31 December 2017
Moody's
Baa2
Stable
(cid:1)
S&P
BBB-
Positive
(cid:1)
Fitch
BBB-
Positive
(cid:1)
60
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Risk management
1
2
Principal risks and uncertainties
Framework
2.1
2.2
2.3
2.4
2.5
Risk management framework
Risk identification and assessment
Risk appetite
Risk governance
Group risk Committee
3
Individual risk types
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
Credit risk
Additional credit quality and forbearance disclosures
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
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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’.
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. While 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.
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
Irish and UK markets. A deterioration in the performance of the
Irish economy or in the European Union (EU), the United
Kingdom (UK) and/or other relevant economies could adversely
affect the Group’s overall financial condition and performance.
Such a deterioration could result in reductions in business
activity, lower demand for the Group’s products and services,
reduced availability of credit, increased funding costs, higher
expected credit losses and lower capital.
Geopolitical developments could have repercussions that
could have a negative impact on global economic growth,
disrupt 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.
Expectations regarding geopolitical events and their impact on
the global economy remain uncertain in both the short and
medium term.
The UK’s exit from the EU could lead to a deterioration in
market and economic conditions in the UK and Ireland,
which could adversely affect the Group’s business, financial
condition, results of operations and prospects.
Although the overall impact of the UK’s withdrawal from the EU
remains uncertain, and may remain uncertain for some time, it is
expected to have a negative effect on Irish and UK GDP growth
over the medium term, with the UK’s future trading relationship
with the EU post-Brexit being the key consideration in
determining the extent of such deterioration.
The legal and regulatory position of the Group’s operations in the
UK may be impacted from changes in legal and regulatory rules
as a result of the UK departure from the EU. Depending on the
nature of such changes the UK exiting the EU could have
a material adverse effect on the Group’s business, financial
condition, results of operations and prospects.
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AIB Group plc Annual Financial Report 2018
Without a legislative change in the UK the default position is
that it will leave the EU on 29 March 2019 with neither a deal
nor a transitional arrangement. Even if a deal is ultimately
secured, uncertainty may persist or worsen throughout the
process of negotiation to determine the future terms of the UK’s
relationship with the EU.
The provisions that the Group holds at the balance sheet date
with regards to Brexit represent the probability weighted
outcome of three scenarios used in the ECL calculation, which
includes the possibility of a no-deal Brexit. However, there is a
risk that should the credit environment deteriorate beyond those
assumptions used in the ECL calculation (for instance if Brexit
was to result in a deep decline in the UK or Irish economies)
that the level of provisions would increase significantly.
The Group's stress testing and integrated planning frameworks
evaluate its risk profile under a range of macroeconomic
scenarios including an orderly Brexit and a ‘no deal’ Brexit
scenario (i.e. a hard Brexit). The most severe systemic risks,
together with their associated risk mitigants are evaluated as
part of the Internal Capital Adequacy Assessment Process
(“ICAAP”).
The Group has established a Brexit Steering committee to
co-ordinate the preparedness of the Group and has
commenced a number of actions within its overall Brexit
contingency plan. The Brexit Steering committee will continue
to monitor the situation and take action in response to Brexit
related risks as they evolve. The Brexit Steering committee
reports regularly to ExCo.
The Group faces risks associated with the level of, and
changes in, interest rates, as well as certain other market
risks.
Market risk such as interest rate risk, credit spread risk
(including sovereign credit spread risk), foreign exchange rate
risk, equity risk and inflation risk arise in the normal course of
the Group's banking business. 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
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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 hold-to-collect-and-sell bond positions.
Trading book risks predominantly result from supporting client
businesses with small residual discretionary positions
remaining. Credit valuation adjustments (CVA) and funding
valuation adjustments (FVA) to derivative valuations arising
from customer activity potentially have the largest trading book
derived impact on earnings.
The Group’s market risk management operates under a Board
approved Risk Appetite framework and policy. The Group’s
Asset and Liability Committee (ALCo) reviews the Group’s
market risk positions and makes decisions on the management
of the Group’s assets and liabilities within the Group Risk
Appetite. The Group’s Treasury function actively manages
market risk – proposing and executing market risk strategy and
managing market risk on a day-to-day basis. The Group’s
Capital and Liquidity function is responsible for making strategic
asset and liability management recommendations to ALCo.
The Group’s Financial Risk function is responsible for second
line oversight of market risk, defining market risk appetite,
setting the market risk framework and policy, and for monitoring
adherence to this framework.
The Group’s Internal Audit function provides third line assurance
on market risk.
Regulatory and legal risks
The Bank Recovery and Resolution Directive (“BRRD”) and
the Single Resolution Mechanism (“SRM”) Regulation
provide for resolution tools that may have a material adverse
effect on the Group.
While the Single Resolution Board has indicated its preferred
resolution strategy for the Group is single point of entry bail-in
through AIB Group plc, the BRRD is designed to provide relevant
authorities with a credible set of tools to intervene sufficiently
early and quickly in an unsound or failing credit institution so as
to ensure the continuity of the institution’s critical financial and
economic functions, while minimising the impact of a credit
institution’s failure on the economy and financial system. Under
the BRRD the resolution authority has extensive powers including
the power to write down certain liabilities with certain resolution
tools in circumstances where the credit institution is failing or is
likely to fail.
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
is constantly evolving, and the burden of compliance with laws
and regulations is increasing. As new laws or regulatory schemes
are introduced, the Group may be required to invest significant
resources in order to comply with the new legislation or
regulations.
The ECB’s publication of guidance to banks on non-performing
loans in March 2017 and NPL addendum in March 2018 set out
the expectations of the SSM with respect to NPL management
and minimum provision levels. The ECB’s objective in issuing the
guidance is to drive strategic and operational focus on the
reduction of non-performing loans, together with further
harmonisation and common definitions of non-performing loans
and forbearance measures. Non-compliance with the guidance
may trigger supervisory measures that are not further specified in
the guidance.
Thus, the Group is required to design and implement policies
that ensure compliance with legislation and regulation within the
jurisdictions in which the Group operates.
The Group faces risks and challenges due to interest rate
benchmark reform, including preparation for the discontinuation
of EONIA and EURIBOR beginning January 2020.
The Group adopts a systematic approach to the identification,
assessment, transposition, control and monitoring of new or
changing laws and regulatory requirements. Once implemented,
second line assurance tests the adequacy of, and adherence to,
the control environment on a risk based approach.
The Group is subject to anti-money laundering and terrorist
financing, anti-corruption and sanctions regulations, and if
it fails to comply with these regulations, it may face
administrative sanctions, criminal penalties and/or
reputational damage.
Monitoring compliance with anti-money laundering (“AML”),
counter-terrorist financing (“CTF”) and anti-corruption and
compliance sanctions rules are complex which requires
significant technical capabilities. In recent years, enforcement of
these laws and regulations by regulators against financial
institutions has become more intrusive, resulting in several
landmark fines against financial institutions.
The 4th EU Anti-Money Laundering Directive (“MLD4”)
emphasises a ‘‘risk-based approach’’ to AML and CTF and
imposes obligations on Irish incorporated bodies to take
measures to compile information on beneficial ownership.
In addition to this, the AML/CTF regulatory landscape is
constantly changing, with a series of proposed further
amendments to MLD4 arising from events such as terrorist
attacks in Europe and the leaking of papers containing highly
sensitive information, as well as from a desire to align European
AML/CTF laws with recommendations from the Financial Action
Task Force.
The combined impact of these changes is the 5th EU Anti-
Money Laundering Directive (“MLD5”), the final text of which was
published on 19 June 2018. Member States have until January
2020 to implement this into domestic law (with certain later
transposition dates for some aspects of MLD5). This is expected
to come into force in each Member State by mid-2019.
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.
Taxation changes may directly impact the financial performance
of the Group through measures such as the bank levy
introduced by the Irish Government in 2014 and the restrictions
on use of tax losses introduced in the UK in 2015 and 2016.
AIB Group plc Annual Financial Report 2018
63
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Risk management – 1. Principal risks and uncertainties
Protection Commission (“CCPC”) (for example, CCPC report on
Options for Ireland’s Mortgage Market, June 2017) on its loan
book, in particular its residential mortgage book, with respect to
such matters as the interest rates it charges on loans. This could
result in increased regulation of the Group’s loan book which
may impact the Group’s level of lending, interest income and net
interest margin and/or increased operational costs.
The Group is subject to conduct risk, including changes in
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 damage and may be subject to challenges by
customers or competitors, or sanctions, fines or other actions
imposed by regulatory authorities. The Group’s practices may
also be challenged under current regulations and standards.
There is also a risk that pressures from the media, consumer
groups and/or politicians could influence the agenda of the
Central Bank and the Financial Conduct Authority (“FCA”).
In addition, the Group may be subject to allegations of mis-
selling of financial products, including as a result of having
sales practices and/or reward structures in place that are
subsequently determined to have been inappropriate. This may
result in adverse regulatory action (including significant fines)
or requirements to amend sales processes, withdraw products
or provide restitution to affected customers, any or all of which
could result in the incurrence of significant costs, may require
provisions to be recorded in the financial statements, and could
adversely impact future revenues from affected products.
The Group has a Conduct Risk Framework, aligned with the
Group Strategy, which is embedded in the organisation and
provides oversight of conduct risks at Leadership Team and
Board level by way of two key fora:
– The Group Conduct Committee: provides the Leadership
Team oversight of conduct through promoting and
supporting a ‘customer first’ culture, and also oversees the
key conduct Risk Appetite metrics for Complaints
Management and Product Reviews.
– The Group Product and Proposition Committee: focus is
exclusively in product oversight and management, including
overseeing a rolling programme of product reviews.
Such taxation changes could have a material adverse effect on
the Group’s financial position.
In addition, changes in taxation policy and other tax measures
adopted by the Irish or UK Governments, or by international
organisations such as the European Union, may have an
adverse impact on economic activity generally, or on borrowers’
ability to repay their loans and, as a result, on the Group’s
business.
The Group assesses this risk by undertaking sensitivity analysis
in its financial planning process, and monitoring financial
performance against the Group’s financial plan on a regular
basis.
Irish legislation and regulations in relation to mortgages,
as well as judicial procedures for the enforcement of
mortgages, custom, practice and interpretation of such
legislation, regulations and procedures, may result in higher
levels of default by the Group’s customers, delays in the
Group’s recoveries in its mortgage portfolio, and increased
impairments.
Regulations such as the Personal Insolvency Act and the Central
Bank’s Code of Conduct on Mortgage Arrears (“CCMA”) may
result in changes in customers’ attitudes, where they may be
more likely to default even when they have sufficient resources
to continue making payments on their mortgages. This could
result in delays in the Group’s recoveries in respect of its
mortgage portfolio and increased impairments, which could have
a material adverse effect on its business, results of operations,
financial condition and prospects.
Furthermore, in instances where the Group seeks to enforce
security on commercial or residential property (in particular over
Private Dwelling House (“PDH”)), the Group may encounter
significant delays arising from judicial procedures, which often
entail significant legal and other costs. Custom, practice and
interpretation of Irish legislation, regulations and procedures may
also contribute to delays or restrictions on the enforcement of
security. The courts or legislature in Ireland may have particular
regard to the interests and circumstances of borrowers relating to
the enforcement of security or sale of their loans which is
different to the custom and practice in other jurisdictions. As a
result of these factors, enforcement of security or recovery of
delinquent loans in Ireland may be more difficult, take longer and
involve higher costs for lenders as compared to other
jurisdictions.
The Government may also seek to influence how credit
institutions set interest rates on mortgages, amend the Personal
Insolvency Act or enact other legislation that affects the rights of
lenders in other ways which could have a material adverse effect
on the Group’s (including the issuer’s) business, financial
condition and prospects.
In common with other residential mortgage lenders, the Group
faces increased scrutiny and focus by the Government, the
Oireachtas and customer or consumer protection regulators,
such as the Central Bank and the Competition and Consumer
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Risks relating to business operations
governance and internal control systems
The Group is subject to credit risks in respect of customers
and counterparties, including risks arising due to
concentration of exposures across its loan book, and any
failure to manage these risks effectively could have a
material adverse effect on its business, financial condition,
results of operations and prospects.
Risks arising from changes in credit quality and the recoverability
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 (“SMEs”) and
corporates, the Group also has exposure to credit risk arising
from loans to financial institutions, its trading portfolio, investment
debt securities, derivatives, and from off-balance sheet
guarantees and commitments. Due to the nature of its business,
the Group has extensive exposure to the Irish property market,
both because of its mortgage lending activities and its property
and construction loan book.
Accordingly, any development that adversely affects the Irish
property market will have a disproportionate impact on the
Group. If the Group is unable to manage its credit risk effectively,
its business, results of operations, financial condition and
prospects could be materially adversely affected. The Group’s
monitoring of its loan portfolio is dependent on the effectiveness,
and efficient operation of its processes, including credit grading
and scoring systems, and there is a risk that these systems and
processes may not be effective in evaluating credit quality.
The Group’s credit risk management operates under a Board
approved framework and suite of policies. The Group’s Credit
Committee (“GCC”) monitors credit risk. The Group’s Credit Risk
function provides second line assurance, defining the credit risk
framework and monitoring compliance with this framework.
The Group Internal Audit function provides third line assurance
on credit risk.
The Group’s strategy may not be optimal and/or not
successfully implemented.
The Group has identified several strategic objectives for its
business. There can be no assurance that the Group’s strategy is
the optimal strategy for delivering returns to shareholders.
The Group may not be successful in implementing its strategy in
a cost effective manner. The Group’s business, results of
operations, financial condition and prospects could be
materially adversely affected if any or all of these strategy related
risks were to materialise.
The Group mitigates this risk by monitoring its performance
against its strategic objectives on a regular basis, by periodically
reviewing the competitive landscape and by benchmarking
against peers.
If a poor or inappropriate culture develops across the
Group’s business, this may adversely impact its
performance and impede the achievement of its strategic
goals.
The Group must continuously develop and promote an
appropriate culture that drives and influences the activities of its
business and staff and its dealings with customers in relation to
managing and taking risks and ensuring that risk
considerations continue to play a key role in business
decisions. It is senior management’s responsibility to ensure
that the appropriate culture is embedded throughout the
organisation. As was demonstrated by many banks during the
financial crisis, if an inappropriate culture develops, then a
strategy or course of action could be adopted that results in
poor customer outcomes. If the Group is unable to maintain an
appropriate culture, this could have a negative impact on the
Group’s business, result of operations, financial condition and
prospects.
The Group promotes, amongst all staff, the principle of ‘doing
the right thing’. It monitors the evolving culture through a staff
engagement programme, iConnect, and through its
performance management system. The performance
management system facilitates quality discussions with staff on
‘what’ and ‘how’ they will achieve their objectives. As a result,
initiatives continue to be undertaken at team level to improve
the way we do things and from which we continuously identify
opportunities to evolve our culture at Group level as a
competitive advantage. As further support, the Group has
implemented a Code of Conduct supported by a range of
employee policies, including ‘Conflicts of Interest’ and
‘Speak up’.
Damage to the Group’s brand or reputation could
adversely affect its relationships with customers, staff,
shareholders and regulators.
Management aims to ensure that the Group’s brands, which
include the AIB and EBS brands in Ireland, the AIB GB brand in
Great Britain and the First Trust Bank brand in Northern
Ireland, are at the heart of its customers’ financial lives by being
useful, informative, and easy to use, and by providing an
exceptional customer experience. The Group’s relationships
with its stakeholders, including its customers, staff and
regulators, could be adversely affected by any circumstance
that cause real or perceived damage to its brands or reputation.
In particular, any regulatory investigations, inquiries, litigation,
actual or perceived misconduct or poor market practice in
relation to customer related issues could damage the Group’s
brands and/or reputation. Any damage to the Group’s brands
and/or reputation could have a material adverse effect on the
Group’s business, results of operations, financial condition or
prospects.
The Group monitors the ‘health’ of its brands and reputation by
regularly seeking feedback from its customers, shareholders
and other stakeholders, and by tracking metrics in relation to
these, e.g. the Net Promoter Score (“NPS”) gauges the loyalty
of customer relationships. The Group maintains open
communication with all regulatory bodies.
AIB Group plc Annual Financial Report 2018
65
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Risk management – 1. Principal risks and uncertainties
Constraints on the Group’s access to funding, including a
loss of confidence by depositors or curtailed access to
wholesale funding markets, may result in the Group being
required to seek alternative sources of funding.
Conditions may arise which would constrain funding or liquidity
opportunities for the Group over the longer term. Currently, the
Group funds its lending activities primarily from customer
accounts. Consequently, a loss of confidence by depositors in
the Group, the Irish banking industry or the Irish economy, could
ultimately lead to a reduction in the availability and/or an
increase in the cost of funding or liquidity resources. The Group
could also be negatively affected by an actual or perceived
deterioration in the soundness of other financial institutions and
counterparties.
The withdrawal of Central Bank funding through Quantitative
Easing (“QE”) could reduce the amount of overall liquidity in the
banking system. This in turn could make the cost of funding more
expensive and negatively affect the Group’s funding position.
The Group’s funding and liquidity risk management operates
under a Board approved Risk Appetite framework and policy.
The Group’s ALCo reviews the Group’s funding and liquidity risk
position and makes decisions on the management of the Group’s
assets and liabilities. The Group’s Treasury and Capital and
Liquidity functions actively manage funding and liquidity risk,
proposing and executing funding strategy and managing liquidity
risk on a day-to-day basis. The adequacy of the Group’s funding
and liquidity is evaluated under both forecast and stress
conditions as part of the Internal Liquidity Adequacy Assessment
Process (“ILAAP”). The ILAAP process includes the identification
and evaluation of potential liquidity mitigants.
The Group’s Financial Risk function provides second line
independent risk oversight on funding and liquidity risk, setting
the risk appetite, defining the funding and liquidity control
framework, and monitoring adherence to this framework.
The Group’s Internal Audit function provides third line assurance
on funding and liquidity risk.
The Group’s risk management systems, processes,
guidelines and policies may prove inadequate for the risks
faced by its business, and any failure to properly assess or
manage the risks which it faces could cause harm to the
Group’s business.
The Group is exposed to a number of material risks that it
manages through its Risk Management Framework. Although
the Group invests substantially in its risk management strategies
and techniques, there is a risk that these could fail to fully
mitigate these risks in some circumstances.
Furthermore, Senior Management are required to make complex
judgements, and there is a risk that decisions made by Senior
Management may not be appropriate or yield the results
expected, or that Senior Management may be unable to
recognise emerging risks in order to take appropriate action in a
timely manner.
The Group mitigates this risk by regularly reviewing the design
and operating effectiveness of its risk management policies and
methodologies. These reviews are supplemented in some
instances by external review and validation.
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The Group uses models across many, though not all, of its
activities, and if these models prove to be inaccurate, its
management of risk may be ineffective or compromised,
and/or the value of its financial assets and liabilities may
be overestimated or underestimated.
The Group uses models across many, though not all, of its
activities, including, but not limited to, capital management,
credit grading, provisioning, valuations, liquidity, pricing, and
stress testing. The Group also uses financial models to
determine the 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. Since the Group uses risk measurement models which
take account of historical observations, there is a risk that it
may underestimate or overestimate exposure to various risks to
the extent that future market conditions deviate from historical
experience.
The Group’s credit models are subject to ongoing regulatory
reviews and inspections, which may give rise to additional
capital requirements, a replacement of internal ratings based
(“IRB”) models, or a reputational risk for the Group.
If the Group’s models are not effective in estimating its
exposure to various risks or determining the fair value of its
financial assets and liabilities, or if its models prove to be
inaccurate, its business, financial condition, results of
operations and prospects could be materially adversely
affected.
The Group mitigates this risk through the review and monitoring
of the design and operating effectiveness of the Group Model
Risk Framework and supporting policies, including model
validation.
The Group requires approval from the ECB in order to
implement new IRB models or to change existing approved IRB
models. It is also subject to reviews and inspections from the
ECB and other regulatory bodies in relation to the models, such
as the Targeted Review of Internal Models (“TRIM”), a process
being undertaken by the ECB to increase harmonisation in the
approaches to internal models used by banks across the EU.
Despite continued progress made throughout 2018, the
Group has a significant level of criticised loans and non-
performing exposures on its statement of financial
position, and there can be no assurance that it will
continue to be successful in reducing the level of these
loans. The management of criticised and non-performing
loans also gives rise to risks, including vulnerability to
challenges by customers and/or third parties, re-default,
changes in the regulatory regime, further losses, costs,
and the diversion of management attention and other
resources from the Group’s business.
Despite significant progress made throughout 2018 to reduce
the level of criticised and non-performing loans, the Group has
a significant level of criticised and non-performing loans, which
are defined as loans requiring additional management attention
over and above that normally required for the loan type.
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Criticised loans are accounts of lower quality and include
“criticised watch” and “criticised recovery”. Non-performing loans
are accounts which have defaulted. The Group has been
proactive in managing its criticised and non-performing loans,
in particular through restructuring activities and the Mortgage
Arrears Resolution Process (“MARP”) that was introduced in
order to comply with the Central Bank’s Code of Conduct on
Mortgage Arrears (“CCMA”). The Group has made significant
reductions to the level of criticised and non-performing loans,
but, there can be no assurance that the Group will continue to be
successful in reducing the level of its criticised and non-
performing loans.
The Group has extensive credit policies and strategies,
implementation guidelines and monitoring structures in place to
manage criticised loans and non-performing exposures.
The Group regularly reviews these credit policies, as well as the
performance of criticised loans and non-performing exposures,
against financial plans.
The Group faces operational risks – including cyber,
outsourcing, fraud, product process and systems risks.
Operational risk is the risk arising from inadequate or failed
internal processes, people and systems, or from external
events. This includes legal risk, which is the potential for loss
arising from the uncertainty of legal proceedings potential legal
proceedings and risk of internal and external fraud incidents,
but excludes strategic and reputational risk.
The Group consider the following to be the current key
operational risks:
The Group’s business continues to be subject to significant
change, as a result of both changes in the way in which the
Group interacts with customers and the implementation of
mandatory changes as a result of new or changed regulatory
requirements. Careful monitoring of the scope and scale of
ongoing change across the Group is required to ensure that
ongoing change does not impact the Group’s operational risk
profile.
Under the terms of the recapitalisation of the Group by the Irish
Government, the Group is required to comply with certain
executive pay and compensation arrangements, including a
cap on salaries as well as a ban on bonuses and similar
incentive-based compensation applicable to employees of Irish
banks who have received financial support from the Irish
Government. As a result of these restrictions, and in the
increasingly competitive markets in Ireland and the UK, and
associated challenges in the market presented by Brexit, the
Group may not be able to attract, retain and remunerate highly
skilled and qualified personnel.
The Group’s business is dependent on the accurate and
efficient processing and reporting of a high volume of complex
transactions across numerous and diverse products and
services. This is enabled by the high-performing information
technology (“IT”) and communications infrastructure on which
the Group relies. Weaknesses or issues which may result in
these systems or processes not operating as expected could
have an adverse effect on the Group's results and on its ability
to deliver appropriate customer outcomes or to achieve its
organisational objectives. This could include issues such as
technical failures, human error, unauthorised access,
cybercrime, natural hazards or disasters, or similarly disruptive
events.
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The Group continues to invest significantly in its technology
and cyber defences. Its IT transformation programmes are
aimed at delivering resilience, agility and a simple, efficient
operating model focused on improving the customer
experience. To respond to the cyber related risks, and
counteract the increased frequency, sophistication and
complexity of cyber attacks, the Group’s Cyber Strategy and
Framework is driven by an informed view of the threat
landscape, a clearly articulated risk appetite, knowledge of the
regulatory environment and placing the customer at the
forefront of our thinking. The Group continues to improve its
capabilities to defend, protect and respond, through a
programme of ongoing enhancements to risk mitigation and
management processes and controls.
The Group is dependent on the performance of third-party
service providers, and if these providers do not perform their
services or fail to provide services to the Group or renew their
licences with the Group, the Group’s business could be
disrupted and it could incur unforeseen costs.
The Group seeks to ensure that procedures are in place to
effectively manage the relevant data protection obligations of its
employees and any third-party service providers, and also
continues to enhance security measures to help prevent
cybercrime. Notwithstanding such efforts, the Group is exposed
to the risk that personal customer data could be lost, disclosed
or stolen, as a result of human error or otherwise.
The Group maintains insurance policies to cover a number of
risk events. These include financial policies (comprehensive
crime/computer crime; professional indemnity/civil liability;
employment practices liability; and directors’ and officers’
liability) and a suite of general insurance policies to cover such
matters as property and business interruption, terrorism,
combined liability and personal accident. There can be no
assurance, however, that the level of insurance the Group
maintains is appropriate for the risks to its business or
adequate to cover all potential claims.
The management of the Group's operational risks is central to
the delivery of its strategic objectives. To support the
management of operational risks, the Group has a defined
Operational Risk Framework and suite of Policies’, which sets
out the principles, roles and responsibilities and governance
arrangements for the management of Operational Risk across
the Group. The operational risk strategy of the Group is to
adopt sound practices in the identification, evaluation,
mitigation, monitoring, assurance and reporting of operational
risks to ensure that they are within the operational risk appetite
of the Group. The Group mitigates its operational risks by
having detailed risk assessment and internal control
requirements in relation to the management of its key people,
process and systems risk.
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Risk management – 1. Principal risks and uncertainties
The Group received approval from the Pensions Authority in
2013 in relation to a funding plan up to January 2018 with regard
to the regulatory minimum funding standard (the MFS)
requirements of the AIB Irish Pension Scheme. The final
payment required under the funding plan was made in January
2018. The most recent actuarial valuation of the Irish Scheme
was carried out at 30 June 2018 and reported the scheme to be
in surplus and requiring no deficit funding at this time.
It has been agreed with the Trustee of the UK Scheme to
extend the deadline for completing the valuation at 31
December 2017 to 2019. The Group is currently considering
funding options for the UK Scheme with the Trustee.
Pension risk is monitored and controlled in line with the
requirements of the Group’s Pension Risk Framework.
The extent of the IAS 19 surplus or deficit is monitored on a
monthly basis. In addition, the potential change in this value
over a one year time horizon is assessed on a monthly basis
and is reported versus a Group RAS watch trigger.
Deferred tax assets that are recognised by the Group may
be affected by changes in tax legislation, the interpretation
of such legislation, or relevant practices. The Group is also
required under capital adequacy rules to deduct from its
CET1 the value of most of its deferred tax assets, which
may result in it being required to hold more capital.
At 31 December 2018, the Group had € 2.7 billion of deferred
tax assets on its statement of financial position, substantially all
of which related to unused tax losses.
Changes in tax legislation or the interpretation of such
legislation, regulatory requirements, accounting standards or
practices of relevant authority, could adversely affect the basis
for recognition of the value of these losses. In the United
Kingdom, for instance, legislation was introduced in 2015 and
2016 to restrict the proportion of a bank’s taxable profit that can
be offset by certain carried forward losses first to 50 per cent,
and then to 25 per cent. This legislation has adversely affected
the value of the Group’s deferred tax assets in relation to its UK
operations.
The capital adequacy rules under CRD IV also require the
Group, among other things, to deduct from its CET1 the value
of most of its deferred tax assets, including all deferred tax
assets arising from unused tax losses. This deduction from
CET1 commenced in 2015 and is to be phased in evenly over
10 years, although this phasing may be subject to change.
The Group monitors this risk by regularly reviewing the basis
for recognition of its deferred tax assets. In addition, the Group
monitors and sets limits on its fully loaded capital position,
which excludes deferred tax assets, from the Group’s available
capital resource.
The Group faces the risk of being unable to recruit and
retain appropriately skilled and experienced staff.
People risk is the risk associated with being unable to recruit and
retain appropriately skilled and experienced staff to ensure the
stability of the business in the long-term. In particular the Group
is restricted in the remuneration it can offer to senior
management which creates a risk that the Group may not be
able to attract and retain the right skills and experience within
key senior management roles.
The Group’s performance is heavily dependent on the talents
and efforts of highly skilled individuals, and the continued ability
of the Group to compete effectively and implement its strategy
depends on its ability to attract new employees and retain and
motivate existing employees. Competition from within the
financial services industry, including from other financial
institutions, as well as from businesses outside the financial
services industry for key employees is intensifying.
The Group may have insufficient capital to meet increased
minimum regulatory requirements.
The Group is subject to minimum capital requirements as set out
in CRD IV and implemented under the SSM. As a result of these
requirements, banks in the EU have been and could continue to
be required to increase the quantity and the quality of their
regulatory capital. Given this regulatory context, and the levels of
uncertainty in the current economic environment, there is a
possibility that the economic outturn over the Group's capital
planning period may be materially worse than expected and/or
that losses on the Group’s credit portfolio may be above forecast
levels. Were such losses to be significantly greater than currently
forecast, or capital requirements for other material risks increase
significantly, there is a risk that the Group’s capital position could
be eroded to the extent that it would have insufficient capital to
meet its regulatory requirements. Due to the Group continuing to
be majority owned by the Irish State, it may have less opportunity
to enhance its capital base, in the event of a significant market
downturn.
This risk is mitigated by evaluating the adequacy of the Group's
capital under both forecast and stress conditions as part of the
ICAAP. The Group ensures that, as part of its capital planning,
it maintains an appropriate buffer over the minimum regulatory
and internal capital requirements. The ICAAP process also
includes the identification and evaluation of potential capital
mitigants should this buffer come under threat.
The Group faces the risk that the funding position of its
defined benefit pension schemes will deteriorate, requiring
it to make additional contributions, adversely affecting its
capital position.
The Group maintains a number of defined benefit pension
schemes for certain current and former employees. These
defined benefit schemes were closed to future accrual from
31 December 2013. In relation to these schemes, the Group
faces the risk that the funding position of the schemes will
deteriorate over the longer term. This may require the Group to
make additional contributions, above what is already planned, to
cover its pension obligations towards current and former
employees. Furthermore, pension deficits as reported are a
deduction from capital under CRD IV. Accordingly, any increase
in the Group’s pension deficit may adversely affect its capital
position. There could also be a negative impact on industrial
relations if the funding level of the schemes were to deteriorate.
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Risk management – 2. Framework
Introduction
The following sections outline the Risk Management Framework
in place throughout 2018. In the final quarter of 2018, the
Leadership Team was replaced with the Executive Committee
(“ExCO”). References in the text to the role of the Leadership
Team should be interpreted accordingly. A number of other
changes to the Group’s risk governance framework were
implemented subsequent to the reporting date as part of the
Group’s transition to a new operating model and internal
governance structure. A summary of the key changes is
presented in Section 2.5.
The principal risks and uncertainties to which the Group is
exposed are set out in the previous section. The governance and
organisation framework through which the Group manages and
seeks to mitigate these risks is described below.
2.1 Risk management framework
The Group takes a variety of risks in undertaking its business
activities. Risk is defined as any event that could damage the
core earnings capacity of the Group, increase cash flow volatility,
reduce capital, threaten its business reputation or viability, and/or
breach its regulatory or legal obligations. The Group has adopted
an enterprise risk management approach to identifying,
assessing and managing risks. To support this approach, a
number of frameworks and policies approved by the Board (or
Board delegation) are in place which set out the key principles,
roles and responsibilities and governance arrangements through
which the Group’s material risks are managed and mitigated.
The core aspects of the Group's risk management approach are
described below.
2.2 Risk identification and assessment
The Group uses a variety of approaches and methodologies to
identify and assess its principal risks and uncertainties.
A Material Risk Assessment (“MRA”) is undertaken on at least
an annual basis. The Group performs a top-down MRA process
to ensure all material risks to which AIB is exposed are
identified. Other assessments of risk are undertaken, as
required, by business areas, focusing on the nature of the risk,
the adequacy of the internal control environment, and whether
additional management action is required. Periodic risk
assessments are also undertaken in response to specific
internal or external events. Reports on the Group’s risk profile
and emerging risks are presented at each Executive Risk
Committee ("ERC") and Board Risk Committee ("BRC")
meeting.
2.3 Risk appetite
The Group’s risk appetite is defined as the amount and type of
risk that the Group is willing to accept or tolerate in order to
deliver on its strategic and business objectives. The Group Risk
Appetite Statement (“RAS”) is a blend of qualitative statements
and quantitative limits and triggers linked to the Group's
strategic objectives.
The Group RAS is reviewed and approved by the Board at least
annually and more often if required, in advance of the business
and financial planning process. The Group RAS is cascaded
down to the Group authorised bank subsidiaries and significant
business areas to ensure it is embedded throughout the Group.
While the Board approves the Group RAS, the Leadership
Team is accountable for ensuring that risks remain within
appetite.
The Group’s risk profile is measured against its risk appetite and
adherence to the Group RAS is reported on a monthly basis to
the ERC and BRC. Should any breaches of Group RAS limits
arise, these, together with associated management action plans,
are escalated to the Board for review, and also reported to the
Central Bank of Ireland (“CBI”)/Joint Supervisory Team ("JST"),
in line with the provisions of the CBI revised Corporate
Governance Code.
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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:
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
behaviour 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 regulatory requirements whilst
achieving returns on capital in line with stakeholder and
market expectations; and
9. We seek resilient, diversified funding, relying significantly on
retail deposits.
Risk appetite is embedded within the Group in a number of ways,
including alignment with risk frameworks and policies, segment
and subsidiary risk appetite statements, delegated authorities
and limits, and new product approval processes. Risk appetite is
a key input into the decision making process within the Group.
Extensive communication and the cascade of key aspects of the
Group’s risk appetite framework, as relevant, serve to ensure that
risk appetite is aligned to strategy and informs day-to-day
decision making.
2.4 Risk governance
2.4.1 Risk management organisation
The Board has ultimate responsibility for the governance of all
risk taking activity in the Group. The Group has adopted a ‘three
lines of defence’ framework in the delineation of accountabilities
for risk governance. Under this model, the primary responsibility
for risk management lies with business line management.
The Risk Management function together with the Compliance
function, headed by the Group Chief Risk Officer (“CRO”) provide
the second line of defence, providing independent oversight and
challenge to business line managers. The third line of defence is
the Group Internal Audit function, under the Head of Group
Internal Audit (“GIA”), which provides independent assurance to
the Board Audit Committee on the effectiveness of the system of
internal control.
Lines of Defence
The following outlines the high level roles each line of defence
plays in risk management.
First Line of Defence
Business lines (First Line of Defence) have primary
responsibility for risk management including: identifying,
measuring, monitoring and controlling risks within their areas of
accountability. They are required to establish effective
governance and controls for their business to be compliant with
Group policy requirements, to maintain appropriate risk
management skills, mechanisms and toolkits, and to act within
Group risk appetite parameters set and approved by the Board.
The First Line of Defence comprises the revenue generating
and client facing areas, along with associated support functions.
This includes customer businesses, business and customer
services as well as support and control functions such as
Human Resources, Customer and Strategic Affairs and
Finance. In the UK Business, the same principles apply.
Line management in the individual business areas are
responsible for ensuring that appropriate business controls and
assessments are in place to adequately mitigate risks.
Second Line of Defence
The Second Line of Defence comprises Risk and Compliance
(together “Risk” or “the Risk function”) and oversees the First
Line, setting the frameworks, policies and limits, consistent with
the Risk Appetite of the Group, and credit sanctioning.
The functions are put in place by senior management to help
ensure risk management processes and controls implemented
by the First Line of Defence are adequately designed and
operate effectively. The Second Line of Defence is responsible
for providing independent oversight and challenge to business
units’ risk management activities and reporting. In the case of
credit risk, independent oversight include Credit Risk’s role in
credit sanctioning. Challenge requires proactive engagement
with business line managers to test and confirm the integrity
and effectiveness of first line risk management. Nominated
‘Second Line Risk Accountable Executives’ are responsible for
ensuring the formulation of risk appetite; that a Risk Policy and
Framework is in place for the risks assigned to them.
Third Line of Defence
Group Internal Audit (“GIA”) provides an independent,
reasonable and objective assurance, on the key risks facing the
Group, and the adequacy and operational effectiveness of
governance, risk management, and the Internal Control
environment in managing these risks. All activities undertaken
within, and on behalf of, the Group are within the scope of GIA.
This includes the activities of subsidiaries and the risk and
control functions established by the Group.
GIA executes its Audit Plan including obtaining an
understanding of processes and systems, evaluating their
adequacy, and testing the effectiveness of key controls. Audit
work is underpinned by comprehensive methodology and
procedures documentation.
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2.4.2 Committees with risk management
responsibilities
The Board has delegated a number of risk governance
responsibilities to various committees and key officers.
The diagram on page 69 summarises the risk committee
structure of the Group in 2018.
The roles of the Board, the Board Audit Committee, the Board
Risk Committee, the Remuneration Committee and the
Nominations and Corporate Governance Committee are set out
in the Governance and Oversight – Corporate Governance report
on pages 174 to 184. The role of the Sustainable Business
Advisory Committee (“SBAC”) is set out on page 20
Sustainability, governance and risk.
The Leadership Team comprises the Senior Executive managers
of the Group who manage the strategic business risks of the
Group. The team establishes the business strategy and risk
appetite within which the Group operates.
The role of the Executive Risk Committee is to foster risk
governance within the Group, to ensure that risks within the
Group are appropriately managed and controlled, and to evaluate
the Group's risk appetite against the Group’s strategy.
It is a sub-committee of the Leadership Team chaired by the
Chief Financial Officer (“CFO”), and its membership includes the
CRO and Chief Operating Officer (“COO”) and the heads of
significant business areas.
The ERC's principal duties and responsibilities include reviewing
the effectiveness of the Group’s risk frameworks and policies,
monitoring and reviewing the Group’s risk profile, risk trends, risk
concentrations and policy exceptions, and monitoring adherence
to approved risk appetite and other limits. The ERC acts as a
parent body to both the Group Credit Committee (“GCC”) and the
Operational Risk Committee (“ORC”).
Principal responsibilities of the GCC include: the exercising of
approval authority for exposure limits to customers of the Group;
exercising approval authority for credit policies; considering
quarterly provision levels, assurance reviews and credit review
reports; approving credit inputs to credit decisioning models, as
well as reviewing and approving other credit related matters as
they occur. The principal responsibility of the ORC is to provide
oversight to ERC in relation to the current and potential future
operational risks/profile facing the Group and operational risk
strategy in that regard. The ORC reviews, approves and
recommends, as appropriate, to the ERC, the BRC and the
Board, the Operational Risk Framework and all other operational
policies and standards. The ORC is also responsible for
reviewing key operational risk assessments and mandating
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,
the UK and the USA, and to monitor compliance with the Board
approved Conduct Risk Appetite and policy. It is a sub-committee
of the Leadership Team chaired by the Chief Marketing Officer
(“CMO”), who is responsible for ensuring a consistent approach
to conduct risk management across the Group.
The Group Conduct Committee’s principal duties include
monitoring the Group’s conduct profile to ensure it remains
within risk appetite, approving and monitoring the effectiveness
of the Group Conduct Risk Framework, and reviewing, and
approving other conduct-related matters, including reviewing
the process by which the Group and its subsidiaries identify and
manage conduct risk, reviewing the Group’s strategy to ensure
customer outcomes and risks to customers are fully articulated,
and developing conduct training programmes. The Group
Conduct Committee acts as a parent to the Group Product and
Proposition Committee, which has delegated authority for
approving the launch of products and propositions, and
oversight of the Group’s overall product portfolio.
The role of the Asset and Liability Committee (“ALCo”) is to act
as the Group’s strategic balance sheet management forum that
combines a business decisioning and risk governance
mandate. It is a sub-committee of the Leadership Team, chaired
by the CFO and its membership includes the CRO and the
heads of significant business areas. The ALCo is tasked with
decision-making in respect of the Group’s balance sheet
structure, including capital, liquidity, funding, interest rate risk in
the Banking Book (“IRRBB”) from an economic value and net
interest margin perspective, foreign exchange hedging risks,
and other market risks. In ensuring sound capital and liquidity
management and planning, the ALCo reviews and approves
models for the valuation of financial instruments, for the
measurement of market and liquidity risk, for regulatory capital,
and for the calculation of expected and unexpected credit
losses and stress testing. In addition, the ALCo directs the
shape of the balance sheet through funds transfer pricing,
direction on product pricing, and review and analysis of risk
adjusted returns on capital (“RAROC”).
The Model Risk Committee (“MRC”) is established under the
AIB Model Risk Framework and acts as a sub-committee of the
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
information relating to the Group and its impacted subsidiary
entities in order to comply with insider information disclosure
obligations under the Market Abuse Regulation (“MAR”), the
Central Bank of Ireland’s Market Abuse Rules, and the Irish
Stock Exchange/Euronext Dublin Listing Rules.
The MAC’s principal duties include determining whether
information raised is deemed to be inside information and, if so,
implementing and monitoring the appropriate procedure to be
followed, together with assigning a business owner for each
inside information event. The Committee also ensures that the
Group issues an announcement in circumstances where an
obligation to disclose insider information has arisen under MAR
but where the Group is not yet in a position to provide full
AIB Group plc Annual Financial Report 2018
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Risk management – 2. Framework
– To provide oversight and challenge of credit risk
management related matters (as escalated by the Group
Credit Committee) and periodically review the credit portfolio
exposures and trends;
– To provide oversight and challenge of risk measurement
matters (as escalated by the Risk Measurement
Committee);
– To provide oversight and challenge of data governance
matters (as recommended by the Data Governance
Committee);
– To oversee the development of the Group’s risk
management culture, including the promotion of a common
risk language and mechanisms for communicating the risk
culture and philosophy throughout the Group;
– To review twice yearly risk assessments prepared by the
first line of business management and Business and
Customer Services (“BCS”) to identify and evaluate all
significant risks and related risk management activities
within the business;
– To advise the Executive Committee on the risk impact of any
strategic initiatives that the Group might be considering and
establish whether the initiative is established within risk
appetite; and
– To provide advice to the BRC on risk governance, current
and future risk exposures and risk appetite.
Other committees which are sub-committees of ExCo and have
risk management responsibilities as part of their remit include:
– Group Asset and Liability Committee
– Group Talent and Culture Committee
– Group Change Committee
– Group Conduct Committee.
details of the underlying facts. The MAC is chaired by the CFO,
and its membership includes the CEO, the CRO, the Group
General Counsel, the Director of Corporate Affairs, and the
Group Treasurer.
The Group Disclosure Committee (“GDC”) is responsible for
reviewing Group financial information for compliance with the
legal and regulatory requirements prior to external publication,
and for exercising oversight of the Accounting Policies Forum,
which ensures that the accounting policies adopted by the Group
conform to the highest standards in financial reporting.
The role of the Arrears and Restructuring Priority Committee
(“ARPC”) is to take all decisions and actions required or deemed
necessary in relation to the Group’s non-performing loan
exposures. It is a sub-committee of the Leadership Team and is
chaired by the Head of Financial Solutions Group.
The Sustainable Business Executive Council (“SBEC”) was
established by the Leadership Team in 2017 as an executive
council supporting the SBAC in the execution of the Group’s
sustainable business strategy in accordance with the approved
Group strategic and financial plan.
The Council is comprised of members of the Leadership Team
and senior managers representing a cross-section of all the
Group’s functions, and is co-chaired by the Director of Corporate
Affairs and the CMO.
2.5 Group Risk Committee
In January 2019, the Group transitioned to a new operating
model and internal governance structure. From a risk
governance perspective, a key change was the replacement of
the Executive Risk Committee (“ERC”) with the Group Risk
Committee (“GRC”). The GRC is a sub-committee of the
Executive Committee (“ExCo”) and is chaired by the Chief Risk
Officer. The roles and responsibilities of the GRC are to:
– To set and approve (and where relevant recommend to the
Board or “BRC”) Risk Frameworks, Risk Appetite Statements
(‘RAS’), Risk Policies and limits to manage the risk profile of
the Group;
– To monitor and review the Group’s risk profile (Enterprise
wide) including risk trends, concentrations, policy exceptions
and impact on capital and agree mitigating actions when
required;
– To periodically review the effectiveness of the Group’s risk
management policies for identifying, evaluating, monitoring,
managing, and measuring significant risks;
– To provide oversight and challenge of regulatory, operational
and conduct risk related matters;
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Risk management – 3. Individual risk types
3.1 Credit risk
Definition
Credit risk organisation and structure
Credit exposure
Credit risk monitoring
Forbearance
Measurement, methodologies and judgements
Credit profile of the loan portfolio
Gross loans and ECL movements
Loans and advances to customers – Residential mortgages
Loans and advances to customers – Republic of Ireland residential mortgages
Loans and advances to customers – United Kingdom residential mortgages
Loans and advances to customers – Asset class by segment
Non-performing exposures to customers
Investment securities
Credit ratings
Large exposures
Page
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85
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103
109
110
113
116
121
122
126
126
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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 their
contractual obligations.
Credit risk can be categorised into the following four sub-risks;
i. Counterparty risk: The risk of losses arising as a result of the counterparty not meeting its contractual obligations in full and on time;
ii. Credit default risk: The current or prospective risk to capital arising from the obligors’ failure to meet the terms of any contract with the
Group;
iii. Concentration risk: The risk of excessive credit concentration including to an individual, counterparty, group of connected
counterparties, industry sector, a geographic region, country, a type of collateral or a type of credit facility; and
iv. Country risk: The risk of having exposure to a country, arising from possible changes in the business environment that may adversely
affect operating profits or the value of assets related to the country.
Credit risk exposure derives from standard on-balance sheet products such as mortgages, loans, overdrafts and credit cards. However,
credit risk also arises from other products and activities including, but not limited to: “off-balance sheet” guarantees and commitments;
the trading portfolio (e.g. bonds and derivatives), investment securities, asset backed securities and partial failure of a trade in a
settlement or payment system.
Credit risk management and key principles
The principles and activities which govern the management of credit risk within the Group are as follows. These principles apply across
the Group in the management of credit risk.
– Formulating and implementing a comprehensive credit risk strategy
Formulate and implement a comprehensive credit risk strategy that is viable through various economic cycles, supported by a
robust suite of credit policies that support the Group’s approved RAS and generate appropriate returns on capital within acceptable
levels of credit quality.
– Establishing appropriate governance structures
Establish governance authority fora to provide independent oversight and assurance to the Board with regards to credit risk
management activities and the quality of the credit portfolio.
– Developing and reinforcing a strong risk focused culture
Develop and continuously reinforce a strong, risk focused culture across the credit risk management functions through the credit
cycle, which supports the Group’s goals and enables business growth, provides constructive challenge and avoids risks that cannot
be adequately measured.
– Ensuring all management and staff involved in core credit risk activities have the required skills appropriate to their duties
and responsibilities
Ensure all management and staff involved in core credit risk activities across the three lines of defence are fully capable of
conducting their duties to the highest standard in compliance with the Group’s policies and procedures.
– Undertaking credit assessments within a sound and well defined credit granting process
Operate within a sound and well defined credit granting process, within which risks for new and existing lending exposures are
identified, assessed, measured, managed and reported in line with risk appetite and the credit risk policy.
– Establishing and enforcing effective monitoring and controls
Establish and enforce an efficient internal review and reporting system to manage effectively the Group’s credit risk across various
portfolios including, establishing and enforcing internal controls and assurance practices to ensure that exceptions to policies,
deviations to credit standards, procedures and limits are monitored and reported in a timely manner for review and action.
– Maintaining sound methodology to identify deteriorating credit quality
Ensure sound methodology exists to proactively assess risk and to identify deteriorating credit quality to minimise losses and
maximise recoveries in work out scenarios.
– Using high quality management information for effective risk measures
Utilise quality management information and risk data to ensure an effective credit risk measurement process when reporting on the
holistic risk profile of the Group including any changes in risk profile and emerging or horizon risks.
– Mitigating credit risk arising from new or amended products
Mitigate potential credit risk arising from new or amended products or activities.
The Group's credit risk framework as outlined on pages 69 to 74 supports the Credit Principles and encompasses a suite of credit
policies, standards to support the credit risk sanctioning policies and policy guidance providing a common and consistent approach to
the management of credit risk.
74
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Page 75
3.1 Credit risk
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, independent oversight and challenge of credit
risk-taking.
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Group risk appetite statement
The Group's risk appetite statement (“RAS”) defines the amount and nature of risks that the Group is willing to accept within its risk
capacity in pursuit of its financial objectives and informs both Group strategy and policies. As part of the overall framework for risk
governance, it forms a boundary condition to strategy and guides the Group in its risk-taking and related business activities. 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 at least annually.
Credit approval overview
The Group operates credit approval criteria which:
–
– Requires a thorough understanding and assessment of the borrower or counterparty, as well as the purpose and structure of credit,
Includes a clear indication of the Group’s target market(s), in line with Group and segment risk appetite statements;
and the source of repayment; and
– Enforces compliance with minimum credit assessment and facility structuring standards.
Credit risk approval is undertaken byprofessionals 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 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 risk 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.
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Risk management – 3. Individual risk types
3.1 Credit risk
Internal credit ratings*
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 risk rating models is fundamental in assessing the credit quality of loan exposures, with variants of these used for the
calculation of regulatory capital. All relevant exposures are assigned to a rating system and within that to an internal risk grade. A grade
is assigned on the basis of rating criteria within each rating model from which estimates of PD are derived (i.e. through the cycle).
Internal 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. Heightened credit management and special attention is paid to lower quality performing loans or
‘criticised’ loans and non-performing/defaulted loans which are defined below.
The Group implemented IFRS 9 at 1 January 2018. The IFRS 9 PD modelling approach uses a combination of rating grades and scores
obtained from these credit risk models along with key factors such as age of an account, the current/recent arrears status or the
current/recent forbearance status and macro-economic factors to obtain the relevant IFRS 9 12 month and Lifetime PDs (i.e. point in
time). The Group has set out its methodologies and judgements exercised in determining its expected credit loss (“ECL”) under IFRS 9
on pages 85 to 92.
Using internal models, the Group designed and implemented a credit grading masterscale that gives it the ability to categorise and
contrast credit risk across different portfolios in a consistent manner. The masterscale consolidates complex credit information into a
single attribute, aligning the output from risk models with the Group’s definition of default (“DoD”) policy. Credit grades are driven by
model appropriated PDs in order to provide the Group with a mechanism for ranking and comparing credit risk associated with a range
of customers. The masterscale categorises loans into a broad range of grades which can be summarised into the following categories:
strong/satisfactory grades, criticised grades and non-performing loans.
Strong/satisfactory
Accounts are considered strong/satisfactory if they have no current or recent credit distress and the probability of default is typically less
than 6.95%, they are not in arrears and there are no indications that they are unlikely to repay.
Strong (typically with PD less than 0.99%): Strong credit with no weakness evident.
Satisfactory (typically with PD greater than 0.98% and less than 6.95%): Satisfactory credit with no weakness evident.
Criticised
Accounts of lower quality and considered as less than satisfactory are referred to as criticised and include the following:
Criticised watch: The credit is exhibiting weakness in terms of credit quality and may need additional management attention; the credit
may or may not be in arrears.
Criticised recovery: Includes forborne cases that are classified as performing including those which have transitioned from default
forborne, but still require additional management attention to monitor for re-default and continuing improvement in terms of credit quality.
Non-performing/default
On 1 January 2018, the Group introduced a new definition of default aligned with the EBA ‘Guidelines on the application of the definition
of default’ under Article 178 of Capital Requirements Regulation and ECB Banking Supervision Guidance to Banks on Non-performing
loans. The Group has aligned the definitions of ‘non-performing loans’, ‘classification of default’ and IFRS 9 Stage 3 ‘credit impaired’,
with the exception of those loans which have been derecognised and newly originated in Stage 1 or POCI (Purchased or Originated
Credit Impaired).
Loans are identified as non-performing or defaulted by a number of characteristics. The key criteria resulting in a classification of
non-performing 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.
– The credit obligor is 90 days or more past due on any material credit obligation. Date count starts where any amount of principal,
interest or fee has not been paid by a credit obligor on the due date.
The trigger for default is based on a calculation of the sum of all past due amounts related to the credit obligation for a retail credit
obligor or related to the credit obligations for a non-retail credit obligor. The Group’s definition of financial distress, forbearance, non-
performing exposures and unlikeliness to pay are included in the Group’s Definition of Default policy.
Non-performing loans that have received a concession from the Group on terms or conditions will remain in the non-performing
probationary period for a minimum of 12 months, and are subject to meeting defined probation criteria before moving to a performing
classification.
*Forms an integral part of the audited financial statements
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3.1 Credit risk
Internal credit ratings* (continued)
Non-performing/default (continued)
Non-performing loans are analysed by the following categories on page 121:
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Unlikely to pay – Where the Group considers a credit obligor to be unlikely to pay his credit obligations in full without realisation of
collateral, regardless of the existence of any past-due amount or the number of days past due.
Greater than 90 days past due – Credit obligor that is past due by 90 days or more on any material obligation.
Collateral disposals – Post restructure cases requiring asset disposal as part of the restructure agreement. These loans will remain as
non-performing until the asset is sold and the loan cleared.
Non-performing loans probation – Loans that have, as a result of financial distress, received a concession from the Group on terms
or conditions, and that are currently operating in line with the post restructure arrangements, and will remain in the non-performing
probationary period for a minimum of 12 months before moving to a performing classification.
The new Masterscale categories outlined above are materially different to the grade categories the Group used in previous years (and in 2017
comparatives on pages 94 and 96) and are, therefore, not directly comparable. The previous years’ definitions of grade categories are set out below:
Satisfactory: Loans that are neither watch, vulnerable nor impaired are considered satisfactory. These loans are further analysed into:
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.
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 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.
Credit risk principles and policy*
The Group implements and operates policies to govern the identification, assessment, approval, monitoring and reporting of credit risk.
The Group Credit Risk Framework and Group Credit Risk Policy are overarching Board approved documents which set out, at a high
level, the principles of how the Group identifies, assesses, approves, monitors and reports credit risk to ensure robust credit risk
management is in place. These documents contain the minimum standards and principles that are applied across the Group to provide
a common, robust and consistent approach to the management of credit risk.
The Group Credit Risk Policy is supported by a suite of credit policies, standards and guidelines which define in greater detail the
minimum standards and credit risk metrics to be applied for specific products, business lines, and market segments.
Credit Risk, as an independent risk management function, monitors key credit risk metrics and trends, including policy exceptions and
breaches, reviews the overall quality of the loan book; challenges variances to planned outcomes and tracks portfolio performance
against agreed credit risk indicators. This allows the Group, if required, to take early and proactive mitigating actions for any potential
areas of concern.
In circumstances where a policy breach occurs, it must be reported to Senior Management and Credit Risk to assess the nature of the
breach and any required remedial action to mitigate the likelihood of re-occurrence.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018
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Risk management – 3. Individual risk types
3.1 Credit risk – Credit exposure
Maximum exposure to credit risk*
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 is their carrying amount, and for
financial guarantees and similar contracts granted, it is the maximum amount the Group would have to pay if the guarantees were called
upon. For loan commitments and other credit related commitments that are irrevocable over the life of the respective facilities, it is
generally the full amount of the committed facilities.
The following table sets out the maximum exposure to credit risk that arises within the Group and distinguishes between those assets
that are carried in the statement of financial position at amortised cost and those carried at fair value at 31 December 2018 and 2017:
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 advances to banks
Loans and advances to customers
Investment securities(5)
Included elsewhere:
Trade receivables
Accrued interest
Financial guarantees
Loan commitments and other credit
related commitments
Amortised
cost(1)
€ m
Fair
value(2)
€ m
5,908
73
–
–
1,443
60,721
–
–
–
900
–
147
187
15,946
2018
Total
€ m
5,908
73
–
900
1,443
60,868
16,133
112
301
–
–
112
301
Amortised
cost(1)
€ m
Fair
value(2)
€ m
5,731
103
–
–
1,313
59,993
–
–
32
1,156
–
–
–
15,642
277
307
–
–
2017
Total
€ m
5,731
103
32
1,156
1,313
59,993
15,642
277
307
68,745
16,993
85,738
67,724
16,830
84,554
780
11,107
11,887
–
–
–
780
11,107
11,887
880
10,231
11,111
–
–
–
880
10,231
11,111
Total
80,632
16,993
97,625
78,835
16,830
95,665
(1)All amortised cost items are loans and advances and investment securities which are in a ‘held-to-collect’ business model.
(2)All items measured at fair value except investment securities at FVOCI and cash flow hedging derivatives are classified as ‘fair value through profit or loss’.
(3)Included within cash and balances at central banks of € 6,516 million (2017: € 6,364 million).
(4)Excluding equity shares of Nil (2017: € 1 million).
(5)Excluding equity shares of € 728 million (2017: € 679 million).
*Forms an integral part of the audited financial statements
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3.1 Credit risk – Credit exposure
Credit risk monitoring*
The Group has developed and implemented processes and information systems to monitor and report on individual credits and credit
portfolios in order to manage credit risk effectively. 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.
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Credit risk, at a portfolio level, is monitored and reported regularly to Senior Management and the Board Risk Committee. Credit
managers proactively 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 expected credit
losses including individual large non-performing 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 regularly. The Group allocates significant
resources to ensure ongoing 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 subject to an ‘unlikely to pay’ test at the time of annual review, or earlier, if there is a material adverse change
or event in their credit risk profile.
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 non-performing 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 non-performing 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.
Mortgage portfolio
Under the mandate of the Central Bank’s Code of Conduct on Mortgage Arrears (“CCMA”), the Group introduced a four-step process
called the Mortgage Arrears Resolution Process, or MARP. This process aims to engage with, support and find resolution for mortgage
customers (for their primary residence only) who are in arrears, or are at risk of going into arrears.
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 family
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:
*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
Forbearance* (continued)
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, where applicable;
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, where applicable; 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 co-operative, and are willing but unable to pay.
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 towards 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 an increase in the
expected credit loss. Loans to which forbearance has 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 ongoing 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 quality and forbearance disclosures on loans and
advances to customers’.
*Forms an integral part of the audited financial statements
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3.1 Credit risk – Credit exposure
Credit risk mitigants*
The perceived strength of a borrower’s repayment capacity is the primary factor in granting a loan. However, the Group 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 advances 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.
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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 advances are:
– Charges over business assets such as premises, inventory and accounts receivable;
– 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 advances 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 advances to banks, 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 advances 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 external valuations; and
– Use of internally developed methodologies, including residual valuations.
Use of independent professional external 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 and Guidelines. Available market indices for relevant assets, e.g. residential property are also used in
valuation assessments, where appropriate.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018
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Risk management – 3. Individual risk types
the development potential given the location of the asset;
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 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)
(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 values may be applied. Alternative use value
(subject to planning permission) may also be considered.
In the context of other internal methodologies, appropriate 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), or if available stabilised EBITDA.
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 may be used.
For non-mortgage lending, where collateral is taken, it will typically include a charge over the business assets such as inventory and
accounts receivables. 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 ECL 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 and Guidelines.
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 ECLs 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 ECL allowance 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 and throughout the credit life cycle (including annual reviews where
required). When undertaking an ECL assessment for individually assessed cases that have been deemed unlikely to pay, the present
value of future cash flows, including the value of collateral held, and the likely time taken to realise any security is estimated. An ECL
allowance is raised for the difference between this present value and the carrying value of the loan.
*Forms an integral part of the audited financial statements
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3.1 Credit risk – Credit exposure
Credit risk mitigants* (continued)
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 78.
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Loans and advances 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 2018.
Comparative data for 2017 has been prepared under IAS 39.
At amortised cost
Stage 1 Stage 2 Stage 3
POCI
Total
2018
€ m
€ m
€ m
€ m
€ m
Neither Past due
but not
impaired
past due
nor
impaired
€ m
Impaired
2017
Total
€ m
€ m
€ m
10,187
8,241
3,300
2,377
1,047
1,290
1,065
416
305
203
835
700
312
263
255
28
75
39
30
25
12,340
10,081
4,067
2,975
1,530
9,901
8,991
4,074
2,876
1,800
282
248
98
86
55
488
564
303
308
336
10,671
9,803
4,475
3,270
2,191
25,152
3,279
2,365
197
30,993
27,642
769
1,999
30,410
Fully collateralised(1)
Loan-to-value ratio:
Less than 50%
50% - 70%
71% - 80%
81% - 90%
91% - 100%
Partially collateralised
Collateral value relating to
loans over 100% loan-to-value
Gross residential mortgages
ECL allowance
Statement of financial position
specific provisions
Statement of financial position
IBNR provisions
Total collateral value
25,557
3,416
2,866
211
32,050
405
137
501
14
1,057
1,695
29,337
82
851
1,005
2,782
3,004
33,192
25,617
3,441
3,023
(8)
(51)
(623)
234
(31)
32,315
(713)
29,558
869
3,293
33,720
(1,135)
(1,135)
(283)
2,158
32,302
Net residential mortgages
25,609
3,390
2,400
203
31,602
(1)The value of collateral held for residential mortgages which are fully collateralised has been capped at the carrying value of the loans outstanding at
each year end.
For residential mortgages, the Group takes collateral in support of lending transactions for the purchase of residential property.
Collateral valuations are required at the time of origination of each residential mortgage. The value at 31 December 2018 is estimated
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.
*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* (continued)
Loans and advances to customers – other
In addition to the credit risk mitigants outlined on the previous page, the Group, from time to time, enters reverse repurchase
agreements with borrowers. However, there were no such agreements outstanding at 31 December 2018. At 31 December 2017, the
Group had accepted collateral with a fair value of € 19 million in respect of reverse repurchase agreements.
Derivatives
Derivative financial instruments are recognised in the statement of financial position at their fair value. Those with a positive fair value
are reported as assets which at 31 December 2018 amounted to € 900 million (2017: € 1,156 million) and those with a negative fair
value are reported as liabilities which at 31 December 2018 amounted to € 934 million (2017: € 1,170 million).
The enforcement of netting agreements would potentially reduce the statement of financial position carrying amount of derivative assets
and liabilities by € 325 million at 31 December 2018 (2017: € 534 million). The Group also has Credit Support Annexes (“CSAs”) in place
which provide collateral for derivative contracts. At 31 December 2018, € 609 million (2017: € 522 million) of CSAs are included within
financial assets as collateral for derivative liabilities and € 266 million (2017: € 193 million) of CSAs are included within financial liabilities
as collateral for derivative assets (note 47 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 advances to banks
Interbank placings, including central banks, are largely carried out on an unsecured basis apart from reverse repurchase agreements.
However, there were no repurchase agreements outstanding at 31 December 2018. The collateral received in respect of repurchase
agreements at 31 December 2017 had a fair value of € 3 million.
Investment securities
At 31 December 2018, government guaranteed senior bank debt which amounted to € 250 million (2017: € 196 million) was held within
the investment securities portfolio.
*Forms an integral part of the audited financial statements
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3.1 Credit risk
Measurement, methodologies and judgements*
Introduction
The Group has set out the methodologies used and judgements exercised in determining its expected credit loss (“ECL”) for both
transition to IFRS 9 at 1 January 2018 and for the year to 31 December 2018.
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IFRS 9 introduces the expected credit loss impairment model that will require a more timely recognition of ECL across the Group. IFRS 9
replaces the concept of recognising credit losses only when there is objective evidence that a loss has been incurred. The impairment
requirements under IFRS 9 are based on an expected credit loss model and replace the IAS 39 incurred loss model. The standard does
not prescribe specific approaches used to estimate the ECL, but stresses that the approach must reflect the following:
– An unbiased and probability weighted amount that is determined by evaluating a range of possible outcomes;
– Underlying models should be point in time – recognising economic conditions;
– The ECL must reflect the time value of money;
– A lifetime ECL is calculated for financial assets in Stages 2 and 3; and
– Models used in the ECL calculation must incorporate reasonable and supportable information that is available without undue cost or
effort at the reporting date about past events, current conditions and forecasts of future economic conditions.
The standard defines credit loss as the difference between all contractual cash flows that are due to an entity in accordance with the
contract and all the cash flows that the entity expects to receive (i.e. all cash shortfalls), discounted at the original effective interest rate
(“EIR”) or an approximation thereof (see ‘Measurement’ section below).
ECLs are defined in IFRS 9 as the weighted average of credit losses across multiple macroeconomic scenarios, the probability of each
scenario occurring as weights and are an estimate of credit losses over the life of a financial instrument.
The ECL model applies to financial instruments measured at amortised cost or at fair value through other comprehensive income.
In addition, the ECL approach applies to lease receivables, loan commitments and financial guarantee contracts that are not measured
at fair value through profit or loss.
A key principle of the ECL model is to reflect any relative deterioration or improvement in the credit quality of financial instruments
occurring (e.g. change in the risk of a default). The ECL amount recognised as a loss allowance or provision depends on the extent of
credit deterioration since initial recognition together with the usual credit risk parameters.
Measurement bases
Under IFRS 9, there are two measurement bases:
1 12-month ECL (Stage 1), which applies to all financial instruments from initial recognition as long as there has been no significant
increase in credit risk;
2 Lifetime ECL (Stages 2 and 3 and POCI), which applies when a significant increase in credit risk has been identified on an account
(Stage 2), an account has been identified as being credit-impaired (Stage 3) or when an account meets the POCI criteria.
Staging
Under IFRS 9, financial assets are allocated to stages dependent on credit quality relative to when assets were originated.
Credit risk at origination
Credit risk at origination (“CRAO”) is a key input into the staging allocation process. The origination date of an account is determined by
the date on which the Group became irrevocably committed to the contractual obligation and the account was first graded on an
appropriate model.
For undrawn credit facilities, the Group uses the date of origination as the date when it becomes party to the irrevocably contractual
arrangements or irrevocable commitment. For overdrafts which have both drawn and undrawn components, the date of origination is the
same for both.
The Group uses best available information for facilities which originated prior to a credit risk rating model or scorecard being in place.
For accounts that originated prior to 1 January 2018, a neutral view of the macroeconomic outlook at the time is used, i.e. where
macroeconomic variables are used in the Lifetime PD models, long-run averages are used instead of historical forecasts.
*Forms an integral part of the audited financial statements
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Risk management – 3. Individual risk types
3.1 Credit risk
Measurement, methodologies and judgements* (continued)
Stage 1 characteristics
Obligations are classified Stage 1 at origination, unless purchased or originated credit impaired (“POCI”), with a 12 month ECL being
recognised. These obligations remain in Stage 1 unless there has been a significant increase in credit risk.
Accounts can also return to Stage 1 if they no longer meet either the Stage 2 or Stage 3 criteria, subject to satisfaction of the
appropriate probation periods, in line with regulatory requirements.
Stage 2 characteristics
Obligations where there has been a ‘significant increase in credit risk’ (“SICR”) since initial recognition but do not have objective
evidence of credit impairment are classified as Stage 2. For these assets, lifetime ECLs are recognised.
The Group assesses at each reporting date whether a significant increase has occurred on its financial assets since their initial
recognition. This assessment is performed on individual assets rather than at a portfolio level. If the increase is considered significant,
the obligation will be allocated to Stage 2 and a lifetime expected credit loss will apply to the obligation. If the change is not considered
significant, a 12 month expected credit loss will continue to apply and the obligation will remain in Stage 1.
The Group’s SICR assessment is determined based on:
Quantitative measure: This measure reflects an arithmetic assessment of the change in credit risk arising from changes in the
probability of default. The Group compares each obligation’s annualised average probability weighted residual lifetime probability of
default (“LTPD”) at origination (see the CRAO section) to its annualised average probability weighted residual LTPD at the reporting
date. If the difference between these two LTPDs meets the quantitative definition of SICR, the Group moves the financial asset into
Stage 2. Increases in LTPD may be due to credit deterioration of the individual asset or due to macroeconomic factors. The Group has
determined that an account has met the quantitative measure if the average residual LTPD at the reporting date is more than double the
average residual LTPD at origination. This is subject to the difference between the LTPDs being at least 50bps.
Qualitative measure: This measure reflects the assessment of the change in credit risk based on the Group’s credit management of
and the individual characteristics of the financial asset. This is not model driven and seeks to capture any change in credit quality that
may not be already captured by the quantitative criteria. The qualitative assessment reflects pro-active credit management and includes
direct client contact, monitoring of client accounts on an individual or portfolio level, knowledge of client behaviour, and cognisance of
industry and economic trends.
The criteria for this trigger include, for example:
– A downgrade of the borrower’s/facility’s credit grade reflecting the increased credit management focus on these accounts; and
– Forbearance has been provided and the account is within the probationary period.
Backstop indicators: The Group has adopted the rebuttable assumptions within IFRS 9 that credit obligations greater than 30 days
past due represent a significant increase in credit risk.
Where SICR criteria is no longer a trigger and the obligor is not credit-impaired, the account can exit Stage 2.
Stage 3 characteristics
Defaulted obligations (with the exception of newly originated loans which are in Stage 1 or POCI) are classified as credit impaired and
allocated to Stage 3. Where default criteria is no longer met, the obligor exits Stage 3 subject to probation period, in line with regulatory
requirements.
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.
The credit obligor is 90 days or more past due on any material credit obligation (count starts where any amount of principal, interest
or fee has not been paid by a credit obligor at the date it was due).
The trigger for default is based on a calculation of the sum of all past due amounts related to the credit obligation for a retail credit
obligor or related to the credit obligations for a non-retail credit obligor. The Group’s definition of financial distress, forbearance,
non-performing exposures and unlikeliness to pay are included in the Group’s Definition of Default policy.
Loans can re-default if any of the default triggers apply or where probation requirements are not adhered to.
*Forms an integral part of the audited financial statements
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Page 87
3.1 Credit risk
Measurement, methodologies and judgements* (continued)
Purchased or originated credit impaired (“POCI”)
POCIs are assets originated credit impaired where the difference between the discounted contractual cash flows and the fair value at
origination is greater than or equal to 5%. The Group uses an appropriate discount rate for measuring ECL in the case of POCIs which
is the credit-adjusted EIR. This rate is used to discount the expected cash flows of such assets to fair value on initial recognition.
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POCIs remain outside of the normal stage allocation process for the lifetime of the obligation. The ECL for POCIs is always measured at
an amount equal to lifetime expected credit losses. The amount recognised as a loss allowance for these assets is the cumulative
changes in lifetime expected credit losses since the initial recognition of the assets rather than the total amount of lifetime expected
credit losses.
Measurement
The measurement of ECL is estimated through one of the following approaches:
i. Standard approach: This approach is used for the majority of exposures where each ECL input parameter (Probability of Default -
PD, Loss Given Default - LGD, Exposure at Default - EAD, and Prepayments - PP) is developed in line with standard modelling
methodology which is set out in the Group IFRS 9 ECL Model Framework and has been approved by the relevant governance
forum. The Group’s IFRS 9 models have been approved in line with the Group’s Model Governance Framework.
ii. Simplified approach: For immaterial portfolios the Group has followed a simplified approach. This approach consists of applying
portfolio level ECL averages, drawn from similar portfolios, where it is not possible to estimate individual parameters. These
generally relate to portfolios where specific IFRS 9 models have not been developed due to immateriality, low volumes or where
there are no underlying grading models. As granular PDs are not available for these portfolios, a non-standard approach to staging
is required with more reliance on the qualitative criteria (along with the 30 days past due back-stop).
iii. Discounted cash-flows (“DCFs”): Assets are grouped together and modelled based on asset classification and sector with the
exception of those Stage 3 assets where a DCF is used. DCFs are used as an input to the ECL calculation for Stage 3 credit
impaired exposures where gross credit exposure is ≥ € 1 million (Republic of Ireland) or ≥ £ 500,000 (UK) or where previously
individually assessed and impaired under IAS 39.
Collateral valuations and the estimated time to realisation of collateral is a key component of the DCF model. The Group
incorporates forward looking information in the assessment of individual borrowers through the credit assessment process. The DCF
assessment produces a base case ECL. This is then adjusted to incorporate the impact of multiple scenarios on the base ECL, by
using a proportional uplift obtained from Stage 2 sensitivities in the same portfolio.
iv. Management judgement: Where the estimate of ECL does not adequately capture all available forward looking information about the
range of possible outcomes, or where there is a significant degree of uncertainty, management judgement may be applied.
The size of the adjustment must consider all relevant and supportable information, including but not limited to, historical data analysis,
predictive modelling and management judgement. The methodology to incorporate the adjustment should consider the degree of over
collateralisation (headroom) and should not result in a zero overall ECL unless there is sufficient headroom to support this.
Effective interest rate: The ECL must incorporate the time value of money discounted to the reporting date using the effective interest
rate (“EIR”) determined at initial recognition or an approximation thereof.
– The Group uses an approximation approach based on the account level interest rate when calculating ECL which is applied to both
drawn and undrawn commitments.
– This approach is subject to an annual assessment that all approximations remain appropriate and do not result in a material
misstatement of the ECL.
– The Group has tested the appropriateness of using current interest rates as an approximation for the discount rates required for
measuring ECLs under IFRS 9. This testing determined that using the current interest rates as the discount rates is an appropriate
approximation.
Policy elections and simplifications
Low credit risk exemption
As allowed by IFRS 9, the Group utilises the practical expedient for the stage allocation of particular financial instruments which are
deemed ‘low credit risk’. This practical expedient permits the Group to assume, without more detailed analysis, that the credit risk on a
financial instrument has not increased significantly since initial recognition if the financial instrument is determined to have ‘low credit
risk’ at the reporting date. The Group allocates such assets to Stage 1.
