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2023 ReportBACKING OUR CUSTOMERS ANNUAL FINANCIAL REPORT for the financial year ended 31 December 2021 AIB Group plc OUR PURPOSE IS TO BACK OUR CUSTOMERS TO ACHIEVE THEIR DREAMS AND AMBITIONS AIB Group operates predominantly in Ireland and the United Kingdom. Our shares are quoted on the Irish and London stock exchanges and we are a member of the FTSE4Good Index. Our three core operating segments are Retail Banking, Capital Markets and AIB UK. Whether it’s adapting to a greener way of living, planning for the future, growing a business or simply navigating day-to-day life, our ambition as a Group is to be at the heart of our customers’ financial lives every step of the way. Merchant Services ANNUAL FINANCIAL REPORT for the financial year ended 31 December 2021 01 ANNUAL REVIEW Business Performance 2 4 AIB Group at a Glance 6 Chair’s Statement Chief Executive’s Review 9 15 AIB in our Communities 16 Economic Outlook 18 Our Strategy 26 Risk Summary Governance in AIB 32 36 Board of Directors 40 Executive Committee 42 Sustainability in AIB 04 GOVERNANCE AND OVERSIGHT 170 Group Directors’ Report 173 Schedule to the Group Directors’ Report 176 Corporate Governance Report 186 Report of the Board Audit Committee Report of the Board Risk Committee 193 Report of the Nomination & 196 Corporate Governance Committee 199 Report of the Remuneration Committee 201 208 209 Corporate Governance Remuneration Statement Report of the Sustainable Business Advisory Committee Report of the Technology and Data Advisory Committee 210 Viability Statement 211 213 Other Governance Information 214 Supervision and Regulation Internal Controls 02 BUSINESS REVIEW 03 RISK MANAGEMENT Operating and Financial Review 58 73 Capital 78 Framework 83 Individual Risk Types 05 FINANCIAL STATEMENTS 216 Statement of Directors’ Responsibilities Independent Auditor’s Report 217 229 Consolidated Financial Statements Notes to the Consolidated 235 Financial Statements AIB Group plc Company Financial Statements 358 361 Notes to AIB Group plc Company Financial Statements 06 GENERAL INFORMATION 367 Shareholder Information 368 Forward Looking Statements 369 Glossary of Terms 375 Principal Addresses 376 Index 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 368. 2 Business Performance Annual Review AIB Group plc Annual Financial Report 2021 BUSINESS PERFORMANCE 2021 RESULTS FINANCIAL PERFORMANCE NET INTEREST INCOME €1,794m NET CREDIT IMPAIRMENT WRITEBACK/(CHARGE) €238m PROFIT/(LOSS) BEFORE TAX €629m 2021 2020 €1,794m €1,872m 2021 2020 €238m 2021 €629m €(1,460)m 2020 €(931)m Lower average loan volumes and low interest rate environment impacting Down 4% due to a reduction in average loan volumes (including the redemption and disposal of NPEs), the low interest rate environment and lower investment securities income partially offset by TLTRO funding income benefit Credit quality and economic backdrop improving, some uncertainty remains Writeback reflecting a more favourable economic environment with improved credit quality and updated macroeconomic assumptions partially offset by post-model adjustments Return to profitability with net credit impairment writeback Operating profit1 down 6% to €688m (impacted by higher regulatory levies with stable operating income and expenses) and impairment writeback of €238m partly offset by exceptional items of €318m NEW LENDING NET LOANS €10.4bn €56.5bn NON-PERFORMING EXPOSURES2 €3.1bn 2021 2020 €10.4bn €9.2bn 2021 2020 €56.5bn €56.9bn 2021 2020 €3.1bn €4.3bn Strong growth in new lending up 13% New lending up 13% with growth of 26% in mortgages in Ireland, strong performance in renewable energy & infrastructure and property lending partly offset by lower UK lending Net loans broadly stable at €56.5bn Net loans down €1.3bn (excluding FX impact) due to the redemption and disposal of non-performing loans 5.4% of gross loans Non-performing exposures (NPEs) decreased by €1.2bn to €3.1bn primarily driven by the disposal of non-performing loan portfolios. Legacy² NPEs €0.9bn or 1.5% of gross loans MEDIUM-TERM FINANCIAL TARGETS3 (END 2023) MEDIUM-TERM FINANCIAL TARGETS3 (END 2023) ABSOLUTE COST BASE4 Cost of running the business, excluding exceptional costs RETURN ON TANGIBLE EQUITY A measure of how well capital is deployed to generate earnings growth CET1 RATIO (FULLY LOADED) A measure of our ability to withstand financial stress and remain solvent TARGET <€1.475bn TARGET >9% TARGET >13.5% Focused cost discipline; controlling costs annually at <€1.475bn by 2023 Deliver sustainable returns; RoTE >9% by 2023 Appropriate capital target of CET1 13.5% needed to run the business OUTCOME 2021 2020 €1.534bn €1.527bn Costs broadly in line with 2020, down 1% excluding Goodbody OUTCOME 2021 2020 (11.2)% Improved RoTE on return to profitability 8.2%5 OUTCOME 2021 16.6%⁶ 2020 15.6% Strong capital position. Proposed dividend €122m and share buyback €91m 1. Operating profit before impairment losses and exceptional items. 2. Non-performing exposures (NPEs) refers to non-performing loans (NPLs) and excludes €161m of off-balance sheet exposures. Legacy NPEs are exposures that entered into default prior to 31 December 2018. 4. Before bank levies, regulatory fees and exceptional items. For exceptional items see pages 62 and 71. 5. Based on CET1 revised target of 13.5%. 2020 RoTE is based on prior CET1 target of 14%. 6. Excludes the impact of the proposed buyback of €91m. Including the buyback CET1 is 3. Revised medium-term targets as published on 4 August 2021. 16.5%. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Annual Review Business Performance 3 NON-FINANCIAL PERFORMANCE GREEN FINANCE DIGITALLY ACTIVE CUSTOMERS CUSTOMER SATISFACTION Amount of new lending per year for climate action Number of active users on digital channels Transaction Net Promoter Score1 Measured after customer transactions for key touch points €2bn 2021 2020 1.85 million €2bn €1.5bn 2021 2020 1.85m 1.72m +45 2021 2020 +45 +49 TARGET €2bn per year TARGET >2.25 million by 2023 TARGET +53 by 2023 INCLUSION & DIVERSITY REDUCTION IN EMISSIONS3 Women as % of management % reduction in Scope 1 & 2 emissions year-on-year 42% 2021 2020 42% 41% 19% 2021 2021 2020 19% 20% TARGET Gender Balanced (Ongoing)2 TARGET Net Zero by 2030 (Own Operations) 1. Transaction Net Promoter Score (NPS) is an aggregation of 20 customer journeys across 3. In our 2020 AFR, we reported our GHG emissions one year in arrears. In an enhancement, Homes, Personal, SME, Digital, Retail, Direct and Day-to-Day Banking. 2. The Gender Equality Global Report & Ranking – 2021 Edition equates “gender balanced” with between 40% and 60% of women. we are now reporting Scope 1 & 2 emissions for the most recent financial year. Consequently, we have restated our 2020 emissions data, as we now disclose our data centre emissions in our Scope 3 emissions. Our ambition is to achieve Net Zero in our financed emissions by 2040 for our full lending portfolio with the exception of Agriculture. In addition, COVID-19 restrictions had an impact on our emissions reduction in 2021. 4 AIB Group at a Glance Annual Review AIB Group plc Annual Financial Report 2021 AIB GROUP AT A GLANCE RETAIL BANKING Retail Banking supports our consumer and business customers with a comprehensive range of banking and financial services, delivered through our No. 1 digital bank in Ireland whilst transforming our branch network. AIB’s leading Irish retail franchise serves over 2.5 million customers with over 1.65 million digitally active customers. Retail Banking has an expanded reach via EBS, Haven, AIB Merchant Services, Payzone and Nifti. 59% OF NET LOANS RETAIL FRANCHISE Market-leading bank positions across core personal and SME products, including current accounts, mortgages, credit cards and personal1 and business lending, with H2 versus H1 new lending up 39%. CUSTOMER ENGAGEMENT Transforming and enhancing how we serve our customers across AIB, EBS and Haven. We settled over 1 billion customer transactions in 2021, with over 96% completed via Digital Channels, Cards or Automated Payments. RESOLVING CUSTOMERS IN DIFFICULTY Our proven capability in resolving non-performing exposures (NPEs) has returned the Group to below pre-COVID NPE levels, on track to reach our c.3% target by 2023 with a transformed business model. €4.8bn LENDING €33.1bn NET LOANS €478m OPERATING CONTRIBUTION2 CAPITAL MARKETS Capital Markets serves AIB’s large and medium-sized business customers as well as our private banking customers. A comprehensive product offering combined with deep sector expertise allows us to develop long-term, strategic relationships with our customers. To provide geographic and sector diversification, we selectively participate in European and US syndicated loans and bonds. In September 2021, Goodbody became part of Capital Markets, bringing additional capability in wealth management, corporate finance, asset management and wider capital markets propositions. 27%OF NET LOANS RELATIONSHIP DRIVEN MODEL Trusted strategic long-term partner for Irish businesses, with a primary focus on senior debt lending. CUSTOMER-FOCUSED SOLUTIONS Complementing traditional debt offering through specialised finance, commercial finance, syndicated finance and corporate finance advisory services, as well as private banking services and advice. SECTOR SPECIALIST TEAMS Centre of Excellence approach to management of key sectors to bring sector-specific insights and expertise to our customers. €4.1bn LENDING €15.4bn NET LOANS €442m OPERATING CONTRIBUTION2 1. No.1 among banks personal lending excluding car finance. 2. Operating contribution before impairments and exceptional items. For further information see Segment Reporting on pages 66 to 70 in the Operating and Financial Review. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Annual Review AIB Group at a Glance 5 AIB UK AIB UK operates in the two distinct markets of Great Britain and Northern Ireland. In Great Britain, AIB supports corporate customers with a comprehensive range of lending and deposit products, offering specific sector expertise. In 2021, AIB UK began its withdrawal from the GB SME market. In Northern Ireland, AIB offers a full service retail banking service to personal and business customers with a focus on mortgages and business lending. 14% OF NET LOANS 424K CUSTOMERS 424k retail, corporate and business customers across the United Kingdom with 133k actively using digital channels. SECTOR-SPECIFIC EXPERTISE A relationship-driven and customer- focused service, specialised in supporting corporate growth, primarily in renewables, infrastructure, real estate, healthcare and manufacturing sectors. RETAIL BANKING AIB in Northern Ireland provides a range of products for personal and business customers through multiple channels including branch banking and digital options, which continue to advance. £1.3bn LENDING £6.7bn NET LOANS £91m OPERATING CONTRIBUTION1 GROUP FUNCTIONS OPERATING CONTRIBUTION1 BY SEGMENT TREASURY Part of our Finance function, Treasury manages the Group’s liquidity and funding position while providing customer treasury services and economic research. CONTROL AND SUPPORT The Group’s control and support functions are: Risk; Finance; Technology; Human Resources; Operations; Corporate Affairs; Strategy & Sustainability; Legal, Corporate Governance & Customer Care; and Group Internal Audit. 10% AIB UK 47% Retail Banking 43% Capital Markets €1.0bn2 FY 2021 TOTAL For a detailed report on our performance, read the Operating and Financial Review section on pages 58 to 72. 1. Operating contribution before impairments and exceptional items For further information 2. Excludes Group segment operating loss €0.3bn. see Segment Reporting on pages 66 to 70 in the Operating and Financial Review. 6 Chair’s Statement Annual Review AIB Group plc Annual Financial Report 2021 CHAIR’S STATEMENT BUILDING ON MOMENTUM FOR THE FUTURE During the year, we strengthened our medium-term targets to reflect the impact of the strategic initiatives in flight and we remain relentlessly focused on the delivery of these by 2023. It is a great honour for me to present this, my first Chairman’s Statement since my appointment to the Board in October 2021. I would first like to thank and pay tribute to Brendan McDonagh, Deputy Chair, who himself fulfilled the role of acting chair at the Board’s request with such skill, diligence and commitment since the retirement of my predecessor, Richard Pym. Under Brendan’s leadership, the Board supported Colin Hunt, our Chief Executive Officer, and the Executive Committee as they successfully navigated the Group through the unprecedented disruption of the COVID-19 pandemic. The Group has emerged from this global shock with a robust balance sheet, a refreshed strategy and medium-term targets, an expanded product suite and exciting business plans for the future. We are focused on delivering sustainable growth by fostering deeper relationships with our customers and being at the heart of their financial lives. RETURN TO DISTRIBUTIONS 2021 saw a welcome return to profitability with the Group reporting profit before taxation of €629m. Colin will elaborate further on this in his Chief Executive’s Review on pages 9 to 14. This result has enabled the Board to consider the issue of distributions and I am very pleased to announce that the Board is recommending a dividend per share of 4.5 cent, subject to shareholder approval at the Annual General Meeting on 5 May 2022. SELL DOWN BY THE IRISH STATE On 21 December 2021, we were pleased to note the announcement by the Minister for Finance in which he announced his intention to sell part of the State’s 71.12% shareholding in the Group. AIB owes the Irish taxpayer an immense debt of gratitude for its support during the global financial crisis. Your Board remains focused on the Group executing its strategy which we believe will benefit all shareholders as the investment case for new shareholders in the Group becomes more and more attractive. BOARD CHANGES DURING 2021 2021 was a busy year for the Nomination and Corporate Governance Committee and saw a total of seven Directors joining the Board. On 22 January 2021 Fergal O’Dwyer, the former CFO of DCC plc was appointed to the Board and the Audit Committee. This was followed on 15 March 2021 when Andy Maguire, the former Group COO for HSBC Holdings plc was appointed to the Board and the Risk Committee. Donal Galvin, the Group CFO was appointed to the Board as an Executive Director on 28 May 2021. On 18 June 2021, we announced the appointment of Anik Chaumartin, a former senior partner at PricewaterhouseCoopers in Paris. Anik joined the Board and the Audit Committee with effect from 1 July 2021. On 14 September 2021, we announced the appointment of two Directors, Tanya Horgan, former CRO at Flutter Entertainment plc and Jan Sijbrand, former executive at ABN Amro Holding NV and Chairman for Supervision at De Nederlandsche Bank N.V. (the central bank for the Netherlands). Both joined the Board and Risk Committee with immediate effect. Finally, my own appointment was announced on 28 October 2021. As part of their induction, all new Directors, including myself, were invited to attend meetings while awaiting the regulatory approval process to conclude so all have been exposed to the Board, and the business and strategy of the Group, for longer than the foregoing dates suggest. This is a lot of change for the Board in one year but I have been struck since my own arrival at how well the new appointees 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Annual Review Chair’s Statement 7 IT IS CLEAR TO ME JUST HOW CENTRAL SUSTAINABILITY IS IN THE GROUP’S STRATEGY had already settled in. On behalf of the Board, I wish to express my sincere gratitude to Ms Carolan Lennon, the Current Senior Independent Director, for her significant contributions to the Board and the Group since she joined in 2016. Carolan informed the Board that she will step down on 30 June 2022 and we wish her the very best for the future. SUSTAINABILITY AND COMMUNITY INVOLVEMENT It is clear to me just how central sustainability is in the Group’s strategy and how it informs so much of what we now decide as a Group. I have been equally impressed by the Group’s commitment to supporting local and national initiatives which undertake such vital work in the communities where we operate. The pages following Colin’s review, and our Sustainability Report 2021, provide more detail on the impressive work being undertaken by the Group in these important areas. THANK YOU TO COLLEAGUES As the world pivots to a new normal in the aftermath of the pandemic and as we see our colleagues return to our offices in new hybrid ways of working, it is opportune for me to record here the Board’s deep appreciation to everyone working in AIB Group, for their extraordinary support to the Group, to each other, to our customers and our communities and those who rely on us every day for their financial needs. Everyone had an important part to play in keeping the Group, our employees and our customers safe during these difficult times, whether from their homes, from branches or our offices and I thank them all on behalf of the Board. AMBITION FOR THE FUTURE My first official duty as Chair of the Board was to chair the strategy offsite meeting in November. I came away with a real appreciation for the ambition of Colin, his team and the Board for the growth and development of the Group, with our valued customers at the heart of every decision. During the year, we strengthened our medium-term targets to reflect the impact of the strategic initiatives in flight and we remain relentlessly focused on the delivery of these by 2023. As we look to the future, everyone in AIB Group is focused on building on the momentum of a successful year in 2021. Your Board remains confident that the Group is well positioned to deliver real, sustainable value in the years ahead for all our shareholders. JIM PETTIGREW Chair 2 March 2022 8 Our Group Annual Review AIB Group plc Annual Financial Report 2021 OUR GROUP AT THE HEART OF CUSTOMERS’ FINANCIAL LIVES AIB is a financial services group of companies. Our main business activities are retail, business and corporate banking, wealth management, mobile payments and card acquiring. AIB is our principal brand across all geographies. AIB provides a range of services to retail, business and corporate customers, with market-leading positions across key segments. EBS is a predominantly mortgage-focused brand within the AIB Group, helping thousands of people buy their own homes in Ireland. It offers mortgage, personal banking, savings and investment products and services. Haven is the trading name of our mortgage broker channel, which was established as a subsidiary of EBS in 2007, providing mortgages through intermediaries on behalf of AIB Group. Payzone is a subsidiary of AIB Group. It is a leader in digital payments, providing comprehensive solutions to more than 7,500 retail stores, over 100 clients and over 400,000 app users across Ireland. Goodbody is a leading investment-led business, offering wealth management, asset management and investment banking services with quality advice and exceptional client service at the core of its offering. AIB Merchant Services is a joint venture with Fiserv, a global leader in fintech and payments. It is one of Ireland’s largest payment solution providers and one of Europe’s largest e-commerce acquirers, with a global customer base. NiftiBusiness and Nifti Personal Leasing promote sustainable mobility solutions for Irish businesses and consumers. NiftiBusiness assists companies in achieving their fleet management goals; Nifti focuses on helping consumers switch to electric driving. AIB Group plc Annual Financial Report 2021 Annual Review Chief Executive’s Review 9 CHIEF EXECUTIVE’S REVIEW POSITIONED FOR GROWTH In 2021, we accelerated the delivery of our strategy and expanded our product suite, enabling us to sustainably generate value for our stakeholders. 