Under IFRS 9 the credit risk on a financial instrument is considered low if:
– the financial instrument has a low risk of default;
– the borrower has a strong capacity to meet its contractual cash flow obligations in the near term; and
– adverse changes in economic business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower
to fulfil its contractual cash flow obligations.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018
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Risk management – 3. Individual risk types
3.1 Credit risk
Measurement, methodologies and judgements* (continued)
This low credit risk exemption is applied to particular assets within the investment debt securities portfolio and for loans and advances to
banks. Specifically, assets which have an internal grade equivalent to an external investment grade (BBB-) or higher.
If an asset does not meet the above criteria for the low credit risk exemption, further assessment is required to determine stage
allocation. If such assets are on a watch list, they are categorised as Stage 2, otherwise, they are allocated to Stage 1.
Short-term cash
The Group policy does not calculate an ECL for short-term cash at central banks and other banks which have a low risk of default (‘PD’)
with a very low risk profile. The calculation of the ECL at each reporting date would be immaterial given these exposures’ short term
nature and their daily management.
Lease receivables and trade receivables
For lease receivables, the Group has elected to use its standard methodology for both stage allocation and the ECL calculation and has
elected to use an expedient (simplified approach) for trade receivables.
Credit risk models
Probability of default
Probability of default (“PD”) is the likelihood that an account or borrower defaults over an observation period, given that they are not
currently in default. The PD modelling approach uses a combination of rating grades/scores obtained from credit risk models, as
outlined on page 76, along with key factors such as the age of an account, the current/recent arrears status or the current/recent
forbearance status and macroeconomic factors to obtain the relevant 12 month (Stage 1) and Lifetime (Stage 2) PD.
Loss given default
Loss given default (“LGD”) is a current assessment of the amount that will not be recovered in the event of default, taking account of
future conditions. It can be thought of as the difference between the amount owed to the Group (i.e. the exposure) and the net present
value of future cash flows less any costs expected to be incurred in the recovery process. If an account returns to performing from
default (absent any loss making concession) or if the discounted post-default recoveries are equal to or greater than the exposure, the
realised loss is zero.
The LGD modelling approach depends on whether the facility has underlying security and, if so, the nature of that security. The following
sets out the approaches to the portfolios:
Retail portfolios
For unsecured loans, a cash flow curve, which estimates the cumulative cash received following default until the loan is written-off or
returns to performing, is used to estimate the future recovery amount. This is discounted at the effective interest rate and compared to
the current outstanding balance. Any shortfall between the recovery amount and the outstanding balance is the ECL.
For secured loans, the value of underlying collateral is estimated at the forecasted time of disposal (taking into account forecasted
market price growth/falls and haircuts on market values that are expected at the date of sale) in order to calculate the future recovery
amount. Estimated costs of disposal are taken into account in this calculation.
Non-retail portfolios
For unsecured loans, characteristics such as borrower sector and nature of collateral linked to affiliated accounts under the same
customer group are used to determine future losses.
For secured loans, the value of the underlying collateral is estimated at the reporting date. This is used to estimate the ECL.
Exposure at default
Exposure at default (“EAD”) is defined as the exposure amount that will be owed by a customer at the time of default. This will comprise
changes in the exposure amount between the reporting date and the date that the customer defaults. This may be due to repayments,
interest and fees charged and additional drawdowns by the customer.
Prepayments
For term credit products, prepayment occurs where a customer fully prepays an account prior to the end of its contractual term.
For revolving credit products, ‘prepayment’ is defined as the cessation of use and withdrawal of the facility provided that the account
was not in default prior to closure.
Prepayment is used in the lifetime ECL calculation for Stage 2 loans to account for the proportion of the facilities/customers that prepay
each year.
*Forms an integral part of the audited financial statements
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Page 89
3.1 Credit risk
Measurement, methodologies and judgements* (continued)
Determining the period over which to measure ECL
Both the origination date and the expected maturity of a facility must be determined for ECL purposes. The origination date is used to
measure credit risk at origination (as explained above).
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The expected maturity is used for assets in Stage 2, where the ECL must be estimated over the remaining life of the facility.
The expected maturity approach is:
– Term credit products: the contractual maturity date, with exposure and survival probability adjusted to reflect behaviour i.e.
amortisation and pre-payment;
– Revolving credit products: the period may extend beyond the contractual period over which the Group is exposed to credit risk, e.g.
overdrafts and credit cards. The Group’s approach for these is to assume an appropriate remaining term based on the
characteristics of the portfolio and sensitivity of ECLs.
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 ECL will be written off. Expert judgement determines the point at which
there is no reasonable expectation of recovery, e.g. inception of formal insolvency proceedings or receivership/other formal recovery
action. This is considered on a case-by-case basis.
Debt forgiveness may subsequently arise where there is a formal contract with the customer for the write-off of the loan. In addition,
certain forbearance solutions and restructuring agreements may include an element of debt write down (debt forgiveness). Refer to
pages 79 and 80 for details of forbearance.
The contractual amount outstanding of loans written off during the year that are still subject to enforcement activity are outlined on
page 108 and relate to non-contracted write-offs, both full and partial.
The Group recognises cash received from the customer in excess of the carrying value of the loan after a non-contracted write-off as
‘recoveries of amounts previously written off’ in the income statement.
Macroeconomic scenarios and weightings
The macroeconomic scenarios used by the Group for IFRS 9 purposes is subject to the Group’s existing governance process covering
the development and approval of macroeconomic scenarios for planning and stress testing i.e. through Stress Test Working Group and
Asset and Liability Committee (ALCo). As outlined above, the parameter models include macroeconomic factors as drivers of the risk.
Therefore, different ECLs are produced under different macroeconomic scenarios. These ECL outcomes are then weighted by the
assessed likelihood attaching to each of the different scenarios.
Macroeconomic scenarios:
The Group’s approach is to use its base, downside and upside macro-scenarios from the financial planning and stress testing processes
for IFRS 9 purposes. The use of current planning scenarios ensures that the scenarios used for IFRS 9 are consistent with the Group’s
expectations of potential outcomes at a point in time. Non-linear effects are captured in the development of risk parameters as well as
through the inclusion of both an upside and a downside case (currently a ‘no deal’ Brexit which includes a relatively severe impact for
the key UK/Republic of Ireland (“ROI”) economies). The AIB Economic Research Unit provide base, downside and upside forecasts over
5 years for planning/IFRS 9. The base case is benchmarked against the outlook available from official sources (e.g. Department of
Finance, ESRI, IMF, etc.). Upside and downside scenarios are provided representing sensitivities around the base. For IFRS 9
purposes, longer-term projections are sourced from a reputable external provider with the internal base/upside and downside scenarios
converging on a linear basis towards the external forecasts from years 5 to 8. External long-term forecasts represent long-term base line
forecasts for the parameter/economy in question. The forecasted scenarios are approved on a quarterly basis at Group ALCo.
The scenarios are described below and reflect the views of the Group at the reporting date.
Base case: As at the reporting date, this reflects an ‘orderly’ Brexit outcome. This reflects deceleration in Irish house price inflation
reflecting rising supply and the impact of the central bank’s macro-prudential rules on mortgage lending. In terms of the US economy,
GDP is expected to continue to grow, helped by the significant fiscal stimulus, while in the UK GDP is also expected to grow at close to
the historical average. Growth in the Eurozone is expected to ease back in 2019 and continuing to trend gradually lower thereafter.
These developments (in addition to tighter monetary conditions, the absorption of remaining spare capacity in the economy and some
slowing due to ‘orderly’ Brexit effects) are reflected in a slight moderation in Irish growth over the horizon.
Downside: Under this scenario, the EU and UK fail to conclude a Withdrawal Agreement. The UK leaves the EU Customs Union and
Single Market in March 2019 in a disorderly Brexit and has to apply WTO rules. Irish GDP growth contracts significantly in this period.
Brexit results in a sharp decline in trade between the UK and EU as well as an outflow of investment from the UK, especially from the
financial sector and a decline in FDI. UK GDP growth is estimated to be significantly lower than in the base case, with the economy
experiencing a recession from 2019-2021. The ‘no deal’ Brexit has a significant negative impact on the Irish economy with exports to the
UK subject to customs checks, tariffs, increased administration and regulatory costs and transport delays. The scenario also includes a
further decline in sterling than in the base case.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018
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Risk management – 3. Individual risk types
3.1 Credit risk
Measurement, methodologies and judgements* (continued)
Taking the expected rise in inward investment into Ireland in a ‘no deal’ Brexit into account the scenario assumes that Irish GDP growth
is lower in a ‘no deal’ Brexit downside scenario than in our base case over the three years to 2021 although the adverse effects are
offset somewhat by an expected rise of inward investment into Ireland (as firms divert new or existing investments away from the UK).
Upside: With continued low interest rates globally, due to subdued inflation, a US fiscal stimulus and improved productivity from a pick-
up in investment, growth in advanced economies could strengthen. Emerging markets could also benefit if the improvement in
commodity prices and trade continues. A long transition period may be agreed as part of a Brexit withdrawal agreement whereby the UK
retains full access to EU markets until a final trade deal is negotiated. Ireland, as a small open economy, benefits due to better than
expected export performance. This will ‘spill-over’ to the domestic side of the economy helped by expansionary fiscal policy. There is a
strong pick-up in house building helped, in part, by government initiatives. As a result, Irish growth is higher over the 2019-21 planning
horizon relative to Base. House price inflation decelerates at a slower pace than in the base case in this environment.
The following table details some of the key macroeconomic variables:
Base forecast
Macroeconomic factors
Ireland
GDP growth
Residential property price growth
Unemployment rate
Commercial property price growth
United Kingdom
GDP growth
Residential property price growth
Unemployment rate
Commercial property price growth
Downside forecast
Macroeconomic factor
Ireland
GDP growth
Residential property price growth
Unemployment rate
Commercial property price growth
United Kingdom
GDP growth
Residential property price growth
Unemployment rate
Commercial property price growth
Upside forecast
Macroeconomic factor
Ireland
GDP growth
Residential property price growth
Unemployment rate
Commercial property price growth
United Kingdom
GDP growth
Residential property price growth
Unemployment rate
Commercial property price growth
2018
(Actual) %
2019
%
2020
%
2021
%
2022
%
2023
%
7.0
10.3
5.8
2.4
1.4
3.3
4.1
4.8
2018
(Actual) %
7.0
10.3
5.8
2.4
1.4
3.3
4.1
4.8
2018
(Actual) %
7.0
10.3
5.8
2.4
1.4
3.3
4.1
4.8
4.0
7.5
5.2
3.9
1.6
1.5
4.1
2.6
2019
%
2.25
5.7
5.8
0.4
0.0
-2.9
5.0
-1.5
2019
%
5.0
8.3
4.9
6
2.5
2.3
3.9
5
3.5
5.2
5.0
3.9
1.7
3.6
4.0
4.0
2020
%
1.0
1.7
6.9
-2.4
-0.5
-5.5
6.0
-5.6
2020
%
5.0
7.7
4.6
7.2
3.0
6.6
3.6
8.8
3.2
5
4.9
3.9
1.6
4.5
4.0
3.9
3.0
4.7
4.8
4.0
1.5
4.8
4.0
3.5
3.0
4.2
4.8
4.0
1.5
4.3
4.0
2.9
2021
%
2022
%
2023
%
1.5
1.5
7.7
-1.6
-0.5
-6.0
7.0
-4.2
2.5
3.0
7.7
2
1.0
-1.0
7.5
0.4
3.5
4.0
7.5
4.1
2.0
4.0
7.3
4.6
2021
%
2022
%
2023
%
5.0
7.7
4.4
7.7
3.0
7.4
3.4
10
4.0
8.0
4.2
5.7
2.0
6.9
3.3
6.5
3.0
7.0
4.2
3.6
1.5
5.2
3.3
3.2
*Forms an integral part of the audited financial statements
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Page 91
3.1 Credit risk
Measurement, methodologies and judgements* (continued)
Macroeconomic scenario weightings
The three scenarios detailed above are used to reflect a representative sample of possible outcomes (i.e. base, downside and upside
scenarios). The ECL allowance reflects a weighted average of the ECLs under the 3 scenarios.
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The weights for the scenarios are derived based on the expert judgement informed by a quantitative analysis. The quantitative analysis
incorporates two approaches: a statistical analysis informed by both historic patterns in the economic data complemented by a more
forward looking approach. These weightings have been reviewed regularly throughout 2018. The weightings have evolved over the year,
reflecting both Brexit developments in the UK and uncertain economic conditions internationally. The table below shows the evolution of
the weightings throughout 2018.
The scenario weightings are approved on a quarterly basis at Group ALCo.
The weights that have been applied as at the reporting date and approved in January 2019 are:
Scenario
Base
Downside
Upside
Weighting
1 January
2018
60%
20%
20%
31 December
2018
50%
35%
15%
In assessing the adequacy of the ECL provisions, the Group has considered all available forward looking information as of the balance
sheet date in order to estimate the future expected credit losses in line with IFRS 9. The Group, through its risk management processes
(including the use of expert credit judgement and other techniques) assesses its ECL provisions for events that cannot be captured by
the statistical models it uses and for other risks and uncertainties. The assessment of ECL at the balance sheet date does not reflect the
worst case outcome, but rather a probability weighted outcome of the three scenarios. Should the credit environment deteriorate beyond
the Group’s expectation, the Group’s estimate of ECL would increase accordingly.
Sensitivities
The Group’s estimates of expected credit losses are responsive to varying economic conditions and forward looking information.
These estimates are driven by the relationship between historic experienced loss and the combination of macroeconomic variables.
Given the co-relationship of each of the macroeconomic variables to one another and the fact that loss estimates do not follow a linear
path, a sensitivity to any single economic variable is not meaningful. As such, the following sensitivities are provided, based on the
aggregate impact of each scenario before the application of probability weights. Relative to the Base scenario, in the 100% Downside
scenario, the ECL allowance increases by 11.1% and in the 100% Upside scenario, the ECL allowance declines by 5.3%, showing that
the ECL impact of the Downside is greater than that of the Upside.
Loans and advances to customers
Residential mortgages
Other personal
Property and construction
Non-property business
Total
Off-balance sheet loan commitments
Financial guarantee contracts
Reported
(50% Base,
35% Downside,
15% Upside)
Total
€ m
713
253
480
593
2,039
25
34
2,098
100% Base,
0% Downside,
0% Upside
Loss allowance at 31 December 2018
0% Base,
0% Downside,
100% Upside
0% Base,
100% Downside,
0% Upside
Total
€ m
691
248
460
576
1,975
24
35
2,034
Total
€ m
789
262
521
631
2,203
27
32
2,262
Total
€ m
607
248
451
565
1,871
24
31
1,926
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018
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Risk management – 3. Individual risk types
3.1 Credit risk
Measurement, methodologies and judgements* (continued)
Management judgement
Stage 3 PDH mortgage ECL
The Group estimates its ECL allowance based on its historic experience of working out arrangements with customers which
predominantly consist of split mortgages, low fixed interest rate, voluntary sale for loss, negative equity trade down and positive equity
solutions. This is consistent with the Group's strategy to deliver sustainable long-term solutions and to support customers. In particular,
the IFRS 9 Mortgage LGD model which was implemented from 1 January 2018 is based on the actual empirical internal data for such
resolved and unresolved cases, and represents the Group’s expected loss based on those current and expected work-out strategies at
the time. However, for a cohort of loans that are deep in arrears and/or in a legal process for a significant period of time, it is recognised
that alternative recovery strategies may need to be considered. To reflect the range of possible outcomes for this cohort where
alternative recovery strategies are required, management judgement has been applied to increase the ECL outcome on transition at
1 January 2018 and at 31 December 2018. As a result, the ECL allowance of € 686 million for residential mortgages in the Republic of
Ireland at 31 December 2018 includes € 239 million for this management judgement.
Details on the Republic of Ireland residential mortgages are set out on pages 110 to 112 and pages 128 to 130.
ECL governance
The Board has put in place a framework, incorporating the governance and delegation structures commensurate with a material risk,
to ensure credit risk is appropriately managed throughout the Group.
The key governance points in the ECL approval process during 2018 were:
– Model Risk Committee
– Assets and Liabilities Committee
– Business level ECL Committees
– Group Credit Committee, and
– Executive Risk Committee/Leadership Team/ Board Audit Committee
For ECL governance, the Group management employs its expert judgement on the adequacy of ECL. The judgements are supported by
detailed information on the portfolios of credit risk exposures, and by the outputs of the measurement and classification approaches
described above, coupled with internal and external data provided on both short term and long-term economic outlook. Business
segments and Group management are required to ensure that there are appropriate levels of cover for all of its credit portfolios and
must take account of both accounting and regulatory compliance when assessing the expected levels of loss.
Assessment of the credit quality of each business segment is initially informed by the output of the quantitative analytical models but
may be subject to management adjustments. This ECL output is then scrutinised and approved at individual business unit level (ECL
Committee) prior to onward submission to the Group Credit Committee (GCC). GCC reviews and challenges ECL levels prior to
recommendation to the Executive Risk Committee/Leadership Team and Board Audit Committee.
Please reference ‘Governance and Oversight’, page 167 for details on each key Committee.
*Forms an integral part of the audited financial statements
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3.1 Credit risk – Credit profile of the loan portfolio*
The 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.
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data for 2017 has also been provided, this has been prepared under IAS 39 and therefore, direct comparability is not possible as a
result of the different nature and basis of composition.
A summarised profile of loans and advances to customers is under IFRS 9 is set out below. Comparative data for 31 December 2017
has been prepared under IAS 39 and the analysis of the asset quality uses the definitions in operation during 2017 which are set out
on page 77. Details of the impact of adopting IFRS 9 at 1 January 2018 are set out in note 3 to the consolidated financial statements.
Credit profile
(1)
Strong
Satisfactory
Total strong/satisfactory
Criticised watch
Criticised recovery
Total criticised
Non-performing
Gross carrying amount loans and
advances to customers
ECL allowance
Carrying amount of loans and
advances to customers
Stage 1
€ m
Stage 2
€ m
Amortised cost
Stage 3
€ m
POCI
€ m
39,148
10,923
50,071
1,226
184
1,410
212
923
1,262
2,185
1,596
1,509
3,105
–
–
–
–
–
–
–
3
–
3
1
5
6
5,541
227
Total
€ m
40,074
12,185
52,259
2,823
1,698
4,521
5,980
51,693
(171)
5,290
(271)
5,541
(1,566)
236
(31)
62,760
(2,039)
FVTPL
Total
€ m
73
–
73
–
–
–
74
147
2018*
Total
€ m
40,147
12,185
52,332
2,823
1,698
4,521
6,054
62,907
(2,039)(2)
51,522
5,019
3,975
205
60,721
147
60,868
(1)A description of credit profile is outlined on page 76.
(2)The ECL allowance on non-performing loans amounted to € 1,608 million.
The above table outlines the credit profile of the Group’s customer loans portfolio and the relationship with staging outcomes.
The credit profile reflects the Group’s internal credit grading systems and risk classification.
Of the total loans to customers of € 62.9 billion, € 52.3 billion are rated as either ‘strong’ or ‘satisfactory’. These represent the best
performing assets and as a result are primarily in Stage 1 with the lowest ECL allowance requirement. Of the € 52.3 billion, € 2.2 billion
are in Stage 2 due to observed deterioration relative to where the loans originated.
The ‘criticised’ classification includes ‘criticised watch’ of € 2.8 billion and ‘criticised recovery’ of € 1.7 billion. Factors considered in
identifying criticised cases include a PD of greater than 6.95%, the presence of arrears or cases which have been granted forbearance or
downgraded from ‘strong’ or ‘satisfactory’ grades.
‘Criticised watch’ of € 2.8 billion primarily relates to downgrade activity and as such, there is a strong correlation with Stage 2 and an
observed increased in credit risk. Some ‘criticised watch’ exposures are in Stage 1 due to granting of new lending at ‘watch’ grades or
origination events.
Similarly, the ‘criticised recovery’ of € 1.7 billion also has a strong correlation with Stage 2 outcomes as it represents those loans which
have recovered from non-performing or which have received forbearance and as such are in Stage 2 reflecting that risk profile.
Non-performing loans amounting to € 6.1 billion are aligned to the Group’s definition of default and Stage 3 credit impaired with the
exception of those originating in Stage 1 or POCI.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018
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Risk management – 3. Individual risk types
3.1 Credit risk – Credit profile of the loan portfolio
Satisfactory
Good upper
Good lower
Total satisfactory
Watch
Vulnerable
Impaired
Total gross loans and advances
Specific provisions
IBNR provisions
Total provisions for impairment
Gross loans and advances to customers less provisions
(1)Of which non-performing loans amount to € 10,194 million.
A detailed analysis of loans and advances to customers by asset class and internal credit ratings profile is set out below.
2017*
Total
€ m
19,864
29,123
48,987
2,035
5,986
6,330
63,338(1)
(2,722)
(623)
(3,345)
59,993
*Forms an integral part of the audited financial statements
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3.1 Credit risk – Credit profile of the loan portfolio
The table below analyses loans and advances to customers by asset class and internal credit ratings profile at 31 December 2018.
Comparative data for 31 December 2017 has been prepared under IAS 39 and the analysis of the asset quality uses the definitions in
operation during 2017 which are set out on page 77.
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Strong
Satisfactory
Total strong/satisfactory
Criticised watch
Criticised recovery
Total criticised
Non-performing(1)
Gross carrying amount
ECL allowance
Carrying amount
Other personal
Strong
Satisfactory
Total strong/satisfactory
Criticised watch
Criticised recovery
Total criticised
Non-performing(1)
Gross carrying amount
ECL allowance
Carrying amount
Property and construction
Strong
Satisfactory
Total strong/satisfactory
Criticised watch
Criticised recovery
Total criticised
Non-performing(1)
Gross carrying amount
ECL allowance
Carrying amount
Non-property business
Strong
Satisfactory
Total strong/satisfactory
Criticised watch
Criticised recovery
Total criticised
Non-performing(1)
Gross carrying amount
ECL allowance
Carrying amount
Stage 1
€ m
Stage 2
€ m
Amortised cost
Stage 3
€ m
POCI
€ m
Total
€ m
FVTPL
Total
€ m
22,478
2,638
25,116
479
1
480
21
25,617
(8)
25,609
1,201
1,062
2,263
68
1
69
2
2,334
(29)
2,305
4,286
1,458
5,744
141
158
299
157
6,200
(41)
6,159
11,183
5,765
16,948
538
24
562
32
17,542
(93)
17,449
828
659
1,487
882
1,072
1,954
–
3,441
(51)
3,390
43
159
202
128
68
196
–
398
(52)
346
23
82
105
201
109
310
–
415
(36)
379
29
362
391
385
260
645
–
1,036
(132)
904
–
–
–
–
–
–
3,023
3,023
(623)
2,400
–
–
–
–
–
–
343
343
(172)
171
–
–
–
–
–
–
1,187
1,187
(403)
784
–
–
–
–
–
–
988
988
(368)
620
3
–
3
1
5
6
225
234
(31)
203
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
2
–
2
–
–
–
–
–
–
–
–
–
–
23,309
3,297
26,606
1,362
1,078
2,440
3,269
32,315
(713)
31,602
1,244
1,221
2,465
196
69
265
345
3,075
(253)
2,822
4,309
1,540
5,849
342
267
609
1,346
7,804
(480)
7,324
11,212
6,127
17,339
923
284
1,207
1,020
19,566
(593)
18,973
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
73
–
73
–
–
–
74
147
147
–
–
–
–
–
–
–
–
–
2018*
Total
€ m
23,309
3,297
26,606
1,362
1,078
2,440
3,269
32,315
(713)
31,602
1,244
1,221
2,465
196
69
265
345
3,075
(253)
2,822
4,382
1,540
5,922
342
267
609
1,420
7,951
(480)
7,471
11,212
6,127
17,339
923
284
1,207
1,020
19,566
(593)
18,973
Total carrying amount of loans and
advances to customers
(1)For further analysis of non-performing loans, see page 121.
51,522
5,019
3,975
205
60,721
147
60,868
As at 31 December 2018, 83% of total loans and advances to customers are in a strong/satisfactory grade. 7% are in a criticised grade
with the remaining 10% being classified as non-performing.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018
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Page 96
Risk management – 3. Individual risk types
3.1 Credit risk – Credit profile of the loan portfolio
Residential
mortgages
€ m
Other
personal
€ m
Property and
construction
€ m
Non-property
business
€ m
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 advances
Specific provisions
IBNR provisions
Total provisions for impairment
Gross loans and advances to customers less provisions
17,564
8,657
1,033
2,304
29,558
3
27
291
548
869
3,293
33,720
(1,135)
(283)
(1,418)
32,302
227
2,135
69
173
2,604
3
47
23
83
156
362
3,122
(203)
(43)
(246)
2,876
205
5,123
187
1,227
6,742
–
41
19
215
275
1,803
8,820
(914)
(150)
(1,064)
7,756
1,861
13,012
384
1,264
16,521
1
81
29
172
283
872
17,676
(470)
(147)
(617)
17,059
59,993
2017*
Total
€ m
19,857
28,927
1,673
4,968
55,425
7
196
362
1,018
1,583
6,330
63,338
(2,722)
(623)
(3,345)
Internal credit ratings of contingent liabilities and commitments
The credit ratings of contingent liabilities and commitments are set out in the following table. The Group revised its internal credit rating
methodology with the implementation of IFRS 9, accordingly, the ratings profile at 31 December 2018 has been prepared on this basis.
Comparative data for 31 December 2017 has been prepared on the basis of the methodology in place at that time.
Strong
Satisfactory
Criticised watch
Criticised recovery
Default
Total
2018*
€ m
8,713
2,721
255
15
183
11,887
Good upper
Good lower
Watch
Vulnerable
Impaired
2017*
€ m
4,228
6,389
90
250
154
11,111
*Forms an integral part of the audited financial statements
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3.1 Credit risk – Credit profile of the loan portfolio
Summary of movements on ECL allowances*
The following table sets out the movements on the ECL allowance on loans and advances to customers at 31 December 2018.
Comparative data for 31 December 2017 has been prepared under IAS 39 and shows the movements on impairment provisions.
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Impact of adopting IFRS 9 at 1 January 2018(1)
At 1 January 2018 (IFRS 9)
Exchange translation adjustments
Transfer in
Net remeasurement of ECL allowance – customers
Changes in ECL allowance due to write-offs(2)
Changes in ECL allowance due to disposals
At 31 December 2018
Residential
mortgages
Other
personal
€ m
1,418
(27)
1,391
–
–
(59)
(564)
(55)
713
€ m
246
83
329
–
–
13
(62)
(27)
253
Property
and
construction
€ m
1,064
42
1,106
–
–
(90)
(178)
(358)
480
Non-property
business
€ m
617
173
790
(1)
14
47
(225)
(32)
593
(1)Further details of the impact of adopting IFRS 9 at 1 January 2018 are set out in note 3 to the consolidated financial statements.
(2)For a geographical and sectoral analysis of write-offs, see page 108.
At 1 January
Exchange translation adjustments
(Credit)/charge to income statement – customers
Amounts written-off
Disposals
Recoveries of amounts written-off
in previous years
At 31 December 2017
Total provisions are split as follows:
Specific
IBNR
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
Property
and
construction
€ m
1,449
(12)
(50)
(190)
(134)
1
1,064
914
150
1,064
Non-property
business
€ m
848
(4)
40
(210)
(69)
12
617
470
147
617
2018
Total
€ m
3,345
271
3,616
(1)
14
(89)
(1,029)
(472)
2,039
2017
Total
€ m
4,589
(26)
(113)
(716)
(404)
15
3,345
2,722
623
3,345
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Risk management – 3. Individual risk types
3.1 Credit risk – Credit profile of the loan portfolio
The following table sets out the concentration of credit by industry sector and geography for loans and advances to customers together
with loan commitments and financial guarantees issued analysed by the ECL profile at 31 December 2018. Comparative data for
31 December 2017 has been prepared under IAS 39.
Exposures to customers*
Gross carrying amount
Analysed by ECL profile
At amortised cost
2018
At FVTPL
Total
Stage 1
Stage 2
Stage 3
POCI
Total
Total
Loans
and
advances
to
customers
€ m
Loan
commitments
and financial
guarantees
issued
€ m
Concentration
by sector
Agriculture
Energy
Manufacturing
Property and construction
Distribution
Transport
Financial
1,836
983
2,934
7,804
5,518
1,779
595
Other services
5,921
Personal: Residential mortgages 32,315
Other
Total
Concentration by location(1)
Republic of Ireland
United Kingdom
North America
Rest of the World
3,075
62,760
48,530
8,864
3,036
2,330
62,760
€ m
2,392
1,592
4,161
9,332
6,816
2,193
898
8,371
€ m
2,018
1,547
3,947
7,602
5,879
2,099
836
7,856
32,671
6,221
25,940
5,347
556
609
1,227
1,528
1,298
414
303
2,450
356
3,146
11,887
74,647
63,071
8,496
2,441
94
856
57,026
11,305
3,130
3,186
46,635
10,269
3,125
3,042
€ m
196
31
152
460
450
73
28
261
3,450
516
5,617
4,899
659
2
57
€ m
178
14
62
1,268
487
21
34
254
3,047
358
5,723
5,258
376
3
86
€ m
–
–
–
2
–
–
–
–
234
–
236
234
1
–
1
€ m
2,392
1,592
4,161
9,332
6,816
2,193
898
8,371
32,671
6,221
74,647
57,026
11,305
3,130
3,186
€ m
–
–
–
147
–
–
–
–
–
–
147
147
–
–
–
11,887
74,647
63,071
5,617
5,723
236
74,647
147
The following table sets out the ECL allowance by industry sector and geography on loans and advances to customers together with loan
commitments and financial guarantee contracts analysed by the ECL profile at 31 December 2018. Comparative data for 31 December
2017 has been prepared under IAS 39.
Total
Stage 1
Stage 2
Stage 3
POCI
Total
Analysed by ECL profile
2018
Loans
and
advances
to
customers
€ m
ECL allowance
Loan
commitments
and financial
guarantees
issued
€ m
77
14
49
480
283
17
12
141
713
253
2,039
1,787
208
2
42
2,039
2
1
4
30
8
–
–
7
–
6
58
47
10
–
1
58
Concentration
by sector
Agriculture
Energy
Manufacturing
Property and construction
Distribution
Transport
Financial
Other services
Personal: Residential mortgages
Other
Total
Concentration by location(1)
Republic of Ireland
United Kingdom
North America
Rest of the World
(1)Based on country of risk.
*Forms an integral part of the audited financial statements
98
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€ m
79
15
53
510
291
17
12
148
713
259
2,097
1,834
218
2
43
2,097
€ m
€ m
14
4
8
43
48
5
2
21
8
32
185
150
29
2
4
185
€ m
45
6
29
428
179
8
8
96
623
173
20
5
16
39
64
4
2
31
51
54
286
1,595
240
44
–
2
1,413
145
–
37
286
1,595
€ m
–
–
–
–
–
–
–
–
31
–
31
31
–
–
–
31
€ m
79
15
53
510
291
17
12
148
713
259
2,097
1,834
218
2
43
2,097
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3.1 Credit risk – Credit profile of the loan portfolio
The following table, prepared under IAS 39, sets out loans and advances to customers by industry sector and geography
at 31 December 2017:
Agriculture
Energy
Manufacturing
Property and construction
Distribution
Transport
Financial
Other services
Personal:
Residential mortgages
Other
Total
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
Concentration by location(1)
Republic of Ireland
United Kingdom
Rest of the World
(1)Based on country of risk.
Total loans
and
advances
to customers
Of which:
impaired
%
2.9
1.1
3.8
13.9
8.7
2.1
0.8
8.5
53.3
4.9
100.0
€ m
101
36
60
1,803
417
14
14
230
3,293
362
6,330
2017*
Specific
provisions
for
impairment
€ m
32
12
49
914
211
8
11
147
1,135
203
2,722
€ 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)
(3,345)
59,993
Total loans
and advances
to customers
€ m
50,737
9,006
3,595
63,338
Of which
impaired
€ m
5,799
464
67
6,330
Specific
provisions for
impairment
€ m
2,437
246
39
2,722
Off-balance sheet exposures
The following table sets out the geographic concentration of off-balance sheet exposures at 31 December 2017*:
Concentration by location
Republic of Ireland
United Kingdom
United States of America
Total
Contingent
liabilities
€ m
607
184
89
880
Commitments
€ m
8,619
1,612
–
10,231
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018
99
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Page 100
Risk management – 3. Individual risk types
3.1 Credit risk – Credit profile of the total loan portfolio by segment
The following table analyses loans and advances to customers by segment for the year ended 31 December 2018. Comparative data for
31 December 2017 has been prepared under IAS 39 and the analysis of the asset quality uses the definitions in operation during 2017
which are set out on page 77.
At amortised cost
Residential mortgages:
Owner-occupier
Buy-to-let
Other personal
Property and construction
Non-property business
RCB
€ m
WIB
€ m
27,839
3,120
30,959
2,879
2,095
5,547
2
19
21
29
3,527
9,092
AIB
UK
€ m
1,228
107
1,335
147
2,182
4,847
Group
2018
Total
€ m
€ m
–
–
–
20
–
80
29,069
3,246
32,315
3,075
7,804
19,566
RCB
€ m
28,332
3,840
32,172
2,888
3,448
5,927
WIB
€ m
5
23
28
43
3,048
7,203
1,327
193
1,520
186
2,324
4,493
Total at amortised cost
41,480
12,669
8,511
100
62,760
44,435
10,322
8,523
AIB
UK
€ m
Group
€ m
2017
Total
€ m
29,664
4,056
33,720
3,122
8,820
17,676
63,338
–
–
–
5
–
53
58
Analysed by ECL staging
Stage 1
Stage 2
Stage 3
POCI
Analysed as to asset quality
Satisfactory
Watch
Vulnerable
Impaired
Total criticised loans
Loss allowance – statement
of financial position
Stage 1
Stage 2
Stage 3
POCI
Specific provisions
IBNR provisions
Total loss allowance
Loss allowance cover percentage
Stage 1
Stage 2
Stage 3
POCI
Specific provisions/impaired loans
Total provisions/impaired loans
Total provisions/total loans
Income statement – credit
impairment (writeback)/losses
Net remeasurement of loss allowance
Recoveries of amounts previously
written-off
Specific
IBNR
31,651
12,379
7,564
99
51,693
4,513
5,080
236
207
83
–
570
377
–
–
1
–
5,290
5,541
236
€ m
119
221
1,411
31
1,782
%
–
5
28
13
€ m
25
12
12
–
49
%
–
6
14
–
€ m
27
38
143
–
208
%
–
7
38
–
€ m
(123)
€ m
16
€ m
17
(116)
–
(4)
€ m
–
–
–
–
–
%
–
–
–
–
€ m
1
–
1
%
€ m
171
271
1,566
31
2,039
%
–
5
28
13
€ m
(89)
(120)
(209)
%
31,570
9,938
7,421
58
48,987
1,691
5,277
5,897
12,865
12
364
8
384
332
345
425
1,102
–
–
–
–
2,035
5,986
6,330
14,351
€ m
€ m
€ m
€ m
€ m
2,488
525
3,013
%
2
45
47
%
42
51
7
25
588
–
232
53
285
%
55
67
3
–
–
–
%
–
–
–
2,722
623
3,345
%
43
53
5
€ m
€ m
€ m
€ m
€ m
(206)
73
(133)
%
(10)
12
2
%
17
1
18
%
–
–
–
%
–
(199)
86
(113)
%
(0.18)
Net credit impairment (writeback)/losses
(239)
%
16
%
13
%
Impairment (credit)/charge/average loans
(0.56)
0.14
0.15
0.93
(0.33)
(0.29)
0.02
0.20
100
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Page 101
3.1 Credit risk – Credit profile of the loan portfolio
The following summarises the key points affecting the credit profile of the loan portfolio at 31 December 2018:
– The Group is predominantly Republic of Ireland and United Kingdom focused where most sectors continue to experience buoyant
trading conditions due to the favourable economic environment. The Group has material concentrations in residential mortgages (51%
of gross loans) and property and construction (13% of gross loans). Furthermore, the non-property business lending book is 31% of
gross loans and is spread across a number of sub-sectors. The remaining 5% is in the personal book.
– New term lending increased by 13% to € 10.7 billion in the 12 months to 31 December 2018 (31 December 2017: € 9.4 billion) and
is spread across most sectors and includes € 2.8 billion mortgage and € 2.1 billion non-mortgage in RCB, € 4.0 billion in WIB and
€ 1.8 billion in AIB UK.
– Continued progress in working to reduce the level of non-performing loans resulted in the quantum of defaulted loans reducing by
€ 4.1 billion in the 12 months to 31 December 2018 (a decrease of 41%). The reduction was impacted by redemptions and
repayments from customers of € 1.3 billion, as well as a € 1.1 billion reduction due to restructuring activity / write-offs (including non-
contracted write-offs and other movements) and by sales of portfolios of distressed loans that were defaulted of € 1.1 billion.
There was also a reduction of € 0.6 billion due to the implementation of a new definition of default policy.
– At 31 December 2018, 83% of the total loans to customers’ portfolio is considered as either strong or satisfactory. The strong/
satisfactory portfolio is typically where new business is written, and which would also be impacted by cases upgrading out of criticised
due to improved performance.
– There was a total net credit impairment writeback of € 204 million in the 12 months to 31 December 2018. This comprised a net credit
impairment writeback of € 209 million on loans and advances to customers, a € 6 million ECL allowance for off-balance sheet loan
commitments and financial guarantee contracts and a € 1 million writeback on loans and advances to banks.
Restructuring
Restructuring the loans of customers in difficulty continues to be a key focus for the Group. Customer treatment strategies have been
developed for customers who are experiencing financial difficulties. The approach is one of structured engagement with co-operating
customers to assess their long term levels of sustainable debt.
The reduction in non-performing loans in recent years was largely achieved through case by case restructuring and working with
customers to right size sustainable debt based on customer affordability alongside a strategic deleveraging initiative where appropriate.
For mortgage customers in difficulty, the core objective 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.
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 property exposures. The aim is to apply the treatment strategies at a customer level to deliver a holistic
solution which prioritises mortgages 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 expected credit losses across
asset classes or for the customer as a whole. Write-offs may also be a feature of this process.
Non-performing loans have continued to reduce and in the 12 months to 31 December 2018 decreased by € 4.1 billion (41%).
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 ECL allowance) 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 expected credit loss amount, for example when a
loan enters a legal process. The reduced loan balance remains on the balance sheet as non-performing. In addition, write-offs may
reflect restructuring activity with customers who are subject to the terms of the revised agreement and subsequent satisfactory
performance.
In the 12 months to 31 December 2018, write-offs totalled € 1,029 million (12 months to 31 December 2017: € 716 million).
AIB Group plc Annual Financial Report 2018 101
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Page 102
Risk management – 3. Individual risk types
Risk management – 3. Individual risk types
3.1 Credit risk – Credit profile of the loan portfolio
Residential mortgages
At 31 December 2018, residential mortgages accounted for 51% of gross loans and advances to customers (€ 32.3 billion), with the
majority of the loans mainly located in the Republic of Ireland 96% (see page 110) and the remainder in the United Kingdom (see
page 113). The portfolio consists of 90% owner-occupier and 10% buy-to-let loans. Total loans in arrears by value decreased by 31% in
the 12 months to 31 December 2018, a decrease of 27% in the owner-occupier portfolio and a decrease of 41% in the buy-to-let portfolio
in the period. These decreases in the level of arrears can be mainly attributed to non-contracted write-offs in the period (€ 0.5 billion),
restructuring activity and favourable economic conditions, which resulted in accounts returning to payment. The buy-to-let portfolio
decrease was also impacted by the disposal of c. € 0.2 billion of buy-to-let mortgages as part of the sale of a portfolio of distressed loans.
Further detailed disclosures in relation to the Republic of Ireland mortgage portfolio are provided on pages 110 to 112 and pages 128 to
130 and the United Kingdom mortgage portfolio on pages 113 to 115 and pages 131 to 133.
Other personal lending
At 31 December 2018, the other personal portfolio amounted to € 3.1 billion (5% of gross loans and advances to customers). 94% of
loans relate to RCB, with 5% in AIB UK and the remainder of loans of 1% in WIB. The portfolio comprises € 2.3 billion in loans and
overdrafts and € 0.8 billion in credit card facilities. The demand for personal loans remains strong and is due to both the improved
economic environment and the expanded service offering, including increased online approval through internet and mobile credit
application activity.
Further detailed disclosures in relation to the other personal portfolio are provided on page 116.
Property and construction
At 31 December 2018, the property and construction portfolio amounted to € 7.9 billion (13% of gross loans and advances to
customers). 46% of loans relate to WIB, 27% in AIB UK and the remaining 27% in RCB. The portfolio is comprised of 78% investment
loans (€ 6.2 billion), 14% land and development loans (€ 1.1 billion) and 8% other property and construction loans (€ 0.6 billion).
Overall, the portfolio reduced by € 0.9 billion or 11% in the 12 months to 31 December 2018. The reduction is due primarily to the
continuing impact of restructuring, write-offs, amortisations and repayments resulting from asset disposals by customers which were
offset by new business written of c. € 1.6 billion.
Further detailed disclosures in relation to the property and construction portfolio are provided on pages 117 and 118.
Non-property business
At 31 December 2018, the non-property business portfolio amounted to € 19.6 billion (31% of gross loans and advances to customers).
46% of loans relate to WIB, 28% to RCB, 25% to AIB UK and the remaining 1% to Group. 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 (9% of the portfolio), hotels (10% of the
portfolio), licensed premises (3% of the portfolio), retail/wholesale (12% of the portfolio) and other services (30% of the portfolio).
At 31 December 2018, 89% of this portfolio is in a strong or satisfactory grade.
Further detailed disclosures in relation to the non-property business portfolio are provided on pages 119 and 120.
ECL allowance – statement of financial position
Under IAS 39, the Group had total impairment provisions of € 3,345 million at 31 December 2017 of which € 2,722 million were specific
provisions and € 623 million were IBNR. Upon implementation of IFRS 9 at 1 January 2018 and the introduction of the ECL model, the
Group required an ECL allowance on loans and advances to customers of € 3,616 million resulting in an increase of € 271 million to the
closing stock of provisions at 31 December 2017.
The total ECL cover rate has decreased from 5.7% at 1 January 2018 to 3.2% at 31 December 2018, and was primarily driven by non-
contracted write-offs in the period, a portfolio sale of distressed loans which had a higher ECL cover and releases in ECL cover as a
result of increased security value and improved business cash flows.
102
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Page 103
3.1 Credit risk – Credit profile of the loan portfolio
Gross loans(1) and ECL movements*
The following table explains the changes in loans and advances to customers at amortised cost by ECL staging together with related
ECL allowance between 1 January 2018 and 31 December 2018.
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Following the implementation of a new definition of default, which aligns to Stage 3 in IFRS 9 and EBA guidelines, the non-performing
exposures (“NPE”) stock was revised from € 10,194 million at 31 December 2017 to € 9,612 million at 1 January 2018 on transition to
IFRS 9 with the impact reflected in the opening staging position.
During 2018, the Group continued to develop and enhance its IFRS 9 ECL modelling methodologies and processes. This includes
recalibration and enhancement to take account of updated observed outcomes as well as the full embedding of the definition of default.
The results of such recalibrations and model enhancements are reported in ‘other movements’ below. The movement from Stage 2 to
Stage 1 is primarily due to model changes noted above as well as adjustments related to SICR sensitivity where no change in credit
quality occurred. The € 500 million movement from Stage 3 is mainly due to the embedding of the definition of default as well as IFRS 9
process improvements.
At 1 January
Transferred from Stage 1 to Stage 2
Transferred from Stage 2 to Stage 1
Transferred to Stage 3
Transferred from Stage 3
Other changes in net exposures
Write-offs
Derecognised due to disposals
Interest applied to accounts
Exchange translation adjustments
Other movements
At 31 December
(1)Movements on the gross loans table have been prepared on a ‘sum of the months’ basis.
At 1 January
Net remeasurement of ECL allowance – income statement
Exchange translation adjustments
Other movements with no income statement impact:
Changes in ECL allowance due to write-offs
Changes in ECL allowance due to disposals
Transfer in
At 31 December
Gross carrying amount
Stage 3
€ m
Stage 2
€ m
POCI
€ m
2018
Total
€ m
9,011
238
63,182
Stage 1
€ m
46,021
(2,777)
2,833
(302)
129
7,912
2,777
(2,833)
(658)
648
2,393
(1,543)
–
(3)
1,503
78
1,818
–
(21)
231
(12)
(1,211)
–
–
960
(777)
(1,251)
(1,029)
(1,013)
140
–
(500)
51,693
5,290
5,541
ECL allowance
Stage 1
€ m
Stage 2
€ m
156
18
–
–
(1)
(2)
303
(23)
–
–
(2)
(7)
Stage 3
€ m
3,136
(99)
(1)
(1,029)
(469)
28
171
271
1,566
–
–
–
–
–
–
–
–
–
(2)
236
POCI
€ m
21
15
–
–
–
(5)
31
–
–
–
–
(401)
(1,029)
(1,037)
1,874
66
105
62,760
2018
Total
€ m
3,616
(89)
(1)
(1,029)
(472)
14
2,039
Total exposures to which an ECL applies decreased during the period by € 0.4 billion from € 63.2 billion as at 1 January 2018 to
€ 62.8 billion as at 31 December 2018.
Stage transfers are a key component of ECL allowance movements with the net remeasurement cost of moving to a higher stage
(i.e. Stage 1 to Stage 2 to Stage 3) being the primary driver of a higher income statement charge (and vice versa).
Transfers from Stage 1 to Stage 2 of € 2.7 billion represent the underlying credit activity where a significant increase in credit risk
occurred at some point during the year through either the quantitative or qualitative criteria for stage movement. The main driver of the
movements to Stage 2 was due to the doubling of PDs, subject to 50bps, mainly in the mortgage portfolio. These movements have
materially resulted in exposures starting and ending in different stages due to an observed increase in credit risk, however, given the
movements represent the cumulative month by month impact, movements to Stage 2 also include those loans that may have
subsequently transferred back to Stage 1 (and included in the € 2.8 billion as outlined below) or further deteriorated to Stage 3 by the
end of 2018.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018 103
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Page 104
Risk management – 3. Individual risk types
3.1 Credit risk – Credit profile of the loan portfolio
Gross loans(1) and ECL movements (continued)*
Similarly, transfers from Stage 2 to Stage 1 of € 2.8 billion represent those loans where the triggers for significant increase in credit risk
no longer apply or loans that have fulfilled a probation period. These transfers include loans which have been upgraded through normal
credit management process.
Transfers from Stage 2 to Stage 3 of € 0.7 billion represent those loans that defaulted during the year. These arose in cases where it
was determined that the customers were unlikely to pay their credit obligations in full without the realisation of collateral regardless of
the existence of any past due amount or the number of days past due. In addition, transfers also include all credit obligors that are
90 days or more past due on a material obligation.
Transfers from Stage 3 to Stage 2 of € 0.7 billion were driven by resolution activity with the customer, through either restructuring or
forbearance, who had subsequently adhered to default probation requirements. As part of the credit management practices, active
monitoring of loans and their adherence to default probation requirements is in place. Transfers from Stage 3 to Stage 1 of € 0.1 billion
primarily reflect curing events from default and loans which were fundamentally restructured in the period and which met derecognition
criteria.
The caption ‘Other changes in net exposures’, which contributed € 0.4 billion to the reduction in exposures, consists of term and
transactional lending offset by cash repayments. This includes € 10.7 billion in new term lending which originates in Stage 1.
Transaction lending and repayments are a feature across all stages.
Write-offs represent the write down of the gross loan balance by the relevant ECL allowance in accordance with the accounting policy.
Write-offs due to restructuring activity are also included in this amount.
Any impact of ‘other movements’ on the ECL allowance is included in the individual stages under ‘net remeasurement of ECL allowance
– income statement’. Given the average cover rate on these loans on 1 January 2018 was materially lower than other Stage 3 loans,
the associated net ECL reduction is an estimated € 25 million.
In summary, the staging movements of the overall portfolio were as follows:
Stage 1 loans increased by € 5.7 billion during 2018 with an ECL of € 0.2 billion and resulting cover of 0.3%. This was primarily on foot
on net new lending and loans curing to Stage 1.
Stage 2 loans decreased by € 2.6 billion during 2018 with an ECL of € 0.3 billion and resulting cover of 5%. This was due to model
recalibration and enhancements to the Stage 2 criteria.
Stage 3 exposures decreased by € 3.5 billion during 2018 with the ECL cover reducing from 35% to 28%. Key drivers were the level of
deleveraging activity, portfolio sales and write-off activity of loans with higher ECLs.
*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
Aged analysis of contractually past due loans and advances to customers
The following table shows aged analysis of contractually past due loans and advances to customers by industry sector analysed by
asset quality and segment at 31 December 2018. Comparative data for 31 December 2017 has been prepared under IAS 39 for
non-impaired arrears.
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At amortised cost
Industry sector
Agriculture
Energy
Manufacturing
Property and construction
Distribution
Transport
Financial
Other services
Personal:
Residential mortgages
Credit cards
Other
Total gross carrying amount
Asset quality
Stage 1
Stage 2
Stage 3
POCI
Segment
RCB
WIB
AIB UK
Group
As a percentage of total gross
loans at amortised cost
At FVTPL
Industry sector
Property and construction
Total at FVTPL
Segment
RCB
As a percentage of
total loans at FVTPL
1–30 days
€ m
31–60 days
€ m
61–90 days
€ m
91–180 days
€ m
181–365 days
€ m
> 365 days
€ m
36
–
11
75
66
4
2
23
463
21
52
753
221
323
191
18
753
680
35
38
–
753
%
1.20
€ m
–
–
€ m
–
–
%
–
5
2
1
20
8
1
–
4
136
4
13
194
–
79
110
5
194
169
–
25
–
194
%
0.31
€ m
–
–
€ m
–
–
%
0.13
4
–
1
21
6
1
–
3
112
3
15
166
–
37
127
2
166
152
–
14
–
166
%
0.26
€ m
–
–
€ m
–
–
%
–
10
–
3
32
9
1
–
8
154
6
19
242
–
–
237
5
242
230
–
12
–
242
%
0.39
€ m
–
–
€ m
–
–
%
–
11
3
3
51
25
3
–
16
195
17
31
355
–
–
349
6
355
331
–
24
–
355
%
0.56
€ m
–
–
€ m
–
–
%
–
81
8
21
532
193
8
3
105
1,426
–
156
2,533
–
–
2,510
23
2,533
2,354
–
179
–
2,533
%
4.04
€ m
2
2
€ m
2
2
%
1.31
2018*
Total
€ m
147
13
40
731
307
18
5
159
2,486
51
286
4,243
221
439
3,524
59
4,243
3,916
35
292
–
4,243
%
6.76
€ m
2
2
€ m
2
2
%
1.44
The figures reported are inclusive of overdrafts, bridging loans and cases with expired limits.
At 31 December 2018, total loans past due reduced by € 2.5 billion to € 4.2 billion or 6.8% of total loans and advances to customers
(31 December 2017: € 6.7 billion or 10.6%).
Residential mortgage loans which were past due at 31 December 2018, amounted to € 2.5 billion. This represents 59% of total loans
which were past due (31 December 2017: € 3.6 billion or 53%). 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 represent 17% or € 0.7 billion of total loans which were past due (31 December
2017: 27% or € 1.8 billion), with non-property business at 16% or € 0.7 billion (31 December 2017: 13% or € 0.9 billion) and other
personal at 8% or € 0.3 billion (31 December 2017: 7% or € 0.4 billion).
All loans past due by 90 days or more on any material obligation are considered non-performing/defaulted.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018 105
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Page 106
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 advances 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
1–30 days
€ m
31–60 days
€ m
61–90 days
€ m
91–180 days
€ m
181–365 days
€ m
> 365 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
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
24
2
2
77
19
–
–
34
145
–
24
327
314
4
8
1
327
%
0.52
The figures reported are inclusive of overdrafts, bridging loans and cases with expired limits.
2017
Total
€ m
78
7
19
275
94
5
1
79
869
32
124
1,583
1,449
13
120
1
1,583
%
2.50
*Forms an integral part of the audited financial statements
106
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Page 107
3.1 Credit risk – Credit profile of the loan portfolio
Income statement –net credit impairment writeback*
The following table analyses the income statement net credit impairment (writeback)/losses for the year to 31 December 2018.
Comparative data for 31 December 2017 has been prepared under IAS 39.
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Credit impairment (writeback)/losses
on financial instruments
Net remeasurement of ECL allowance:
Loans and advances to banks
Loans and advances to customers
Loan commitments
Financial guarantee contracts
Credit impairment (writeback)/losses
Recoveries of amounts previously written-off(1)
Net credit impairment (writeback)/losses
Of which:
Loans and advances to banks
Loans and advances to customers
Loan commitments and financial guarantee contracts
Specific provisions – Individually significant
– Individually insignificant
IBNR
Total provisions for impairment (credit)/charge on loans
and advances to customers
Writeback of provisions for liabilities and commitments
Total
(1)For a geographical and sectoral analysis, see page 108.
RCB
€ m
–
(123)
3
(5)
(125)
(116)
(241)
–
(239)
(2)
RCB
€ m
(176)
(30)
73
(133)
WIB
€ m
AIB
UK
€ m
Group
€ m
–
16
–
–
16
–
16
–
16
–
WIB
€ m
(10)
–
12
2
–
17
6
2
25
(4)
21
–
13
8
AIB
UK
€ m
30
(13)
1
18
(1)
1
–
–
–
–
–
(1)
1
–
Group
€ m
–
–
–
–
2018
Total
€ m
(1)
(89)
9
(3)
(84)
(120)
(204)
(1)
(209)
6
2017
Total
€ m
(156)
(43)
86
(113)
(8)
(121)
The € 204 million net credit impairment writeback in 2018 comprises a € 89 million writeback on on-balance sheet exposures/loans to
customers, recoveries of amounts previously written-off of € 120 million and a € 1 million writeback on loans and advances to banks.
These were partly offset by a charge of € 6 million on off-balance sheet exposures.
The writeback of € 89 million, attributable to loans to customers, continues to be driven by loans curing from Stage 3 and trading and
asset value improvements associated with general economic environment in Ireland.
Changes in cash flow assumptions, recoveries and repayments have all contributed to writeback activity. Collateral values and uplift in
market yields have also contributed to writeback activity observed as part of ongoing restructuring and whilst cases serve probation
periods within Stage 3. Writeback is predominantly driven by the commercial real estate and property exposures.
Included in the recovery of amounts previously written-off as outlined above, € 44 million relates to interest previously suspended on
impaired loans that has subsequently cured. This was previously classified as release to interest income but which under new
accounting guidelines, is recorded as a recovery of amounts previously written-off. The remaining recovery relates to cash received on
amounts previously written-off.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018 107
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Page 108
Risk management – 3. Individual risk types
3.1 Credit risk – Credit profile of the loan portfolio
Loans written-off and recoveries of previously written-off loans
The following table analyses loans written-off and recoveries of previously written-off loans by geography(1) and industry sector for the
year ended 31 December 2018. Comparative data for 31 December 2017 has been prepared under IAS 39.
Loans written-off
Agriculture
Energy
Manufacturing
Property and construction
Distribution
Transport
Financial
Other services
Personal – Residential mortgages
– Other
Recoveries of amounts
previously written-off
Agriculture
Energy
Manufacturing
Property and construction
Distribution
Transport
Financial
Other services
Personal – Residential mortgages
– Other
(1)By country of risk
Ireland
2017
€ m
–
0.9
5.9
127.2
47.6
25.6
–
48.6
280.1
20.0
555.9
Ireland
2017
€ m
0.1
–
–
–
4.5
–
0.8
4.0
1.8
–
2018
€ m
19.0
5.1
19.8
112.0
37.3
3.2
0.1
83.0
543.2
56.0
878.7
2018
€ m
7.4
0.7
1.7
28.1
10.5
0.8
0.2
12.1
24.2
23.0
108.7
11.2
United Kingdom
2017
€ m
2018
€ m
Rest of the World
2017
2018
€ m
€ m
0.1
5.5
5.4
65.9
9.7
–
5.2
4.9
15.8
6.2
118.7
0.1
–
0.5
46.3
17.1
24.4
3.0
–
4.2
9.7
105.3
–
–
–
–
5.8
–
1.6
19.8
4.5
0.2
31.9
–
–
–
16.5
11.7
–
20.7
4.3
1.4
–
54.6
United Kingdom
2017
€ m
2018
€ m
Rest of the World
2017
2018
€ m
€ m
–
–
–
0.9
0.4
–
–
2.6
0.8
2.6
7.3
–
–
–
0.3
0.1
–
–
2.1
–
–
2.5
–
–
–
4.1
–
–
–
–
0.2
–
4.3
–
0.1
–
0.2
0.4
–
–
0.4
–
–
1.1
Total
Total
2018
€ m
19.1
10.6
25.2
177.9
52.8
3.2
6.9
107.7
563.5
62.4
1,029.3
2018
€ m
7.4
0.7
1.7
33.1
10.9
0.8
0.2
14.7
25.2
25.6
2017
€ m
0.1
0.9
6.4
190.0
76.4
50.0
23.7
52.9
285.7
29.7
715.8
2017
€ m
0.1
0.1
–
0.5
5.0
–
0.8
6.5
1.8
–
120.3
14.8
The contractual amount outstanding of loans written-off during the year that are subject to enforcement activity amounted to €750 million
which includes both full and partial write-offs.*
*Forms an integral part of the audited financial statements
108
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Page 109
3.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis
Loans and advances to customers – Residential mortgages
Residential mortgages amounted to € 32.3 billion at 31 December 2018, with the majority (96%) relating to residential mortgages in the
Republic of Ireland and the remainder relating to the United Kingdom. This compares to € 33.7 billion at 31 December 2017, of which
95% related to residential mortgages in the Republic of Ireland. The split of the residential mortgage portfolio was owner-occupier
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€ 29.1 billion and buy-to-let € 3.2 billion (31 December 2017: owner-occupier € 29.7 billion and buy-to-let € 4.0 billion).
At 31 December 2018, a € 0.7 billion ECL allowance was held against the Group’s residential mortgages portfolio, or 2.2% total
cover rate.
During 2018, there was a net credit impairment writeback of € 84 million to the income statement. This was primarily driven by the
Republic of Ireland portfolio with a € 58 million writeback as a result of loans curing from Stage 3 to Stage 2. A further € 24 million of
recoveries were observed on loans previously written-off.
Republic of Ireland residential mortgages – pages 110 to 112
– Credit profile
– Actual and weighted average indexed loan-to-value ratios by staging
United Kingdom (“UK”) residential mortgages – pages 113 to 115
– Credit profile
– Actual and weighted average indexed loan-to-value ratios by staging
Residual debt, which is now unsecured following the disposal of property on which the residential mortgage was secured, is included in
the residential mortgage portfolio and as such, is included in the tables within this section.
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AIB Group plc Annual Financial Report 2018 109
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Page 110
Risk management – 3. Individual risk types
3.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis
Loans and advances to customers – Republic of Ireland residential mortgages
The following table analyses the Republic of Ireland residential mortgage portfolio showing the ECL allowance at 31 December 2018.
Comparative data for 31 December 2017 has been prepared under IAS 39.
Residential mortgages at amortised cost
Gross loans and
advances to customers
Total gross carrying amount
Analysed as to ECL staging
Stage 1
Stage 2
Stage 3
POCI
Analysed by arrears/impaired
In arrears (>30 days past due)
In arrears (>90 days past due)
Of which impaired
ECL allowance - statement
of financial position
Stage 1
Stage 2
Stage 3
POCI
Specific provisions
IBNR provisions
Total ECL allowance
Residential mortgages at
amortised cost
Owner-
occupier
€ m
27,841
22,615
2,867
2,137
222
€ m
5
36
451
23
Buy-to-let
€ m
3,139
1,931
446
750
12
€ m
2
13
148
8
2018*
Total
€ m
30,980
24,546
3,313
2,887
234
€ m
7
49
599
31
Owner-
occupier
€ m
28,337
Buy-to-let
€ m
3,863
2017*
Total
€ m
32,200
2,556
2,423
2,277
1,005
982
888
3,561(1)
3,405(1)
3,165
€ m
€ m
€ m
515
171
686
793
188
981
309
90
399
1,102
278
1,380
27,326
2,968
30,294
27,356
3,464
30,820
ECL allowance cover percentage
Stage 1
Stage 2
Stage 3
POCI
Specific provisions/impaired loans
Income statement credit impairment
(writeback)/losses
Net remeasurement of ECL allowance
Recoveries of amounts previously written-off
Specific provisions
IBNR provisions
Net credit impairment (writeback)
Net credit impairment (writeback)/
on average loans
(1)Includes all impaired loans whether past due or not.
%
–
1
21
10
€ m
(13)
(16)
(29)
%
(0.10)
%
–
3
20
63
€ m
(45)
(8)
(53)
%
(1.52)
%
–
1
21
13
€ m
(58)
(24)
(82)
%
(0.26)
%
%
%
34.8
34.8
34.8
€ m
€ m
€ m
(32)
29
(3)
%
(x)
(72)
(17)
(89)
%
(x)
(104)
12
(92)
%
(x)
*Forms an integral part of the audited financial statements
110
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Page 111
3.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis
Loans and advances to customers – Republic of Ireland residential mortgages (continued)
Residential mortgages in the Republic of Ireland amounted to € 31 billion at 31 December 2018 compared to € 32.2 billion at
31 December 2017. The decrease in the portfolio was primarily due to loan repayments and disposals, offset by new lending in the
12 months to 31 December 2018. Total drawdowns in the 12 months to 31 December 2018 were € 2.8 billion, of which 96% related to
owner-occupier, whilst the weighted average indexed loan-to-value for new residential mortgages was 70%. New lending in the
12 months to 31 December 2018 increased by 16% on the comparable period in 2017 driven by the favourable macroeconomic
conditions.
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The split of the residential mortgage portfolio is 90% owner-occupier and 10% buy-to-let and comprises 30% tracker rate, 56% variable
rate and 14% fixed rate mortgages.
Non-performing loans decreased from € 4.4 billion at 31 December 2017 to € 3.1 billion at 31 December 2018, impacted by the sale of
a portfolio of distressed mortgages (€ 0.2 billion) in the period and also partly due to restructuring, write-offs, repayments and
redemptions.
Residential mortgage arrears
Total loans in arrears (including non-performing loans) by value decreased by 29% during the 12 months to 31 December 2018,
a decrease of 25% in the owner-occupier portfolio and a decrease of 35% in the buy-to-let portfolio.
The number of loans in arrears (based on number of accounts) greater than 90 days was 5.3% at 31 December 2018 and remains
below the industry average of 7.4%(1). For the owner-occupier portfolio, loans in arrears greater than 90 days at 4.5% were below the
industry average of 6.2%. For the buy-to-let portfolio, loans in arrears greater than 90 days at 12.1% were below the industry average
of 14.7%.
Forbearance
Residential mortgages subject to forbearance measures decreased by € 1.1 billion from 31 December 2017 to € 3.6 billion at
31 December 2018, compared to a decrease of € 1.2 billion in the 12 months to 31 December 2017. 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 and
support customers in remaining in their family home.
Details of forbearance measures are set out on pages 134 to 144.
Income statement
There was a net credit impairment writeback of € 82 million to the income statement in the year to 31 December 2018, as a result of
loans curing from Stage 3 and also recoveries of € 24 million on loans previously written-off.
(1)Source: Central Bank of Ireland (“CBI”) Residential Mortgage Arrears and Repossessions Statistics as at 30 September 2018, based on numbers
of accounts.
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AIB Group plc Annual Financial Report 2018 111
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Page 112
Risk management – 3. Individual risk types
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112
AIB Group plc Annual Financial Report 2018
A5 Risk 2 2018 Purp 119-154:Layout 1
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20:47
Page 113
3.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis
Loans and advances to customers – United Kingdom (“UK”) residential mortgages
The UK mortgage portfolio is predominantly based in Northern Ireland (75% of total) with the remainder located in Great Britain.
The portfolio decreased in sterling terms by c. 11% at 31 December 2018. However, due to the impact of currency movements,
the portfolio decreased by c. 12% in euro terms.
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The following table analyses the UK residential mortgage portfolio showing the ECL allowance at 31 December 2018.
Comparative data for 31 December 2017 has been prepared under IAS 39.
Residential mortgages at amortised cost
Gross loans and
advances to customers
Total gross carrying amount
Analysed as to ECL staging
Stage 1
Stage 2
Stage 3
POCI
Analysed by arrears/impaired
In arrears (>30 days past due)
In arrears (>90 days past due)
Of which impaired
ECL allowance - statement
of financial position
Stage 1
Stage 2
Stage 3
POCI
Specific provisions
IBNR provisions
Total ECL allowance
Residential mortgages at
amortised cost
ECL allowance cover percentage
Stage 1
Stage 2
Stage 3
POCI
Specific provisions/impaired loans
Income statement credit impairment
(writeback)
Net remeasurement of ECL allowance
Recoveries of amounts previously written-off
Specific provisions
IBNR provisions
Net credit impairment (writeback)
Net credit impairment (writeback)/
Owner-
occupier
€ m
1,228
983
118
127
–
€ m
1
2
22
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25
1,203
%
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–
€ m
–
(1)
(1)
%
Buy-to-let
€ m
107
88
10
9
–
€ m
–
–
2
–
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105
%
–
2
28
–
€ m
(1)
–
(1)
%
2018*
Total
€ m
1,335
1,071
128
136
–
€ m
1
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27
1,308
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–
€ m
(1)
(1)
(2)
%
average loans
(0.08)
(0.86)
(0.14)
(1)Includes all impaired loans whether past due or not.
Owner-
occupier
€ m
1,327
Buy-to-let
€ m
193
129
115
109
€ m
29
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27.2
€ m
(6)
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19
19
19
€ m
4
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189
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19.4
€ m
(1)
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(1)
%
(x)
2017*
Total
€ m
1,520
148(1)
134(1)
128
€ m
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5
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26.1
€ m
(7)
(2)
(9)
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(x)
Total loans in arrears greater than 90 days has reduced to 5% of the total portfolio. This is reflective of the continued focus on
deleveraging, combined with early intervention to prevent new cases reaching 90 days past due.
The net credit impairment writeback to the income statement in the year to 31 December 2018 amounted to € 2 million. Stage 3 cover
for the UK mortgage portfolio is 18%.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018 113
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A5 Risk 2 2018 Purp 119-154:Layout 1
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Risk management – 3. Individual risk types
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114
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Page 115
3.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis
Loans and advances to customers – United Kingdom (“UK”) residential mortgages
Actual and weighted average indexed loan to value ratios of United Kingdom residential mortgages.
8% of the total owner-occupier and 10% of the total buy-to-let mortgages were in negative equity at 31 December 2018 (excluding
unsecured), compared to 12% and 21% respectively at 31 December 2017, impacted by a sustained increase in house prices,
amortisation of the loan portfolio, low interest rates and continuing modest economic growth, despite Brexit uncertainties. The weighted
average indexed loan-to-value for the total residential mortgage portfolio was 60% at 31 December 2018 compared to 64.8% at
31 December 2017, again, reflecting the increase in residential property prices and overall modestly improved domestic economic
factors, in conjunction with new lending volumes and the continued deleveraging of non-performing mortgages.
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AIB Group plc Annual Financial Report 2018 115
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Page 116
Risk management – 3. Individual risk types
3.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis
Loans and advances to customers – Other personal
The following table analyses other personal lending by segment showing asset quality and the loss allowance at 31 December 2018.
Comparative data for 31 December 2017 has been prepared under IAS 39 and the analysis of the asset quality uses the definitions in
operation during 2017 which are set out on page 77.
Gross loans and
advances to customers
Total gross carrying amount
Analysed as to ECL staging
Stage 1
Stage 2
Stage 3
Analysed as to asset quality
Satisfactory
Watch
Vulnerable
Impaired
Total criticised loans
Loss allowance – statement
of financial position
Stage 1
Stage 2
Stage 3
Specific provisions
IBNR provisions
Total loss allowance
Loss allowance
cover percentage
Stage 1
Stage 2
Stage 3
Specific provisions/impaired loans
Total provisions/impaired loans
Total provisions/total loans
Income statement – credit
impairment (writeback)/losses
Net remeasurement of loss allowance
Recoveries of amounts previously written-off
Specific
IBNR
RCB
€ m
2,879
2,176
368
335
WIB AIB UK
€ m
€ m
Group
€ m
2018*
Total
€ m
29
28
1
–
147
20
3,075
110
29
8
20
–
–
2,334
398
343
RCB
€ m
2,888
WIB
€ m
43
AIB UK
€ m
Group
€ m
2017*
Total
€ m
186
5
3,122
2,203
42
162
87
249
349
685
–
1
–
1
5
6
13
24
5
–
–
–
–
2,412
92
256
362
710
€ m
€ m
€ m
€ m
€ m
190
40
230
–
–
–
%
%
13
3
16
%
–
–
–
203
43
246
%
%
54
66
8
–
–
–
100
123
9
–
–
–
56
68
8
€ m
€ m
€ m
€ m
€ m
(8)
8
–
%
–
–
–
%
(1)
(1)
(2)
%
–
–
–
%
(9)
7
(2)
%
€ m
29
52
172
253
%
1
13
50
€ m
13
(26)
(13)
%
€ m
28
51
167
246
%
1
14
50
€ m
10
(24)
€ m
€ m
€ m
–
–
–
–
%
–
4
–
1
1
5
7
%
1
5
64
–
–
–
–
%
–
–
–
€ m
€ m
€ m
3
(2)
1
%
–
–
–
%
–
–
–
%
–
Net credit impairment (writeback)/losses
(14)
Net credit impairment (writeback)/losses
on average loans
%
(0.49)
0.64
–
(0.42)
(0.01)
–
(0.83)
–
(0.07)
The other personal lending portfolio of € 3.1 billion comprises € 2.3 billion in loans and overdrafts and € 0.8 billion in credit card facilities.
The credit quality of the portfolio remains strong. 20% is categorised as less than satisfactory, of which defaulted loans amounted to
€ 0.4 billion.
The demand for personal loans remains strong which is due to the favourable economic environment and AIB’s service offering,
especially increased online approval through internet and mobile credit application activity. The level of new lending at € 0.9 billion in
2018 remains consistent with the level of new lending experienced in 2017.
At 31 December 2018, the loss allowance cover was 8% with Stage 3 cover at 50%.
The net credit impairment writeback in the income statement amounted to € 13 million in the year to 31 December 2018.
*Forms an integral part of the audited financial statements
116
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3.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis
Loans and advances to customers – Property and construction
The following table analyses property and construction lending by segment at 31 December 2018. Comparative data for 31 December
2017 has been prepared under IAS 39 and the analysis of the asset quality uses the definitions in operation during 2017 which are set
out on page 77.
A
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R
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w
i
2017*
Total
€ m
5,258
944
6,202
918
961
1,879
482
257
8,820
5,369
206
1,442
1,803
3,451
Gross loans and
advances to customers
Investment:
Commercial investment
Residential investment
Land and development:
Commercial development
Residential development
Contractors
Housing associations
RCB
€ m
1,277
360
1,637
160
194
354
104
–
WIB
€ m
AIB UK
€ m
2,844
161
3,005
98
357
455
67
–
823
627
1,450
46
227
273
151
308
Total gross carrying amount
2,095
3,527
2,182
2018*
Total
€ m
4,944
1,148
6,092
304
778
1,082
322
308
7,804
RCB
€ m
2,002
571
2,573
275
485
760
115
–
WIB
€ m
AIB UK
€ m
2,375
124
2,499
216
253
469
80
–
881
249
1,130
427
223
650
287
257
3,448
3,048
2,324
Analysed as to ECL staging
Stage 1
Stage 2
Stage 3
POCI
Analysed as to asset quality
Satisfactory
Watch
Vulnerable
Impaired
Total criticised loans
Loss allowance – statement
of financial position
Stage 1
Stage 2
Stage 3
POCI
Specific provisions
IBNR provisions
Total loss allowance
Loss allowance cover percentage
Stage 1
Stage 2
Stage 3
POCI
Specific provisions/impaired loans
Total provisions/impaired loans
Total provisions/total loans
Income statement – credit
impairment (writeback)/losses
Net remeasurement of loss allowance
Recoveries of amounts previously written-off
Specific
IBNR
Net credit impairment (writeback)/
losses
Net credit impairment (writeback)/
869
255
969
2
€ m
18
28
309
–
355
%
2
11
32
8
€ m
(80)
(33)
(113)
%
3,420
44
63
–
1,911
116
155
–
6,200
415
1,187
2
679
142
1,052
1,575
2,769
2,758
–
290
–
290
1,932
64
100
228
392
€ m
€ m
16
3
7
–
26
%
–
6
12
–
€ m
(3)
–
(3)
%
7
5
87
–
99
%
–
4
56
–
€ m
41
36
403
–
480
%
1
9
34
8
€ m
€ m
€ m
€ m
761
104
865
%
48
55
25
–
26
26
%
–
–
1
153
20
173
%
67
76
7
914
150
1,064
%
51
59
12
€ m
(7)
–
€ m
(90)
(33)
(7)
%
(123)
%
€ m
€ m
€ m
€ m
(85)
26
(59)
%
(1)
20
19
%
(14)
4
(10)
%
(100)
50
(50)(1)
%
losses on average loans
(4.26)
(0.09)
(0.31)
(1.50)
(1.55)
0.65
(0.38)
(0.56)
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018 117
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Risk management – 3. Individual risk types
3.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis
Loans and advances to customers – Property and construction (continued)
In addition to the loans at amortised cost of € 7,804 million, there is also € 147 million of loans measured at FVTPL, giving a total
property portfolio of € 7,951 million.