1 2 3 4 5 6 2021 was a year of very significant progress across the Group despite uncertainties related to the COVID-19 pandemic. The Irish economy performed much better than expected due to the successful vaccine rollout, sustained government supports for business and society’s willingness to adapt to tough restrictions. Against this backdrop, I am pleased to report a robust set of results with profit before tax of €629m, a strong CET1 capital position of 16.6%1 and solid growth in new lending – clear evidence of AIB’s ability to play a key role in the country’s economic recovery. We continued to simplify, streamline and strengthen our business and maintained the No. 1 position in our core markets. We are now the country’s leading business bank and foremost mortgage provider while also setting the sustainability agenda in financial services in Ireland. As the country and the world confronts the growing threat of climate change, we expanded our green lending portfolio and put a comprehensive set of actions in train across the Group to ensure we maintain and extend our position as a leading force for sustainability. We have stated our ambition for 70% of our new lending to be green or transition by 2030 and have a clear target to achieve net zero in our financed emissions by 2040 for our full lending portfolio (2050 including agriculture). Throughout 2021, we accelerated the delivery of our strategy and began the year with the announcement of the acquisition of Goodbody, now firmly in the Group with integration going well. This was followed by our agreement to set up a joint venture with Great-West Lifeco. Both of these developments will enhance our wealth offering to customers and provide material long-term opportunities for the Group. We also announced the acquisition of the Ulster Bank corporate and commercial loan book, for which the competition authority approval process is underway. 1. Excludes the impact of the proposed buyback of €91m. Including the buyback CET1 is 16.5%. 10 Chief Executive’s Review Annual Review AIB Group plc Annual Financial Report 2021 NEW MORTGAGE LENDING WAS 26% HIGHER, AT €3bn, AS IRELAND’S MORTGAGE MARKET CONTINUED ITS STRONG PERFORMANCE THROUGHOUT 2021 These initiatives help to complete our product suite and position the Group for growth, sustainably generating value for all our stakeholders and enhancing our capacity to be at the very heart of our customers’ financial lives. The recently agreed sale of our SME loan book in Great Britain is further evidence of how our Transformation Programme is delivering real change and tangible cost savings. We remain on track to meet our medium-term targets of a CET1 of greater than 13.5%, a cost base of less than €1.475bn and a return on tangible equity of greater than 9% in 2023. More details on the progress made on each of our strategic initiatives can be found on page 19. FINANCIAL PERFORMANCE Our core business segments contributed positively to our financial performance in 2021 and we are reporting a profit before tax of €629m for the full-year. This includes an operating profit of €688m before exceptional items and impairment writeback. Total operating income of €2,384m was in line with full year 2020. We have seen a further reduction in our net interest income to €1,794m, a 4% decrease year- on-year. This moderate decline was driven by lower average customer loan volumes, the low interest rate environment and lower investment securities income partially offset by the TLTRO funding income benefit. Other income of €590m is up 18%, or 13% excluding Goodbody, compared to 2020 driven by an increase in underlying net fee and commission income. Our total operating expenses were €1,534m, down 1% excluding Goodbody. We will continue to maintain our focus on the cost agenda in 2022, leveraging opportunities to reduce costs through increased efficiencies. There was a net credit impairment writeback of €238m reflecting a more favourable economic environment, improved credit quality and updated macroeconomic assumptions partially offset by post- model adjustments. Our overall approach remains conservative, comprehensive and forward-looking and is reflected in an expected credit loss coverage rate of 3.2%. Exceptional items of €318m include restitution- related costs, restructuring costs and inorganic transaction costs. In terms of legacy items, where we identify an issue, our priority is to put things right for our impacted customers. We continue to work closely with the Central Bank of Ireland with regard to any Tracker-related issues and associated Enforcement investigations. New lending of €10.4bn in 2021 was 13% higher than 2020. We continued to see mixed trends across our core segments; new mortgage lending was 26% higher at €3bn, as Ireland’s mortgage market continued its strong performance throughout the year, while personal lending was 5% lower at €0.9bn, reflecting subdued credit demand and higher savings as a result of COVID-19 restrictions. New lending in Capital Markets was 33% higher at €4.1bn, driven by an increase in property and renewable energy lending. Irish SME lending was broadly in line with 2020 with higher term lending (which benefited from government-supported schemes) offset by lower transaction lending. Gross loans at €58.4bn were down €1.0bn driven by a reduction in non-performing loans of €1.2bn or 28% with performing loans of €55.3bn, broadly stable when compared to 2020 year-end. Net loans were down €1.3bn (excluding FX impact) primarily due to the redemption and disposal of non-performing loans. As at 31 December 2021, 87% of AIB’s loan book was of strong or satisfactory AIB Group plc Annual Financial Report 2021 Annual Review Chief Executive’s Review 11 1 2 3 4 5 6 quality (up from 85% at 2020 year-end). Maintaining the quality of new lending is critical, with more than 98% of our new lending being of strong or satisfactory credit quality in 2021. Non-performing loans as a percentage of gross loans to customers was 5.4% at 31 December 2021 compared to 7.3% at 31 December 2020. This decrease primarily reflects the disposal of loan portfolios and redemptions, partially offset by net flow to non-performing. We remain committed to reducing non-performing exposures (NPEs) to c.3% of gross loans by 2023 given the impact on cost, capital requirements and balance sheet resilience. Legacy NPEs were €0.9bn or 1.5% of gross loans. AIB’s funding ratios remain robust. As customer deposits continue to accumulate, up 13% in 2021, our Loan to Deposit Ratio was 61% at the end of December 2021 and we continue to have strong liquidity metrics (Liquidity Coverage Ratio 203% and Net Stable Funding Ratio 160%). In May, we issued our second green bond to the market raising €750m and bringing MREL eligible instruments to €6.6bn. The Group has a strong capital base with a CET1 ratio of 16.6% at 31 December 2021, well in excess of regulatory requirements and our medium-term target of greater than 13.5%. Proposed distributions include an ordinary dividend of €122m and a directed share buyback of €91m. DIGITAL As Ireland’s leading digital bank, continued investment in our digitally-enabled product lines is imperative to ensure we provide our customers with a seamless end-to-end journey characterised by quicker decision times and access to funds. The way our customers are choosing to interact with us has fundamentally changed – and was hastened by the pandemic with our digitally-active base now standing at 1.85m. It is not only younger IT IS NOT ONLY YOUNGER CUSTOMERS WHO ARE CHOOSING DIGITAL; WE SAW A 41% INCREASE IN THE NUMBER OF ACTIVE MOBILE BANKING CUSTOMERS AGED 65+ 12 Chief Executive’s Review Annual Review AIB Group plc Annual Financial Report 2021 designed to equip our people with the skills and knowledge to successfully manage and motivate colleagues to be purpose-driven and performance orientated, while positively impacting cultural change. We are committed to creating an inclusive and supportive organisation that delivers for all our customers and creates an environment in which our employees also develop and thrive. In 2021, we were the first Irish bank to be awarded a Silver accreditation by the Irish Centre for Diversity, Ireland’s only equality, diversity and inclusion performance mark. Gender diversity has been a key strategic focus for AIB and last year’s Graduate Programme intake had a 50/50 gender split. We also launched our Employee Value Proposition (EVP), which is designed to attract more diverse talent while supporting our continued focus on ensuring we have the right skills and capabilities in place to deliver on our strategic objectives. Despite the challenges posed by the pandemic, our customer-facing colleagues continued to work tirelessly supporting our customers, while the majority of our colleagues continued to work remotely. Progress was also made on our Future of Work plans and in December 2021 we defined our future Hybrid Working Model. We will focus on new ways of working, enabling team engagement in the office, and shifting the emphasis to purposeful collaboration, networking and innovation. A number of announcements were made in 2021 regarding our Executive Committee. Fergal Coburn was appointed Chief Technology Officer, Robert Mulhall announced his decision to leave the Group and Hilary Gormley has since been appointed Managing Director Designate of AIB UK. Our Chief Risk Officer, Deirdre Hannigan, also signalled her intention to retire and a process to appoint her successor is well advanced and an announcement will be made in due course. I congratulate Fergal and Hilary on their appointments and express my appreciation to Deirdre and Robert for their significant contributions to the Group and wish them well in their future endeavours. SUSTAINABLE COMMUNITIES Sustainable Communities is a key strategic pillar for AIB. The Environmental, Social and Governance (ESG) agenda is being embedded as part of the very fabric of the organisation and how we conduct our activities day in, day out. As underlined at COP26 in Glasgow last year, in the fight against climate change there can be no further delays. customers who are choosing digital; in 2021 we saw a 41% increase in the number of active mobile banking customers aged 65+. Our customers have also embraced new payment methods with a 218% increase in digital wallet payments compared to pre- pandemic levels, with the value of these payments increasing by 382% on the same period. Recognising the importance of cyber risk and information security, we continue to educate AIB staff and our customers on emerging cyber threats. We sustain significant annual investment in a range of sophisticated technologies and strategic partnerships that underpin our cyber defence capabilities. We actively participate in industry fora, collaborating with other banks to ensure our products and services remain available to customers and their data remains protected. CULTURE AND OUR PEOPLE Our purpose, values and our people are the cornerstones on which our culture is built. Empowering our leaders and encouraging them to live our organisation’s values and associated behaviours is key to evolving our culture. With that in mind, we held our first Leadership Summit in October and launched our Leaders Enabling a Difference (LEAD) Programme, an all-inclusive programme EMPOWERING OUR LEADERS AND ENCOURAGING THEM TO LIVE OUR ORGANISATION’S VALUES AND ASSOCIATED BEHAVIOURS IS KEY TO EVOLVING OUR CULTURE 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Annual Review Chief Executive’s Review 13 WE CONTINUED TO EXPAND OUR GREEN LENDING WHICH ACCOUNTED FOR 19% OF ALL NEW LENDING IN 2021 To this end, we continued to expand our green lending which accounted for 19% of all new lending in 2021 and is the fastest growing part of our loan book. We also reduced our own scope 1 & 2 emissions by 19% and are now finalising a Corporate Power Purchase Agreement (PPA) to directly source renewable solar energy for our operations to reduce our emissions further. We gave further practical effect to our commitment to social progress, particularly in relation to the greatest issue facing our society – the housing deficit. We announced a new €500m Social Housing Fund to provide 3,000 social housing units in Ireland in the coming three years. We published our Social Bond Framework, we launched a financial literacy and skills programme for secondary school students and, in addition, AIB also became the title sponsor of the GOAL Mile. From a governance perspective, we established a new Group Sustainability Committee which also oversees our multi-year sustainability regulatory programme. Overall, the Group is now well placed to continue to drive ESG and Sustainability across both the organisation and our customer base. For further details on the progress we are making, please see pages 42 to 55 and our detailed Sustainability Report. We p l e d g e t o D O M O R E S U S TA I N A B I L I T Y R E P O RT fo r t h e fi n a n c i a l ye a r e n d e d 3 1 D e ce m b e r 2 0 2 1 A I B G ro u p p l c For more information see our Sustainability Report 2021 OUTLOOK Though COVID-related restrictions remained in place for much of the year, it is a measure of the underlying strength of the Irish economy that it could rebound so strongly in 2021 across all sectors including manufacturing, services, construction and retail. Housing starts picked up sharply during 2021, with the strongest level of commencement activity seen since 2007. Forecasters are projecting another year of strong economic growth, with the global economy expected to perform well and scope for a rundown of the large build-up of private sector savings seen during the pandemic. However, there are still risks to the economic recovery, including how well businesses will cope with a withdrawal of government COVID-19 supports, as well as the marked rise in inflationary pressures over the past year, which is expected to see central banks move onto a policy-tightening path in 2022. The crisis in Ukraine adds further uncertainty to the economic outlook, but any impact on growth in our core markets is expected to be modest at this point. AIB Group’s robust balance sheet, its digital capability and the scale of its operations mean we will continue to play a key role in supporting our customers, our communities and the wider Irish economy. We want to build on the achievements of 2021, by enabling and leveraging a platform for growth, focusing on key areas including mortgages, Capital Markets and our UK business. We will further enhance our wealth proposition and go to market across a wide range of customer groups. Combining this with our leading customer franchise and the quality and ever increasing functionality of our digital offering, these moves will ensure that AIB is the market-leading, full-service financial provider in Ireland. We welcomed the decision in December by the Minister for Finance, Mr Paschal Donohoe, in relation 14 Chief Executive’s Review Annual Review AIB Group plc Annual Financial Report 2021 to the further divestment of the State’s shareholding in AIB Group plc. We owe the Irish taxpayer an immense debt of gratitude for its support during the global financial crisis. And so, looking to 2022 and beyond, buoyed by the momentum in our business and strong pipeline, we are well positioned to deliver on our medium- term targets and generate sustainable profits in the interests of all our stakeholders. Finally, I would like to thank my fellow Board and Executive Committee members for their unwavering support and determination to deliver a professional and trusted banking service to our 2.8 million customers. I welcome our new Chair, Jim Pettigrew, to the Group, and I look forward to working closely with him in implementing our strategy. I also thank our interim Chair, Brendan McDonagh, and all of my colleagues across the Group for their relentless effort and commitment. Together, we are demonstrating our ability to rise to unprecedented challenges and to ensure that all our strategies have, at their core, the welfare of our customers and the strengthening of the Group’s balance sheet so that we continue to play a key positive role in the Irish economy now and in the years to come. COLIN HUNT Chief Executive Officer 2 March 2022 CREATING VALUE SUSTAINABLY 10,000 HOMES UNDER DEVELOPMENT 2,000 SOCIAL HOMES FUNDED 7,686 FIRST TIME BUYERS SUPPORTED S E M H O #1 IN IR E L A N D €450M 4 €10M €1.0BN 2.8M CUSTOMERS 2,128 SUPPLIERS6 C R E V A A L T U I O E N 9,154 EMPLOYEES5 €796M DIGITA L LEADERS H I P 1.55M ACTIVE MOBILE CUSTOMERS 1.85M DIGITALLY ACTIVE CUSTOMERS 2.86M DAILY INTERACTIONS €3.1BN €10.4BN €1.6BN G S N M I K A C E A R B D €2.0BN Information as of 28 February 2022. Source: Company information and independent market research. 1. New mortgage lending FY2021 2. No. 1 among banks personal lending excluding car finance 3. See “Personnel expenses” in our AFR 2021 – note 12 p.276. 4. “Tax paid” (€194m) refers to taxes borne by the Group, incl. corporate tax, bank levy, social employer insurance and irrecoverable VAT. “Tax collected” (€256m) comprises of payroll taxes/social insurance collected from employees and net VAT collected from customers. 5. Average employees in 2021, including Payzone and Goodbody employees. Total employees at 31 December 2021 including Payzone and Goodbody employees was 8,916. 6. For more details, see page 112 in our Sustainability Report 2021. AIB Group plc Annual Financial Report 2021 Annual Review AIB in our Community 15 AIB IN OUR COMMUNITY DOING MORE FOR OUR COMMUNITIES In 2021, AIB continued to support local and national initiatives to do vital work in our communities. 1 2 3 4 5 6 In 2021 communities continued to be impacted by the COVID-19 pandemic, and AIB continued to respond. With our deep community roots, we have demonstrated our support and are committed to making a positive contribution to society and the communities in which we live and work. We make a meaningful impact through community partnerships and our people; our physical presence on high streets enables face-to-face advice and support for local activities. Our employees fundraised for over 600 local organisations in 2021 and have now surpassed 10,000 recorded volunteering hours since 2018. Our core community partners and programmes enable us to further develop our impact on society and focus on key areas where we can make a real difference: Education & Opportunities; Sustainability, and; Digital Innovation & Financial Inclusion. THE GOAL MILE First year of AIB sponsorship of the GOAL Mile, supporting sustainable communities, raised €409k with 20,000 participants in over 20 countries around the world – making 2021 the largest GOAL Mile ever! 2021 was our fourth year of partnering with FoodCloud. Since 2018, with AIB’s support alone, over 19 MILLION MEALS have been redistributed to over 600 charities throughout Ireland 6th year of partnering with SOAR. 5,847 teenagers supported across Ireland 25 years of partnering with Junior Achievement. 