The property and construction sector amounted to 13% of total loans and advances. The portfolio comprised of 78% investment loans
(€ 6.2 billion), 14% land and development loans (€ 1.1 billion) and 8% other property and construction loans (€ 0.6 billion). AIB UK
accounts for 27% of the total property and construction portfolio.
Overall, the portfolio reduced by € 0.9 billion or 11% during the 12 months to 31 December 2018. This reduction was due principally to
the continuing impact of restructuring, and to write-offs, amortisations and repayments, resulting from asset disposals by customers,
and by the sale of a portfolio of distressed assets. These reductions were offset by new lending of € 1.6 billion, of which € 1.1 billion is in
WIB and is typically to provide senior secured funding within acceptable risk parameters. At 31 December 2018, 74% of the portfolio
was in a strong/satisfactory grade.
There was a net credit impairment writeback of € 123 million to the income statement in the year to 31 December 2018. This was driven
by writebacks of € 90 million due to increased collateral values, uplift in market yields and business cash flows due to the improved
economic environment, mainly in the commercial real estate portfolio. Also included within the writeback of € 123 million was
€ 33 million due to recovery of loans previously written-off.
Investment
Investment property loans amounted to € 6.2 billion at 31 December 2018 (31 December 2017: € 6.2 billion) of which € 5.1 billion
related to commercial investment. € 4.8 billion of the investment property portfolio related to loans for the purchase of property in the
Republic of Ireland and € 1.4 billion in the United Kingdom.
There was a net credit impairment writeback of € 94 million to the income statement in the year to 31 December 2018 on the investment
property element of the property and construction portfolio.
Land and development
At 31 December 2018, land and development loans amounted to € 1.1 billion (31 December 2017: € 1.9 billion) of which € 0.4 billion
related to loans in RCB, € 0.4 billion in WIB and € 0.3 billion in AIB UK.
There was a net credit impairment writeback of € 29 million to the income statement in the year to 31 December 2018.
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3.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis
Loans and advances to customers – Non-property business
The following table analyses non-property business lending by segment at 31 December 2018. Comparative data for 31 December 2017
has been prepared under IAS 39 and the analysis of the asset quality uses the definitions in operation during 2017 which are set out on
page 77.
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RCB
€ m
1,558
404
366
990
123
1,883
1,242
864
5,547
WIB
€ m
182
991
154
972
217
2,334
2,718
3,858
9,092
AIB
UK
€ m
96
644
141
336
180
1,301
1,960
1,490
4,847
Group
€ m
–
–
–
–
–
–
1
79
80
2018*
Total
€ m
1,836
2,039
661
2,298
520
5,518
5,921
6,291
19,566
4,071
8,920
4,472
79
17,542
584
892
155
17
297
78
–
1
1,036
988
€ m
66
93
337
496
%
2
16
38
€ m
€ m
€ m
9
9
4
22
%
–
6
22
18
30
27
75
%
–
10
35
–
–
–
–
%
–
–
40
€ m
93
132
368
593
%
1
13
37
Gross loans and advances
to customers
Agriculture
Distribution:
Hotels
Licensed premises
Retail/wholesale
Other distribution
Other services
Other
Total gross carrying amount
Analysed as to ECL staging
Stage 1
Stage 2
Stage 3
Analysed as to asset quality
Satisfactory
Watch
Vulnerable
Impaired
Total criticised loans
Loss allowance – statement
of financial position
Stage 1
Stage 2
Stage 3
Specific provisions
IBNR provisions
Total loss allowance
Loss allowance cover percentage
Stage 1
Stage 2
Stage 3
Specific provisions/impaired loans
Total provisions/impaired loans
Total provisions/total loans
Income statement – credit
impairment losses/(writeback)
€ m
€ m
€ m
€ m
€ m
Net remeasurement of loss allowance
Recoveries of amounts previously written-off
5
(35)
Specific
IBNR
Net credit impairment losses/(writeback)
(30)
Net credit impairment losses/(writeback)
%
19
–
19
%
22
(1)
21
%
1
–
1
%
47
(36)
11
%
RCB
€ m
1,568
496
401
1,071
133
2,101
1,380
878
5,927
WIB
€ m
168
915
156
974
135
2,180
2,111
2,744
7,203
AIB
UK
€ m
82
527
123
505
111
1,266
1,882
1,263
4,493
Group
€ m
–
–
–
–
–
–
1
52
53
2017*
Total
€ m
1,818
1,938
680
2,550
379
5,547
5,374
4,937
17,676
3,658
7,118
4,126
53
14,955
209
1,252
808
2,269
12
65
8
85
192
119
56
367
–
–
–
–
413
1,436
872
2,721
€ m
€ m
€ m
€ m
€ m
435
103
538
%
54
67
9
€ m
(9)
26
17
%
2
19
21
%
25
263
–
€ m
(9)
(7)
(16)
%
33
25
58
%
59
104
1
€ m
39
–
39
%
–
–
–
%
–
–
–
470
147
617
%
54
71
3
€ m
€ m
–
–
–
%
21
19
40
%
on average loans
(0.52)
0.23
0.46
0.96
0.06
0.28
(0.23)
0.83
0.00
0.23
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018 119
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Risk management – 3. Individual risk types
3.1 Credit risk – credit profile of the loan portfolio – Asset class analysis
Loans and advances to customers – Non-property business (continued)
The non-property business portfolio comprises of Small and Medium Enterprises (“SMEs”) which are reliant on the domestic economies
in which they operate and larger corporate and institutional borrowers which are impacted by global economies. The portfolio increased
by 11% (€ 1.9 billion) to € 19.6 billion in the 12 months to 31 December 2018 due to continued demand for credit across all segments
resulting in new lending of € 5.4 billion in the same period (31 December 2017: € 4.9 billion). However, this was offset by amortisation,
restructuring activity and the sale of a portfolio of distressed assets. The portfolio amounted to 31% of total loans and advances at
31 December 2018. The majority of the portfolio exposure is to Irish borrowers with the UK and USA being the other main geographic
concentrations.
Satisfactory loans and advances increased in the 12 months to 31 December 2018, continuing the positive trend experienced in 2017,
with new drawdowns exceeding amortisation and repayment coupled with upward grade migration through improved performance.
The level of less than satisfactory loans (including defaulted loans) reduced from € 2.9 billion at 31 December 2017 to € 2.2 billion at
31 December 2018, mainly due to a reduction of € 0.6 billion in defaulted loans as a result of restructuring activity.
The following are the key themes within the main sub-sectors of the non-property business portfolio:
– The agriculture sub-sector (9% of the portfolio) is experiencing significant on-farm challenges due to the difficult weather conditions
in the 12 months to 31 December 2018, which will result in increasing costs across almost all farms. The Group is proactively
encouraging farmers to take action to quantify the impact and determine cash flow requirements;
– The hotels sub-sector comprises 10% of the portfolio. This sector continued to perform well in the 12 months to 31 December 2018,
helped by a stronger local economy. There has been a net growth in tourist numbers despite a decline in visitors from the UK.
Valuations for hotels have continued to increase, with a number of foreign investors and fund managers competing for a limited
number of available properties. There has been a marginal net increase in supply during the 12 months to 31 December 2018, with
more significant supply of available rooms expected during 2019 in Dublin, Cork and Galway in order to meet the current high levels
of demand;
– The licensed premises sub-sector comprises 3% of the portfolio. This sector continues to perform strongly in areas of high footfall,
however, the challenge remains for licensed premises in more rural locations or in small towns where there is a lot of competition;
– The retail/wholesale sub-sector (12% of the portfolio) was broadly stable in the Republic of Ireland during the 12 months to 31
December 2018, with some challenges ahead due to Brexit uncertainty and a growing adoption of online shopping. In the UK, a
number of high profile retailers have been impacted by a drop in consumer confidence and disposable income. These headwinds,
and similar trends in the US, must be considered when reviewing the sector within the Republic of Ireland, albeit current economic
performance is strong and consumer confidence is high;
– The other services sub-sector comprises 30% 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 the year to 31 December 2018; and
– The category titled ‘Other’ totalling € 6.3 billion (32% of the portfolio) includes a broad range of sub-sectors such as energy,
manufacturing, transport and financial.
Strong economic growth in the Republic of Ireland has continued during 2018. Notwithstanding this continued strong economic
performance, there are still challenges. In particular, there is heightened economic uncertainty around Brexit and the medium-term
outlook for the UK economy continues to be uncertain.
WIB includes € 4.6 billion (31 December 2017: € 3.2 billion) in syndicated and international lending exposures. The Group has
specialised lending teams which are involved in participating in the provision of finance to US and European corporations for mergers,
acquisitions, buy-outs and general corporate purposes. At 31 December 2018, 100% of the syndicated and international lending
portfolio is in a satisfactory grade. 63% of the customers in this portfolio are domiciled in the USA, 5% in the UK, and 32% in the Rest of
the World (31 December 2017: 66% in the USA, 6% in the UK and 28% in the Rest of the World (primarily Europe) respectively).
The largest industry sub-sectors within the portfolio include Healthcare and Pharmaceuticals, Business services, Food and Beverage,
Telecoms and Hotel and Leisure.
There was a net credit impairment loss of € 11 million to the income statement in the year to 31 December 2018. This was driven by a
charge of € 47 million offset by recoveries of previously written-off loans of € 36 million.
The portfolio held € 0.6 billion of ECL allowances which provides total ECL allowance cover of 3%. For the Stage 3 portfolio, the loss
allowance cover is 37%.
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3.1 Credit risk – credit profile of the loan portfolio
Non-performing exposures (“NPE”) to customers
The internal credit ratings profile of loans and advances to customers is described on page 76. This sets out the basis on which the Group
manages its credit portfolio. In addition, the Group’s off-balance sheet commitments are set out on page 96.
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The table below further analyses non-performing loans and advances to customers by asset class at 31 December 2018. Comparative
data for 31 December 2017 has been prepared under IAS 39 and uses the internal ratings methodology in operation at that time.
Total non-performing loans and advances to customers
3,269
Total ECL on non-performing loans
and advances to customers
Non-performing loans as % of total loans
and advances to customers
653
10%
1,420
1,020
6,054
Non-performing loans
At amortised cost
Collateral disposals
Unlikely to pay (including > 90 days past due)
Non-performing loans probation
Total gross carrying amount at amortised cost
At FVTPL
Collateral disposals
Unlikely to pay (including > 90 days past due)
Non-performing loans probation
Total carrying amount at FVTPL
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
At 1 January 2018 (revised) non-performing loans
and advances to customers
Total ECL on non-performing loans
and advances to customers
Residential
mortgages
€ m
Other
personal
€ m
Property and
construction
€ m
Non-property
business
€ m
188
2,689
392
3,269
–
–
–
–
49
261
35
345
–
–
–
–
345
173
11%
3,293
246
1,277
4,816
14%
€ m
4,585
1,286
362
47
145
554
18%
€ m
518
255
398
808
140
1,346
14
53
7
74
112
758
150
1,020
–
–
–
–
412
18%
370
5%
1,803
141
1,005
2,949
33%
€ m
2,849
872
122
881
1,875
11%
€ m
1,660
Residential
mortgages
€ m
Other
personal
€ m
Property and
construction
€ m
Non-property
business
€ m
2018
Total
€ m
747
4,516
717
5,980
14
53
7
74
1,608
10%
2017
Total
€ m
6,330
556
3,308
10,194
16%
€ m
9,612
1,035
609
3,185
The non-performing exposures (“NPE”) stock was revised from € 10,194 million at 31 December 2017 to € 9,612 million at 1 January
2018 reflecting the implementation and harmonisation of a new definition of default policy which aligns to accounting standards and EBA
guidelines. The revision resulted in a decrease of € 1.2 billion arising from the implementation of a one year probation rule for
transferring from NPE to performing and the reclassification of a portfolio of loans that had been held as NPE for longer than the
required probation period. This decrease was offset by an increase of € 0.6 billion arising from the implementation of a wider rule set for
the identification of default. This rule set includes: the impact of contagion; number of forbearance events; determination of financial
distress; and a materiality threshold for days past due.
Total non-performing off-balance sheet commitments
Total non-performing off-balance sheet commitments amounted to € 183 million (31 December 2017: € 322 million).
See page 76 for definition of the non-performing loan classifications above.
Continued momentum in 2018 in reducing the stock of non-performing loans resulted in in the quantum of defaulted loans reducing by
€ 4.1 billion in the 12 months to 31 December 2018 (a decrease of 41%). However, on a restated basis, excluding the impact of
€ 0.6 billion due to the implementation of a new definition of default policy, NPEs have reduced from € 9.6 billion (restated 15% of total
gross loans at 1 January 2018) to € 6.1 billion (10% at 31 December 2018), a decrease of € 3.5 billion or 37%. This reduction was achieved
through redemptions and repayments from customers, restructuring activity including non-contracted write-offs and asset sales/disposals.
The reductions were evident across all the components and asset classes with reductions noted in collateral disposals, unlikely-to-pay
stock, loans greater than 90 days past due and loans in a probationary period within default.
AIB Group plc Annual Financial Report 2018 121
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Risk management – 3. Individual risk types
3.1 Credit risk – Investment securities
The following table analyses the carrying value of investment securities by major classification together with the unrealised gains and
losses for those securities measured at FVOCI and FVTPL at 31 December 2018. Comparative data for 31 December 2017 has been
prepared under IAS 39.
Carrying
value
€ m
Unrealised
gross gains
€ m
Unrealised
gross losses
€ m
Carrying
value
€ m
Unrealised
gross gains
€ m
Unrealised
gross losses
€ m
2018*
2017*
Debt securities at FVOCI (2017: available for sale)
Irish Government securities
Euro government securities
Non Euro government securities
Supranational banks and government agencies
Collateralised mortgage obligations
Other asset backed securities
Euro bank securities
Non Euro bank securities
Euro corporate securities
Non Euro corporate securities
6,282
1,921
158
1,132
264
103
5,007
815
216
48
401
78
3
26
–
–
46
1
–
–
Total debt securities at FVOCI
15,946
555
Debt securities at amortised cost
Asset backed securities
Total debt securities at amortised cost
Equity securities
Equity investments at FVOCI(1)
Equity investments at FVTPL
187
187
468
260
Total investment securities
16,861
425
84
1,064
(6)
(4)
(2)
(7)
(11)
–
(11)
(6)
(2)
–
(49)
–
(3)
(52)
7,021
2,406
161
1,368
278
16
4,336
–
56
–
646
124
5
40
–
–
79
–
–
–
(6)
–
(1)
(4)
(8)
–
(1)
–
–
–
15,642(2)
894
(20)
679
–
16,321
467
–
1,361
(3)
–
(23)
Debt securities and related ECL analysed by IFRS 9 staging at 31 December 2018*
At amortised cost – gross
ECL allowance
At amortised cost – carrying value
At FVOCI – carrying value
ECL allowance (included in carrying value)
Total carrying value
Stage 1
€ m
Stage 2
€ m
Stage 3
€ m
187
–
187
15,946
(4)
16,133
–
–
–
–
–
–
–
–
–
–
–
–
Total
€ m
187
–
187
15,946
(4)
16,133
–
(1)Includes NAMA subordinated bonds with a fair value of € 468 million (31 December 2017: € 466 million) of which unrealised gains amount to € 425 million
(31 December 2017: € 423 million). These subordinated bonds were designated and measured at FVOCI on transition to IFRS 9 on 1 January 2018.
All other equity investments are held at FVTPL.
(2)At 1 January 2018, on transition to IFRS 9, all debt securities were measured at FVOCI in Stage 1. These had an ECL allowance amounting to € 4 million
which was included in the carrying value of € 15,642 million (see note 3 in the consolidated financial statements).
*Forms an integral part of the audited financial statements
122
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3.1 Credit risk – Investment securities (continued)
The following table categorises the debt securities portfolio by contractual residual maturity and weighted average yield at
31 December 2018. Comparative data for 31 December 2017 has been prepared under IAS 39.
Within 1 year
Yield %
€ m
After 1 but
within 5 years
€ m Yield %
After 5 but
within 10 years
€ m Yield %
2018
After 10 years
€ m Yield %
At FVOCI
Irish Government securities
Euro government securities
Non Euro government securities
Supranational banks and government agencies
Collateralised mortgage obligations
Other asset backed securities
Euro bank securities
Non Euro bank securities
Euro corporate securities
Non Euro corporate securities
1,951
210
38
134
–
–
797
–
8
–
5.0
1.9
3.3
1.7
–
–
0.9
–
–
–
2,457
1,221
90
581
–
–
3,767
781
63
14
Total at FVOCI ............................................................
3,138
3.6
8,974
At amortised cost
Asset backed securities
Total at amortised cost
–
–
–
–
–
–
3.7
1.8
2.3
1.0
–
–
0.6
1.7
1.2
1.3
1.8
–
–
1,091
490
30
96
9
–
443
34
130
34
2,357
–
–
1.3
1.4
1.1
1.7
2.2
–
0.7
3.2
1.3
4.1
1.3
–
–
783
–
–
321
255
103
–
–
15
–
1,477
187
187
1.3
–
–
3.0
2.4
0.1
–
–
1.7
–
1.8
2.3
2.3
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 available for sale securities
Within 1 year
Yield %
€ m
After 1 but
within 5 years
€ m Yield %
After 5 but
within 10 years
Yield %
€ m
1,071
51
–
305
–
–
133
1
–
.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
2017
After 10 years
Yield %
€ m
384
–
–
246
268
16
–
2
–
916
1.4
–
–
2.3
1.8
0.1
–
1.5
–
1.8
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Risk management – 3. Individual risk types
3.1 Credit risk – Investment securities (continued)
The following tables analyse the investment securities portfolio by geography at 31 December 2018. Comparative data for 31 December
2017 has been prepared under IAS 39.
Government securities
Republic of Ireland
Italy
France
Spain
Netherlands
Germany
Belgium
Austria
Portugal
United Kingdom
Czech Republic
Poland
Saudi Arabia
Asset backed securities
United States of America
Republic of Ireland
Netherlands
France
Bank securities
Republic of Ireland
France
Netherlands
United Kingdom
Australia
Sweden
Canada
Finland
Norway
Belgium
Germany
Denmark
New Zealand
Switzerland
United States of America
Singapore
Irish
Government
€ m
Euro
government
€ m
2018*
Non Euro
government
€ m
Irish
Government
€ m
Euro
government
€ m
2017*
Non Euro
government
€ m
6,282
–
–
–
–
–
–
–
–
–
–
–
–
–
497
117
1,048
138
53
23
28
17
–
–
–
–
6,282
1,921
–
–
–
–
–
–
–
–
–
60
11
43
44
158
7,021
–
–
–
–
–
–
–
–
–
–
–
–
–
907
122
1,075
195
56
23
28
–
–
–
–
–
7,021
2,406
2018*
Total
€ m
292
158
85
19
554
Euro
€ m
423
529
516
553
335
372
728
198
282
289
30
57
24
–
–
–
Euro
€ m
2018*
Non Euro
€ m
358
908
537
690
396
390
753
238
307
80
37
118
24
54
40
77
–
86
55
165
124
80
184
–
40
–
–
–
–
22
42
17
5,007
815
4,336
–
–
–
–
–
–
–
–
–
62
12
44
43
161
2017*
Total
€ m
278
16
–
–
294
2017*
Non Euro
€ m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
*Forms an integral part of the audited financial statements
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3.1 Credit risk – Investment securities (continued)
Debt securities at FVOCI
Debt securities held at fair value through other comprehensive income (“FVOCI”) increased to € 15.9 billion (nominal € 15.2 billion) at
31 December 2018 from a fair value of € 15.6 billion (nominal € 14.9 billion) at 31 December 2017. Bank securities increased by
€ 1.5 billion offset by decreases in Irish Government securities (€ 0.7 billion) and euro government securities (€ 0.5 billion).
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The external ratings profile remained relatively static with total investment grade ratings remaining at 100%. The profile of the investment
grade ratings was AAA: 29% (2017: 27%); AA: 12% (2017: 13%); A: 46% (2017: 47%); BBB: 13% (2017: 13%); and the sub investment
grade remained at 0% (2017: 0%)
Republic of Ireland securities
The fair value of Irish debt securities amounted to € 6.8 billion at 31 December 2018 (2017: € 7.4 billion) and consisted of sovereign
debt € 6.3 billion (2017: € 7.0 billion), senior unsecured bonds of € 0.1 billion (2017: € 0.2 billion), covered bonds of € 0.2 billion
(2017: € 0.2 billion) and others (corporate, and asset backed securities bonds) at € 0.2 billion (2017: Nil). The fall in Irish sovereign debt
was primarily driven by a bond redemption in October which reduced the nominal holding by € 1.0 billion. This was partially offset by
€ 0.4 billion of new purchases.
United Kingdom securities
The fair value of United Kingdom securities amounted to € 0.9 billion at 31 December 2018 (2017: € 0.6 billion) and consisted of
sovereign debt € 0.1 billion (2017: € 0.1 billion), senior unsecured bonds of € 0.2 billion (2017: € 0.1 billion), covered bonds of
€ 0.6 billion (2017: € 0.4 billion).
Euro government securities
The fair value of government securities denominated in euros (excluding those issued by the Irish Government) decreased by
€ 0.5 billion to € 1.9 billion (2017: € 2.4 billion). This decrease was largely due to net sales of Italian Government securities, (nominal
€ 0.3 billion).
Bank securities
At 31 December 2018, the fair value of bank securities of € 5.8 billion (2017: € 4.3 billion) included € 3.2 billion in covered bonds (2017:
€ 2.8 billion), € 2.3 billion in senior unsecured bank debt (2017: € 1.3 billion), € 0.3 billion in government guaranteed senior bank debt
(2017: € 0.2 billion). The net purchases of covered bonds (nominal € 0.4 billion) and senior unsecured (nominal € 1.1 billion) drove this
increase.
Asset backed securities
Asset backed securities increased to € 0.4 billion (2017: € 0.3 billion).
Equity securities
The fair value of the NAMA subordinated bonds increased to € 468 million (nominal € 437 million) at 31 December 2018 to 107.20%
from 106.69% of nominal.
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Risk management – 3. Individual risk types
3.1 Credit risk
Credit ratings
External credit ratings of financial assets*
The following table sets out the credit quality of financial assets based on external credit ratings at 31 December 2018. These include
loans and advances to banks, investment debt securities, trading portfolio financial assets and loans and advances to customers (where
an external rating is available). Comparative data for 31 December 2017 has been prepared under IAS 39.
At amortised cost
Other
€ m
Bank
€ m
987
423
32
–
1
1,443
1,443
–
–
98
79
10
–
–
187
187
–
–
AAA/AA
A/A-
BBB+/BBB/BBB-
Sub investment
Unrated
Total
Of which: Stage 1
Stage 2
Stage 3
AAA/AA
A/A-
BBB+/BBB/BBB-
Sub investment
Unrated
Total
Total
€ m
1,085
502
42
–
1
4,695
807
320
–
–
1,630
5,822
1,630
5,822
–
–
–
–
Bank
€ m
4,430
961
164
–
94
5,649
At FVOCI
Bank Corporate Sovereign
€ m
€ m
€ m
Other
€ m
367
–
–
–
–
Total
€ m
6,613
7,267
2,037
29
–
2018
Total
€ m
7,698
7,769
2,079
29
1
1,551
6,381
1,561
–
–
9,493(1)
367
15,946
17,576
9,493
367
15,946
17,576
–
–
–
–
–
–
–
–
2017
Total
€ m
6,592
8,103
2,182
17
94
Corporate
€ m
Sovereign
€ m
Other
€ m
295
–
–
–
–
1,867
7,139
1,982
–
–
10,988(1)
295
16,988
–
79
156
29
–
264
264
–
–
–
3
36
17
–
56
(1)Includes supranational banks and government agencies.
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 2018, the Group’s top 50 exposures amounted to € 4.4 billion, and accounted for 7.1% (2017: € 4.3 billion and 6.7%) of
the Group’s on-balance sheet total gross loans and advances to customers. In addition, these customers have undrawn facilities
amounting to € 606 million (2017: € 146 million). No single customer exposure exceeded regulatory requirements.
*Forms an integral part of the audited financial statements
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Risk management – 3. Individual risk types
3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
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Republic of Ireland residential mortgages
Year of origination profile
Age profile by ECL staging
Properties in possession
Repossessions disposed of
United Kingdom residential mortgages
Year of origination profile
Age profile by ECL staging
Properties in possession
Repossessions disposed of
Forbearance
Risk profile by asset class and ECL staging
Movements in stock of Republic of Ireland residential mortgages
in forbearance
Republic of Ireland residential mortgages in forbearance analysed
by forbearance type and ECL staging
Age profile of Republic of Ireland residential mortgages in
forbearance by ECL staging
Indexed loan-to-value ratios
Movements in stock of non-mortgage loans in forbearance by asset class
analysed between the Republic of Ireland and the United Kingdom
Non-mortgage loans in forbearance analysed by forbearance
type and ECL staging
Page
128
129
130
130
131
132
133
133
134
136
137
139
140
141
142
The tables on the following pages denoted by * form part of the audited financial statements as described in the ‘Basis of preparation’
on pages 235 to 237. All other information in ‘Additional credit quality and forbearance disclosures on loans and advances to
customers’ is additional information and does not form part of the audited financial statements.
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Page 128
Risk management – 3. Individual risk types
3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
Republic of Ireland residential mortgages by year of origination
The following table profiles the Republic of Ireland residential mortgage portfolio by year of origination at 31 December 2018.
Comparative data for 31 December 2017 has been prepared under IAS 39.
Total
Number
Balance
€ m
Credit impaired/POCI
Balance
Number
€ m
Total
Number
2018
2017
Impaired
Balance
€ m
Number
Balance
€ m
2,158
809
1,145
2,991
3,985
4,606
7,166
10,361
15,076
21,309
28,268
28,273
27,100
17,730
12,328
3,679
5,420
4,724
6,565
9,315
10,873
12,437
14,626
62
24
40
77
145
222
436
760
1,337
2,178
3,549
3,759
3,732
2,277
1,597
461
718
640
919
1,386
1,796
2,227
2,638
429
155
238
375
493
546
910
1,396
2,113
3,219
4,776
4,909
4,066
1,841
674
109
60
40
40
108
95
51
27
15
5
8
17
27
37
70
126
215
362
599
637
565
255
89
14
11
10
5
22
16
10
6
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
–
250,944
30,980
26,670
3,121
254,180
32,200
21,237
3,165
1996 and before
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
A significant element (€ 13.2 billion or 43%) of the € 31 billion residential mortgage portfolio was originated between 2005 and 2008,
of which 16% (€ 2.2 billion) was credit impaired at 31 December 2018. 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.
10% of the residential mortgage portfolio was originated before 2005 of which 17% was credit impaired at 31 December 2018, while the
remaining 47% of the portfolio was originated from 2009 onwards, of which 3% was credit impaired at 31 December 2018.
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3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
Republic of Ireland residential mortgages by age profile
The following table provides an age profile of the Republic of Ireland residential mortgage portfolio by ECL staging at 31 December 2018.
Comparative data for 31 December 2017 has been prepared under IAS 39.
Owner-occupier
Not past due
1 - 30 days
31 - 60 days
61 - 90 days
91 - 180 days
181 - 365 days
Over 365 days
Total
Buy-to-let
Not past due
1 - 30 days
31 - 60 days
61 - 90 days
91 - 180 days
181 - 365 days
Over 365 days
Total
Total
Not past due
1 - 30 days
31 - 60 days
61 - 90 days
91 - 180 days
181 - 365 days
Over 365 days
Stage 1
€ m
22,553
62
Stage 2
€ m
2,596
217
–
–
–
–
–
38
16
–
–
–
At amortised cost
Stage 3
€ m
664
110
65
71
115
137
975
22,615
2,867
2,137
1,924
7
–
–
–
–
–
420
20
4
2
–
–
–
1,931
446
24,477
69
3,016
237
–
–
–
–
–
42
18
–
–
–
252
23
13
13
27
43
379
750
916
133
78
84
142
180
1,354
2,887
(7)
(49)
(599)
24,539
3,264
2,288
POCI
€ m
172
17
5
2
5
6
15
222
6
–
–
–
–
–
6
12
178
17
5
2
5
6
21
234
(31)
203
2018*
Total
€ m
25,985
406
108
89
120
143
990
27,841
2,602
50
17
15
27
43
385
3,139
28,587
456
125
104
147
186
1,375
30,980
(686)
30,294
2017*
Total
Total
€ m
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Total gross carrying amount of residential mortgages
24,546
3,313
ECL allowance
Carrying value
Not past due
1 - 30 days
31 - 60 days
61 - 90 days
91 - 180 days
181 - 365 days
Over 365 days
Owner-
occupier
€ m
25,394
387
91
42
28
30
88
Non-impaired
Buy-to-let
€ m
Total
€ m
Owner-
occupier
€ m
2,802
28,196
56
15
8
16
21
57
443
106
50
44
51
145
Impaired
Buy-to-let
€ m
153
26
20
13
30
50
596
888
Total
€ m
551
126
71
57
137
187
2,036
3,165
398
100
51
44
107
137
1,440
2,277
Total gross loans
26,060
2,975
29,035
Provisions for impairment
Specific
IBNR
Carrying value
*Forms an integral part of the audited financial statements
Owner-
occupier
€ m
Buy-to-let
€ m
25,792
2,955
28,747
487
142
86
135
167
82
35
21
46
71
569
177
107
181
238
1,528
28,337
653
2,181
3,863
32,200
(793)
(188)
(981)
(309)
(90)
(399)
(1,102)
(278)
(1,380)
27,356
3,464
30,820
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Risk management – 3. Individual risk types
3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
Republic of Ireland residential mortgages – properties in possession(1)
The Group seeks to avoid repossession through working with customers, but where agreement cannot be reached, it proceeds to
repossession of the property or the appointment of a receiver, using external agents to realise the maximum value as soon as is
practicable. Where the Group believes that the proceeds of sale of a property will comprise only part of the recoverable amount of the
loan against which it was being held as security, the customer remains liable for the outstanding balance and the remaining loan
continues to be recognised on the statement of financial position.
The number (stock) of properties in possession at 31 December 2018 and 2017 is set out below:
Owner-occupier
Buy-to-let
Total
Stock
547
46
593
2018
Balance
outstanding
€ m
131
10
141
Stock
602
53
655
2017
Balance
outstanding
€ m
145
11
156
(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 62 properties in 2018. This decrease relates to the disposal of 53
properties (31 December 2017: 203 properties) which were offset by the addition of 43 properties (31 December 2017: 112 properties),
the majority of which were voluntary surrenders or abandonments. In addition, a further 52 properties were removed from the stock in
2018, mainly due to cases where the receiver has been discharged.
The disposal of 53 residential properties in the Republic of Ireland resulted in a total loss on disposal of € 6.75 million at 31 December
2018 (before loss allowance) and compares to 31 December 2017 when 203 residential properties were disposed of resulting in a total
loss of € 23 million. Losses on the sale of such properties are recognised in the income statement as part of the net credit impairment
losses.
Republic of Ireland residential mortgages – repossessions disposed of
The following table analyses the disposals of repossessed properties for the years ended 31 December 2018 and 2017:
Number of
disposals
Outstanding
balance at
repossession
date
€ m
Gross sales
proceeds
on
disposal
€ m
49
4
53
13
1
14
8
–
8
Number of
disposals
Outstanding
balance at
repossession
date
€ m
Gross sales
proceeds
on
disposal
€ m
187
16
203
48
4
52
30
2
32
Costs
to
sell
€ m
1
–
1
Costs
to
sell
€ m
3
–
3
2018
Loss on
sale(1)
€ m
6
1
7
2017
Loss on
sale(1)
€ m
21
2
23
Owner-occupier
Buy-to-let
Total
Owner-occupier
Buy-to-let
Total
(1)Before ECL allowance/specific impairment provisions.
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3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
United Kingdom residential mortgages by year of origination
The following table profiles the United Kingdom residential mortgage portfolio by year of origination at 31 December 2018.
Comparative data for 31 December 2017 has been prepared under IAS 39.
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Number
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Credit impaired/POCI
Balance
Number
€ m
Total
Number
2018
2017
Impaired
Balance
€ m
Number
Balance
€ m
1996 and before
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
641
253
240
493
566
592
899
1,257
1,461
2,053
2,818
2,390
950
405
209
105
111
203
284
195
180
422
446
13
5
6
13
13
18
35
60
80
142
252
294
113
32
16
7
11
17
35
27
26
61
59
38
8
13
39
23
66
57
115
148
217
256
256
93
23
15
2
3
1
–
2
2
–
–
1
–
–
1
1
2
3
7
10
18
33
40
16
2
1
–
–
–
–
–
1
–
–
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
–
–
–
–
–
–
–
–
17,173
1,335
1,377
136
19,165
1,520
1,237
128
The majority (€ 0.8 billion or 60%) of the € 1.3 billion residential mortgage portfolio in the UK was originated between 2005 and 2008.
13% (€ 0.1 billion) of mortgages from this period were credit impaired as at 31 December 2018, driven by the financial crisis in 2008
which led to unemployment and reduced disposable incomes, and the rapid reduction in house prices experienced following the peak in
2007. 18% of the portfolio was originated before 2005 of which 10% was credit impaired at 31 December 2018, and the remaining 22%
of the portfolio was originated since 2009 of which 1.4% was credit impaired at 31 December 2018. The improving impairment profile in
recent years is reflective of more responsible lending practices and affordability regulations introduced following the financial crisis.
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Risk management – 3. Individual risk types
3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
United Kingdom residential mortgages by age profile
The following table provides an age profile of the United Kingdom residential mortgage portfolio by ECL staging at 31 December 2018.
Comparative data for 31 December 2017 has been prepared under IAS 39.
Owner-occupier
Not past due
1 - 30 days
31 - 60 days
61 - 90 days
91 - 180 days
181 - 365 days
Over 365 days
Total
Buy-to-let
Not past due
1 - 30 days
31 - 60 days
61 - 90 days
91 - 180 days
181 - 365 days
Over 365 days
Total
Total
Not past due
1 - 30 days
31 - 60 days
61 - 90 days
91 - 180 days
181 - 365 days
Over 365 days
Total gross carrying amount of residential mortgages
ECL allowance
Total
Not past due
1 - 30 days
31 - 60 days
61 - 90 days
91 - 180 days
181 - 365 days
Over 365 days
Total gross loans
Provisions for impairment
Specific
IBNR
Carrying value
*Forms an integral part of the audited financial statements
132
AIB Group plc Annual Financial Report 2018
Owner-
occupier
€ m
1,189
9
8
6
5
1
–
Non-impaired
Buy-to-let
€ m
173
1
–
–
–
–
–
Total
€ m
1,362
10
8
6
5
1
–
1,218
174
1,392
Owner-
occupier
€ m
Impaired
Buy-to-let
€ m
24
9
3
4
6
12
51
109
3
1
1
–
2
1
11
19
At amortised cost
Stage 1
€ m
Stage 2
€ m
Stage 3
€ m
POCI
€ m
983
111
–
–
–
–
–
–
3
3
1
–
–
–
983
118
88
10
–
–
–
–
–
–
–
–
–
–
–
–
88
10
1,071
121
–
–
–
–
–
–
1,071
(1)
1,070
3
3
1
–
–
–
128
(2)
126
Total
€ m
27
10
4
4
8
13
62
50
2
7
7
7
8
46
127
2
–
–
1
1
2
3
9
52
2
7
8
8
10
49
136
(24)
112
Owner-
occupier
€ m
1,213
18
11
10
11
13
51
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Buy-to-let
€ m
176
2
1
–
2
1
11
193
(4)
–
(4)
2018*
Total
€ m
1,144
5
10
8
7
8
46
1,228
100
–
–
1
1
2
3
107
1,244
5
10
9
8
10
49
1,335
(27)
1,308
2017*
Total
Total
€ m
1,389
20
12
10
13
14
62
1,520
(33)
(5)
(38)
128
1,327
(29)
(5)
(34)
1,293
189
1,482
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3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
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
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The number (stock) of properties in possession at 31 December 2018 and 2017 is set out below:
Owner-occupier
Buy-to-let
Total
Stock
16
2
18
2018
Balance
outstanding
€ m
3
–
3
Stock
13
14
27
2017
Balance
outstanding
€ m
3
2
5
(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 2018, and has reduced from 27 properties at December 2017 to 18 properties.
United Kingdom residential mortgages – repossessions disposed of
The following table analyses the disposals of repossessed properties for the years ended 31 December 2018 and 2017:
Owner-occupier
Buy-to-let
Total
Owner-occupier
Buy-to-let
Total
Number of
disposals
Outstanding
balance at
repossession
date
€ m
Gross sales
proceeds
on
disposal
€ m
24
11
35
6
2
8
4
1
5
Number of
disposals
Outstanding
balance at
repossession
date
€ m
Gross sales
proceeds
on
disposal
€ m
50
3
53
10
1
11
6
–
6
Costs
to
sell
€ m
–
–
–
Costs
to
sell
€ m
–
–
–
2018
Loss on
sale(1)
€ m
2
1
3
2017
Loss on
sale(1)
€ m
4
1
5
(1)Before ECL allowance/specific impairment provisions.
The disposal of 35 residential properties in possession resulted in a loss on disposal of € 3 million before loss allowance (2017:
disposal of 53 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 net credit impairment losses.
AIB Group plc Annual Financial Report 2018 133
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Risk management – 3. Individual risk types
3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
Forbearance
The Group’s forbearance initiatives are detailed on pages 79 to 80 in the ‘Risk management’ section of this report.
The following table sets out the risk profile of forborne loans and advances to customers at 31 December 2018. Comparative data for
31 December 2017 has been prepared under IAS 39.
Residential
mortgages
Other
personal
€ m
€ m
At amortised cost
Property
and
construction
€ m
Non-
property
business
€ m
2018
At FVTPL
Total
Total
€ m
€ m
1
2
–
–
3
1
1,072
–
5
1,078
21
–
2,354
211
2,586
–
–
–
–
–
1
68
–
–
69
3
–
187
–
190
–
–
–
–
–
160
109
–
–
269
157
–
613
2
772
–
–
–
–
–
24
260
–
–
284
33
–
483
–
516
1
2
–
–
3
186
1,509
–
5
1,700
214
–
3,637
213
4,064
3,667(1)
259
1,041
800
5,767
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Strong/satisfactory:
Stage 1
Stage 2
Stage 3
POCI
Total
Criticised:
Stage 1
Stage 2
Stage 3
POCI
Total
Non-performing:
Stage 1
Stage 2
Stage 3
POCI
Total
Total gross carrying amount of forborne
loans and advances to customers
Total gross carrying amount of loans and
advances to customers
32,315
3,075
7,804
19,566
62,760
147
(1)Republic of Ireland: € 3,615 million and United Kingdom: € 52 million.
Forborne loans and advances to customers
Neither past due nor impaired:
Good upper
Good lower
Watch
Vulnerable
Total
Past due but not impaired
Impaired
Total
Residential
mortgages
Other
personal
€ m
€ m
Property
and
construction
€ m
Non-
property
business
€ m
526
577
229
1,156
2,488
485
1,765
2,250
1
333
12
98
444
56
144
200
1
33
50
686
770
136
454
590
1
119
36
695
851
103
327
430
2017
Total
€ m
529
1,062
327
2,635
4,553
780
2,690
3,470
Total gross carrying amount of forborne
loans and advances to customers
Total gross carrying amount of loans and
advances to customers
(1)Republic of Ireland: € 4,692 million and United Kingdom: € 46 million.
4,738(1)
644
1,360
1,281
8,023
33,720
3,122
8,820
17,676
63,338
The Republic of Ireland residential mortgage forbearance portfolio is profiled in more detail on pages 135 to 140 and further detail on the
non-mortgage forbearance portfolio is included on pages 141 to 144.
134
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3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
Forbearance
Republic of Ireland residential mortgages
The Group has a Mortgage Arrears Resolution Strategy (“MARS”) for dealing with mortgage customers in difficulty or likely to be in
difficulty, which builds on and formalises the Group’s Mortgage Arrears Resolution Process. The core objectives of MARS are to ensure
that arrears solutions are sustainable in the long term and that they comply with the spirit and the letter of all regulatory requirements.
MARS includes long-term forbearance solutions which have been devised to assist existing Republic of Ireland primary residential
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mortgage customers in difficulty.
Under the definition of forbearance, which complies with that 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.
In the 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.
Notwithstanding the addition of € 0.6 billion of loans to the mortgage forbearance stock in the 12 months to 31 December 2018, due to
enhancements to data in line with the implementation of the new definition of default policy, the stock of loans subject to forbearance
measures decreased by € 1.1 billion from 31 December 2017 to € 3.6 billion at 31 December 2018. This decrease was driven by
customers exiting the forbearance probation period and by lower numbers of customers seeking new forbearance solutions which is
reflective of improving customer ability to meet their mortgage terms.
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AIB Group plc Annual Financial Report 2018 135
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Risk management – 3. Individual risk types
3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
Forbearance
Republic of Ireland residential mortgages (continued)
The following table analyses movements in the stock of loans subject to forbearance by (i) owner-occupier, (ii) buy-to-let and (iii) total
residential mortgages at 31 December 2018. Comparative data for 31 December 2017 has been prepared under IAS 39.
Owner-occupier
At 1 January
Implementation of definition of default policy
Additions
Expired arrangements
Payments
Interest
Closed accounts(1)
Disposals
Advanced forbearance arrangements - valuation adjustments
Write-offs(2)
Transfer between owner-occupier and buy-to-let
At 31 December
Buy-to-let
At 1 January
Implementation of definition of default policy
Additions
Expired arrangements
Payments
Interest
Closed accounts(1)
Disposals
Advanced forbearance arrangements - valuation adjustments
Write-offs(2)
Transfer between owner-occupier and buy-to-let
At 31 December
Total
At 1 January
Implementation of definition of default policy
Additions
Expired arrangements
Payments
Interest
Closed accounts(1)
Disposals
Advanced forbearance arrangements - valuation adjustments
Write-offs(2)
Number
25,067
1,850
1,372
(5,690)
–
–
(914)
(23)
–
–
(80)
2018
Balance
€ m
3,549
240
173
(758)
(185)
71
(92)
(7)
(3)
(212)
(5)
Number
29,865
–
2,973
(6,691)
–
–
(1,000)
–
–
(87)
7
2017
Balance
€ m
4,274
–
438
(899)
(209)
95
(91)
–
(8)
(53)
2
21,582
2,771
25,067
3,549
Number
7,244
2,224
164
(1,534)
–
–
(905)
(873)
–
–
80
6,400
Number
32,311
4,074
1,536
(7,224)
–
–
(1,819)
(896)
–
–
Balance
€ m
1,143
310
17
(210)
(121)
17
(103)
(170)
(1)
(43)
5
844
Balance
€ m
4,692
550
190
(968)
(306)
88
(195)
(177)
(4)
(255)
Number
9,509
–
415
(530)
–
–
(1,544)
(521)
–
(78)
(7)
Balance
€ m
1,657
–
54
(91)
(130)
28
(219)
(102)
(7)
(45)
(2)
7,244
1,143
Number
39,374
–
3,388
(7,221)
–
–
(2,544)
(521)
–
(165)
32,311
Balance
€ m
5,931
–
492
(990)
(339)
123
(310)
(102)
(15)
(98)
4,692
At 31 December
27,982
3,615
(1)Accounts closed during the year were due primarily to customer repayments and redemptions.
(2)Includes contracted and non-contracted write-offs.
In line with the implementation of the new definition of default policy, the Group enhanced the modification and forbearance data which
added € 0.6 billion of loans into the stock of forbearance as at 1 January 2018.
136
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3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
Forbearance
Republic of Ireland residential mortgages (continued)
Residential mortgages subject to forbearance measures by type of forbearance
The following table analyses by type of forbearance and staging (i) owner-occupier, (ii) buy-to-let and (iii) total residential mortgages that
are based on current forbearance measures in the Republic of Ireland at 31 December 2018. Comparative data for 31 December 2017
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Owner-occupier
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
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
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
Total forbearance
Of which: Performing
Non-performing
Total
Stage 1
Stage 2
Stage 3
POCI
Gross at amortised cost
Number
Balance
€ m
Balance
€ m
Balance
€ m
Balance
€ m
Balance
€ m
2018
Loss
allowance
Balance
€ m
5,590
1,178
906
2
218
8,384
905
1,060
413
1,195
1,472
259
748
191
105
–
12
1,088
89
156
12
176
151
43
21,582
2,771
2,081
504
274
446
683
1,531
282
59
308
9
23
200
6,400
7,671
1,682
1,180
448
901
9,915
1,187
1,119
721
1,204
1,495
459
27,982
7,821
20,161
306
90
37
56
29
229
43
9
9
1
2
33
844
1,054
281
142
56
41
1,317
132
165
21
177
153
76
3,615
1,074
2,541
–
–
–
–
–
–
–
–
–
–
–
5
5
–
–
–
17
–
–
–
–
–
–
–
–
17
–
–
–
17
–
–
–
–
–
–
–
5
22
1
21
165
35
41
–
2
492
43
89
–
–
–
7
580
156
64
–
10
557
44
67
3
38
150
19
874
1,688
56
28
5
–
3
79
19
4
–
–
–
–
194
221
63
46
–
5
571
62
93
–
–
–
7
250
62
32
39
26
150
22
5
–
–
2
33
621
830
218
96
39
36
707
66
72
3
38
152
52
1,068
1,068
–
2,309
–
2,309
3
–
–
–
–
39
2
–
9
138
1
12
204
–
–
–
–
–
–
2
–
9
1
–
–
164
41
14
–
5
111
9
16
10
14
9
5
398
47
14
11
9
14
27
6
2
7
–
–
5
12
142
3
–
–
–
–
39
4
–
18
139
1
12
216
5
211
211
55
25
9
19
138
15
18
17
14
9
10
540
25
515
AIB Group plc Annual Financial Report 2018 137
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Page 138
Risk management – 3. Individual risk types
3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
Forbearance
Republic of Ireland residential mortgages (continued)
Residential mortgages subject to forbearance measures by type of forbearance (continued)
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
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
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
2017
Loans > 90 days
in arrears and/or
impaired
Number
Balance
€ m
Number
Balance
€ m
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
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
Number
Balance
€ m
Number
Balance
€ m
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
Number
6,649
1,473
2,253
837
983
Balance
€ m
1,062
294
366
113
72
12,852
1,855
1,730
1,966
673
1,044
1,338
513
207
307
26
160
145
85
Number
Balance
€ m
Number
Balance
€ m
3,262
647
1,811
412
157
7,797
1,358
1,408
366
863
1,238
267
490
126
308
57
19
3,387
826
442
425
826
1,094
5,055
158
220
8
131
135
46
372
558
307
181
100
246
572
168
58
56
53
761
49
87
18
29
10
39
32,311
4,692
19,586
2,792
12,725
1,900
(1)Included in ‘Other’ is: € 35 million relating to forbearance solutions where it was 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 where customers agreed to pay an amount that is affordable.
138
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3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
Forbearance
Republic of Ireland residential mortgages (continued)
Residential mortgages subject to forbearance measures by type of forbearance (continued)
A key feature of the forbearance portfolio is the 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 € 0.5 billion accounted for 14% of the total forbearance portfolio at
31 December 2018 (31 December 2017: € 0.7 billion, 14%). Following restructure, loans are reported as defaulted for a probationary
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Other permanent standard forbearance solutions are term extensions and arrears capitalisation (which often include a term extension).
Permanent forbearance solutions are reported within the stock of forbearance for five years, and therefore, represent in some cases
forbearance solutions which were agreed up to five years ago. These include loans where a subsequent interest only or other temporary
arrangement had expired at 31 December 2018, but where an arrears capitalisation or term extension was awarded previously.
Arrears capitalisation continues to be the largest category of forbearance solutions at 31 December 2018, accounting for 36% by value
of the total forbearance portfolio (31 December 2017: 40%). While actually decreasing year on year, a high proportion of the arrears
capitalisation portfolio (57% by value) is defaulted at 31 December 2018. This reflects the historic nature of the forbearance event for
part of the portfolio and the requirement that loans complete a probationary period of at least 12 months before being upgraded from
default, as described above.
Residential mortgages subject to forbearance measures – days past due analysis.
The following table sets out gross residential mortgages subject to forbearance measures analysed by credit profile and by the number
of days past due status at 31 December 2018. Comparative data for 31 December 2017 has been prepared under IAS 39.
Owner-occupier
Not past due
1 - 30 days
31 - 60 days
61 - 90 days
91 - 180 days
181 - 365 days
Over 365 days
Total
Buy-to-let
Not past due
1 - 30 days
31 - 60 days
61 - 90 days
91 - 180 days
181 - 365 days
Over 365 days
Total
Total
Not past due
1 - 30 days
31 - 60 days
61 - 90 days
91 - 180 days
181 - 365 days
Over 365 days
Stage 1
€ m
5
–
–
–
–
–
–
5
16
1
–
–
–
–
–
17
21
1
–
–
–
–
–
Stage 2
€ m
796
69
5
4
–
–
–
At amortised cost
Stage 3
€ m
602
105
60
58
95
114
654
874
1,688
186
8
–
–
–
–
–
194
982
77
5
4
–
–
–
210
20
12
12
22
38
307
621
812
125
72
70
117
152
961
Total gross loans subject to forbearance
22
1,068
2,309
2018
Total
€ m
1,557
191
70
64
100
120
669
2,771
418
29
12
12
22
38
313
844
1,975
220
82
76
122
158
982
3,615
POCI
€ m
154
17
5
2
5
6
15
204
6
–
–
–
–
–
6
12
160
17
5
2
5
6
21
216
AIB Group plc Annual Financial Report 2018 139
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Risk management – 3. Individual risk types
3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
Forbearance
Republic of Ireland residential mortgages (continued)
Residential mortgages subject to forbearance measures – days past due analysis.
Owner-
occupier
€ m
1,998
190
55
28
22
21
61
Non-impaired
Buy-to-let
€ m
476
33
7
5
11
17
32
Total
€ m
2,474
223
62
33
33
38
93
Owner-
occupier
€ m
335
88
41
37
84
108
481
Impaired
Buy-to-let
€ m
117
21
17
8
24
39
336
Total
€ m
452
109
58
45
108
147
817
Owner-
occupier
€ m
2,333
278
96
65
106
129
542
Buy-to-let
€ m
593
54
24
13
35
56
368
2017
Total
Total
€ m
2,926
332
120
78
141
185
910
2,375
581
2,956
1,174
562
1,736
3,549
1,143
4,692
Not past due
1 – 30 days
31 – 60 days
61 – 90 days
91 – 180 days
181 – 365 days
Over 365 days
Total loans subject
to forbearance
Within the forborne portfolio of € 3.6 billion at 31 December 2018, € 2 billion is currently performing in accordance with agreed terms for
sustainable forbearance solutions and the continued compliance with these terms over the probationary period will result in an upgrade
out of default and forbearance. The remaining € 1.6 billion includes loans that have been the subject of a temporary or short term
forbearance solution but will remain classified as forborne 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 default and probation.
Republic of Ireland residential mortgages subject to forbearance measures by indexed loan-to-value ratios
The following table profiles the Republic of Ireland residential mortgage portfolio that was subject to forbearance measures by the
indexed loan-to-value ratios at 31 December 2018 and 2017:
Less than 50%
50% – 70%
71% – 80%
81% – 90%
91% – 100%
101% – 120%
121% – 150%
Greater than 150%
Unsecured
Total forbearance
Owner-
occupier
€ m
784
727
329
287
242
252
99
37
14
Buy-to-let
€ m
230
214
106
70
60
58
36
40
30
2018
Total
€ m
1,014
941
435
357
302
310
135
77
44
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
2,771
844
3,615
3,549
1,143
4,692
Negative equity in the residential mortgage portfolio in the Republic of Ireland that was subject to forbearance measures at 31 December
2018 was 14% of the owner-occupier portfolio (2017: 18%) and 16% of the buy-to-let portfolio (2017: 22%), due primarily to the continued
increase in property prices in 2018 and loan repayments.
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3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
Forbearance
Non-mortgage
The following table analyses movements in the stock of loans subject to forbearance in the Republic of Ireland and the United Kingdom
at 31 December 2018 and 2017, excluding residential mortgages which are analysed on pages 135 to 140.
Comparative data for 31 December 2017 has been prepared under IAS 39.
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At 1 January
Implementation of definition
of default policy
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
Implementation of definition
of default policy
Additions
Write-offs
Expired arrangements
Closed accounts
Movements in the stock
of forbearance loans
Disposals
Exchange translation adjustments
At 31 December
Total
At 1 January
Implementation of definition
of default policy
Additions
Fundamental restructures -
valuation adjustments
Write-offs
Expired arrangements
Closed accounts
Movements in the stock
of forbearance loans
Disposals
Exchange translation adjustments
At 31 December
Other
personal
€ m
641
(211)
35
(11)
(22)
(111)
(42)
(24)
255
3
6
1
–
(5)
(1)
–
–
–
4
Property
and
construction
€ m
Non-
property
business
€ m
1,311
1,236
66
242
(4)
(40)
(84)
(347)
(138)
1,006
49
5
5
(1)
(3)
(8)
(12)
–
–
35
(22)
104
(11)
(59)
(351)
(96)
(35)
766
45
18
6
–
(12)
(18)
(5)
–
–
34
2018
Total
€ m
3,188
(167)
381
(26)
(121)
(546)
(485)
(197)
2,027
97
29
12
(1)
(20)
(27)
(17)
–
–
73
644
1,360
1,281
3,285
(205)
36
(11)
(22)
(116)
(43)
(24)
–
–
259
71
247
(4)
(41)
(87)
(355)
(150)
–
–
1,041
(4)
110
(11)
(59)
(363)
(114)
(40)
–
–
800
(138)
393
(26)
(122)
(566)
(512)
(214)
–
–
2,100
Other
personal
€ m
608
–
188
(4)
–
(81)
(48)
(22)
641
7
–
1
–
–
(1)
(3)
(1)
–
3
615
–
189
(4)
–
(81)
(49)
(25)
(1)
–
644
Property
and
construction
€ m
Non-
property
business
€ m
1,862
1,527
–
157
(36)
–
(21)
(553)
(98)
1,311
84
–
9
–
(2)
(12)
(8)
(19)
(3)
49
–
130
(22)
(3)
(136)
(175)
(85)
1,236
56
–
19
–
(1)
(7)
(3)
(17)
(2)
45
2017
Total
€ m
3,997
–
475
(62)
(3)
(238)
(776)
(205)
3,188
147
–
29
–
(3)
(20)
(14)
(37)
(5)
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1,946
1,583
4,144
–
166
(36)
–
(23)
(565)
(106)
(19)
(3)
–
149
(22)
(3)
(137)
(182)
(88)
(17)
(2)
–
504
(62)
(3)
(241)
(796)
(219)
(37)
(5)
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1,281
3,285
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In line with the implementation of the new definition of default policy, the Group enhanced the modification and forbearance data which
resulted in € 0.1 billion of loans being removed from the stock of forbearance as at 1 January 2018.
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Risk management – 3. Individual risk types
3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
Forbearance
Non-mortgage subject to forbearance measures by type of forbearance
The following table sets out an analysis of non-mortgage forbearance solutions at 31 December 2018. Comparative data for December
2017 has been prepared under IAS 39.
Total
Stage 1
Stage 2
Stage 3
POCI
At amortised cost
Balance
€ m
Balance
€ m
Balance
€ m
Balance
€ m
Balance
€ m
2018
Loss
allowance
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
Of which: Performing
Non-performing
40
13
18
12
34
35
87
20
–
259
102
41
7
23
144
298
355
52
19
1,041
110
38
8
13
94
201
287
41
8
800
2,100
623
1,477
–
–
–
–
–
4
–
–
–
4
1
–
–
2
2
143
162
–
7
317
–
–
–
–
–
51
–
4
2
57
378
186
192
5
2
9
3
15
2
32
–
–
68
11
5
1
6
31
–
53
1
1
109
34
7
1
2
47
50
117
–
2
260
437
437
–
35
11
9
9
19
29
55
20
–
187
90
36
6
15
111
155
140
51
9
613
76
31
7
11
47
100
170
37
4
483
1,283
–
1,283
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
2
–
–
–
–
–
–
–
–
–
–
2
–
2
17
6
7
3
10
16
30
4
–
93
30
7
2
9
36
61
46
10
3
204
33
13
2
6
16
49
82
9
1
211
508
77
431
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 page 80.
Non-retail customers in difficulty typically have exposures across a number of asset classes including SME debt, associated property
exposures and residential mortgages.
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3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
Forbearance
Non-mortgage subject to forbearance measures by type of forbearance (continued)
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
Total
€ m
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
Loans neither
> 90 days
in arrears
nor impaired
€ m
Loans >
90 days in
arrears but
not impaired
€ m
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
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
2,206
154
Impaired
loans
€ m
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
Specific
provisions on
impaired
loans
€ m
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
At 31 December 2018, non-mortgage loans subject to forbearance amounted to € 2.1 billion, of which € 1.5 billion are non-performing
with ECL cover of 29%. The majority of these forborne loans are in property and construction (€ 1.0 billion) and non-property business
(€ 0.8 billion). Within non-mortgage forbearance categories, ’Fundamental restructure’ (€ 0.5 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 allowance, being derecognised and new facilities being classified as loans and
advances and recognised on day 1 at fair value but will remain classified as non-performing.
AIB Group plc Annual Financial Report 2018 143
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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
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Risk management – 3. Individual risk types
3.2 Additional credit quality and forbearance disclosures on loans and advances to customers
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.
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.
Additional cash flows received have resulted in income of € 84 million, being the net gain on other financial assets measured at FVTPL
in the year to 31 December 2018 (31 December 2017: € 137 million) due to continued strong levels of asset sales.
At 31 December 2018, the carrying value of the main facilities in fundamental restructures, including buy-to-let mortgages, amounted to
€ 0.6 billion (31 December 2017: € 1.2 billion).
Main facilities that rely principally on the realisation of collateral (property assets held as security) are as follows:
– Buy-to-let of € 56 million, which has associated contractual secondary facilities of € 174 million (31 December 2017: € 111 million
and € 144 million respectively).
– Property and construction of € 298 million, which has associated contractual secondary facilities of € 1,787 million (31 December
2017: € 466 million and € 1,676 million respectively) which are further analysed as:
– Commercial real estate primary facilities of € 240 million, which have associated contractual secondary facilities of € 915 million
(31 December 2017: € 374 million and € 873 million respectively).
–
Land and development primary facilities of € 58 million, which have associated contractual secondary facilities of € 872 million
(31 December 2017: € 92 million and € 803 million respectively).
Non-property business lending and other personal lending where fundamental restructures have been granted amount to € 236 million
which have associated secondary facilities of € 825 million (31 December 2017: € 478 million and € 724 million respectively).
The ‘Restructure’ category (€ 0.7 billion) includes some longer-term/permanent solutions where the existing customer debt was
deemed to be sustainable post-restructuring. The solutions offered include interest only with asset disposal or bullet/fixed payment,
debt consolidation, amongst others. This category also includes cases which were restructured prior to the current treatment strategies
being developed. Some of these cases may yet qualify for a ‘Fundamental restructure’ following a full review of sustainable repayment
capacity.
The remaining forbearance categories include borrowers who have received a term extension and borrowers who 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 2018, the stock of non-mortgage forbearance loans reduced by € 1,187 million, with new forborne borrowers (€ 394 million)
being offset by reductions due to expired and closed forbearance arrangements and repayments.
144
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3.3 Restructure execution risk
A restructure execution risk exists whereby the Group’s restructuring activity may not be executed in line with Management’s
expectations. The Group has reduced its non-performing loans from € 29 billion at December 2013 to € 6.1 billion as at 31 December
2018. A significant element of this reduction has been achieved by working with customers in difficulty to deliver sustainable solutions
based on a wide range of customer restructuring options. This approach has materially improved the Group’s asset quality, and lowered
the overall credit risk profile. The Group continues to implement solutions for customers who fully engage.
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Criticised and non-performing loans are managed through the restructuring lifecycle in line with the Group’s credit strategies, policies,
and implementation guidelines. A wide range of monitoring procedures are in place to manage loan portfolios, including restructured
loans. The Group regularly reviews the performance of these loans through dedicated teams who focus on asset sales, covenants and
milestones within the restructured portfolio. The reduction of non-performing loans continues to be a key focus for the Group going
forward.
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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/Executive Committee 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 which comprises the Group’s Finance department. The Group’s Finance department, reporting to the
CFO, is the owner of the Group’s Funding and Liquidity plan which sets out the strategy for funding and liquidity management for the
Group and is responsible for 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, reporting to the CFO, 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-equivalent and price sensitivity; and
finally, net inflows and outflows are monitored on a daily basis.
–
–
The Financial Risk function, reporting to the CRO is responsible for exercising independent risk oversight 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 Risk Framework and supporting 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.
*Forms an integral part of the audited financial statements
146
AIB Group plc Annual Financial Report 2018
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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 Executive Committee/Leadership Team and the Board are briefed on
funding and liquidity on an ongoing basis.
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At 31 December 2018, the Group held € 29,896 million (2017: € 26,850 million) in qualifying liquid assets (“QLA”)(1)/contingent funding of
which € 5,391 million (2017: € 7,859 million) 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. At 31 December 2018, the Group
liquidity pool was € 24,505 million (2017: € 18,991 million). During 2018, the liquidity pool ranged from € 18,471 million to € 25,548
million and the average balance was € 21,102 million.
(1)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 2018 and 2017:
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Liquidity pool
available
(ECB eligible)
2018
High Quality Liquid
Assets(HQLA)(1) in the
liquidity pool
Level 2
€ m
Level 1
€ m
€ m
–
8,112
4,153
9,011
13,164
4,063(2)
8,428
3,103
323
3,426
–
198
1,050
296
1,346
1,544
21,276
15,917
Cash and deposits with
central banks
Total government bonds
Other:
Covered bonds
Other
Total other
Total
Of which:
EUR
GBP
USD
Other
Liquidity pool
€ m
(2)
1,937
8,626
4,153
9,789
13,942
24,505
22,143
935
1,427
–
Liquidity pool
available
(ECB eligible)
€ m
–
9,177
3,034
4,387
7,421
Liquidity pool
€ m
1,485(2)
9,570
3,259
4,677
7,936
2017
High Quality Liquid
Assets(HQLA)(1) in the
liquidity pool
Level 2
€ m
Level 1
€ m
3,700(2)
9,423
2,534
302
2,836
–
147
724
249
973
18,991
16,598
15,959
1,120
18,236
149
606
–
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(1)Level 1 - High Quality Liquid Assets (“HQLAs”) 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 - HQLAs include highly rated sovereign bonds, highly rated covered bonds and certain other strongly rated securities.
(2)For Liquidity Coverage Ratio (“LCR”) purposes, assets outside the Liquidity function’s control can qualify as HQLAs in so far as they match outflows in the
same jurisdiction. For the Group, this means that UK HQLAs (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.
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, internal covered bonds and central
bank reserves. AIB’s liquidity buffer increased in 2018 by € 5,514 million which was predominantly due to an increase in the Republic of
Ireland customer deposits and senior unsecured note issuances 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.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018 147
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Risk management – 3. Individual risk types
3.4 Funding and liquidity risk
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/Executive Committee 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 Single Supervisory Mechanism/Central Bank of Ireland 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 and other related liquidity metrics.
The following table outlines the LCR, NSFR and Loan to Deposit Ratio (LDR) at 31 December 2018 and 2017.
Liquidity metrics
Liquidity Coverage Ratio
Net Stable Funding Ratio
Loan to Deposit Ratio
2018
%
128
125
90
2017
%
132
123
93
The Group has fully complied with the minimum LCR requirement of 100% during 2018.
A minimum NSFR requirement of 100% was scheduled to be introduced from 1 January 2018 and AIB is awaiting further developments
in this regard. The calculated NSFR is based on the Group’s interpretation of the Basel standard.
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
Of which:
Euro
Sterling
US dollar
Other currencies
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
*Forms an integral part of the audited financial statements
148
AIB Group plc Annual Financial Report 2018
31 December 2018
%
€ m
31 December 2017
%
€ m
67,699
76
64,572
74
54,885
11,001
1,698
115
424
420
–
3,090
–
2,655
14,653
88,941
2,595
91,536
1
1
–
3
–
3
16
100
51,773
11,065
1,642
92
2,801
839
–
3,590
–
1,000
14,404
87,206
2,856
90,062
3
1
–
4
–
1
17
100
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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 € 3,127 million in 2018. This was mainly due to a € 3,112 million increase in Euro deposits, primarily in credit current accounts
reflecting strong economic activity and inflows as a result of a competitor exiting the market.
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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 fully repaid outstanding Targeted Longer Term refinancing Operations (“TLTRO”) of € 1,900 million during the year.
On 22 March 2018, AIB Group plc issued € 500 million Senior Unsecured 1.5% Notes maturing on 29 March 2023. On 3 July 2018,
AIB Group plc issued € 500 million Senior Unsecured 2.25% Notes maturing on 3 July 2025. On 12 October 2018, AIB Group plc issued
US $ 750 million unsecured 4.75% notes maturing on 12 October 2023.
In 2018, the Group did not issue debt securities under the short-term commercial paper programme.
Outstanding asset covered securities (“ACS”) decreased from € 3,590 million at 31 December 2017 to € 3,090 million at 31 December
2018 due to contractual maturities.
Composition of wholesale funding*
At 31 December 2018, total wholesale funding outstanding was € 7,384 million (2017: € 9,023 million). € 1,130 million of wholesale
funding matures in less than one year (2017: € 2,240 million). € 6,254 million of wholesale funding has a residual maturity of over one
year (2017: € 6,783 million).
Outstanding wholesale funding comprised € 3,514 million in secured funding (2017: € 6,891 million) and € 3,870 million in unsecured
funding (2017: € 2,132 million).
Deposits by central banks and banks
Senior debt
ACS/ABS
Subordinated liabilities and other
capital instruments
Total 31 December
Of which:
Secured
Unsecured
Deposits by central banks and banks
Senior debt
ACS/ABS
Subordinated liabilities and other
capital instruments
Total 31 December
Of which:
Secured
Unsecured
3–6
months
€ m
6–12
months
€ m
Total
< 1 year
€ m
< 1
month
€ m
325
1–3
months
€ m
240
–
–
–
–
–
–
–
500
–
–
325
240
500
81
244
325
64
176
240
–
500
500
1–3
years
€ m
–
500
1,250
3–5
years
€ m
279
1,155
1,750
> 5
years
€ m
–
500
25
2018
Total
€ m
844
2,655
3,090
–
–
795
795
565
500
65
–
1,130
1,750
3,184
1,320
7,384
210
920
1,130
1,250
500
1,750
2,029
1,155
3,184
25
1,295
1,320
–
–
65
–
65
65
–
65
Total
< 1 year
€ m
1,740
–
500
–
< 1
month
€ m
1,029
1–3
months
€ m
544
3–6
months
€ m
167
–
–
–
–
–
–
–
–
–
1,029
544
167
690
339
1,029
544
–
544
167
–
167
6–12
months
€ m
–
–
500
–
500
500
–
500
1–3
years
€ m
1,900
1,000
815
3–5
years
€ m
–
–
> 5
years
€ m
–
–
1,250
1,025
–
–
793
793
2,240
3,715
1,250
1,818
9,023
1,901
339
2,240
2,715
1,000
3,715
1,250
–
1,250
1,025
793
1,818
6,891
2,132
9,023
AIB Group plc Annual Financial Report 2018 149
3,514
3,870
7,384
2017
Total
€ m
3,640
1,000
3,590
*Forms an integral part of the audited financial statements
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Risk management – 3. Individual risk types
3.4 Funding and liquidity risk
Currency composition of wholesale debt
At 31 December 2018, 82% (2017: 89%) 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.
Deposits by central banks and banks
Senior debt
ACS/ABS
Subordinated liabilities and other
capital instruments
Total wholesale funding
% of total funding
EUR
€ m
186
2,000
3,090
760
6,036
%
82
GBP
€ m
284
–
–
35
319
%
4
USD
€ m
374
655
–
–
1,029
%
14
Other
€ m
–
–
–
–
–
%
–
2018
Total
€ m
844
2,655
3,090
795
7,384
%
100
EUR
€ m
2,669
1,000
3,590
760
8,019
%
89
GBP
€ m
202
–
–
33
235
%
2
USD
€ m
769
–
–
–
769
%
9
Other
€ m
–
–
–
–
–
%
–
2017
Total
€ m
3,640
1,000
3,590
793
9,023
%
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 Group manages encumbrance levels to ensure that the Group has sufficient contingent
collateral to maximise balance sheet flexibility.
The Group had an encumbrance ratio of 12% at 31 December 2018 (2017: 14%) with € 11,103 million of the Group’s assets encumbered
(2017: € 12,612 billion). This represents a 2% decrease over the year due mainly to a reduction in the funding requirement of the Group.
The encumbrance level is based on the amount of assets that are required in order to meet regulatory and contractual commitments.
Interbank repurchase agreements and ECB refinancing operations
The following table analyses the interbank repurchase agreements and ECB refinancing operations as at 31 December 2018 and 2017:
<1 month 1–3 months >3 months
€ m
€ m
€ m
562
–
562
177
33
210
129
1,900
2,029
2,801
2017
Total
€ m
868
1,933
Highly liquid
Less liquid
Maturity profile
<1 month 1–3 months
€ m
€ m
>3 months
€ m
81
–
81
64
–
64
–
–
–
2018
Total
€ m
145
–
145
150
AIB Group plc Annual Financial Report 2018
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3.4 Funding and liquidity risk
Financial assets and financial liabilities by contractual residual maturity*
The following table analyses financial assets and financial liabilities by contractual residual maturity at 31 December 2018 and 2017:
Financial assets
Derivative financial instruments(1)
Loans and advances to banks(2)
Loans and advances to customers(2)
Investment securities(3)
Other financial assets
Financial liabilities
Deposits by central banks and banks
Customer accounts
Derivative financial instruments(1)
Debt securities in issue
Subordinated liabilities and other capital instruments
Other financial liabilities
Financial assets
Trading portfolio financial assets(4)
Derivative financial instruments(1)
Loans and advances to banks(2)
Loans and advances to customers(2)
Financial investments available for sale(3)
Other financial assets
Financial liabilities
Deposits by central banks and banks
Customer accounts
Trading portfolio financial liabilities(4)
Derivative financial instruments(1)
Debt securities in issue
Subordinated liabilities and other capital instruments
Other financial liabilities
On demand
€ m
–
1,440
4,647
–
–
<3 months
but not
on demand
€ m
3 months 1–5 years
to 1 year
Over
5 years
2018
Total
€ m
€ m
€ m
€ m
22
3
626
387
640
39
–
2,655
2,751
–
212
–
627
–
15,832
39,147
8,974
4,021
–
–
900
1,443
62,907
16,133
640
6,087
1,678
5,445
25,018
43,795
82,023
246
52,509
–
–
–
1,074
53,829
319
9,573
22
–
–
–
–
3,866
129
565
–
–
279
1,710
194
4,655
–
–
–
41
589
525
795
–
844
67,699
934
5,745
795
1,074
9,914
4,560
6,838
1,950
77,091
On demand
€ m
–
–
1,306
8,125
–
–
<3 months
but not
on demand
€ m
3 months
to 1 year
1–5 years
Over
5 years
2017
Total
€ m
€ m
€ m
€ m
–
77
6
671
118
736
–
64
1
2,554
1,443
–
18
326
–
14
689
–
13,887
38,101
9,427
4,654
–
–
32
1,156
1,313
63,338
15,642
736
9,431
1,608
4,062
23,658
43,458
82,217
241
47,168
1,332
10,727
–
3
–
–
1,061
–
58
–
–
–
167
4,880
–
39
500
–
–
1,900
1,666
4
369
–
131
26
701
3,065
1,025
–
–
793
–
3,640
64,572
30
1,170
4,590
793
1,061
48,473
12,117
5,586
7,004
2,676
75,856
(1)Shown by maturity date of contract.
(2)Shown gross of expected credit losses.
(3)Excluding equity shares.
(4)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.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018 151
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Risk management – 3. Individual risk types
3.4 Funding and liquidity risk
Financial liabilities by undiscounted contractual maturity*
The balances in the table below include the undiscounted cash flows relating to principal and interest on financial liabilities and as such
will not agree directly with the balances on the consolidated statement of financial position. All derivative financial instruments have
been analysed based on their contractual maturity undiscounted cash flows.
In the daily management of liquidity risk, the Group adjusts the contractual outflows on customer deposits to reflect the inherent stability
of these deposits. Offsetting the liability outflows are cash inflows from the assets on the statement of financial position. Additionally, the
Group holds a stock of high quality liquid assets, which are held for the purpose of covering unexpected cash outflows.
The following table analyses, on an undiscounted basis, financial liabilities by remaining contractual maturity at 31 December 2018 and
2017:
Financial liabilities
Deposits by central banks and banks
Customer accounts
Derivative financial instruments
Debt securities in issue
Subordinated liabilities and other capital instruments
Other financial liabilities
Financial liabilities
Deposits by central banks and banks
Customer accounts
Trading portfolio financial liabilities
Derivative financial instruments
Debt securities in issue
Subordinated liabilities and other capital instruments
Other financial liabilities
On demand
€ m
246
52,509
–
–
–
1,074
<3 months
but not
on demand
€ m
3 months 1–5 years
to 1 year
Over
5 years
2018
Total
€ m
€ m
€ m
€ m
329
9,604
70
48
–
–
2
3,884
259
618
31
–
284
1,721
361
4,942
115
–
–
41
314
556
957
–
861
67,759
1,004
6,164
1,103
1,074
53,829
10,051
4,794
7,423
1,868
77,965
On demand
€ m
<3 months
but not
on demand
€ m
3 months
to 1 year
1–5 years
Over
5 years
2017
Total
€ m
€ m
€ m
€ m
241
47,168
1,342
10,792
–
–
–
–
1,061
–
73
33
–
–
168
4,901
–
195
538
31
–
1,900
1,685
4
497
–
132
26
454
3,197
1,043
117
–
958
–
3,651
64,678
30
1,219
4,811
1,106
1,061
48,470
12,240
5,833
7,400
2,613
76,556
*Forms an integral part of the audited financial statements
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3.4 Funding and liquidity risk
Financial liabilities by undiscounted contractual maturity* (continued)
The undiscounted cash flows potentially payable under guarantees and similar contracts
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 their obligations. The Group expects that most guarantees it provides will expire unused.
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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 following table analyses undiscounted cash flows potentially payable under guarantees and similar contracts at 31 December 2018
and 2017:
Contingent liabilities
Commitments
Contingent liabilities
Commitments
On demand
€ m
780
11,107
11,887
On demand
€ m
880
10,231
11,111
<3 months
but not
on demand
€ m
3 months 1–5 years
to 1 year
Over
5 years
€ m
€ m
€ m
–
–
–
–
–
–
–
–
–
–
–
–
<3 months
but not
on demand
€ m
3 months
to 1 year
1–5 years
Over
5 years
€ m
€ m
€ m
–
–
–
–
–
–
–
–
–
–
–
–
2018
Total
€ m
780
11,107
11,887
2017
Total
€ m
880
10,231
11,111
Analysis of loans and advances to customers by contractual residual maturity and interest rate sensitivity
The following table analyses gross loans and advances to customers by contractual residual maturity and interest rate sensitivity at
31 December 2018 and 2017. Overdrafts, which in the aggregate represent approximately 2% of the portfolio at 31 December 2018,
are classified as repayable within one year. Approximately 13% of AIB Group’s loan portfolio is provided on a fixed rate basis. Fixed rate
loans are defined as those loans for which the interest rate is fixed for the full term of the loan. The interest rate risk exposure is
managed within agreed policy parameters. The geographical concentrations are based primarily on the location of the office recording
the transaction.
Fixed
rate
€ m
7,579
807
–
8,386
Fixed
rate
€ m
5,662
753
–
6,415
Variable
rate
€ m
46,711
7,730
80
54,521
Variable
rate
€ m
49,064
7,786
73
56,923
Total
€ m
54,290
8,537
80
62,907
Total
€ m
54,726
8,539
73
63,338
Within 1
year
€ m
7,099
823
6
7,928
Within 1
year
€ m
10,186
1,154
10
11,350
After 1 year
but within 5
years
€ m
11,434
4,324
74
15,832
After 1 year
but within 5
years
€ m
10,036
3,788
63
13,887
After 5
years
€ m
35,758
3,389
–
39,147
After 5
years
€ m
34,504
3,597
–
38,101
2018
Total
€ m
54,291
8,536
80
62,907
2017
Total
€ m
54,726
8,539
73
63,338
Republic of Ireland
United Kingdom
Rest of the World
Total
Republic of Ireland
United Kingdom
Rest of the World
Total
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018 153
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Risk management – 3. Individual risk types
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 the Business and Financial 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.
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 macroeconomic
and financial market outlook.
Risk management and mitigation
The ICAAP is fully integrated and embedded in the strategic, financial and risk management processes of the Group. An ICAAP
Framework is in place which sets out the key processes, governance arrangements and roles and responsibilities which support the
ICAAP. Embedding of the ICAAP 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 Annual Financial Report 2018.
*Forms an integral part of the audited financial statements
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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.
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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 hold-to-collect-and-sell (“HTCS”) securities portfolio. Credit spreads are defined as the difference between bond yields and
interest rate swap rates of equivalent maturity. The HTCS bond portfolio is the principal source of credit spread risk.
Interest rate risk in the banking book (“IRRBB”) is the current or prospective risk to both the earnings and capital of the Group as a result
of adverse movements in interest rates. Changes in interest rates impact the underlying value of the Group’s assets, liabilities and off-
balance sheet instruments and, hence, its economic value (or capital position). Similarly, interest rate changes will impact the Group’s
net interest income (NII) through interest-sensitive income and expense effects.
The Group also assumes market risk through its trading book activities which relate to all positions in financial instruments (principally
derivatives) that are held with trading intent or in order to hedge positions held with trading intent. Risks associated with valuation
adjustments such as credit value adjustment (“CVA”) and funding value adjustment (“FVA”) are managed by the trading unit in the
Group’s Treasury function.
The Group’s Treasury function is responsible for managing market risk that has been transferred to it by the customer facing businesses
and the Group’s Asset and Liability Management (“ALM”) function which 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 responsible for the development of the market
risk measurement methodologies, and the Compliance function is responsible for the validation of 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 HTCS portfolio, IRRBB and trading risk are managed by
separate front office teams.
(1)The Capital at Risk on core trading book positions is assessed using a ten day horizon, with the exception of FX which is assessed using a
one year horizon.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018 155
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Risk management – 3. Individual risk types
3.6 Financial risks* (a) Market risk (continued)
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. The first line documents an annual Market
Risk Strategy and Appetite statement as part of the annual financial planning cycle which ensures 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.
The following table sets out financial assets and financial liabilities at 31 December 2018 and 2017 subject to market risk analysed
between trading and non-trading portfolios, showing the principal market risks to which the assets and liabilities are exposed:
Carrying
amount
€ m
Market risk measures
Non-trading
portfolios
€ m
Trading
portfolios
€ m
Risk factors
6,516
900
1,443
60,868
16,861
844
67,699
934
5,745
795
–
517
–
–
–
–
–
6,516
Interest rate, foreign exchange
383
Interest rate, foreign exchange,
credit spreads, equity, inflation
swap rates
1,443
Interest rate, foreign exchange
60,868
16,861
Interest rate, foreign exchange
Interest rate, foreign exchange,
credit spreads, equity
844
Interest rate, foreign exchange
67,699
Interest rate, foreign exchange
534
400
Interest rate, foreign exchange,
credit spreads, equity, inflation
swap rates
–
–
5,745
Interest rate, credit spreads
foreign exchange
795
Interest rate, credit spreads
2018
2017
Carrying
amount
€ m
Market risk measures
Non-trading
portfolios
€ m
Trading
portfolios
€ m
Risk factors
6,364
33
1,156
1,313
59,993
16,321
3,640
64,572
30
1,170
4,590
793
–
33
613
–
–
–
–
–
30
663
–
–
6,364
Interest rate, foreign exchange
–
Equity, interest rate, credit spreads
543
Interest rate, foreign exchange, credit
spreads, equity, inflation swap rates
1,313
Interest rate, foreign exchange
59,993
16,321
Interest rate, foreign exchange
Interest rate, foreign exchange,
credit spreads, equity
3,640
Interest rate, foreign exchange
64,572
Interest rate, foreign exchange
–
Interest rate, credit spreads
507
4,590
Interest rate, foreign exchange, credit
spreads, equity, inflation swap rates
Interest rate, credit spreads,
foreign exchange
793
Interest rate, credit spreads
Assets subject to market risk
Cash and balances at central banks
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Investment securities
Liabilities subject to market risk
Deposits by central banks and banks
Customer accounts
Derivative financial instruments
Debt securities in issue
Subordinated liabilities and other capital instruments
Assets subject to market risk
Cash and balances at central banks
Trading portfolio financial assets
Derivative financial instruments
Loans and advances to banks
Loans and advances 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
*Forms an integral part of the audited financial statements
156
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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
2018
€ m
211
(245)
2017
€ m
129
(165)
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.
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 2018.
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 for the
financial years to 31 December 2018 and 2017. 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)
2017
€ m
2018
€ m
VaR (banking book)
2017
€ m
2018
€ m
Total VaR
2018
€ m
2017
€ m
0.1
1.4
–
0.1
0.1
0.5
0.1
0.2
6.7
9.1
3.5
8.1
4.3
5.4
3.4
4.7
6.7
9.2
3.7
8.2
4.4
5.4
3.5
4.7
The following table sets out the VaR for foreign exchange rate and equity risk for the financial years to 31 December 2018 and 2017:
1 day holding period:
Average
High
Low
At 31 December
Foreign exchange rate risk
Equity risk
VaR (trading book)
2017
€ m
2018
€ m
VaR (trading book)
2017
€ m
2018
€ m
0.39
0.85
0.06
0.24
0.04
0.33
0.01
0.09
0.01
0.03
–
–
0.03
0.16
–
0.01
The low level of VaR in the trading book throughout 2018 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 2018 157
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Risk management – 3. Individual risk types
Interest rate sensitivity*
The net interest rate sensitivity of the Group at 31 December 2018 and 2017 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.
Comparative data for 31 December 2017 has been prepared under IAS 39.
*Forms an integral part of the audited financial statements
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A7 Risk 4 2018 Purp 155-182:Layout 1
28/02/2019
20:28
Page 160
Risk management – 3. Individual risk types
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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.
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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 movement in GBP/EUR
and USD/EUR foreign exchange rates.
Sensitivity of CET 1 fully loaded capital to foreign exchange movements (unaudited)
+ 10% move in GBP and USD FX rates
– 10% move in GBP and USD FX rates
31 December
2018
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the same direction and at the same time.
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 towards current and former employees.
– The capital position of the Group is negatively affected as funding deficits will be fully deductible from regulatory capital.
– There could be a negative impact on industrial relations if the funding level of the scheme was to deteriorate significantly.
Risk identification and assessment
The IAS 19 valuation of the pension scheme assets and liabilities may vary which could impact on the Group’s capital. The Group
works with the Trustees of each scheme to monitor the performance of investments and estimates of future liability to identify deficits.
Given that variability in the value of the pension scheme assets and liabilities can impact on the Group’s capital the key processes
through which pension risk is evaluated are:
•
• monthly reporting of Pension risk against risk appetite. The pension capital at risk metric is measured and reported monthly against
the Internal Capital Adequacy Assessment Process (“ICAAP”) as well as quarterly internal stress tests and
this watch trigger.
The Group maintains a number of defined benefit pension schemes for current and former employees. These defined benefit schemes
were closed to future accrual by the 31 December 2013 with all staff transferring to a defined contribution scheme for future service on
a standardized basis.
Each scheme has a separate trustee board and the Group has agreed funding plans to deal with deficits in each scheme. As part of
each funding agreement, the Group engages with each trustee regarding an appropriate investment strategy to reduce the risk in each
scheme.
Irish schemes that are deemed to have a deficit under the Minimum Funding Standard must prepare funding plans to address this
situation in a timely manner and submit them to the Pensions Authority for approval.
Risk management and mitigation
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. Although the Group has interaction with the trustees, it cannot direct the investment strategy
of the schemes.
AIB has developed a strategy going forward for each of its defined benefit schemes which include the following steps;
1. All defined benefit schemes are closed to future accrual.
2. They have funding plans (or are funded as required for the US schemes) and each defined benefit scheme has an investment
strategy in place.
3. All schemes have a strategy of de-risking in line with their regulatory requirements, funding positions and funding plans taking into
account the nature of their liabilities.
*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018 161
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Risk management – 3. Individual risk types
3.6 Financial risks* (b) Pension risk (continued)
During 2018, the Group made the final € 40 million payment to the AIB Group Irish Pension Scheme under the Minimum Funding
Standard funding proposal agreed in 2013 with the Pensions Authority and Trustee of the Irish Scheme. The most recent actuarial
valuation of the Irish Scheme was carried out at 30 June 2018 and reported the scheme to be in surplus and requiring no deficit funding
at this time. It has been agreed with the Trustee of the UK Scheme to extend the deadline for completing the valuation at 31 December
2017 to 2019. The Group is currently considering funding options for the UK Scheme with the Trustee.
Risk monitoring and reporting
Pension risk is included in the quarterly internal stress test. 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.
The pension Capital at risk exposure is reported against the watch trigger and is contained in the CRO report each month.
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.
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 includes information
technology, cyber, change, continuity management, outsourcing and cloud, products, people and property protection and legal risks.
Operational risk operating model
AIB’s operating model for operational risk is designed to ensure the framework is embedded and executed robustly across the Group.
The key components of the operating model 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 provides the customer facing business areas, BCS, Finance, Risk, Compliance and Group
Internal Audit with one consistent view of the Risks, Controls, Actions and Events across the Group. 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; and outsourcing) 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 ongoing 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 second line assurance process.
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, personal accident and cyber).
*Forms an integral part of the audited financial statements
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3.7 Operational risk (continued)
Risk monitoring and reporting
The Head of Operational Risk reports to the Chief Risk Officer, and provides information to the Board through the Board Risk
Committee, Executive Risk Committee and the Operational Risk Committee. The primary objective of operational risk reporting is to
provide the Board with a timely and pertinent update on the Operational Risk profile, in order to assist the Board in discharging its
responsibilities for the oversight of risk. A secondary objective is to provide senior management with an overview of the Operational Risk
profile, in order to support the effective management of risks. The profile update details the current status of the Group’s key Operational
Risks and includes an overview of current trends and an update on recent significant events. The reporting of the Operational Risk
profile, as required, at the Executive Risk and Board Risk Committees supports these two objectives. In addition, the Board Audit
Committee and the Executive Risk Committee receive summary information on the Group’s Operational Risk profile on a regular basis.
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
programme.
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 the 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/Executive Committee 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
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 and taxation law to Group Taxation.
Regulatory Compliance undertakes a periodic detailed assessment of the key 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 2018 163
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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 independent assurance teams, or in collaboration with other control functions such as
Group Internal Audit and/or Operational Risk.
Risk prioritised annual assurance plans are prepared with assurance reviews undertaken on both a business unit and a process basis.
The annual assurance 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 assurance activity 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. A People and Culture
Risk Framework was introduced in 2018.
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. The survey includes measures on our cultural ambitions 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.
The Group’s performance is heavily dependent on the talents and efforts of highly skilled individuals, and the continued ability of the
Group to compete effectively and implement its strategy depends on its ability to attract new employees and retain and motivate existing
employees. Competition from within the financial services industry, including from other financial institutions, as well as from businesses
outside the financial services industry for key employees is intensifying. In particular, under the terms of the recapitalisation of the Group
by the Government, the Group is required to comply with certain executive pay and compensation arrangements, including a cap on
salaries as well as a ban on bonuses and similar incentive-based compensation applicable to employees of Irish banks who have
received financial support from the Government.
The Group uses 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.
164
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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 Culture
Dashboard.
3.10 Business model risk
Business model risk is defined as the risk of not achieving the Group’s 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 outcomes of these
processes form the basis of the Group’s ICAAP and ILAAP.
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 macroeconomic 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/Executive Committee performance scorecards.
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/Executive Committee 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 and Board.
AIB Group plc Annual Financial Report 2018 165
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Risk management – 3. Individual risk types
3.11 Model risk
Model Risk is defined as the potential loss an institution may incur, as a consequence of decisions that could be principally based on the
output of models, due to errors in the development, implementation or use of such models. Model risk is comprised of two elements,
firstly, - 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 models used by AIB are fit for purpose, meet all jurisdictional regulatory and
accounting standards, and ensuring that there is clarity on the model risk strategy and framework. It is responsible for the appointment
of organisational structures to implement and manage the model risk framework and 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 Group 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 Group 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 Board 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 (“ALCo”) and reviews and approves the
use, or recommends to a higher governance authority, the use of the Group’s credit, operational and financial risk models. It also
monitors and maintains oversight of the performance of these models.
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
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201
205
211
212
213
214
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Governance and oversight –
Group Directors’ report for the financial year ended 31 December 2018
The Directors of AIB Group plc (‘the Company’) present their
report and the audited financial statements for the financial year
ended 31 December 2018. The Directors’ Responsibility
Statement is shown on page 216.
For the purpose of this report ‘AIB Group’ or ‘the Group’
comprises the Company and its subsidiaries in the financial year
ended 31 December 2018.
Results
The Group’s profit attributable to the ordinary shareholders of the
Company amounted to € 1,092 million and was arrived at as
shown in the consolidated income statement on page 227.
Dividend
The Board is recommending a dividend of € 0.17 per share
payable on 3 May 2019 to shareholders on the Company’s
Register of Members at the close of business on 22 March 2019.
During 2018, the Company paid a final dividend of € 0.12 per
share on 8 May 2018 to its ordinary shareholders who were on
the Register of Members at the close of business on 23 March
2018.
Going concern
The financial statements for the financial year ended 31
December 2018 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 12 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 2019 to 2021
approved by the Board in December 2018, 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 62 to 68 in the ‘Risk management’ section of this report.
Directors Compliance Statement
As required by section 225(2) of the Companies Act 2014, the
Directors acknowledge that they are responsible for securing the
Company's compliance with its relevant obligations (as defined in
section 225(1)). The Directors confirm that:
(a) a compliance policy statement (as defined in section
225(3)(a)) has been drawn up that sets out the Company’s
policies and, in the Directors’ opinion, is appropriate to
ensure compliance with the company’s relevant obligations;
(b) appropriate arrangements or structures that are, in the
Directors' opinion, designed to secure material compliance
with the relevant obligations have been put in place; and
(c) a review of those arrangements or structures has been
conducted in the financial year to which this report relates.
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AIB Group plc Annual Financial Report 2018
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 171 to 173 and is
part of note 42 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 39 to 56 contain an overview of the
development of the business of the Group during the year, of
recent events, and of likely future developments.
Directors
At 31 December 2018, the Board of Directors of the Company was
comprised of Richard Pym, Simon Ball, Mark Bourke, Bernard
Byrne, Thomas (Tom) Foley, Peter Hagan, Carolan Lennon,
Brendan McDonagh, Helen Normoyle, James (Jim) O’Hara and
Catherine Woods.
Mark Bourke is resigning as CFO and Executive Director with
effect from 1 March 2019.
Bernard Byrne has informed the Board of his intention to resign
as CEO and Executive Director of the Company.
On 14 December 2018, Colin Hunt was announced as the Board’s
proposed successor to the role of CEO and Executive Director
subject to the regulatory assessment process. The regulatory
assessment processes relating to Dr Hunt’s proposed
appointments and a successor to the CFO role respectively are
progressing well and are expected to finalise shortly.
Simon Ball has notified the Company of his intention not to stand
for re-election at this year’s Annual General Meeting.
The names of the Directors, together with a short biographical
note on each Director, is provided on pages 34 and 35.
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 pages 172 and 173.
Directors’ and Secretary’s 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 Corporate
Governance Remuneration statement on page 210.
Directors’ Remuneration
The Group’s policy with respect to Directors’ remuneration is
included in the Corporate Governance Remuneration statement on
pages 205 to 207. Details of the total remuneration of the Directors
in office during 2018 and 2017 are shown in the Corporate
Governance Remuneration statement on pages 208 to 210.
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Non-Financial Statement
New regulations on non-financial information, which were
transposed into Irish law by the European Union (disclosure of
Non-Financial and Diversity Information by certain large
undertakings and groups) Regulations 2017, require that we
report on specific topics such as environmental matters; social
and employee matters; respect for human rights; and bribery and
corruption (‘key non-financial matters’). The Group is committed
to maintaining sustainable and ethically responsible corporate
and social practices in every aspect of its business. The table
included on page 24 of the Annual Financial Report, together with
the information it refers to, is intended to assist shareholders to
understand our position on key non-financial matters.
A description of our business model is included on pages 12 and
13 of the Annual Financial Report and the table on page 19
summarises the linkage between the Group’s strategic pillars, the
principal risks and uncertainties and the Group’s material risks.
The material risks primarily impacted by key non-financial matters
include conduct risk and people and culture risk. Further details
of the Group’s risk management governance and organisational
framework can be found on pages 69 to 72.
Substantial interests in the share capital
As at 31 December 2018, the Company had been notified that
the Minister for Finance of Ireland holds 1,930,436,543 ordinary
shares representing 71.12% of the total voting rights attached
to the issued share capital.
On 7 January 2019, International Value Advisers, LLC notified
the Company that as of 2 January 2019, they had acquired an
interest in 81,484,743 ordinary shares representing 3.002% of
the total voting rights attached to the issued share capital.
On 20 February 2019, International Value Advisers, LLC notified
the Company that as of 20 February 2019, following a disposal
of voting rights, they held an interest in 81,210,952 ordinary
shares representing 2.992% of the total voting rights attached
to the issued share capital.
There were no other interests disclosed to the Company in
accordance with the Market Abuse Regulation and Part 5 of the
Transparency Regulations and the related transparency rules
during the period from 31 December 2018 to 22 February 2019.
Corporate Governance
The Directors’ Corporate Governance report is set out on pages
174 to 185 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 171 to 173.
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 186 to 191.
Political donations
The Directors have satisfied themselves that there were no
political contributions that require disclosure under the Electoral
Act 1997.
Accounting records
The measures taken by the Directors to secure compliance with
the Company's obligation to keep adequate accounting records
include the use of appropriate systems and procedures,
incorporating those set out within ‘Internal controls’ in the
‘Governance and oversight’ on pages 212 and 213, 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 379.
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 62 to 68.
Branches outside the State
The Company has not established any branches since
incorporation. However, the Company’s principal 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 and the
United States of America. The branch of Allied Irish Banks,
p.l.c., previously established in the Grand Cayman Islands was
closed on 2 January 2019.
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
re-appointed as auditors of the Company at the last Annual
General Meeting held on 25 April 2018 and shall hold office until
the conclusion of the next 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 indicated a
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:
(a) so far as the Director is aware, there is no relevant audit
information of which the company’s auditor is unaware; and
(b) the Director has taken all the steps that he/she ought to
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.
This confirmation is given and should be interpreted in
accordance with the provisions of section 330 of the Companies
Act 2014.
AIB Group plc Annual Financial Report 2018 169
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Governance and oversight –
Group Directors’ report for the financial year ended 31 December 2018
Other information
Other information relevant to the Group Directors’ report may be found in the following pages of the report:
2018 financial highlights
Page
1
Financial risk management objectives and policies of the Group and the Company
61 to 166
Own shares
Non-adjusting events after the reporting period
324
363
The Group Directors’ Report for the year ended 31 December 2018 comprises these pages and the sections of the report referred to
under ‘Other information’ above, which are incorporated into the Group Directors’ report by reference.
Richard Pym
Chairman
28 February 2019
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 2018
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
(Takeover Bids (Directive 2004/25/EC)) Regulations 2006.
issued Ordinary Shares, the Directors will be entitled to
withhold payment of any dividend payable on such shares,
As required by these Regulations, the information contained
and the shareholder will not be entitled to transfer such shares
below represents the position of the Company as of
except by sale through a Stock Exchange to a bona fide
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31 December 2018.
Capital Structure
The authorised share capital of the Company is € 2,500,025,000
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
divided into 4,000,000,000 ordinary shares of € 0.625 each
satisfaction of the Company, with the notice served as
(‘Ordinary Shares’) and 40,000 Subscriber Shares of € 0.625
provided for above.
each. The issued share capital of the Company is 2,714,381,237
Ordinary Shares of € 0.625 each.
The following rights attach to Subscriber Shares:
Rights and obligations of each class of share
The following rights attach to Ordinary Shares:
–
on a return of assets on a winding up of the Company, the
holders of the Subscriber Shares shall be entitled, in
priority to the holders of Ordinary Shares, to repayment of
– the right to receive duly declared dividends, in cash or, where
the aggregate nominal value of the Subscriber Shares
offered by the Directors, by allotment of additional Ordinary
held by them. The Subscriber Shares shall not be entitled
Shares;
to any further payment on a return of assets on a winding
– the right to attend and speak, in person or by proxy, at
up of the Company.
general meetings of the Company;
– the right to vote, in person or by proxy, at general meetings of
Subscriber Shares may, at any time, be redeemed at par by
the Company having, in a vote taken by show of hands, one
the Company and cancelled. Neither the redemption nor the
vote, and, on a poll, a vote for each Ordinary Share held;
cancellation of the Subscriber Shares by the Company shall
– the right to appoint a proxy, in the required form, to attend
constitute a variation or abrogation of the rights or privileges
and/or vote at general meetings of the Company;
attached to the Subscriber Shares, and accordingly the
–
the right to receive, (by post or electronically), at least 21
Subscriber Shares or any of them may be so redeemed and
days before the Annual General Meeting, a copy of the
cancelled without any consent or sanction on the part of the
Directors’ and Auditor’s reports accompanied by copies of the
holders thereof.
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;
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
–
the right to receive notice of general meetings of the
Shares, and there is no requirement to obtain the approval of
Company; and
the Company, or of other holders of Ordinary Shares, for a
– in a winding-up of the Company, and subject to payments of
transfer of Ordinary Shares.
amounts due to creditors and to holders of shares ranking in
priority to the Ordinary Shares, repayment of the capital paid
The Ordinary Shares are, in general, freely transferable, but
up on the Ordinary Shares and a proportionate part of any
the Directors may decline to register a transfer of Ordinary
surplus from the realisation of the assets of the Company.
Shares upon notice to the transferee, within two months after
the lodgement of a transfer with the Company, in the following
There is attached to the Ordinary Shares an obligation for the
cases: (i) a lien held by the Company on the shares;
holder, when served with a notice from the Directors requiring the
(ii) a purported transfer to an infant or a person lawfully
holder to do so, to inform the Company in writing within not more
declared to be incapable for the time being of dealing with
than 14 days after service of such notice, of the capacity in which
their affairs; or
the shareholder holds any share of the Company and, if such
(iii) a single transfer of shares which is in favour of more than
shareholder holds any share other than as beneficial owner, to
four persons jointly.
furnish in writing, so far as it is within the shareholder’s
knowledge, the name and address of the person on whose behalf
Ordinary Shares held in certificated form are transferable
the shareholder holds such share or, if the name or address of
upon production to the Company’s Registrars of the Original
such person is not forthcoming, such particulars as will enable or
Share certificate and the usual form of stock transfer duly
assist in the identification of such person, and the nature of the
executed by the holder of the shares.
interest of such person in such share. Where the shareholder
served with such notice (or any person named or identified by a
Shares held in uncertificated form are transferable in
shareholder on foot of such notice), fails to furnish the Company
accordance with the rules or conditions imposed by the
with the information required within the time period specified, the
operator of the relevant system that enables title to the
shareholder shall not be entitled to attend meetings of the
Ordinary Shares to be evidenced and transferred without a
AIB Group plc Annual Financial Report 2018 171
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Governance and oversight –
Schedule to the Group Directors’ report
for the financial year ended 31 December 2018
written instrument, and in accordance with the Companies Act
– No person, other than a Director retiring at a general meeting
2014.
is eligible for appointment as a Director without a
recommendation by the Directors for that person’s
The rights attaching to Ordinary Shares remain with the
appointment unless, not less than 42 days before the date of
transferor until the name of the transferee has been entered
the general meeting, written notice by a shareholder duly
on the Register of Members of the Company
qualified to be present and vote at the meeting of the
Exercise of rights of shares in employee share schemes
The AIB Approved Employee Profit Sharing Scheme 1998
intention to propose the person for appointment, and notice
in writing signed by the person to be proposed of willingness
to act, if so appointed, have been given to the Company.
and the Allied Irish Banks, p.l.c. Share Ownership Plan (UK)
– A shareholder may not propose himself or herself for
provide that voting rights in respect of shares held in trust for
appointment as a Director.
employees who are participants in those schemes are, on a
– The Directors have the power to fill a casual vacancy or to
poll, to be exercised only in accordance with any directions in
appoint an additional Director (within the maximum number
writing by the employees concerned to the Trustees of the
of Directors fixed by the Company in a general meeting), and
relevant scheme. Following the establishment of the
any Director so appointed holds office only until the
Company, the shares previously held in trust in Allied Irish
conclusion of the next Annual General Meeting following his
Banks, p.l.c. were exchanged, on a one-for-one basis, for new
or her appointment, when the Director concerned shall retire,
shares in the Company.
Deadlines for exercising voting rights
Voting rights at general meetings of the Company are exercised
when the Chairman puts the resolution at issue to a vote of the
meeting. A vote decided by a show of hands is taken forthwith.
but shall be eligible for reappointment at that meeting.
– One-third of the Directors for the time being (or if their
number is not three or a multiple of three, not less than
one-third) are obliged to retire from office at each Annual
General Meeting on the basis of the Directors who have
been longest in office since their last appointment. While
A vote taken on a poll for the election of the Chairman or on a
not obliged to do so, the Directors have, in recent years,
question of adjournment is also taken forthwith, and a poll on any
adopted the practice of all (those wishing to continue in
other question is taken either immediately or at such time (not
office) offering themselves for re-election at the Annual
being more than 30 days from the date of the meeting at which
General Meeting.
the poll was demanded or directed) as the Chairman of the
– A person is disqualified from being a Director, and their
meeting directs. Where a person is appointed to vote for a
office as a Director ipso facto vacated, in any of the
shareholder as proxy, the instrument of appointment must be
following circumstances:
received by the Company not less than 48 hours before the time
– if at any time the person has been adjudged bankrupt
appointed for holding the meeting or adjourned meeting at which
or has made any arrangement or composition with his
the appointed proxy proposes to vote, or, in the case of a poll,
or her creditors generally;
not less than 48 hours before the time appointed for taking the
– if found to no longer have adequate decision making
poll.
Rules concerning amendment of the Company’s
Constitution
As provided in the Companies Act 2014, the Company may, by
capacity 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
special resolution, alter or add to its Constitution. A resolution is a
successive months (without an alternate attending) and
special resolution when it has been passed by not less than
the Directors resolve that his or her office be vacated
three-fourths of the votes cast by shareholders entitled to vote
on that account;
and voting in person or by proxy, at a general meeting at which
– if, unless the Directors or a court otherwise determine,
not less than 21 clear days’ notice specifying the intention to
he or she be convicted of an indictable offence;
propose the resolution as a special resolution, has been duly
– if he or she be requested, by resolution of the Directors,
given. A resolution may also be proposed and passed as a
to resign his or her office as Director on foot of a
special resolution at a meeting of which less than 21 clear days’
unanimous resolution (excluding the vote of the
notice has been given if it is so agreed by a majority in number of
Director concerned) passed at a specially convened
the members having the right to attend and vote at any such
meeting at which every Director is present (or
meeting, being a majority together holding not less than 90% in
represented by an alternate) and of which not less than
nominal value of the shares giving that right.
Rules concerning the appointment and replacement
of Directors of the Company
– Other than in the case of a casual vacancy, Directors are
seven days’ written notice of the intention to move the
resolution and specifying the grounds therefor has been
given to the Director; or
– if he or she has reached an age specified by the
Directors as being that at which that person may not be
appointed on a resolution of the shareholders at a general
appointed a Director or, being already a Director, is
meeting, usually the Annual General Meeting.
required to relinquish office and a Director who reaches
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the specified age continues in office until the last day of the
year in which he or she reaches that age.
– In addition, the office of Director is vacated, subject to any
right of appointment or reappointment under the Company’s
Constitution, if:
– not being a Director holding for a fixed term an executive
office in his or her capacity as a Director, he or she
resigns their office by a written notice given to the
Company, upon the expiry of such notice; or
– being the holder of an executive office other than for a
fixed term, the Director ceases to hold such executive
office on retirement or otherwise;
– 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
provision of the Company’s Constitution.
– Notwithstanding anything in the Company’s Constitution or
in any agreement between the Company and a Director, the
Company may, by Ordinary Resolution of which extended
notice has been given in accordance with the Companies
Act 2014, remove any Director before the expiry of his or
her period of office.
– 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:
https://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
Chairman’s introduction
Dear Shareholder,
I am pleased to present our Corporate Governance Report for
2018. This report explains how corporate governance standards
are applied across the Group. It should be read in conjunction
with Governance in AIB, pages 26 to 29 and Governance in
Action, pages 30 to 32.
I would like to thank each member of the Board for their continued
commitment and support during 2018. On behalf of the Non-
Executive Directors, I wish to extend our sincere appreciation to
Mr Bernard Byrne and Mr Mark Bourke for their effective
leadership and significant contribution to AIB Group as Chief
Executive Officer (“CEO”) and Chief Financial Officer (“CFO”)
respectively. I wish them well as they depart AIB Group in early
2019 and in all future endeavours.
Looking ahead, 2019 will be another pivotal year for AIB Group
and I look forward to working with our new CEO designate and
Executive Director, Dr Colin Hunt, subject to regulatory
assessment. As at the date of this Corporate Governance report,
the regulatory assessment processes relating to Colin’s
appointment and a successor to the CFO role are progressing
well and are expected to finalise shortly.
The composition of the Board changes greatly in 2019, as, in
addition to the Executive Director changes, we see the departure
of a number of our long standing Non-Executive Directors. While
Corporate Governance arrangements and practices
AIB Group’s Governance Framework (the “Framework”)
underpins effective decision making and accountability and is the
basis on which the Group conducts its business and engages
with customers and stakeholders. It ensures that organisation
and control arrangements are appropriate to the governance of
the Group’s strategy and operations and the mitigation of related
material risks. The Framework encompasses AIB Group plc and
its subsidiaries (collectively referred to as ‘AIB Group’ or the
‘Group’).
The Framework takes account of the many statutory and
regulatory obligations that apply to the Group, including various
corporate governance codes, regulations and best practice
standards and guidelines, Irish company law, the Listing Rules
of the Main Securities Market of the Euronext Dublin Stock
Exchange and the London Stock Exchange, and, in relation to
the UK businesses, UK company law. Further detail on the
Group’s governance practices is available on
http://aib.ie/investorrelations.
The Group’s governance arrangements include:
–
a Board of Directors of sufficient size and expertise, the
majority of whom are independent Non-Executive Directors,
to oversee the operations of the Group, led by a Chairman
who has the relevant qualifications, expertise and
background to effectively conduct that role;
–
a Chief Executive Officer to whom the Board has delegated
responsibility for the day-to-day running of the Group,
ensuring an effective organisation structure, the selection
and direction of senior executive management, and for the
operational management, compliance and performance of all
the Group’s businesses;
–
–
a clear organisational structure with well defined, transparent
and consistent lines of responsibility;
a framework and policy architecture which comprises a
comprehensive and coherent suite of frameworks, policies,
procedures and standards covering business and financial
they will be missed, each having made a significant contribution to
planning, corporate governance and risk management;
the evolution of the Group during some very turbulent times since
–
effective structures and processes to identify, manage,
the financial crisis, I look forward to a new diverse selection of
monitor and report the risks to which the Group is, or might
Non-Executive Directors joining the Board.
be exposed, including a three lines of defence risk
We will continue to work together to ensure a sharper focus on the
Group’s culture to ensure that, increasingly, a commitment to high
standards and customer values are at the heart of all of our
decisions and that the Group is living and fulfilling its Purpose of
backing our customers to achieve their dreams and ambitions.
This shared sense of purpose guides the overall ambition and
strategy of the Group and seeks to unite all staff behind a
common goal.
As a Board, we remain committed to the principles of strong
corporate governance and to creating sustainable long-term value
for our stakeholders.
Richard Pym
Chairman
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AIB Group plc Annual Financial Report 2018
–
–
governance model;
a strong and functionally independent internal audit
function; and
adequate internal control mechanisms, including sound
administrative and accounting procedures, IT systems and
controls, people policies and practices, including
remuneration, that are consistent with and promote sound
and effective risk management.
Statements of Compliance
UK Corporate Governance Code 2016 and Irish Corporate
Governance Annex
The Group is subject to the provisions of the UK Corporate
Governance Code 2016 (the ‘2016 UK Code’ which is publicly
available on www.frc.org.uk). During 2018, the Group applied the
main principles and complied with all provisions of the 2016 UK
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Code other than in instances related to Section D: Remuneration,
in particular the principles and provisions under Section D.1: The
Level and Components of Remuneration. Such non-compliance is
Demonstrating Leadership through Corporate
Governance
The Group is headed by an effective Board which is collectively
due to agreements in place with the Irish State that restrict the
responsible for the long-term success of the Group and is
Remuneration Committee and the Board’s ability to set
supported by the Executive Committee, being the most senior
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remuneration for Executive Directors and to design Executive
executive committee of the Group.
Directors’ remuneration packages to promote the long-term
success of the Group. The Group continues to apply the 2016 UK
The Group ensures a clear division of responsibilities, including
Code and during 2018 we began to consider any areas requiring
between the Chairman, who is responsible for the overall
enhancement following the application of the newly introduced UK
leadership of the Board and for ensuring its effectiveness, and
Corporate Governance Code 2018 which has been effective from
the CEO, who manages and leads the business. No one
1 January 2019.
Additional obligations apply to the Group under the Irish
individual has unfettered powers of decision. Key roles and
responsibilities and a formal schedule of matters specifically
reserved for Board decision are clearly defined, documented
Corporate Governance Annex (publicly available on www.ise.ie),
and communicated to key stakeholders.
which applies to relevant Irish companies with a primary listing on
the Main Securities Market of the Euronext Dublin Stock
Exchange. The Group is fully compliant with the Irish Corporate
Governance Annex.
The Board
Throughout 2018, the Board comprised the Chairman
(Mr Richard Pym, who was independent on appointment), eight
Independent Non-Executive Directors (Mr Simon Ball, Mr Tom
Central Bank of Ireland’s Corporate Governance
Foley, Mr Peter Hagan, Ms Carolan Lennon, Mr Brendan
Requirements for Credit Institutions 2015 and European
Union (Capital Requirements) Regulations 2014
As a financial holding company, AIB Group plc is not directly
required to comply with the Central Bank of Ireland’s Corporate
McDonagh, Ms Helen Normoyle, Mr Jim O’Hara and Ms
Catherine Woods) and two Executive Directors (Mr Mark Bourke
and Mr Bernard Byrne).
Governance Requirements for Credit Institutions 2015 (the “2015
The Board deems the appropriate number of directors to meet
Requirements” which is publicly available on www.centralbank.ie).
the requirements of the business to be between 10 and 14 but
Allied Irish Banks, p.l.c., the principal subsidiary of AIB Group plc,
term to accommodate succession planning activities and to
is a credit institution and is subject to the 2015 Requirements,
ensure the timely induction and development of new directors.
including compliance with requirements specifically relating to
The names of the Directors, with brief biographical notes, are
‘high impact institutions’ and additional corporate governance
shown on pages 34 to 35.
acknowledges that this number may go beyond 14 in the short
obligations on credit institutions deemed significant for the
purposes of the European Union (Capital Requirements)
Notice of the resignations in early 2019 of each of Mr Bernard
Regulations 2014 (“CRD”) (S.I. 158/2014 which is publicly
Byrne, Chief Executive Officer, and Mr Mark Bourke, Chief
available on www.irishstatutebook.ie).
Financial Officer, were announced in October and September
2018 respectively. In December 2018, Dr Colin Hunt was
As outlined previously, the governance structures of AIB Group plc
announced as the Board’s proposed successor to the role of
and Allied Irish Banks, p.l.c. are mirrored. As such, the 2015
CEO and Executive Director subject to regulatory assessment.
Requirements and the applicable corporate governance aspects
The regulatory assessment processes relating to Dr Hunt’s
of CRD are applied across both entities. During 2018, AIB Group
proposed appointments and a successor to the CFO role
was materially compliant with the 2015 Requirements and
respectively are progressing well and are expected to finalise
applicable corporate governance aspects of CRD.
shortly. Following the departure of Mark Bourke with effect from
1 March 2019, and pending conclusion of the aforementioned
This Report, in conjunction with the Directors’ Responsibilities
assessment process, the Deputy CFO and Group Treasurer
Statement, Corporate Governance Remuneration Statement, Risk
Mr Donal Galvin will lead the Finance function.
Governance section of the Risk Management Framework report
and the Statement on Internal Control sets out our approach to
The Board is responsible for corporate governance,
governance in practice, the work of the Board and its Committees,
encompassing leadership, direction and control of the Group
and explains how the Group applied the principles of the 2016 UK
and is accountable to shareholders for financial performance.
Code during 2018.
The Board is also responsible for approving high-level policy
and strategic direction in relation to the nature and scale of risk
For ease of reference, an index to disclosures relevant to the
that the Group is prepared to assume in order to achieve its
various Principles of the 2016 UK Code can be found on page 33.
strategic objectives, and maintaining an appropriate system of
internal controls. The Board receives regular updates on the
Group’s risk profile through the Chief Risk Officer’s monthly
report, and relevant updates from the Chairman of the Board
Risk Committee. An overview of the Board Risk Committee’s
activities is detailed on pages 192 to 195.
AIB Group plc Annual Financial Report 2018 175
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Governance and oversight –
Corporate Governance report
While arrangements have been made by the Directors for
delegation of the management, organisation and administration of
the Group’s affairs, the following matters are included in a
–
–
to approve dividend policy and declare/recommend
dividends to shareholders;
to ensure the role of the Board is clearly defined and the
schedule of matters specifically reserved for decision by the
roles of the executive and non-executive functions of the
Board:
Board are distinguishable; such roles shall be described in a
–
to retain primary responsibility for corporate governance
written document and approved by the Board; and
within the Group at all times and oversee the efficacy of
–
to establish sub-committees of the Board and their terms of
governance arrangements;
reference.
–
to set and monitor the culture of the Group to ensure an
effective culture, where commitment to high standards and
customer values are at the heart of decision-making;
Relationship with the Irish State
The Group has received significant support from the Irish State
–
to approve and oversee the Group's strategic and financial
(the “State”) in the context of the financial crisis due to its
plans, including operating and capital budgets, and to ensure
systemic importance to the Irish financial system. Following a
that the necessary financial and human resources and an
reduction in its shareholding during 2017, the State now holds
appropriate internal control framework are in place for the
71.12% of the issued ordinary shares of AIB Group plc.
Group to meet its objectives and support a sustainable
–
–
–
business model;
The relationship between the Group and the State is governed
to approve and oversee major acquisitions and disposals,
by a Relationship Framework. Within the Relationship
including dealing in own securities and treasury shares;
Framework, with the exception of a number of important items
to approve risk appetite limits and designated risk frameworks
requiring advance consultation with or approval by the State, the
and policies;
Board retains responsibility and authority for all of the operations
to approve expenditure in excess of € 20 million in
accordance with the Board-approved delegated authority
and business of the Group in accordance with its legal and
fiduciary duties and retains responsibility and authority for
framework;
ensuring compliance with the regulatory and legal obligations of
–
to approve the provision of any guarantee, indemnity or
the Group.
security by a Group company or a sum exceeding
€ 100 million other than as part of a credit transaction which is
In considering the matters reserved for the Board, it should be
approved in accordance with the credit approval process;
noted that certain of those matters require advance consultation
–
to prepare financial statements which give a fair, balanced
with, or consent from, the Minister for Finance. The conditions
and understandable view of the state of affairs of the Group,
under which such prior consultation or approvals are required
to maintain adequate accounting records so as to ensure that
are outlined in the Relationship Framework which is available on
such statements comply with statutory requirements and, on
the Group’s website at http://aib.ie/investorrelations.
the recommendation of the Board Audit Committee, to
–
–
approve any significant change in accounting policies;
Furthermore, the Relationship Framework is intended to ensure
to approve the preliminary announcements of interim and full
that the Minister (as controlling shareholder) complies with the
year financial results;
independence provisions set out in the applicable listing rules.
to approve the statutory Annual Financial Report, Half-Yearly
AIB has complied with the independence provisions in the
Financial Report and other published financial statements and
Relationship Framework and as far as AIB is aware the
information of the Company, including all circulars to
independence and procurement provisions in the Relationship
shareholders;
Framework have been complied with in the period by the
–
to appoint the Chairman of the Board, Non-Executive and
controlling shareholder.
Executive Directors, the Chief Executive Officer and the
Group Company Secretary;
–
to endorse the appointment of people who may have a
material impact on the risk profile of the Group, and
Key Roles and Responsibilities
Chairman
Mr Richard Pym leads the Board, setting its agenda, ensuring
monitor on an ongoing basis their appropriateness for the
Directors receive adequate, accurate and timely information,
role;
facilitating the effective contribution of the Non-Executive
to approve any decisions regarding the removal of Heads of
Directors, ensuring the proper induction of new Directors, the
Control Functions from office;
ongoing training and development of all Directors, and reviewing
to review and approve related party transactions under the
the performance of individual Directors. Mr Pym was appointed
applicable Listing Rules;
as Chairman of the Group in 2014. Mr Pym currently has no
to approve Class 1 transactions under the applicable Listing
other external directorship commitments. His biographical details
–
–
–
Rules and to recommend Class 2 transactions to
are available on page 34.
shareholders;
–
to convene a general meeting to allow shareholders to vote
on any matter reserved specifically for shareholder approval,
as determined under relevant legislation and/or the Listing
Rules;
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Senior Independent Director
As Senior Independent Director (“SID”), Ms Catherine Woods
Executive Directors
Executive Directors have executive functions in the Group in
acts as a conduit for the views of shareholders and is available
addition to their Board duties. The role of Executive Directors, led
as an alternate point of contact to address any concerns or
by the CEO, is to propose strategies to the Board and following
issues they feel have not been adequately dealt with through the
challenging Board scrutiny, to execute the agreed strategies to the
usual channels of communication. The SID also leads the
highest possible standards. As at 31 December 2018, the Board
annual review of the Chairman’s performance and succession
had two Executive Directors, the CEO, who is referenced above,
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planning for the Chairman’s role. She attends meetings with a
and the Chief Financial Officer, Mr Mark Bourke.
range of major shareholders as required, to listen to their views
in order to develop a balanced understanding of the issues of
concern to them. Ms Woods was appointed to the role of Senior
Executive Committee
The Executive Committee is the most senior executive committee
Independent Director on 30 January 2015 and her biographical
of the Group and is accountable to the CEO. Subject to financial
details are available on page 34.
Deputy Chairman
Ms Catherine Woods was appointed as Deputy Chairman on
and risk limits set by the Board, and excluding those matters
which are reserved specifically for the Board, the Executive
Committee under the stewardship of the CEO has responsibility
for the day-to-day management of the Group’s operations.
1 January 2018. In this role, Ms Woods steps in as acting
It assists and advises the CEO in reaching decisions on the
Chairman of the Board, wherever necessary, and ensures
Group’s strategy, governance and internal controls, and
continuity of Chairmanship as required. She deputises for the
performance and risk management. Up to 31 October 2018, the
Chairman, supporting the Chairman in representing and acting as
Leadership Team supported the CEO in this manner. Following
a spokesperson for the Board. The Deputy Chairman is available
a review of the executive governance structures as part of the
to the Board for consultation and advice.
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-
Executive Directors to scrutinise the performance of management
new Operating Model, the Executive Committee was established
in place of the Leadership Team. Biographical details of all
Executive Committee members can be found on pages 36 and
37.
Group Company Secretary
The Directors have access to the advice and services of Ms
in meeting agreed objectives and monitor the reporting on
Sarah McLaughlin, the Group Company Secretary, who is
performance. They should bring an independent viewpoint to the
responsible for advising the Board on all governance matters,
deliberations of the Board that is objective and independent of the
ensuring that Board procedures are followed and that applicable
activities of the management and of the Group. They are
rules and regulations are complied with. The Group Company
expected to constructively challenge and help develop proposals
Secretary facilitates information flows within the Board and its
on strategy. Biographical details for each of the Independent Non-
Committees and between senior executive management. The
Executive Directors are available on pages 34 to 35.
Group Company Secretary communicates with shareholders as
appropriate, and ensures that due regard is paid to their
interests. Both the appointment and removal of the Group
Company Secretary is a matter for the Board as a whole.
Chief Executive Officer (CEO)
Mr Bernard Byrne manages the Group on a day-to-day basis and
makes decisions on matters affecting the operation, performance
and strategy of the Group’s business. He has established an
Executive Committee which has responsibility for the day-to-day
management of the Group’s operations and assists and advises
the CEO in reaching decisions on the Group’s strategy,
governance and internal controls, and performance and risk
management.
Mr Byrne was appointed CEO of the Group with effect from 29
May 2015 and stands down from that role in early 2019.
As announced in December 2018, Dr Colin Hunt has been
identified as the Board’s proposed successor as CEO and
Executive Director subject to the regulatory assessment process.
As at the time of this Corporate Governance Report, the process
is progressing well and expected to finalise shortly. His
biographical details, as a current member of the Executive
Committee, are available on page 36.
AIB Group plc Annual Financial Report 2018 177
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Governance and oversight –
Corporate Governance report
How our Board meetings work?
Board Meetings
(cid:4)(cid:4) In advance of the next
calendar year
– An indicative Work Programme is prepared by the Group Company Secretary in advance
of the calendar year, informed by the Board’s agreed priorities, the integrated strategy, financial
planning and risk assessment process, and is agreed with the Board for the year ahead.
– The Training Programme for the year ahead is set in tandem with the indicative Work Programme
to ensure alignment of relevant training topics to planned agenda items.
– Both Programmes are shared with key internal stakeholders to ensure preparedness and
alignment across the Group.
(cid:4)(cid:4) Agenda setting
– The Chairman sets the agenda for each Board meeting in consultation with the Group Company
Secretary and the CEO. The agenda is driven by the indicative Board Work Programme and
includes any material matters that have arisen since its agreement that require Board
consideration or decision.
– The Group Company Secretary and the CEO share the Board agenda with the Executive
Committee to seek input on any other matters of relevance requiring the Board’s attention and to
ensure any emerging issues receive adequate agenda time.
– The Chairman ensures Board agendas and the meetings themselves are structured to facilitate
open discussion, debate and challenge.
– Unless circumstances or the nature of the topic determine otherwise, matters requiring Board
attention are generally considered at an Executive Governance Forum or by an Executive
Committee Member in advance. This ensures good governance is observed and appropriate
challenge and due consideration of all relevant matters across the Group.
– Meeting papers are typically distributed one week in advance of the meeting to ensure sufficient
time is available to the Directors to review the papers and prepare for the meeting, and to seek
clarification or any additional information in advance of the meeting, where necessary.
– Meetings papers are uploaded and communicated to Directors via a secure electronic board
portal.
(cid:4)(cid:4) Paper preparation
(cid:4)(cid:4) Paper distribution
(cid:4)(cid:4) Before the Board meeting
– Board Committee meetings are normally held in the days prior to the Board meeting, with the
Chairman of each Committee reporting matters discussed and/or matters for approval at the
subsequent full Board meeting.
– Private sessions between the Independent Non-Executive Directors and members of
management may be held to further explore issues.
– Board training usually takes place on the evening before the Board meeting. This allows the
Board to receive training on topics that are relevant to the agenda to further facilitate timely and
constructive challenge and a consistent level of awareness of the subject matter. Training is
provided by a mix of internal and external facilitators.
– Board dinners are held on the evening prior to most Board meetings which allow for further
informal discussion of current issues. Some, but not all, of these Board dinners include the
Executive Directors and in some instances members of the wider Executive Committee are
invited.
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How our Board meetings work? (continued)
Board Meetings
(cid:4)(cid:4) During the Board Meeting
(cid:4)(cid:4) After the Meeting
– The minutes of the previous meeting are reviewed and approved for signature. The Board action
log is reviewed.
– Each Board agenda includes certain standing items, such as the Executive Management Report
which encompasses updates from the CEO, CFO and Chief Risk Officer, items recommended for
approval from Board Committees, an overview of the business discussed at each Committee
meeting and updates from the main business areas.
– Other topics to be discussed will include topics of importance at that time.
– In his opening remarks, the Chairman sets the focus of each meeting. In the rare event of a
Director being unable to attend a meeting, the Chairman discusses the matters proposed with the
Director concerned, seeking their support or feedback accordingly. The Chairman subsequently
represents those views at the meeting.
– Presenters are requested to take each paper as read, and highlight the key matters requiring the
Board’s attention. The Chairman encourages open debate and challenge through the
participation of all Directors and attendees. In bringing discussions to a conclusion, the Chairman
will confirm the Board’s collective position.
– The Chairman provides an update on matters of relevance from his own internal and external
engagements in the recent period.
– The Group Company Secretary will draw the Board’s attention to any matter of importance and
remind the Directors of their obligations under certain statutory or regulatory requirements, where
necessary. Any actual, potential or perceived conflicts of interest are monitored and managed
appropriately throughout the meeting.
– The Group Company Secretary and the Chairman will have a debrief of the meeting and consider
any possible enhancements to its future operation. The operation of the meeting remains under
regular review to ensure focus on continuous enhancement.
– Minutes and actions arising from the meeting are produced and circulated to the Chairman for
feedback, review and agreement within agreed timeframes.
– Actions are provided to action owners to ensure responses are prepared and updates provided to
the next meeting or at the most appropriate juncture and within the agreed timeframes.
In total, 12 scheduled meetings of the Board were held during 2018 and four additional out of course meetings.
Attendance at Board meetings of AIB Group plc is outlined below. 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
Catherine Woods
Board
(scheduled)
Board
(out of course)
Eligible to attend Attended
Eligible to attend Attended
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
12
11
12
12
4
4
4
4
4
4
4
4
4
4
4
4
3
4
4
4
3
4
4
3
4
4
AIB Group plc Annual Financial Report 2018 179
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Governance and oversight –
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During 2018, the Non-Executive Directors met on occasion in the
of the business through site visits, formal briefing sessions or
absence of the Executive Directors.
through attendance at events including those relating to staff or
customers, and meetings with the Regulator. In 2018, all
The Board of AIB Group plc and Allied Irish Banks, p.l.c. are
Directors attended the inaugural ‘Tone from the Top’ event.
coterminous. A number of the Non-Executive Directors are also
Full details of this event can be found on page 31.
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, which
facilitates oversight of subsidiary activities and strong links
between the Group and these material entities.
Outside of our Board Meetings
Non-Executive Directors see attendance at Board and Board
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 training, regularly meeting with senior
management and spending time increasing their understanding
Our professional development and training programme
The following graphic aims to provide an overview of the development and training undertaken by the Board. Some of these items were in
place throughout 2018 whilst others have been introduced in 2019, prior to finalisation of this Report.
Formal induction
programme for
new Directors
Feedback loop on the
programme via Group
Company Secretary
Relevant training
session pre formal
Board consideration of
material matters
Agreed expected
number of hours per
annum of development
One to ones with
executives on key areas
of development as
required by individual
Directors
Overview of the
Board
Professional
Development and
Training
Programme
Access to the suite of
AIB Group ilearn
courses
Site visits across the
Group including
meetings with staff and
customers
Access to an online
Corporate Governance
Library
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Board Focus in 2018
While not intended to be exhaustive, below is a high level overview of a number of matters considered by the Board and Board
Committees during 2018:
(cid:3)(cid:3) Financial
–
2019 Budget
– Financial Plan 2019 - 21
–
2017 results and analyst
presentations
– Approval of dividend
(cid:3)(cid:3) Strategy
(cid:3)(cid:3) Culture and Values
– Progress implementing the Group’s
– Updates on talent and culture
2017–19 strategy
– The outcome of the CBI behaviour
– Brexit
and culture review
– Future environment and business
– Sustainability Report and
model
Conference
– Funding and Liquidity Policy
– Strategy and integrated financial
– Employee engagement
–
–
ICAAP/ILAAP
IFRS 9 Programme
planning beyond 2019
– Property strategy
– New Operating Model
– Customer First activities
(cid:3)(cid:3) Governance and Shareholders
(cid:3)(cid:3) Regulatory
(cid:3)(cid:3) Risk Management
– Board effectiveness
– Regulatory updates
– Chairman’s performance review
– Regulatory inspections
– 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
– Group’s Remuneration Policy
and practices
–
IRB Model Programme progress
–
Investor Relations activities
– Related Party Lending
– Group Recovery Plan
– AGM briefing
– Subsidiary Governance
– Board and Executive Succession
Planning
– CEO and CFO Succession
Processes
– General material risks, including
those related to Brexit and the
wider macro economy
(cid:3)(cid:3) Regular updates
– Business performance update and
– Risk Management
– Chairman's activities
outlook
–
Tracker Mortgage Review
– Board Committee activities
– Balanced scorecard performance
Programme
–
Financial performance update and
– Non-Performing Loans
outlook
Testing our Corporate Governance Processes
At the Board Meeting in July 2018, the Board took part in an
It provided an opportunity to positively test the Group’s
corporate governance structures and the reactions of
advanced scenario testing exercise, internally known as a Fire Drill,
individuals and key areas across the Group, and created a
to simulate a potential adverse capital scenario that would trigger
greater level of awareness of the Recovery Plan and the speed
action under the Group’s Recovery Plan. This simulation exercise
and quality of response expected across the Group.
sought to test the Group’s processes and controls and the ability to
respond quickly and appropriately across the Group in a
Following the Fire Drill, lessons learned and suggested
heightened scenario. The Fire Drill enabled us to test the actions
improvements to the process were incorporated into the
and responses of executive management, the Executive
Recovery Plan. We will undertake another Fire Drill during
Committee and the Board, and those of the AIB UK Board and
2019.
management team, as well as assessing their interactions.
AIB Group plc Annual Financial Report 2018 181
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Board Committees
The Board is assisted in the discharge of its duties by a number of
non-executive director appointments, as required. In all
recruitment processes, we aim to ensure a formal, rigorous and,
Board Committees, whose purpose it is to consider, in greater
acknowledging the need for confidentiality, transparent process.
depth than would be practicable at Board meetings, matters for
which the Board retains responsibility. The composition of such
Prior to all recommendations for appointment of a given
Committees is required to be formally reviewed annually, however
candidate, a comprehensive due diligence process is
as indicated throughout the Report it is, in fact, a continuous
undertaken, which includes candidates’ self-certification of
process. Each Committee operates under terms of reference
probity and financial soundness and external checks. The due
approved by the Board. The terms of reference of the Board Audit
diligence process facilitates the Committee in satisfying itself as
Committee, the Board Risk Committee, the Nomination and
to the candidate’s independence, fitness and probity, and
Corporate Governance Committee and the Remuneration
capacity to devote sufficient time to the role. A final
Committee are available on the Group’s website at
recommendation is made to the Board by the Nomination and
http://aib.ie/investorrelations.
Corporate Governance Committee.
The minutes of all meetings of Board Committees are circulated to
The Relationship Framework specified by the Minister for
all Directors, for information and are formally noted by the Board.
Finance (the “Minister”), which governs the relationship between
Papers for all Board Committee meetings are also made available
AIB and the Minister, on behalf of the Irish State as shareholder,
to all Directors, irrespective of membership. Such circulation of
requires the Board to consult with the Minister before appointing,
minutes and papers are restricted should there be a conflict of
reappointing or removing the Chairman or Chief Executive
interest or issues of personal confidentiality.
Officer and in respect of any other proposed Board
appointments. A Board-approved Policy for the Assessment of
The Board has established a Sustainable Business Advisory
Committee, comprising of Non-Executive Directors and members,
the Suitability of Members of the Board, which outlines the
Board appointment process, is in place, and is in accordance
of senior management to support the execution of the Group’s
with applicable joint guidelines issued by the European
sustainable business strategy, which includes the development
Securities and Markets Authority and European Banking
and safeguarding of the Group’s ‘social license to operate’, such
Authority.
that the Group plays its part in helping its customers prosper as
an integral component of the Group’s business and operations.
Further details on our sustainability related activities are available
on pages 20 to 25.
Induction and professional development
There is an induction process in place for new Directors, the
contents of which varies for Executive and Non-Executive
Directors. In respect of the latter, the induction is designed to
In carrying out their duties, Board Committees and the Advisory
provide familiarity with the Group and its operations, and
Committee are entitled to take independent professional advice,
comprises the provision of relevant briefing material, including
at the Group’s expense, where deemed necessary or desirable by
details of the Group’s strategic, business and financial plans,
the Committee Members.
and a programme of meetings with the Chief Executive Officer
and the senior management of businesses and support and
Reports from the Board Audit Committee, the Board Risk
control functions. A programme of targeted and continuous
Committee, the Nomination and Corporate Governance
professional development to refresh their skills and knowledge is
Committee and the Remuneration Committee are presented later
in place for Non-Executive Directors as part of the overall Board
in this Annual Report.
training programme.
Demonstrating Effectiveness through Corporate
Governance
Board Appointments
The review of the appropriateness of the composition of the Board
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
and Board Committees is a continuous process, and
Governance Committee. Any additional term beyond six years
recommendations are made based on merit and objective criteria,
will be subject to annual review and approval by the Board.
having regard to the collective skills, experience, independence
and knowledge of the Board along with its diversity requirements.
Following appointment, in accordance with the requirements of
the Company’s Constitution, Directors are required to retire at
In addressing appointments to the Board, a role profile for the
the next Annual General Meeting (‘AGM’), and may go forward
proposed new directors is prepared by the Group Company
for reappointment, and are subsequently required to make
Secretary on the basis of the criteria laid down by the
themselves available for reappointment at intervals of not more
Nomination and Corporate Governance Committee, taking into
than three years. The 2019 AGM is scheduled for 24 April 2019.
account the existing skills and expertise of the Board and the
In line with previous AGMs, all directors will retire from office at
anticipated time commitment required. The services of
the date of the AGM and may choose to offer themselves for
experienced third party professional search firms are retained for
reappointment.
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Letters of appointment, as well as dealing with terms of
whole effective in discharging their responsibilities and, in the
appointment and appointees’ responsibilities, stipulate that a
case of individual Directors, to determine whether each Director
specific time commitment is required from Directors. Copies of
continues to contribute effectively and to demonstrate
Directors’ letters of appointment are available to shareholders of
commitment to the role.
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AIB Group plc for inspection at the AGM and at the registered
office during business hours on request from the Group
Company Secretary.
2018 Internal Effectiveness Evaluation
The Board conducts an annual evaluation of its effectiveness,
and is required to have an external evaluation conducted once
Non-Executive Directors are required to devote such time as is
every three years. Having conducted a successful external
necessary for the effective discharge of their duties.
evaluation in 2017, which was facilitated by Lintstock and
The estimated minimum time commitment set out in the terms of
reported on in the 2017 Annual Financial Report, an internal
appointment is 30 to 60 days per annum including attendance at
evaluation was carried out in 2018.
Committee meetings.
The 2018 evaluation was led by the Chairman and was
Before being appointed, Directors disclose details of their other
facilitated by the provision of formal questionnaires by Lintstock.
significant commitments along with a broad indication of the time
The provision of these questionnaires and production of a
absorbed by such commitments. Before accepting any additional
consolidated report by Lintstock on the outcome of that aspect
external commitments, including other directorships that might
of the internal evaluation process facilitated comparison of the
impact on the time available to devote to their role, the agreement
outcome of the process in 2018 to the 2017 outcome to
of the Chairman and the Group Company Secretary, and, in
ascertain the level of progress made in the intervening period.
certain cases, the Central Bank of Ireland (“CBI”), must be sought.
Balance and Independence
Responsibility has been delegated by the Board to the Nomination
Lintstock is an independent external consultancy, who also
conducted an effectiveness evaluation of the Group’s UK
subsidiary during 2018 but has no other connection to AIB
and Corporate Governance Committee for ensuring an
Group.
appropriate balance of experience, skills and independence on
the Board. Non-Executive Directors are appointed so as to
Each Board member completed the online Lintstock
provide strong and effective leadership and appropriate challenge
questionnaire, which sought their views on a range of topics
to executive management.
including Board composition and expertise, Board culture and
dynamics, the Board’s calendar and agenda, the quality and
The independence of each Director is considered by the
timeliness of information, strategy and operational matters, risk
Nomination and Corporate Governance Committee prior to
management and internal control, succession planning, human
appointment and reviewed annually thereafter. It has been
resource management, and priorities.
determined that all Non-Executive Directors in office during 2018,
namely Mr Simon Ball, Mr Tom Foley, Mr Peter Hagan,
As part of the evaluation process, the Chairman met with each
Ms Carolan Lennon, Mr Brendan McDonagh, Ms Helen Normoyle,
Director to review their individual performance. These reviews
Mr Jim O’Hara and Ms Catherine Woods are independent in
included discussion of the Director’s individual contributions and
character and judgement and free from any business or other
performance at the Board and relevant Board Committees, the
relationship with the Group that could affect their judgement.
conduct of Board meetings, the performance of the Board as a
Mr Richard Pym was determined as independent on appointment
whole and its Committees, compliance with Director-specific
in acknowledgement that his independence may be impacted
provisions of the relevant 2015 Requirements, the requirements
during his tenure due to nature of the role and the level of
of the Central Bank’s Fitness and Probity Regulations, and any
engagement involved. Mr Pym is, however, regarded as
other specific matters which the Chairman and/or Directors
continuing to operate in a manner that is independent in character
wished to raise.
and judgement.
Board Effectiveness
The Chairman of the Board leads the annual review of the Board’s
The performance of the Chairman was also assessed and, led
by the SID, the Board met to discuss the Chairman’s
performance, in his absence. The SID subsequently provided an
effectiveness and that of its Committees and individual Directors
update on the positive outcome of the review to the Chairman.
with the support of the Nomination and Corporate Governance
Committee, which he also chairs. The annual evaluation is
A consolidated report on the findings of the full evaluation
facilitated externally at least once every three years.
process was presented to the Board and the Committees.
The objective of these evaluations is to review past performance
concluding that the Board continued to be effective, with all
with the aim of identifying any opportunities for improvement,
Directors demonstrating commitment to their roles, with
determining whether the Board and its Committees are as a
progress being made across all areas when compared to the
The outcome of the evaluation was generally positive,
AIB Group plc Annual Financial Report 2018 183
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previous year. 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 2018 review, actions in respect of
each which are actively underway, included:
– Board Papers: Similar to the prior year’s evaluation, the Board
expressed an appetite for greater brevity and clarity in Board
papers. In response, processes have commenced to provide
a more ‘real time’ opportunity for the Board to provide
feedback to review the current standards and approach to the
collation of executive and Board papers;
– Decision implementation: Directors are keen to implement a
more formal process for them to assess the quality of the
implementation of Board decisions and to review the
effectiveness of past decisions. This aims to ensure the Board
can continue to enhance effectiveness and learn from the
past while ensuring a forward-looking focus;
– Board Work Programme: Directors recognised the progress
made during 2018 in ensuring more time was spent on
strategic matters and ensuring a longer term focus.
Directors want to see that continue alongside a greater
emphasis on culture and behaviours and the 2019
indicative Board Work Programme has incorporated these
areas of activity; and
– Enhanced Stakeholder Engagement: Directors wish to
continue to enhance engagement with key stakeholders,
specifically customers and employees. As such,
consideration is underway for opportunities to enhance
such engagements and build on engagements that have
already taken place and proven effective. In addition,
Directors reaffirmed their appetite for the ‘Tone from the
Top’ event held during 2018 to be repeated in 2019.
A summary of the Board’s progress against the actions arising from the 2017 external effectiveness review are set
out below.
(cid:4)(cid:4) Volume of Board/
Committee papers
(cid:4)(cid:4) Conduct of Board/
Committees
(cid:4)(cid:4) Culture
(cid:4)(cid:4) Strategy
While observations on the volume of papers did appear again during the 2018 effectiveness
review, a strong focus was applied to the refinement of papers during 2018 and improvements were
acknowledged. In particular the CEO, CFO and CRO reports were reviewed and amalgamated into
a more streamlined Executive Management Report, the first iteration of which travelled to the Board
in early 2018.
2018 saw an in-depth review and focusing of agendas to ensure that the Board and Board
Committees had sufficient time to devote to strategic thinking and constructive challenge.
Particular focus was applied to the Board Risk Committee, the activity of which has grown due to the
increasingly challenging regulatory environment.
The Board engaged more directly on the topic of culture during 2018, and particular focus was
brought about by the CBI’s Review of Behaviour and Culture in the Banking Industry and CBI
representatives’ attendance at the December Board meeting in 2018. Significant progress was
made internally across the areas of culture and diversity and inclusion, and a sharper focus is being
planned throughout Board engagement in 2019.
As part of the intended evolution of the wider integrated and focused strategic programme under the
direction of the CEO and the Head of Group Strategy, dedicated time was allocated to Board
meetings to focus on strategic items, with significant time spent in May 2018 to review progress
against the implementation of the strategy agreed in late 2017 and to frame the agenda for the
strategic considerations to take place over the remainder of the year, culminating in a robust full day
strategy session in November 2018. The focus of these sessions received positive feedback from
the Board which is satisfied with progress and the direction being taken with regard to strategic
focus and the process being embedded across the Group for 2019 and beyond.
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Other matters related to Corporate Governance
Diversity
Employee diversity and inclusion in AIB Group is addressed
through policy, practices and values which recognise that a
productive workforce comprises of different work styles, cultures,
generations, genders and ethnic backgrounds. AIB Group
opposes all forms of unlawful or unfair discrimination.
The efficacy of related policy and practices and the embedding
of 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.
Whilst the Board recognises that the diversity is wider than
gender, in order to achieve its objective to build a diverse Board,
it has set measurable targets and objectives around the
under-represented gender in its Board Diversity Policy.
The original Board Diversity Policy for AIB Group was introduced
in 2015 with an initial target to ensure the percentage of females
on the Board reached or exceeded 25 per cent by the end of
2016. This target was met in October 2016. Thereafter the
Board’s aim was to ensure that the percentage of females on the
Board remained at or exceeded 25 per cent.
On review of the Board Diversity Policy in July 2018, the Board
set a new target to achieve 30 per cent female representation by
the end of 2020 and thereafter, to take opportunities to increase
the number of female directors over time, where that is consistent
with other skills and diversity requirements. At 31 December
2018, the percentage of females on the Board stood at 27 per
cent and the Board is confident it will reach its target by 2020.
In terms of implementation, the Nomination and Corporate
Governance Committee (the “Committee”) reviews and assesses
AIB Group Board composition and has responsibility for leading
the process for identifying and nominating, for approval by the
AIB Group Board, candidates for appointment as directors. In
reviewing AIB Group Board composition, balance and
appointments, the Committee considers candidates on merit
against objective criteria and with due regard for the benefits of
diversity, in order to maintain an appropriate range and balance
of skills, experience and background on the Board. Where
external search firms are engaged to assist in a candidate
search, they will be requested to aim for a fair representation of
both genders to be included in the initial list of potential
candidates so the Committee have a fair list from which to select
candidates for interview.
The Board Diversity Policy and monitoring of performance
relative to targets set out therein is a matter for the Committee,
which discusses progress relative to the agreed targets in its
Committee report on page 197. 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
reported on page 27, is tasked with considering and advising on
AIB Group’s policies relating to employee diversity in AIB Group
generally.
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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.
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 Executive Committee
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 Executive
Committee 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, delivers the Group’s
shareholder services, including in relation to shareholder
meetings. The Group Company Secretary and her office
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 2019 AGM along with other
shareholder related information can be found on page 371.
AIB Group plc Annual Financial Report 2018 185
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Governance and oversight –
Report of the Board Audit Committee
Letter from Catherine Woods,
Chairman of the Board Audit Committee
This accounting standard requires losses to be reflected on an
expected credit loss (“ECL”) basis. ECLs are required to
incorporate forward-looking information, reflecting
management’s view of potential future economic environments.
The complexity involved required management to develop new
methodologies involving the use of subjective judgements as
well as significant changes to systems, processes and controls.