1,260 volunteers working with over 29,000 students in 355 schools Through our AIB Together Covid fund, we distributed €1 MILLION to those most in need, including our charity partners Age NI, Age UK, ALONE, FoodCloud, Pieta, and Soar “ I FELT A REAL BOOST OF MORALE AND SUPPORT FROM AIB BACKING THE GOAL MILE. I WAS BOWLED OVER BY THE ENTHUSIASTIC AND ENERGETIC HELP FROM AIB STAFF IN THE AREA... TOGETHER WE FORMED A DYNAMIC TEAM OF EVENT ORGANISERS AND LOCAL NETWORKERS” Liam O’Brien, GOAL Mile Organiser, Herbert Park and Lahinch “ I LOVE WORKING IN THE SHOP. I’VE MET SO MANY PEOPLE IN THE COMMUNITY, FRIENDS AND NEIGHBOURS” Emma Raben, AIB employee and Sue Ryder Foundation charity shop volunteer “ I DEFINITELY FEEL MORE PREPARED FOR MY FUTURE WORK LIFE AND FEEL LESS NERVOUS ABOUT GOING FOR AN INTERVIEW” Sean O’Leary, Junior Achievement student at St. Paul’s CBS, North Brunswick Street, Dublin 7 16 Economic Outlook Annual Review AIB Group plc Annual Financial Report 2021 ECONOMIC OUTLOOK STRONG RECOVERY AMID UNCERTAINTY The global economy rebounded strongly last year and into 2022, albeit set against a backdrop of continued concerns around the COVID-19 pandemic and inflation. +25% NEW MORTGAGE LENDING 20,500 HOUSING COMPLETIONS +4.9% CORE RETAIL SALES The global economy rebounded strongly in 2021 following the large contraction in output seen in 2020 as a result of the COVID-19 pandemic. The strong rebound was very much aided by the rollout of vaccines that proved effective in countering the coronavirus and allowing economies to re-open – many economies went back into lockdown in the early part of the year before vaccines became widely available. The vaccines, though, have not proved fully effective in reducing the transmissibility of the virus, and a number of countries re-imposed some restrictions late in the year as COVID-19 case numbers rose again. Overall, though, global growth proved stronger than expected in 2021, with the OECD putting the rise in world GDP at 5.6%. It estimates that the US, UK and Eurozone economies grew by 5.6%, 6.9% and 5.2%, respectively, in 2021. Meanwhile, labour markets recovered more quickly than anticipated, with the unemployment rate falling towards 4% by year-end in the US and UK and near 7% in the Eurozone. On the other hand, inflation picked up much more rapidly than expected in 2021, most notably energy prices, with headline CPI rates rising to 7% in the US and c. 5% in Europe. IRISH ECONOMY PERFORMS VERY WELL The Irish economy also recovered well in 2021, despite being in lockdown for the first four months of the year, with both exports and the domestic economy performing strongly. GDP growth, though, continued to be inflated by trade-related flows in the multinational sector. According to the latest CSO data, GDP increased by 14.5% year-on- year in the first three quarters of 2021. By contrast, modified final domestic demand rose by 5.3% year-on-year over the same period. Consumer spending, which took a considerable hit in 2020, rose by 5% in the first three quarters of 2021. Full year CSO figures show that core retail sales (i.e. excluding the motor trade) rose by 4.9% in 2021, while new car registrations were up by 21%. Meanwhile, domestic investment rose by 6.7% year-on-year in the first three quarters of 2021 per CSO data. The recession in the domestic economy in 2020 saw employment contract and unemployment rise, but the labour market recovered strongly in 2021. By end of 2021, the level of employment had recovered to 6.3% its pre-pandemic levels. Meanwhile, the unemployment rate fell sharply over the course of the year. By end 2021, the pandemic adjusted jobless rate had fallen to 7.4%, having stood at 27% earlier in the year when the economy was back in lockdown. HOUSING COMPLETIONS HOLDS STEADY House prices in Ireland, as elsewhere, rose very strongly in Ireland in 2021. The latest CSO data show prices rose by 14.4% year-on-year in December. Rents in the residential sector also rose strongly during 2021, with CSO data showing them up 8.4% in December on previous year levels. House building activity held up in 2021, despite the lockdown earlier in the year, with CSO data putting house completions at 20,500, broadly unchanged on the levels in 2020 and 2019. Meanwhile, official government data show housing commencements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Annual Review Economic Outlook 17 CORE RETAIL SALES (YOY, %) 20 16 8 4 0 -4 -8 -16 Q4 2014 Q2 2015 Q4 2015 Q2 2016 Q4 2016 Q2 2017 Q4 2017 Q2 2018 Q4 2018 Q2 2019 Q4 2019 Q2 2020 Q4 2020 Q2 2021 Q4 2021 SOURCE: CSO VIA REFINITIV PRIVATE SECTOR DEPOSITS (TOTAL, €MN) 290,000 270,000 250,000 230,000 210,000 190,000 DEC 18 JUN 19 DEC 19 JUN 20 DEC 20 JUN 21 DEC 21 SOURCE: CBI VIA REFINITIV MODIFIED FINAL DOMESTIC DEMAND (3 QTR MOV AVG, YOY, %) 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 Q3 2014 Q1 2015 Q3 2015 Q1 2016 Q3 2016 Q1 2017 Q3 2017 Q1 2018 Q3 2018 Q1 2019 Q3 2019 Q1 2020 Q3 2020 Q1 2021 Q3 2021 SOURCE: CSO VIA REFINITIV NEW DWELLING COMPLETIONS (TOTAL, 4 QTR MOV AVG) 24,000 21,000 18,000 15,000 12,000 9,000 6,000 3,000 0 Q4 2014 Q2 2015 Q4 2015 Q2 2016 Q4 2016 Q2 2017 Q4 2017 Q2 2018 Q4 2018 Q2 2019 Q4 2019 Q2 2020 Q4 2020 Q2 2021 Q4 2021 SOURCE: CSO VIA REFINITIV picked up sharply during 2021, rising to over 30,700. This points to a likely rise in housing completions over the next couple of years. SAVINGS RISE FURTHER, MORTGAGE LENDING REBOUNDS A notable feature of the pandemic has been a very sharp increase in private sector savings in many economies, including Ireland. This manifested itself in a further rise in levels of Irish banking deposits in 2021. These rose to €286.5bn by December from €255bn at the start of the year. Mortgage lending rebounded in 2021, increasing by 25% having fallen to €8.4bn in 2020. Meanwhile, Central Bank data show new lending to the SME sector amounted to €2.1bn to end-September, up 8% from the same period in 2020. ECONOMIC OUTLOOK All the main official international and domestic forecasters are projecting a continuation of the strong global economic recovery in 2022, helped by an ongoing supportive stance to macroeconomic policy and with scope for a rundown of the large buildup of private sector savings seen during 2020-2021. Both these factors are very much in evidence in Ireland and should be supportive of continuing strong growth in activity here during 2022. However, forecasters also warn of risks to the economic outlook, in particular with regard to the future path of the coronavirus, impact of the withdrawal of government Covid supports, ongoing disruptions and bottlenecks in supply chains, geopolitical tensions as well as elevated inflationary pressures. 18 Our Strategy Annual Review AIB Group plc Annual Financial Report 2021 OUR STRATEGY A PLATFORM FOR GROWTH In 2021, we continued to make steady progress against our strategic initiatives to address product gaps, generate cost savings and position AIB for growth, while supporting the transition to a low-carbon economy. Following an acceleration towards digital banking and changing ways of working associated with the COVID-19 pandemic, we announced a refreshed three-year strategy and Transformation Programme for AIB Group in December 2020. Our strong capital base, leading customer franchise and digital capability enabled the Group to adapt to uncertainty and change while remaining focused on our long-term strategic objectives. In 2021, we made good progress in our Transformation Programme, delivering real change to enable cost-savings across each of our strategic initiatives over the course of a multi-year plan. These initiatives are aligned to our five strategic pillars – Customer First, Simple & Efficient, Risk & Capital, Talent & Culture and Sustainable Communities. For more details, and an overview of the progress made in 2021, see the table on page 19. Amid the uncertainty caused by the pandemic, there was also a growing recognition globally of a need to create a more sustainable world. Increasing evidence of the climate crisis, as witnessed by extreme weather events across the world in 2021, has reinforced and accelerated the drive to sustainability. GOVERNANCE AND OVERSIGHT REMAIN KEY TO ENSURING OUR STRATEGY IS DELIVERED AND EFFECTIVE At AIB, Sustainable Communities is a key strategic pillar and a core consideration in everything we do. We continue to progress our sustainability agenda across each of the ESG categories – environment, social, and governance (see page 19). A comprehensive set of actions is in train across the Group to further integrate sustainability practices and offer our customers more green propositions and services. To oversee and progress this integration appropriately, in 2021 we introduced a new executive governance committee, the Group Sustainability Committee (GSC), complementing the existing Sustainability Board Advisory Committee. For more information about these committees, see our Sustainability Report 2021. Governance and oversight remain key to ensuring our strategy is delivered and effective. To ensure the Group achieves our purpose and strategic goals in an appropriately risk-controlled manner, the Group’s Risk Committee safeguards proper oversight of the Group’s risk appetite, management structure, frameworks and policies, as well as challenging whether the management controls in place are adequately robust. More information about our risk approach can be found in the Risk Summary on pages 26 to 31. In managing our strategy, the Group remains adaptable to changing circumstances and has responded appropriately in recent times, including the establishment of new Board advisory committees, such as the Technology & Data Advisory Committee in 2020. Our focus for the next year is to leverage the progress made in 2021, using it as a platform for growth. While we remain alert to uncertainties in the economic environment and the evolving banking landscape, we have strong business fundamentals underpinning our growth strategy. Looking forward, we will maintain focus on our products and services, aligning our Group operating model and ways of working to ensure we can serve customers as their banking needs evolve, as a complete provider of financial services. And we will continue to action our pledge to support the transition to a low-carbon economy, reducing our own carbon footprint and assisting our customers to do the same. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Annual Review Our Strategy 19 IN 2021, WE FOCUSED ON STRATEGIC INITIATIVES ACROSS OUR FIVE PILLARS, MAKING GOOD PROGRESS IN EACH DURING THE YEAR. STRATEGIC PILLAR INITIATIVE UPDATE CUSTOMER FIRST PRODUCT GAPS; INORGANIC GROWTH SIMPLE & EFFICIENT RISK & CAPITAL REFOCUSED BRANCH NETWORK CHANGE DELIVERY AIB GB BUSINESS MODEL END-TO-END CREDIT • Acquired Goodbody to enhance capital markets, wealth management and corporate finance propositions • CCPC approval received for a joint venture with Great-West Lifeco; CBI application underway • Completed commercial negotiations with NatWest Holdings Limited for the acquisition of the performing Ulster Bank corporate and commercial loan portfolio; CCPC process underway • Acquired a 50% stake in Autolease Fleet Management – trading as NiftiBusiness and Nifti Personal Leasing – for car leasing solutions • Reorganised c.20% of our AIB and EBS branch network in Ireland and the UK • Amalgamated 21 AIB branches and closed 3 EBS offices in Ireland; closed 8 branches in Northern Ireland • Created 17 new Sales & Advisory branches, making 22 in total, dedicated to meeting our customers’ lending, mortgage and financial planning needs • Expanded the services on offer for AIB customers at An Post locations • Created 240 technology, data and digital specialist roles, reducing reliance on third parties • Enhanced cost management across the Group using zero-based budgeting methodology • Reorganised the business to focus on Corporate growth in specific sectors, including renewables, infrastructure, real estate, healthcare and manufacturing • Exited the SME market with agreed bid on portfolio sale of £0.6bn • Streamlined existing credit, customer and account management and fulfilment activities for SMEs • Completed design work on long-term credit solutions for corporate and SME customers • Implemented CreditLogic technology to enable digitalisation of EBS mortgage journeys TALENT & CULTURE FUTURE OF WORK • Designed our Future of Work approach around a hybrid working model • Physical exit completed of Burlington Road office building in Dublin • Launched aib Connect, our new employee communications and engagement app ENVIRONMENT • Launched the AIB Personal Green Loan and Haven Green Mortgage • Raised €750m on completion of our second green bond issuance • Doubled our Climate Action Fund to €10bn to support large-scale green and transition projects SUSTAINABLE COMMUNITIES SOCIAL GOVERNANCE • Launched a Social Bond Framework to support communities across Ireland • Launched Future Sparks, supporting financial literacy among post-primary schools in Ireland • Agreed a three-year partnership to support the annual GOAL Mile • Appointment of Jim Pettigrew as Chair of the Board • Established the Group Sustainability Committee (GSC) • Advanced the work of the new Technology & Data Advisory Committee (TDAC) • Appointed Elaine MacLean as our NED designated to engage directly on employee issues KEY: DIGITALISATION WAYS OF WORKING SUSTAINABILITY BUSINESS MODEL 20 Our Strategy Annual Review AIB Group plc Annual Financial Report 2021 CUSTOMER FIRST SIMPLE & EFFICIENT RISK & CAPITAL TALENT & CULTURE SUSTAINABLE COMMUNITIES 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Annual Review Our Strategy 21 OUR STRATEGY CUSTOMER FIRST AWARD-WINNING CX The International Customer Experience Awards (ICXA) recognise organisations leading the way in managing Customer Experience excellence. In November, AIB won Gold Awards in Best Use of Insights and Feedback and Customer Experience in the Crisis categories and a Silver Award for Customer Experience Team of the Year. COMPETITIVE MORTGAGE OFFERINGS In 2021, AIB Group continued to offer market-leading mortgages: • Launched AIB Higher Value 4 Year Fixed Rate • Reduced AIB Green 5 Year Fixed Rate • Launched Haven Green 4 Year Fixed Rate • Reduced EBS 3 and 5 Year Fixed Rates • Reduced Haven long-term 7 and 10 Year Fixed Rates €1.6BN NEW LENDING TO SMEs including Government support schemes 10,000 NEW SUSTAINABLE HOMES AIB is the main Irish bank for most large residential development groups, with primary lending facilities on current live developments with the potential to deliver over 10,000 new sustainable homes, including 1,100 social housing units. And in the second half of 2021, we launched a new €500m Social Housing Fund to provide over 3,000 individuals and families with the keys to their own homes. IRELAND’S #1 MORTGAGE PROVIDER IRELAND’S #1 BUSINESS BANK MEASURE OUTCOME 2021 TARGET CUSTOMER SATISFACTION TRANSACTION NET PROMOTER SCORE (NPS)1 Measured after customer transactions for key touch points +45 +53 MEDIUM-TERM (END 2023) 1. Transaction Net Promoter Score (NPS) is an aggregation of 20 customer journeys across Homes, Personal, SME, Digital, Retail, Direct and Day-to-Day Banking. 22 Our Strategy Annual Review AIB Group plc Annual Financial Report 2021 OUR STRATEGY SIMPLE & EFFICIENT AWARD-WINNING AUTOMATION In October, we won the EMEA Automation & Management category at the Red Hat Digital Leaders Awards. Our CTO team was recognised for the speed at which we provision and decommission systems, the empowerment of our developers through a fully automated self-service model, the level of security codified upfront and the focus on our team training and capability uplift. FASTER COMMERCIAL GRADING In October, we launched our new Commercial Grading System for facilities where the borrower’s total AIB exposure is €300,000 or greater. The new system has many efficiencies including accelerated completion time. 85% PERSONAL LOANS COMPLETED ONLINE BEST IN CLASS E2E In December, our nCino Programme won Best Use of Technology – Transformation Programme in the Customer Contact & Shared Services Awards 2021 for its transparent and seamless customer credit journey. CONTINUED DIGITAL GROWTH AIB customers made c. 107m digital wallet payments in 2021, almost double the number in 2020 (57m) and three times the amount before the pandemic (c. 34m in 2019). The value of these payments has increased 382% since 2019 from €0.5bn to €2.4bn in 2021. Overall, AIB’s digitally active customer base grew by a further 8% in 2021. MEASURE OUTCOMES 2021 TARGETS DIGITALLY ACTIVE CUSTOMERS Number of active customers on digital channels 1.85m >2.25m MEDIUM-TERM (END 2023) ABSOLUTE COST BASE1 Cost of running the business, excluding exceptional costs €1.534bn <€1.475bn MEDIUM-TERM (END 2023) 1. Before bank levies, regulatory fees and exceptional items. For exceptional items, see pages 62 and 71. AIB Group plc Annual Financial Report 2021 Annual Review Our Strategy 23 OUR STRATEGY RISK & CAPITAL €750m GREEN BOND ISSUANCE In May, we raised €750m after completing our second green bond issuance in less than a year. The proceeds will finance projects with clear environmental and climate change benefits and further strengthen AIB’s capital position. MANAGING OUR ESG RISKS In June, we launched new initiatives that will further embed ESG considerations across our lending business: our Sustainable Lending Framework which will categorise green or transition lending; our ESG Questionnaire for borrowers in high climate risk sectors to help assess ESG risk before we agree to lend; and our Collateral Valuations to capture Building Energy Ratings/Energy Performance Certificates for our property assets. 1 2 3 4 5 6 FIGHTING FINANCIAL CRIME In May, we mobilised a new centre of excellence for AML, Fraud and Sanctions to ensure timely detection and response in the first line of defence. OUR SOCIAL BOND FRAMEWORK In August, we became the first Irish bank to launch a Social Bond Framework. Funds raised under this new framework will support a wide range of social issues, including the provision of social and affordable housing, healthcare and education as well as charitable and non-profit organisations. €6.6bn MREL ELIGIBLE INSTRUMENTS MEASURE OUTCOMES 2021 TARGETS RETURN ON TANGIBLE EQUITY1 A measure of how well capital is deployed to generate earnings growth 8.2% >9% MEDIUM-TERM (END 2023) CET1 RATIO (FULLY LOADED)2 A measure of our ability to withstand financial stress and remain solvent 16.6% >13.5% MEDIUM-TERM (END 2023) 1. Based on CET1 revised target of 13.5%. 2020 RoTE is based on prior CET1 target of 14%. 2. Excludes the impact of the proposed buyback of €91m. Including the buyback CET1 is 16.5%. 24 Our Strategy Annual Review AIB Group plc Annual Financial Report 2021 OUR STRATEGY TALENT & CULTURE CHAMPIONING #WOMENINTECH In November, we were awarded the #WomeninTech Company Initiative of the Year by Technology Ireland. We were recognised for our work with Skillnet ReBOOT, supporting the ambitions of IT-qualified women and helping to reignite their careers in technology. YOUNG BANKER OF THE YEAR In October, AIB UK’s Rosie Lyon won the 2021 UK Chartered Banker Institute’s Global Young Banker of the Year competition for her proposal to create a fairer financial future for victims/survivors of domestic violence. In November, we launched our week-long Speak Your Mind campaign, encouraging our people to speak up about opinions, ideas and issues, and report wrongdoing through AIB’s Speak Up Policy. AIB’s commitment to an open, transparent and supportive culture is supported by our senior leaders, our CEO, CPO and Whistle-blowers’ Champion, who shared videos encouraging staff to ‘Speak Your Mind’. INVESTING IN DIVERSITY In August, we became the first bank in Ireland to be awarded the Investors in Diversity Silver accreditation. Supported by the Irish Business and Employers Confederation (Ibec), Investors in Diversity is Ireland’s only equality, diversity and inclusion performance mark. GENDER BALANCED 2021 Graduate Programme in-take #1 IN IRELAND #11 IN EUROPE Gender Diversity Index Report 2021 EMPLOYEE CHECK-IN SURVEY, NOVEMBER 2021 RESPONDENTS AGREED STATEMENT 82% 83% 85% AIB is supporting employees to adapt to new ways of working. AIB has communicated clearly and consistently during COVID-19. My people leader keeps me informed about what is going on at AIB. MEASURE OUTCOME 2021 TARGET INCLUSION & DIVERSITY Women as % of management 42% GENDER BALANCED ONGOING 1. Based on a participation rate of 59%. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Annual Review Our Strategy 25 OUR STRATEGY SUSTAINABLE COMMUNITIES SUPPORTING ZERO-CARBON COMMUNITIES Throughout the summer, we worked with social enterprise the Think Tank for Action on Social Change (TASC), piloting The People’s Transition Project in Ardara, Donegal, and Phibsborough, Dublin. The project aimed to facilitate community stakeholders to identify local challenges and create a strategic plan of potential climate solutions to benefit their community. €10BN CLIMATE ACTION FUND In October we doubled our Climate Action Fund to €10bn, due to strong customer demand. The fund was originally launched in 2019 with a target of lending €1bn per annum for green lending over five years. Having comfortably exceeded this annual target for two years, it is now €2bn. SKILLS FOR SECONDARY SCHOOL STUDENTS In September, we launched our Future Sparks programme for post-primary school students aimed at supporting their development and learning of key life skills, including financial literacy. We plan to support 500,000 customers with financial literacy by 2023. GAA: FROM THE GRASSROOTS UP AIB is proudly the longest continuous sponsor of the GAA. We are now in our 31st season as sponsor of the All-Ireland Club Championships, our ninth season as sponsor of the AIB Camogie Club Championships, and we have sponsored the All-Ireland Senior Football Championships since 2014. MEASURE OUTCOMES 2021 TARGETS REDUCTION IN EMISSIONS1 % reduction in Scope 1 & 2 emissions from operations year-on-year 19% NET ZERO BY 2030 (OWN OPERATIONS) LONG-TERM GREEN FINANCE Amount of new lending per year for climate action €2bn €2bn per year MEDIUM-TERM (END 2023) 1. In our 2020 AFR, we reported our GHG emissions one year in arrears. In an enhancement, we are now reporting Scope 1 & 2 emissions for the most recent financial year. Consequently, we have restated our 2020 emissions data, as we now disclose our datacentre emissions in our Scope 3 emissions. Our ambition is to achieve Net Zero in our financed emissions by 2040 for our full lending portfolio with the exception of Agriculture. In addition, COVID-19 restrictions had an impact on our emissions reduction in 2021. 