The key judgements include:
– The key accounting policies with respect to classification
and measurement and credit impairment;
– Determining the criteria for a significant increase in credit
risk and for being classified as credit impaired;
– Choosing the appropriate models and assumptions for
Dear Shareholder,
measuring ECL;
On behalf of the Board Audit Committee (‘the Committee’), I am
the period over which to measure ECL;
pleased to introduce the report on the Committee’s activities
– Key assumptions, including collateral valuation and cash-
during the financial year ended 31 December 2018.
flow timings, used in discounted cash-flows (‘DCFs’) of
– Determining the life of a financial instrument and therefore,
individually assessed loans. DCFs are the most significant
At a high level the Committee ensures that the Group operates a
input to the ECL calculation for Stage 3 loans;
strong control environment and acts independently of Executive
– Post model adjustments determined by management for
Management so that the interests of the shareholders are
appropriately protected in relation to internal control and financial
reporting.
certain portfolios; and
– The macro-economic scenarios and future outlook,
including the potential impact of the withdrawal of the
United Kingdom from the European Union on the Group’s
This year, we were pleased to welcome Mr Brendan McDonagh
ECL and the probability weights attaching to each scenario.
to the Committee; Brendan’s extensive experience and skill set
has enabled him to contribute fully to our discussions from the
The Committee has obtained regular and detailed reports and
outset of his appointment; his membership and experience of the
presentations from management throughout 2018 on the impact
Board Risk Committee (“BRC”) also serves to further ensure
of IFRS 9 adoption and the process for determining the key
co-ordination with the work of the BRC, and facilitates effective
assumptions noted above. The Committee has also considered
governance across common risk and finance issues.
the reports of independent assurance processes within the
Group as well as reports from Group Internal Audit. In relation
During 2018, the Committee continued to focus on the quality
to forward looking macro-economic scenarios, the Committee
and integrity of the application of the Group’s accounting policies
has considered and challenged the process used by
and financial reports and disclosures. A key activity of the
management to determine the assumptions and weightings,
Committee is to consider the significant matters relating to the
including the potential impact of Brexit. The Committee has also
annual and interim accounts with key accounting judgements
reviewed the sensitivities and disclosures on pages 89 to 92
being subject to in depth discussion with management, and the
and are satisfied these are balanced and fair. Based on the
External Auditor. It is vital that the Committee provides robust
work performed, the Committee concurred with the conclusion
challenge to those judgements in advance of recommending to
reached by management that the level of provisions is within
the Board that all financial reports are considered to be a fair,
the acceptable range of outcomes.
balanced and understandable assessment of the Group’s
financial position. The key matters of judgement considered by
The Committee also received reports from Management with
the Audit Committee in relation to the 2018 accounts, and how
respect to the net credit impairment writeback recorded in the
they were addressed, are set out below:
income statement and adequacy of credit provisions at year
end and concurred that the level of provisions were appropriate.
At the end of 2017, I noted that the Committee had focused
considerable time on overseeing the Group’s preparedness for
The Group has recognised significant deferred tax assets and it
the implementation of IFRS 9.
is projected that these assets will be utilised over an extended
period. The assessment of the conditions for the recognition of
On 1 January 2018, the Group transitioned to IFRS 9 which
a deferred tax asset is a critical judgement, given the inherent
resulted in an opening impact of € 267 million on shareholders
uncertainties associated with projecting profitability over a long
equity. Throughout 2018, we received updates from management
time period.
on the embedding of IFRS 9.
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In assessing the recognition of the deferred tax assets, the
Once again this year, the Committee assessed and discussed
Committee has considered the Group’s Financial Plan and the
control issues on a thematic, holistic basis against a number of
growth assumptions and profitability levels underpinning the
“Key Control Enhancement Themes”, against which
Financial Plan. The Committee has also assessed the range of
improvements are driven by a specified, responsible Executive
positive and negative evidence prepared by Management and
Committee Member. Considerable progress was made against
the inherent uncertainties in any long term assumptions and
the Assurance Framework for the Prudential Regulatory
projections. Based on this assessment, the Committee
Reporting theme; in light of this, the Committee accepted the
concluded that the assumptions used by Management in
recommendation from the Group Head of Internal Audit to
assessing the recognition of deferred tax assets are reasonable.
transfer that theme to business as usual in May 2018. Steady
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There is a high degree of estimation and judgement in the
and demanding external environment: Key Person
calculation of retirement benefit liabilities. These liabilities are
Succession/Handover; Oversight of subsidiaries, including a
highly sensitive to changes in the underlying actuarial
focus on AIB Group (UK) p.l.c.; IT Governance, Change and
assumptions including the discount rate, pension in payment
Third Party Management; Credit and Compliance Risk
increases and inflation rates.
Management including Anti Money Laundering.
progress was made against the following themes in an evolving
In assessing the reasonableness of defined benefit obligation
In light of a sustained focus on the enhancement and
assumptions, the Committee has reviewed reports by
embedding of the three lines of defence model across the
Management setting out the processes for deriving the key
Group, a new control theme on First Line Assurance was also
assumptions and how these assumptions are benchmarked to
established in 2018. The Committee look forward to receiving
external market data. The Committee has also reviewed
updates from Management regarding the heightened control
assessments by independent actuaries that have been used as
Management’s opinion experts. Based on the work performed,
environment which we anticipate will be put in place. It is hoped
that the continued implementation and roll out of the “Shield” risk
the Committee agreed with Management’s conclusion that the
management system, which provides a view of risk and control
assumptions supporting the retirement benefit liabilities are
activity from the first to the third line, will assist in this regard.
reasonable.
During the course of a Committee meeting, Management
demonstrated the system and provided an overview of both
The measurement of provisions, including those for customer
current and future capabilities.
redress and related matters, is highly judgemental, and involves
a number of key assumptions relating to the identification of
The Committee has responsibility for ensuring the appropriate
impacted customers and related redress costs.
arrangements are in place by which staff can, in confidence,
raise concerns regarding possible improprieties in matters of
The Committee has received detailed reporting from
financial reporting or other matters. We received regular updates
Management in relation to the status of the Tracker Mortgage
from Management regarding the Group’s whistleblowing or
Examinations, the process and assumptions used, and the
“Speak Up” arrangements in place, and the efficacy of same.
results of independent assurance. The Committee has also
The supporting policies and procedures are communicated to
evaluated the disclosures made in the financial statements
staff across the Group on an ongoing basis; the Committee will
around conduct provisions given the inherent uncertainties in
continue to ensure that appropriate support and arrangements
their calculation and their judgemental nature. Based on this, the
are in place in this regard throughout the coming year.
Committee concur with Management’s conclusions on the
reasonableness of provisions for customer redress and related
The Committee continues to evaluate the independence and
matters.
performance of Internal Audit and the External Auditor. In
December 2018, the Group Head of Internal Audit commenced
In addition to our considerations of key judgements, the
an acting leadership role within the Human Resources function
Committee continued to provide oversight on the operation of a
on an interim basis, with a member of the Audit Senior
strong control environment across the Group and 2018
Management Team undertaking the Acting Group Head of
evidenced progress on the effectiveness of internal controls.
Internal Audit role. At that time, the Committee undertook a
The Committee received regular reports from the Group Internal
holistic assessment of any potential, perceived or actual
Audit function regarding control issues identified through the
conflicts of interest which may arise as a result, as well as an
execution of the internal audit plan, as well as Management’s
assessment of the strength and capacity of the Internal Audit
response to those issues. Audit engagements continued to be
function in the absence of the Group Head of Internal Audit, and
rated based on the strength of both the control environment in
any possible negative implications for the Group’s control
operation, and Management’s awareness of the risks facing
environment. The Committee satisfied itself that there were
their business areas, and the controls in place to mitigate those
appropriate arrangements in place to address the issues
risks. The Committee also considered reports and presentations
discussed.
from the Auditor, Finance and Risk Management on the
effectiveness of the control environment.
AIB Group plc Annual Financial Report 2018 187
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Governance and oversight –
Report of the Board Audit Committee
This year saw a change in Lead Audit Partner, with Gerard
Fitzpatrick of Deloitte stepping down in early 2018, and John
McCarroll appointed. Following a smooth transition, the
collaborative relationship with the External Auditor has continued,
and the Committee look forward to working with Mr McCarroll in
the coming year.
This year, I continued my practice of meeting with and engaging
on an ongoing basis with the External Auditor, Chief Financial
Officer, Group Head of Internal Audit and other members of
executive management, as appropriate, throughout the year.
Further details on the Committee’s activities, Members of the
Committee and their record of attendance at meetings during
2018 are outlined in the full report below.
This will be my final letter to you as Committee Chair, given that
2019 marks the end of my nine year term as a Member of the
Board. The past nine years constitute a transformational period
in AIB’s history and this has made my time on the Board both
interesting and challenging. I would like to pay tribute to the
significant contributions made by my fellow Members (both past
and current) throughout my tenure as Chairman, and particularly
so during 2018. Their support, dedication and insights have
proven invaluable to me and AIB has benefitted immensely from
their contributions. I wish them every success in the future.
Catherine Woods
Committee Chairman
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Report of the Board Audit Committee
Membership and meetings
In 2018, the Board Audit Committee comprised five independent
To ensure ongoing awareness of the work of the Committee by
all Directors, the Committee Chairman provided an update to
the Board following each meeting on the key items discussed
Non-Executive Directors whom the Board determined have the
and considered by the Committee.
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collective skills, competence 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
Committee purpose
A full overview of the responsibilities of the Committee are set
risk related considerations of the Board Audit Committee,
out in its Terms of Reference. The Committee is appointed by
Mr Peter Hagan, Ms Catherine Woods and Mr Brendan
the Board to assist the Board in fulfilling its independent
McDonagh are also members of the Board Risk Committee.
oversight responsibilities in relation to:
This common membership provides effective oversight of
relevant risk and finance issues. Details of each of the Members
are outlined on pages 34 to 35.
–
–
the quality and integrity of the Group’s accounting policies,
financial and narrative reports, and disclosure practices;
the effectiveness of the Group’s internal control, risk
management, and accounting and financial reporting
The Committee met on ten occasions during 2018, eight of which
systems;
were scheduled, and two of which were out of course meetings.
–
the adequacy of arrangements by which staff may, in
Additionally, the Members met with the Group Head of Internal
confidence, raise concerns regarding possible improprieties
Audit and members of the Senior Audit Leadership team to
in matters of financial reporting or other matters; and
discuss the 2019 Group Internal Audit plan. All scheduled
–
the independence and performance of the Internal and
meetings were attended by the Chief Financial Officer, the Chief
External Auditors.
Risk Officer, the Group Head of Internal Audit, and the Lead Audit
Partner from our External Auditor, Deloitte. Other senior
executives also attended by invitation, where appropriate.
The Committee’s Terms of Reference can be found on the
Group’s website at: https://aib.ie/investorrelations.
The Committee met with the External Auditor, the Chief Financial
Officer, the Group Head of Internal Audit and the Chief Risk
Officer, 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.
Members: Ms Catherine Woods, Chairman, Mr Tom Foley,
Mr Peter Hagan, Mr Jim O’ Hara and Mr Brendan McDonagh.
Member attendance during 2018:
Catherine Woods
Tom Foley
Peter Hagan
Brendan McDonagh*
Jim O’Hara
Eligible to attend
10
Attended
10
10
10
7
10
10
10
7
10
*Mr Brendan McDonagh was appointed as a Member of the
Board Audit Committee in May 2018 and as such was eligible to
attend seven meetings of the Committee.
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Governance and oversight –
Report of the Board Audit Committee
Matters considered by the Committee
The following, while not intended to be exhaustive, is a summary of key items considered, reviewed and/or approved or recommended
by the Committee during the year:
Area of focus
Role of the Committee
(cid:4)(cid:4) Financial and Narrative
Reporting
– Reviewed and recommended as appropriate significant financial reporting judgements and
accounting assumptions made by Management.
– Reviewed and approved, as appropriate, new accounting policies and changes to existing
policies prior to implementation.
– Considered the minutes of the Group Disclosure Committee in advance of recommending the
financial statements to the Board.
– Recommended to Board the approval of the Annual Financial Report.
(cid:4)(cid:4) Internal Control
– Received reports from management regarding the operation and effectiveness of the system of
controls over financial reporting.
– Received reports from management regarding key internal controls in respect of fraud prevention
and detection.
– Received reports from management regarding compliance with regulatory outsourcing
requirements.
– Approved Directors’ statements concerning internal controls to be included in the Annual
Financial Report.
– Reviewed the minutes of the subsidiary audit Committees of AIB Group (UK) p.l.c.; EBS d.a.c.
and AIB Mortgage Bank.
(cid:4)(cid:4) Code of Conduct and
Speak Up Policy
– Received reports on the operation of the Group Code of Conduct and Conflicts of Interest Policy
across the Group.
– Received reports regarding the operation of the Speak Up policy and all other whistleblowing
options available in the Group.
(cid:4)(cid:4) Internal Auditor
– Considered the findings of internal audit reports and special investigation reports, and
management’s response to actions outlined therein.
– Monitored progress against the agreed 2018 Group Internal Audit Plan, and progress against
issues raised.
– Considered the annual and half year audit opinion relation to the overall control environment.
– Approved the Annual Internal Audit Plan for 2019.
– Approved the Group Internal Audit Charter.
– Approved the approach to compliance with Article 191 of the Capital Requirements Regulation,
including the output of the Annual General Risk Assessment relating to Internal Models.
(cid:4)(cid:4) External Auditor
– Reviewed the scope of the statutory external audit, as well as the findings, conclusions and
recommendations of the External Auditor.
– Reviewed and made recommendations to the Board regarding the Audit Representation Letter.
– Reviewed and recommended to the Board the Policy on Employment of Former Employees of
the External Auditor.
– Reviewed annual report from management regarding the employment of former employees of
the External Auditor across the Group.
– Reviewed the level of non-audit fees paid to the External Auditor.
– Approved the fees paid to the Statutory Auditor.
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Internal Audit
The Committee provided assurance to the Board regarding the
The Committee considered the detailed audit plan in respect of
the annual and interim financial statements and the Auditor’s
independence and performance of the Group Internal Audit
findings and the conclusions and recommendations arising
function. The Committee considered and approved the annual
from the half yearly review and annual audit. The Committee
audit plan, with reference to the principal risks of the business
satisfied itself with regard to the Auditor’s effectiveness,
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and the adequacy of resources allocated to the function.
independence and objectivity through a number of mechanisms
Throughout the year, the Chairman of the Committee met with
throughout the year. These included consideration of the work
Group Internal Audit management between scheduled meetings
undertaken, confidential discussions with the Auditor, feedback
of the Committee to discuss forthcoming agendas for Committee
received from Management and through its annual evaluation
meetings and material issues arising. The Committee also
of the Committee’s effectiveness, which incorporated questions
met with the Group Head of Internal Audit in a confidential
regarding the external audit process.
session during 2018, in the absence of Management. The Group
Head of Internal Audit has unrestricted access to the Chairman
On the basis of the above, and the Committee’s determination
of the Board Audit Committee.
of the Auditor’s effectiveness, independence and objectivity, the
Committee recommends that Deloitte should be reappointed as
The Committee is responsible for making recommendations in
the Auditors at the Annual General Meeting on 24 April 2019.
relation to the Group Head of Internal Audit, including on
appointment, replacement and remuneration, in conjunction with
the Remuneration Committee, and confirming the Group Head of
Performance evaluation
An internal performance evaluation of the Board was
Internal Audit’s independence.
External Audit
Following a tender process in 2013, Deloitte were appointed as
conducted in 2018, as noted on page 183; this included a
review of the Committee. The overall results of that review were
positive and conclude that the Committee continued to operate
in an efficient manner. A number of minor areas for
the Group’s Auditor. In accordance with the requirements
enhancement have been set out in actions which will be
regarding timelines for audit partner rotation set out in the EU
tracked for conclusion in 2019.
Directive, John McCarroll was appointed lead Audit Partner in
March 2018, replacing Gerard Fitzpatrick. The next tendering
process for a new Group auditor will be no later than 2023.
The Committee provided oversight in relation to the Auditor’s
effectiveness and relationship with the Group, including
agreeing the Auditor’s terms of engagement, remuneration and
monitoring the independence and objectivity of the Auditors. To
help ensure the objectivity and independence of the Auditors,
the Committee has established a policy on the engagement of
the Auditors to supply non-audit services, which outlines the
types of non-audit fees for which the use of Auditors is
pre-approved. It also provides guidance regarding which
non-audit services require specific approval from the
Committee before they are contracted, and those from which
the Auditor is excluded. Further details on the approach can be
found at the Group’s website at: https://aib.ie/investorrelations.
In addition, the Committee provided oversight in monitoring the
effectiveness of the policy for the employment of individuals
previously employed by the Auditor. The Committee reviewed
the policy and received updates on its application, including the
number of former employees of the external auditor currently
employed in senior management positions in the Group, and
facilitated its considerations as to the Auditor’s independence
and objectivity in respect of the audit. The policy was
established in 2016 in accordance with the EU Audit
Regulations 537/2014 and Directive 2014/56/EU.
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Governance and oversight –
Report of the Board Risk Committee
Letter from Peter Hagan,
Chairman of the Board Risk Committee
Laundering and Counter Terrorist Financing regulations and
compliance with appropriate sanctions regimes.
Dear Shareholder,
Other areas of focus for the Committee during 2018 included:
–
the review of the proposed 2019 risk appetite statement
and the ongoing monitoring of performance against agreed
2018 risk appetite metrics on an ongoing basis;
–
the review of risk-related policies and frameworks,
including the introduction of a Group Credit Policy
Architecture Framework;
updates regarding IFRS 9 implementation;
the Group’s recovery planning;
the Group’s capital and liquidity position, with particular
–
–
–
On behalf of the Board Risk Committee (‘the Committee’), I am
reference to the Internal Capital Adequacy Assessment
pleased to report on the Committee’s activities during the financial
Process (“ICAAP”) and Internal Liquidity Adequacy
year ended 31 December 2018.
Assessment Process (“ILAAP”); and
–
updates received on significant credit activity across the
The Committee’s priorities continued to evolve in 2018, giving
organisation.
consideration to the external market, emerging areas of concern
and the regulatory environment. The Committee maintained
In line with the trend of the previous number of years, the
regular oversight of exposure to the material risks facing the
Committee spent a substantial portion of time discussing items
organisation; to that end, conduct, credit, compliance, market and
related to the continuing regulatory agenda. The Group was
operational risks all remained significant areas of focus.
subject to a number of constructive, in-depth inspections
throughout the year and the resultant actions arising from the
Due to a number of factors, including the proposed
Single Supervisory Mechanism Risk Mitigation Programme
implementation of the Group’s revised Operating Model, ongoing
were brought before the Committee for discussion. The
remuneration restrictions in place in the Irish banking industry and
effective execution and subsequent implementation of those
the announcement of notable departures of Executive
actions by management has served to enhance the overall
Management team members, Operational Risk and People Risk
control environment in operation in the Group. It is anticipated
came to the fore on a recurring basis throughout 2018. The
that this positive engagement will continue into 2019 and
Committee consideration of the mitigants to those risks will
beyond.
continue throughout 2019.
Further details on the Committee’s activities, Members of the
This year saw some positive Operational Risk developments, with
Committee and their record of attendance at meetings during
continued enhancements to the Operational Risk management
2018 are outlined in the full report below.
infrastructure in the Group, through the use of the “Shield” risk
management system across the three lines of defence. Evidence
The Committee's focus in 2019 will continue to be on ensuring
of improvements in the quality of the internal Risk Control
that the Group's risk culture, risk appetite, policies, procedures
Assessment process undertaken by Management were monitored
and management controls are sufficiently robust to support its
and assured by the Operational Risk function and reported to the
ongoing financial progress and to withstand shocks in the
Committee. Cyber Risk was also considered by the Committee,
market and economic environments in which the Group
given the rapidly evolving external global threat landscape.
operates. The impact of the uncertainties regarding the UK’s
exit of the European Union on the risk profile of the Group and
The development of modelling capabilities across the Group
the related contingency plans and escalation mechanisms in
continued to be a key area of focus for the Committee. To that
place will also continue to be reviewed by the Committee.
end, the Committee commissioned regular reports from
management regarding progress against set deliverables. Positive
As I approach the conclusion of my seven year term as an AIB
developments, including the achievement of some significant
Group Board Member, this is likely to be my final letter to you
milestones, have been evidenced by the Committee throughout
as Committee Chair. Looking back over those seven years, it is
the year, and the area will remain a focus throughout 2019.
satisfying to see that AIB has rebuilt a strong capital base,
The Committee continued to receive regular reports on the
and significantly reduced the volume of problem assets on its
Group’s efforts to ensure compliance with relevant Anti-Money
books.
acquired exceptional liquidity, established stable profitability
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As important as these changes are, I take even more comfort
from the new policies, procedures and standards that will
facilitate ongoing control over the Group’s risk profile. I have no
doubt that given the calibre of my fellow Members, there will be
continued focus on the material risks facing the organisation by
the Committee. I would like to take this opportunity to express my
gratitude to my fellow Members for their contribution to the
effective working of the Committee throughout my tenure as
Chairman, and particularly throughout the course of 2018.
I wish them well in their future endeavours.
Peter Hagan,
Committee Chairman
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Governance and oversight –
Report of the Board Risk Committee
Membership and meetings
In 2018, the Committee comprised five independent Non-
To ensure ongoing awareness of the Committees work by all
Directors, the Committee Chairman provided an update to the
Executive Directors who the Board determined have the
Board following each meeting on the key items discussed and
collective skills and relevant experience to enable the Committee
considered by the Committee. The Committee Chairman
to discharge its responsibilities. To ensure co-ordination of the
continued to remain satisfied that the skills and experience of
work of the Committee with the risk related considerations of the
the Committee Members enable the Committee to provide the
Board Audit Committee, Mr Peter Hagan, Ms Catherine Woods
independent risk oversight it is tasked with, while maintaining a
and Mr Brendan McDonagh are also members of the Board Audit
constructive relationship with Management.
Committee. This common membership provides effective
oversight of relevant risk and finance issues. In addition, to
ensure that remuneration policies and practices are consistent
Committee Purpose
A full overview of the responsibilities of the Committee are set
with and promote sound and effective risk management, common
out in its Terms of Reference. The Committee assists the Board
membership between the Committee and the Remuneration
in proactively fostering sound risk governance within the Group
Committee is maintained through the joint membership of both
through ensuring that risks are appropriately identified and
Committees of Mr Simon Ball and Mr Brendan McDonagh.
managed, and that the Group’s strategy is informed by, and
Details of each of the Members are outlined on pages 34 to 35.
aligned with, the Board approved risk appetite. The remit of the
Committee continues to evolve year on year. However, its
The Committee met on ten occasions during 2018, nine of which
primary roles and responsibilities are:
were scheduled and one of which was a joint meeting with the
–
providing assistance and advice to the Board in relation to
Remuneration Committee. All meetings were attended by the
current and potential future risks facing the Group and risk
Chief Financial Officer, the Chief Risk Officer, the Group Head of
strategy in that regard, including the Group’s risk appetite
Internal Audit, the Lead Audit Partner from our External Auditor,
and tolerance, with a view to ensuring that the Board is
Deloitte, and on occasion by the Chief Executive Officer.
equipped to fulfil its oversight responsibilities in relation to
Other senior executives also attended by invitation, where
these;
appropriate. The Chief Risk Officer has attended all meetings of
–
assessing the effectiveness of the Group’s risk management
the Committee, has had unrestricted access to the Chairman of
infrastructure;
the Board Risk Committee, and met twice in confidential sessions
– monitoring compliance with relevant laws and regulation
with the Committee, in the absence of other management.
obligations;
Additionally, the Committee also met with the Group Chief
Compliance Officer, the Group Head of Internal Audit and the
Chief Credit Officer on one occasion each, in the absence of
–
–
reviewing the Group’s risk profile, risk trends, risk
concentrations and risk policies;
considering and acting upon the implications of reviews of
Management, during the year. The Chairman of AIB Group (UK)
risk management undertaken by Group Internal Audit and/or
p.l.c. also attends meetings of the Committee by invitation, where
external third parties; and
appropriate.
–
promoting a risk awareness culture within the Group.
The Chairman and Members of the Committee, together with
The responsibilities of the Committee are discharged through its
their attendance at scheduled meetings, are shown below.
meetings, and through the regular commissioning, receiving and
considering of reports from the Chief Risk Officer, the Chief
Members: Mr Peter Hagan, Chairman, Mr Simon Ball,
Credit Officer, the Chief Financial Officer and the Group Head of
Ms Carolan Lennon, Mr Brendan McDonagh and Ms Catherine
Internal Audit, all of whom attend meetings of the Committee.
The Committee’s Terms of Reference can be found on the
Group’s website at: https://aib.ie/investorrelations
Woods.
Member attendance during 2018:
Peter Hagan
Simon Ball
Carolan Lennon
Brendan McDonagh
Catherine Woods
Eligible to attend
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Attendance
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10
9
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10
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Matters considered by the Committee
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:
Area of focus
Role of the Committee
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(cid:4)(cid:4) Risk Appetite, Risk Profile
and Key Risk Areas/Issues
(cid:4)(cid:4) Risk Frameworks and
Policies
(cid:4)(cid:4) Liquidity, Funding and
Capital
(cid:4)(cid:4) Compliance
– Reviewed regular reports from the Chief Risk Officer which provide an overview of key
material risks, including funding and liquidity, capital adequacy, credit risk, market risk,
regulatory risk, business risk, conduct risk, cyber risk, model risk and related mitigants.
– Reviewed and recommended the Group and Subsidiary Risk Appetite Statement (“RAS”) to the
Board for approval, whilst ensuring alignment to the Group’s business objectives, and that the
subsequent business and strategic plans were developed in line with agreed RAS metrics.
– Monitored the Group’s risk profile against agreed Group RAS metrics on an ongoing basis, and
recommending changes to the Group RAS as appropriate.
– Reviewed 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.
– Assessed credit risk performance and trends, including regular updates on significant credit
transactions.
– Reviewed the ongoing operational risk profile, including significant operational risk events and
potential risks.
– Considered reports regarding 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.
– Reviewed and recommended to Board Management’s proposed plans to address actions
required under the Single Supervisory Mechanism Risk Mitigation Programme, and monitored
progress against these deliverables on a quarterly basis.
– Received status updates regarding compliance with the General Data Protection Regulation
requirements across the Group.
– Approved and recommended risk frameworks and policies as appropriate, including those relating
to credit and credit risk, model risk, people and culture risk and funding and liquidity.
– Reviewed and recommended as appropriate capital planning, including consideration of the
Group ICAAP and ILAAP reports and related Group wide stress test scenarios.
– Reviewed the funding and liquidity policy and related stress tests.
– Received reports from the Group Chief Compliance Officer regarding compliance and conduct
advisory services, fraud monitoring, horizon risk and regulatory change projects.
– Received reports from the Money Laundering Reporting Officer regarding the status of the
AML/CFT control environment, and compliance with Anti-Money Laundering/Financial Sanctions
policies and frameworks.
(cid:4)(cid:4) Chief Risk Officer and
Group Risk Function
– Received reports regarding the structure and operation of the Risk and Compliance functions
and progress against deliverables.
Performance evaluation
An internal performance evaluation of the Board was conducted in 2018 as noted on page 183 and this included a review of the
Committee. The overall results of that review concluded that the Committee continued to operate in an efficient manner. Members noted
the importance of continuing to ensure that the Committee maintain appropriate focus and oversight of the material risks facing the
Group, and allow sufficient time to discharge those responsibilities. Targeted plans for improvement will be rolled out in 2019.
AIB Group plc Annual Financial Report 2018 195
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Governance and oversight – Report of the Nomination
and Corporate Governance Committee
Letter from Richard Pym, Chairman of the Nomination and
This work culminated in the identification of four profiles or
Corporate Governance Committee
Dear Shareholder,
specific Board roles requiring successors for immediate focus
in 2018, and action was commenced to ensure the timely
appointment during 2019 of suitable high-calibre successors to
the following roles:
– Chairman of the Board Audit Committee;
– Chairman of the Remuneration Committee;
– Chairman of the Board Risk Committee;
A fourth profile was identified for immediate focus in 2018, and
action commenced to ensure the continuation of the current skill
set and experience profile of the Board on matters relating to
risk management and investment banking in preparation for the
On behalf of the Nomination and Corporate Governance
departure of certain directors during 2019.
Committee (the “Committee”), I am pleased to present our
report on the Committee’s activity during the financial year
While the Committee developed candidate specifications for
ended 31 December 2018.
these particular identified roles and skill sets, potential
candidates were also required to be of sufficient calibre and
As announced publicly in 2018 and referenced throughout the
suitable for appointment to the Board as Non-Executive Director
Report, our Chief Executive Officer (“CEO”), Mr Bernard Byrne,
and enhance the Board’s overall effectiveness, facilitating the
and Chief Financial Officer (“CFO”), Mr Mark Bourke,
regrettably informed us in late 2018 of their intention to resign
Board in fostering a culture where a commitment to high
standards and customer values was at the heart of decision-
from AIB Group in early 2019. Furthermore, and as announced
making.
on 27 February 2019, Mr Simon Ball has notified the Board of
his intention not to stand for re-election at this year’s Annual
In addition, the Committee considered the nominees of the
General Meeting. Added to this, three of our long-standing and
Minister for Finance who had been selected by the Minister
valuable Non-Executive Directors are due to step down during
through a Public Appointment Service process. The Ministers’
2019.
nominees were subject to the same level of consideration and
suitability review by the Committee as applied to all other Non-
These developments, along with the continued evolution of
Executive Directors.
corporate governance requirements and the introduction of new,
or in some cases enhanced, requirements that the Group is
Turning to executive succession planning, the Committee
required to adhere to, resulted in a very busy year for the
continued to ensure the adequacy of succession planning and
Committee, whose primary areas of focus under its Board-
contingency arrangements for key executive roles. Executive
approved Terms of Reference relate to succession planning for
succession planning is of utmost importance and is a key area
the Board and Senior Executives and the Group’s corporate
of focus for the Committee. The Group’s Remuneration Policy is
governance policies and practices.
governed by restrictions contained in certain agreements with
the Irish State. The resignation of a number of senior executives
Each year the Committee regularly reviews the suitability of the
during 2018, including the CEO and CFO, supports the validity
composition of the Board and the composition of the Board
of the Board’s concerns regarding heightened people risk and
Committees. However, with the number of changes imminent,
the impact of the continuing limitations on the Board’s ability to
the Committee spent a significant amount of time in 2018
exercise its authority and discretion over remuneration, in line
developing a longer-term Board succession plan, which had
with EBA Guidelines on Sound Remuneration Policies. Against
regard for current Directors’ tenure and the required skill set,
that backdrop, and acknowledging increasing competition in the
experience and diversity profile of the Board as a collective now
market, executive succession planning, while challenging,
and into the future. The Committee also identified any potential
becomes even more vital to ensure the long-term sustainability
gaps that would need to be addressed following the departure
of the business. The Remuneration Committee report on page
of current Directors and ensured identification of actions
201 further describes the Group’s considerations in this regard.
required to ensure preparedness of timely appointments.
In line with the Joint European Securities and Markets Authority
about the succession search process; (1) with the CEO, to
(“ESMA”) and European Banking Authority (“EBA”) Guidelines
identify the preferred successor to the CFO; and (2) to identify
on the Assessment of Suitability of members of the
the preferred successor to the CEO, each of which require
management body and key function holders, a collective
consultation with the Minister for Finance and the submission of
suitability assessment of the Board was also carried out during
applications to the Central Bank of Ireland and the European
Following news of their intended departures, the Committee set
the year. Such assessments facilitate the Committee in
ensuring its processes to assess the suitability of the Board as
a collective are continually enhanced and sufficiently robust.
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Central Bank for fitness and probity assessment processes,
prior to final Board approval. Alongside these succession
considerations, the Committee also discussed the appointment
of additional Executive Directors and agreed that the Deputy
CEO would be appointed as an Executive Director, subject to
the fitness and probity assessment process and that the CFO
would attend Board meetings as a regular attendee.
Following rigorous processes, both the CEO and CFO
successors have been identified from within the ranks of AIB
Group. This is a positive reflection of the strength and calibre of
talent across AIB. I look forward to working with Dr Colin Hunt
who was announced in December 2018 as the Board’s
proposed successor to the role of CEO and Executive Director
subject to the regulatory assessment process. The regulatory
assessment processes relating to Dr Hunt’s proposed
appointments and a successor to the CFO role respectively are
progressing well and are expected to finalise shortly.
In reviewing the executive succession plan, the Committee
requires management to ensure appropriate and effective plans
are in place to develop and nurture high performing individuals
and identified potential successors to further strengthen our
succession pipeline. The Committee receives updates from
management on such plans and related progress.
The Committee challenged the Board Diversity Policy in 2018
and recommended a more progressive Policy to the Board,
which it approved. You will have read earlier in the Report that
we have now set ourselves a target of reaching at least 30%
female representation on the Board by 2020.
We have made great progress in improving the gender profile of
the Board since the implementation of the first Board Diversity
Policy in 2015, and, more widely, I am proud of the efforts made
across our business to foster an environment of diversity and
inclusion. Further information on the Group’s approach to and
focus on diversity and inclusion can be found at page 17.
I would like to thank my fellow Committee Members for their
unwavering commitment in what was an extremely busy and, at
times, testing year. In particular, I would like to acknowledge the
support and leadership shown by Ms Catherine Woods on the
Committee during 2018 and in her roles as Senior Independent
Director and Deputy Chairman. As Catherine prepares for her
own departure, reaching her nine year term in October 2019,
she will facilitate the Committee in ensuring appropriate
successors to those two key roles. Each of Directors departing
the Group in 2019 have shown great commitment to AIB during
their tenure and will be missed.
Looking ahead, the Committee will continue to ensure that focus
remains on selecting the most suitable and high-calibre
individuals for the Board and to lead the business.
Richard Pym
Committee Chairman
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Governance and oversight – Report of the Nomination
and Corporate Governance Committee
Membership and meetings
The Committee was comprised of three Independent Non-
To ensure ongoing awareness of the Committee’s activities by
the full Board, the Chairman provides an update to the Board
Executive Directors and the Chairman, who was independent
following each meeting on the key items discussed and
on appointment, during 2018. Its composition is fully compliant
considered by the Committee.
with the Central Bank of Ireland’s Corporate Governance
Requirements for Credit Institutions 2015, the UK Corporate
Governance Code 2016 and the Capital Requirements Directive
IV.
Committee purpose
A full overview of the responsibilities of the Committee are set
out in its Terms of Reference. The purposes of the Committee
are:
The Chairman of the Board is the Chairman of the Committee
–
to support and advise the Board in fulfilling its oversight
and chairs all meetings, other than when the Committee is
responsibilities in relation to the composition of the Board by
dealing with the process for appointing a successor to the role
ensuring it is comprised of individuals who are best able to
of Board Chairman. In such instances, the Senior Independent
discharge the duties and responsibilities of Directors to
Director, Ms Catherine Woods, leads the Committee
include leading the process for nominations and
discussions. Biographical details of each of the Committee
appointments to the Board and Board Committees as
Members are outlined on pages 34 to 35.
appropriate, and making recommendations in this regard to
the Board for its approval;
The Committee met nine times during 2018, four of which were
–
to support and advise the Board in fulfilling its oversight
scheduled meetings. The Chairman and Members of the
responsibilities in relation to the composition of the Group’s
Committee, together with their attendance at meetings, are
Executive Committee and the composition of the boards of
shown below. The Committee meets regularly with no
its licensed subsidiaries; and
management present. The Chief Executive Officer, Chief People
Officer and other members of management are invited to attend
–
to keep Board governance arrangements, corporate
governance compliance and related policies under review
meetings where the agenda item is relevant and their
and make appropriate recommendations to the Board to
attendance is requested by the Committee.
ensure corporate governance practices are consistent with
best practice corporate governance standards.
Member attendance during 2018:
Richard Pym
Simon Ball
Jim O’Hara
Catherine Woods
Eligible to attend
9
Attended
9
The Committee’s Terms of Reference can be found on the
Group’s website at: https://aib.ie/investorrelations
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During 2018, the Committee engaged Merc Partners and Korn
Ferry to facilitate searches for new Non-Executive Directors.
It should be noted that Korn Ferry have been engaged by the
Group for a number of candidate searches in recent years.
Korn Ferry has also been appointed by AIB Group to conduct a
number of internal management assessments. Separately, Korn
Ferry has been appointed by the Minister for Finance to conduct
a Remuneration Review; confirmation was received that parties
engaged by AIB Group during the candidate search processes
were separate to those engaged in the Minister’s Review.
The Group is mindful at all times of the need to avoid possible
conflicts of interest.
Merc Partners has been engaged by the Group for a number of
candidate searches in recent years but has no other relationship
with the Group.
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Matters considered by the Committee
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:
Area of focus
Role of the Committee
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(cid:4)(cid:4) Non-Executive Board
composition and
succession planning
– Considered the Board and Board Committee’s collective composition.
–
Identified, in particular, actions required in anticipation of the conclusion of Mr Hagan’s seven
year term and Ms Woods and Mr O’Hara’s respective nine year terms.
– Developed a three year Board succession plan to ensure preparedness for anticipated
changes over that period.
– Prepared candidate specifications containing the key competencies and skills expected of
Non-Executive Directors and other pertinent details, such as time commitment expectations,
in advance of commencing searches for individuals for appointment to the Board and key
Board roles.
– Engaged Korn Ferry and Merc Partners to facilitate searches for new Non-Executive Directors.
Open advertising for Independent Non-Executive Directors positions was not used by AIB in 2018
as the Committee believes that targeted recruitment is the optimal way of recruiting for such
positions.
– Oversaw the search process for Non-Executive Director candidates and assessed potential
successors for all roles, and kept the Board abreast of progress.
– Shortlisted candidates were interviewed by Committee Members and the Committee met as a
whole to discuss feedback and reach consensus prior to recommending to the Board for
consideration and approval.
– Assessed the independence of individual Directors against certain criteria, including whether
Directors were demonstrably independent and free of relationships and other circumstances
that could affect their judgement, and whether they met criteria set out in applicable Irish and
UK regulations.
(cid:4)(cid:4) Executive Directors and
Committee succession
planning
– Considered updates on executive management succession strategy and received updates
from Chief People Officer on succession plans, including emergency cover, the talent pipeline
and identified areas for enhancement and proposed actions in that regard.
– Considered proposals for appointments to the new Executive Committee roles under the new
Operating Model.
– Considered proposals for appointments to the roles of Deputy CEO, Deputy CFO and CFO
following receipt of notice of the intended departure of the CFO in early 2019.
– Considered proposals for appointment to the role of CEO following receipt of notice of the
intended departure of the CEO in early 2019. The process undertaken was rigorous and
included:
– Receipt of internal nominations for consideration in the search process.
– Appointment of Korn Ferry to facilitate the search process for a CEO successor, which
included a market assessment and assessment of internal and external candidates.
A consistent process was used to assess internal and external candidates and included;
(i) Korn Ferry’s assessment of competency, psychometrics and potential; (ii) external market
benchmarking; and (iii) interviews by the Committee members and another selected
Non-Executive Director.
AIB Group plc Annual Financial Report 2018 199
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Governance and oversight – Report of the Nomination
and Corporate Governance Committee
Matters considered by the Committee (continued)
Area of focus
Role of the Committee
(cid:4)(cid:4) Executive Directors and
Committee succession
planning (continued)
–
These results, along with external candidate profiles were reviewed by the Committee,
and following this, Members of the Committee met with all shortlisted candidates.
– The Committee discussed each potential candidate in detail with Korn Ferry and separately
in private sessions on a number of occasions following which the Committee engaged with
the wider Board for feedback and input following which a final decision on the preferred
candidate was made and a regulatory application for fitness and probity assessment
submitted.
– Notwithstanding the need for the regulatory fitness and probity assessment process to be
conducted, the Committee and the Board considered the selection of a preferred candidate
by the Board in the context of Market Abuse Regulations. Having received advice from the
Group Company Secretary and external legal counsel, it was deemed that such a selection
constituted inside information under the Regulations and an immediate announcement was
required to the market.
(cid:4)(cid:4) Corporate Governance
– Considered the Group’s corporate governance policies and procedures. Policies reviewed
considerations, subsidiary
during 2018 included the Board Governance Manual and matters reserved for the Board,
related matters
the Board Code of Conduct and Conflicts of Interests Policy, the Board Diversity Policy, the
Governance and Organisation Framework, Committee Terms of Reference, and the Policy on
assessment of suitability of Members of the Board.
– Assessed the continued appropriateness of and the extent to which the Group Subsidiary
Governance Framework had been embedded since its establishment in late 2017.
– Received regular updates regarding compliance by the material licensed subsidiaries with
applicable regulation and guidance and, recognising improvements in recent years, noted the
need for continued enhancement in subsidiary governance and oversight.
– Consideration of subsidiary board composition and agreed a number of subsidiary board
appointments.
– Discussed the implications of the corporate governance aspects of the EBA Guidelines on
internal governance and joint ESMA and EBA Guidelines on the assessment of suitability of
members of the management body and key function holders and actions required to enhance
processes to ensure compliance with those Guidelines.
– Discussed potential areas for enhanced focus in anticipation of the UK Corporate Governance
Code 2018.
Performance Evaluation
An internal performance evaluation of the Board and Board Committees was conducted during 2018 as noted on page 183, and
included a review of the Committee. The review concluded that the Committee continued to operate in an efficient manner. During the
evaluation, the Committee Members emphasised the importance of continued focus on executive succession planning and ensuring
adequate time was allocated to corporate governance matters. The amount of change to the Board’s composition was also highlighted
during the evaluation as an area needing careful monitoring during 2019 and is something that is front and centre on the Committee’s
2019 indicative Work Programme.
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Governance and oversight –
Report of the Remuneration Committee
Letter from Jim O’Hara, Chairman of the Remuneration
arranged throughout the year with stakeholders and key
Committee
Dear Shareholder,
investors and attended by either the Chairman of the Board or I,
in my capacity of Chair of the Committee. The overall theme of
these conversations centred on the need to move to address the
Group’s remuneration model constraints and ensure alignment of
the remuneration of key executives with the long-term stability
and performance of the Group.
It was with these risks in mind that I wrote to you last year
outlining the Group’s plans to introduce an incentive plan with the
key objective of retaining key executives and creating long-term
sustainable value for customers and shareholders. While the
construct of the plan received the approval of 99.97% of all other
independent shareholders including major institutional
shareholders and retail shareholders, it was not supported by the
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On behalf of the Remuneration Committee (the “Committee”),
State, the Group’s majority shareholder, and consequently the
I am pleased to present our report on the Committee’s activity
plan was not implemented.
during the financial year ended 31 December 2018.
While this was a very disappointing outcome for the Group and
We’ve reported previously on the remuneration restrictions
the Board, the Group welcomed the State’s initiative in launching
contained in certain agreements with the Irish State following the
a review of remuneration policy across all impacted banks within
State’s recapitalisation of the Group in 2010 and 2011 (“State
the State to determine if it remains fit for purpose. In this respect,
Agreements”) and the continuing impact of these restrictions on
the terms of reference of the review were agreed and an external
the Group’s ability to retain and attract key members of senior
consultancy firm appointed to undertake the review in conjunction
management. These restrictions include salary caps and the
with the State’s Department of Finance. Notwithstanding the
inability to return to a variable pay environment that would be
outcome of our efforts in early 2018, to ensure preparedness and
standard across comparative peers. The impact of these
continued focus on this area of concern, we continued during the
restrictions became more prevalent as we prepared for the
second half of 2018 to consider how we would progress towards
transition from full State ownership and the initial public offering
a more normalised remuneration policy, which would offer an all
(“IPO”) in 2017. The risk relating to the potential loss of senior
employee share plan alongside a deferred executive share plan,
management as a result of these restrictions was highlighted in
should the opportunity arise in the near future.
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the IPO Prospectus in 2017 and in the 2017 Annual Report
published in 2018.
As at the time of writing, the outcome of the Minister’s review is
pending and the Committee looks forward to recommendations
The Committee and the Board as a whole remain concerned
being issued during the course of 2019. It is considered important
about the impact of these continuing restrictions and are acutely
to await the outcome of the review and, so, it has been decided
aware of the heightened key people risk in the Group. The
that no new remuneration proposal will be brought to the Annual
potential loss of senior management, a risk that was highlighted
General Meeting this year.
in the IPO Prospectus, clearly manifested itself during 2018 in the
resignations of a number of key staff, most notably the Chief
The Committee’s desired remuneration policy remains to
Executive Officer and the Chief Financial Officer.
implement a competitive, market-aligned, performance-related
remuneration model, fully compliant with CRD IV and EBA
While the Committee continued to monitor and address key
Guidelines, which will mitigate the Group’s key people risks and
people risk, where possible, during 2018, the loss of senior talent
align the remuneration of our staff with the achievement of Group
in this way remains of critical concern to the Committee and the
strategic objectives. Following the conclusion of the State’s
Board as we strive to secure the future stability and performance
remuneration review and clarity on any potential
of the Group. The Committee also remains aware that external
recommendations that might arise at that time, the Committee will
factors, including the number of financial services firms relocating
consider the Group’s Remuneration Policy. Should there be a
to Dublin, have increased competition for attracting and retaining
need subsequently to present an updated Remuneration Policy
employees at all levels of the Group.
to shareholders we will recommend to the Board that a
shareholder meeting be convened. In the meantime, the Group’s
During 2018, as in previous years, the Committee spent a
Remuneration Policy remains under review and continues to be
significant amount of time in formal and informal meetings with
governed in accordance with the remuneration restrictions
management and external remuneration consultants seeking to
contained in the State Agreements.
find ways to address key people risk. A number of meetings were
AIB Group plc Annual Financial Report 2018 201
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Governance and oversight –
Report of the Remuneration Committee
Further information on the Group’s Remuneration Policy is
contained on page 205. I look forward to seeing many of our
shareholders at the AGM and the opportunity to hear their views
on remuneration matters.
As indicated in the Report, I am due to conclude my nine year
term on the Board of AIB Group in October 2019 and, therefore,
this will be my final report as Committee Chairman. I know that,
in my absence, the Committee and the Board as a whole will
ensure continued focus on those matters of greatest relevance to
the long-term sustainability of the Group.
I would like to acknowledge the invaluable input and support from
my fellow Committee Members and thank them for their
continued efforts throughout 2018. I look forward to driving the
remuneration agenda forward in 2019 and I wish my fellow Board
members and AIB Group all the best in the future.
Jim O’Hara
Chairman of the Remuneration Committee
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Membership and Meetings
During 2018, the Committee comprised of three Independent
Non-Executive Directors and the Chairman, who was
During 2018, the Committee used the services of Willis Towers
Watson (“WTW”) and PricewaterhouseCoopers (“PwC”) for
advice on market-based remuneration practices, compliance
independent on appointment. Its composition is fully compliant
and training. WTW are solely focused on Human Resources
with the Central Bank of Ireland’s Corporate Governance
and remuneration consultancy and have no other relationship
Requirements for Credit Institutions 2015, the UK Corporate
with the Group. PwC provide a range of consultancy services to
Governance Code 2016 and the Capital Requirements Directive
the Group. WTW has a standing invitation to attend Committee
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meetings where their advice would enhance the discussion at
the Committee. PwC were invited to attend a number of
There was one change to the Committee’s composition during
meetings to provide further advice and guidance on matters of
the year, reflecting actions agreed in the Board Succession Plan,
remuneration policy.
with Mr Tom Foley stepping down and being replaced by
Mr Brendan McDonagh on 1 September 2018. In order to ensure
To ensure ongoing awareness of the Committee’s activities by
that remuneration policies and practices are consistent with and
the full Board, the Committee Chairman provides an update to
promote sound and effective risk management, common
the Board following each meeting on the key items discussed
membership between the Remuneration Committee and the
and considered by the Committee.
Board Risk Committee is maintained, with Mr Simon Ball and
Mr McDonagh being a members of both Committees.
Committee Purpose
A full overview of the responsibilities of the Committee are set out
Biographical details of each of the Committee members are
in its Terms of Reference. The purposes of the Committee are:
outlined on pages 34 to 35.
The Committee met eight times during 2018, six of which were
–
to oversee the design and implementation of the Group’s
overall Remuneration Policy for employees and directors,
designed to support the long term business strategy, values
scheduled meetings and one being a joint meeting with the Board
and culture of the Group as well as to promote effective risk
Risk Committee. The Chairman and Members of the Committee,
management and comply with applicable legal and regulatory
together with their attendance at meetings, are shown below.
requirements;
The Committee met on one occasion with no management
–
to oversee the operation of Group-wide remuneration policies
present. The Chief Executive Officer, the Chief People Officer
and practices for all employees, with specific reference to
and Head of Reward and other members of management are
Executive Directors, the Chief Executive Officer, Executive
invited to attend the meetings where the agenda item is relevant
Committee members, Heads of Control Functions and
and at the request of the Committee. The Chief Risk Officer is a
Material Risk Takers; and
permanent attendee unless the topic under discussion relates to
–
to perform any other functions appropriate to a Remuneration
her own remuneration or that of her executive colleagues. No
Committee or assigned to it by the Board.
member of management is permitted to attend where a specific
proposal relating to their own remuneration is scheduled for
The Committee’s Terms of Reference can be found on the
discussion.
Group’s website at https://aib.ie/investorrelations
Member attendance during 2018:
Jim O’Hara
Simon Ball
Richard Pym
Brendan McDonagh*
Tom Foley*
Eligible to attend
8
Attended
7
8
8
3
5
8
8
2
5
*Tom Foley resigned from the Committee on 1 September 2018
and Brendan McDonagh was appointed on the same date.
AIB Group plc Annual Financial Report 2018 203
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Governance and oversight –
Report of the Remuneration Committee
Matters considered by the Committee
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:
Area of focus
Role of the Committee
(cid:2)(cid:2) Remuneration Model and
Key Remuneration Risks
– Considered the continued heightened retention risk of key executives and the impact of the
continuing remuneration constraints more generally across the Group.
– Reviewed potential future variable remuneration plan designs with the primary objective
of safeguarding the retention of key executives, delivery of a share plan for all staff and the
delivery of the Group’s strategic objectives.
– Reviewed the EBA Guidelines on Sound Remuneration Policies to better understand the
governance that applies to remuneration models.
– Considered the appropriateness or otherwise of the Group’s Remuneration Policy and the likely
outcome of the Minister’s review into remuneration in the banking industry. Considerations
included what should be proposed to the shareholders at the 2019 AGM, having regard for the
outcome of the 2018 AGM advisory vote on the Group Remuneration Policy.
– Assessed the key risks impacting the Group’s current remuneration structure and
practices and received an update from the Chief Risk Officer on remuneration related risks.
– Considered the cap on pay specifically in the context of the CEO’s remuneration
package relative to local peers.
– Considered the remuneration packages in the context of the new Operating Model.
(cid:2)(cid:2) Compliance and annual
matters for review
– Reviewed the composition and remuneration components of Identified Staff.
– Reviewed ongoing compliance with relevant statutory disclosures, regulatory
requirements and guidelines.
– Reviewed the process for the identification of Material Risk Takers.
– Reviewed the duties and responsibilities of the Committee in accordance with the
requirements of CRD IV and EBA Guidelines on sound remuneration practices.
– Reviewed the Committee’s Terms of Reference to incorporate any regulatory or legislation
changes relating to the activities and operations of the Committee.
Performance Evaluation
An internal performance evaluation of the Board and Board Committees was conducted during 2018 as noted on page 183, and included
a review of the Committee. The review concluded that the Committee continued to operate in an efficient manner. The Committee
Members highlighted the need for further enhancements to the quality of the information and support provided to the Committee. In order
to improve the quality of information, an action has been taken to clarify the Committee’s expectations in terms of external advisors and
provide an opportunity for feedback at each Committee meeting.
Directors’ Remuneration
Details of the total remuneration of the Directors in office during 2018 and 2017 are shown in the Directors’ Remuneration report on pages
208 to 210. It should be noted that where an Executive Director holds a Non-Executive Directorship at an 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 limitations.
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Governance and oversight –
Corporate Governance Remuneration statement
Remuneration Constraints
The Group has been required to comply with certain executive
European Banking Authority (EBA) Guidelines
The Remuneration Policy reflects the relevant provisions of the
pay and compensation restrictions following the Group’s
EBA Guidelines as they apply to the Group’s current
recapitalisation by the Irish Government in 2010 and 2011.
remuneration practices and the requirements of the Senior
These restrictions include a cap on salaries and allowances in
Managers Regime in respect of the Group’s UK activities. In the
the amount of € 500,000 and a ban on the introduction of any
absence of variable incentive schemes, there was little scope in
new bonus or incentive schemes, allowances or other fringe
practice to apply the provisions of the EBA Guidelines
benefits. They apply to all directors, senior management,
pertaining to variable remuneration. The Remuneration Policy
employees and service providers across the Group. Additionally,
incorporates the provisions of the EBA Guidelines in relation to
Irish taxation legislation applies an excess tax charge on certain
the ongoing design, implementation and governance of
remuneration, such as bonus payments, paid to employees of
remuneration.
financial institutions in Ireland that have received financial
support from the State.
Pillar 3 and Other Remuneration Disclosures
The Group publishes additional remuneration disclosures in the
The continued application of these constraints preclude the
annual Group Pillar 3 Report. These disclosures provide further
Group from applying market aligned remuneration policies and
details in relation to the Group’s decision making process and
practices and represent a significant challenge to the Group in
governance of remuneration, the link between pay and
attracting and retaining high calibre and specialist staff.
performance, the remuneration of those employees whose
professional activities are considered to have a material impact
Remuneration Policy and Governance
The Group’s Remuneration Policy, operating within the confines
on the Group’s risk profile and the key components of the
Group’s remuneration structure. The Group’s Pillar 3 Report is
of the above remuneration constraints, sets out the overall
framework, philosophy and principles under which all AIB’s
available on the Group website.
remuneration policies, procedures and practices operate.
EBA remuneration benchmarking requirements require the
Group to disclose remuneration data in respect of material risk
The Remuneration Policy sets out the key components of the
takers and high earners (those earning above € 1 million) to the
Group’s current remuneration structure together with the
Central Bank of Ireland. The Group continued to comply with
functional responsibilities for governance and the remuneration
these reporting requirements during 2018. There were no
approach for key groups of individuals, including Executive and
employees whose total remuneration exceeded € 1 million
Non-Executive Directors, members of the Executive Committee,
during 2018.
material risk takers and all other employees. The remuneration
philosophy aims to ensure that remuneration is aligned with
The Group published its gender pay gap report for the first time
performance and that employees are rewarded fairly and
in 2018 in relation to its UK based employees. The disclosures
competitively for their contribution to the Group’s future success
are available on the AIB (GB) website, www.aibgb.co.uk.
and growth. Key remuneration principles focus on simplicity,
transparency, fairness, performance alignment, external market
positioning and strong risk management. The scope of the
Identified Staff and Risk Oversight
The Group maintains a list of those staff whose professional
Remuneration Policy includes all financial benefits available to
activities are considered to have a material impact on the
employees and applies to all employees of the Group.
Group’s risk profile (“Identified Staff”). The Group’s process,
The Group undertakes an annual review of the Remuneration
an addendum to the Remuneration Policy. The list of Identified
Policy to ensure that remuneration policies and practices are
Staff is reviewed annually by the Remuneration Committee.
operating as intended, are consistently applied across the Group
Further details in relation to the composition and remuneration
and are compliant with regulatory requirements. The annual
of Identified Staff are set out in the remuneration disclosures of
including relevant criteria, for determining Identified Staff forms
review is informed by appropriate input from the Group’s risk,
the Group’s Pillar 3 Report.
compliance and internal audit functions. During 2018, the policy
was updated to incorporate the Group’s remuneration philosophy.
A key principle of the Remuneration Policy is the promotion of a
There were no other material changes made to the policy arising
strong risk management culture and risk-taking which is aligned
from the review.
to the Group’s Risk Appetite Statement. The Remuneration
Committee is supported by the Chief Risk Officer in its
The Remuneration Policy is governed by the Remuneration
assessment of the key risks that should be considered in the
Committee on behalf of the Board. The Committee oversees the
context of the Group’s remuneration structure and future
operation and effectiveness of the Remuneration Policy, including
remuneration strategy. The Chief Risk Officer attends all
the process for the identification of material risk takers.
meetings of the Remuneration Committee.
The Committee’s governance role in this respect is outlined in its
Terms of Reference.
AIB Group plc Annual Financial Report 2018 205
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Governance and oversight –
Corporate Governance Remuneration statement
Reward Structure and Operation in 2018
The continued existence of remuneration constraints significantly
Remuneration of Executive Directors
The remuneration of Executive Directors in 2018 continued to
impedes the Group’s ability to apply its desired remuneration
comprise of base salary, taxable benefits and pension
policy and to implement market aligned remuneration policies
contributions. Taxable benefits represent a non-pensionable
and practices. Consequently, the absence of performance based
cash allowance in lieu of company car and other contractual
variable pay, combined with the requirement to operate within an
benefits while pension contributions represent agreed payments
overall cap on individual salaries and allowances of € 500,000,
to a defined contribution scheme.
precludes AIB from aligning the remuneration of key executives
with the achievement of the Group’s strategic objectives which
There were no changes to the remuneration of the Chief
include the repayment of the Irish State’s residual investment in
Executive Officer during 2018. In line with the cap on salaries
the Group.
and allowances imposed by existing remuneration restrictions,
the Chief Executive Officer was paid a base salary of € 500,000
During 2018, remuneration across the Group continued to be
together with an additional pension contribution of € 100,000
principally comprised of fixed pay elements encompassing base
(20%) to a defined contribution scheme.
salary, allowances and employer pension contributions. Base
salary endeavours to reflect the size and level of responsibilities
The base salary of the Chief Financial Officer increased from
attaching to individual roles while allowances are designed to
€ 470,000 to € 500,000 in May 2018. In keeping with the
reflect benefits and allowances generally available in the external
remuneration restrictions however, this was offset by a
market. The Group operates defined contribution pension
decrease in his non-pensionable cash allowance from € 30,000
schemes which followed the closure of all Group defined benefit
to zero. Pension contribution for the full year of € 98,000 (20%)
schemes to future accrual on 31 December 2013. Further details
was also made to the Group’s defined contribution scheme.
in respect of the Group’s fixed pay elements are provided in the
table below.
There were no bonuses, shares or other incentive schemes
paid or awarded to Executive Directors in 2018.
Increases in base salary were performance based, determined
The remuneration of Executive Directors is reviewed annually
by performance against each individual’s objectives. Such
by the Remuneration Committee on behalf of the Board.
increases were awarded following the annual pay review
process, through promotion and, in exceptional cases, through
out-of-course increases to retain business critical staff and key
skills.
Performance based salary increases of between 0% and 3.25%
were awarded to employees in April 2018 under the annual pay
review process. These increases represented the final year of a
two year agreement with employee representatives arising from
the recommendations of the Workplace Relations Commission
(WRC). Following the WRC’s recommendations for 2019, the
next annual pay review will take place in April 2019.
The remuneration of Executive Directors and members of the
Leadership Team was determined and approved by the
Remuneration Committee within the remuneration constraints set
by the State.
There were no general short or long term variable incentive
schemes or share incentive schemes in operation during 2018.
The Group operates two local business variable commission
schemes. These schemes are designed to protect the rights and
interests of customers via customer centric performance criteria,
the prevention of conflicts of interest and the assessment and
mitigation of risks to the customer. The maximum amount
payable to any individual per year is € 20,000.
206
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Page 207
Fixed Pay Elements
The principal fixed pay design elements are outlined below.
Pay Element Rationale and
Design and Operation
Base Salary
alignment to Strategy
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:3)(cid:296)(cid:437)(cid:410)(cid:437)(cid:396)(cid:286)(cid:3)(cid:400)(cid:437)(cid:272)(cid:272)(cid:286)(cid:400)(cid:400)(cid:3)
and growth.
Base salary is designed to reflect
individual experience, contribution
and the size and level of
responsibilities attached to each role.
Base salaries are typically reviewed
annually as part of the annual pay
review process with increases taking
effect from 1st April.
Base salaries of Executive Directors
and members of the Leadership
Team are reviewed annually by the
Remuneration Committee on behalf
of the Board.
Allowances
To provide a contribution
to market aligned
benefits and allowances
generally available in the
market.
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.
Pension
To enable employees plan
for an appropriate
standard of living in
retirement.
Employees are entitled to participate
(cid:349)(cid:374)(cid:3)(cid:410)(cid:346)(cid:286)(cid:3)(cid:39)(cid:396)(cid:381)(cid:437)(cid:393)(cid:859)(cid:400)(cid:3)(cid:24)(cid:286)(cid:296)(cid:349)(cid:374)(cid:286)(cid:282)(cid:3)(cid:18)(cid:381)(cid:374)(cid:410)(cid:396)(cid:349)(cid:271)(cid:437)(cid:410)(cid:349)(cid:381)(cid:374)(cid:3)
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.
Other
Benefits
To provide affordable
benefits in accordance
with general market
practice.
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.
Performance Assessment and Maximum
Potential Value
Increases in base salary are performance
based, following an assessment of each
(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:3)(cid:258)(cid:272)(cid:346)(cid:349)(cid:286)(cid:448)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:400)(cid:3)(cid:258)(cid:336)(cid:258)(cid:349)(cid:374)(cid:400)(cid:410)(cid:3)(cid:410)(cid:346)(cid:286)(cid:349)(cid:396)(cid:3)
objectives. This includes an assessment against
a specific risk objective included in each
(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:3)(cid:393)(cid:286)(cid:396)(cid:296)(cid:381)(cid:396)(cid:373)(cid:258)(cid:374)(cid:272)(cid:286)(cid:3)(cid:373)(cid:258)(cid:374)(cid:258)(cid:336)(cid:286)(cid:373)(cid:286)(cid:374)(cid:410)(cid:3)(cid:393)(cid:367)(cid:258)(cid:374)(cid:856)
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
(cid:258)(cid:400)(cid:400)(cid:286)(cid:400)(cid:400)(cid:373)(cid:286)(cid:374)(cid:410)(cid:3)(cid:381)(cid:296)(cid:3)(cid:258)(cid:374)(cid:3)(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:3)(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:3)(cid:410)(cid:381)(cid:3)
role, 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 and executives
(cid:396)(cid:258)(cid:374)(cid:336)(cid:286)(cid:3)(cid:296)(cid:396)(cid:381)(cid:373)(cid:3)(cid:934)(cid:1011)(cid:853)(cid:1004)(cid:1004)(cid:1004)(cid:3)(cid:410)(cid:381)(cid:3)(cid:934)(cid:1006)(cid:1004)(cid:853)(cid:1004)(cid:1004)(cid:1004)(cid:3)(cid:393)(cid:286)(cid:396)(cid:3)(cid:258)(cid:374)(cid:374)(cid:437)(cid:373)(cid:856)
All(cid:381)(cid:449)(cid:258)(cid:374)(cid:272)(cid:286)(cid:400)(cid:3)(cid:381)(cid:296)(cid:3)(cid:437)(cid:393)(cid:3)(cid:410)(cid:381)(cid:3)(cid:934)(cid:1007)(cid:1004)(cid:853)(cid:1004)(cid:1004)(cid:1004)(cid:3)(cid:258)(cid:396)(cid:286)(cid:3)(cid:393)(cid:258)(cid:455)(cid:258)(cid:271)(cid:367)(cid:286)(cid:3)(cid:410)(cid:381)(cid:3)
Executive Directors and members of the
Leadership Team (subsequently known as the
Executive Committee).
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 (subsequently known as the
Executive Committee) are entitled to an
employer pension contribution of up to 20% of
base salary.
The Group does not operate a company car
scheme.
Executive Directors and members of the
Leadership Team (subsequently known as the
Executive Committee) may occasionally avail of
the use of a pool car and driver.
AIB Group plc Annual Financial Report 2018 207
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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 2018 and 2017:
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)
Catherine Woods
(Deputy Chairman)
Former Directors
Declan Collier(2)
Anne Maher(5)
Other(6)
Total
Directors’ fees
Parent and Irish
subsidiary
companies(1)
Directors’
fees
AIB Group
(UK) p.l.c.(2)
Salary
Annual
taxable
benefits(3)
Pension
contribution(4)
2018
Total
€ 000
€ 000
€ 000
€ 000
€ 000
€ 000
490
500
990
10
–
10
98
100
198
598
600
1,198
95
88
95
80
94
75
115
365
180
1,187
39
34
34
7
95
122
95
80
94
75
115
365
180
1,221
7
39
11
1,278
(1)Fees paid to Non-Executive Directors in 2018 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) p.l.c.
(“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 2018;
(3)’Annual Taxable Benefits’ represents a non-pensionable cash allowance in lieu of company car, medical insurance and other contractual benefits;
(4)’Pension Contribution’ represents agreed payments to a defined contribution scheme to provide post-retirement pension benefits for Executive Directors
from normal retirement date. The fees of the Chairman, Deputy Chairman and Non-Executive Directors are non-pensionable;
(5)Ms Anne Maher is a former Non-Executive Director of Allied Irish Banks, p.l.c. who has, since her resignation, continued as a Director of the Corporate
Trustee of the AIB Irish Pension Scheme and of the AIB Defined Contribution Scheme, in respect of which she earned fees as quoted; and
(6)’Other’ represents the payment of pensions to former Directors or their dependants granted on an ex-gratia basis and are fully provided for in the
Statement of Financial Position.
*Forms an integral part of the audited financial statements
208
AIB Group plc Annual Financial Report 2018
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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
Brendan McDonagh
Helen Normoyle
Jim O’Hara
Richard Pym
(Chairman)
Dr Michael Somers
(Deputy Chairman resigned 31 December 2017)
Catherine Woods
Former Directors
Declan Collier
Anne Maher
Other
Total
Directors’ fees
Parent and Irish
subsidiary
companies
€ 000
Directors’
fees
AIB Group
(UK) p.l.c.
€ 000
93
90
95
74
76
75
106
365
110
150
1,234
45
38
38
49
Salary
Annual
taxable
benefits
Pension
contribution
2017
Total
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€ 000
€ 000
€ 000
€ 000
470
500
970
30
–
30
94
100
194
594
600
1,194
93
128
95
74
76
75
106
365
110
150
1,272
49
45
11
1,377
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*Forms an integral part of the audited financial statements
AIB Group plc Annual Financial Report 2018 209
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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 Group Company
Share options
No share options were granted or exercised during 2018, and
there were no options to subscribe for ordinary shares
Secretary in office at 31 December 2018, 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 2018.
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
Catherine Woods
31 December
2018
1 January
2018**
5,000
2,000
2,000
2,501
8,000
7,700
10,000
2,000
20,064
2,000
24,000
5,000
2,000
2,000
2,501
8,000
2,000
10,000
2,000
–
2,000
24,000
Group Company Secretary:
Sarah McLaughlin
2
2
**or date of appointment, if later
Performance shares
There were no conditional grants of awards of ordinary shares
outstanding to Executive Directors or the Group Company
Secretary at 31 December 2018.
Apart from the interests set out above, the Directors and
Group Company Secretary in office at 31 December 2018,
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 2018 and 28 February 2019.
The year end closing price of the Company’s ordinary shares
on the Main Market of the Irish Stock Exchange/Euronext
Dublin was € 3.68 per share.
Service contracts
All Executive Directors have a service contract whereas all
non-executive Directors have a letter of appointment.
The following table sets out the beneficial interests of the
In respect of Executive Directors, no service contract exists
Directors and Executive Committee (Members of the Executive
between the Company and any Director which provides for a
Committee as at 31 December 2018, excluding the Group
notice period from AIB Group of greater than one year.
Company Secretary) members of AIB as a group (including
their spouses and minor children) at 31 December 2018:
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
85,348
***
***The total ordinary shares in issue at 31 December 2018, was
2,714,381,237.
Non-Executive Directors are appointed for an initial term of
three years. Terms of office for non-executive directors will not
be extended beyond nine years in total unless the Board, on
the recommendation of the Nomination and Corporate
Governance Committee, concludes that such extension is
necessary.
All Directors, should they choose to stand, are subject to
annual re-election by shareholders.
*Forms an integral part of the audited financial statements
210
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Governance and oversight –
Viability statement
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 principal risks facing the Group over the next three
years to 31 December 2021. The Directors concluded that three
years was an appropriate period for the annual assessment given
that this is the key period of focus within the Group’s strategic
and financial planning process.
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 39 to
60 and the governance and organisation framework through
which the Group manages and seeks where possible to mitigate
risk as described on pages 69 to 72. 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 include on pages 62 to 68.
Key processes in place during the year which support the
Director’s assessment include:
– The Group’s Material Risk Assessment Process, which seeks
to ensure that all significant risks to which the Group is
exposed have been identified and are being appropriately
managed. New and emerging risks are also identified and
mitigating actions are put in place. For example, the loss of
senior management was recognised as a heightened risk
during the year.
– The Group’s Risk Appetite Framework represents an
articulation of the amount of risk the Group is willing to accept
in pursuit of its strategic objectives. The Group Risk function
propose Risk Appetite metrics to the Board and ensure
appropriate metrics are in place across all the Group’s
material risks. Stress testing is applied to risk appetite
metrics so as to ensure that the Group’s risk profile remains
within appetite in the event of stress scenarios. The Group
Risk Appetite Statement is reviewed by the Board on at least
an annual basis.
– The Business and Financial Planning process drives delivery
of the Group’s strategy and is aligned to the Group’s risk
appetite. The Plan is reviewed annually and is subject to
stress testing to reflect the potential impact of plausible yet
severe scenarios which take account of the principal risks
and uncertainties facing the Group. A key stress event
considered in the reporting year was the risk of a disorderly
Brexit outcome, and the impact this would have on the Group
through its activities in the UK and Ireland. A number of other
systemic and Group specific stresses were also evaluated,
including a global economic slowdown combined with a
disorderly Brexit (this formed the basis of the ‘severe’
scenario used in Group’s assessment of its capital adequacy
in the Internal Capital Adequacy Assessment Process), the
impact of major operational disruption such as a cyber-attack
and the disruption caused by the entry of a major FinTech
financial services provider. Risk Management undertook a
comprehensive second line assessment of the Plan which
was presented to the Board for their evaluation. Key
assumptions and challenges in the Plan which were reviewed
included:
– Key macro-economic and financial market assumptions.
– Key market size growth assumptions and associated
balance sheet growth assumptions.
– Competitive environment in key markets;
– Assumptions relating to NPE reduction through restructure
and portfolio sales
– Asset quality and ECL charge forecasts and sensitivities
– Net Interest Margin (NIM) assumptions; and
– Key assumptions relating to costs, including cost reduction
initiatives.
– The ICAAP and quarterly stress testing. The ICAAP is the
process undertaken annually through which the Group
ensures it holds a level and quality of capital sufficient to
support its strategic and financial objectives, and
commensurate with the risks to which it is exposed.
The ICAAP was reviewed and approved by the Board in the
reporting period. As a result of this assessment, the Board
was satisfied that the Group had an adequate level and
quality of capital to support its strategic objectives,
commensurate with the risks to which it was exposed.
The Group also undertakes quarterly internal stress tests to
review the adequacy of its capital position. The outcome of
these stress tests continued to demonstrate the resilience of
the Group’s capital position throughout the reporting period.
In addition, the Group was subject to the 2018 EU-wide
stress test conducted by the European Banking Authority
(EBA). While there was no ‘pass fail, the Group’s capital
position in the adverse scenario comfortably demonstrated
the resilience of its capital positon, and no capital action was
required for the Group as a result of the EBA stress test.
–
– The Internal Liquidity Adequacy Assessment Process
(ILAAP) identifies and evaluates AIB’s liquidity risk, the
Group’s resources and requirements and sets out the risk
management framework AIB employs to manage and
control its liquidity risk. In approving the Liquidity Adequacy
Statement (LAS – a part of the ILAAP) the Board concluded
that the Group had comprehensively assessed its liquidity
risks and satisfied itself that it maintains adequate liquidity
resources (both in quantity and quality) to meet its
obligations in both normal and stressed times in line with its
expressed liquidity risk appetite.
– The Group’s Recovery Plan sets out the arrangements and
measures the Group could adopt to restore its long-term
viability in the event of a significant stress. The Board
reviewed the Recovery Plan in the reporting period and was
satisfied that the Group has a range of available recovery
options which could be deployed within one year and which
could serve materially to improve the capital and/or liquidity
position of the Group under a range of very severe macro-
economic and Group-specific scenarios. During the year
the Board also conducted a Fire Drill of the Group’s
recovery planning mechanisms which demonstrated the
ability of the Group to respond to such an event.
On the basis of the above, the Directors believe taking into
account the Group’s current position, and subject to the
identified principal risks, the Group will be able to continue in
operation and meet its liabilities as they fall due over the three
year period of assessment.
AIB Group plc Annual Financial Report 2018 211
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Governance and oversight –
Internal controls
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 Corporate Governance
requirements for Credit Institutions 2015 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 primarily by the
Board Audit Committee (“BAC”).
– The Board Risk Committee (“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 (“RAS”).
– The Board Audit Committee reviews various aspects of
internal control, including the design and operating
effectiveness of the financial reporting framework, the Group’s
statutory accounts and other published financial statements
and information. It also ensures that no restrictions are placed
on the scope of the statutory audit or the independence of the
Internal Audit and Regulatory Compliance functions.
– The Chief Financial Officer (“CFO”), the Chief Risk Officer
(“CRO”) and the Group Head of Internal Audit 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.
212
AIB Group plc Annual Financial Report 2018
Executive risk management and controls
– During 2018, the Leadership Team at executive level was
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.
– During 2018, the Executive Risk Committee (“ERC”) which
was a sub-committee of the Leadership Team reviewed 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.
– During 2018, the Group Asset and Liability Committee
(“ALCo”) which was a sub-committee of the Leadership
Team and acts as the Group’s strategic balance sheet
management forum that combines a business decisioning
and risk governance mandate.
– There is a centralised risk control function headed by the
Chief Risk Officer 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.
– During 2018 the Group’s risk profile and Risk Appetite
metrics were monitored on a monthly basis and exceptions
are reported to the Executive Risk Committee and Board
Risk Committee 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 Risk function is headed by a Chief
Credit Officer who reports to the CRO.
– There is an independent Compliance function which
provides advisory services to the Group and which
monitors and reports on conduct of business and financial
crime compliance and forthcoming regulations across the
Group, and on Management’s focus on compliance
matters.
– There is an independent Group Internal Audit function
which is responsible for independently assessing the
effectiveness of the Group’s corporate governance, risk
management and internal controls and which reports
directly to the Chairman of the BAC.
– AIB employees who perform Pre-Approved Controlled
functions and 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 72 of this report.
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Page 213
Governance and oversight –
Internal controls / Other governance information
Internal controls (continued)
Executive risk management and controls (continued)
In the event that material failings or weaknesses in the systems
Other governance information
Relations with shareholders
The Group has a number of procedures in place to allow its
of risk management or internal control are identified, the relevant
shareholders and other stakeholders to stay informed about
Leadership Team member is required to attend the relevant
matters affecting their interests. In addition to this Annual
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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.
Financial Report, which is available on the Group’s website at
www.aib.ie/investorrelations and sent in hard copy to those
shareholders who request it, the following communication tools
are used by the Group:
Given the work of the Board, BRC, BAC and representations
made by the Leadership Team during the year, the Board is
satisfied that the necessary actions to address any material
failings or weaknesses identified through the operation of the
Group’s risk management and internal control framework have
been taken, or are currently being undertaken.
Taking this and all other information into consideration as outlined
above, the Board is satisfied that there has been an effective
system of control in place throughout the year.
Shareholders’ Report
The Shareholders’ Report (‘the Report’) is a summary version
of AIB’s Annual Financial Report. The Report, which covers the
Group’s performance in the previous year, is available on the
Group’s website and sent in hard copy to those shareholders
who request it. The Report does not form part of the Annual
Financial Report and is for reference purposes only.
Website
The Group’s website, 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
relevant years. In accordance with the Transparency (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.
Annual General Meeting (“AGM”)
The AGM is an opportunity for shareholders to hear directly
from the Board on the Group’s performance and developments
of interest for the year to date and, importantly, to ask
questions.
All shareholders of the Company are invited to attend the AGM.
Separate resolutions are proposed on each separate issue and
voting is conducted by way of poll. The votes for, against and
withheld on each resolution, including proxies lodged, are
subsequently published on the Group’s website. Proxy forms
provide the option for shareholders to direct their proxies to
withhold their vote. It is usual for all Directors to attend the AGM
and to be available to meet shareholders before and after the
meeting. The Chairmen of the Board Committees are available
to answer questions about the Committee’s activities.
A help desk facility is available to shareholders attending.
The Company’s 2019 AGM is scheduled to be held on 24 April
2019, at the Ballsbridge Hotel, Ballsbridge, Dublin 4 and it is
intended that Notice of the Meeting will be made available on
the Group’s website and sent in hard copy to those
shareholders who request it, at least 20 working days before
the meeting, in accordance with UK Code requirements.
AIB Group plc Annual Financial Report 2018 213
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Governance and oversight –
Supervision and Regulation
Throughout 2018, the Group continued to work with its
regulators, which include the European Central Bank (“ECB”), the
United Kingdom
During 2018, 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”), the Financial Conduct Authority (“FCA”) in the
Northern Ireland and will remain focused on this throughout
United Kingdom (“UK”), the New York State Department of
2019.
Financial Services (“NYSDFS”) and the Federal Reserve Bank of
New York in the United States of America (“USA”) and the
Cayman Islands Monetary Authority to focus on ensuring
Regulatory change horizon – UK
AIB Group (UK) p.l.c. is subject to the European Regulation
compliance with existing regulatory requirements together with
described under “Current climate of regulatory change” above
the management of regulatory change.
and works closely with AIB Group to ensure the requirements
are implemented compliantly taking into consideration UK
AIB Group plc is the holding company of Allied Irish Banks, p.l.c.
regulatory guidance. The approach to implementation of
(the principal operating company of AIB Group) and as such AIB
European Regulation will be reviewed in light of Brexit and any
Group plc is subject to consolidated supervision with respect to
impact which Brexit might have on the applicability of such
Allied Irish Banks, p.l.c. and other credit institutions and
investment firms in the Group.
regulation to AIB Group (UK) p.l.c. and to the AIB Group.
However, the current stance of the UK Government is to
maintain regulatory alignment with EU in respect of financial
Current climate of regulatory change
The level of regulatory change remained high in 2018 as the
services.
regulatory landscape for the banking sector continued to evolve.
As further regulatory reforms continue to emerge from the
2018 represented a culmination of a decade of regulatory reform,
regulators, AIB Group (UK) p.l.c. will continue to focus on the
with a large volume of significant regulatory initiatives becoming
effective. There was an increased focus on regulatory
management of regulatory change and its compliance
obligations.
supervision.
The Regulatory focus on Conduct and Culture will continue in
implementation of the retail banking market investigation order
2019 and beyond, with anticipated regulatory developments in
(2017) (the “Order”). The Order will provide for remedies to
the form of the Senior Executive Accountability Regime, and
market-wide issues identified as part of the Competition and
In addition, AIB Group (UK) p.l.c. will focus on the
review of the Fitness and Probity requirements.
The Group is committed to proactively identifying regulatory
Markets Authority’s Retail Banking Market Investigation into the
Personal Current Accounts and SME Banking markets in the UK.
obligations arising in each of the Group’s operating markets in
There will also be a focus on regulatory interventions to limit the
Ireland, the UK and the USA and ensuring the timely
cost of credit, particularly unauthorised overdrafts and anti-fraud
implementation of regulatory change.
Throughout 2018, the Group continued cross-functional
programmes to ensure the Group met its new regulatory
requirements. In particular, the Group focused on the EU
directives on the prevention of the use of the financial system for
the purpose of money laundering and terrorist financing the “4th
AML Directive, the implementation of PSD2; the EU directive on
security of network and information systems; the EU General
Data Protection Regulation (“GDPR”); the ECB Regulation on the
measures such as ‘Confirmation of Payee’. In addition, UK
Regulators are placing a focus on enhancing operational
resilience in the UK financial services sector and requiring
banks to make plans to take account of climate change.
United States
Compliance with federal and state banking laws and
regulations
During 2018, AIB’s state-licensed branch in New York continued
collection of granular credit and credit risk data (known as the
to prioritise compliance with its regulatory obligations in the
AnaCredit Regulation) and the Credit Reporting Act 2013 with
USA and will remain focused on this throughout 2019. In
regard to the central credit register.
particular, it will continue to monitor ongoing business activities
with regard to the Dodd Frank Act 2010. In addition, particular
Although 2019 will see a move to regulators and supervisors
focus will be given to the new Transaction Monitoring and
assessing how recent key regulatory requirements have been
Filtering Programme Regulation and new Cybersecurity
implemented, the level of regulatory change is expected to still
Regulation from the NYSDFS.
remain at high levels in 2019 and beyond.
Cayman Islands
During 2018, Allied Irish Banks, p.l.c. formally surrendered the
Bank and Trust licences of its Cayman Branch. These were
confirmed as having been cancelled with effect from 20
December 2018 by the Cayman Islands Monetary Authority.
214
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Financial statements
1 Directors’ Responsibility Statement
2 Independent Auditor’s 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
216
217
227
233
364
367
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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.
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/Euronext Dublin 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 whose names and functions are listed on pages 34 to 35 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 2018 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 2018;
– 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 and the company’s position and performance, business model and strategy.
For and on behalf of the Board
Richard Pym
Chairman
28 February 2019
Bernard Byrne
Chief Executive Officer
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Independent Auditor’s Report
Independent auditor’s 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’)
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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 2018 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 61, including a summary of significant accounting policies as set out in note 1.
The Company financial statements:
–
the Company Statement of Financial Position;
–
–
–
the Company Statement of Cash Flows;
the Company Statement of Changes in Equity; and
the related notes a to l, including a summary of significant accounting policies as set out in note a.
The relevant financial reporting framework that has been applied in the preparation of the Group and Company financial statements 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:
– Expected credit losses on loans and advances to customers;
– 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”); and
the Company to be € 63 million which is 0.5% of total equity of the Company.
AIB Group plc Annual Financial Report 2018 217
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Independent Auditor’s Report
Scoping
We focused the scope of our Group audit 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 total assets and 97%
of the Group’s total operating income.
Significant changes
in our approach
On 1 January 2018, the Group transitioned to financial instruments accounting standard IFRS 9 which
replaced IAS 39. Under the new impairment model, losses on financial assets which are classified at
amortised cost are recognised on an expected credit loss basis.
As a result we have identified a new key audit matter, ‘Expected credit losses on loans and advances
to customers’.
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 report, add or draw attention to:
–
–
–
the Directors’ confirmation in the annual report on page 211 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 disclosures on pages 62 to 68 to the annual report that describe the principal risks and explain how they are being managed
or mitigated;
the Directors’ statement on page 168 in the annual report 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 Directors’ explanation on page 211 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 judgement, 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.
Expected credit losses on loans and advances to customers
Key audit matter
description
On 1 January 2018, the Group transitioned to financial instruments accounting standard IFRS 9 which replaced
IAS 39. Under the new impairment model, losses on assets which are classified at amortised cost are
recognised on an expected credit loss basis. Expected credit losses (“ECL”) are required to incorporate
forward looking information, reflecting Management’s view of potential future economic environments.
The complexity involved in the calculations required Management to develop new methodologies involving the
use of significant judgements. In order to meet the requirements of the new standard, significant changes have
also been made to systems, processes and controls with effect from 1 January 2018. Management have
availed of the option within IFRS 9 to apply the standard prospectively. Information regarding the transitional
effect of IFRS 9 is disclosed in note 3, including the impact on shareholders’ equity at 1 January 2018.
Expected credit loss allowances on loans and advances to customers was € 2,039 million at 31 December 2018
(€ 3,616 million at 1 January 2018).
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How the scope of our
audit responded to the
key audit matter
Measurement of the ECL allowance on loans and advances to customers is a key audit matter as the
determination of assumptions for ECLs is highly subjective due to the level of judgement applied by
Management. The most significant judgements include:
–
–
–
–
–
–
Determining the criteria for a significant increase in credit risk, (“SICR”) and for being classified as credit
impaired;
Accounting interpretations and assumptions used to build the models that calculate the ECL;
The determination of key assumptions, including collateral valuation and cashflow timings, used in
discounted cash flows (“DCFs”) of individually assessed loans. DCFs are the most significant input to
the ECL calculation for Stage 3 loans;
The completeness and accuracy of data used to calculate the ECL;
The completeness and valuation of post-model adjustments determined by Management for certain
higher risk portfolios and to address known model limitations; and
Establishing the number and relative weightings for forward looking macroeconomic scenarios applied
in measuring the ECL. This is highly subjective given that such assumptions are subject to significant
uncertainty related to future economic outcomes, including the impact of Brexit. This results in a wide
range of possible outcomes.
Please also refer to page 186 (Audit Committee Report), page 252 (Accounting Policy – Impairment of
financial assets), Note 2 – Critical accounting judgements and estimates, Note 3 – Transition to IFRS 9,
Note 15 – Net credit impairment writeback and Note 27 – Loss allowance on financial assets.
We tested key controls supporting the calculation of ECLs on loan and advances to customers focusing on:
– model development, validation and approval to ensure compliance with IFRS 9 requirements;
–
review and approval of key assumptions, judgements and macroeconomic forward looking information
used in the models;
the integrity of data used as input to the models including the transfer of data between source systems
and the ECL models;
the application of SICR criteria and default definition used to determine stage outcomes;
governance and approval of post model adjustments recorded by Management;
governance and approval of the output of IFRS 9 models; and
front line credit monitoring and assessment controls including annual case file reviews.
–
–
–
–
–
Our testing included an evaluation of the design and implementation of these key controls. Where control
deficiencies were identified we tested compensating controls implemented to produce the ECLs and
financial statement disclosures. We also assessed Management review controls and governance controls
including attendance and observation of Board Risk Committee and Credit Committee meetings.
We evaluated IT system controls including assessing data inputs and new controls which were implemented
for IFRS 9. We tested the completeness and accuracy of key data inputs and reconciled to source systems,
where appropriate.
We critically assessed the ECL models developed by the Group. In conjunction with Deloitte credit modelling
specialists we assessed judgements and assumptions supporting the ECL requirements of the standard.
These included assumptions used in the ECL models applied in stage allocation, calculation of lifetime
probability of default and methods applied to derive loss given default rates. We evaluated the methodology
and performed code reviews for a sample of models.
We assessed the reasonableness of forward looking information incorporated into the impairment
calculations including assessing Management’s experts. We challenged the macroeconomic scenarios
chosen and the weighting applied to capture non-linear losses. This included benchmarking the economic
data used to recognised external data sources. We also considered the impact of key uncertainties,
including Brexit.
We considered material post-model adjustments applied by Management to address model and data
limitations. We challenged the rationale for these adjustments and performed testing on their calculation.
In examining a risk based sample of DCF individually assessed loan cases, we challenged Management on
AIB Group plc Annual Financial Report 2018 219
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Independent Auditor’s Report
the judgements made regarding the application of the default policy, status of loan restructures, collateral
valuation and realisation time frames and examined the credit risk functions analysis of data at a portfolio
level. 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 used and to
assess the objectivity of the external experts used.
We considered significant items impacting the ECL allowance balance. This included portfolio sales and non-
contracted write-offs as well as recoveries on amounts previously written-off.
We evaluated the disclosures made in the financial statements. In particular, we focused on challenging
Management that the disclosures were sufficiently clear in highlighting the significant uncertainties that exist
in respect of the ECL allowance and the sensitivity of the allowance to changes in the underlying
assumptions.
Based on the evidence obtained, we found that the ECLs on loans and advances to customers are within a
range we consider to be reasonable.
The key audit matter relates to the incorrect recognition or measurement of the deferred tax asset. Deferred
tax assets of € 2,808 million (2017: € 2,907 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 Management
judgement, given the inherent uncertainties associated with projecting profitability over a long time period.
This is highly subjective given the significant uncertainty related to future economic outcomes, including the
impact of Brexit.
Please refer to page 186 (Audit Committee Report), page 244 (Accounting Policy – Income tax, including
deferred income tax), Note 2 – Critical accounting judgements and estimates and Note 33 – Deferred
taxation.
Deferred tax asset
Key audit matter
description
How the scope of our
audit responded to the
key audit matter
We have evaluated the design and implementation of key controls over the preparation of financial plans and
budgets.
We assessed whether the level of forecasted profits were appropriate by challenging the growth,
profitability and economic assumptions. We tested the accuracy of Management’s forecasting process by
reviewing previous forecasts and compared to actual results.
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 the “more likely than not” test and assessed the adequacy of the
financial statement disclosures.
Based on the evidence obtained, we found that the assumptions used by Management in the recognition of
the deferred tax asset is within a range we consider to be reasonable.
Defined benefit obligations
Key audit matter
description
The key audit matter is that the recognition and measurement of defined benefit obligations of € 5,323
million (2017: € 5,694 million) is inappropriate.
There is a high degree of estimation and judgement in the calculation of defined benefit obligations.
A 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 186 (Audit Committee Report), page 242 (Accounting Policy – Employee benefits), and
Note 2 – Critical accounting judgements and estimates and Note 34 – Retirement benefits.
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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 and implementation of the controls for determining the actuarial assumptions and the
approval of those assumptions by Management.
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We have utilised Deloitte actuarial specialists as part of our team to assist us in challenging 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 the defined benefit obligations. We benchmarked economic and
demographic assumptions against market data and assessed Management adjustments to market rates 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 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 key audit matter relates to the recognition, measurement and disclosure of provisions for customer redress
and related matters (included within Note 40 – Provisions for liabilities and commitments of € 57 million
(2017: € 104 million)) are inappropriate for allegations of mis-selling of financial products, allegations of
overcharging and breach of contract 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 186 (Audit Committee Report), page 256 (Accounting Policy – Non-credit risk
provisions), Note 2 – Critical accounting judgements and estimates, Note 40 - Provisions for liabilities and
commitments, and Note 48 – Memorandum items: contingent liabilities and commitments, and contingent assets.
How the scope of our
audit responded to the
key audit matter
We have evaluated the design and implementation and tested the operating effectiveness of the Group’s
controls over the identification, measurement and the disclosure of the provisions. We also assessed
Management review controls and governance controls including attendance at and observation of Board Risk
Committee.
We challenged the assumptions regarding the interpretation of contract terms, the numbers of customers
affected and the costs arising from the issues in the calculation of the provisions. We reviewed the
correspondence with regulators and legal advice obtained. We also considered regulatory developments and
Management’s interactions with regulators including the status of the enforcement process.
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 the disclosures,
in particular, whether 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.
AIB Group plc Annual Financial Report 2018 221
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Independent Auditor’s Report
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 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 misstatements, complexity of the
Group and the reliability of the control environment.
We determined materiality for the Company to be € 63 million which is 0.5% of Company total equity. We have selected total equity as
an appropriate benchmark for Company materiality as the Company’s primary purpose is to act as a holding company with investments
in the Group’s primary subsidiary and therefore a profit based measure is not relevant.
Group materiality
(cid:934) (cid:1010)(cid:1010) (cid:373)
Component materiality
r(cid:258)(cid:374)(cid:336)(cid:286) (cid:934) (cid:1013) (cid:373) (cid:410)(cid:381) (cid:934) (cid:1006)(cid:1006) (cid:373)
Audit Committee reporting
(cid:410)(cid:346)(cid:396)(cid:286)(cid:400)(cid:346)(cid:381)(cid:367)(cid:282) (cid:934) (cid:1007)(cid:856)(cid:1007) (cid:373)
PBT (cid:934) 1,247 m
Group materiality
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 Board 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.
Based on that assessment, we focused our Group audit work in AIB Group plc and the four legal entities as disclosed in Note 49 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 Group’s total
assets and 97% 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.
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An overview of the scope of our audit (continued)
The levels of coverage of key financial aspects of the Group by type of audit procedures as set out below:
Total operating income
Total assets
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97%
Specified audit
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3%
Full audit scope
93%
Specified audit
procedures
5%
Review at
Group level
2%
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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.
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 position and performance, business model and strategy is materially inconsistent with our
knowledge obtained in the audit; or
– Board 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.
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Independent Auditor’s Report
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 judgement 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.
– 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 Company (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.
For listed entities and public interest entities, the auditor also provides those charged with governance with a statement that the
auditor has complied with relevant ethical requirements regarding independence, including the Ethical Standard for Auditors (Ireland)
2016, and communicates with them all relationships and other matters that may be reasonably be thought to bear on the auditor’s
independence, and where applicable, related safeguards.
224
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Where the auditor is required to report on key audit matters, from the matters communicated with those charged with governance, the
auditor determines those matters that were of most significance in the audit of the financial statements of the current period and are
therefore, the key audit matters. The auditor describes these matters in the auditor’s report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare circumstances, the auditor determines that a matter should not be
communicated in the auditor’s report because the adverse consequences of doing so would reasonably be expected to outweigh the
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public interest benefits of such communication.
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 those parts of the Directors’ report as specified for our review 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 174 to 185 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 Corporate Governance Statement contains the
information required by Regulation 6(2) of the European Union (Disclosure of Non-Financial and Diversity Information by certain
large undertakings and groups) Regulations 2017 (as amended); and
–
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 2018 225
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Independent Auditor’s 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/Euronext Dublin 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. The period of
total uninterrupted engagement including previous renewals and reappointments of the firm is 6 years, covering the years ending
2013 to 2018.
Following the corporate restructure, as disclosed in Note 46 to the financial statements, we were appointed on 21 September 2017 to
audit the financial statements of AIB Group plc for the financial year ended 31 December 2017 and subsequent financial periods.
The period of total uninterrupted engagement including previous renewals and reappointments of the firm is 2 years, covering the
years ending 2017 and 2018.
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 Board Audit Committee that we are required to provide in accordance
with ISA (Ireland) 260.
John McCarroll
For and on behalf of Deloitte Ireland LLP
Chartered Accountants and Statutory Audit Firm
Deloitte & Touche House, Earlsfort Terrace, Dublin 2
Dublin
28 February 2019
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.
226
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Consolidated income statement
for the financial year ended 31 December 2018
Continuing operations
Interest income calculated using the effective interest method
Other interest income and similar income
Interest and similar income
Interest expense
Net interest income
Dividend income
Fee and commission income
Fee and commission expense
Net trading income
Net gain on other financial assets measured at FVTPL
Net gain on derecognition of financial assets measured at amortised cost
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 impairment losses and provisions
Net credit impairment writeback
Writeback of provisions for liabilities and commitments
Operating profit
Associated undertakings and joint venture
Profit on disposal of property
Loss 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
5
5
6
7
8
8
9
10
11
12
13
31
32
15
40
29
16
17
19
20(a)
20(b)
2018
€ m
2,289
77
2,366
(266)
2,100
26
498
(41)
5
146
121
19
774
2,874
(1,661)
(110)
(52)
(1,823)
1,051
204
–
1,255
12
2
(22)
1,247
(155)
2017
€ m
2,414
67
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)
1,092
1,114
38.9c
38.9c
39.7c
39.7c
AIB Group plc Annual Financial Report 2018 227
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Consolidated statement of comprehensive income
for the financial year ended 31 December 2018
Profit for the year
Other comprehensive income – continuing operations
Items that will not be reclassified subsequently to profit or loss:
Net actuarial gains in retirement benefit schemes, net of tax
Net change in fair value of equity investments at FVOCI, 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
Net change in fair value of investment debt securities at FVOCI, net of tax
Total items that will be reclassified subsequently to profit or loss
when specific conditions are met
Notes
19
19
19
19
19
19
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
2018
€ m
1,092
2017
€ m
1,114
26
2
28
10
28
–
(291)
(253)
(225)
24
–
24
(53)
(203)
(132)
–
(388)
(364)
867
750
228
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Consolidated statement of financial position
as at 31 December 2018
31 December
2018
€ m
1 January 31 December
2017
€ m
2018(1)
€ m
Notes
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 advances to banks
Loans and advances to customers
Investment securities
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
Reserves
Total shareholders’ equity
Other equity interests
Total equity
Total liabilities and equity
22
23
24
25
26
28
29
31
32
30
33
34
35
36
37
24
38
33
34
39
40
41
42
44
6,516
73
10
–
900
1,443
60,868
16,861
90
682
330
356
10
2,702
454
241
91,536
844
67,699
–
934
5,745
74
107
49
887
325
219
795
6,364
103
8
33
1,156
1,312
59,722
16,321
80
569
321
430
5
2,787
459
183
6,364
103
8
33
1,156
1,313
59,993
16,321
80
569
321
418
5
2,736
459
183
89,853
90,062
3,640
64,572
30
1,170
4,590
68
109
87
824
348
267
793
3,640
64,572
30
1,170
4,590
68
97
87
824
348
231
793
77,678
76,498
76,450
1,696
11,668
13,364
494
13,858
91,536
1,697
11,164
12,861
494
13,355
89,853
1,697
11,421
13,118
494
13,612
90,062
(1)The ‘Statement of financial position’ as at 1 January 2018 reflects the adoption of IFRS 9 and IFRS 15 which apply with effect from 1 January 2018.
See ‘Basis of preparation’ in note 1.
Richard Pym
Chairman
28 February 2019
Bernard Byrne
Chief Executive Officer
Mark Bourke
Chief Financial Officer
Sarah McLaughlin
Group Company Secretary
AIB Group plc Annual Financial Report 2018 229
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Consolidated statement of cash flows
for the financial year ended 31 December 2018
Cash flows from operating activities
Profit before taxation for the year from continuing operations
Adjustments for:
– Non-cash and other items
– Change in operating assets
– Change in operating liabilities
– Taxation (paid)/refund
Net cash inflow/(outflow) from operating activities
Cash flows from investing activities
Purchase of investment securities
Proceeds from sales and maturity of investment securities
Additions to property, plant and equipment
Disposal of property, plant and equipment
Additions to intangible assets
Investments in associated undertaking and joint venture
Disposal of associated undertaking/joint venture
Dividends/distribution received from associated
undertakings and joint venture
Net cash (outflow)/inflow from investing activities
Cash flows from financing activities
Dividends paid on ordinary shares
Distributions 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
Notes
2018
€ m
2017
€ m
1,247
1,306
53
53
53
28
32
31
29
21
21
53
(4)
(740)
1,306
(44)
1,765
(3,276)
2,392
(65)
8
(223)
(10)
2
10
(1,162)
(326)
(37)
(31)
(394)
209
7,058
(21)
7,246
(5)
1,963
(4,693)
19
(1,410)
(1,419)
3,499
(26)
9
(261)
(81)
76
9
1,806
(250)
(37)
(31)
(318)
78
7,164
(184)
7,058
230
AIB Group plc Annual Financial Report 2018
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232
AIB Group plc Annual Financial Report 2018
A11 Acc Pols 2018 Purp 225-250:Layout 1 28/02/2019
20:34
Page 233
Notes to the consolidated financial statements
Page
234
Note
33 Deferred taxation
34 Retirement benefits
Note
1
2
3
4
5
6
7
8
9
Accounting policies
Critical accounting judgements
and estimates
Transition to IFRS 9
Segmental information
Interest and similar income
Interest expense
Dividend income
Net fee and commission income
Net trading income
10 Net gain on other financial assets
measured at FVTPL
11 Net gain on derecognition of financial
assets measured at amortised cost
12 Other operating income
13
14
Administrative expenses
Share-based compensation schemes
15 Net credit impairment writeback
16
17
18
19
20
Profit on disposal of property
Loss on disposal of business
Auditors’ fees
Taxation
Earnings per share
21 Distributions on equity shares and other
equity interests
22 Disposal groups and non-current assets
held for sale
23
Trading portfolio financial assets
24 Derivative financial instruments
25
26
27
28
29
Loans and advances to banks
Loans and advances to customers
Loss allowance on financial assets
Investment securities
Interests in associated undertakings
30 Other assets
31
32
Intangible assets
Property, plant and equipment
262
267
279
283
283
283
284
284
284
285
285
285
286
286
286
286
287
288
290
291
291
291
292
299
300
301
301
305
306
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308
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40
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instruments
42
Share capital
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liabilities
Page
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317
318
318
319
319
320
321
322
324
324
325
326
327
48 Memorandum items: contingent liabilities
and commitments, and contingent assets
331
49
Subsidiaries and consolidated
structured entities
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transferred financial assets
51 Classification and measurement of
financial assets and financial liabilities
Fair value of financial instruments
Statement of cash flows
52
53
54 Related party transactions
55 Commitments
56
Employees
57 Regulatory compliance
58
Financial and other information
59 Dividends
60 Non-adjusting events after the reporting
period
61
Approval of financial statements
333
334
338
340
349
351
361
362
362
362
363
363
363
AIB Group plc Annual Financial Report 2018 233
A11 Acc Pols 2018 Purp 225-250:Layout 1 28/02/2019
20:34
Page 234
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)
(r)
Sale and repurchase agreements (including
stock borrowing and lending)
Derivatives and hedge accounting
(s) Derecognition
(t)
Impairment of financial assets
(u) Collateral and netting
(v)
Financial guarantees and loan commitment contracts
(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
234
AIB Group plc Annual Financial Report 2018
A11 Acc Pols 2018 Purp 225-250:Layout 1 28/02/2019
20:34
Page 235
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.
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The consolidated financial statements for the year ended 31 December 2018 include the financial statements of AIB Group plc and its
subsidiary undertakings, collectively referred to as ‘AIB Group’ or ‘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. became a 100% subsidiary of AIB Group plc. The comparative consolidated financial statements incorporated 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 for 2017. See basis of consolidation below. Further details are disclosed in note 46 ‘Corporate
restructuring’.
(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 2018. The consolidated financial statements also comply with those parts of the Companies Act 2014 and the
European Union (Credit Institutions: Financial Statements) Regulations 2015 applicable to companies reporting under IFRS, 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, apart from policies adopted as a result of the implementation of IFRS 9 Financial Instruments and
IFRS 15 Revenue from Contracts with Customers which are outlined below.
(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 investment securities at FVOCI.
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 ongoing
basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future period affected.
The estimates that have a significant effect on the financial statements and estimates with a significant risk of material adjustment in the
next year are in the areas of expected credit losses on 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.
A description of these judgements and estimates is set out in ‘Critical accounting judgements and estimates’ on pages 262 to 266.
AIB Group plc Annual Financial Report 2018 235
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(c) Basis of preparation (continued)
Going concern
The financial statements for the financial year ended 31 December 2018 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.
First time adoption of new accounting standards
On 1 January 2018, the Group implemented the requirements of IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts
with Customers for the first time. As permitted by IFRS 9 and IFRS 15, the Group did not restate the prior year on their initial application.
Accordingly, comparative data for 2017 has been prepared under the previous standards ‘IAS 18 Revenue’ and ‘IAS 39 Financial
Instruments: Recognition and Measurement’.
IFRS 9 Financial Instruments
The effective date for IFRS 9 Financial Instruments was 1 January 2018 and was adopted by the Group on that date. 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,
any difference arising between IAS 39 carrying amounts and IFRS 9 carrying amounts at 1 January 2018 are recognised in opening
retained earnings (or in other comprehensive income, as applicable).
The Group applied IFRS 9 as issued in 2014 at 1 January 2018 and early adopted the amendments to IFRS 9 ‘Prepayment Features with
Negative Compensation’ on the same date.
Since the Group is continuing to apply IAS 39 hedge accounting requirements as allowed by IFRS 9, there has been no change to the
‘derivatives and hedge accounting policy’ – Accounting policy (r).
IFRS 9 Financial Instruments replaced IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes a revised classification
and measurement model for financial assets, a forward looking expected credit loss (“ECL”) impairment methodology and modifies the
approach to hedge accounting.
The business model assessment test required by IFRS 9 was performed as at the date of initial application. The Group assessed whether the
financial assets met the conditions for recognising a change in the classification/measurement basis at that date. This classification applies
retrospectively.
Impairment losses were measured at the date of initial application under the ‘expected credit loss model’ set out in IFRS 9.
The impact net of tax on transition to IFRS 9 was € 267 million representing a reduction in revenue reserves and other comprehensive
income, principally due to the impairment requirements.
Further details on the impact of adopting IFRS 9 at 1 January 2018 are set out in note 3 to these financial statements.
IFRS 9 accounting policies
The more significant accounting policies for the Group under IFRS 9:
Financial instruments
– Recognition and initial measurement;
– Classification and subsequent measurement;
–
Interest income and expense recognition;
– Derecognition; and
–
Impairment of financial assets
A summary of these policies is set out below under the relevant headings.
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1 Accounting policies (continued)
(c) Basis of preparation (continued)
IFRS 15 Revenue from Contracts with Customers
The effective date for IFRS 15 Revenue from Contracts with Customers was 1 January 2018 and was adopted by the Group on that
date by recognising the cumulative effect of initially adopting the standard as an adjustment to the opening balance of retained earnings.
IFRS 15 replaces all existing revenue recognition requirements in IFRS and applies to all revenue arising from contracts with customers
unless the contracts are within the scope of other accounting standards.
The standard outlines the principles entities must apply to measure and recognise revenue with the core principle being that entities
should recognise revenue at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for
fulfilling its performance obligations to a customer.
IFRS 15 had the following impact on the date of initial adoption:
Increase in “Other assets”
Decrease in “Deferred taxation”
Increase in “Revenue reserves“
€ 12 million
€ 2 million
€ 10 million
The accounting policy on ‘fee and commission income’ set out below (h) replaces the previous accounting policy implemented under
IAS 18.
(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 IFRS 9 Financial
Instruments, 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.
AIB Group plc Annual Financial Report 2018 237
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Notes to the consolidated financial statements
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
the sum of:
–
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–
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
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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 comparative consolidated financial statements for 2017 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 46 ‘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 IFRS 9 Financial Instruments.
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.
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 2018 239
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Notes to the consolidated financial statements
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 designated at FVOCI, 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
cumulative translation reserve within shareholders’ equity. When a foreign operation is disposed of in full, the relevant amount of this
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. In the case of a partial disposal, a pro-rata amount of the foreign
currency cumulative translation reserve is transferred to the income statement. This also applies in the case where there has not been
a reduction in the overall percentage holding, i.e. repayment of capital.
(f) Interest income and expense recognition
Interest income and expense is recognised in the income statement using the effective interest method.
Effective interest rate
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 gross carrying amount of the financial asset; or
the amortised cost of the 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 for financial
instruments other than credit impaired assets, the Group estimates cash flows (using projections based on its experience of customers’
behaviour) considering all contractual terms of the financial instrument but excluding expected 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.
Amortised cost and gross carrying amount
The amortised cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at
initial recognition minus the principal repayments, plus or minus the cumulative amortisation using the effective interest method of any
difference between that initial amount and the maturity amount and, for financial assets, adjusted for any loss allowance.
The gross carrying amount of a financial asset is the amortised cost before adjusting for any loss allowance.
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1 Accounting policies (continued)
(f) Interest income and expense recognition (continued)
Calculation of interest income and interest expense
In calculating interest income and expense, the effective interest rate is applied to the gross carrying amount of the asset (when the
asset is not credit impaired) or to the amortised cost of the liability.
For financial assets that have become credit impaired subsequent to initial recognition, interest income is calculated by applying the
effective interest rate to the amortised cost of the financial asset. If the asset is no longer credit impaired, the calculation of interest
income reverts to the gross basis.
However, for financial assets that were credit impaired on initial recognition, interest income is calculated by applying the credit adjusted
effective interest rate to the amortised cost of the financial asset. The calculation of interest income does not revert to a gross basis,
even if the credit risk of the asset improves.
When a financial asset is no longer credit impaired or has been repaid in full (i.e. cured without financial loss), the Group presents
previously unrecognised interest income as a reversal of credit impairment/recovery of amounts previously written-off. (The Group policy
prior to the adoption of IFRS 9 on 1 January 2018 was to recognise such income in interest income).
Interest income and expense on financial assets and liabilities classified as held for trading or at FVTPL is recognised in ‘other interest
income and similar income’ or ‘interest expense’ on the income statement, as applicable.
Presentation
Interest income and expense presented in the consolidated income statement include:
–
–
–
– Net interest income and expense on qualifying hedge derivatives designated as cash flow hedges or fair value hedges which are
Interest on financial assets and financial liabilities measured at amortised cost calculated on an effective interest basis;
Interest on investment debt securities measured at FVOCI calculated on an effective interest basis;
Interest on financial assets measured at FVTPL;
recognised in interest income or interest expense; and
Interest income and funding costs of trading portfolio financial assets.
–
The Group policy for the recognition of leasing income is set out in Accounting policy (o).
(g) Dividend income
Dividends on equity investments measured at FVTPL are recognised in the income statement when the entity's right to receive payment
is established. Dividends on equity investments measured at FVOCI are recognised in the income statement provided that they
represent a return on capital.
(h) Fee and commission income
The measurement and timing of recognition of fee and commission income is based on the core principles of IFRS 15 Revenue from
Contracts with Customers.
The principles in IFRS 15 are applied using the following 5 step model:
–
–
–
–
–
Identify the contract(s) with a customer;
Identify the performance obligations in the contract;
Determine the transaction price;
Allocate the transaction price to the performance obligations in the contract; and
Recognise revenue when or as the Group satisfies its performance obligations.
Fee and commission income is recognised when the performance obligation in the contract has been performed, ‘point in time’
recognition, or ‘over time’ recognition if the performance obligation is performed over a period of time unless the income has been
included in the effective interest rate calculation.
The Group includes in the transaction price, some or all of an amount of, variable consideration estimated only to the extent that it is
highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty
associated with the variable consideration is subsequently resolved.
The majority of the Group’s fee and commission income arises from retail banking activities. Loan syndication fees are recognised as
revenue when the syndication has been completed and the Group has retained no part of the loan package for itself or retained a part
at the same effective interest rate as applicable to the other participants.
Foreign exchange income is fee income that is derived from arranging foreign exchange transactions on behalf of customers.
Such income is recognised when the individual performance obligation has been fulfilled.
AIB Group plc Annual Financial Report 2018 241
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(h) Fee and commission income (continued)
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 time in line with the performance obligation. 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 over time in
line with the performance obligation except 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. Interest revenue and dividend income on trading assets are shown in ‘interest income’ and ‘dividend income’
respectively.
(j) Employee benefits
Retirement benefit obligations
The Group provides employees with post-retirement benefits mainly in the form of pensions.
The Group provides a number of retirement benefit schemes including defined benefit and defined contribution as well as a hybrid
scheme that has both defined benefit and defined contribution elements. In addition, the Group contributes, according to local law in the
various countries in which it operates, to governmental and other schemes which have the characteristics of defined contribution
schemes. The majority of the defined benefit schemes are funded.
Full actuarial valuations of defined benefit schemes are undertaken every three years and are updated to reflect current conditions at
each year end reporting date. Scheme assets are measured at fair value determined by using current bid prices. Scheme liabilities are
measured on an actuarial basis by estimating the amount of future benefit that employees have earned for their service in current and
prior periods and discounting that benefit at the market yield on a high quality corporate bond of equivalent term and currency to the
liability. The calculation is performed by a qualified actuary using the projected unit credit method. The difference between the fair value
of the scheme assets and the present value of the defined benefit obligation at the year end reporting date is recognised in the
statement of financial position. Schemes in surplus are shown as assets and schemes in deficit, together with unfunded schemes, are
shown as liabilities. A surplus is only recognised as an asset to the extent that it is recoverable through a refund from the scheme or
through reduced contributions in the future. Actuarial gains and losses are recognised immediately in other comprehensive income.
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.
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1 Accounting policies (continued)
Retirement benefit obligations (continued)
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.
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 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.
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.
AIB Group plc Annual Financial Report 2018 243
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(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. However, the income tax consequences of payments on financial instruments that are
classified as equity but treated as liabilities for tax purposes are recognised in profit or loss if those payments are distributions of profits
previously recognised in profit or loss.
Current tax is the expected tax payable on the taxable income for the year using tax rates enacted or substantively enacted at the
reporting date and any adjustment to tax payable in respect of previous years.
Deferred income tax is provided, using the balance sheet liability method, on temporary differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes. Deferred income tax is determined using tax rates based on
legislation enacted or substantively enacted at the reporting date and expected to apply when the deferred tax asset is realised or the
deferred tax liability is settled. Deferred income tax assets are recognised when it is probable that future taxable profits will be available
against which the temporary differences will be utilised. The deferred tax asset is reviewed at the end of each reporting period and the
carrying amount will reflect the extent that sufficient taxable profits will be available to allow all of the asset to be recovered.
The tax effects of income tax losses available for carry forward are recognised as an asset to the extent that it is probable that future
taxable profits will be available against which these losses can be utilised.
Deferred and current tax assets and liabilities are only offset when they arise in the same tax reporting group and where there is
both the legal right and the intention to settle the current tax assets and liabilities on a net basis or to realise the asset and settle the
liability simultaneously.
The principal temporary differences arise from depreciation of property, plant and equipment, revaluation of certain financial assets and
financial liabilities including derivative contracts, provisions for pensions and other post-retirement benefits, and in relation to
acquisitions, on the difference between the fair values of the net assets acquired and their tax base.
Deferred income tax is provided on temporary differences arising from investments in subsidiaries and associates, except where the
timing of the reversal of the temporary difference is controlled by the Group and it is probable that the difference will not reverse in the
foreseeable future. In addition, the following temporary differences are not provided for: goodwill, the amortisation of which is not
deductible for tax purposes, and assets and liabilities the initial recognition of which, in a transaction that is not a business combination,
affects neither accounting nor taxable profit. Income tax payable on profits, based on the applicable tax law in each jurisdiction, is
recognised as an expense in the period in which the profits arise.
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1 Accounting policies (continued)
(m) Financial assets
Recognition and initial measurement
The Group initially recognises financial assets on the trade date, being the date on which the Group commits to purchase the assets.
Loan assets are recognised when cash is advanced to borrowers.
Financial assets measured at amortised cost or at fair value through other comprehensive income (“FVOCI”) are recognised initially at
fair value adjusted for direct and incremental transaction costs. Financial assets measured at fair value through profit or loss (“FVTPL”)
are recognised initially at fair value and transaction costs are taken directly to the income statement.
Derivatives are measured initially at fair value on the date on which the derivative contract is entered into. 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.
Classification and subsequent measurement
On initial recognition, a financial asset is classified and subsequently measured at amortised cost, FVOCI or FVTPL.
The classification and subsequent measurement of financial assets depend on:
– The Group's business model for managing the asset; and
– The cash flow characteristics of the asset (for assets in a ‘hold-to-collect’ or ‘hold-to-collect-and-sell’ business model).
Based on these factors, the Group classifies its financial assets into one of the following categories:
– Amortised cost
Assets that have not been designated as at FVTPL, and are held within a ‘hold-to-collect’ business model whose objective is to hold
assets to collect contractual cash flows; and whose contractual terms give rise on specified dates to cash flows that are solely payments
of principal and interest. The carrying amount of these assets is calculated using the effective interest method and is adjusted on each
measurement date by the expected credit loss allowance for each asset, with movements recognised in profit or loss.
– Fair value through other comprehensive income (“FVOCI”)
Assets that have not been designated as at FVTPL, and are held within a ‘hold-to-collect-and-sell’ business model whose objective is
achieved by both collecting contractual cash flows and selling financial assets; and whose contractual terms give rise on specified dates
to cash flows that are solely payments of principal and interest (“SPPI”). Movements in the carrying amount of these assets are taken
through other comprehensive income (“OCI”), except for the recognition of credit impairment gains or losses, interest revenue or foreign
exchange gains and losses, which are recognised in profit or loss. When a financial asset is derecognised, the cumulative gain or loss
previously recognised in OCI is reclassified from equity to profit or loss other than in the case of equity instruments designated at
FVOCI.
– Fair value through profit or loss (“FVTPL”)
Financial assets that do not meet the criteria for amortised cost or FVOCI are measured at FVTPL. Gains or losses (excluding interest
income or expense) on such assets are recognised in profit or loss on an ongoing basis.
In addition, the Group may irrevocably designate a financial asset as at FVTPL that otherwise meets the requirements to be measured
at amortised cost or at FVOCI if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise.
– Embedded derivatives
Certain hybrid contracts may contain both a non-derivative host and an ‘embedded derivative’. Under IFRS 9, there is no bifurcation of
embedded derivatives from the host financial asset. As a result, such financial assets will generally fail the SPPI test unless the
embedded derivative does not substantially modify the cash flows that would otherwise be required by the contract. Those failing the
SPPI test will be classified and measured at FVTPL.
AIB Group plc Annual Financial Report 2018 245
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(m) Financial Assets (continued)
Business model assessment
The Group makes an assessment of the objective of the business model at a portfolio level, as this reflects how portfolios of assets are
managed to achieve a particular objective, rather than management's intentions for individual assets.
The assessment considers the following:
– The strategy for the portfolio as communicated by management;
– How the performance of the portfolio is evaluated and reported to senior management;
– The risks that impact the performance of the business model, and how those risks are managed;
– How managers of the business are compensated (i.e. based on fair value of assets managed or on the contractual cash flows
collected); and
– The frequency, value and timing of sales in prior periods, reasons for those sales, and expectations of future sales activity.
Financial assets that are held for trading or managed within a business model that is evaluated on a fair value basis are measured at
FVTPL because the business objective is neither hold-to-collect contractual cash flows nor hold-to-collect-and-sell contractual cash
flows.
Characteristics of the contractual cash flows
An assessment (‘SPPI test’) is performed on all financial assets at origination that are held within a ‘hold-to-collect’ or ‘hold-to-collect-
and-sell’ business model to determine whether the contractual terms of the financial assets give rise on specified dates to cash flows
that are solely payments of principal and interest on the principal outstanding. For the purposes of this assessment, ‘principal’ is defined
as the fair value of the financial asset at initial recognition. ‘Interest’ is defined as consideration for the time value of money, for the credit
risk associated with the principal amount outstanding, and for other basic lending risks and costs (i.e. liquidity, administrative costs), and
profit margin.
The SPPI test requires an assessment of the contractual terms and conditions to determine whether a financial asset contains any
terms that could modify the timing or amount of contractual cash flows of the asset, to the extent that they could not be described as
solely payments of principal and interest. In making this assessment, the Group considers:
– Features that modify the time value of money element of interest (e.g. tenor of the interest rate does not correspond with the
frequency within which it resets);
– Terms providing for prepayment and extension;
–
Leverage features;
– Contingent events that could change the amount and timing of cash flows;
– Terms that limit the Group's claim to cash flows from specified assets; and
– Contractually linked instruments.
Contractual terms that introduce exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending
arrangement, do not give rise to contractual cash flows that are solely payments of principal and interest on the principal amount
outstanding.
Reclassifications
Reclassifications of financial assets to alternative asset categories, (e.g. from amortised cost to FVOCI), should be very infrequent, and
will only occur if the Group decides to make a fundamental change in its business model for managing a specific portfolio of financial
assets.
Investments in equity instruments
Equity instruments are classified and measured at FVTPL with gains and losses reflected in profit or loss.
On initial recognition, the Group may elect to irrevocably designate at FVOCI, an equity instrument that is not held for trading.
This election is made on an instrument-by-instrument basis. When this election is used, fair value gains and losses are recognised in
OCI and are not subsequently reclassified to profit or loss on derecognition of the equity instrument.
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1 Accounting policies (continued)
(n) Financial liabilities and equity
The Group categorises financial liabilities as at amortised cost or as at fair value through profit or loss.
The Group recognises a financial liability when it becomes party to the contractual provisions of the contract.
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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.
AIB Group plc Annual Financial Report 2018 247
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(p) Determination of fair value of financial instruments
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.
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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.
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(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) 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.
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(r) Derivatives and hedge accounting (continued)
Hedging
The Group has opted to remain with the IAS 39 hedge accounting requirements until macro hedge accounting is addressed by the IASB
as part of a separate project. This is an accounting policy choice allowed by IFRS 9.
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.
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 debt securities measured at FVOCI, 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.
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1 Accounting policies (continued)
(r) Derivatives and hedge accounting (continued)
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.
(s) Derecognition
Financial assets
The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire or it transfers the
rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the
financial asset are transferred or in which the Group neither transfers nor retains substantially all of the risks and rewards of ownership
and it does not retain control of the financial asset.
On derecognition of a financial asset, the difference between the carrying amount of the asset and the sum of (i) the consideration
received (including any new asset obtained less any new liability assumed) and (ii) any cumulative gain or loss that had been
recognised in OCI is recognised in profit or loss. Relevant costs incurred with the disposal of a financial asset are deducted in
computing the gain or loss on disposal.
Any cumulative gain/loss recognised in OCI in respect of equity investment securities designated as at FVOCI is not recognised in profit
or loss on derecognition of such securities. However, the amount held in investment securities reserves is transferred to revenue
reserves on derecognition. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the
Group is recognised as a separate asset or liability.
The Group enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all or
substantially all of the risks and rewards of the transferred assets or a portion of them. In such cases, the transferred assets are not
derecognised. Examples of such transactions are securities lending and sale-and-repurchase transactions.
In transactions in which the Group neither retains nor transfers substantially all of the risks and rewards of ownership of a financial asset
and it retains control over the asset, the Group continues to recognise the asset to the extent of its continuing involvement, determined
by the extent to which it is exposed to changes in the value of the transferred asset.
In certain transactions, the Group retains the obligation to service the transferred financial asset for a fee. The transferred asset is
derecognised if it meets the derecognition criteria. An asset or liability is recognised for the servicing contract if the servicing fee is more
than adequate or is less than adequate for performing the servicing.
The write-off of a financial asset constitutes a derecognition event. Where a financial asset is partially written-off, and the portion written-
off comprises specifically identified cash flows, this will constitute a derecognition event for that part written-off.
AIB Group plc Annual Financial Report 2018 251
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(t) Impairment of financial assets
The Group recognises loss allowances for expected credit losses at each balance sheet date for the following financial instruments that
are not measured at FVTPL:
– Financial assets at amortised cost;
– Financial assets at FVOCI (except for equity instruments);
–
Lease receivables;
– Financial guarantee contracts issued; and
–
Loan commitments issued.
Investments in equity instruments are recognised at fair value, accordingly, expected credit losses are not recognised separately for
equity instruments.
ECLs are the weighted average of credit losses. These are an estimate of credit losses over the life of a financial instrument.
When measuring ECLs, the Group takes into account:
–
–
–
probability-weighted outcomes;
the time value of money so that ECLs are discounted to the reporting date; and
reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current
conditions and forecasts of future economic conditions.
The amount of ECLs recognised as a loss allowance depends on the extent of credit deterioration since initial recognition. There are two
measurement bases:
–
12-month ECLs (Stage 1), which applies to all items as long as there is no significant deterioration in credit quality since initial
recognition; and
Lifetime ECLs (Stages 2 and 3), which applies when a significant increase in credit risk has occurred on an individual or collective
basis.
–
The 12 month ECL is the portion of lifetime expected credit losses that represent the expected credit losses that result from default
events on a financial instrument that are possible within the 12 months after the reporting date. Lifetime ECL is the expected credit
losses that result from all possible default events over the expected life of a financial instrument.
In the case of Stage 2, credit risk on the financial instrument has increased significantly since initial recognition but the instrument is not
considered credit impaired. For a financial instrument in Stage 3, credit risk has increased significantly since initial recognition and the
instrument is considered credit impaired.
Financial assets are allocated to stages dependent on credit quality relative to when the asset was originated.
A financial asset can only originate in either Stage 1 or as purchased or originated credit impaired (“POCI”). The ECL held against an
asset depends on a number of factors, one of which is its stage allocation. Assets allocated to Stage 2 and Stage 3 have lifetime ECLs.
Collateral and other credit enhancements are not considered as part of stage allocation. Collateral is reflected in the Group’s loss given
default models (‘LGD’).
Purchased or originated credit impaired
Purchased or originated credit impaired (“POCI”) financial assets are those that are credit-impaired on initial recognition. The Group may
originate a credit-impaired financial asset following a substantial modification of a distressed financial asset that resulted in
derecognition of the original financial asset.
POCIs are assets originated credit impaired where the difference between the discounted contractual cash flows and the fair value at
origination is greater than or equal to 5%. The Group uses an appropriate discount rate for measuring ECL in the case of POCIs which
is the credit-adjusted EIR. This rate is used to discount the expected cash flows of such assets to fair value on initial recognition.
POCIs remain outside of the normal stage allocation process for the lifetime of the obligation. The ECL for POCIs is always measured at
an amount equal to lifetime expected credit losses. The amount recognised as a loss allowance for these assets is the cumulative
changes in lifetime expected credit losses since the initial recognition of the assets rather than the total amount of lifetime expected
credit losses.
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1 Accounting policies (continued)
(t) Impairment of financial assets (continued)
At each reporting date, the Group recognises the amount of the change in lifetime expected credit losses as a credit impairment gain or
loss in profit or loss. Favourable changes in lifetime expected credit losses are recognised as a credit impairment gain, even if the
favourable changes exceed the amount previously recognised in profit or loss as a credit impairment loss.
Modification
From time to time, the Group will modify the original terms of a customer’s loan either as part of the ongoing relationship or arising from
changes in the customer’s circumstances such as when that customer is unable to make the agreed original contractual repayments.
A modification refers to either:
– A change to the previous terms and conditions of a debt contract; or
– A total or partial refinancing of a debt contract.
Modifications may occur for both customers in distress and for those not in distress. Any financial asset that undergoes a change or
renegotiation of cash flows and is not derecognised is a modified financial asset.
When modification does not result in derecognition, the modified assets are treated as the same continuous lending agreement but
requires a modification gain or loss to be taken to profit or loss immediately. The gross carrying amount of the financial asset is
recalculated as the present value of the renegotiated or modified contractual cash flows discounted at the financial asset’s original
effective interest rate. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are amortised over the
remaining term of the modified financial asset.
The stage allocation for modified assets which are not derecognised is by reference to the credit risk at initial recognition of the original,
unmodified contractual terms i.e. the date of initial recognition is not reset.
Where renegotiation of the terms of a financial asset 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.
Derecognition occurs if a modification or restructure is substantial on a qualitative or quantitative basis. Accordingly, certain forborne
assets are derecognised. The modified/restructured asset (derecognised forborne asset (‘DFA’)) is considered a ‘new financial
instrument’ and the date that the new asset is recognised is the date of initial recognition from this point forward. DFAs are allocated to
Stage 1 on origination and follow the normal staging process, thereafter.
If there is evidence of credit impairment at the time of initial recognition of a DFA, and the fair value at recognition is at a discount to the
contractual amount of the obligation, the asset is deemed to be a POCI. POCIs are not allocated to stages but are assigned a lifetime
PD and ECL for the duration of the obligation’s life. Where the modification/restructure of a non-forborne credit obligation results in
derecognition, the new loan is originated in Stage 1 and follows the normal staging process thereafter.
Collateralised financial assets – Repossessions
The ECL calculation for 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 credit 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 that asset and not as a credit impairment of the original loan.
Financial assets at FVOCI
The ECL allowance for financial assets measured at FVOCI does not reduce the carrying amount in the statement of financial position
because the carrying amount of these assets is fair value. However, an amount equal to the ECL allowance that would arise if the
assets were measured at amortised cost is recognised in other comprehensive income (‘OCI’) as an accumulated credit impairment
amount, with a corresponding charge to profit or loss. The accumulated loss recognised in OCI is recycled to the profit or loss upon
derecognition of the assets (together with other accumulated gains and losses in OCI).
AIB Group plc Annual Financial Report 2018 253
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(t) Impairment of financial assets (continued)
Write-offs and debt forgiveness
The Group reduces the gross carrying amount of a financial asset either partially or fully when there is no reasonable expectation of
recovery.
Where there is no formal debt forgiveness agreed with the customer, the Group may write off a loan either partially or fully when there is
no reasonable expectation of recovery. This is considered a non-contracted write-off. In this case, the borrower remains fully liable for
the credit obligation and is not advised of the write-off.
Once a financial asset is written-off either partially or fully, the amount written-off cannot subsequently be recognised on the balance
sheet. It is only when cash is received in relation to the amount written-off that income is recognised in the income statement as a
‘recovery of bad debt previously written-off’.
Debt forgiveness arises where there is a formal contract agreed with the customer for the write-off of a loan.
(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 advances 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 advances continues to be recorded on the statement of financial position. Collateral paid away in the form of cash
is recorded in loans and advances 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 and loan commitment contracts
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.
A loan commitment is a contract with a borrower to provide a loan or credit on specified terms at a future date. The contract may or may
not be cancelled unconditionally at any time without notice depending on the terms of the contract.
Financial guarantees and loan commitment contracts are initially recognised in the financial statements at fair value on the date that the
guarantee or loan commitment is given. Subsequent to initial recognition, the Group applies the impairment provisions of IFRS 9 and
calculates an ECL allowance for financial guarantees and loan commitment contracts which are not measured at FVTPL.
The origination date for such contracts is the date when the contracts become irrevocable. The credit risk at this date is used to
determine if a significant increase in credit risk has subsequently occurred.
The ECL allowance calculated on financial guarantees and loan commitment contracts is reported within IAS 37 provisions.
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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 IFRS 9 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 equity.
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 59.
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 44). 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 45). 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; and (c) 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 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 2018 257
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(ab) Equity (continued)
Capital redemption reserves
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.
In 2018, Subscriber Shares were redeemed resulting in a transfer of € 25,000 from revenue reserves to capital redemption reserves.
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.
Investment securities reserves (previously available for sale securities reserves)
Investment securities reserves represent the net unrealised gain or loss, net of tax, arising from the recognition in the statement of
financial position of investment securities at FVOCI.
On disposal of equity securities which had been designated at FVOCI on initial recognition, any amounts held in the investment
securities reserves account is transferred directly to revenue reserves without recycling through profit or loss.
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 46).
The cumulative surplus/deficit within the defined benefit pension schemes and other appropriate adjustments are included in/offset
against revenue reserves.
Foreign currency cumulative translation reserves
The foreign currency cumulative 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 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 45). 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 was 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 Executive
Committee/Leadership Team. The Executive Committee/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:
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.
IFRIC 23 is expected to have an insignificant effect on the financial statements.
Effective date: Annual reporting periods beginning on or after 1 January 2019.
Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures
The amendments to IAS 28 regarding long-term interests in associates and joint ventures which were issued in October 2017, clarify that:
–
An entity applies IFRS 9 Financial Instruments to long-term interests in an associate or joint venture that form part of the net
investment in the associate or joint venture but to which the equity method is not applied.
These amendments are not expected to have a significant impact on the Group.
Effective date: Annual reporting periods beginning on or after 1 January 2019.
AIB Group plc Annual Financial Report 2018 259
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Notes to the consolidated financial statements
1 Accounting policies (continued)
(ae) Prospective accounting changes (continued)
Annual Improvements: 2015-2017 cycle
The IASB's annual improvements project provides a process for making amendments to IFRSs that are considered non-urgent but
necessary. The amendments clarify guidance and wording, or correct for relatively minor unintended consequences, conflicts or
oversights in existing IFRSs. Annual Improvements to IFRSs 2015- 2017 Cycle amends IFRSs in relation to three issues addressed
during this cycle.
The Group has early adopted ‘Amendments to IAS 12 Income Taxes- Recognition of current and deferred tax’ which is one of the
clarifications included in the 2015-2017 cycle. This clarification requires that the income tax consequences of payments on financial
instruments that are classified as equity but treated as liabilities for tax purposes be recognised in profit or loss if those payments are
distributions of profits previously recognised in profit or loss. The adoption of these amendments has resulted in € 14 million being
recognised as a tax credit in the income statement rather than directly in equity. Comparatives are not restated as there was no impact on
the 2017 financial statements.
None of the other amendments are expected to have a significant impact on reported results or disclosures.
Effective date: Annual reporting periods beginning on or after 1 January 2019.
Amendments to IAS 19: Plan Amendment, Curtailment or Settlement
The amendments to IAS 19 regarding Plan Amendment, Curtailment or Settlement which were issued in February 2018, require the
following change:
–
If a plan amendment, curtailment or settlement occurs, it is required that the current service cost and the net interest for the period
after the remeasurement are determined using the assumptions used for the remeasurement.
– Amendments have been included to clarify the effect of a plan amendment, curtailment or settlement on the requirements regarding
the asset ceiling.
These amendments are not expected to have a significant impact on the Group.
Effective date: Annual reporting periods beginning on or after 1 January 2019.
Amendments to IFRS 3 Business Combinations
The amendments to IFRS 3 Business Combinations, which were issued in October 2018, clarify the definition of a business through the
following changes:
–
–
To be considered a business, an acquired set of activities and assets must include, at a minimum, an input and a substantive process;
They narrow the definitions of a business and outputs by focusing on goods and services provided to customers and by removing the
reference to an ability to reduce costs.
These amendments are not expected to have a significant impact on the Group.
Effective date: Business combinations where the acquisition date is on or after annual reporting periods beginning on or after 1 January
2020.
Amendments to IAS 1 and IAS 8: Definition of Material
The amendments to IAS 1 and IAS 8 regarding the definition of material which were issued in October 2018, clarify the definition of
material through the following changes:
– A revised definition of ‘material’ which is included in the defined terms
–
as follows “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence the decisions that
the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial
information about a specific reporting entity”.
These amendments are not expected to have a significant impact on the Group.
Effective date: Annual reporting periods beginning on or after 1 January 2020.
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1 Accounting policies (continued)
(ae) Prospective accounting changes (continued)
IFRS 16 Leases
IFRS 16 Leases, which was issued in January 2016, replaces IAS 17 Leases with effect from 1 January 2019. 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.
On transition, the Group will apply this standard using the modified retrospective approach for leases previously classified as operating
leases, under this approach the Group will not restate comparative figures. 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.
On transition, the Group will apply the following practical expedients when applying IFRS 16 to leases previously classified as operating
under IAS 17:
–
–
apply the exemption not to recognise right-of-use assets and liabilities for leases with less than 12 months of lease term remaining;
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.
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 has assessed its impact, and the assets and liabilities in the statement of financial position will increase by € 0.5 billion
on implementation. (This includes minimum lease payments as outlined in note 55 ‘Commitments’ together with additional lease payments
which the Group is reasonably certain to incur beyond the termination option of a break clause). The expected impact on the income
statement in 2019 is not disclosed given the significant changes occurring in the Group’s property footprint. However, the overall impact of
IFRS 16 over the life of a lease will be neutral on the income statement, whilst its implementation will result in a higher charge in the earlier
years following implementation with a lower charge in later years.
Effective date: Annual periods beginning on or after 1 January 2019.
AIB Group plc Annual Financial Report 2018 261
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Notes to the consolidated financial statements
2 Critical accounting judgements and estimates
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the
application of policies and reported amounts of certain assets, liabilities, revenues and expenses, and disclosures of contingent assets
and liabilities. The estimates and assumptions are based on historical experience and various other factors that are believed to be
reasonable under the circumstances. Since management judgement involves making estimates concerning the likelihood of future
events, the actual results could differ from those estimates.
The accounting policies that are deemed critical to 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.
Impairment of financial assets
The Group’s accounting policy for impairment of financial assets is set out in accounting policy (t) in note 1. The expected credit loss
(‘ECL’) allowance for financial assets at 31 December 2018 represent management’s best estimate of the expected credit losses on the
various portfolios at the reporting date.
On 1 January 2018, the Group implemented the three stage ECL impairment model under IFRS 9. The calculation of the ECL allowance
is required for all financial assets measured at amortised cost, financial assets at FVOCI (apart from equities) and loan commitments
and financial guarantee contracts.
The estimation of the ECL allowance is inherently uncertain and depends upon many factors, including loan loss trends, portfolio grade
profiles, local and international economic climates both current and evolving, conditions in various industries to which the Group is
exposed and other external factors such as legal and regulatory requirements.
The implementation of an expected credit loss model for the first time has resulted in a new methodology and basis for calculating
impairment losses compared to the incurred loss model under IAS 39. The calculation of ECL allowances is complex and therefore, an
entity must consider much more information in the determination of such expectations of future credit losses. This process requires
significant use of estimates, judgements and assumptions, some of which, by their nature, are highly subjective and very sensitive to
risk factors such as changes to economic conditions. Further information on the IFRS 9 measurement, methodologies and judgements
is detailed on pages 85 to 92.
The management process for the calculation of ECL allowances is underpinned by independent tiers of review. Credit quality and ECL
provisioning are independently monitored by credit and risk management on a regular basis. All the Group’s segments assess and
approve their ECL allowances and their adequacy on a quarterly basis. These ECL allowances are, in turn, reviewed and approved by
the Group Credit Committee on a quarterly basis with final Group levels being approved by the Board Audit Committee. Further detail on
the ECL governance process is set out on page 92.
On an ongoing basis, the various judgements, estimates and assumptions are reviewed in light of differences between actual and
previously calculated expected losses. These are then recalibrated and refined to reflect current and evolving economic conditions.
After a period of time, when it is concluded that there is no reasonable expectation of recovering a Stage 3 loan in its entirety or a
portion thereof, the Group reduces the gross carrying amount directly by the relevant ECL allowance for that amount deemed
irrecoverable.
Inputs for calculating ECL allowance
The inputs to models used to derive the ECL allowance rely, to a large extent, on reasonably supportable past events as predictors of
future outcomes. Given the severe financial crisis which affected the Irish banking sector in the past, the use of historical loss data as a
predictor of future outcomes may not be relevant due to significant changes in circumstances albeit that this data has been be adjusted
on the basis of current observable data in order to reflect the effects of current conditions.
The ECL methodology has resulted in a reassessment of the critical accounting judgements and estimates used for the determination of
loss allowances which are as follows:
– Determining the criteria for a significant increase in credit risk and for being classified as credit impaired;
– Choosing the appropriate models and assumptions for measuring ECL, e.g. PD, LGD and EAD;
– Determining the life of a financial instrument and therefore, the period over which to measure ECL;
– Establishing the number and relative weightings for forward looking scenarios for each asset class and ECL, particularly in relation
to Brexit uncertainty; and
– Stratifying financial assets into groups with similar risk characteristics.
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2 Critical accounting judgements and estimates
Inputs for calculating ECL allowance (continued)
Discounted cash-flows (‘DCFs’) are the most significant input to the ECL calculation for Stage 3 credit impaired obligors where the gross
credit exposure is ≥ € 1 million for the Republic of Ireland or ≥ £ 500,000 for the UK. Collateral valuations and the estimated time to
realisation of collateral is a key component of the DCF model. The DCF assessment produces a base case ECL which is then adjusted
to incorporate the impact of multiple scenarios on the base ECL. The size of the adjustment must consider all relevant and supportable
information, including but not limited to, historical data analysis, predictive modelling and management judgement.
The Group estimates its ECL provisions on Mortgages based on its historic experience of working out arrangements with customers
which predominantly consist of split mortgages, low fixed interest rate, voluntary sale for loss, negative equity trade down and positive
equity solutions. This is consistent with the Group's strategy to deliver sustainable long-term solutions and to support customers.
In particular, the IFRS 9 Mortgage LGD model which was implemented from 1 January 2018 is based on the actual empirical internal
data for such resolved and unresolved cases, and represents the Group’s expected loss based on those current and expected work-out
strategies at the time. However, for a cohort of loans that are deep in arrears and/or in a legal process for a significant period of time, it
is recognised that alternative recovery strategies may need to be considered. To reflect the range of possible outcomes for this cohort
where alternative recovery strategies are required, management judgement has been applied to increase the ECL outcome on transition
on 1 January 2018 and as at 31 December 2018.
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 the effects of forbearance
strategies on ECL allowances 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.
AIB Group plc Annual Financial Report 2018 263
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Notes to the consolidated financial statements
2 Critical accounting judgements and estimates (continued)
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 33.
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;
–
–
–
–
–
the absence of any expiry dates for Irish and UK tax losses;
turnaround evident in the financial performance over the past five years and the continuing growth in the Irish economy since 2014;
external forecasts for Ireland 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;
the introduction of the bank resolution framework under the BRRD and the establishment in 2017 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).
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;
– the impact of Brexit;
– 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 return to profitability objective was realised in 2014 and has continued to date. Profitability and growth has been reaffirmed in the
annual planning exercise covering the period 2019 to 2021 undertaken by the Group in the second half of 2018. Growth assumptions
and profitability levels underpinning the plan are within market norms.
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2 Critical accounting judgements and estimates (continued)
Deferred taxation (continued)
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 2019 to 2021. Assuming a sustainable market
return on equity (c.8.0%) 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 (€ 2.7 billion) to be utilised. Furthermore, under this scenario, it is
expected that 47% of the deferred tax asset will be utilised within 10 years (2017: 51%) and 83% utilised within 15 years (2017: 89%).
In a more stressed scenario with a return on equity of 5.6% and GDP growth of 1.5%, the utilisation period increases by a further
7 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 £ 114 million at 31 December 2018.
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 € 2,808 million of which € 2,680 million relates to Irish tax losses and € 128 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, the income statement.
AIB Group plc Annual Financial Report 2018 265
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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 2017 the Board, having taken actuarial and external legal advice, 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 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.
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 2017. In 2018, under this process, the Group agreed to provide a level of funding for increases in pensions in
payment for 2018. The Trustees of certain Irish schemes awarded an increase in the range of 0.35% to 0.50% in respect of pensions eligible
for discretionary pension increases. The Group completed the same process early in 2019 taking account of all relevant factors and decided
that funding of discretionary increases to pensions in payment was appropriate for 2019 to enable the Trustees to grant an increase of
0.50%.
The above process is a formal annual process that is carried out on a standalone basis. Therefore, no constructive obligation is being
created on behalf of scheme members with regard to future funding of increases in pensions in payment. Accordingly, the assumption for
long term rate of increases in pensions in payment is nil.
The assumptions adopted for the Group's defined benefit schemes are set out in note 34 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 40 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.
As detailed in notes 40 and 48, AIB and EBS were advised in 2018 by the CBI of the commencement of investigations as part of an
administrative sanctions procedure in connection with the Tracker Mortgage Examination. In addition, litigation has been served on the
Group by customers that are pursuing claims in relation to tracker mortgages. Further cases may be served in the future in relation to
tracker mortgages. It is not practicable at this time to predict the final outcome of these investigations and litigation, nor the timing and
possible impact, including any monetary penalties, on the Group. Accordingly, the Group has not made a provision at this stage in relation
to these matters.
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3 Transition to IFRS 9
(a) Summary
On 1 January 2018, the Group implemented the requirements of IFRS 9 Financial Instruments, a new accounting standard, replacing IAS
39 Financial Instruments: Recognition and Measurement. In addition, the Group early adopted a narrow scope amendment to IFRS 9 titled
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‘Prepayment features with Negative Compensation’ which was endorsed by the European Union in March 2018.
As permitted by IFRS 9, the Group did not restate prior periods on initial application, accordingly, any difference arising between IAS 39
carrying amounts and IFRS 9 carrying amounts at 1 January 2018 are recognised in opening retained earnings (or in other comprehensive
income, as applicable) at 1 January 2018.
The information set out in this note provides details relevant to understanding the impact of IFRS 9 on the Group’s financial position at
1 January 2018 and has been prepared in accordance with the requirements for initial application of IFRS 9 as set out in IFRS 7 Financial
Instruments: Disclosures. These transition disclosures provide a point-in-time bridge between IAS 39 Financial Instruments: Recognition
and Measurement, IAS 37 Provisions, Contingent Liabilities and Contingent Assets and IFRS 9 Financial Instruments results and should
be read in conjunction with the IFRS 9 related accounting policies set out in note 1 Accounting policies and the credit impairment
measurement, methodologies and judgements set out on pages 85 to 92.
IFRS 9 impacts the accounting for financial instruments in the following areas:
Classification and measurement – the classification of financial assets under IFRS 9 determines how they are accounted for and how they
are measured on an ongoing basis. This did not result in any significant changes for the Group at initial recognition.
Impairment – IFRS 9 introduces an expected credit loss model that requires recognition of expected credit losses on all financial assets
measured at amortised cost or at FVOCI. This resulted in an overall increase of € 312 million in loss allowances for the Group.
Hedge accounting – IFRS 9 introduces an approach that aligns hedge accounting more closely with risk management. This had no impact
for the Group as it is exercising a policy choice, as permitted by IFRS 9, to continue hedge accounting under IAS 39. However, the Group
is providing the revised hedge accounting disclosures required by the amendments to IFRS 7.
The opening statement of financial position at 1 January 2018 under IFRS 9 is set out on page 270. This shows a decrease in net assets of
€ 267 million with a corresponding decrease in shareholders’ equity driven by credit impairment provisions on loans and advances
amounting to € 272 million and credit impairment provisions for liabilities and commitments amounting to € 36 million, net of related
deferred tax amounting to € 41 million.
In particular, the following table reconciles impairment provisions (specific and IBNR) under IAS 39 and provisions for loan commitments and
financial guarantee contracts under IAS 37 at 31 December 2017 to the opening loss allowance determined in accordance with IFRS 9 at
1 January 2018.
Impairment allowance
Loans and advances to customers at amortised cost
Loans and advances to banks at amortised cost
Available for sale investments,
financial investments at FVOCI(1)
Undrawn commitments and
financial guarantee contracts
Total
31 December 2017
Impairment
allowance under
IAS 39 or
provision under
IAS 37
€ m
3,345
–
–
32
3,377
Reclassification
impact
1 January 2018
Loss
allowance
under IFRS 9
Additional
IFRS 9
loss
allowance
€ m
–
–
–
–
–
€ m
271
1
4
36
312
€ m
3,616
1
4
68
3,689
(1)Impairment allowance does not impact overall reserves as this is a transfer between investment securities reserves and revenue reserves.
AIB Group plc Annual Financial Report 2018 267
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Notes to the consolidated financial statements
3 Transition to IFRS 9 (continued)
(a) Summary
The following table presents a reconciliation of gross loans and advances to customers at amortised cost together with impairment
provisions under IAS 39 to gross loans and advances to customers at amortised cost together with loss allowances, analysed by staging
under IFRS 9.
Gross loans and advances to customers
Impairment provisions/loss allowance
Carrying amount
(1)Reclassified to FVTPL (see page 275).
Gross loans and advances to customers
Impairment provisions/loss allowance
Carrying amount
Loss allowance coverage rate
IFRS 9
transition adjustments
Reclassified Remeasured
€ m
At 1 January
2018
Total
€ m
At 31 December 2017
IAS 39
€ m
63,338
(3,345)
59,993
€ m
(156)(1)
–
(156)
–
(271)
(271)
63,182
(3,616)
59,566
At 1 January 2018
IFRS 9
Total
€ m
POCI
€ m
238
(21)
217
%
8.82
63,182
(3,616)
59,566
%
5.72
Stage 1
€ m
46,021
(156)
45,865
%
0.34
Stage 2
€ m
Stage 3
€ m
7,912
(303)
7,609
%
3.83
9,011
(3,136)
5,875
%
34.8
(b) Principal impacts of IFRS 9
This section details the principal impacts of IFRS 9 in relation to classification and measurement, impairment and hedge accounting.
(i) Classification and measurement
The classification of financial assets under IFRS 9 determines how they are accounted for, and, in particular, how they are measured on an
ongoing basis.
–
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
(“FVOCI”) and fair value through profit or loss (“FVTPL”);
– 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 loss allowance;
There is no separation of an embedded derivative where the instrument is a financial asset;
Investment in 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.