26 Risk Summary Annual Review AIB Group plc Annual Financial Report 2021 RISK SUMMARY OUR APPROACH TO RISK Supported by a risk-aware culture, our risk management approach allows AIB Group to respond effectively to changing circumstances. AIB Group’s risk management approach seeks to identify the key risks to our strategy, provide a risk management framework for each Principal Risk, sets an appropriate risk appetite, and regularly stresses our risk exposures to test the Group’s resilience to the occurrence of those risks. This process occurs quarterly, allowing the Group to respond to changing circumstances in a dynamic manner and enabling the Group to meet our purpose of backing our customers to achieve their dreams and ambitions. Our Risk Management Framework sets out the integrated approach to risk management across the Group, providing a clear, concise and comprehensive approach to the governance, implementation and embedding of risk management practices across the Group and its subsidiaries. This is supported by a Group-wide focus on risk culture, in particular our Customer First and Risk & Capital strategic pillars. The Principal Risks facing the Group are identified through the Material Risk Assessment (MRA), which also identifies the key emerging risk drivers, which are described on page 31. Changes in the risk profile and outlook of the Group’s Principal Risks, which are outlined in more detail on pages 28 to 30, are reported monthly to the Group Risk Committee and regularly to the Board Risk Committee and Board. We manage each Principal Risk within a set of individual risk frameworks and policies that are maintained by the Risk function. We review these regularly to ensure they continue to support the strategy while remaining aligned to regulatory requirements and industry good practice. On an annual basis, the Board sets out the maximum amount of risk the Group is willing to accept within our Risk Appetite Statement (RAS). The approved risk limits are monitored monthly and reported to the Board to ensure the Group remains within our risk appetite. and stress-testing. The scenarios used are informed by the key emerging risk drivers identified in the MRA. These are used to assess the internal capital adequacy assessment process (ICAAP) and the three- year financial plan, including testing the financial plan outcomes against the approved risk appetite. The Group is closely monitoring the rapidly evolving situation in Ukraine and its potential impact on the Group's business. Further details are provided on page 78. The Risk Management section of this Report, from pages 78 to 168, provides a more in-depth overview of how risk is managed within the Group, detailing the approach to risk governance including the three lines of defence, committee structures, risk appetite and stress testing. RISK DEVELOPMENTS IN 2021 2021 was another year of high uncertainty. COVID-19 continued to pose significant challenges to the Group’s activities; our customers continued to be impacted by public health restrictions and many of our customers and employees are still working remotely. As the global economy recovers from COVID-19, inflation and supply-chain concerns have come to the fore. Other risks, such as cyber risk and information security, sustainability and climate change and competition in the Irish market have also been a key focus for the Board in 2021. The Risk Management Framework has remained robust and continued to support the Group’s response to these risks. The key developments in 2021, and the risk actions undertaken to manage these, are set out below. COVID-19 Despite continuing uncertainty from new variants such as the recent Omicron wave, economies have been more resilient than was expected at the beginning of 2021 albeit that certain sectors have been, and continue to be, adversely impacted by COVID-19. We test the resilience of the Group’s strategy across each of the Principal Risks through scenario analysis The Group has continued to enhance the sector review process recognising that COVID-19, along with Brexit, has impacted some sectors more than 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Annual Review Risk Summary 27 A NEW ESG QUESTIONNAIRE HAS BEEN IMPLEMENTED TO ASSIST THE GROUP’S CREDIT PROCESSES others. This sectoral outlook is reviewed regularly by the Group Credit Committee, requiring increased governance for new lending to sectors that are viewed as higher risk, supporting the Group in remaining within our risk appetite. The Group’s expected credit loss and stress-testing processes have continued to incorporate risks from COVID-19 and other downside risks, such as the impact of more persistent high inflation. The Group’s capital position remains strong under our adverse scenarios. There are further details on our macro-economic scenarios on page 94. CYBER RISK, INFORMATION SECURITY, THIRD PARTY AND DATA RISK There has been an increase in cyber-related crime, both at a national and global level, during the COVID-19 period as cyber criminals seek to take advantage of peoples’ vulnerabilities and exploit new weaknesses introduced through the rapid operational changes required to sustain new ways of working through the pandemic. Through our cyber programme, we continue to invest significantly in our cyber security capability to prevent, detect and respond to this evolving cyber threat landscape, and have focused on educating staff and customers on actions they can take to prevent cyberattacks. This includes detailed guidance on how to identify and prevent common fraud and threats such as phishing and smishing. The Group has also partnered with other banks across Europe through the Banking & Payments Federation of Ireland (BPFI) and the Cyber Defence Alliance, playing an active role in fostering an open, knowledge-based and mutual protection culture that enhances the ability of all participants to protect against cyber threats. There has also been an increased emphasis and focus on the identification, monitoring and management of our operational resilience, concentration and data related risks arising from our third party ecosystem. Through the combination of the active monitoring of supplier performance and ongoing risk assessments this has further embedded the identification, monitoring and management of the risks associated with our outsourcing and third-party arrangements. SUSTAINABILITY AND CLIMATE CHANGE Sustainability is at the core of the Group’s strategy. The Group recognises that climate change risk continues to evolve rapidly. We are committed to managing our climate risk and supporting our customers’ transition to a low-carbon economy with enhanced green products, propositions and support. Climate change risks have been classified into two main categories: physical risk and transition risk. Physical risk arises from the increasing frequency and severity of events related to climate change (flooding and extreme weather events), while transition risk is the financial loss that may incur, directly or indirectly, as a result of the process of adjusting to a low-carbon economy. The impact of climate change poses an emerging Credit Risk. We have continued to embed these risks within Credit Risk by updating credit sanctioning policies and lending procedures across different sectors to require greater consideration of ESG factors in the credit origination process. These have been supported by the development of a sectoral heatmap in order to identify those sectors that are highly impacted by climate risks. A new ESG questionnaire has been implemented to assist the Group’s credit processes and procedures in identifying and assessing ESG risk during the lending process. This has been implemented for customers in high climate risk sectors in Ireland. The ESG Questionnaire enables simple and efficient engagement with customers that also serves to increase their awareness of the transition risks of climate change. We will further embed ESG factors in our credit risk underwriting in 2022 along with a roll- out across the other risks that are identified as being significantly impacted by climate risk. COMPETITION IN IRISH BANKING MARKET Another focus during the year was the changing Irish banking market landscape, with KBC Bank Ireland and Ulster Bank both announcing their intention to exit the Irish market. Additionally, new competitors continue to focus on their specific market segments. COVID-19 has also accelerated the move to online banking and driven a change in the expectations a customer has of their bank, which impacts on our business model. To respond in part to these competitive pressures, each of the inorganic transactions agreed in 2021 aims to strengthen the Group’s business model, providing broader services to our customers, particularly in areas such as wealth management and insurance. While we expect integration of these initiatives to progress as planned during 2022, if the implementation risks are not mitigated successfully, or if financial performance was to deviate materially from expectations, then the Business Model Risk profile of the Group would increase accordingly. These inorganic transactions have been incorporated into the Group’s risk management framework and processes in 2021, with integration expected to continue during 2022. 28 Risk Summary Annual Review AIB Group plc Annual Financial Report 2021 OUR PRINCIPAL RISKS CUSTOMER FIRST SIMPLE & EFFICIENT RISK & CAPITAL TALENT & CULTURE SUSTAINABLE COMMUNITIES Principal Risks are those risks that could have a material adverse effect on our customers or the financial, operational or reputational standing of the Group. All of the Group’s Principal Risks are outlined below, and did not change in 2021. The key elements of these Principal Risks are reported regularly to the Board Risk Committee through the Risk Reporting process. BUSINESS MODEL RISK CREDIT RISK OPERATIONAL RISK The risk of not achieving the agreed strategy The risk that the Group will incur losses The risk arising from inadequate or failed or approved business plan either as a result as a result of a customer or counterparty internal processes, people and systems, or of an inadequate implementation plan or being unable or unwilling to meet their from external events. This includes legal failure to execute the implementation plan contractual obligations and associated bank risk – the potential for loss arising from as a result of the inability to secure the credit exposure in respect of loans or other the uncertainty of legal proceedings and required investment. This also includes the financial transactions. potential legal proceedings. risk of implementing an unsuitable strategy or maintaining an obsolete business model in KEY DEVELOPMENTS IN 2021 The Group’s focus continued to be impacted KEY DEVELOPMENTS IN 2021 2021 brought a heightened focus and light of known internal and external factors. by COVID-19 throughout 2021 by adapting challenge on key areas of operational KEY DEVELOPMENTS IN 2021 The announced acquisitions and joint credit risk management processes and policies risk in the current environment namely to support existing customers and ensure cyber, change risk, operational resilience, ventures in 2021 provide the Group with a they were provided with the appropriate third-party management and products platform to grow income in the near term. measures taking account of the current and propositions risks. Progress has been While the planned exits of KBC Bank Ireland expected financial impact and recovery made to further develop and embed strong and Ulster Bank creates opportunities for outlook, with sectors believed to be most operational risk practices, however this increased market share in ROI Retail, the impacted continuing to be closely monitored. is an evolving and dynamic landscape. growth of non-banks in the mortgage market The Group also continues to be proactive in The key areas of focus included: ongoing intermediary channel will ensure continued terms of adapting its credit risk management oversight, review and challenge of the competition. The Group developed new green products to continue supporting our customers. While these are positive processes and policies to capture ESG risks in transformation agenda across the Group, order to achieve our sustainability ambition of including inorganic activities; uplift in our 70% of our new lending to be green/transition cyber security capabilities in response to developments in our business model risk, lending by 2030. should the Group not achieve its financial plan objectives, its business model risk could increase. KEY RISK INDICATORS » NPE outstanding as % of customer loans » Migration to Stage 2 KEY RISK INDICATORS » Operating Profit (pre-exceptional items) negative variance to plan LINKAGE TO THE GROUP’S STRATEGY the evolving external threats; and enhanced oversight of third-party service providers to drive improved resilience. KEY RISK INDICATORS » Cumulative operational risk losses » Cyber security metric » Aggregate Group Risk Adjusted Return on Customer First LINKAGE TO THE GROUP’S STRATEGY Capital (RAROC) on new business LINKAGE TO THE GROUP’S STRATEGY Customer First Simple and Efficient Simple and Efficient Sustainable Communities Risk & Capital Risk & Capital Customer First Talent & Culture Risk & Capital + Read more: pages 83 to 144 Sustainable Communities + Read more: page 163 Talent & Culture Sustainable Communities + Read more: page 162 AIB Group plc Annual Financial Report 2021 Annual Review Risk Summary 29 CONDUCT RISK REGULATORY COMPLIANCE RISK PEOPLE & CULTURE RISK The risk that inappropriate actions or The risk of legal or regulatory sanctions The risk to achieving the Group’s strategic inactions by the Group cause poor and or material financial loss the Group may objectives as a result of an inability to recruit, unfair customer outcomes or negatively suffer as a result of a failure to comply with retain or develop resources, or the inability impact market integrity. principal laws, regulations, rules, related to evolve the culture aligned to the Group’s 1 2 3 4 5 6 KEY DEVELOPMENTS IN 2021 Managing the impact of legacy issues self-regulatory organisation standards, and values and behaviours. codes of conduct applicable to banking continues to be a key feature of conduct risk activities as outlined in our regulatory KEY DEVELOPMENTS IN 2021 The Group has a number of defined management for the Group. Improvements compliance universe. strategic initiatives, and programmes of work in the Conduct Risk profile through ongoing reviews and challenges of the control KEY DEVELOPMENTS IN 2021 The dynamic and evolving regulatory are underway to respond to the various people- and culture-related headwinds, environment by the three lines of defence. change landscape continues to be a key such as wellbeing and engagement, This level of challenge ensured that root feature of the management of regulatory increased uncertainty relating to COVID-19, causes of issues were being identified and compliance risk for the Group. In 2021, we a buoyant employment market resulting in preventative actions taken resulting in the saw a continued focus by our regulators a competition for talent and our workforce impact to the customer being remediated. on regulatory change implementation continuing to adapt to new ways of working. Throughout 2021, the identification of these dates. AIB Group has identified areas for There has also been significant investment legacy operational and process design enhancement which would allow for an in terms of developing capabilities across issues resulted in the declaration of nine improved experience when implementing the bank including running a number restitutions to address the poor customer new regulations. outcomes identified. This is a decrease on the number of restitutions when compared to the total of 14 in 2020. KEY RISK INDICATORS » Number of complaints and time taken to KEY RISK INDICATORS » Number of data protection incidents » Reporting of suspicious transactions to manage anti-money laundering and financial crime risks resolve » Number of overdue product reviews LINKAGE TO THE GROUP’S STRATEGY Customer First Customer First Risk & Capital Risk & Capital + Read more: pages 164 to 165 Talent & Culture of Leadership Development and Talent Management programmes during the year. Efforts are also underway to develop an internal talent depository capturing the existing skills, capabilities, knowledge and experience of the workforce enabling the Group to scenario plan for the future. development journey and much progress has been made throughout the year, including significant enhancements to our wellbeing, engagement and inclusion and diversity (I&D) strategies. KEY RISK INDICATORS » Attrition of Senior Roles LINKAGE TO THE GROUP’S STRATEGY The Group continues on our culture + Read more: page 165 to 166 LINKAGE TO THE GROUP’S STRATEGY Talent & Culture Customer First + Read more: pages 167 to 168 30 Risk Summary Annual Review AIB Group plc Annual Financial Report 2021 CAPITAL ADEQUACY RISK MODEL RISK LIQUIDITY & FUNDING RISK The risk that the Group breaches or may The potential loss the Group may incur, The risk that the Group will not be able to breach regulatory capital ratios and internal as a consequence of decisions that could fund our assets and meet our payment targets measured on a forward-looking be principally based on the output of obligations as they come due, without basis across a range of scenarios, including models, due to errors in the development, incurring unacceptable costs or losses. a severe but plausible stress. implementation or use of such models. Funding is the means by which liquidity KEY DEVELOPMENTS IN 2021 The Group maintained a strong capital KEY DEVELOPMENTS IN 2021 The Model Risk profile improved in the last is generated, e.g. secured or unsecured, corporate or retail. In this respect, Funding position throughout 2021 with substantial year, reflecting improvements in the control Risk is the risk that liquidity cannot be buffers to regulatory requirements for environment and validation coverage obtained at an acceptable cost. Fully Loaded Common Equity Tier 1 (CET1) subsequent to its introduction. In the second and Total Capital ratios. Various stress half of the year, the Model Risk score was KEY DEVELOPMENTS IN 2021 Customer deposits have continued to grow testing activities in 2021 demonstrated the recalibrated to reduce subjectivity in the at pace predominantly due to the low robustness of the capital position including assessment; improve transparency; reduce interest rate environment and COVID-19- the annual Internal Capital Adequacy the element of double-counting / overlap related dynamics of precautionary savings Assessment Process (ICAAP) and the in scoring considerations; and to simplify and lower consumer consumption. While biennial European-wide EBA Stress Test. the model risk reporting summary. A four- the planned exit of KBC Bank Ireland RAS metrics were reviewed during 2021 point measurement process was introduced and Ulster Bank creates opportunities for to ensure they continued to appropriately to align to the four-point validation and increased market share in this space, it reflect both regulatory requirements and the monitoring scoring systems. This has added further contributed to higher volumes of uncertain external environment. benefit of differentiating between models in excess liquidity held with the Central Bank KEY RISK INDICATORS » Fully Loaded CET1 ratio » Fully Loaded Total Capital Ratio a more risk-sensitive way. at negative rates. KEY RISK INDICATORS » Quarterly risk assessment of live models KEY RISK INDICATORS » Liquidity Coverage Ratio (LCR) » Survival Period LINKAGE TO THE GROUP’S STRATEGY LINKAGE TO THE GROUP’S STRATEGY Simple and Efficient Risk & Capital LINKAGE TO THE GROUP’S STRATEGY Risk & Capital + Read more: pages 145 to 152 Talent & Culture + Read more: page 168 Risk & Capital + Read more: page 153 FINANCIAL RISK The uncertainty of returns attributable to fluctuations in market factors. Where the uncertainty is expressed as a potential loss in earnings or value, it represents a risk to the income and capital position of the Group. KEY DEVELOPMENTS IN 2021 Central Bank stimulus helped to bring stability to financial markets in 2021. However, economic growth in the second half of the year, and particularly rising inflation, led to the tapering of stimulus programmes globally and a return of market volatility as central banks re-assess the appropriateness of their interest rate policies. KEY RISK INDICATORS » Earnings Sensitivity » Interest Rate Capital at Risk (CaR) LINKAGE TO THE GROUP’S STRATEGY Risk & Capital Simple and Efficient + Read more: pages 154 to 161 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Annual Review Risk Summary 31 EMERGING RISKS AND UNCERTAINTIES The Group takes a proactive approach to identifying and assessing the potential impact of emerging risks, which could have a material impact on the Group’s strategy, operations and on our customers over the medium to long term. Where the probability of their occurrence or the expected magnitude may be difficult to accurately evaluate, the use of scenarios and expert judgement is applied. The key themes of focus in 2021 were broadly similar to those identified in 2020 but also included integration risk, and attracting and retaining talent. EMERGING RISK MITIGANTS LINKS TO RISKS TREND 2021 COVID-19 VARIANTS The risk of continuous cycles of outbreaks and lockdowns triggered by COVID-19 variants, driving increased credit losses to vulnerable sectors such as hospitality. INTEGRATION RISK The risks from the execution of the inorganic transactions including the integration of systems, operations, people and culture. CYBER THREATS The risk of diminished operational capability of the