Classification and measurement of financial assets did not result in any significant changes for the Group. In general:
–
–
loans and advances to banks and customers that were classified as ‘loans and receivables’ under IAS 39 are measured at amortised
cost under IFRS 9;
debt securities classified as available for sale under IAS 39 are measured at FVOCI; and
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3 Transition to IFRS 9 (continued
(b) Principal impacts of IFRS 9
–
equity investments will continue to be measured at fair value, however, for one equity instrument held for strategic purposes (NAMA
subordinated bonds with a fair value of € 466 million), the Group elected to present changes in fair value in other comprehensive
income with no recycling to profit or loss. All other equity investments held at 1 January 2018 are now measured under IFRS 9 at
FVTPL. Under IAS 39, all equity investments, 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’.
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The business model assessment which was carried out 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 loans and advances to customers
failed the SPPI test. Accordingly, such instruments are measured at FVTPL in accordance with IFRS 9. Fair value movements on these
instruments will be shown in profit or loss. There was no impact on the carrying value on transition to this new measurement basis.
The Group has not currently opted to designate any financial assets at FVTPL 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 ongoing validation of its business models and for ensuring that financial instruments
failing the SPPI test are correctly identified at initial recognition.
(ii) Impairment
IFRS 9 introduces a new impairment model that requires the recognition of expected credit losses on all financial assets measured at
amortised cost or at FVOCI. Expected credit losses on certain loan commitments and on financial guarantee contracts together with lease
receivables are also covered by this new impairment model. Under IAS 39, impairment losses were compiled on an ‘incurred loss’ basis
where there was objective evidence of impairment. In particular, IFRS 9:
– 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, an allowance 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, an allowance for 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 losses;
–
The assessment of credit risk, and the estimation of expected credit losses, are required to be unbiased and probability-weighted.
They 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 losses should take into account the time value of money. As a result, the recognition and measurement of
impairment is now more forward looking unlike IAS 39 and the resulting credit impairment charge will tend to be more volatile. It will
also tend to result in an increase in the total level of credit loss allowances, since all financial assets will be assessed for at least
12 month expected credit losses and the population of financial assets to which lifetime expected credit losses apply is likely to be
larger than the population for which there is objective evidence of impairment in accordance with IAS 39.
The impact of IFRS 9 on credit loss allowances is set out below. The credit impairment measurement, methodologies and judgements
applied are set out in the ‘Risk management’ section of this report on pages 85 to 92.
(iii) Hedge accounting
IFRS 9 introduces an approach that aligns hedge accounting more closely with risk management. It makes some fundamental changes to
the requirements under IAS 39 by removing or amending some of the key prohibitions and rules. However, many of these changes are
more relevant to non-financial corporations.
The general hedge accounting requirements of IFRS 9 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 until macro hedge accounting is addressed by the IASB as part of a separate project.
AIB Group is exercising this policy choice and will continue to account under IAS 39. However, it has implemented the revised hedge
accounting disclosures required by the amendments to IFRS 7.
AIB Group plc Annual Financial Report 2018 269
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Notes to the consolidated financial statements
3 Transition to IFRS 9 (continued)
(c) Financial statement impacts at 1 January 2018
This section sets out: the opening statement of financial position; the impact of classification and measurement on the Group’s
financial assets; an impairment reconciliation; and revenue reserves and other components of equity reconciliations at 1 January 2018.
(i) Opening statement of financial position
The following table reconciles the statement of financial position under IAS 39 at 31 December 2017 to that under IFRS 9 at
1 January 2018.
Impact of IFRS 9
31 December Classification(1)
2017
and
(IAS 39) measurement
€ m
€ m
Loss
allowance
€ m
Tax
€ m
1 January
2018
(IFRS 9)
€ m
Assets
Cash and balances at central banks
Items in the course of collection
Disposal groups and non-current assets held for sale
Trading portfolio financial assets
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Investment securities
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
Reserves
Total shareholders’ equity
Other equity interests
Total equity
Total liabilities and equity
(1)For classifications within captions, see page 271.
270
AIB Group plc Annual Financial Report 2018
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
76,450
1,697
11,421
13,118
494
13,612
90,062
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1)
(271)
–
–
–
–
–
–
–
–
–
(272)
–
–
–
–
–
–
–
–
–
–
36
–
36
–
(308)
(308)
–
(308)
(272)
–
–
–
–
–
–
–
–
–
–
–
–
–
53
–
–
53
–
–
–
–
–
–
12
–
–
–
–
–
12
–
41
41
–
41
53
6,364
103
8
33
1,156
1,312
59,722
16,321
80
569
321
418
5
2,789
459
183
89,843
3,640
64,572
30
1,170
4,590
68
109
87
824
348
267
793
76,498
1,697
11,154
12,851
494
13,345
89,843
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3 Transition to IFRS 9 (continued)
(c) Financial statement impacts at 1 January 2018
(ii) Financial assets - Classification and measurement
The following table summarises the impact of classification and measurement on the Group’s financial assets at 1 January 2018.
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Original
measurement
category determined
in accordance
with IAS 39
at 31 December 2017
New
measurement
category
determined in
accordance
with IFRS 9
at 1 January 2018
Carrying
amount
determined in
accordance
with IAS 39
at 31 December 2017
2018
Carrying
amount
determined in
accordance
with IFRS 9
at 1 January 2018
Financial assets
Cash and balances at central banks
Loans and receivables
Items in course of collection
Loans and receivables
Amortised cost
Amortised cost
Trading portfolio financial assets
Derivative financial instruments
FVTPL
FVTPL (mandatory)
Fair value
FVTPL (mandatory)
Loans and advances to banks
Loans and receivables
Loans and advances to customers
Loans and receivables
Fair value
FVOCI
Amortised cost
Amortised cost
Investment securities – debt
Investment securities – equity
Other financial assets
Total financial assets
Loans and receivables
FVTPL (mandatory)
Available for sale
Available for sale
FVOCI
FVOCI
Available for sale
FVTPL (mandatory)
Amortised cost
Amortised cost
There were no changes in the classification of financial liabilities.
€ m
6,364
103
33
738
418
1,313
59,993
–
15,642
679
–
736
€ m
6,364
103
33
738
418
1,312
59,566
156
15,642
466
213
736
86,019
85,747
AIB Group plc Annual Financial Report 2018 271
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Notes to the consolidated financial statements
3 Transition to IFRS 9 (continued)
(c) Financial statement impacts at 1 January 2018
(iii) Impairment reconciliation
The following table reconciles the closing impairment provision (recognised in accordance with IAS 39) and any provision for loan
commitments and financial guarantee contracts (recognised in accordance with IAS 37) as at 31 December 2017 to the opening ECL allowance
(in accordance with IFRS 9) as at 1 January 2018:
Financial assets at amortised cost
Cash and balances at central banks
Items in the course of collection
Loans and advances to banks
Loans and advances to customers
Provisions for liabilities and commitments
Loan commitments and financial guarantees issued
Impairment
provision at
31 December 2017
(IAS 39)
€ m
–
–
–
3,345
3,345
Reclassific- Remeasure-
ment
ation
ECL
1 January 2018
(IFRS 9)
€ m
–
–
–
–
–
€ m
–
–
1
271
272
€ m
–
–
1
3,616
3,617
Impairment
provision at
31 December 2017
(IAS 37)
€ m
32
Reclassific- Remeasure-
ment
ation
ECL
1 January 2018
(IFRS 9)
€ m
–
€ m
36
€ m
68
Recognised in statement of financial position as:
Impairment provision/ECL allowance - IAS 39/IFRS 9
Provision for liabilities and commitments - IAS 37/IFRS 9
At 31 December
2017
€ m
Reclassific- Remeasure-
ment
€ m
ation
€ m
At 1 January
2018
€ m
3,345
32
3,377
–
–
–
272
36
308
3,617
68
3,685
For financial assets at FVOCI, the expected credit loss provision does not impact overall reserves, however, it results in a transfer between
investments securities reserves and revenue reserves on transition.
At FVOCI
Investment securities at FVOCI
Impairment
provision at
31 December 2017
(IAS 39)
€ m
–
ECL
1 January 2018
(IFRS 9)
€ m
4
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3 Transition to IFRS 9 (continued)
(c) Financial statement impacts at 1 January 2018
(iv) Revenue reserves and other components of equity reconciliations
The following table sets out the impact of applying IFRS 9 on opening revenue reserves and other components of equity as at
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Available for sale securities reserves
Closing balance at 31 December 2017 (IAS 39)
Reclassification to revenue reserves
Reclassification to investment securities reserves
Opening balance at 1 January 2018 (IFRS 9)
Investment securities reserves
Closing balance at 31 December 2017
Reclassification from available for sale reserves (IAS 39) – debt at FVOCI
Reclassification from available for sale (IAS 39) – equity at FVOCI
Recognition of expected credit losses investment securities – debt at FVOCI
Opening balance at 1 January 2018 (IFRS 9)
Revenue reserves
Closing balance at 31 December 2017 (IAS 39)
Reclassification from available for sale reserves (IAS 39) – equities at FVTPL
Recognition of expected credit losses for loans and advances to customers at amortised cost
Recognition of expected credit losses for loans and advances to banks at amortised cost
Recognition of expected credit losses for loan commitments
Recognition of expected credit losses for financial guarantee contracts
Recognition of expected credit losses for investment securities – debt at FVOCI
Opening balance at 1 January 2018 (IFRS 9)
Gross
€ m
Taxation
€ m
1,126
(24)
(1,102)
–
Gross
€ m
–
679
423
1,102
4
1,106
(145)
4
141
–
Taxation
€ m
–
(88)
(53)
(141)
–
(141)
Gross
€ m
Taxation
€ m
24
(271)
(1)
(16)
(20)
(4)
(288)
(4)
37
–
2
2
–
37
Net
€ m
981
(20)
(961)
–
Net
€ m
–
591
370
961
4
965
Net
€ m
13,249
20
(234)
(1)
(14)
(18)
(4)
(251)
12,998
IFRS 9 transition adjustment to total reserves at 1 January 2018
(308)
41
(267)
AIB Group plc Annual Financial Report 2018 273
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Notes to the consolidated financial statements
3 Transition to IFRS 9 (continued)
(d) Analysis of financial instruments by staging
This section provides detailed analysis of: exposures within the scope of the ECL framework by balance sheet caption and
staging; loans and advances to customers by asset class and staging; off-balance sheet commitments by staging; loans and
advances to customers by segment and staging; and forbearance by staging.
(i) Exposures within the scope of the ECL framework by balance sheet caption and staging
The following table analyses exposures within the scope of IFRS 9 including off-balance sheet commitments and guarantees.
Exposures are shown gross of ECL.
Items outside the scope of the ECL framework such as cash and items in the course of collection are excluded from this table as it is the
Group policy not to calculate an ECL for such items as they have a low risk of default with a very low risk profile. In addition, equity
investments have been excluded as they are outside the scope of the ECL framework.
Loans and advances to banks
Loans and advances to customers
Investment securities - debt
Other assets
Total assets
Undrawn commitments and
financial guarantee contracts
Total exposure
Stage 1
€ m
1,313
46,021
15,642
–
62,976
10,353
73,329
Stage 2
€ m
–
7,912
–
–
Stage 3
€ m
–
9,011
–
–
7,912
9,011
326
8,238
432
9,443
1 January 2018
Total
€ m
POCI
€ m
–
238
–
–
238
–
238
1,313
63,182
15,642
–
80,137
11,111
91,248
For additional analysis of loans and advances to customers and of off-balance sheet commitments, see note 3(d)(ii) to 3(d)(v) below.
274
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A12 IFRS 9 transition Purp:Layout 1 28/02/2019
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Notes to the consolidated financial statements
3 Transition to IFRS 9 (continued)
(d) Analysis of financial instruments by staging
(iii) Off-balance sheet commitments
The following table analyses the nominal amount of off-balance sheet commitments and the opening loss allowance at 1 January 2018:
POCI
€ m
–
POCI
€ m
–
Off-balance sheet commitments
Impact of
adopting
IFRS 9
€ m
At 31
December
2017
€ m
At 1
January
2018
€ m
Stage 1
Analysed as to:
Stage 2
Stage 3
€ m
€ m
326
€ m
432
Nominal amount
11,111
–
11,111
10,353
At 31
December
2017
€ m
Loss allowance
Impact of
adopting
IFRS 9
€ m
At 1
January
2018
€ m
Loss allowance
(32)
(36)
(68)
Stage 1
Analysed as to:
Stage 2
Stage 3
€ m
(11)
€ m
(10)
€ m
(47)
276
AIB Group plc Annual Financial Report 2018
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Page 277
3 Transition to IFRS 9 (continued)
(d) Analysis of financial instruments by staging
(iv) Loans and advances to customers by segment
The following table reconciles gross loans and advances to customers and impairment provisions recognised in accordance with IAS 39
as at 31 December 2017 to gross loans and advances to customers and the expected credit loss allowance recognised in accordance
A
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with IFRS 9 as at 1 January 2018, by segment and by measurement category:
RCB
€ m
At amortised cost
WIB AIB UK Group
€ m
€ m
€ m
At FVTPL
Total
€ m
RCB
€ m
WIB AIB UK Group
€ m
€ m
€ m
Total
€ m
Total
€ m
Gross carrying amount at
31 December 2017
Impact of adopting IFRS 9
Reclassification
Remeasurement
At 1 January 2018 gross
44,435 10,322
8,523
58
63,338
(63)
–
(93)
–
–
–
–
–
(156)
–
carrying amount/fair value
44,372 10,229
8,523
58
63,182
Analysed by staging
Stage 1
Stage 2
Stage 3
POCI
€ m
€ m
29,784
9,933
6,068
8,282
238
156
140
–
€ m
6,247
1,688
588
–
€ m
€ m
57
46,021
–
1
–
7,912
9,011
238
44,372 10,229
8,523
58
63,182
–
63
–
63
–
93
–
93
–
–
–
–
–
–
–
–
–
63,338
156
–
–
–
156
63,338
Impairment provisions under IAS 39/expected credit loss allowance under IFRS 9
RCB
€ m
At amortised cost
WIB AIB UK Group
€ m
€ m
€ m
At FVTPL
Total
€ m
RCB
€ m
WIB AIB UK Group
€ m
€ m
€ m
Total
€ m
Total
€ m
At 31 December 2017
Specific provisions
IBNR provisions
Total impairment
(2,488)
(525)
(2)
(45)
(232)
(53)
provisions under IAS 39
(3,013)
(47)
(285)
Impact of adopting IFRS 9
Reclassification
Remeasurement
At 1 January 2018
Expected credit loss
–
(245)
–
2
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(27)
–
–
–
–
(2,722)
(623)
(3,345)
–
(1)
(271)
allowance under IFRS 9
(3,258)
(45)
(312)
(1)
(3,616)
(2,722)
(623)
(3,345)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(271)
–
(3,616)
Analysed by staging
Stage 1
Stage 2
Stage 3
POCI
Net carrying amount
at 1 January 2018
€ m
(105)
(260)
(2,872)
(21)
€ m
€ m
€ m
(23)
(11)
(11)
–
(27)
(32)
(253)
–
(1)
–
–
–
€ m
(156)
(303)
(3,136)
(21)
(3,258)
(45)
(312)
(1)
(3,616)
41,114 10,184
8,211
57
59,566
63
93
–
–
156
59,722
AIB Group plc Annual Financial Report 2018 277
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Notes to the consolidated financial statements
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278
AIB Group plc Annual Financial Report 2018
A13 Notes 4-31 Purp 2018 pages251-286:Layout 1
28/02/2019
20:36
Page 279
4 Segmental information
Segment overview
The Group was managed through the following business segments: Retail & Commercial Banking (“RCB”), Wholesale, Institutional &
Corporate Banking (“WIB”), AIB UK and Group during 2018.
A
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Segment allocations
The segments’ performance statements include all income and direct costs but exclude certain overheads which are managed centrally
the costs of which 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 financial 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 295 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 leading digital bank in Ireland with over 1.38 million active digital customers and
over nine hundred and forty thousand active mobile users with 73% of personal loans applied for online.
Wholesale, Institutional & Corporate Banking* (“WIB”)
WIB provides wholesale, institutional and corporate banking services to the Group’s larger 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 just under three hundred and six thousand
retail, corporate and business customers and over one hundred and twenty three 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 and a centre for small and micro businesses. It provides full banking services, including mobile, online, post office and
traditional banking, to business and personal customers.
Allied Irish Bank (GB) is a sector-led commercial and corporate bank, supporting businesses in Great Britain with 14locations in key cities
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 skill set. FSG has developed a comprehensive suite of sustainable solutions for customers in financial difficulty.
AIB Group plc Annual Financial Report 2018 279
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A13 Notes 4-31 Purp 2018 pages251-286:Layout 1
28/02/2019
20:36
Page 280
Notes to the consolidated financial statements
4 Segmental information (continued)
RCB
WIB
AIB UK
Group
Total
€ m
€ m
€ m
€ m
€ m
Operations by business segment
Net interest income
Net fee and commission income*
Other
Other income
Total operating income
Personnel expenses
General and administrative expenses
Depreciation, impairment and
amortisation
Total operating expenses
Operating profit before impairment
losses and provisions
Bank levies and regulatory fees
Net credit impairment writeback/
(losses)
Operating profit/(loss)
Associated undertakings
Profit on disposal of property
Loss on disposal of business
Profit before taxation from
1,346
336
71
407
1,753
(412)
(252)
(86)
(750)
1,003
–
241
1,244
10
–
–
312
36
38
74
386
(64)
(35)
254
188
2,100
58
(7)
51
305
(71)
(49)
27
67
94
282
(183)
(244)
457
169
626
2,726
(730)
(580)
(1)
(1)
(50)
(138)
(100)
(121)
(477)
(1,448)
286
–
(16)
270
–
–
–
184
1
(21)
164
2
2
–
(195)
(83)
1,278
(82)
–
204
(278)
1,400
–
–
–
12
2
–
continuing operations
1,254
270
168
(278)
1,414
Bank Exceptional
items(2)
levies and
regulatory
fees(1)
€ m
2018
Total
€ m
€ m
–
–
148
148(3)
2,100
457
317
774
148
(34)(4)(5)
(235)(5)-(8)
2,874
(764)
(897)
(24)
(162)
(293)
(1,823)
(145)
1,051
–
–
–
204
(145)
1,255
–
–
(22)(9)
12
2
(22)
(167)
1,247
–
–
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(82)
–
(82)
(82)
82
–
–
–
–
–
–
(1)In the consolidated financial statements, bank levies and regulatory fees are shown as part of general and administrative expenses. They are disclosed
separately in the ‘Operating and Financial Review’ - see page 46.
(2)Exceptional and one-off items are shown separately above. These are items that Management view as distorting comparability of performance from period
to period. Exceptional items include:
(3)Gain on disposal of financial instruments;
(4)Termination benefits;
(5)Restitution and restructuring costs;
(6)Property strategy costs;
For further information on these items see page 46.
*Analysis of net fee and commission income
Retail banking customer fees
Foreign exchange fees
Credit related fees
Wealth and insurance commissions
Fee and commission income
Fee and commission expense
(7)Customer redress;
(8)IFRS 9 and associated regulatory costs; and
(9)Loss on disposal of business activities..
RCB
€ m
283
30
8
47
368
(32)
336
WIB
€ m
AIB UK
€ m
Group
€ m
15
7
15
–
37
(1)
36
39
11
14
–
64
(6)
58
4
23
4
(2)
29
(2)
27
2018
Total
€ m
341
71
41
45
498
(41)
457
Further information on ‘Net fee and commission income’ is set out in note 8.
280
AIB Group plc Annual Financial Report 2018
A13 Notes 4-31 Purp 2018 pages251-286:Layout 1
28/02/2019
20:36
Page 281
4 Segmental information (continued)
RCB
WIB
AIB UK
Group
Total
€ m
€ m
€ m
€ m
€ m
A
n
n
u
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l
R
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v
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w
i
2017
Total
Bank Exceptional
items(2)
levies and
regulatory
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€ m
Operations by business segment
Net interest income
Net fee and commission income*
Other
Other income
Total operating income
Personnel expenses
General and administrative expenses
Depreciation, impairment and
amortisation
Total operating expenses
Operating profit/(loss) before impairment
losses and provisions
Bank levies and regulatory fees
Writeback/(provisions) for impairment
on loans and advances
Writeback/(provisions) for liabilities
and commitments
Total writeback/(provisions)
1,435
305
228
533
1,968
(414)
(278)
(77)
(769)
1,199
–
133
10
143
Operating profit/(loss)
1,342
221
Associated undertakings and
joint venture
(Loss)/profit on disposal of property
Profit/(loss) before taxation from
14
(1)
2
–
267
34
15
49
316
(58)
(33)
238
48
22
70
308
(77)
(52)
236
4
135
139
375
(162)
(238)
2,176
391
400
791
2,967
(711)
(601)
–
–
–
–
–
–
(105)
(61)
(107)
1,539
(105)
(105)
105
225
–
(2)
(2)
(4)
176
2
(18)
–
(18)
160
3
1
–
–
–
113
8
121
(168)
1,555
–
–
19
–
–
–
–
–
–
–
–
€ m
€ m
–
–
34
34(3)
2,176
391
434
825
34
(79)(4)(5)
(198)(5)-(9)
3,001
(790)
(904)
(268)
1,166
–
–
–
–
–
113
8
121
(268)
1,287
–
–
19
–
(268)
1,306
–
(3)
(36)
(116)
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(25)(5)(9)
(141)
(91)
(132)
(436)
(1,428)
(105)
(302)
(1,835)
continuing operations
1,355
223
164
(168)
1,574
(1)In the consolidated financial statements, bank levies and regulatory fees are shown as part of general and administrative expenses. They are disclosed
separately in the ‘Operating and Financial Review’ - see page 46.
(2)Exceptional and one-off items are shown separately above. These are items that Management view as distorting comparability of performance from period
to period. Exceptional items include:
(3)Gain on disposal of financial instruments;
(4)Termination benefits;
(5)Restitution and restructuring costs;
(6)IPO and capital related costs;
For further information on these items see page 46.
*Analysis of net fee and commission income
Retail banking customer fees
Foreign exchange fees
Credit related fees
Wealth and insurance commissions
Fee and commission income
Fee and commission expense
(7)Property strategy costs;
(8)Customer redress; and
(9)IFRS 9 costs
RCB
€ m
272
10
9
48
339
(34)
305
WIB
€ m
AIB UK
€ m
Group
€ m
15
–
20
–
35
(1)
34
41
1
12
1
55
(7)
48
5
1
1
–
7
(3)
4
2017
Total
€ m
333
12
42
49
436
(45)
391
Further information on ‘Net fee and commission income’ is set out in note 8.
AIB Group plc Annual Financial Report 2018 281
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Notes to the consolidated financial statements
4 Segmental information (continued)
Other amounts – statement of financial position
31 December 2018
WIB
€ m
AIB UK
€ m
Group
€ m
Loans and advances to customers:
– measured at amortised cost
– measured at FVTPL
Total loans and advances to customers
Customer accounts
Loans and advances to customers
– measured at amortised cost
– measured at FVTPL
Total loans and advances to customers
Customer accounts
Loans and advances to customers
Customer accounts
RCB
€ m
39,698
50
39,748
50,326
RCB
€ m
41,114
63
41,177
46,552
RCB
€ m
41,422
46,552
12,620
97
12,717
5,734
WIB
€ m
10,184
93
10,277
5,654
WIB
€ m
10,275
5,654
8,303
–
8,303
9,911
AIB UK
€ m
8,211
–
8,211
10,182
AIB UK
€ m
8,238
10,182
Total
€ m
60,721
147
60,868
67,699
1 January 2018
Total
€ m
59,566
156
59,722
64,572
100
–
100
1,728
Group
€ m
57
–
57
2,184
31 December 2017
Group
€ m
58
2,184
Total
€ m
59,993
64,572
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
Year to 31 December 2018
Republic of
Ireland
€ m
United
Kingdom
€ m
Rest of the
World
€ m
2,528
26
2,554
329
(18)
311
17
(8)
9
Total
€ m
2,874
–
2,874
Year to 31 December 2017
Republic of
Ireland
€ m
United
Kingdom
€ m
Rest of the
World
€ m
2,621
27
2,648
374
(24)
350
6
(3)
3
Total
€ m
3,001
–
3,001
Revenue from external customers comprises interest income (note 5) and interest expense (note 6)and all other items of income
(notes 7 to 12).
Geographic information
Non-current assets(3)
Republic of
Ireland
€ m
951
United
Kingdom
€ m
60
31 December 2018
Total
Rest of the
World
€ m
€ m
1,012
Republic of
Ireland
€ m
United
Kingdom
€ m
45
Rest of the
World
€ m
31 December 2017
Total
€ m
890
1
1
Geographic information
Non-current assets(3)
(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 of this report.
(3)Non-current assets comprise intangible assets and property, plant and equipment.
844
282
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5 Interest and similar income
Interest on loans and advances to customers at amortised cost
Interest on loans and advances to banks at amortised cost
Interest on NAMA senior bonds at amortised cost
Interest on investment securities at FVOCI/financial investments available for sale
Interest on financial investments held to maturity
Negative interest on financial liabilities at amortised cost
Interest income calculated using the effective interest method
Interest income on finance leases and hire purchase contracts
Interest income on financial assets at FVTPL
Other interest income and similar income
Total interest and similar income
(1)Includes additional interest income of € 61 million on loans cured without financial loss.
2018
€ m
2,005
33
–
226
–
2,264
25
2,289
71
6
77
2017
€ m
2,099(1)
16
2
154
130
2,401
13
2,414
67
–
67
2,366
2,481
Interest income includes a credit of € 143 million (2017: a credit of € 191 million) transferred from other comprehensive income in
respect of cash flow hedges which is included in ‘Interest on loans and advances to customers’.
The Group presents interest resulting from negative effective interest rates on financial liabilities as interest income rather than as offset
against interest expense.
In 2017, interest income recognised on impaired loans amounted to € 100 million.
6 Interest expense
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 financial assets at amortised cost
Interest expense calculated using the effective interest method
2018
€ m
21
157
45
32
255
11
266
2017
€ m
8
229
33
31
301
4
305
Interest expense includes a charge of € 56 million (2017: a charge of € 72 million) transferred from other comprehensive income in
respect of cash flow hedges which is included in ‘Interest on customer accounts’.
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.
7 Dividend income
NAMA subordinated bonds at FVOCI
Equity investments at FVOCI
Equity investments at FVTPL
Total
2018
€ m
23
–
3
26
2017
€ m
25
3
–
28
AIB Group plc Annual Financial Report 2018 283
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m
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f
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a
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i
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Notes to the consolidated financial statements
8 Net fee and commission income
Retail banking customer fees(1)(2)
Foreign exchange fees(1)
Credit related fees
Wealth and insurance commissions(2)
Fee and commission income
Fee and commission expense(3)
2018
€ m
341
71
41
45
498
(41)
457
2017
€ m
370
–
41
25
436
(45)
391
(1)Customer related foreign exchange income amounting to € 58 million was reported as ‘Net trading income’ (note 9) at 31 December 2017 and customer
related foreign exchange branch commissions amounting to € 13 million were reported as ‘Retail banking customer fees’ at 31 December 2017. These are
both now reported as foreign exchange fees.
(2)Wealth and insurance commissions at 31 December 2018 include commissions amounting to € 25 million received from the sale of wealth products which
at 31 December 2017 amounted to € 28 million and were reported under ‘Retail banking customer fees’.
(3)Fee and commission expense includes credit card commissions of € 25 million (2017: € 29 million) and ATM expenses of € 5 million (2017: € 5 million).
Fees and commissions which are an integral part of the effective interest rate are recognised as part of interest income (note 5) or
interest expense (note 6).
9 Net trading income
Foreign exchange contracts(1)
Interest rate contracts and debt securities(2)
Credit derivative contracts
Equity investments, index contracts and warrants(3)
2018
€ m
(12)
24
2
(9)
5
2017
€ m
56
48
(4)
(3)
97
(1)In the year to 31 December 2017, customer related foreign exchange fees amounting to € 58 million were reported at ‘Net trading income’. This income is
now reported in ‘Net fee and commission income’ (note 8).
(2)Includes a gain of € 8 million (2017: gain of € 21 million) in relation to XVA adjustments.
(3)Includes loss amounting to € 10 million on a total return swap, which is hedging equities measured at FVTPL. In 2017, this includes the mark to market
loss of € 2 million on equity warrants.
The total hedging ineffectiveness on cash flow hedges reflected in the consolidated income statement amounted to Nil (2017: Nil).
10 Net gain on other financial assets measured at FVTPL
Loans and advances to customers(1)
Investment securities – equity(2)
Total
(1)Excludes interest income (note 5).
(2)Includes unrealised gain of € 18 million on equities hedged by a trading total return swap.
2018
€ m
105
41
146
2017
€ m
–
–
–
284
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11 Net gain on derecognition of financial assets measured at amortised cost
Loans and advances to customers
Carrying
value at
derecognition
€ m
781
Gain on
derecognition
Loss on
derecognition
€ m
200(1)
€ m
(79)(1)
2018
Net gain
on
derecognition
€ m
121
A
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R
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(1)Gain and loss on derecognition have been computed at a customer connection level.
The net gain on derecognition arose from the disposal of loans and advances to customers.
Profit on disposal of loans and advances to customers
Provision writeback on NAMA loan transfers
Total
12 Other operating income
Gain on disposal of investment securities at FVOCI – debt
Loss on termination of hedging swaps(1)
Gain on disposal of available for sale equity investments
Acceleration/re-estimation of the timing of cash flows on NAMA senior bonds
Realisation/re-estimation of cash flows on restructured loans
Miscellaneous operating income
2017
€ m
31
1
32
2017
€ m
18
(11)
48(2)
4
213
5
277
2018
€ m
24
(9)
–
–
–
4
19
(1)The majority of the loss on termination of hedging swaps relates to the disposal of investment securities at FVOCI – debt. In addition, it includes a € 1 million
charge transferred from other comprehensive income in respect of cash flow hedges (2017: € 1 million).
(2)Includes € 32 million gain on part disposal of NAMA subordinated bonds.
13 Administrative expenses
Personnel expenses:
Wages and salaries
Termination benefits(1)
Retirement benefits(2)
Social security costs
Other personnel expenses(3)
Total personnel expenses
Staff costs capitalised
Personnel expenses
General and administrative expenses:
Bank levies and regulatory fees
Other general and administrative expenses
Total general and administrative expenses
2018
€ m
2017
€ m
587
21
92
65
21
786
(22)
764
82
815
897
587
70
82
64
20
823
(33)
790
105
799
904
1,661
1,694
(1)In 2018, a charge of € 21 million (2017: € 70 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 € 75 million (2017: a charge of € 75 million), a charge of € 8 million in relation to defined benefit expense
(2017: a credit of € 1 million), and a long-term disability payments charge of € 9 million (2017: a charge of € 8 million). For details of retirement benefits,
see note 34.
(3)Other personnel expenses include staff training, recruitment and various other staff costs.
The average number of employees for 2018 and 2017 is set out in note 56 ’Employees’.
AIB Group plc Annual Financial Report 2018 285
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Notes to the consolidated financial statements
14 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 year ended 31 December 2018 (2017: Nil).
15 Net credit impairment writeback
The following table analyses the income statement net credit impairment writeback/(losses) on financial instruments for the year to
31 December 2018.
Credit impairment writeback on financial instruments
Measured at
amortised cost
€ m
Measured
at FVOCI
€ m
Net remeasurement of loss allowance
Loans and advances to banks
Loans and advances to customers
Loan commitments
Financial guarantee contracts
Credit impairment writeback
Recoveries of amounts previously written-off
Net credit impairment writeback
1
89
(9)
3
84
120
204
–
–
–
–
–
–
–
Writeback of provisions for impairment on loans and advances to customers
16 Profit on disposal of property
Profit on disposal of property amounted to € 2 million (2017: Nil).
2018
Total
€ m
1
89
(9)
3
84
120
204
2017
€ m
113
17 Loss on disposal of business
Loss on disposal of business amounted to € 22 million (2017: Nil). This follows the repatriation of part of the capital of certain foreign
subsidiaries in the Group which had ceased trading. A pro-rata amount of the related foreign currency cumulative translation reserve
was transferred to the income statement.
286
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18 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 Auditor only (Deloitte Ireland LLP) for services relating to the audit of the Group financial statements in the
categories set out below. Both years presented are on that basis.
A
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R
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w
i
Auditor’s fees (excluding VAT):
Audit of Group financial statements
Other assurance services
Other non-audit services
Taxation advisory services
2018
€ m
2.6
0.6
1.1
–
4.3
2017
€ m
2.2
5.6(1)
0.9
–
8.7
(1)This related to the applications for listing to the Main Securities Market of the Irish Stock Exchange/Euronext Dublin. All work was completed in 2017 and
fees paid were included as part of ‘Other assurance services’.
All the above amounts were paid to the Group Auditor 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 LLP):
Auditors’ fees excluding Deloitte Ireland LLP (excluding VAT)
2018
€ m
0.58
2017
€ m
0.41
AIB Group plc Annual Financial Report 2018 287
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Notes to the consolidated financial statements
19 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
Total tax charge for the year
Effective tax rate
2018
€ m
2017
€ m
(21)
(3)
(24)
(21)
1
(20)
(44)
(10)
13
(114)
(111)
(155)
(10)
–
(10)
(26)
(4)
(30)
(40)
(13)
(2)
(137)
(152)
(192)
12.4%
14.7%
Factors affecting the effective tax rate
The following table explains the difference between the tax charge that would result from applying the standard corporation tax rate in
Ireland of 12.5% and the actual tax charge for the year:
Profit before tax from continuing operations
2018
%
€ m
1,247
2017
%
€ m
1,306
Tax charge at standard corporation tax rate in Ireland of 12.5%
(156)
12.5
(163)
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
Tax legislation on equity distributions – current and prior years
(Deferred tax assets not recognised)/reversal
of amounts previously not recognised
Other differences
Adjustments to tax charge in respect of prior years
(8)
(17)
2
1
(14)
14
11
10
2
0.6
1.4
(0.2)
(0.1)
1.1
(1.1)
(0.9)
(0.7)
(0.2)
(10)
(25)
3
3
(12)
–
18
–
(6)
0.8
1.8
(0.2)
(0.2)
0.9
–
(1.4)
–
0.5
Tax charge
(155)
12.4
(192)
14.7
288
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19 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
Foreign currency translation losses transferred to income statement
Change in foreign currency translation reserves taken to other
comprehensive income
Total
Cash flow hedging reserves (IAS 39)
Fair value (gains) transferred to income statement
Fair value (losses) taken to other comprehensive income
Total
Cash flow hedging reserves (IFRS 9)
Amounts reclassed from cash flow hedging reserves to the
income statement as a reclassification adjustment:
– amounts for which hedge accounting had previously been used,
but for which the hedged future cash flows are no longer expected
to occur
– amounts that have been transferred because the hedged item
has affected the income statement
Hedging gains or losses recognised in other comprehensive income
Total
Available for sale securities reserves (IAS 39)
Fair value (gains) transferred to income statement
Fair value (losses) taken to other comprehensive income
Total
Investment debt securities at FVOCI reserves (IFRS 9)
Fair value (gains) transferred to income statement
Fair value (losses) taken to other comprehensive income
Total
Investment equity securities measured at FVOCI reserves (IFRS 9)
Fair value gains taken to other comprehensive income
Total
Gross
€ m
Tax
€ m
2018
Net
€ m
Gross
€ m
Tax
€ m
2017
Net
€ m
A
n
n
u
a
l
R
e
v
e
w
i
–
–
35
35
22
(12)
10
–
–
–
–
–
(9)
(9)
–
–
–
–
–
–
–
–
26
26
22
–
–
25
25
–
(12)
10
(53)
(53)
–
–
–
(118)
(116)
(234)
–
–
(1)
(1)
–
–
–
16
15
31
–
–
–
–
7
9
–
–
24
24
–
(53)
(53)
(102)
(101)
(203)
–
–
–
–
(59)
(73)
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a
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a
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i
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G
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n
f
o
r
m
a
t
i
o
n
–
–
–
–
(66)
(82)
–
–
–
(86)
118
32
10
(14)
(4)
(76)
104
28
–
–
–
(24)
(308)
(332)
2
2
–
–
–
3
38
41
–
–
–
–
–
(21)
(270)
(291)
2
2
(148)
16
(132)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
AIB Group plc Annual Financial Report 2018 289
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Notes to the consolidated financial statements
20 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
Distributions on other equity interests (note 21)
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 20 (a))
Weighted average number of ordinary shares in issue during the year
Potential weighted average number of shares
Earnings per share from continuing operations - diluted
2018
€ m
1,092
(37)
1,055
2017
€ m
1,114
(37)
1,077
Number of shares (millions)
2,714.4
2,714.4
EUR 38.9c
EUR 39.7c
2018
€ m
1,055
2017
€ m
1,077
Number of shares (millions)
2,714.4
2,714.4
2,714.4
2,714.4
EUR 38.9c
EUR 39.7c
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/Euronext Dublin 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 46). 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 42 for further detail).
These warrants were not included in calculating the diluted earnings per share as they were antidilutive.
290
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21 Distributions on equity shares and other equity interests
Ordinary shares – dividends paid
Other equity interests – distributions
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2018
€ m
326
37
2017
€ m
250
37
Final dividends are not accounted for until they have been approved at the Annual General Meeting of shareholders or in the case of
interim dividends, when they become irrevocable having already been approved for payment by the Board of Directors. Interim dividends
may be cancelled at any time prior to the actual payment.
On 25 April 2018, a final dividend of € 0.12 per ordinary share, amounting in total to € 326 million (2017: € 250 million), was approved at
the Annual General Meeting of AIB Group plc and subsequently paid on 4 May 2018.
During 2018, distributions amounting to € 37 million were paid on the Additional Tier 1 securities (2017: € 37 million) (note 44).
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22 Disposal groups and non-current assets held for sale
Property and non-financial assets held for sale(1)
Total disposal groups and non-current assets held for sale
(1)Includes property surplus to requirements and repossessed assets.
23 Trading portfolio financial assets
Investment debt securities
Equity investments
Of which listed:
Investment debt securities
Of which unlisted:
Equity investments
2018
€ m
10
10
2017
€ m
8
8
2018
€ m
2017
€ m
–
–
–
–
–
–
32
1
33
32
1
33
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Notes to the consolidated financial statements
24 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 2018 and 2017:
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
2018
€ m
44,488
848
(901)
4,369
38
(24)
479
14
(5)
355
–
(4)
49,691
900
(934)
2017
€ m
53,465
1,094
(1,092)
4,882
29
(34)
715
33
(35)
130
–
(9)
59,192
1,156
(1,170)
(1)Interest rate, exchange rate, equity and credit derivative contracts are entered into for both hedging and trading purposes.
(2)At 31 December 2018, 39% of fair value relates to exposures to banks (2017: 55%).
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 of this report.
292
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24 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:
Residual maturity
Less than
1 year
€ m
1 to
5 years
€ m
5 years +
€ m
2018
Total
€ m
Less than
1 year
€ m
1 to
5 years
€ m
5 years +
€ m
Notional principal amount
11,843
18,694
19,154
49,691
18,742
21,862
18,588
Positive fair value
61
212
627
900
141
326
689
2017
Total
€ m
59,192
1,156
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
2017
€ m
2018
€ m
Positive fair value
2017
€ m
2018
€ m
47,366
2,129
196
49,691
57,005
1,938
249
59,192
547
341
12
900
743
398
15
1,156
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. The level of credit
risk is minimised by dealing with counterparties of good credit standing, by the use of Credit Support Annexes and ISDA Master Netting
Agreements and increased clearing of derivatives through Central Counterparties (CCPs). 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 2018 and 2017, are presented within this note.
AIB Group plc Annual Financial Report 2018 293
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Notes to the consolidated financial statements
24 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 2018 and 2017. A description of how the fair values of derivatives are determined is set out in note 52.
Notional
principal
amount
€ m
2018
Fair values
Assets
Liabilities
€ m
€ m
Notional
principal
amount
€ m
2017
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
4,736
381
1,270
6,387
2,814
2,814
1,124
1,124
414
31
1
446
19
19
–
–
(446)
(31)
(1)
(478)
(23)
(23)
–
–
6,180
373
391
6,944
1,855
1,855
7,474
7,474
507
27
–
534
17
17
–
–
(544)
(27)
–
(571)
(16)
(16)
–
–
Total interest rate derivatives
10,325
465
(501)
16,273
551
(587)
Foreign exchange derivatives – OTC
Foreign exchange contracts
Currency options bought and sold
Total foreign exchange derivatives
Equity derivatives – OTC
Equity index options bought and sold
Equity total return swaps
Total equity derivatives
Credit derivatives – OTC
Credit derivatives
Total credit derivatives
4,274
95
4,369
376
103
479
355
355
36
2
38
5
9
14
–
–
(24)
–
(24)
(5)
–
(5)
(4)
(4)
4,852
30
4,882
623
–
623
130
130
29
–
29
33
–
33
–
–
(34)
–
(34)
(33)
–
(33)
(9)
(9)
Total derivatives held for trading
15,528
517
(534)
21,908
613
(663)
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24 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
10,486
10,486
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
5,178
5,178
–
–
2018
Fair values
Assets
Liabilities
€ m
€ m
Notional
principal
amount
€ m
2017
Fair values
Assets
Liabilities
€ m
€ m
A
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86
53
53
–
–
(176)
11,740
(176)
11,740
(28)
(28)
–
–
1,670
1,670
92
92
92
92
33
33
–
–
(253)
(253)
(2)
(2)
(2)
(2)
Total derivatives designated as fair value hedges
15,664
139
(204)
13,502
125
(257)
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
7,134
1,965
9,099
9,400
9,400
18,499
34,163
49,691
158
4
162
82
82
244
383
900
(116)
(57)
(173)
(23)
(23)
(196)
(400)
(934)
14,540
1,192
15,732
8,050
8,050
23,782
37,284
341
62
403
15
15
418
543
(183)
(2)
(185)
(65)
(65)
(250)
(507)
59,192
1,156
(1,170)
AIB Group plc Annual Financial Report 2018 295
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Notes to the consolidated financial statements
24 Derivative financial instruments (continued)
Nominal values and average interest rates by residual maturity
At 31 December 2018, the Group held the following hedging instruments of interest rate risk in fair value and cash flow hedges respectively:
Less than
1 month
1 to 3
months
3 months
to 1 year
1 to 5
years
5 years +
2018
Total
Fair value hedges – Interest rate swaps
Assets
Hedges of investment securities – debt
Nominal principal amount (€ m)
Average interest rate (%)(1)
Liabilities
Hedges of debt securities in issue
Nominal principal amount (€ m)
Average interest rate (%)(1)
Hedges of subordinated debt
Nominal principal amount (€ m)
Average interest rate (%)(1)
Cash flow hedges –Interest rate swaps(2)
Hedges of financial assets
Nominal principal amount (€ m)
Average interest rate (%)(3)
125
0.99
114
0.74
1,459
4.24
4,430
0.85
3,041
0.97
9,169
1.43
–
–
–
–
–
–
–
–
565
3.02
4,655
1.61
525
2.39
5,745
1.82
–
–
750
4.13
–
–
750
4.13
147
0.25
452
0.35
2,067
0.24
2,250
0.59
9,401
0.78
14,317
0.65
Hedges of financial liabilities
Nominal principal amount (€ m)
Average interest rate (%)(3)
(1)Represents the fixed rate on the hedged item which is being swapped for a variable rate.
(2)Includes interest rate swaps and cross currency swaps used to hedge interest rate risk on variable rate EUR/GBP and EUR/USD assets and liabilities.
(3)This is the average interest rate on the fixed leg of swap agreements where the variable rate on the assets and liabilities in cash flow hedges is being
1,800
1.03
1,550
0.90
589
2.84
3
1.60
240
0.77
4,182
1.22
swapped for a fixed rate.
Fair value hedges of interest rate risk
The tables below set out the amounts relating to items designated as (a) hedging instruments and (b) hedged items in fair value hedges
of interest rate risk together with the related hedge ineffectiveness at 31 December 2018:
Carrying amount(1)
Nominal
Assets
Liabilities
(a) Hedging instruments
€ m
Interest rate swaps hedging:
Investment securities – debt
Debt securities in issue
Subordinated debt
9,169
5,745
750
€ m
17
117
5
€ m
(204)
–
–
Line item in
SOFP* where
the hedging
instrument
is included
Change in fair
value used for
calculating hedge
ineffectiveness
for the year
€ m
Hedge
ineffectiveness
recognised in
the income
statement
€ m
2018
Line item in
the income
statement that
includes hedge
ineffectiveness
Derivative
financial instruments
Derivative
financial instruments
Derivative
financial instruments
31
17
3
(1)The mark to market of these instruments excluding accruals of € 14 million is € 79 million.
Carrying amount
of hedged items
recognised in
the SOFP*
Accumulated amount
of fair value hedge
adjustments on the
hedged items included
in the carrying amount
of the hedged items
Line item in the
SOFP* where
hedged item is
included
Change in
value of hedged
items used for
calculating hedge
ineffectiveness
for the year
(b) Hedged items
Investment securities – debt
Debt securities in issue
Subordinated debt
Assets
€ m
Liabilities
€ m
Assets
€ m
Liabilities
€ m
9,453
142
(5,806)
(753)
(61)
(3)
Investment securities
Debt securities in issue
Subordinated
liabilities and other
capital instruments
€ m
(32)
(17)
(3)
*Statement of financial position.
296
AIB Group plc Annual Financial Report 2018
(1)
–
–
Net trading
income
Net trading
income
Net trading
income
2018
Accumulated
amount of fair value
hedge adjustments
remaining in the SOFP*
for any hedged items
that have ceased to be
adjusted for hedging
gains and losses
€ m
–
–
–
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Page 298
Notes to the consolidated financial statements
24 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
64
44
Between 1
and 2 years
€ m
Between 2
and 5 years
€ m
More than
5 years
€ m
19
33
122
36
231
29
Within 1 year
€ m
40
57
Between 1
and 2 years
€ m
Between 2
and 5 years
€ m
22
34
179
44
More than
5 years
€ m
215
38
2018
Total
€ m
436
142
2017
Total
€ m
456
173
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
64
105
Between 1
and 2 years
€ m
Between 2
and 5 years
€ m
More than
5 years
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122
81
231
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Between 2
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More than
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64
€ m
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47
2018
Total
€ m
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293
2017
Total
€ m
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260
Ineffectiveness reflected in the income statement that arose from cash flow hedges at 31 December 2018 amounted to Nil
(31 December 2017: 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 2018 was a gain
of € 28 million (2017: a charge of € 203 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, debt securities at FVOCI and fixed rate liabilities. The fair values of financial instruments are set out
in note 52. The net mark to market on fair value hedging derivatives, excluding accrual and risk adjustments at 31 December 2018 is
negative € 79 million (2017: negative € 133 million) and the net mark to market on the related hedged items at 31 December 2018 is
positive € 78 million (2017: positive € 151 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 47.
298
AIB Group plc Annual Financial Report 2018
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25 Loans and advances to banks
At amortised cost
Funds placed with central banks
Funds placed with other banks
ECL allowance
Total loans and advances to banks
Amounts include:
Reverse repurchase agreements
Loans and advances to banks by geographical area(2)
Republic of Ireland
United Kingdom
United States of America
31 December
2018
€ m
1 January 31 December
2017
€ m
2018(1)
€ m
589
854
–
854
536
777
(1)
776
536
777
–
777
1,443
1,312
1,313
–
3
3
31 December
2018
€ m
1 January 31 December
2017
€ m
2018(1)
€ m
752
689
2
1,443
712
598
2
713
598
2
1,312
1,313
(1)For details of the impact of adopting IFRS 9 at 1 January 2018, see note 3.
(2)The classification of loans and advances to banks by geographical area is based primarily on the location of the office recording the transaction.
Loans and advances to banks include cash collateral of € 570 million (31 December 2017: € 527 million) placed with derivative
counterparties in relation to net derivative positions and placed with repurchase agreement counterparties.
Under reverse repurchase agreements, the Group accepts collateral that it is permitted to sell or repledge in the absence of default by
the owner of the collateral. There were no reverse repurchase agreements outstanding at 31 December 2018. At 31 December 2017,
the collateral received consisted of non-government securities with a fair value of € 3 million, none of which had been resold or
repledged. These transactions were conducted under terms that are usual and customary to standard reverse repurchase agreements.
AIB Group plc Annual Financial Report 2018 299
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A13 Notes 4-31 Purp 2018 pages251-286:Layout 1
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Page 300
Notes to the consolidated financial statements
26 Loans and advances to customers
At amortised cost
Loans and advances to customers
Reverse repurchase agreements
Amounts receivable under finance leases and hire purchase contracts
ECL allowance
Mandatorily at fair value through profit or loss
Loans and advances to customers
Total loans and advances to customers
Of which repayable on demand or at short notice
Amounts include:
Due from associated undertakings
(1)For details of the impact of adopting IFRS 9 at 1 January 2018, see note 3.
31 December
2018
€ m
1 January 31 December
2017
€ m
2018(1)
€ m
61,309
–
1,451
62,760
(2,039)
60,721
147
60,868
4,647
61,876
19
1,287
63,182
(3,616)
59,566
62,032
19
1,287
63,338
(3,345)
59,993
156
–
59,722
59,993
8,126
8,126
–
5
5
Loans and advances to customers include cash collateral amounting to € 79 million (31 December 2017: Nil) placed with derivative
counterparties.
At 31 December 2018, there were no reverse repurchase agreements outstanding. At 31 December 2017, the Group had accepted
collateral with a fair value of € 19 million in respect of reverse repurchase agreements that it was permitted to sell or repledge in the
absence of default by the owner of the collateral.
For details of credit quality of loans and advances to customers, including forbearance, refer to the ‘Risk management’ section of this
report.
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
ECL allowance for uncollectible minimum payments receivable(1)
Net investment in new business
2018
€ m
582
946
18
1,546
(107)
12
1,451
564
872
15
1,451
41
805
2017
€ m
520
833
17
1,370
(91)
8
1,287
504
769
14
1,287
23(2)
674
(1)Included in loss allowance on financial assets (note 27). The IFRS 9 transition impact on ECL allowance amounted to an increase of € 14 million at
1 January 2018.
(2)Comparative data for 31 December 2017 has been prepared under IAS 39.
300
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27 Loss allowance on financial assets
The following table shows the movements on the ECL allowance on financial assets. Comparative data for 31 December 2017 has been
prepared under IAS 39. Further information is disclosed in the ‘Risk management’ section of this report.
At 1 January
Transition to IFRS 9
Exchange translation adjustments
Transfer in
Net remeasurement of ECL allowance – banks
Net remeasurement of ECL allowance – customers
Changes in ECL allowance due to write-offs
Changes in ECL allowance due to disposals
Recoveries of amounts previously written-off
At 31 December
Amounts include loss allowance on:
Loans and advances to banks measured at amortised cost
Loans and advances to customers measured at amortised cost
(1)For details of the impact of adopting IFRS 9 at 1 January 2018, see note 3.
IFRS 9
31 December
2018
€ m
3,617
–
(1)
14
(1)
(89)
(1,029)
(472)
–
2,039
–
2,039
2,039
IFRS 9
IAS 39
1 January 31 December
2017
€ m
2018(1)
€ m
3,345
272
–
–
–
–
–
–
–
3,617
1
3,616
3,617
4,589
–
(26)
–
–
(113)
(716)
(404)
15
3,345
–
3,345
3,345
28 Investment securities
The following table sets out the carrying value of investment securities by type and by measurement category at 31 December 2018.
Comparative data for 31 December 2017 has been prepared under IAS 39.
Debt securities measured at FVOCI
Debt securities at amortised cost
Equity investments measured at FVOCI (designated under IFRS 9)
Equity investments measured at FVTPL
Total investment securities
(1)For details of the impact of adopting IFRS 9 at 1 January 2018, see note 3.
31 December
2018
€ m
1 January 31 December
2017
€ m
2018(1)
€ m
15,946
15,642
15,642
187
468
260
–
466
213
–
679
–
16,861
16,321
16,321
Credit impairment losses recognised in the income statement at 31 December 2018 amounted to Nil (31 December 2017: Nil).
On transition to IFRS 9 on 1 January 2018, the loss allowance on debt securities at FVOCI amounted to € 4 million which had no impact
either on the carrying value of the debt securities or on reserves as this was a transfer between investment securities reserves and
revenue reserves (note 3).
AIB Group plc Annual Financial Report 2018 301
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Notes to the consolidated financial statements
28 Investment securities (continued)
The following table analyses the carrying value of investment securities by major classification together with the unrealised gains and
losses for those securities measured at FVOCI and FVTPL at 31 December 2018. Comparative data for 31 December 2017 has been
prepared under IAS 39.
Unrealised
gross
gains
€ m
Unrealised
gross
losses
€ m
Net unrealised
gains/
(losses)
€ m
Tax
effect
€ m
2018
Net
after
tax
€ m
Debt securities at FVOCI
Irish Government securities
Euro government securities
Non Euro government securities
Supranational banks and government agencies
Collateralised mortgage obligations
Other asset backed securities
Euro bank securities
Non Euro bank securities
Euro corporate securities
Non Euro corporate securities
Carrying
value
€ m
6,282
1,921
158
1,132
264
103
5,007
815
216
48
401
78
3
26
–
–
46
1
–
–
Total debt securities at FVOCI
15,946
555
Debt securities at amortised cost
Asset backed securities
Total debt securities at amortised cost
Equity securities
Equity investments at FVOCI
Equity investments at FVTPL
Total equity securities
187
187
468
260
728
425
84
509
Total investment securities
16,861
(6)
(4)
(2)
(7)
(11)
–
(11)
(6)
(2)
–
(49)
–
(3)
(3)
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
Fair
value
€ m
7,021
2,406
161
1,368
278
16
4,336
56
15,642
466
213
679
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
302
AIB Group plc Annual Financial Report 2018
395
74
1
19
(11)
–
35
(5)
(2)
–
(49)
346
(9)
–
(3)
5
–
(4)
1
–
–
65
1
16
(6)
–
31
(4)
(2)
–
506
(59)
447
425
81
506
(53)
(24)
(77)
372
57
429
2017
Net
after
tax
€ m
560
109
3
33
(4)
–
68
–
(80)
(15)
(1)
(3)
4
–
(10)
–
(105)
769
(53)
(11)
(64)
370
30
400
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28 Investment securities (continued)
Equity investments designated at FVOCI
On adoption of IFRS 9 at 1 January 2018
Increase in unrealised gains during the year
At 31 December 2018
A
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a
l
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e
w
i
2018
€ m
466
2
468
On the adoption of IFRS 9 at 1 January 2018, the Group designated its investment in NAMA subordinated bonds as measured at FVOCI
since this investment is held for strategic purposes. Previously, this investment was classified as available for sale and measured at fair
value through other comprehensive income. Dividends received during the year amounted to € 23 million (2017: € 25 million) (note 7).
Equity investments mandatorily measured at FVTPL
On adoption of IFRS 9 at 1 January 2018
At 31 December
2018
€ m
213
260
On the adoption of IFRS 9 at 1 January 2018, all equity investments apart from the NAMA subordinated bonds above were classified and
measured at FVTPL. Previously, these investments were classified as available for sale and measured at fair value through other
comprehensive income.
2017
€ m
466
92
121
679
2017
Total
€ m
15,437
(77)
1,419
Equity investments (IAS 39)
Equity investments – NAMA subordinated bonds
Equity investments – Visa Inc. Series B Preferred Stock
Equity investments – other
Total equity investments available for sale
The following table sets out an analysis of movements in investment securities/financial investments available for sale:
Equity investments
measured at
FVOCI
FVTPL
2018
Total
Debt
securities
Equity
securities
At 1 January
Exchange translation adjustments
Purchases/acquisitions
Sales/disposals
Maturities
IAS 39 reclassification in
Amortisation of discounts net
of premiums
Movement in unrealised (losses)/gains
At 31 December
Of which:
Listed
Unlisted
Debt
securities
at FVOCI
€ m
15,642
25
3,061
(1,425)
(945)
–
(71)
(341)
15,946
15,946
–
15,946
Debt
securities
at amortised
cost
€ m
–
–
187
–
–
–
–
–
€ m
466
–
–
–
–
–
–
2
187
468
187
–
187
–
468
468
€ m
213
–
28
(22)
–
–
–
41
260
23
237
260
€ m
€ m
16,321
14,832
25
3,276
(1,447)
(945)
–
(71)
(298)
(77)
1,347
(1,991)
(1,457)
3,234
(93)
(153)
€ m
605
–
72
(51)
(2,042)
–
–
–
53
(1,457)
3,234(1)
(93)
(100)
16,861
15,642
679
16,321
16,156
705
16,861
15,642
–
15,642
16
663
679
15,658
663
16,321
(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.
AIB Group plc Annual Financial Report 2018 303
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a
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a
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a
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Notes to the consolidated financial statements
28 Investment securities (continued)
The following table sets out at 31 December 2018 and 2017, 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:
Fair value
Unrealised losses
Investments
Investments
with unrealised with unrealised
losses
of more than
12 months
€ m
losses
of less than
12 months
€ m
Debt securities at FVOCI
Irish Government securities
Euro government securities
Non Euro government securities
Supranational banks and government agencies
Collateralised mortgage obligations
Euro bank securities
Non Euro bank securities
Euro corporate securities
Total debt securities at FVOCI
Equity securities
Equity securities at FVTPL
Total
91
174
–
49
–
740
662
208
1,924
5
1,929
147
49
44
247
272
101
22
8
890
30
920
Investments
with unrealised
losses
of less than
12 months
€ m
Fair value
Investments
with unrealised
losses
of more 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
Total
–
–
187
–
–
187
1
188
150
26
56
252
88
572
19
591
Total
€ m
238
223
44
296
272
841
684
216
2,814
35
2,849
Total
€ m
150
26
243
252
88
759
20
779
Unrealised Unrealised
losses
of more
than
12 months
€ m
losses
of less
than
12 months
€ m
–
(2)
–
–
–
(11)
(6)
(2)
(21)
(1)
(22)
(6)
(2)
(2)
(7)
(11)
–
–
–
(28)
(2)
(30)
Unrealised losses
Unrealised
losses
of less
than
12 months
€ m
Unrealised
losses
of more
than
12 months
€ m
2018
Total
€ m
(6)
(4)
(2)
(7)
(11)
(11)
(6)
(2)
(49)
(3)
(52)
2017
Total
€ m
(6)
(1)
(4)
(8)
(1)
–
–
(3)
–
–
(3)
–
(3)
(6)
(1)
(1)
(8)
(1)
(17)
(20)
(3)
(20)
(3)
(23)
For details of the credit quality of the investment securities portfolio, see the ‘Risk management’ section of this report.
304
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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
Share of net assets including goodwill
At 1 January
Income for the year
Dividends/distribution received from associated undertakings/income from joint venture(2)
Investments in associated undertaking/joint venture
Disposals(5)
At 31 December(6)
Of which listed on a recognised stock exchange
2018
€ m
12
12(1)
2017
€ m
19
19(1)
2018
€ m
2017
€ m
80
12
(10)
10(3)
(2)
90
–
65
19
(9)
81(4)
(76)
80
–
(1)Includes AIB Merchant Services € 12 million (2017: AIB Merchant Services € 17 million and Greencoat Renewables plc € 2 million).
(2)Includes dividends/distribution received from AIB Merchant Services € 10 million (2017: AIB Merchant Services € 7 million and Greencoat Renewables plc
€ 2 million).
(3)During 2018, the Group invested € 10 million in Fulfil Holdings Limited (25% equity interest).
(4)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.
(5)In 2018, the Group realised its investment amounting to € 2 million in Aviva Undershaft Five Limited which was liquidated. In 2017, the Group disposed of
its interest in the joint venture Greencoat Renewables plc for € 76 million.
(6)This comprises the Group’s investments in AIB Merchant Services and Fulfil Holdings Limited at 31 December 2018 (2017: AIB Merchant Services and
Aviva Undershaft Five Limited).
AIB Group plc Annual Financial Report 2018 305
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Notes to the consolidated financial statements
29 Interests in associated undertakings (continued)
The following is the principal associate company of the Group at 31 December 2018 and 2017:
Name of associate
Principal activity
Place of incorporation
and operation
Proportion of ownership
interest and voting power
held by the Group at
2017
%
2018
%
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.
Banking transactions between the Group and its associated undertakings are entered into in the normal course of business. For further
information see notes 26 and 36.
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 2018 or 2017.
Change in the Group’s ownership interest in associates
During 2018, the Group invested € 10 million in Fulfil Holdings Limited (25% equity interest) and disposed of its interest in Aviva
Undershaft Five Limited for € 2 million.
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.
30 Other assets
Proceeds due from disposal of loan portfolio
Other(1)
Total
31 December
2018
€ m
1 January 31 December
2017
€ m
2018
€ m
13
343
356
166
264(2)
430
166
252
418
(1)Includes items in transit € 124 million and sundry debtors € 80 million.
(2)Transition to IFRS 15: Impact € 12 million (for further information, see note 1).
306
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31 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(2)
Amounts written-off(1)
At 31 December
Carrying value at 31 December
Cost
At 1 January
Additions
Transfers in/(out)
Amounts written-off(1)
Exchange translation adjustments
At 31 December
Amortisation/impairment
At 1 January
Amortisation for the year
Impairment for the year(2)
Amounts written-off(1)
Transfers in/out
At 31 December
Carrying value at 31 December
Software
externally
purchased
€ m
Software
Software
internally
under
generated construction
€ m
€ m
Other
2018
Total
€ m
€ m
A
n
n
u
a
l
R
e
v
e
w
i
323
6
–
–
–
329
293
14
–
–
307
22
794
40
123
–
–
957
428
91
4
–
523
434
183
177
(123)
(11)
–
226
10
–
1
(11)
–
226
3
–
–
–
–
3
3
–
–
–
3
–
Software
externally
purchased
€ m
Software
internally
generated
€ m
Software
under
construction
€ m
Other
€ 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
–
1,303
223
–
(11)
–
1,515
734
105
5
(11)
833
682
2017
Total
€ m
1,067
261
–
(24)
(1)
1,303
675
76
7
(24)
–
734
569
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s
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R
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i
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M
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e
m
e
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a
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d
O
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r
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i
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a
n
c
i
a
l
S
t
a
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e
m
e
n
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s
G
e
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a
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I
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f
o
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m
a
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i
o
n
(1)Relates to assets which are no longer in use with a Nil carrying value.
(2)Included in ‘Impairment and amortisation of intangible assets’ in the consolidated income statement.
Future capital expenditure in relation to both intangible assets and property, plant and equipment is set out in note 55.
AIB Group plc Annual Financial Report 2018 307
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Notes to the consolidated financial statements
32 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(2)
Reversal of impairment charge for the year(2)
Held for sale
Amounts written-off(1)
Exchange translation adjustments
At 31 December
Carrying value at 31 December
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(2)
Held for sale
Amounts written-off(1)
Exchange translation adjustments
At 31 December
Carrying value at 31 December
Freehold
€ m
215
1
1
(3)
(1)
–
213
74
5
10
(4)
–
(1)
–
84
129
Freehold
€ m
217
1
1
(3)
–
(1)
215
72
5
–
(2)
–
(1)
74
141
Property
Long
Leasehold
leasehold under 50 years
€ m
€ m
88
–
1
(1)
(4)
–
84
52
1
2
–
–
(4)
–
51
33
137
5
3
–
(6)
–
139
95
8
4
–
–
(6)
–
101
38
Property
Long
leasehold
€ m
Leasehold
under 50 years
€ 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
539
4
14
–
(27)
–
530
458
23
3
–
–
(27)
–
457
73
Assets
under
construction
€ m
21
(10)
46
–
–
–
57
–
–
–
–
–
–
–
–
57
Equipment
€ m
524
5
12
–
(1)
(1)
539
433
25
2
–
(1)
(1)
458
81
Assets
under
construction
€ m
21
(10)
10
–
–
–
21
–
–
–
–
–
–
–
21
2018
Total
€ m
1,000
–
65
(4)
(38)
–
1,023
679
37
19
(4)
–
(38)
–
693
330
2017
Total
€ m
986
–
26
(6)
(3)
(3)
1,000
629
40
18
(3)
(3)
(2)
679
321
(1)Relates to assets which are no longer in use with a Nil carrying value.
(2)Included in ‘impairment and depreciation of property, plant and equipment’ in the consolidated income statement.
The carrying value of property occupied by the Group for its own activities was € 199 million (2017: € 217 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
(2017: € 1 million).
Future capital expenditure in relation to both property, plant and equipment and intangible assets is set out in note 55.
308
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33 Deferred taxation
Deferred tax assets:
Transition to IFRS 9
Assets used in the business
Retirement benefits
Assets leased to customers
Unutilised tax losses
Other
Total gross deferred tax assets
Deferred tax liabilities:
Transition to IFRS 9
Transition to IFRS 15
Cash flow hedges
Retirement benefits
Amortised income on loans
Assets used in business
Investment securities/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
31 December
2018
€ m
1 January 31 December
2017
€ m
2018(1)
€ m
43
9
12
10
2,808
14
2,896
(10)
(1)
(40)
(58)
(3)
(21)
(101)
(67)
(301)
2,595
2,702
(107)
2,595
53
–
17
4
2,907
18
2,999
(12)
(2)
(36)
(43)
(4)
(12)
(142)
(70)
(321)
–
–
17
4
2,907
18
2,946
–
–
(36)
(43)
(4)
(12)
(145)
(67)
(307)
2,678
2,639
2,787
(109)
2,678
2,736
(97)
2,639
For each of the years ended 31 December 2018 and 2017, full provision has been made for capital allowances and other temporary
differences.
Analysis of movements in deferred taxation
At 1 January
Transition to IFRS 9
Transition to IFRS 15
Exchange translation and other adjustments
Deferred tax through other comprehensive income
Income statement –Continuing operations (note 19)
At 31 December
(1)For details of the impact of adopting IFRS 9 at 1 January 2018, see note 3.
31 December
2018
€ m
1 January 31 December
2017
€ m
2018(1)
€ m
2,678
2,639
2,747
–
–
–
28
(111)
2,595
41
(2)
–
–
–
2,678
–
–
(2)
46
(152)
2,639
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 264 and 265. Information on the regulatory capital treatment of deferred tax assets is included in
‘Principal risks and uncertainties’ on page 68.
At 31 December 2018, recognised deferred tax assets on tax losses and other temporary differences, net of deferred tax liabilities,
totalled € 2,595 million (31 December 2017: € 2,639 million). The most significant tax losses arise in the Irish tax jurisdiction and their
utilisation is dependent on future taxable profits.
AIB Group plc Annual Financial Report 2018 309
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Notes to the consolidated financial statements
33 Deferred taxation (continued)
Temporary differences recognised in other comprehensive income consist of deferred tax on financial assets at FVOCI, cash flow
hedges and actuarial gains/losses on retirement benefit schemes. Temporary differences recognised in the income statement consist of
provisions for expected credit losses on financial instruments, amortised income, assets leased to customers, and assets used in the
course of the business.
Net deferred tax assets at 31 December 2018 of € 2,489 million (31 December 2017: € 2,535 million) are expected to be recovered after
more than 12 months.
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.
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 2018 of € 122 million
(31 December 2017: € 122 million); overseas tax (UK and USA) on unused tax losses of € 3,015 million (31 December 2017:
€ 3,090 million); and foreign tax credits for Irish tax purposes of € 13 million (31 December 2017: € 3 million). Of these tax losses totalling
€ 3,137 million for which no deferred tax is recognised: € 24 million expires in 2032; € 38 million in 2033; € 25 million in 2034; and
€ 5million in 2035.
The aggregate amount of temporary differences associated with investments in subsidiaries, branches and associates for which
deferred tax liabilities have not been recognised amounted to Nil (31 December 2017: Nil).
Deferred tax recognised directly in equity amounted to Nil (31 December 2017: Nil).
Analysis of income tax relating to total comprehensive income
Gross
Tax
Net of tax
€ m
1,247
10
32
(330)
35
994
€ m
(155)
–
(4)
41
(9)
(127)
€ m
1,092
10
28
(289)
26
867
2018
Net amount
attributable
to owners of
the parent
€ m
1,092
10
28
(289)
26
867
994
(127)
867
867
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
Profit for the year
Exchange translation adjustments
Net change in cash flow hedging reserves
Net change in fair value of investment securities at FVOCI
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 hedging 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
310
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Page 311
34 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.
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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 amount included in administrative expenses in respect of DC schemes is € 75 million (2017: € 75 million) (note 13).
Defined benefit schemes
All defined benefit schemes operated by the Group closed to future accrual no later than 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 16,384 members comprising 4,028 pensioners and 12,356 deferred members as at 31 December
2018. 7,971 members have benefits accrued from 2007 to 2013 under a hybrid arrangement. In addition, there are 1,000 members
comprising 111 pensioners and 889 deferred members as at 31 December 2018 in EBS Defined Benefit Schemes.
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 161 of this report.
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 most recent valuation of the Irish scheme was
carried out at 30 June 2018 and reported the scheme to be in surplus and requiring no deficit funding at this time. It has been agreed
with the Trustee of the UK Scheme to extend the deadline for completing the valuation at 31 December 2017 to 2019.
Contributions
Payments in 2018 amounted to € 72 million. Contributions to the Irish scheme include € 40 million, being the final payment under the
Minimum Funding Standard funding proposal agreed in 2013 with the Pensions Authority and Trustee of the Irish Scheme, and a
€ 9 million payment to fund a discretionary increase in pensions in payment. £ 19.1 million was contributed to the UK scheme as part of
the asset backed funding plan described below.
The total contributions to all the defined benefit pension schemes operated by the Group in the year ended 31 December 2019 are
estimated to be € 1 million (excluding the UK scheme). The Group is currently considering funding options for the UK scheme with the
Trustee.
AIB Group plc Annual Financial Report 2018 311
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Notes to the consolidated financial statements
34 Retirement benefits (continued)
Funding arrangements and policy
There is an asset backed funding plan in place for the UK scheme. This plan grants the UK Scheme a regular income payable quarterly
from 1 April 2016 to 31 December 2032. Based on the interim results of the December 2017 valuation, the asset backed funding plan
would pay the UK Scheme £ 15 million in 2019 (2018: £ 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. However, as
mentioned above, the Group is currently considering funding options for the UK scheme with the Trustee.
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 2018 and 2017. 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
2018
%
0.00
2.14
1.25
3.20
2.90
3.20
2017
%
0.00
2.07
1.35
3.10
2.50
3.10
0.00 – 3.20
2.14 – 4.20
1.25 – 3.20
0.00 – 2.10
2.10 – 3.55
1.35 – 3.10
(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.
312
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34 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
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The Group completed this process early in 2019 taking account of all relevant factors and decided that the funding of discretionary
increases to pensions in payment was appropriate for 2019. Funding will be provided to enable the Trustee to grant an increase of 0.50%
in 2019. If the Trustees award an increase of 0.50%, Irish schemes’ liabilities would increase by c. € 10 million.
In 2018, under this process, the Group agreed to provide a level of funding for discretionary increases in pensions in payment for 2018
for certain schemes. The Trustees of these schemes awarded an increase in the range of 0.35% to 0.50% in respect of pensions eligible
for discretionary pension increases. This resulted in a past service cost of € 10 million in 2018. In 2017, the Board decided that funding of
discretionary increases was not appropriate for 2017.
As the decision to fund discretionary increases to pensions in payment is an annual process, the Board will go through this process
again in early 2020 for 2020.
Mortality assumptions
The life expectancies underlying the value of the scheme liabilities for the Irish and UK schemes at 31 December 2018 and 2017 are
shown in the following table:
Life expectancy - years
Retiring today age 63
Retiring in 10 years at age 63
Males
Females
Males
Females
2018
25.2
27.1
26.0
28.1
2018
25.0
27.0
25.8
27.9
25.1
27.0
26.0
28.0
25.1
27.0
26.0
28.0
Irish scheme
2017
UK scheme
2017
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 2018 is assumed to live on average for 25.2 years for a male
(25.0 years for the UK scheme) and 27.1 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 2018 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.
AIB Group plc Annual Financial Report 2018 313
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Notes to the consolidated financial statements
34 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 2018 and 2017:
Asset
ceiling/
minimum
2017
Net
defined
benefit
funding(1) (liabilities)
assets
€ m
€ m
(252)
(5)
(5)
8
–
2
(1)
1
(36)
41
137
164
(281)
(281)
25(3)
Defined
benefit
obligation
Asset
Fair
value of
ceiling/
scheme minimum
2018
Net
defined
benefit
funding(1) (liabilities)
assets
€ m
€ m
(538)
96
Defined
benefit
obligation
Fair
value of
scheme
assets
€ m
(6,153)
€ m
6,413
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
6,328
–
136
(1)
135
€ m
(5,694)
(12)(2)
(120)
–
(132)
105
6
145
–
–
–
(11)
(11)
(12)(2)
5
(1)
(8)
105
6
145
–
(122)
–
(122)
(36)
41
137
–
129
(1)
128
–
–
–
interest income
–
(149)
(149)
–
164
– Asset ceiling/minimum funding
adjustments
Translation adjustment on
non-euro schemes
Other
Contributions by employer
Benefits paid
(72)
(72)
(72)
35(3)
(3)
32
72
–
72
6
262
–
241
241
(9)
(158)
72
(241)
(169)
(281)
52
194
–
387
387
(54)
110
64
(387)
(323)
(2)
23
64
–
64
96
At 31 December
(5,323)
6,136
(621)
192
(5,694)
6,328
(538)
31 December
2018
€ m
31 December
2017
€ 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
232
9
241
–
(29)
(20)
(49)
192
174
9
183
(40)
(26)
(21)
(87)
96
(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)Includes a charge of € 2 million relating to the equalisation of guaranteed minimum funding benefits in the UK Scheme.