Group’s systems, data risk exposures and potential for legal liability from customers due to evolutions in ransomware and cyber criminals' practices including fraudulent phishing and smishing activities. CLIMATE TRANSITION RISKS Transitioning to a lower-carbon economy, including climate-related financial risks. UNEXPECTED MACROECONOMIC EVENTS, GEOPOLITICAL RISKS Elevated uncertainties regarding the macroeconomic and geopolitical (including events in Ukraine) outlook arising from volatility in financial markets, inflation and interest rates. Should higher inflation persist longer than expected, it could prompt central banks to raise interest rates sharply in order to restore price stability. Adverse developments such as these may have an impact on the Group with higher- than-expected credit losses, sudden reduction in asset quality and increases in capital requirements. TALENT AND SKILLS The loss of high-performing, high- potential, senior and highly skilled employees due to a competitive labour market and limitations on the Group’s ability to attract and retain such skills. • The Group has implemented additional measures in response to COVID-19, such as a suite of forbearance measures, payment breaks, enhanced portfolio asset quality monitoring, case-specific reviews and top- down vulnerable sector reviews. • The Group continues to stress test the risks that COVID-19 created in order to identify weakness and mitigate appropriately. • The Group MRA includes an assessment of any potential new material risks created by new transactions. • The Group has established a programme with dedicated resources to assess each transaction individually. • The Group ensures appropriate governance is in place to manage the integration change and identify risks to delivering the change. Across all Principal Risks DECREASING RISK Credit Risk Regulatory Compliance Risk Conduct Risk Operational Risk Model Risk INCREASING RISK • The Group continues to invest in our controls around information technology. • There is an well-resourced active Cyber Security and Operational Risk Business Model Risk Conduct Risk Intelligence Unit. • There is a key focus on staff awareness around Cyber Risk, both from an external and internal threat. STABLE • Enhanced qualitative risk appetite statements for Business Model Risk and Credit Risk approved by the Board to take ESG considerations into account when formulating the Group’s strategy. • All material lending decisions >€300k for customers in high climate risk sectors, are in scope for completion of an ESG Questionnaire as part of the customer credit application. Credit Risk Business Model Risk Operational Risk Regulatory Compliance Risk Model Risk Liquidity & Funding Risk Financial Risk INCREASING RISK Credit Risk Capital Adequacy Risk Financial Risk Business Model Risk • The Group assesses the impact of changing macroeconomic conditions and internal factors as part of the detailed annual financial planning processes. The Financial Plan is integral to the Group’s Risk Management process. It drives the delivery of the Group’s strategy aligned to the Risk Appetite Statement (RAS). • The Group also incorporates geopolitical risks in scenarios assessing adequacy of provisions and capital. • A suite of sanctioning and credit management policies are reviewed in line with the policy governance framework to ensure they are aligned to the Group’s risk appetite. INCREASING RISK • The Group has invested in developing staff capabilities with a strong focus on identifying senior talent and increase on internal mobility. • Significant enhancement of the Group’s wellbeing, engagement, inclusion and diversity strategies which has been one of the Group’s key response to the challenges of COVID-19. People & Culture Risk Business Model Risk INCREASING RISK 32 Governance in AIB Annual Review AIB Group plc Annual Financial Report 2021 GOVERNANCE IN AIB ADVANCING OUR CORPORATE GOVERNANCE Strong corporate governance standards, underpinning effective decision-making and accountability, are the basis on which we conduct our business and engage with our customers and other stakeholders. AIB Group’s Board is fully aware of the importance of its role and is strongly committed to upholding high standards of corporate governance and seeking continual enhancements. The Board engages with, and considers, the Group’s stakeholders in its decision-making to ensure that all decisions are informed by their views and advance the sustainable success of the Group. Below are some key developments in our governance over the course of 2021. SUCCESSION PLANNING AND INDUCTION 2021 saw the successful conclusion of a number of Board succession planning searches, with the appointments of Fergal O’Dwyer, Andy Maguire, Anik Chaumartin, Tanya Horgan and Jan Sijbrand as Non-Executive Directors and the appointment of Jim Pettigrew as Chair. Our Chief Financial Officer, Donal Galvin, also joined the Board as an Executive Director. These appointments were made following targeted search processes with due regard for the Board Diversity Policy, the Board Skills Matrix and the future strategic direction of the Group. The knowledge, skills and experience that these Directors bring to the Board serve to enhance its overall skills profile, most notably in the following areas: Customer and Conduct; Digital; Finance, Accounting and Audit; Retail Banking; Risk Management; and Technology. All newly-appointed Directors underwent extensive and tailored induction AIB GROUP BOARD IS FULLY AWARE OF THE IMPORTANCE OF ITS ROLE AND IS STRONGLY COMMITTED TO UPHOLDING HIGH STANDARDS OF CORPORATE GOVERNANCE 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Annual Review Governance in AIB 33 programmes to accelerate their familiarisation with the Group. The strength of the Board composition ensures it is positioned to continue to provide effective leadership now and into the future. 2021 and it supported the Board in this area by devoting time to the oversight of cyber risk and controls and cyberattack scenarios. Cyber strategy and cyber risk will remain an area of continued focus for the Board Risk Committee in 2022. Details on the key skills and experience of Board members are available on pages 36 to 39. TECHNOLOGY & DATA In recognition of the importance of the technology and data agenda for the Group, a new Board Advisory Committee, the Technology & Data Advisory Committee (TDAC), was established in late 2020. Throughout 2021, the TDAC supported the Board in fulfilling its oversight responsibilities by reviewing, challenging and advising the Board on the strategy, governance and execution of technology, data and cyber matters. This was particularly relevant in the TDAC’s review and challenge of the Group’s technology strategy in advance of the Executive Committee and Board strategy sessions held in November. An overview of TDAC’s work during 2021 is available on page 209. The area of cyber risk was also an important consideration for the Board Risk Committee during RISK CULTURE AND SPEAK UP The Board places great importance on the ongoing evolution of AIB’s culture. In 2021, it oversaw and supported management to enhance risk culture within the Group. During the course of Risk Awareness Week 2021, a number of Non-Executive Directors participated in interactive Board Member Conversation sessions open to all employees where they discussed their views on risk management topics. In addition, there was considerable focus by the Board Audit Committee on the Group’s Speak Up policy during 2021. The Board Audit Committee Chair, Sandy Kinney Pritchard, is the Group’s Whistleblower Champion and participated in the Group’s ‘Speak Your Mind’ campaign. She expressed the Board’s commitment to high standards in this area, encouraging all employees to report concerns about any suspected wrongdoing in order to protect the Group, our customers and other stakeholders. AIB GROUP GOVERNANCE STRUCTURE AIB GROUP BOARD BOARD AUDIT COMMITTEE BOARD RISK COMMITTEE Independently oversees the quality and integrity of the Group’s accounting policies, financial reporting and disclosures, internal control framework and audit, as well as the mechanisms through which employees may raise concerns. BOARD COMMITTEE Fosters sound risk governance across the Group’s operations, overseeing risk management and compliance frameworks to include the risk appetite profile and the overall risk awareness across the Group. BOARD COMMITTEE REMUNERATION COMMITTEE Oversees the design and implementation of the Group’s Remuneration policy and the operation of remuneration policies and practices with particular reference to certain senior management. BOARD COMMITTEE NOMINATION & CORPORATE GOVERNANCE COMMITTEE Oversees Board and Executive Committee succession planning and keeps the Board’s governance arrangements and corporate governance compliance under review. BOARD COMMITTEE SUSTAINABLE BUSINESS ADVISORY COMMITTEE Supports the Group’s sustainable business strategy which includes the development and safeguarding of the Group’s social license to operate. ADVISORY COMMITTEE TECHNOLOGY & DATA ADVISORY COMMITTEE Reviews and challenges the strategy, governance and execution of matters relating to technology, data and cyber. ADVISORY COMMITTEE 34 Governance in AIB Annual Review AIB Group plc Annual Financial Report 2021 GOVERNANCE IN AIB ENGAGING OUR STAKEHOLDERS We have adapted how we interact with our stakeholders in response to COVID-19 so that we can maintain active engagement and ensure the interests of all stakeholders continue to be taken into consideration in decision-making. Our Board’s approach to stakeholder engagement aligns with the UK Corporate Governance Code 2018 which applies to the Group by virtue of its premium listing on the London Stock Exchange. While not directly applicable to the Group as it is a provision of UK Company Law, the Board recognises the benefits of considering the spirit intended by section 172 of the UK Companies Act 2006 as part of its decision-making process. An overview of Board engagement with each of AIB’s key stakeholder groups, the importance of each to the business and operations, and the strategic direction of the Group is set out below. WHO HOW Our 2.8 million customer relationships, which are managed by dedicated teams across Retail Banking, Capital Markets, and AIB UK. OUR CUSTOMERS Our purpose is to back our customers to achieve their dreams and ambitions, and our ambition is to be at the heart of our customers’ financial lives by meeting their evolving needs at every life stage. Regular Board oversight of customer performance and satisfaction metrics, including customer journey times, Net Promoter Scores, complaints, digitalisation, as well as Brexit and COVID-19 impacts and supports. OUR EMPLOYEES As at 31 December 2021, AIB directly employed 8,916 people across Ireland, the United Kingdom and the United States of America. The Board is acutely aware that our people are the key resource and enabler for the Group to deliver our overall ambition and strategy in a manner underpinned by our values. Ensuring we have an engaged workforce is critical to delivery for all of our stakeholders. As such, we aim to ensure our employees are satisfied and empowered in their work. The Board monitors metrics and considers reporting on matters including AIB’s Culture Evolution Programme, Speak Up, Inclusion & Diversity, Wellbeing, Talent Development, and Employee Engagement. Elaine MacLean is the Non-Executive Director designated to engage directly with employees on behalf of the Board to enhance the ‘employee voice’ at the Board table. A number of Non-Executive Directors participated in interactive Board Member Conversation sessions with employees during Risk Awareness Week. We have a diverse range of institutional and individual investors. The Irish State is a significant shareholder of the Group. OUR INVESTORS In order to ensure that we continue to generate attractive and sustainable returns for all our shareholders, the Board aims to lead the Group in executing its strategy and meeting its financial and non-financial targets. Our communities, and society as a whole, permeate all of our stakeholder considerations and are also central to our sustainability strategy. SOCIETY We strive to make a meaningful contribution to the communities in which we operate and to support economic and social progress as an integral part of the Group’s business and operations. Engaging with our shareholders in advance of, during and after our AGM and EGM in 2021. The Board also receives investor views and feedback through the Investor Relations programme, which in 2021 included a two-day ESG investor roadshow. There is an extensive programme of engagement which includes the Chair, CEO, CFO, and major shareholders, and other institutional investors. This will continue through 2022 and will also involve the Senior Independent Director. The Board is supported in considering stakeholder views in relation to the Group’s sustainability strategy, which encompasses three pillars: Climate & Planet, Economic & Social Inclusion and Future-proof Business, through the work of the Sustainable Business Advisory Committee (SBAC). The Group’s annual Sustainability Conference in 2021 provided the opportunity for engagement between Directors and stakeholders. REGULATORS Includes the Central Bank of Ireland (CBI), European Central Bank (ECB), European Commission, Prudential Regulation Authority (PRA), Financial Conduct Authority (FCA) and Federal Reserve Bank of New York. The Board strives to ensure that the Group supports financial stability, consumer protection and market integrity across the jurisdictions in which we operate. Strong engagement with our regulators ensures the Group is well positioned to meet regulatory requirements and expectations. Ongoing supervisory engagement, including inspections, thematic reviews and regular engagement with the Board, particularly Committee Chairs, and Senior Executives. The Group also has a dedicated Regulatory Relations team which reports to the Board regularly. In 2021, representatives of the Joint Supervisory Team (JST) attended a Board meeting to engage directly with Directors on top-of-mind supervisory matters. While not included among our five principal stakeholder groups, AIB recognises the importance of engagement with our over 4,000 suppliers to ensure their adherence to our Responsible Supplier Code. Additional Information can be found in our Sustainability Report 2021 and in the Suppliers section of the AIB website at aib.ie/suppliers. AIB Group plc Annual Financial Report 2021 Annual Review Governance in AIB 35 1 2 3 4 5 6 IMPACTED STAKEHOLDERS: IMPACTED STAKEHOLDERS: IMPACTED STAKEHOLDERS: IMPACTED STAKEHOLDERS: EXAMPLES OF STAKEHOLDER CONSIDERATION SUPPORTING OUR CUSTOMERS Our Customer First strategic pillar is a core consideration for the Board in its deliberations and brings a customer lens to all discussions to ensure positive customer outcomes are reached. The Board has supported management in ensuring ongoing support for customers as they deal with the impacts of Brexit and COVID-19. In 2021, this took the form of low-cost loans to small businesses, including those in farming and fishing, through the Strategic Banking Corporation of Ireland (SBCI) Brexit Impact Loan Scheme, and a range of COVID-19 supports for customers. In addition, the Board has overseen the implementation of a range of products and services for personal and business customers to support them on their transition journey to reduce their carbon footprint and will continue to monitor progress in achieving our ambition that 70% of new lending is categorised as ‘green’ or ‘transition’ lending by 2030. SOCIETY & OUR COMMUNITIES The Board is keenly aware of the importance of the Group’s role in making a positive and meaningful contribution to the communities in which we operate and to society more broadly. In February 2021, the Board approved AIB becoming a UN Global Compact Signatory and the related Human Rights Commitment. Other initiatives overseen by the Board during 2021 included the launch of the Social Bond Framework to support communities across Ireland with the issuance of bonds for environmental, social and governance (ESG) purposes, becoming the first Irish organisation to do so. The launch of a Social Housing Fund will help provide 3,000 homes across Ireland over the next two-to-three years. In the area of financial inclusion, the Board monitored progress against the target to support the financial literacy of 500,000 customers by 2023, with 2021 seeing the launch of a dedicated programme for secondary school students in Ireland. CLIMATE ACTION The Board is committed to remaining at the forefront of the sustainability agenda in financial services in Ireland and recognises the crucial role that financial institutions can play in promoting climate action. The Board demonstrated this commitment further in 2021, overseeing a sustainability programme of work to deliver on new sustainability requirements and initiatives to support customers on this transition, which included doubling our Climate Action Fund to €10bn. The Board approved increased resourcing and focus on renewables and a scaling up of investment in green energy and infrastructure. The Board monitored progress in delivering our sustainability strategy in 2021, as well as the management of climate change risks, as it is being embedded throughout the organisation. Among many elements, this included providing support to farmers so that they can implement strategies, based on solid scientific research, to reduce greenhouse gas emissions. CULTURE EVOLUTION PROGRAMME Our culture continues to evolve in AIB and it remained a key focus area for the Board who oversaw the progress made during 2021. The Board was keenly focused on the results of the second Irish Banking Culture Board (IBCB) survey, which measures culture across the five IBCB member banks through the views of their employees. AIB had the highest employee participation rate of the member banks in this iteration of the survey, and the Board was pleased to note that the concentrated focus placed on improving AIB’s culture had delivered many positive results. More generally, the IBCB had the view that progress had been made across the industry since 2018. In June 2021, AIB’s first ever Employee Values Awards took place to recognise and celebrate Culture Heroes who are truly living our values every day. Over 3,300 colleagues from across the Group were nominated by their peers. Notwithstanding the great strides made to date, the Board is committed to supporting management in those areas where further work is required, and our culture evolution remains a priority for the Board in 2022. Additional information on considerations of our stakeholders is available in this Annual Financial Report on pages 21 to 25 where the strategy is presented through the lens of each of strategic pillar, as well as within the Corporate Governance Report on page 178. 36 Governance Annual Review AIB Group plc Annual Financial Report 2021 OUR BOARD OF DIRECTORS JIM PETTIGREW ANIK CHAUMARTIN BASIL GEOGHEGAN TANYA HORGAN Non-Executive Chair, independent on appointment Independent Non-Executive Director Date of appointment 28 October 2021 Date of appointment 1 July 2021 Independent Non-Executive Director Date of appointment 4 September 2019 Independent Non-Executive Director Date of appointment 14 September 2021 Nationality British Nationality French Nationality Irish Nationality Irish COMMITTEE MEMBERSHIP & TENURE (as at 31 December 2021, in years or months) N R 2 mths A 6 mths Ri 2 y Ri T 3 mths SKILLS, EXPERTISE AND EXPERIENCE Key Skills Deep technical accountancy and audit expertise in financial services, talent and culture development, and stakeholder management Anik has over 37 years’ international and professional services experience. She was a partner in PwC in Paris for 27 years, and held various leadership positions in the firm for 15 of those years. During her time in PwC she acted in the roles of Global Client Relationship Partner and Lead Audit Partner for a number of major banking and financial services organisations. Anik currently serves as Chair of the Banking Committee of the Compagnie Nationale des Commissaires aux Comptes (the French Statutory Auditors’ Institute). Key Skills In-depth knowledge of international finance, corporate banking, strategy and risk management Key Skills Robust risk management, compliance, finance, accounting and audit, customer and conduct, and technology skills Basil is a partner in the Strategic Advisory Group at PJT Partners in London. Previously, Basil was a Managing Director at Goldman Sachs, Deutsche Bank and Citigroup in London and New York. He has broad M&A, corporate finance and strategic advisory experience in the US, UK, Ireland and internationally. He qualified as a solicitor with Slaughter and May. Basil is Chair of daa plc and Patron of The Ireland Fund of Great Britain. He holds an LLB from Trinity College, Dublin, and an LLM from the European University Institute. Tanya is a Chartered Accountant with extensive industry-based experience in the areas of compliance, internal audit and risk management and has over 20 years’ experience in publicly listed companies. Tanya trained and qualified with PwC. She has since held roles in a number of organisations including Tesco, Mercury Engineering, Paddy Power Betfair plc and, most recently, was the Group Chief Risk Officer of Flutter Entertainment plc. She has a B.Comm in Accounting from University College Cork. Key Skills Extensive financial services experience, retail banking, customer and conduct, governance, strategy and culture development Jim has over 30 years’ experience in UK and international financial services leadership in public, listed and private company environments, including at board level, as CEO and as Chair. He was Chair of Scottish Financial Services, the Scottish financial services trade body, served as Co-Chair of Scotland’s Financial Services Advisory Board and is a former President of the Institute of Chartered Accountants of Scotland. In 2020, he retired as Chair of Virgin Money and CYBG plc (Clydesdale Bank) having overseen the bank’s successful demerger from National Australia Bank Group, its IPO and acquisition of Virgin Money. He has built considerable non-executive experience over the past 10 years across retail, wholesale and investment banking, asset and wealth management and the insurance sectors. KEY EXTERNAL APPOINTMENTS Chair of BlueBay Asset Management Chair of Scottish Ballet Chair of Dundee Industrial Heritage Trust Non-Executive Director of ALD Automotive. Non-Executive Director of La Banque Postale Chair of daa plc Partner at PJT Partners Chief Risk Officer of Primark BOARD COMMITTEES R N Remuneration Nomination & Corporate Governance A Board Audit Ri Board Risk S T Sustainable Business Advisory Committee Chair Technology & Data Advisory AIB Group plc Annual Financial Report 2021 Annual Review Governance 37 1 2 3 4 5 6 SANDY KINNEY PRITCHARD CAROLAN LENNON ELAINE MACLEAN ANDY MAGUIRE Independent Non-Executive Director Date of appointment 22 March 2019 Senior Independent Director Date of appointment 27 October 2016 Independent Non-Executive Director Date of appointment 4 September 2019 Independent Non-Executive Director Date of appointment 15 March 2021 Nationality Irish Nationality Irish Nationality British Nationality Irish COMMITTEE MEMBERSHIP & TENURE (as at 31 December 2021, in years or months) AA Ri 2.5 y 2.5 y N S 3 mths 4.5 y R 2 y NN 1 y N N 2 y Ri T 9 mths 9 mths SKILLS, EXPERTISE AND EXPERIENCE Key Skills Expertise in finance, accounting and audit, governance, regulation, customer and conduct, risk management, wealth management, retail and investment banking Sandy is a University College Dublin graduate, with a distinguished career across the financial services industry. She is an accountant who previously was a senior partner at PricewaterhouseCoopers LLP and has held a number of Non-Executive Directorship roles, including at Irish Life and Permanent plc, Skipton Building Society, the FSCS, TSB Bank plc and MBNA Ltd. Key Skills Substantial leadership, strategy, technology, customer operations and sustainability skills Key Skills Significant experience in remuneration and governance, organisational structures, and people and culture development Key Skills Extensive retail banking, technology and digital, transformation, and risk management skills Carolan was the CEO of eir for four years up to January 2022. Prior to the CEO role, she held a variety of executive roles in eir Limited, including Managing Director of Open eir and 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 Dublin Institute of Technology Foundation and the Irish Management Institute. Carolan was appointed Senior Independent Director with effect from 29 April 2020. Elaine is a highly experienced human resources director specialising in financial services and retail. Following her early retail career with roles at Harrods, Windsmoor and later as Retail Operations Director and Human Resources Director with Arcadia, Elaine moved to financial services culminating in her appointment as Group Human Resources Director for Legal and General plc in 2006. Elaine holds an MA in English Literature and Psychology from the University of Glasgow. She is the Designated Non-Executive Director for workforce engagement. Andy has extensive financial services experience spanning 35 years, including 16 years with the Boston Consulting Group where he rose to become Managing Partner of the London office covering the UK and Ireland, prior to which he held several global roles including Global Head of Retail Banking. From 2014 to 2020, Andy was the Group Chief Operating Officer for HSBC Holdings plc with responsibility for operations, technology, real estate, change and transformation and operational resilience. He holds a BA and a BAI from Trinity College, Dublin. KEY EXTERNAL APPOINTMENTS Non-Executive Director and Chair of the Audit Committee and the Remuneration Committee of Credit Suisse (UK) Ltd AIB NON-EXECUTIVE DIRECTORS GENDER Female: 7 – 50% Male: 7 – 50% Sits on the Council of Patrons for Special Olympics Ireland None Non-Executive Director of The Boston Consulting Group UK Chair of Thought Machine Group Chair of CX Holdings (Cennox Group) AGE 56-64: 8 – 57% 46-55: 4 – 36% 65-70: 1 – 7% BOARD TENURE NATIONALITIES 0-2 yrs: 6 – 43% 2-4 yrs: 5 – 36% 4-6 yrs: 2 – 14% 6-8 yrs: 1 – 7% Irish: 9 – 64% British: 2 – 14% USA: 1 – 7% Dutch: 1 – 7% French: 1 – 7% 38 Governance Annual Review AIB Group plc Annual Financial Report 2021 OUR BOARD OF DIRECTORS BRENDAN MCDONAGH HELEN NORMOYLE ANN O’BRIEN Independent Non-Executive Director and Deputy Chair Independent Non-Executive Director Date of appointment 27 October 2016 Date of appointment 17 December 2015 Independent Non-Executive Director Date of appointment 25 April 2019 FERGAL O’DWYER Independent Non-Executive Director Date of appointment 22 January 2021 Nationality Irish Nationality Irish Nationality Irish Nationality Irish COMMITTEE MEMBERSHIP & TENURE (as at 31 December 2021, in years or months) Ri 2 y Ri A N 5 y 3.5 y 2 y R 3 y S N T 5.5 y 1.5 y 1 y A R S T T 1.5 y 2.5 y 2.5 y 1 y 1 y A 11 mths SKILLS, EXPERTISE AND EXPERIENCE Key Skills Significant global financial services experience in retail and commercial banking, strategy, governance, regulation, and risk management Brendan started his banking career with HSBC in 1979, working across Asia, Europe, North America and the Middle East, 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 (NTMA). He was previously the Executive Chairman of Bank of N.T. Butterfield & Son Limited. Brendan was appointed Deputy Chair with effect from 24 October 2019. Key Skills Deep knowledge and experience of sustainability, customer and conduct, digital, stakeholder management, and culture development Helen is a highly experienced marketeer with over 30 years’ experience in consumer marketing and market research across a range of sectors and geographies. A graduate of the University of Limerick, she started her career with Infratest+GfK, based in Germany. From there she moved to Motorola, where she held a range of roles including Director of Global Consumer Insights and Product Marketing and Director of Marketing. After working in broadcast and telecoms regulation at Ofcom as the Director of Market Research, she held Marketing Director and Chief Marketing Officer roles at the BBC, DFS, Countrywide and Boots, where she was also the Chair and Director of the Boots Charitable Trust. Helen also serves on the Board of AIB Group (UK) p.l.c as a Non-Executive Director. Key Skills Significant technology and digital expertise, and highly-skilled in the areas of sustainability, strategy and leadership Key Skills Extensive experience in finance and accounting, treasury and liquidity management, strategy, and capital markets Ann has over 30 years’ experience in the financial services industry. A graduate of both University College Dublin and later Trinity College, Dublin, Ann has led complex management consulting engagements at many of the world’s largest global banking and securities organisations. Her most recent role was as a Principal with Deloitte in New York where she was based for 10 years. Ann was appointed by the Board on the nomination of the Irish Minister for Finance under the Relationship Framework between the Minister for Finance and AIB Group. Fergal is a Chartered Accountant with significant experience in financial management, treasury, strategy, capital deployment and development. Fergal retired in 2020 from DCC plc, the Irish- headquartered international sales, marketing and business support services group which is a FTSE100 constituent company, where he began as an Associate Director, later progressing to Chief Financial Officer in 1992, and Executive Director in 2000. Prior to working in DCC, he worked in PwC and KPMG. KEY EXTERNAL APPOINTMENTS Non-Executive Director and Chair of Audit & Risk Committees of Bradford & Bingley Limited and NRAM Limited Chair of PEAL Capital Group Limited Serves on the Board of The Ireland Funds, Ireland Chapter Council Member of Global Advisory Council, Impact Ireland Fund Chair of the Trinity Business School Advisory Board Co-founder and Executive Director of My Menopause Centre Non-Executive Director of Thame and London Ltd Non-Executive Director of Royal London Asset Management Advisory role with Euroclear UK & Ireland Non- Executive Director of Hibernia REIT plc Non-Executive Director of ABP Food Group Unlimited Board Member of Focus Ireland and Focus Housing Association BOARD COMMITTEES R N Remuneration Nomination & Corporate Governance A Ri Board Audit Board Risk S T Sustainable Business Advisory Committee Chair Technology & Data Advisory AIB Group plc Annual Financial Report 2021 Annual Review Governance 39 1 2 3 4 5 6 JAN SIJBRAND RAJ SINGH COLIN HUNT DONAL GALVIN Independent Non-Executive Director Date of appointment 14 September 2021 Independent Non-Executive Director Chief Executive Officer & Executive Director Chief Financial Officer & Executive Director Date of appointment 25 April 2019 Date of appointment 8 March 2019 Date of appointment 28 May 2021 Nationality Dutch Nationality United States Nationality Irish Nationality Irish COMMITTEE MEMBERSHIP & TENURE (as at 31 December 2021, in years or months) Ri 3 mths Ri S 2.5 y 2.5 y S 3 y SKILLS, EXPERTISE AND EXPERIENCE Key Skills Highly-skilled in the areas of risk management, retail and commercial banking, governance, financial regulation and oversight Jan has had an extensive executive career including roles in Royal Dutch Shell PLC, Rabobank Nederland, ABN AMRO Holding N.V. and NIBC Bank N.V. and was a Member of the Executive Board and Chairman for Supervision at De Nederlandsche Bank N.V. (the central bank of the Netherlands). He is currently a member of the Supervisory Board and Chair of the Public Interest Committee of PwC Nederland and joined the Global Board of PwC in June 2021. Jan has an MSc in Applied Mathematics and a PhD in Mathematics, both from the University of Utrecht. Key Skills Significant international experience in risk management, governance, retail and corporate banking, insurance, wealth and asset management, and sustainability Raj has over 35 years’ business, risk and governance experience gained in large and complex global listed financial services organisations including Citibank, Allianz, Swiss Re, Standard Life Aberdeen and EFG International with the last 20 years at the executive committee level as Group Chief Risk Officer. He has served as a Non-Executive Director of a national credit bureau and two listed financial institutions as well as many of the banking, insurance, reinsurance and asset management subsidiaries of those firms. Raj was appointed by the Board on the nomination of the Irish Minister for Finance under the Relationship Framework between the Irish Minister for Finance and AIB Group. Key Skills Strategic leadership, extensive executive experience covering risk, treasury, research, capital markets, customer focus, and sustainability In March 2019, Colin was appointed Chief Executive Officer of AIB Group. He joined AIB in August 2016 as Managing Director of Wholesale, Institutional & Corporate Banking. Prior to joining AIB, he was Managing Director at Macquarie Capital in Ireland. Previously, he was a Policy Adviser at the Departments of Transport and Finance, Research Director at Goodbody, Head of Trading Research at Bank of Ireland Group Treasury and a country risk analyst at NatWest. He has a PhD in Economics from Trinity College, Dublin and BComm and MEconSc degrees from University College Cork. Key Skills Significant international retail and wholesale banking, capital, liquidity, treasury, investor relations, and risk management skills Donal joined AIB as Group Treasurer in September 2013 and was appointed to the role of Chief Financial Officer in March 2019 and to the Board in May 2021. Donal has gained significant experience working in domestic and international financial markets over the last 25 years. Prior to joining AIB, Donal held a number of senior executive roles including Managing Director in Mizuho Securities Asia, Managing Director in Dutch Rabobank and Treasurer of Rabobank International. He serves as a Non-Executive Director of Goodbody. KEY EXTERNAL APPOINTMENTS Non-Executive Director of PwC Nederland Non-Executive Director of PricewaterhouseCoopers International Ltd Non-Executive Chair of Muscat Insurance Company Non-Executive Director of HSBC Bank Oman Serves on the Board of The Ireland Funds, Ireland Chapter Non-Executive Director and President 2021/2022 of the Institute of Bankers in Ireland None 40 Governance Annual Review AIB Group plc Annual Financial Report 2021 OUR EXECUTIVE COMMITTEE CJ BERRY Chief Operating Officer Designate CATHY BRYCE Managing Director of Capital Markets GERALDINE CASEY Chief People Officer FERGAL COBURN Chief Technology Officer HELEN DOOLEY Group General Counsel SKILLS, EXPERTISE AND EXPERIENCE CJ joined AIB in 2002, bringing with him a wealth of experience across Irish, UK, US and European markets. During his 19 years in AIB, he has driven significant business development in our corporate and retail business, taking up the position of Interim Head of Group Strategy in July 2020. As Chief Operating Officer Designate, CJ oversees the bank’s transformation agenda, identifying and leading initiatives that contribute to the strategy. He is an Economics & Philosophy graduate of Trinity College Dublin. Cathy started her career in investment banking with Morgan Stanley and subsequently ABN AMRO. She joined AIB in 1996, holding a range of leadership roles in debt capital markets, most recently leading the international leveraged finance business. In 2018 she joined the National Treasury Management Agency where she was part of the executive management team as Director of NewERA and National Development Finance Agency. In 2019 she returned to AIB as Managing Director of Capital Markets. She is a Business graduate of Trinity College Dublin and holds an MBA from INSEAD. Chief People Officer Geraldine, originally from Kerry and a graduate of University College Cork, joined AIB in January 2020 from her most recent role as Director of People, Communications & IT at Tesco Ireland. She was a member of the Executive Board of Tesco for five years prior to joining AIB and has a wealth of experience working closely with internal and external stakeholders. Geraldine has led large teams through culture, process and organisational change, and has brought that experience to bare in driving AIB’s inclusion, culture, people and future of work agendas. Geraldine joined the Board of AIB Group (UK) plc as a Non-Executive Director in May 2021. Prior to his appointment to Chief Technology Officer, Fergal was Chief Digital & Innovation Officer, responsible for the strategy and development of AIB’s digital businesses. Over the previous 20 years, he held leadership positions across all aspects of AIB’s digital and technology businesses. He currently serves as a Director on the Boards of First Merchant Processing (Ireland) DAC and Payzone Ireland Limited. An electronics engineer, before joining AIB Fergal spent five years in the oil and gas exploration industry as a senior wireline engineer followed by five years with Eircom in network support systems development. He holds Bachelor’s and Master’s degrees from Trinity College Dublin. Helen joined AIB as Group General Counsel in 2012. She had previously worked in private practice in the City of London, Hong Kong and Dublin, before taking up an in-house role as Head of Legal in EBS Building Society in 2005, which became part of AIB Group in 2011. Over the last 20 years, in addition to her legal role, Helen has also held the Company Secretary position and managed the regulatory compliance and HR functions. Helen is currently responsible for the Legal, Corporate Governance and Customer Care function. AIB Group plc Annual Financial Report 2021 Annual Review Governance 41 1 2 3 4 5 6 HILARY GORMLEY Managing Director Designate of AIB Group (UK) plc DEIRDRE HANNIGAN Chief Risk Officer ROBERT MULHALL Managing Director of AIB Group (UK) plc JIM O’KEEFFE Managing Director of Retail Banking SKILLS, EXPERTISE AND EXPERIENCE Hilary has over 30 years’ experience in AIB, enjoying a wide and varied career across retail, commercial and corporate banking, holding a number of senior roles and leading teams across different geographies. She has successfully completed highly strategic priorities for the Group, from leading strategic change programmes to completing large portfolio transactions. Hilary holds a Bachelor’s degree in Financial Services from University College Dublin, has completed the Harvard General Management Programme, and is a member of the Institute of Bankers. Deirdre joined AIB in April 2017 from the National Treasury Management Agency where she was Chief Risk Officer and chaired the Executive Risk Committee. She has held a number of senior international risk management roles with GE Capital and progressively senior roles in Bank of Ireland, primarily in strategy and risk management. Previous to that, she worked 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. In April, it was announced that Deirdre would retire in 2022. Jim has worked across many aspects of Retail Banking, including leadership roles in IT, direct channels, mortgages and BZWBK (now Santander) in Poland. 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 NPEs. He was Chief Customer & Strategic Affairs Officer from November 2018 to November 2019, when he was appointed Managing Director of Retail Banking. Robert’s career in AIB has spanned almost 25 years, covering a variety of roles across multiple business areas and geographies. Before taking up his current role within AIB, Robert was Managing Director of Retail & Commercial Banking. Outside of AIB, Robert held the position of Managing Director of Distribution & Marketing Consulting as well as Financial Services with Accenture in North America from 2013 to 2015, during which time he brought his industry experience to build a rapidly growing consulting practice in the fast moving and innovative areas of financial services. Robert is a director of the Irish Banking Culture Board (IBCB). In December, it was announced that Robert would step down from his position in AIB Group in 2022. MARY WHITELAW Director of Corporate Affairs, Strategy & Sustainability Mary joined AIB in 2007 and her experience has spanned the retail, corporate and treasury businesses. She has held a number of senior leadership roles across the Group including Group Chief of Staff, Head of Strategy & Business Performance for Corporate and Institutional Banking and Head of Corporate Treasury Sales. Prior to joining AIB, Mary trained as a Chartered Accountant and Chartered Tax Adviser with PwC. She is a graduate of University College Dublin. Mary is also a Non-Executive Director of Goodbody. Colin Hunt, Chief Executive Officer, and Donal Galvin, Chief Financial Officer, are also on the Executive Committee. Their biographies can be found on page 39. 