(3)After tax € 26 million (2017: € 24 million) see page 289.
314
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34 Retirement benefits (continued)
Scheme assets
The following table sets out an analysis of the scheme assets:
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
Real estate(1)(2)
Derivatives
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.
2018
€ m
133
66
115
134
129
253
162
147
167
98
42
1,313
12
1,325
1,117
1,430
2,547
202
20
24
387
1
214
103
37
594
215
1
1,576
1,576
333
–
6,136
2017
€ m
114
79
169
129
143
297
153
166
198
39
40
1,413
12
1,425
1,274
1,166
2,440
261
(45)
24
494
1
242
100
37
626
240
1
1,765
1,765
365
3
6,328
AIB Group plc Annual Financial Report 2018 315
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Notes to the consolidated financial statements
34 Retirement benefits (continued)
Sensitivity analysis for principal assumptions used to measure scheme liabilities
There are inherent uncertainties surrounding the financial assumptions adopted in calculating the actuarial valuation of the pension
schemes. Set out in the table below is a sensitivity analysis of the key assumptions for the Irish scheme and the UK scheme at
31 December 2018.
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 change in life expectancy)
Irish scheme
defined benefit obligation
Decrease
€ m
Increase
€ m
UK scheme
defined benefit obligation
Decrease
€ m
Increase
€ m
(165)
45
106
176
(42)
(104)
(38)
37
29
40
(36)
(29)
Maturity of the defined benefit obligation
The weighted average duration of the Irish scheme at 31 December 2018 is 17 years and of the UK scheme at 31 December 2018 is
17 years.
Asset-liability matching strategies
Since 2012, the Irish Scheme has reduced its level of equities from c. 63% to c. 30%, put an equity protection strategy in place and
increased the level of bonds and liability matching assets. 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.
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 2018, the Group contributed € 9 million (2017: € 8 million) towards insuring this benefit. This amount is included in administrative
expenses (note 13).
316
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35 Deposits by central banks and banks
Central banks
Eurosystem refinancing operations(1)
Other borrowings – secured
– unsecured
Banks
Securities sold under agreements to repurchase
Other borrowings – unsecured
Amounts include:
Due to associated undertakings
2018
€ m
–
279
175
454
145
245
390
844
–
2017
€ m
1,900
–
500
2,400
901
339
1,240
3,640
–
(1)Eurosystem refinancing operations are credit facilities from the Eurosystem secured by a fixed charge over securities. These were fully repaid during 2018.
Securities sold under agreements to repurchase mature within six months and are secured by Irish Government bonds, other mar-
ketable securities and eligible assets. These agreements are completed under market standard Global Master Repurchase Agreements.
Deposits by central banks and banks include cash collateral at 31 December 2018 of € 177 million (2017: € 166 million) received from
derivative counterparties in relation to net derivative positions (note 47) 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
1,689
–
1,689
Banks
€ m
200
107
93
2018
Total
€ m
1,889
107
1,782
Central
banks
€ m
3,462
–
3,462
Banks
€ m
954
696
258
2017
Total
€ m
4,416
696
3,720
(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.
AIB Group plc Annual Financial Report 2018 317
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Notes to the consolidated financial statements
36 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
2018
€ m
36,853
15,728
15,117
1
67,699
29,635
38,064
67,699
2017
€ m
33,179
14,007
17,305
81
64,572
28,977
35,595
64,572
253
191
(1)At 31 December 2018, the Group had pledged government investment securities with a fair value of € 1 million (2017: € 71 million) and non-government
investment securities with a fair value of Nil (2017: € 12 million) as collateral for these facilities (see note 47 for further information).
Customer accounts include cash collateral of € 113 million (2017: € 34 million) received from derivative counterparties in relation to net
derivative positions (note 47).
At 31 December 2018, the Group’s five largest customer deposits amounted to 1% (2017: 1%) of total customer accounts.
37 Trading portfolio financial liabilities
Debt securities:
Government securities
For contractual residual maturity see ‘Risk management’ – 3.4 Liquidity risk.
2018
€ m
–
–
2017
€ m
30
30
318
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38 Debt securities in issue
AIB Group plc
Euro Medium Term Note Programme
Global Medium Term Note Programme
Other issuances
Bonds and medium term notes:
Euro Medium Term Note Programme
Bonds and other medium term notes
Analysis of movements in debt securities in issue
At 1 January
Issued during the year
Matured
Amortisation of discounts net of premiums
Exchange translation adjustments
At 31 December
2018
€ m
1,000
655
1,655
1,000
3,090
4,090
5,745
2018
€ m
4,590
1,651
(500)
–
4
5,745
2017
€ m
–
–
–
1,000
3,590
4,590
4,590
2017
€ m
6,880
412
(2,686)
–
(16)
4,590
In March 2018, AIB Group plc issued € 500 million Senior Unsecured 1.50% Notes maturing on 29 March 2023. The notes bear interest
on the outstanding nominal amount, payable annually in arrears on 29 March each year.
In July 2018, AIB Group plc issued € 500 million Senior Unsecured 2.25% Notes maturing on 3 July 2025. The notes bear interest on
the outstanding nominal amount, payable annually in arrears on 3 July each year.
In October 2018, AIB Group plc issued US $ 750 million unsecured 4.75% notes maturing on 12 October 2023. The notes bear
interest on the outstanding nominal amount, payable semi-annually in arrears on 12 April and 12 October each year.
In 2018, the Group did not issue debt securities under the short-term commercial paper programme (2017: € 412 million issued and
matured under this programme).
Debt securities which matured amounted to € 500 million (2017: € 2,686 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.
(note 50)).
39 Other liabilities
Notes in circulation
Items in transit
Creditors
Fair value of hedged liability positions
Other(1)
2018
€ m
313
65
17
64
428
887
2017
€ m
333
109
19
43
320
824
(1)Includes bank drafts € 154 million (31 December 2017: € 141 million), items in course of collection € 79 million (2017: € 26 million) and the purchase of debt
securities awaiting settlement € 13 million (31 December 2017: Nil).
AIB Group plc Annual Financial Report 2018 319
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2018
Total
€ m
231
–
36
267
(14)
207
(86)
(155)
219(5)
2017
Total
€ m
246
–
(4)
121
(34)
(98)
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Notes to the consolidated financial statements
40 Provisions for liabilities and commitments
Liabilities Onerous
and contracts
charges
Legal
claims provisions
Other ECLs on
loan
ECLs on
financial
commit- guarantee
contracts
ments
At 31 December 2017
Impact of adopting IFRS 9 at 1 January 2018:
Reclassification(1)
Remeasurement(1)
Restated balance at 1 January 2018
Transfers out
Charged to income statement
Released to income statement
Provisions utilised
At 31 December 2018
€ m
31
(31)
–
–
–
–
–
–
–
€ m
59
–
–
59
–
89(2)
(54)(2)
(29)
65
€ m
37
–
–
37
–
8(2)
(4)(2)
(2)
39
€ m
104
(1)
–
103
–
85(2)
(7)(2)
(124)
57
€ m
–
–
16
16
–
19(3)
(10)(3)
–
25
€ m
–
32
20
52
(14)
6(3)
(11)(3)(4)
–
33
At 1 January
Transfers in
Exchange translation adjustments
Charged to income statement
Released to income statement
Provisions utilised
At 31 December 2017
Liabilities
and
charges
€ m
47
–
(3)
2(6)
(10)(6)
(5)
31
Onerous
contracts
Legal
claims
Other
provisions
€ m
12
–
–
52(2)
(1)(2)
(4)
59
€ m
32
4
–
7(2)
(4)(2)
(2)
€ m
155
(4)
(1)
60(2)
(19)(2)
(87)
37
104
231(5)
(1)For details of the impact of adopting IFRS 9 at 1 January 2018, see note 3.
(2)Included in ‘Other general and administrative expenses’ in note 13 ‘Administrative expenses’.
(3)Included in ‘Net credit impairment writeback’, note 15.
(4)€ 2 million included in ‘Net gain on derecognition of financial assets measured at amortised cost’, note 11.
(5)Excluding the ECLs on loan commitments and financial guarantee contracts, the total provisions for liabilities and commitments expected to be settled within
one year amount to € 71 million (31 December 2017: € 150 million).
(6)Included in writeback of provisions for liabilities and commitments in income statement at 31 December 2017.
(a) Other provisions
Includes the provisions for customer redress and related matters, other restitution provisions, and miscellaneous provisions.
Tracker Mortgage Examination
Provisions amounting to € 135 million were created in the period 2015 to 2017 relating 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 have expected (Tracker Mortgage
Examination). The Group determined that a further € 35 million was required during 2018 for customer redress and compensation,
including payments arising on appeals.
Over € 160 million of the provision has now been utilised (€ 95 million at 31 December 2017). As a result, the provision at 31 December
2018 is € 10 million which is required for the remaining customers that have yet to receive redress and compensation. Payments are
expected to complete in early 2019. The residual amount reflects the advanced stage of the examination process in the Group.
The Group also created provisions of € 95 million with regard to ‘Other Costs’ during the period 2015 to 2017. During 2018, € 2 million
was released to the Income statement. € 88 million has now been utilised (€ 68 million at 31 December 2017) leaving a provision at
31 December 2018 of € 5 million. Further disclosures in relation to the wider impact of the Tracker Mortgage Examination are contained
in Note 48: Memorandum items: contingent liabilities and commitments, and contingent assets in the section ‘Legal Proceedings’.
320
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40 Provisions for liabilities and commitments (continued)
(b) Onerous contracts
Arising from the Group’s property strategy, the Group will exit certain office space. In this regard, the Group made an onerous lease
provision amounting to € 87 million in 2018 as further office space was identified to exit following a Board decision in 2018. The required
provision represents the unavoidable costs which are expected to arise when exiting the office space identified under the strategy.
During 2018, € 26 million of the provision was utilised. In 2017, a provision of € 52 million was made in respect of the property strategy.
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(c) IFRS 9
At 1 January 2018, the Group adopted IFRS 9. This resulted in the provision for ECLs on loan commitments amounting to € 16 million
and ECLs on financial guarantee contracts amounting to € 20 million. In addition, a provision amounting to € 32 million previously held
was reclassified to ECLs on financial guarantees.
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41 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
2018
€ m
2017
€ m
750
10
34
1
795
2018
€ m
795
750
9
33
1
793
2017
€ m
793
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 capital instruments. 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, and payment of coupons became optional at the discretion of the Group. The Board of Allied Irish Banks, p.l.c. has considered the
matter and as at the date of this report, the Group’s position is that coupons are not paid on these instruments. These instruments will
amortise to their nominal value in the period to their maturity in 2035.
AIB Group plc Annual Financial Report 2018 321
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Notes to the consolidated financial statements
42 Share capital
Authorised
Ordinary share capital
Subscriber Shares of € 0.625 each
Ordinary shares of € 0.625 each
Total
Issued and fully paid
Ordinary share capital
At 1 January
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
31 December 2018
31 December 2017
Number of
shares
€
Number of
shares
€
40,000
4,000,000,000
25,000
2,500,000,000
40,000
4,000,000,000
25,000
2,500,000,000
4,000,040,000
2,500,025,000
4,000,040,000
2,500,025,000
2,714,421,237
1,696,513,273
2(1)(2)
1(1)(2)
–
–
–
–
39,998(2)
24,999(2)
2,714,381,237
6,704,521,655
€ 2.47 per share to € 0.625 per share
Redemption of Subscriber Shares of € 0.625 each
–
(40,000)
–
(25,000)
(5,008,033,382)
–
–
At 31 December
Subscriber Shares of € 0.625 each
Ordinary shares of € 0.625 each
Total
(1)These had been issued on incorporation.
(2)Converted to Subscriber Shares during 2017.
–
2,714,381,237
–
1,696,488,273
40,000
2,714,381,237
25,000
1,696,488,273
2,714,381,237
1,696,488,273
2,714,421,237
1,696,513,273
In November 2018, the Subscriber Shares were cancelled and redeemed at par.
The table above is summarised as follows:
Authorised
Ordinary share capital
Ordinary shares of € 0.625 each
Issued
Ordinary share capital
Ordinary shares of € 0.625 each
(1)Reduction due to rounding.
31 December 2018
31 December 2017
Number of
shares
m
Number of
shares
m
€ m
€ m
4,000.0
2,500
4,000.0
2,500
2,714.4
1,696(1)
2,714.4
1,697(1)
2017
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 shares 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.
322
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42 Share capital (continued)
2017
Pursuant to the Scheme of Arrangement described in note 46 ‘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.
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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 46).
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.
2018
In November 2018, the Subscriber Shares were cancelled and redeemed at par.
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 46). Allied Irish Banks, p.l.c. warrants were cancelled on that date.
Structure of the Company’s share capital
The following table shows the structure of the Company’s share capital:
Class of share
Ordinary share capital
Capital resources
The following table shows the Group’s capital resources:
Equity
Dated capital notes (note 41)
Total capital resources
31 December 2018
Issued
share
capital
%
Authorised
share
capital
%
31 December 2017
Issued
share
capital
%
Authorised
share
capital
%
100
100
100
100
31 December
2018
€ m
13,858
795
14,653
2017
€ m
13,612
793
14,405
AIB Group plc Annual Financial Report 2018 323
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Notes to the consolidated financial statements
43 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 were held by trustees with a carrying value of € 23 million. The carrying value was deducted from
revenue reserves while the shares were held by the Group. These shares were disposed of in full during 2018 with the proceeds of disposal
being credited directly to equity.
44 Other equity interests
At beginning and end of year
2018
€ m
494
2017
€ 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 of 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.
324
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45 Capital reserves, merger reserve and capital redemption reserves
Capital reserves
At 1 January
Transfer to revenue reserves:
Anglo business transfer
At 31 December
(1)Relates to the acquisition of EBS d.a.c.
Capital
contribution
reserves
€ m
Other
capital
reserves
€ m
955(1)
–
955(1)
178
–
178
2018
Total
€ m
1,133
–
1,133
Capital
contribution
reserves
€ m
Other
capital
reserves
€ m
2017
Total
€ m
1,021
178
1,199
(66)
955(1)
–
(66)
178
1,133
The capital contribution reserves arose from the acquisition of Anglo deposit business and EBS. The capital contribution reserves which
arose on the Anglo business transfer are now deemed to be distributable having been fully transferred to revenue reserves at
31 December 2017, thereby, meeting the conditions for distribution outlined in accounting policy (ab) in note 1.
Merger reserve
At end of year
2018
€ m
(3,622)
2017
€ m
(3,622)
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
was 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 46).
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
2018
€ m
14
2017
€ m
14
During 2018, the Group cancelled and redeemed at par outstanding Subscriber Shares (note 42). An amount equal to the nominal
value of shares redeemed was credited to capital redemption reserves from revenue reserves.
AIB Group plc Annual Financial Report 2018 325
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Notes to the consolidated financial statements
46 Corporate restructuring
In 2017, the Group implemented the Single Resolution Board’s preferred resolution strategy for AIB Group which consisted of a single
point of entry via a holding company.
Accordingly, Allied Irish Banks, p.l.c. undertook a corporate restructuring during 2017 which comprised three principal 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.
On 8 December 2017, Allied Irish Banks, p.l.c. was acquired by AIB Group plc.
Under the Scheme of Arrangement, 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 were 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 was treated as an unrealised profit, a ‘merger reserve’. As required by Section 72, no
share premium was created.
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. was a common control transaction. This business combination was presented similar to that for a reverse acquisition where
the existing parent, Allied Irish Banks, p.l.c. was determined to be the accounting acquirer. The consolidated financial statements in
2017 incorporated 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 reflected both entities full year’s results.
Whilst the consolidated financial statements were issued under the name of the legal parent, AIB Group plc, these were, in effect, a
continuation of the financial statements of the legal subsidiary, Allied Irish Banks, p.l.c. with one adjustment, which was to adjust
retroactively the accounting acquirer’s legal capital to reflect the legal capital of the accounting acquiree, AIB Group plc.
(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/Euronext
Dublin and the London Stock Exchange on 11 December 2017 following the Scheme of Arrangement becoming effective (note 46).
See note 54 ‘Related Party Transactions – Relationship with the Irish Government’.
(c) AIB Group plc capital reduction
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.
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47 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.
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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 advances 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
€ 325 million at 31 December 2018 (2017: € 534 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 2018, € 609 million (2017: € 522 million) of CSAs are included within
financial assets and € 266 million (2017: € 193 million) of CSAs are included within financial liabilities.
AIB Group plc Annual Financial Report 2018 327
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Notes to the consolidated financial statements
47 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 2018 and 2017:
Gross
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
€ m
Related amounts not
offset in the statement
of financial position
Financial
collateral
(including
cash
collateral)
received
€ m
Financial
position instruments
€ m
586
–
3,500
4,086
(3,500)
(3,500)
586
–
586
(325)
(201)
–
(325)
–
(201)
Gross
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
€ m
Related amounts not
offset in the statement
of financial position
Financial
collateral
(including
cash
collateral)
pledged
€ m
Financial
position instruments
€ m
2018
Net
amount
€ m
60
–
60
2018
Net
amount
€ m
3,645
(3,500)
145
(157)
(16)
(28)
1
875
–
–
1
875
4,521
(3,500)
1,021
(1)
(325)
(483)
–
(544)
(560)
–
6
(22)
Financial assets
Derivative financial instruments
Loans and advances to banks –
Reverse repurchase agreements
Note
24
25
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
35
36
24
Total
328
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47 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
Gross
amounts of
recognised
financial
assets
€ m
776
–
776
(534)
(193)
1,703
(1,700)
19
–
2,498
(1,700)
3
19
798
(3)
(19)
(556)
–
–
(193)
Gross
amounts of
recognised
financial
assets
offset in the
statement
of financial
position
€ m
Net
amounts of
financial
liabilities
presented
in the
statement
of financial
position
€ m
Related amounts not
offset in the statement
of financial position
Financial
collateral
(including
cash
collateral)
pledged
€ m
Financial
instruments
€ m
Gross
amounts of
recognised
financial
liabilities
€ m
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
Financial assets
Derivative financial instruments
Loans and advances to banks –
Reverse repurchase agreements
Loans and advances to customers –
Reverse repurchase agreements
Note
24
25
26
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
35
36
24
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 advances to banks – amortised cost;
loans and advances to customers – amortised cost and FVTPL;
deposits by central banks and banks – amortised cost; and
customer accounts – amortised cost.
AIB Group plc Annual Financial Report 2018 329
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Notes to the consolidated financial statements
47 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 2018 and 2017:
Net amounts
of financial
assets presented
in the statement
of financial position
€ m
Line item in
statement of
financial position
Carrying
amount in
statement
of financial
position
€ m
2018
Financial
assets not
in scope of
offsetting
disclosures
€ m
586
Derivative financial instruments
900
314
–
–
Loans and advances to banks
1,443
1,443
Loans and advances to customers
60,868
60,868
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
2018
Financial
liabilities not
in scope of
offsetting
disclosures
€ m
Financial assets
Derivative financial instruments
Loans and advances to banks –
Reverse repurchase agreements
Loans and advances 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
145
1
875
Deposits by central banks and banks
844
699
Customer accounts
Derivative financial instruments
67,699
934
67,698
59
Net amounts
of financial
assets presented
in the statement
of financial position
€ m
Line item in
statement of
financial position
776
Derivative financial instruments
3
Loans and advances 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
19
Loans and advances 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
Financial assets
Derivative financial instruments
Loans and advances to banks –
Reverse repurchase agreements
Loans and advances 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
81
1,098
Customer accounts
Derivative financial instruments
64,572
1,170
64,491
72
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48 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
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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 table gives 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
2018
€ m
2017
€ m
627
153
780
91
7,932
3,084
11,107
11,887
612
268
880
63
7,543
2,625
10,231
11,111
(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.
For details of the internal credit ratings and geographic concentration of contingent liabilities and commitments, see pages 96 and 98
in the ‘Risk management’ section of this report.
Provisions for ECLs on loan commitments and financial guarantee contracts are set out in note 40.
AIB Group plc Annual Financial Report 2018 331
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Notes to the consolidated financial statements
48 Memorandum items: contingent liabilities and commitments, and contingent assets (continued)
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 Group is aware, (other than as set out in the following paragraphs), 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.
In March 2018, AIB and EBS were advised by the CBI of the commencement of investigations as part of an administrative sanctions
procedure in connection with the Tracker Mortgage Examination. The investigations relate to alleged breaches of the relevant consumer
protection legislation, principally regarding inadequate controls or instances where AIB or EBS acted with a lack of transparency, unfairly
or without due skill and care. The investigations are ongoing and AIB and EBS are co-operating with the CBI in this regard.
In addition, litigation has been served on the Group by customers that are pursuing claims in relation to tracker mortgages.
Further cases may be served in the future in relation to tracker mortgages.
Based on the facts currently known and the current stages that the investigations and litigation are at, it is not practicable at this time to
predict the final outcome of these investigations and litigation, nor the timing and possible impact, including any monetary penalties, on
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 participates in the TARGET 2-Ireland system, the Irish component of TARGET 2, which is the real time gross settlement system for
large volume interbank payments in euro. The following disclosures relate to charges provided by AIB to secure its payment obligations
arising from participation in TARGET 2.
On 15 February 2008, AIB executed a deed of charge pursuant to which it created a first floating charge in favour of the Central Bank of
Ireland (Central Bank) over all of its right, title, interest and benefit, present and future, in and to the balances then or at any time
standing to the accounts held by AIB with any Eurosystem central bank for the purpose of participation in TARGET 2.
In addition, AIB and the Central Bank entered into a Framework Agreement in respect of Eurosystem Operations (dated 7 April 2014),
which include the credit line facility for intra-day credit in TARGET 2-Ireland. In order to secure its obligations under the Framework
Agreement, AIB executed a deed of charge (dated 7 April 2014). Pursuant to the deed, AIB created a first fixed charge in favour of the
Central Bank over all of its right, title, interest and benefit, present and future, in and to eligible assets (as identified as such by the
Central Bank) which are held in a designated collateral account.
Both deeds of charge contain provisions that 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 property subject to the floating
charge 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.
In addition, under the 2014 charge, AIB undertakes not to sell, transfer, lend or otherwise dispose of or deal in the assets subject to the
fixed charge or any part thereof or, in each case, 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.
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49 Subsidiaries and consolidated structured entities
The following are the material subsidiary companies of the Group at 31 December 2018 and 2017:
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 in 2017);
– Emerald Mortgages No. 5 d.a.c.;
– Mespil 1 RMBS d.a.c.;
– AIB PFP Scottish Limited Partnership.
Further details on these SPEs are set out in note 50.
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 interests in unconsolidated structured entities.
AIB Group plc Annual Financial Report 2018 333
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Notes to the consolidated financial statements
50 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 the Treasury function;
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. All outstanding shares held by Trustees were disposed of during 2018 (note 43 ‘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 IFRS 9 Financial Instruments:
(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 35) and ‘Customer accounts’ (note 36). 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 35 and 36. 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
334
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50 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 held by external investors included within
‘Debt securities in issue’ (note 38). 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
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securities of this type issued amounting to € 12.5 billion, internal Group companies hold € 9.4 billion which are eliminated on
consolidation.
Special purpose entities
Securitisations are transactions in which the Group sells loans and advances 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 38). 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.
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
A liquidator was appointed to this company in December 2017 following the redemption of all outstanding loan notes.
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 2018 is € 967 million (2017: € 1,084 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 2018 is € 636 million (2017: € 684 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 2018 335
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Notes to the consolidated financial statements
50 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 2018 and 2017 which did not
qualify for derecognition together with their associated financial liabilities:
Carrying
amount of
transferred
assets
Carrying
amount of
associated
liabilities held
by third parties
€ m
€ m
Carrying
amount of
associated
liabilities held
by Group
companies
€ m
Sale and repurchase agreements/
similar products
3,285(1) (2)
146(1)
Covered bond programmes
Residential mortgage backed
4,298(3)
3,090
–
–
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
Sale and repurchase agreements/
similar products
2,718(1) (2)
982(1)
Covered bond programmes
Residential mortgage backed
6,543(3)
3,590
–
–
Fair
value of
transferred
assets
Fair value
of associated
liabilities
held by third
parties
€ m
3,285
€ m
146
4,234
3,183
Fair value
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
–
–
2018
Net
fair value
position
€ m
3,139
1,051
2017
Net
fair value
position
€ m
1,736
2,517
(1)See notes 35 and 36.
(2)Includes € 3,084 million of assets pledged in relation to securities lending arrangements (2017: € 1,681 million).
(3)The asset pools € 18 billion (2017: € 18 billion) in the covered bond programme have been apportioned on a pro-rata basis in relation to the value of
bonds held by external investors and those held by the Group companies. The € 4,298 million (2017: € 6,543 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. It has been agreed with the Trustees of the UK Scheme to extend the deadline for
completing the triennial valuation into 2019.
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.
336
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50 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 advances
previously transferred at fair value from the Group. The loans and advances 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 advances transferred. Under the servicing
agreement, the Group subsidiary company collects the cash flows on the transferred loans and advances 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 advances 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 2018, the Group recognised € 0.8 million
(cumulative € 6.9 million) (2017: € 0.8 million (cumulative € 6.1 million)) in the income statement for the servicing of the loans and
advances 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 advances 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 2018, the Group recognised € 3 million
(cumulative € 91 million) (2017: € 2 million (cumulative € 88 million)) in the income statement for the servicing of financial assets
transferred to NAMA.
AIB Group plc Annual Financial Report 2018 337
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Notes to the consolidated financial statements
51 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 at 31 December 2018 the carrying amounts of the financial assets and financial liabilities by measurement
category as defined in IFRS 9 Financial Instruments and by statement of financial position heading. Comparative data for 31 December
2017 has been prepared under IAS 39.
At amortised cost
2018
Total
Loans
and
advances
€ m
5,908
73
–
1,443
60,721
–
–
Other
€ m
€ m
608(1)
–
–
–
–
187
640
6,516
73
900
1,443
60,868
16,861
640
Cash flow
hedge
derivatives
€ m
–
–
244
–
–
–
–
244
68,145
1,435
87,301
–
–
196
–
–
–
196
–
–
–
–
–
–
–
844
844
67,699
67,699
–
5,745
795
1,075
934
5,745
795
1,075
76,158
77,092
At fair value through
profit or loss
Mandatorily
At fair value through other
comprehensive income
Debt
Equity
investments investments
Financial assets
Cash and balances at central banks
Items in course of collection
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Investment securities
Other financial assets
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
€ m
€ m
€ m
–
–
656(2)
–
147
260
–
1,063
–
–
738(3)
–
–
–
738
–
–
–
–
–
15,946
–
15,946
–
–
–
–
–
–
–
–
–
–
–
–
468
–
468
–
–
–
–
–
–
–
(1)Comprises cash on hand.
(2)Held for trading € 517 million and fair value hedges € 139 million.
(3)Held for trading € 534 million and fair value hedges € 204 million.
338
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51 Classification and measurement of financial assets and financial liabilities (continued)
At fair value through
profit or loss
At fair value
through equity
At amortised cost
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2017
Total
Fair value
hedge
derivatives
€ m
Cash flow
hedge
derivatives
€ m
Available
for sale
securities
€ m
Loans
and
advances
€ m
Other
€ m
€ m
Held for
trading
Financial assets
Cash and balances at central banks
Items in course of collection
Trading portfolio financial assets
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Financial investments available for sale
Other financial assets
€ 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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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
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Notes to the consolidated financial statements
52 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 advances, involves the application of judgement and estimation. Market and
credit risks are key assumptions in the estimation of the fair value of loans and advances. 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, those whose contractual terms do
not give rise on specified dates to cash flows that are solely payments of principal and interest (“SPPI”), and financial instruments in fair
value hedge relationships are subsequently measured at fair value through profit or loss. Financial assets in a held-to-collect-and-sell
business model which pass the SPPI test and cash flow hedge derivatives are subsequently measured at fair value through other
comprehensive income (‘FVOCI’).
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 2018.
The methods used for calculation of fair value in 2018 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 (2017: 60%).
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52 Fair value of financial instruments (continued)
The Group applies a FVA in 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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negative adjustment, contains within it the benefit of own credit.
Within the range of estimates and fair value sensitivity measurements, a favourable and an adverse scenario have been selected for
PDs and LGDs for CVA. The favourable/adverse scenario for customer PDs are (i) a single rating upgrade and (ii) a single rating
downgrade, respectively. Customer LGDs are shifted according to estimates of improvement in value of security compared with potential
derivatives market values. Within the combination of LGD and PD, both are shifted together yielding positive and negative valuations
which are disclosed as potential alternative valuations on page 347. 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.
Investment securities
The fair value of investment securities 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.
Loans and advances 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 and taking credit risk into account .
In addition to the assumptions set out above under valuation techniques regarding cash flows and discount rates, a key assumption for
loans and advances 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.
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.
The majority of loans and advances to customers are held at amortised cost, however, the Group has a small number of loans and
advances which are required to be measured at fair value through profit or loss (‘FVTPL’) having failed the SPPI test. The valuation
techniques used apply equally to those held at FVTPL and those held at amortised cost.
Financial instruments not measured at fair value but with fair value information presented separately in the
notes to the financial statements
Loans and advances to banks
The fair value of loans and advances 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 advances to customers at amortised cost
See methodology under the heading ‘Loans and advances to customers’.
AIB Group plc Annual Financial Report 2018 341
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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
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Page 342
Notes to the consolidated financial statements
52 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.
Subordinated liabilities and 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 and
accounts payable). 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 48. 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 2018 and 2017:
342
AIB Group plc Annual Financial Report 2018
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Page 343
52 Fair value of financial instruments (continued)
Carrying amount
Financial assets measured at fair value
Derivative financial instruments:
Interest rate derivatives
Exchange rate derivatives
Equity derivatives
Loans and advances to customers at FVTPL
Investment debt securities at FVOCI:
Government securities
Supranational banks and government agencies
Asset backed securities
Bank securities
Corporate securities
Equity investments at FVOCI
Equity investments at FVTPL
Financial assets not measured at fair value
Cash and balances at central banks
Items in the course of collection
Loans and advances to banks
Loans and advances to customers:
Mortgages(2)
Non-mortgages
Total loans and advances to customers
Investment debt securities at amortised cost
Other financial assets
Financial liabilities measured at fair value
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
Subordinated liabilities and other capital instruments
Other financial liabilities
(1)Comprises cash on hand.
(2)Includes residential and commercial mortgages.
A
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n
u
a
l
R
e
v
e
w
i
i
B
u
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n
e
s
s
R
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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
Fair value hierarchy
Level 1
€ m
Level 2
€ m
Level 3
€ m
–
–
–
–
8,361
1,132
284
5,755
224
–
23
489
38
14
–
–
–
83
67
31
–
1
359
–
–
147
–
–
–
–
9
468
236
2018
Total
€ m
848
38
14
147
8,361
1,132
367
5,822
264
468
260
€ m
848
38
14
147
8,361
1,132
367
5,822
264
468
260
17,721
15,779
723
1,219
17,721
6,516
73
1,443
31,715
29,006
60,721
187
640
69,580
901
24
5
4
934
420
424
36,853
15,728
15,117
1
5,745
795
1,075
76,158
608(1)
–
–
–
–
–
–
–
5,908
–
589
–
–
–
–
–
–
73
854
30,656
29,095
59,751
184
640
6,516
73
1,443
30,656
29,095
59,751
184
640
608
6,497
61,502
68,607
–
–
–
–
–
–
–
–
–
–
–
5,717
762
–
6,479
779
24
5
4
812
175
274
–
–
–
–
101
76
–
626
122
–
–
–
122
245
145
36,853
15,728
15,146
1
–
–
1,075
69,193
901
24
5
4
934
420
419
36,853
15,728
15,146
1
5,818
838
1,075
76,298
AIB Group plc Annual Financial Report 2018 343
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Page 344
Notes to the consolidated financial statements
52 Fair value of financial instruments (continued)
Carrying amount
Fair value
Fair value hierarchy
Level 2
€ m
Level 1
€ m
Level 3
€ m
32
–
–
–
9,588
1,368
278
4,336
56
16
1
667
29
33
–
–
16
–
–
1
–
427
–
–
–
–
–
–
–
662
€ m
33
1,094
29
33
9,588
1,368
294
4,336
56
679
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
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 advances to banks
Loans and advances to customers:
Mortgages(2)
Non-mortgages
Total loans and advances 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.
344
AIB Group plc Annual Financial Report 2018
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Page 345
52 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 2018 and
2017.
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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:
Financial assets
Loans and
advances
at FVTPL
Equities
at
FVTPL
2018
Financial liabilities
Total Derivatives
Total
Derivatives
€ m
427
–
–
(68)
–
(68)
–
–
–
–
–
–
–
At 31 December 2017
IFRS 9 transition adjustments at
1 January 2018
Transfers into/out of level 3(1)
Total gains or (losses) in:
Profit or loss:
Net trading income
Net change in FVTPL
Other comprehensive income:
Net change in fair value of
investment securities
Net change in fair value of
cash flow hedges
Purchases/additions
Sales/disposals
Settlements
Cash received:
Principal
At 31 December 2018
359
Investment
securities
Debt Equities
at FVOCI
€ m
€ m
–
–
–
–
–
–
–
–
–
9
–
–
–
9
662
(196)
–
–
–
–
2
–
2
–
–
–
–
468
€ m
–
156
–
–
105
105
–
–
–
32
(53)
–
(93)
147
€ m
€ m
–
1,089
€ m
119
€ m
119
196
156
–
–
41
41
–
–
–
21
(22)
–
–
–
(68)
146
78
2
–
2
62
(75)
–
(93)
–
–
3
–
3
–
–
–
–
–
–
–
–
–
3
–
3
–
–
–
–
–
–
–
236
1,219
122
122
(1)Transfers between levels of the fair value hierarchy are recognised at the end of the reporting period during which the change occurred.
There were no transfers into/out of Level 3 during 2018.
AIB Group plc Annual Financial Report 2018 345
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a
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a
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a
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d
O
v
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g
h
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F
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a
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i
a
l
S
t
a
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e
m
e
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Page 346
Notes to the consolidated financial statements
52 Fair value of financial instruments (continued)
Reconciliation of balances 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
Derivatives
€ m
509
2
(7)
(74)
–
(74)
–
(3)
(3)
–
–
–
427
Financial assets
Available for
sale equity
securities
€ m
604
–
–
–
48
48
5
–
5
56
(51)
–
662
2017
Financial liabilities
Total
Derivatives
Total
€ m
1,113
2
(7)
(74)
48
(26)
5
(3)
2
56
(51)
–
€ m
161
–
–
(30)
–
(30)
–
(9)
(9)
–
–
(3)
€ m
161
–
–
(30)
–
(30)
–
(9)
(9)
–
–
(3)
1,089
119
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.
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 2018 and 2017:
Net trading income – gains
Gains on equity investments at FVTPL
Gains on loans and advances at FVTPL
2018
€ m
40
41
22
103
2017
€ m
46
–
–
46
346
AIB Group plc Annual Financial Report 2018
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Page 347
52 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 2018 and 2017 in
measuring financial instruments categorised as Level 3 in the fair value hierarchy:
A
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u
a
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R
e
v
e
w
i
Fair Value
31 December 31 December
Financial
instrument
Uncollateralised Asset
customer
Liability
derivatives
2018
€ m
359
122
2017 Valuation
€ m technique
427 CVA
119
Significant
unobservable
input
LGD
PD
Range of estimates
31 December
2018
43% – 67%
(Base 54%)
31 December
2017
41% – 65%
(Base 53%)
0.4% – 1.1%
(Base 0.7% 1 year PD)
0.6% – 1.3%
(Base 0.9% 1 year PD)
FVA
Funding spreads
(0.3%) to 0.6%
(0.3%) to 0.3%
Asset
468
466 Discounted
cash flows
Discount rate
1% – 5%
(Base 2.49%)
2.79% – 6.0%
(Base 3.98%)
Asset
109
92 Quoted market Final conversion
0% – 80%
0% –90%
price (to which rate
a discount has
been applied)
Asset
147
– Discounted
cash flows*
Collateral
values
Discount on market
value
Collateral changes
(3%) – 12%
0% – 6%
–
–
NAMA
subordinated
bonds
Visa Inc.
Series B
Preferred
Stock
Loans and
advances to
customers
measured at
FVTPL
*Expected cash flows discounted at market rates, taking into consideration the fair value of collateral where relevant.
Uncollateralised customer derivatives
The fair value measurement sensitivity to unobservable inputs at 31 December 2018 ranges from (i) negative € 35 million to positive
€ 19 million for CVA (31 December 2017: negative € 39 million to positive € 23 million) and (ii) negative € 10 million to positive € 5 million
for FVA (31 December 2017: negative € 7 million to positive € 6 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 rates ranges from negative € 14 million to positive € 9 million at
31 December 2018 (31 December 2017: negative € 18 million to positive € 12 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 illiquidity
and the conversion rate variability of the preferred stock of Visa Inc. 45% haircut (2017: 45%). 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) 80% discount for conversion rate variability.
Loans and advances to customers measured at FVTPL
The fair value measurement sensitivity to unobservable collateral values and interest rates ranges from negative € 2 million to positive
€ 13 million at 31 December 2018.
Fair value is applied in respect of secondary facilities arising on restructured loans subject to forbearance measures, on the likelihood
that additional cash flows, in excess of their primary facilitates, will be received from customers. Given the significant uncertainty with
regard to such cash flows, the Group does not attribute a fair value unless it is reasonably certain that this value will be realised.
AIB Group plc Annual Financial Report 2018 347
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n
a
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a
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d
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g
h
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a
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i
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S
t
a
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e
m
e
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Page 348
Notes to the consolidated financial statements
52 Fair value of financial instruments (continued)
Sensitivity of Level 3 measurements
The implementation of valuation techniques involves a considerable degree of judgement. While the Group believes its estimates of fair
value are appropriate, the use of different measurements or assumptions could lead to different fair values. The following table sets out
the impact of using reasonably possible alternative assumptions in the valuation methodology at 31 December 2018 and 2017:
Classes of financial assets
Derivative financial instruments
Investment securities – equity
Loans and advances measured at FVTPL
Total
Classes of financial liabilities
Derivative financial instruments
Total
Level 3
2018
Effect on income
statement
Favourable Unfavourable
€ m
€ m
Effect on other
comprehensive income
Favourable Unfavourable
€ m
€ m
22
40(1)
13
75
1
1
(43)
(60)(1)
(2)
(105)
(2)
(2)
–
9
–
9
–
–
–
(14)
–
(14)
–
–
(1)Relates to the largest equity investment, the carrying value of which was € 109 million at 31 December 2018. Sensitivity information has not been provided
for other equities as the portfolio comprises several investments, none of which is individually material.
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)
–
–
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.
348
AIB Group plc Annual Financial Report 2018
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Page 349
53 Statement of cash flows
Non-cash and other items included in profit before taxation
Non-cash items
Profit on disposal of property
Loss on disposal of business
Net gain on derecognition of financial assets measured at amortised cost
Dividends received from equity investments
Dividends/distribution received from associated undertakings and joint venture
Associated undertakings and joint venture
Net credit impairment writeback
Net provisions for liabilities and commitments
Change in other provisions
Retirement benefits – defined benefit expense/(income)
Depreciation, amortisation and impairment
Interest on subordinated liabilities and other capital instruments
Gain on disposal of investment securities
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
Net gain on equity investments measured at FVTPL
Net gain on loans and advances to customers at FVTPL
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 investments
Total other items
Non-cash and other items for the year ended 31 December
2018
€ m
(2)
22
(121)
(26)
(10)
(12)
(84)
–
117
8
162
32
(24)
9
–
71
–
(41)
(22)
5
(26)
(16)
42
(72)
26
(46)
(4)
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)
(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 2018 349
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w
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i
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s
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M
a
n
a
g
e
m
e
n
t
G
o
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r
n
a
n
c
e
a
n
d
O
v
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r
s
g
h
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i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
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Page 350
Notes to the consolidated financial statements
53 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 advances to banks
Change in loans and advances 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 notes in circulation
Change in other liabilities
2018
€ m
30
33
94
(98)
(884)
–
85
(740)
2018
€ m
(2,831)
3,140
(30)
1,151
(20)
(104)
1,306
2017
€ m
28
(32)
43
114
10
1,805
(5)
1,963
2017
€ m
(4,029)
1,697
30
(2,274)
(33)
(84)
(4,693)
(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 advances to banks(1)
2018
€ m
6,516
730
7,246
2017
€ m
6,364
694
7,058
(1)Included in ‘Loans and advances to banks’ total of € 1,443 million (2017: € 1,313 million) set out in note 25.
The Group is required by law to maintain balances with the Bank of England. At 31 December 2018, these amounted to € 589 million
(2017: € 536 million).
There are certain regulatory restrictions on the ability of subsidiaries to transfer funds to the parent company in the form of cash
dividends, loans or advances. The impact of such restrictions is not expected to have a material effect on the Group’s ability to meet its
cash obligations.
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54 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 46).
(a) Transactions with Group and subsidiary undertakings
(i) Transactions with AIB Group plc
Under the Scheme of Arrangement noted above, Allied Irish Banks, p.l.c. is a wholly owned subsidiary of AIB Group plc.
The following transactions occurred between AIB Group plc and its subsidiary, Allied Irish Banks, p.l.c. during 2018. AIB Group plc as
the lender, entered into the following loan agreements with Allied Irish Banks, p.l.c., as the borrower, whereby the obligations of the
borrower were unsecured and subordinated:
–
–
–
In March 2018, AIB Group plc lent € 500 million at an interest rate of 1.625% p.a. The loan is due to be repaid in full on the maturity
date 29 March 2023, unless previously prepaid;
In July 2018, AIB Group plc lent € 500 million at an interest rate of 2.375% p.a. The loan is due to be repaid in full on the maturity
date 3 July 2025, unless previously prepaid; and
In October 2018, AIB Group plc lent US $ 750 million at an interest rate of 4.875% p.a. The loan is due to be repaid in full on the
maturity date 12 October 2023, unless previously prepaid.
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 42 for further details on Subscriber Shares).
AIB Group plc redeemed these Subscriber Shares at par in November 2018.
(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 50).
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 advances previously transferred at fair value from the
Group. A subsidiary of AIB was appointed as a service provider for the loans and advances transferred in return for a servicing fee at a
market rate (note 50).
AIB Group plc Annual Financial Report 2018 351
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Notes to the consolidated financial statements
54 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 Executive Committee (see pages 34 to 37). As at 31 December 2018, the Group had 19 KMP
(2017: 22 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 208 to 210.
Short-term compensation(1)
Post-employment benefits(2)
Termination benefits
Total
2018
€ m
6.8
0.9
–
7.7
2017
€ m
6.7
0.8
–
7.5
(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.
(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 aggregate amounts outstanding, in respect 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
2018
€ m
4.69
0.57
(0.68)
4.58
2017
€ m
5.23
0.13
(0.67)
4.69
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 2018 were € 0.20 million (2017: € 0.28 million).
Deposit and other credit balances held by KMP and their close family members as at 31 December 2018 amounted to € 6.88 million
(2017: € 6.89 million).
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54 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,
Director means the Board of Directors and any past Directors who are Directors during the relevant period.
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There were 11 Directors in office during the year, 8 of whom availed of credit facilities (2017: 9). Of the Directors who availed of credit
facilities, 4had balances outstanding at 31 December 2018 (2017: 5 of 9).
Details of transactions with Directors for the year ended 31 December 2018 are as follows:
Balance at
31 December
2017
€ 000
Amounts
advanced
during 2018
€ 000
Amounts
repaid
during 2018
€ 000
Balance at
31 December
2018
€ 000
Mark Bourke:
Loans
Overdraft/credit card*
Total
Interest charged during the year
Maximum debit balance during the year**
Tom Foley:
Loans
Overdraft/credit card*
Total
Interest charged during the year
Maximum debit balance during the year**
Carolan Lennon:
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**
466
–
466
–
–
–
–
3
3
50
–
50
–
–
–
–
–
–
–
2
2
–
–
–
50
–
50
–
–
–
–
–
–
10
–
10
416
–
416
5
466
–
–
–
–
2
–
5
5
–
11
40
–
40
–
50
*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.
AIB Group plc Annual Financial Report 2018 353
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Notes to the consolidated financial statements
54 Related party transactions (continued)
(d) Companies Act 2014 disclosures
(i) Loans to Directors (continued)
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. Tom Foley had a nil balance at 31 December 2018 and a maximum debit balance as
represented in the preceding table.
Bernard Byrne, Peter Hagan and Brendan McDonagh had no facilities with the Group during 2018.
As required on transition to IFRS 9, an expected credit loss allowance was created for all loans and advances. Accordingly, an ECL of
c. € 21,000 was created on 1 January 2018 and is held on the above facilities at 31 December 2018. All facilities are performing to their
terms and conditions.
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
€ 000
Amounts
repaid
during 2017
€ 000
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**
515
–
515
–
–
–
–
2
2
–
2
2
–
–
–
–
–
–
–
–
–
–
2
2
49
–
49
–
–
–
–
–
–
–
–
–
466
–
466
5
515
–
–
–
–
1
–
–
–
–
2
–
3
3
–
10
*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.
354
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54 Related party transactions (continued)
(d) Companies Act 2014 disclosures
(i) Loans to Directors (continued)
Balance at
31 December
2016
€ 000
Amounts
advanced
during 2017
€ 000
Amounts
repaid
during 2017
€ 000
Balance at
31 December
2017
€ 000
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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**
–
2
2
59
–
59
–
–
–
–
–
–
–
–
–
10
–
10
–
2
2
–
2
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.
(ii) Connected persons
The aggregate of loans to connected persons of Directors in office at 31 December 2018, as defined in Section 220 of the Companies
Act 2014, are as follows (aggregate of 17 persons; 2017: 26 persons):
Loans
Overdraft/credit card*
Total
Interest charged during the year
Maximum debit balance during the year**
Balance at
31 December
2018
€ 000
Balance at
31 December
2017
€ 000
2,050
79
2,129
2,013
51
2,064
41
2,216
As required on transition to IFRS 9, an expected credit loss allowance was created for all loans and advances. Accordingly, an ECL of
c. € 22,000 was created on 1 January 2018 and is held on the above facilities at 31 December 2018.
*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 2018 represents less
than 0.02% of the net assets of the Group (2017: 0.02%).
AIB Group plc Annual Financial Report 2018 355
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Notes to the consolidated financial statements
54 Related party transactions (continued)
(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
shareholding 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.
The relationship of the Irish Government with AIB is outlined under the following headings:
– Capital investments;
– Guarantee schemes;
– NAMA;
– Funding support;
– Relationship Framework; and
– AIB Restructuring Plan
There were no significant changes to the various aspects of the relationship in the year to 31 December 2018.
– 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 2018 and 2017 are as follows:
Equity holdings
The Irish Government holds 1,930,436,543 ordinary shares in AIB Group plc (71.12% of total).
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).
356
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54 Related party transactions (continued)
(e) Summary of relationship with the Irish Government
– Capital investments
Equity holdings
Shares in AIB Group plc are now traded on the Irish and London Stock Exchanges which followed the Scheme of Arrangement
becoming effective (note 46).
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.
Capital contributions
On 28 July 2011, capital contributions totalling € 6.054 billion were made by the Irish State to AIB for nil consideration.
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/Euronext Dublin 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 46, 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 46). 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. There were no liabilities guaranteed under the ELG Scheme at
31 December 2018 (31 December 2017: € 143 million). Participating institutions are 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.
AIB Group plc Annual Financial Report 2018 357
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Notes to the consolidated financial statements
54 Related party transactions (continued)
(e) Summary of relationship with the Irish Government
– NAMA
AIB was designated a participating institution under the NAMA Act in February 2010. Under this Act, AIB transferred financial assets
to NAMA for which it received consideration from NAMA in the form of NAMA senior bonds and NAMA subordinated bonds which
are detailed in notes 11 and 28. 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 48.
Investment in National Asset Management Agency Investment d.a.c. (“NAMAIL”)
In March 2010, a then subsidiary of Allied Irish Banks, p.l.c. made an equity investment in 17 million “B” shares of NAMAIL, a
special purpose entity established by NAMA. The total investment amounted to € 17 million, of which € 12 million was invested on
behalf of the AIB Group pension scheme (fair value at 31 December 2018: € 12 million; 31 December 2017: € 12 million), with the
remainder invested on behalf of clients.
– Funding support
The Group availed of Targeted Long Term Refinancing Operation II (“TLTRO II”) funding from the ECB, through the Central
Bank. At 31 December 2018, all outstanding amounts had been fully repaid (31 December 2017: € 1.9 billion for TLTRO which are
included in ‘Deposits by central banks and banks’ in the table 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 substitution 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 which covered the period from
2014 to 2017.
As part of this plan, 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.
358
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54 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 2018 and 2017 with Irish Government entities(1) together with the
highest balances held at any point during the year.
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Cash and balances at central banks
Trading portfolio financial assets
Derivative financial instruments
Loans and advances to customers
Investment securities/financial investments
available for sale
Total assets
Liabilities
Deposits by central banks and banks
Customer accounts
Trading portfolio financial liabilities
Derivative financial instruments
Total liabilities
Balance
2018
Highest(2)
balance held
€ m
€ m
Balance
2017
Highest(2)
balance held
€ m
€ m
1,303
5,360
1,162
3,452
–
2
6
6,750
8,061
68
2
7
7,506
19
–
7
7,487
8,675
63
10
9
8,936
Balance
2018
Highest(2)
balance held
€ m
€ m
Balance
2017
Highest(2)
balance held
€ m
€ m
–
454
–
–
454
1,900
1,057
66
11
1,900
499
19
–
2,418
2,346
1,172
48
14
a
b
c
d
(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 2018 was € 596 million (2017: € 549 million).
Investment securities at FVOCI at 31 December 2018 comprise € 6,282 million in Irish Government securities held in the normal
course of business and NAMA subordinated bonds of € 468 million. At 31 December 2017, these related to financial investments
available for sale and comprised € 7,021 million in Irish Government securities held in the normal course of business and NAMA
subordinated bonds of € 466 million.
This relates to funding received from the ECB through the Central Bank which is detailed under ‘Funding Support’ above, all of
which was fully repaid during 2018.
Includes € 295 million (2017: € 360 million) borrowed from the Strategic Banking Corporation of Ireland (“SBCI”), the ordinary share
capital of which is owned by the Minister for Finance.
b
c
d
All other balances, both assets and liabilities are carried out in the ordinary course of banking business on normal terms and
conditions.
Local government(1)
During 2018 and 2017, 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.
(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.
AIB Group plc Annual Financial Report 2018 359
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Notes to the consolidated financial statements
54 Related party transactions (continued)
(e) Summary of relationship with the Irish Government
Commercial semi-state bodies(1)
During 2018 and 2017, 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 and clearing transactions.
(1)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 debt securities and repurchase agreements.
The following balances were outstanding in total to these financial institutions at 31 December 2018 and 2017:
Assets
Derivative financial instruments
Loans and advances to banks(1)
Investment securities/financial investments available for sale
Liabilities
Deposits by central banks and banks(2)
Derivative financial instruments
2018
€ m
6
2
339
–
–
2017
€ m
1
2
423
1
1
(1)The highest balance in loans and advances to banks amounted to € 2 million in respect of funds placed during the year (2017: € 17 million).
(2)The highest balance in deposits by central banks and banks to these financial institutions amounted to € 30 million in respect of funds received during the
year (2017: € 302 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.
Irish bank levy
The bank levy, introduced on certain Irish financial institutions in 2014, 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 annual levy paid by the Group for 2018 and reflected in administrative expenses (note 13) in the income statement amounted
to € 49 million (2017: € 49 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.
360
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Page 361
55 Commitments
Capital expenditure
Estimated outstanding commitments for capital expenditure
not provided for in the financial statements
Capital expenditure authorised but not yet contracted for
2018
€ m
5
80
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
2018
€ m
65
58
47
41
38
156
405
2017
€ m
5
50
2017
€ m
69
72
71
68
62
331
673
The Group holds a number of significant operating lease arrangements in respect of branches and its headquarter locations.
In the past 18 months, the Group has reassessed its property strategy. In this regard, the Group plans to fully vacate its current
headquarters campus at Bankcentre, Ballsbridge by the end of 2020 for which final agreements on assigning these leases have been
signed. Accordingly, the lease commitments above are significantly reduced. Onerous lease provisions have been made to cover the
unavoidable costs of leaving Bankcentre (note 40).
The Group’s new corporate headquarters will be at Molesworth Street, Dublin 2 with occupancy expected in the first half of 2019.
The minimum lease terms remaining on the most significant leases vary from 1 year to 14 years. The average lease length outstanding
until a break clause in the lease arrangements is approximately 9 years with the final contractual remaining terms ranging from 1 year
to 19 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
€ 5 million (2017: € 6 million).
Operating lease payments recognised as an expense for the year were € 67 million (2017: € 68 million). There was no sublease
income in either 2018 or 2017.
Included in the € 405 million (2017: € 673 million) in the table above are minimum lease payments amounting to Nil
(2017: € 114 million) for which an onerous lease provision has been created.
In addition to the above minimum lease commitments, the Group was in advanced discussions at 31 December 2019 to lease premises at
Heuston South Quarter, with plans to begin occupancy in 2019.
AIB Group plc Annual Financial Report 2018 361
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Notes to the consolidated financial statements
56 Employees
The following table shows the geographical analysis of average employees for 2018 and 2017:
Average number of staff (Full time equivalents)
Republic of Ireland
United Kingdom
United States of America
Total
The following table shows the segmental analysis of average employees for 2018 and 2017:
RCB
WIB
AIB UK
Group(1)
Total
2018
8,681
1,066
54
9,801
2018
5,268
332
820
3,381
9,801
2017
8,840
1,244
53
10,137
2017
5,403
278
941
3,515
10,137
(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.
The average number of employees for 2018 and 2017 set out above excludes employees on career breaks and other unpaid long
term leaves.
Actual full time equivalent numbers at 31 December 2018 were 9,831 (2017: 9,720).
57 Regulatory compliance
During the years ended 31 December 2018 and 2017, the Group and its regulated subsidiaries complied with their externally imposed
capital ratios.
58 Financial and other information
Operating ratios
Operating expenses/operating income
Other income/operating income
Rates of exchange
€ /$*
Closing
Average
€ /£*
Closing
Average
*Throughout this report, US dollar is denoted by $ and Pound sterling is denoted by £.
2018
%
63.4
26.9
2017
%
61.1
27.5
2018
2017
1.1450
1.1808
0.8945
0.8847
1.1993
1.1299
0.8872
0.8767
Currency information
Euro
Other
362
AIB Group plc Annual Financial Report 2018
Assets
2017
€ m
71,801
18,261
90,062
2018
€ m
70,756
20,780
91,536
Liabilities and equity
2017
€ m
2018
€ m
70,888
20,648
91,536
71,543
18,519
90,062
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59 Dividends
On 4 May 2018, following approval by the shareholders at the Annual General Meeting held on 25 April 2018, AIB Group plc paid a final
dividend of € 0.12 per ordinary share amounting in total to € 326 million. The financial statements for the year ended 31 December 2018
reflect this in shareholders’ equity as an appropriation of distributable reserves.
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On 9 May 2017, Allied Irish Banks, p.l.c. as parent company of the Group at that time, paid a final dividend to its shareholders of
€ 0.0921 per ordinary share amounting in total to € 250 million.
The Board is recommending that a final dividend of € 0.17 per ordinary share, amounting in total to € 461 million, be paid on 3 May
2019. The financial statements for year ended 31 December 2018 do not reflect this dividend which will be accounted for in
shareholders’ equity as an appropriation of distributable reserves in 2019.
60 Non-adjusting events after the reporting period
No significant non-adjusting events have taken place since 31 December 2018.
61 Approval of financial statements
The financial statements were approved by the Board of Directors on 28 February 2019.
AIB Group plc Annual Financial Report 2018 363
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Page 364
AIB Group plc company statement of financial position
as at 31 December 2018
Assets
Loans and advances to banks – subsidiary
Investment in subsidiary undertaking
Current taxation
Prepayments and accrued income
Total assets
Liabilities
Debt securities in issue
Accruals and deferred income
Total liabilities
Equity
Share capital
Merger reserve
Revenue reserves
Total equity
Total liabilities and equity
Notes
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2018
€ m
1,653
12,940
1
19
2017
€ m
–
12,940
–
–
14,613
12,940
1,655
25
1,680
1,696
6,235
5,002
12,933
14,613
–
–
–
1,697
6,235
5,008
12,940
12,940
Richard Pym
Chairman
28 February 2019
Bernard Byrne
Chief Executive Officer
Mark Bourke
Chief Financial Officer
Sarah McLaughlin
Group Company Secretary
364
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Page 365
AIB Group plc company statement of cash flows
for the financial year ended 31 December 2018
8 December
2016 to
31 December 31 December
2017
€ m
2018
€ m
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Cash flows from operating activities
Profit before taxation for the year
Adjustments for:
– Non-cash and other items
Change in prepayments and accrued income
Change in accruals and deferred income
Dividend income
Net credit impairment loss
– Change in operating assets
Loans and advances to banks
– Change in operating liabilities
Change in debt securities in issue
Net cash inflow/(outflow) from operating activities
Cash flows from investing activities
Dividends received from subsidiary
Net cash inflow from investing activities
Cash flows from financing activities
Dividends paid on ordinary shares
Net cash outflow from financing activities
Change in cash and cash equivalents
Closing cash and cash equivalents
319
(19)
25
(326)
1
(319)
(1,651)
1,651
–
326
326
(326)
(326)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
The impact of foreign exchange translation for relevant lines in the statement of financial position is removed in order to show the
underlying cash impact.
AIB Group plc Annual Financial Report 2018 365
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AIB Group plc company statement of changes in equity
for the financial year ended 31 December 2018
At 1 January 2018
Total comprehensive income for the year
Profit
Other comprehensive income
Total comprehensive income for the year
Transactions with owners, recorded directly in equity
Dividends paid on ordinary shares
Redemption of Subscriber Shares(1)
Other movements (note 42 to the consolidated financial statements)
Total contributions by and distribution to owners
2018
Attributable to equity holders of the parent
Share
capital
€ m
1,697
Merger
reserve
€ m
6,235
Revenue
reserves
€ m
Total
€ m
5,008
12,940
–
–
–
–
–
–
(1)
(1)
–
–
–
–
–
–
–
–
–
320
–
320
(326)
–
–
(326)
5,002
–
320
–
320
(326)
–
(1)
(327)
12,933
At 31 December 2018
1,696
6,235
(1)Redemption of 40,000 Subscriber Shares of € 0.625 each at par.
At 8 December 2016
Total comprehensive income for the period
Profit/(loss)
Other comprehensive income
Total comprehensive income for the period
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 e)
Reduction in company capital
Total contributions by and distribution to owners
At 31 December 2017
8 December 2016 to 31 December 2017
Attributable to equity holders of the parent
Share
capital
€ m
Merger
reserve
€ m
Revenue
reserves
€ m
Total
€ m
–
–
–
–
–
–
–
–
–
–
6,705
(5,008)
1,697
1,697
6,235
–
6,235
6,235
–
–
–
–
–
–
5,008
5,008
5,008
–
–
–
–
–
12,940
–
12,940
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.
366
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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. AIB Group plc is registered under the Companies Act 2014 as a public limited company under the
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company number 594283 and is the holding company of the Group. Further details on AlB Group plc's 'Corporate restructuring' are set out
in note 46 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 234 to 261.
The parent company financial statements and related notes set out on pages 364 to 370 have been prepared in accordance with
International Financial Reporting Standards (collectively "IFRSs'') as issued by the IASB and IFRSs as adopted by the EU and applicable
for the financial year ended 31 December 2018. They also comply with those parts of the Companies Act 2014 and with the European
Union (Credit Institutions: Financial Statements) Regulations 2015 applicable to companies reporting under lFRS.
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 262 to 266.
Parent Company Income statement
In accordance with Section 304(2) of the Companies Act 2014, the parent company is availing of the exemption to omit the income
statement, statement of comprehensive income and related notes from its financial statements; from presenting them to the Annual
General Meeting: and from filing them with the Registrar of Companies. The parent company’s profit after taxation for the financial year
ended 31 December 2018 is € 320 million (2017: Nil).
b Administrative expenses
Amounts payable to subsidiary under Master Service Agreement
2018
€ m
7
7
2017
€ m
–
–
c 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 Auditor only (Deloitte Ireland LLP) for services relating to the audit of the Group financial statements. No audit
fees were paid/payable to the Group Auditor (Deloitte Ireland LLP) for services relating to the audit of the financial statements of AIB
Group plc during the year to 31 December 2018.
d Loans and advances to banks
At amortised cost
Funds placed with subsidiary, Allied Irish Banks, p.l.c.
ECL allowance
2018
€ m
1,654
(1)
1,653
2017
€ m
–
–
–
AIB Group plc Annual Financial Report 2018 367
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Notes to AIB Group plc company financial statements
e Investment in subsidiary undertaking
At 1 January
Additions
At 31 December
2018
€ m
12,940
–
12,940
2017
€ m
–
12,940
12,940
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 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 46 to the consolidated financial statements.
Allied Irish Banks, p.l.c. is a financial services company incorporated and registered in Ireland with a registered office at Bankcentre,
Ballsbridge, Dublin 4. 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 for 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.
f Debt securities in issue
Euro Medium Term Note Programme
Global Medium Term Note Programme
Analysis of movements in debt securities in issue
At 1 January
Issued during the year
Exchange translation adjustments
At 31 December
2018
€ m
1,000
655
1,655
2018
€ m
–
1,651
4
1,655
2017
€ m
–
–
–
2017
€ m
–
–
–
–
Euro Medium Term Note Programme
In March 2018, AIB Group plc issued € 500 million Senior Unsecured 1.50% Notes maturing on 29 March 2023. The notes bear interest
on the outstanding nominal amount, payable annually in arrears on 29 March each year.
In July 2018, AIB Group plc issued € 500 million Senior Unsecured 2.25% Notes maturing on 3 July 2025. The notes bear interest on
the outstanding nominal amount, payable annually in arrears on 3 July each year.
Global Medium Term Note Programme
In October 2018, AIB Group plc issued US $ 750 million unsecured 4.75% notes maturing on 12 October 2023. The notes bear
interest on the outstanding nominal amount, payable semi-annually in arrears on 12 April and 12 October each year.
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g Share capital
The share capital of AIB Group plc is detailed in note 42 to the consolidated financial statements, all of which relates to AIB Group plc.
h Merger reserve
At 31 December
2018
€ m
6,235
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. 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 46 to the consolidated financial statements).
i 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 46 to the consolidated financial statements).
j 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.
The following were the principal transactions during 2018 between AIB Group plc (the parent company) and Allied Irish Banks, p.l.c.
(the subsidiary company):
– Under a Master Service Agreement, Allied Irish Banks, p.l.c. provides various services which include accounting, taxation and
administrative services to AIB Group plc (note b);
– AIB Group plc placed funds with Allied Irish Banks, p.l.c amounting to € 1,653 million (note d);
– AIB Group plc received a dividend amounting to € 326 million from Allied Irish Banks, p.l.c.
AIB Group plc has not issued any guarantees in favour of Allied Irish Banks, p.l.c. or its subsidiaries.
Other related party transactions including transactions with Directors are detailed in note 54 to the consolidated financial statements.
Directors’ remuneration is set out on pages 208 to 210 in the ‘Governance and oversight’ section of this report.
k Credit risk information
The following table sets out the maximum exposure to credit risk for financial assets all of which are carried at amortised cost(1) at
31 December 2018:
Maximum exposure to credit risk
Loans and advances to banks
Included elsewhere:
Accrued interest
Total
(1)All amortised cost items are loans and advances which are in a ‘held to collect’ business model.
2018
Total
€ m
1,653
19
1,672
2017
Total
€ m
–
–
–
AIB Group plc Annual Financial Report 2018 369
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Notes to AIB Group plc company financial statements
l Funding and liquidity risk
Financial assets and financial liabilities by contractual residual maturity
The following table analyses financial assets and financial liabilities by contractual residual maturity at 31 December 2018:
Financial assets
Loans and advances to banks(1)
Other financial assets
Financial liabilities
Debt securities in issue
Other financial liabilities
(1)Shown gross of expected credit losses.
On demand
€ m
–
–
–
–
25
25
<3 months
but not
on demand
€ m
3 months 1–5 years
to 1 year
Over
5 years
2018
Total
€ m
€ m
€ m
€ m
–
19
19
–
–
–
–
–
–
–
–
–
1,154
500
1,654
–
–
19
1,154
500
1,673
1,155
500
1,655
–
–
25
1,155
500
1,680
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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
www.computershare.com/ie/InvestorCentre. You will need your unique user ID and password which you created during registration,
or register at 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 on the Investor Centre accessed above or via
the Investor Relations section of AIB’s website at www.aib.ie/investorrelations, clicking on the Shareholder Information and Personal
Shareholder Information option, and following the on-screen instructions.
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/Euronext Dublin 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
Major shareholdings
The issued share capital of the AIB Group plc is 2,714,381,237 ordinary shares of € 0.625 each.
The Minister for Finance of Ireland holds 1,930,436,543 ordinary shares representing 71.12% of the total voting rights attached to
issued share capital.
Financial calendar
Annual General Meeting: 24 April 2019, at the Ballsbridge Hotel, Ballsbridge, Dublin 4.
Interim results
The unaudited Half-Yearly Financial Report 2019 will be announced on 26 July 2019 and will be available on the Company’s
website – www.aib.ie.
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
AIB Group plc Annual Financial Report 2018 371
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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 62 to 68
in the 2018 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 62 to 68 of
the 2018 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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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 a hold to collect and sell basis.
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)
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).
Commercial
paper
Commercial
property
Common equity
tier 1 capital
(“CET 1”)
Common equity
tier 1 ratio
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) Office projects;
c) Retail projects;
d) Hotels; and
e) 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.
AIB Group plc Annual Financial Report 2018 373
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Glossary of terms
Concentration
risk
Contractual
maturity
Contractual
residual maturity
Credit default
swaps
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.
Credit
derivatives
Financial instruments where credit risk connected with loans, bonds or other risk weighted assets or market risk positions is
transferred to counterparties providing credit protection. The credit risk might be inherent in a financial asset such as a loan or might
be a generic credit risk such as the bankruptcy risk of an entity.
Credit impaired
Under IFRS 9, these are Stage 3 financial assets where there is objective evidence of impairment and, therefore, considered to be
in default. A lifetime ECL is recognised for such assets.
Credit risk
Credit risk
mitigation
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
Accounts of lower quality and considered as less than satisfactory are referred to as criticised and include the following;
Criticised watch:
The credit is exhibiting weakness and is deteriorating in terms of credit quality and may need additional attention.
Criticised recovery:
Includes forborne cases that are classified as performing having transitioned from default, but still requires additional management
attention to monitor for re-default and continuing improvement in terms of credit quality.
Customer
accounts
Debt
restructuring
A liability of the Group where the counterparty to the financial contract is typically a personal customer, a corporation (other than a
financial institution) or the government. This caption includes various types of deposits and credit current accounts, all of which are
unsecured.
This is the process whereby customers in arrears, facing cash flow or financial distress, renegotiate the terms of their loan
agreements in order to improve the likelihood of repayment. Restructuring may involve altering the terms of a loan agreement
including a partial write down of the balance. In certain circumstances, the loan balance may be swapped for an equity stake in the
counterparty.
Debt securities
Assets on the Group’s balance sheet representing certificates of indebtedness of credit institutions, public bodies and other
undertakings.
Debt securities
in issue
Liabilities of the Group which are represented by transferable certificates of indebtedness of the Group to the bearer of the
certificates.
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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.
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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
ECLs
under its main refinancing operations.
Expected credit loss (“ECLs”) – The weighted average of credit losses with the respective risks of a default occurring as the weights.
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.
Home loan
A loan secured by a mortgage on the primary residence or second home of a borrower.
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.
AIB Group plc Annual Financial Report 2018 375
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Glossary of terms
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
Ratio
30 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 advances 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.
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
Loss Given Default (“LGD”) is the expected or actual loss in the event of default, expressed as a percentage of ‘exposure at default’.
Medium term
notes
National Asset
Management
Agency
Net interest
income
Net interest
margin
Medium term notes (“MTNs”) are notes issued by the Group across a range of maturities under the European Medium Term Notes
(“EMTN”) Programme.
National Asset Management Agency (“NAMA”) was established in 2009 as one of a number of initiatives taken by the Irish
Government to address the serious problems which arose in Ireland’s banking sector as the result of excessive property lending.
The amount of interest received or receivable on assets net of interest paid or payable on liabilities.
Net interest margin (“NIM”) is a measure of the difference between the interest income generated on average interest earning
financial assets (lendings) and the amount of interest paid on average interest bearing financial liabilities (borrowings) relative to the
amount of interest-earning assets.
Net Stable Funding Net Stable Funding Ratio (“NSFR”): The ratio of available stable funding to required stable funding over a 1 year time horizon.
Ratio
New transaction
lendings
Non-performing
exposures
New transaction lending is defined as incremental increase in drawn balances against facilities granted for a specific period of time
whereby the borrower can draw down or repay amounts as required to manage cash flow. It includes revolving credit facilities,
overdrafts and invoice discounting facilities.
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 credit 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.
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.
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Optionality risk
A type of market risk associated with option features that are embedded within assets and liabilities on the Group's balance sheet.
The embedded option features can significantly change the cash flows (and/or redemption) of the contract and can, therefore, effect
its duration, yield and pricing. Examples include bonds with early call provisions or prepayment risk on a mortgage portfolio.
Where these risks are left unhedged, it can result in losses arising in the Group's portfolio.
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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.
Principal
components
analysis
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.
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.
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 advances,
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).
Stage allocation:
Under IFRS 9, loans and advances to customers are classified into one of three stages:
Stage 1
Stage 2
Stage 3
Includes newly originated loans and loans that have not had a significant increase in credit risk since initial recognition.
Includes loans that have had a significant increase in credit risk since initial recognition but do not have objective evidence of
being credit impaired.
Includes loans that are defaulted or are otherwise considered to be credit impaired.
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.
AIB Group plc Annual Financial Report 2018 377
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Glossary of terms
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. It is subject to adjustments relating to the excess of
expected loss on the IRBA portfolios over the accounting expected credit losses 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.
Trade date and
1. Trade date accounting records the transaction on the date on which an agreement has been entered (the trade date), instead of
settlement date
on the date the transaction has been finalised (the settlement date).
accounting
2. Under the settlement date accounting approach, the asset is recognised on the date on which it is received by the Group, on
disposal, the asset is not derecognised until the asset is delivered to the buyer.
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).
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.
378
AIB Group plc Annual Financial Report 2018
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 2018 379
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Index
A
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 impairment – income
statement
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
285
371
363
305
287
43
186
182
175
165
154
57
325
325
4
6
361
177
331
325
174
73
262
362
318
319
309
317
292
34
210
208
107 and 286
76 and 126
M
Market risk
Memorandum items: contingent
liabilities and commitments
and contingent assets
Model risk
N
Net fee and commission income
Net trading income
Nomination and Corporate
Page
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331
166
284
284
Governance Committee
196
Non-adjusting events after the
reporting period
363
Notes to the financial statements 233
Page
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E
Earnings per share
ECL
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 liabilities by undiscounted
contractual maturity
Financial statements
Forbearance
Foreign exchange risk
Forward looking information
Funding and liquidity risk
Page
290
301
362
362
340
300
362
151
371
152
227
127
161
372
146
284 and 285
Other equity interests
O
Off-balance sheet arrangements
and transferred financial
assets
Offsetting financial assets and
financial liabilities
Operating and financial review
Operational risk
Other liabilities
Other operating income
Own shares
P
Pension risk
People and culture risk
Principal addresses
Property, plant and equipment
Prospective accounting changes
Provisions for liabilities
and commitments
373
236
167
191
227
217
307
283
283
155
157
334
327
40
162
324
319
285
324
161
164
379
308
259
320
G
Gain on financial assets
Glossary
Going concern
Governance and oversight
Group Internal Audit
Investment securities
122 and 301
I
Income statement
Independent auditor’s report
Intangible assets
Interest and similar income
Interest expense
Interest rate risk in the banking book
Interest rate sensitivity
Investments in Group
undertakings
Irish Government
L
Liquidity risk
Loans and advances to banks
Loans and advances to customers
333
356
146
299
300
301
Statement
216
Loss allowance on financial assets
Disposal groups and non-current
assets held for sale
Disposal of business
Distributions on equity shares
Dividend income
Dividends
291
286
291
283
363
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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
Statement 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
163
351
168
145
311
69
69
69
69
73
212
171
279
286
322
230
228
231
229
371
321
333
214
288
291
318
334
211
371
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AIB Group plc Annual Financial Report 2018
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© AIB GROUP 2019
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AIB Group plc
Bankcentre, PO Box 452, Dublin 4, Ireland
T: + 353 (1) 660 0311 / group.aib.ie