42 Sustainability in AIB Annual Review AIB Group plc Annual Financial Report 2021 SUSTAINABILITY IN AIB ADOPTING GLOBAL STANDARDS To help embed sustainability across AIB, we are committed to providing both mandatory and voluntary reporting disclosures as outlined on pages 43 to 55. We recognise that the scale and impact of our business confers on us a responsibility and role across the economy and society. At the heart of our strategy is a commitment to help ensure a greener tomorrow by backing those building it today. Our strategy for Sustainable Communities is focused on three areas: Climate & Environment, Economic & Social Inclusion, and Future Proof Business. Our priorities for each area are the result of extensive stakeholder engagement, including an independent bi-annual materiality and evaluation process. As part of our commitment to transparency and pledge To Do More, in this section we disclose our reporting against the following: World Economic Forum (WEF) Stakeholder Capitalism metrics; the Task Force on Climate-related Financial Disclosures; our Non-Financial Statement; and the EU Taxonomy. In 2021, we were pleased to become the first Irish company to commit to using WEF metrics in our reporting as detailed on pages 43-47. For our full Sustainability reporting, read our Sustainability Report 2021. ENSURING A GREENER TOMORROW BY BACKING THOSE BUILDING IT TODAY CLIMATE & ENVIRONMENT ECONOMIC & SOCIAL INCLUSION FUTURE PROOF BUSINESS S U C O F R U O We’re actively integrating climate change into our business to accelerate our understanding, strengthen our strategy and clarify our actions. We’re reducing our own carbon footprint and commit to being Net Zero by 2030. We’re supporting our customers and communities in their transition to a low-carbon economy with an ambition that green and transition products will account for 70% of all our new lending by 2030. We recognise the responsibility that comes with the scale and impact of our business. We aspire to contribute and advocate for a fairer society that is socially and economically inclusive. We do this by investing and raising awareness in access, education and innovation for our customers, our colleagues and our communities. Our future sustainability depends on our ongoing investment in our business, people and processes. We want to give our customers the best possible banking experience – we’re always learning and improving. In an increasingly digitalised world, we are focused on keeping our systems resilient and our data secure. OUR TARGETS OUR 2021 PROGRESS OUR TARGETS OUR 2021 PROGRESS OUR TARGETS OUR 2021 PROGRESS 2023 €10BN IN NEW CLIMATE & ENVIRONMENT LENDING €4.5BN GREEN LENDING SINCE 2019 2024 €800M FINANCE FOR SOCIAL HOUSING €300M FULLY ALLOCATED 2023 +53 TRADITIONAL NPS3 +45 TRADITIONAL NPS (2021) 2030 NET ZERO1 IN OUR OPERATIONS AMBITION OF 70% OF NEW LENDING TO BE GREEN2 19%REDUCTION IN EMISSIONS (YEAR ON YEAR) 19% OF NEW LENDING IS GREEN 2030 500K CUSTOMERS SUPPORTED FINANCIAL LITERACY 288K SECONDARY SCHOOLS PROGRAMME 2023 >2.25M DIGITALLY ACTIVE CUSTOMERS 1.85M DIGITALLY ACTIVE CUSTOMERS 2040 NET ZERO AMBITION CUSTOMER PORTFOLIO LENDING (AGRI 2050) INTERNAL SCIENCE BASED TARGETS SET ONGOING AIB IN OUR COMMUNITY ON-GOING STRATEGIC FOCUS €10M SUPPORTING COMMUNITY CAUSES ONGOING GENDER BALANCED4 BOARD, EXCO & ALL MANAGEMENT GENDER BALANCED 1. Includes Scopes 1 & 2 emissions. 2. Green includes Transition Lending. 3. Transactional Net Promoter Score (NPS) is an aggregation of 20 Homes, Personal, SME, Digital, Retail, Direct and Day-to-Day Banking Journeys. 4. The Gender Equality Global Report & Ranking – 2021 Edition equates “gender balanced” with between 40% and 60% of women. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Annual Review Sustainability in AIB 43 CLIMATE & ENVIRONMENT THEME METRIC RESPONSE PLANET CLIMATE CHANGE GREENHOUSE GAS (GHG) EMISSIONS For all relevant greenhouse gases (carbon dioxide, methane, nitrous oxide, F-gases etc.), report in metric tonnes of carbon dioxide equivalent (tCO2e) GHG Protocol Scope 1 and Scope 2 emissions. Estimate and report material upstream and downstream (GHG Protocol Scope 3) emissions where appropriate. (Note: Scope 1 – all direct emissions from owned / controlled sources including boilers and vehicles. Scope 2 – all indirect emissions from the consumption of purchased electricity, heat or steam. Scope 3 – all indirect emissions occurring in the value chain of the reporting company.) NATURE LOSS TCFD IMPLEMENTATION Fully implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). If necessary, disclose a timeline of at most three years for full implementation. Disclose whether you have set, or have committed to set, GHG emissions targets that are in line with the goals of the Paris Agreement – to limit global warming to well below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C – and to achieve net-zero emissions before 2050. LAND USE AND ECOLOGICAL SENSITIVITY Report the number and area (in hectares) of sites owned, leased or managed in or adjacent to protected areas and/ or key biodiversity areas (KBA). We reduced GHG Scope 1 & 2 emissions by 19% (year on year) in 2021. Our most recent CO2 emissions are: • Scope 1 (location-based): 3,653 tCO2e (2021) • Scope 2 (location-based): 5,863 tCO2e (2021) • Scope 2 (market-based): 101 tCO2e (2021) • Scope 3 (location-based): 11,739 tCO2e (2020) Our Scope 3 emissions include the following: • Purchased goods and services: 2,422 tCO2e (2020) • Capital goods: 3,557 tCO2e (2020) • Fuel and energy-related activities: 2,410 tCO2e (2020) • Waste generated in operations: 106 tCO2e (2020) • Business travel: 884 tCO2e (2020) • Employee commuting: 2,360 tCO2e (2020) We currently do not report on our Scope 3 financed emissions but are in the process of setting science-based Net Zero targets and aim to disclose these in 2022. Scope 1 & Scope 2 emissions are reported for the 12 months to 31 December 2021 whereas Scope 3 emissions are reported for the 12 months to 31 December 2020. Scope 1, 2 & 3 emissions are independently verified by EcoAct. For more detail on our GHG emissions, see our Sustainability Report 2021 on pages 107-110. It is our intention to fully implement the recommendations of the TCFD by 2023, while recognising that the climate-related financial disclosures will mature over time. Our TCFD disclosures are summarised on pages 48-49. Further information on our progress towards implementing the TCFD disclosures, together with an update on our progress since we announced our Net Zero ambitions and commitments, is set out in greater detail in our Sustainability Report 2021 on pages 20-50. AIB operates sites in Ireland, Northern Ireland, Great Britain and the United States of America. To date, we have mapped our Ireland and Northern Ireland sites to KBAs. We identified one site in Northern Ireland (0.082 hectares) with a property which is adjacent to a regional KBA with marine and terrestrial attributes. The property is a leasehold office, located within a shopping centre which is multi-tenanted. Based on the analysis completed to date, which covers the majority of our operations, and on the nature of our operations (i.e. offices), it is our understanding that the sites of our operations do not represent a heightened risk of adverse impacts on biodiversity. For more information, see our Sustainability Report 2021 on page 111. FRESH WATER AVAILABILITY WATER CONSUMPTION AND WITHDRAWAL IN WATER-STRESSED AREAS Report for operations where material: megalitres of water withdrawn, megalitres of water consumed and the percentage of each in regions with high or extremely high baseline water stress, according to the World Resources Institute (WRI) Aqueduct water risk atlas tool. Estimate and report the same information for the full value chain (upstream and downstream) where appropriate. We report discharged water as water consumed. We rely on municipal water networks for our water demand. There are no other sources of withdrawals. In 2021, AIB withdrew and consumed 112.4 megalitres of water from our global operations. Of this, 1.5% of water withdrawn and consumed was from high water-stressed regions in Great Britain, according to the WRI Aqueduct water risk atlas tool. At 31 January 2022, the tool did not indicate that any of our operations in GB were in an extremely high water-stressed region. None of our operations in Ireland, where AIB operates predominantly, Northern Ireland or the United States are located in a region of high/extremely high water stress. For more information, see our Sustainability Report 2021 on page 110. For more information about our sustainability strategy, go to aib.ie/sustainability 44 Sustainability in AIB Annual Review AIB Group plc Annual Financial Report 2021 ECONOMIC AND SOCIAL INCLUSION THEME METRIC RESPONSE PROSPERITY EMPLOYMENT AND WEALTH GENERATION ABSOLUTE NUMBER AND RATE OF EMPLOYMENT Total number and rate of new employee hires during the reporting period, by age group, gender, other indicators of diversity and region. Total number and rate of employee turnover during the reporting period, by age group, gender, other indicators of diversity and region. ECONOMIC CONTRIBUTION 1. Direct economic value generated and distributed (EVG&D), on an accruals basis, covering the basic components for AIB’s global operations, ideally split out by: revenues; operating costs; employee wages and benefits; payments to providers of capital; payments to government; community investment. 2. Financial assistance received from the government: total monetary value of financial assistance received by AIB from any government during the reporting period. FINANCIAL INVESTMENT CONTRIBUTION Total capital expenditures (CapEx) minus depreciation, supported by narrative to describe the company’s investment strategy. Share buybacks plus dividend payments, supported by narrative to describe the company’s strategy for returns of capital to shareholders. HIRES IN FY21 NUMBER RATE LEAVES NUMBER RATE <30 yrs 30-50 yrs >50 years Female Male Ireland United Kingdom United States of America 639 237 28 417 487 894 10 71% 26% 3% 46% 54% 99% 1% 0% —% <30 yrs 30-50 yrs >50 years Female Male Ireland United Kingdom United States of America 668 574 374 876 740 1,313 293 41% 36% 23% 54% 46% 81% 18% 10 1% This above data does not include Payzone or Goodbody employees. Further data on our employees is set out in our Sustainability Report 2021 on pages 103-105. 1. For FY2021, direct economic value generated was €2,635m, and economic value distributed was €1,762m. The components of economic value generated and distributed include: Revenues Operating costs (excluding community investments) Employee wages and benefits Payments to providers of capital Payments to government Community investment €2,379m €711m €796m €65m1 €180m €10m Information on the components of economic contribution for the Group is set out in our Sustainability Report 2021 on page 106. 2. AIB operates predominantly in Ireland, and received no financial assistance (including tax relief and tax credits, subsidies, investment grants, research and development grants, financial assistance from export credit agencies, financial incentives or other financial benefits received/receivable) from the Irish Government in 2021. The issued share capital of AIB Group plc is 2,714,381,237 ordinary shares of €0.625 each. At 2 March 2022, the Minister for Finance holds 1,926,309,424 ordinary shares representing 70.97% of the total voting rights attached to the issued share capital. The nature of the Group’s relationship with the Irish Government is set out on page 352 in note 51(g) Related party transactions – Summary of the relationship with the Irish Government. For FY2021, total CapEx minus depreciation was €8m. CapEx for the year included additions to property and plant of €30m, additions to intangibles of €204m, depreciation charge for the year on property, plant and equipment of (€29m) and amortisation for the year on intangible assets of (€197m). AIB continues to invest significantly to transform itself into a market leading technology driven Group with infrastructure that is both secure and resilient. These investments have focused on enhancing the customer experience. The current investment strategy approach encompasses i) regulatory change ii) cyber iii) transformation iv) inorganics including the following areas: • A world class personal mobile app and business payments platform. • Streamlining and digitalisation of the mortgage customer journey. • Transforming the Group’s credit processes and technologies. In addition, the Group’s property strategy has focused on adapting to an agile model, both in terms of IT solutions and location that enables us to drive collaboration and efficiency to best deliver for our customers. For FY2021, €65 million of distributions were paid on other equity instruments (AT1 coupons) and there were no distributions on ordinary shares. The company’s strategy for ordinary shareholder distributions is a target 40-60% payout of attributable earnings, subject to regulatory approval. Any decision on the balance between dividends and buybacks in any year will be assessed at the appropriate time. Information on the components of CapEx and share buybacks is in the Sustainability Report 2021 on page 106. INNOVATION IN BETTER PRODUCTS AND SERVICES TOTAL R&D EXPENSES (€) Total costs related to research and development. While R&D expenses are indicative of a company’s investment in innovation and producing better products and services for their customers, it is not the only way to measure a company’s efforts to innovate new products and services, and to be fit for the future. AIB is keenly focused on implementing the Sustainable Communities pillar of our Group strategy, which has a strong focus on financing our customers’ transition to a low-carbon economy. We have invested in a suite of sustainable finance options, continue to build our understanding of climate risk and are adapting our systems and processes to capture ESG data. In addition, we have a sustained programme of investment in IT to support our digitalisation strategy and the resilience of our business systems. COMMUNITY AND SOCIAL VITALITY TOTAL TAX PAID The total global tax borne by the company, including corporate income taxes, property taxes, non-creditable VAT and other sales taxes, employer-paid payroll taxes, and other taxes that constitute costs to the company, by category of taxes. The table below sets out the total global tax paid by AIB for FY2021. Corporate income taxes Property taxes Non-creditable VAT and other sales taxes Employer-paid payroll taxes Other taxes – Bank levy Total (€9m) - €98m €68m €37m €194m 1. Distributions paid to other equity interests. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Annual Review Sustainability in AIB 45 FUTURE PROOF BUSINESS THEME METRIC RESPONSE PRINCIPLES OF GOVERNANCE GOVERNING PURPOSE SETTING PURPOSE The company’s stated purpose, as the expression of the means by which a business proposes solutions to economic, environmental and social issues. Corporate purpose should create value for all stakeholders, including shareholders. QUALITY OF GOVERNING BOARD GOVERNANCE BODY COMPOSITION Composition of the highest governance body and its committees by: competencies relating to economic, environmental and social topics; executive or non- executive; independence; tenure on the governance body; number of each individual’s other significant positions and commitments, and the nature of the commitments; gender; membership of under-represented social groups; and stakeholder representation. AIB’s purpose is to back our customers to achieve their dreams and ambitions. Our purpose was developed by the Group’s Executive Committee and approved by the Group’s Board in 2017. In 2018, our purpose was systematically rolled out and communicated across the Group. Upon completion of a consultation across the business, we launched an updated set of values and associated behaviours in March 2020. Following the acceleration towards digital banking and changing ways of working associated with the COVID-19 pandemic, AIB announced a refreshed three-year strategy in December 2020, which was developed by the Executive Committee and approved by the Board. The strategy cycle includes a rolling annual review process. The Group is headed by an effective Board which is collectively responsible for the long-term, sustainable success of the organisation, generating value for shareholders and contributing to wider society. The Board supports, and strives to operate in accordance with, the Group’s purpose and values at all times and challenges Management as to whether the purpose, values and strategic direction of the Group align with its desired culture. The Board recognises that diversity in its widest sense is important, is inclusive of all individuals and is focused on ensuring a truly diverse board. The Board embraces the benefits of diversity and through its succession planning is committed to achieving the most appropriate blend and balance of diversity possible over time. In terms of implementation of the Board Diversity Policy, the Nomination and Corporate Governance Committee reviews and assesses the Group Board composition and has responsibility for leading the process for identifying and nominating, for approval by the Board, candidates for appointment as Directors. At 31 December 2021, there was 44% female representation on our Board. In reviewing the 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 and in consideration of the Group’s future strategic plans. Where external search firms are engaged to assist in a candidate search, they are requested to aim for a fair representation of both genders to be included in the initial list of potential candidates so the Committee has a balanced list from which to select candidates for interview. All Board succession planning processes during 2021 were conducted in line with the policy. For more information, see Board Succession Planning and Appointments on page 181. The composition of the Board and its committees is set out in Our Board of Directors on pages 36 to 39. Committee membership is also reported within each of the Committee reports on pages 186 to 209. STAKEHOLDER ENGAGEMENT MATERIAL ISSUES IMPACTING STAKEHOLDERS A list of the topics that are material to key stakeholders and the company, how the topics were identified and how the stakeholders were engaged. Through our Materiality Exercise, the following issues have been identified as being material to our stakeholders (customers, employees, suppliers, investors, regulators and society & community) and to AIB: 1. Ensure a climate resilient & responsive business model 2. Products and services to address environmental issues 3. Responsible lending and investments 4. Usability of services and accessibility of products 5. Enable customers to make better informed financial decisions 6. Housing 7. Customer experience 8. Digitalisation and interconnectivity 9. Cyber security and business system resilience 10. Protect our customers’ data and privacy 11. Talent attraction, retention and development 12. Corporate governance & accountability We also report on Community Investment, as this is a key area of strategic focus for AIB. Further details on our Materiality Exercise and our approach to managing each topic can be found in our Sustainability Report 2021. ETHICAL BEHAVIOR ANTI-CORRUPTION 1. Total percentage of governance body members, employees and business partners who have received training on AIB’s anti-corruption policies and procedures, broken down by region. a) Total number and nature of incidents of corruption confirmed during the current year, but related to previous years; and b) Total number and nature of incidents of corruption confirmed during the current year, related to this year. 2. Discussion of initiatives and stakeholder engagement to improve the broader operating environment and culture, in order to combat corruption. Training on AIB’s anti-corruption policies and procedures was provided to the Board, to our employees and business partners in 2021. By year end, 100% of our Board, 90% of our employees and 87% of our business partners had completed our anti-corruption training. For a more detailed breakdown, see our Sustainability Report 2021 on page 105. Two incidents of corruption were confirmed in 2021 – one related to 2021 and the other to a previous year. Both incidents arose from customer complaints and have been fully investigated. The monetary amount for both is not material. Our Code of Conduct, Conflicts of Interests Policy and Anti-Bribery & Corruption policy and training builds awareness across the organisation to assist in combating corruption. Our Speak Up (whistleblowing) policy and training clearly sets out how our employees can raise any concerns. Other stakeholders can raise concerns through our complaints process. PROTECTED ETHICS ADVICE AND REPORTING MECHANISMS A description of internal and external mechanisms for: 1. Seeking advice about ethical and lawful behaviour and organisational integrity; and 2. Reporting concerns about unethical or unlawful behaviour and lack of organisational integrity. Our key mechanism for seeking advice about ethical and lawful behaviour and on reporting concerns is our Speak Up (whistleblowing) policy and process. This is underpinned by our Code of Conduct, which sets out clear expectations for how we behave and how we do business. The Code guides our behaviours and emphasises our commitment to acting ethically, honestly and with integrity while demonstrating trustworthiness. All employees are required to complete mandatory training on both our Code of Conduct and on Speak Up to ensure awareness and understanding of what is expected and how to raise any concerns. Our Speak Up policy and our Code of Conduct are publicly available at www.aib.ie/sustainability. 46 Sustainability in AIB Annual Review AIB Group plc Annual Financial Report 2021 FUTURE PROOF BUSINESS THEME METRIC RESPONSE PEOPLE RISK AND OPPORTUNITY OVERSIGHT INTEGRATING RISK AND OPPORTUNITY INTO BUSINESS PROCESS Company risk factor and opportunity disclosures that clearly identify the principal material risks and opportunities facing the company specifically (as opposed to generic sector risks), the company appetite in respect of these risks, how these risks and opportunities have moved over time and the response to those changes. These opportunities and risks should integrate material economic, environmental and social issues, including climate change and data stewardship (which includes responsibility for personal data, as well as the use and governance of artificial intelligence and cyber security). DIGNITY AND EQUALITY INCLUSION & DIVERSITY (%) Percentage of employees per employee category, by age group, gender and other indicators of diversity (e.g. ethnicity). PAY EQUALITY (%) Ratio of the basic salary and remuneration for each employee category by significant locations of operation for priority areas of equality: women to men, minor to major ethnic groups, and other relevant equality areas. WAGE LEVEL (%) 1. Ratios of standard entry level wage by gender compared to local minimum wage. 2. Ratio of the annual total compensation of the CEO to the median of the annual total compensation of all its employees, except the CEO. In our Risk Summary, we set out how AIB manages material risks, including our approach to Climate Change and Cyber and Information Security, which we see as Emerging Risk Drivers. Our Material Risks, Emerging Risk Drivers together with the linkage of these Risk Drivers for each of the Principal Risks, are set out on pages 28-31. Further insights into the risks and opportunities associated with Climate Change and Data Stewardship are set out in our Sustainability Report 2021 on pages 20-50 and pages 75-83. EMPLOYEES (BY AGE) <30 YRS 30-50 YRS >50 YRS Senior management Junior management Non-management —% 1% 20% 65% 72% 64% EMPLOYEES (BY GENDER) FEMALE Senior management Junior management All management Non-management 36% 44% 42% 60% 35% 28% 16% MALE 64% 56% 58% 40% Diversity is a key strategic priority for AIB. We have a long-term strategic target for gender balance in our Board, ExCo, and all management. Further data on diversity is set out in our Sustainability Report 2021 on page 104. Within AIB Group we are committed to being open, transparent and clear in relation to our position on inclusion and diversity and with this mind we are making our first disclosure on gender pay gap in Ireland, our most significant location of operation. Our gender pay gap for Ireland is 12.9% mean and 7.4% median. The gender pay gap represents the difference between both the mean (average) and the median (midpoint of all wages) hourly pay of male and female employees. Our disclosures are made ahead of the finalisation of Irish regulations on gender pay gap reporting, therefore we have based our calculations on the UK methodology. We have used a snapshot date of 25 September 2021. Please note, gender pay gap is not the same as equal pay. An equal pay comparison involves a direct comparison between a man and a woman, or a group of men and women, who are carrying out the same work. We have achieved a lot during 2021 reflecting our commitment to gender equality. We were the first bank to achieve a Silver “Investors in Diversity” Accreditation. In addition, we were named Best Practice Leader in the 2021 European Women on Boards Gender Diversity Index. We recognise that fair compensation and benefits contribute to the economic wellbeing of employees. The ratio of AIB’s standard entry level wage compared to local minimum wage is 1.31:1 (Ireland) and 1.1:1 (United Kingdom). In AIB, the standard entry level wage is equal for female and male employees. Data excludes Payzone and Goodbody employees. The ratio of the annual total compensation of the CEO to the median of the annual total compensation of all AIB employees, except the CEO, is 9.84:1. Our CEO’s total compensation is set out on page 205. For more information, see our Sustainability Report 2021 on page 105. RISK FOR INCIDENTS OF CHILD, FORCED OR COMPULSORY LABOUR An explanation of the operations and suppliers considered to have significant risk for incidents of child labour, forced or compulsory labour. Such risks could emerge in relation to: a) type of operation (such as manufacturing plant) and type of supplier; and b) countries or geographic areas with operations and suppliers considered at risk. AIB does not have suppliers considered to have a significant risk for incidents of child labour. In 2021, we have made significant progress in relation to Human Rights, launching our Human Rights Commitment developed in line with the standards set out in the UN Guiding Principles on Human Rights. We also completed a pilot project to model the identification of our salient human rights issues, recognising our responsibilities relating to our rolel as an employer, as a procurer of goods and services, and as a provider of retail banking and corporate lending. For more information, see our Sustainability Report 2021 on page 91. AIB Group plc Annual Financial Report 2021 Annual Review Sustainability in AIB 47 FUTURE PROOF BUSINESS THEME METRIC RESPONSE PEOPLE HEALTH AND WELLBEING HEALTH AND SAFETY (%) 1. The number and rate of fatalities as a result of work-related injury; high-consequence work-related injuries (excluding fatalities); recordable work-related injuries; main types of work-related injury; and the number of hours worked. 2. An explanation of how AIB facilitates workers’ access to non-occupational medical and healthcare services, and the scope of access provided for employees and workers. For all employees and workers who are not employees but whose work and/or workplace is controlled by AIB, we reported the following for FY2020: HIRES NUMBER Fatalities from work-related injury High-consequence work-related injuries (excl. fatalities) Recordable work-related injuries 0 1 13 RATE 0.00 0.06 0.83 1 2 3 4 5 6 The main types of work-related injuries include slips/trips/falls, trapped/crushed, hit against something fixed or stationary. We use FY2020 data which is our most current available. Please note the rate is calculated using an estimate of the number of hours worked, and indicates the number of work-related injuries per 500 full-time worked in 2020. Further details on health and safety matters are set out in our 2020 Health & Safety Report available at www.aib.ie/sustainability. AIB provides access to additional professional, emotional and wellbeing support via an external provider, Workplace Options, in addition to an occupational health service provided to employees by Medmark. SKILLS FOR THE FUTURE TRAINING PROVIDED (HOURS, €) 1. Average hours of training per person that AIB’s employees have undertaken during the reporting period, by gender and employee category (total number of hours of training provided to employees divided by the number of employees). 2. Average training and development expenditure per full-time employee (total cost of training provided to employees divided by the number of employees). AIB has a proud tradition of investing in best-in-class training and development to support employees to perform their best work, and reach their potential. Our objective is to make learning inclusive and accessible to everyone who works in AIB, and our employees access a wide range of training, skills development and leadership development programmes. In 2021, training continued to be delivered virtually and a number of new initiatives were launched to support employees to lead effectively in a hybrid work environment. Our employees completed on average 28 hours of training (females 28.2, males 27.7). These training hours include all training types such as Instructor Led training, Virtual Instructor Lead training, SMT, iLearn: Web Based Training and external training, and relates to permanent and temporary employees. The average training spend per FTE employee was €800. For more detail on the above data, including information on assumptions, inclusions/exclusions, please refer to the Non-Financial Information section of our Sustainability Report 2021, available at www.aib.ie/sustainability. We p l e d g e t o D O M O R E S U S TA I N A B I L I T Y R E P O RT fo r t h e fi n a n c i a l ye a r e n d e d 3 1 D e ce m b e r 2 0 2 1 A I B G ro u p p l c For our full Sustainability disclosures, see our Sustainability Report 2021 48 Sustainability in AIB Annual Review AIB Group plc Annual Financial Report 2021 SUSTAINABILITY IN AIB OUR TCFD DISCLOSURES AIB is a supporter of the Task Force on Climate-related Financial Disclosures (TCFD) and this is our second year of disclosing our progress against its recommendations.1 Our full set of TCFD disclosures is contained as part of our update on Climate & Environment on pages 20-50 in our Sustainability Report 2021 alongside our other ESG disclosures, which allows for the inclusion of more detailed and technical content. See www.aib.ie/sustainability. GOVERNANCE TCFD FOCUS AREA RECOMMENDED DISCLOSURE OUR DISCLOSURE Disclose the organisation’s governance around climate-related risks and opportunities Describe the Board’s oversight of climate-related risk and opportunities Describe management’s role in assessing and managing climate-related risks and opportunities § Oversight of climate change and material items reviewed at Board level. Board and Executive Committee oversight and review of climate-related metrics that appear on the AIB Group Scorecard. § Enhanced ESG governance with new Sub-Executive Committee, the Group Sustainability Committee, in addition to existing Board committee that has been in place since 2016, the Sustainability Board Advisory Committee. For more details, see our Sustainability Report 2021 – ESG Goverance section on page x. § Roles & responsibilities and Terms of Reference of Board and Executive committees updated to reflect consideration of Climate Risk. § Multi-year programme in train and sustainability working groups in place across key business areas. § Sustainability training (including Climate Risk training) at Board, Executive Committee and employee levels. § Mandatory sustainability objectives for all employees. § First disclosures on WEF Stakeholder Capitalism metrics and continuing Carbon Disclosure Project disclosures (Leadership rated for six consecutive years). STRATEGY TCFD FOCUS AREA RECOMMENDED DISCLOSURE OUR DISCLOSURE Disclose the actual and potential impacts of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning where such information is material Describe the climate-related risks and opportunities the organisation has identified over the short, medium, and long term Describe the impact of climate-related risks and opportunities on the organisation’s businesses, strategy, and financial planning Resilience of the organisation’s strategy, taking into consideration different climate-related scenarios, including a 2°C or lower scenario § Integrated consideration of climate risks and opportunities in the annual strategic planning process. § Review of climate action opportunities and areas prioritised for investment as part of strategy review. § Undertook initial climate risk quantification – physical flood risk for our residential mortgage portfolio and transition risk for our high climate risk sectors. § New propositions launched to support customer transition including joint venture with leasing company for electric & hybrid vehicles (Nifti) and new green mortgage propositions across other AIB brands (in addition to existing Green Mortgage, Electric Vehicle proposition, Green Consumer Loan and Sustainability Linked Loans). § Sustainable Lending Framework defined for categorisation of green and transition lending published externally. § Internal science-based targets set for 63% of the lending portfolio based on International Energy Agency 2ºC or lower scenarios. Embedded within multi-year financial plans with plan to externally validate and disclose in 2022. § Partnerships or collaboration to build awareness of climate change and promote action including prevention of food waste (FoodCloud), biodiversity (Coillte), community dialogues (TASC), in addition to annual Sustainability Conference and other events. § AIB signed up to Net Zero Banking Alliance, Equator Principles, WEF Stakeholder Capitalism metrics and UN Global Compact in 2021. 1. We comply with the FCA’s Listing Rule 9.8.6R(8) and make disclosures consistent with the 2017 TCFD recommendations and recommended disclosures across all four of the TCFD pillars: Strategy; Governance; Risk Management; and Metrics and Targets. AIB Group plc Annual Financial Report 2021 Annual Review Sustainability in AIB 49 1 2 3 4 5 6 RISK MANAGEMENT TCFD FOCUS AREA RECOMMENDED DISCLOSURE OUR DISCLOSURE Disclose how the organisation identifies, assesses, and manages climate-related risks Organisation’s processes for identifying and assessing climate-related risks § Conducted climate risk heat-mapping to determine the most likely sectors with greatest exposure to physical and transition risks and developed a methodology to use scenario analysis to quantify climate-related risks for our commercial and retail customers. Organisation’s processes for managing climate-related risks § Detailed work on ECB stress testing (Modules 1, 2 & 3) in progress. § Introduced a new ESG Questionnaire to assess a borrower’s ESG risk (for customers in high climate risk sectors), the outputs of which feed into the credit assessment process. Processes for identifying, assessing, and managing climate-related risks are integrated into the organisation’s overall risk management § In-depth review of AIB Group’s Enterprise Risk Management Framework with respect to climate risk and areas for enhancement identified, with a number of gaps closed in 2021 including updates to a number of policies. § Climate Risk has been recognised as a key risk driver within Material Risk Assessment and updates made to AIB’s Risk Appetite Statement (RAS) relating to Business Model Risk and Credit Risk. § An assessment of climate-related risks over short, medium and long term was performed and linked to existing risk categories. § Data & Systems programme of work in train to capture required data fields for Climate Risk quantification and emissions reduction measurement. METRICS & TARGETS TCFD FOCUS AREA RECOMMENDED DISCLOSURE OUR DISCLOSURE Disclose the metrics and targets used to assess and manage relevant climate- related risks and opportunities where such information is material Disclose the metrics used by the organisation to assess climate-related risks and opportunities in line with its strategy and risk management process Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse gas (GHG) emissions, and the related risks Describe the targets used by the organisation to manage climate-related risks and opportunities and performance against targets § Progress made on 2020 climate ambition announcements including: § – €2bn of green financing accounting for 19% of new lending (excludes transition finance); – issuance of second €750m Green Bond; – contracting for a power purchase agreement for 100% certified solar renewable energy. § Climate action lending target doubled from €5bn over five years to €10bn in the same period. § Science-based emissions reduction targets disclosed for a number of key sectors (residential mortgages, commercial real estate and electricity generation) covering 63% of lending balance sheet, with internal measurement processes in place to track progress. § Reduction of emissions from our own operations (Scope 1 & Scope 2) of 19% in 2021. We p l e d g e t o D O M O R E S U S TA I N A B I L I T Y R E P O RT fo r t h e fi n a n c i a l ye a r e n d e d 3 1 D e ce m b e r 2 0 2 1 A I B G ro u p p l c For our full Sustainability disclosures, see our Sustainability Report 2021 50 Sustainability in AIB Annual Review Annual Review AIB Group plc Annual Financial Report 2021 SUSTAINABILITY IN AIB 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. This Non-Financial Statement offers some high- level information to provide an understanding of the development, performance, position and impact of our activities in the four non-financial matters. We have provided references to supplemental information in this report and in our Sustainability Report 2021, which is published to the Global Reporting Initiative (GRI) Standards. For information on our business model, see pages 2 to 5. In AIB, policies and codes are in place to enable us to operate our business in a responsible and sustainable way. Below we have set out some of the key policies related to Non-Financial Reporting Directive (NFRD) requirements, and provided links to the associated principal risks and key performance indicators (KPIs) for each matter. For more information, see our Sustainability Report 2021. ENVIRONMENTAL MATTERS ENVIRONMENTAL POLICY ENERGY POLICY GROUP CREDIT RISK POLICY PROJECT FINANCE POLICY Our Environmental Policy is sponsored by our Chief Operating Officer Designate and our Director of Corporate Affairs, Strategy & Sustainability. The purpose of our policy is to enable us to carry out our business in an environmentally responsible and compliant manner. It will allow for greater management of the risks to the environment in our operations. The policy includes AIB’s commitment to decarbonise our operations and to support initiatives aimed at preventing, mitigating, adapting or responding to climate change and decarbonisation of our operations. AIB is certified to ISO 14001 for environmental management. Our policy is publicly available at www.aib.ie/sustainability. Our Energy Policy is sponsored by our Chief Operating Officer Designate and our Director of Corporate Affairs, Strategy & Sustainability. The purpose of our policy is to enable us carry out our business as energy efficiently as possible, reduce our carbon footprint and to achieve continuous improvement in energy performance. AIB is certified to ISO 50001 for energy management. Our policy is publicly available at www.aib.ie/sustainability. Our Group Credit Risk Policy includes a list of excluded business activities that are considered to be incompatible with Group Strategy due to negative environmental impacts associated with deforestation, nuclear power generation, natural gas fracking and the exploration, extraction or refining of oil or coal. The policy rule prohibits providing new money for any term lending facilities to businesses, or any of its subsidiaries, involved in the excluded business activities. This rule applies to all business customers with a Gross Connected Exposure of > €/£300k and who are relationship managed. The full list is publicly available on www.aib.ie/sustainability. Our Project Finance Policy, approved by our Group Credit Committee, guides our climate-related lending assessments and decisions for long-term infrastructure, industrial projects and public services. Within credit assessment due diligence, assets that are likely to have significant effects on the environment by virtue of their size, nature or location must undergo an environmental impact assessment (EIA), which will have to be submitted to competent authorities when applying for project development. AIB may rely on analyses provided by external parties to support our assessment. SUSTAINABLE LENDING FRAMEWORK Our Sustainable Lending Framework (SLF) enables the classification of customer loans as green, transition or social. The SLF was developed to provide transparency on the criteria that AIB employs in reporting on green and transition lending to help us achieve our ambition that 70% of new lending should be green or transition by 2030. The SLF is based on industry best practice and is largely aligned, where applicable, to the EU Taxonomy regulation and will evolve as the EU Taxonomy develops. It was approved by the Group Sustainability Committee and is publicly available at www.aib.ie/sustainability. KPIs Our main key performance indicators for environmental matters are Reduction in Emissions and Green Finance metrics. • Reduction in emissions – in FY2021 we achieved a 19% reduction in our Scope 1 & 2 GHG emissions (year on year). • Green Finance – in FY2021 we advanced €2bn in new green lending. PRINCIPAL RISKS Operational Risk (see page 163) and Credit Risk (see pages 83-144). AIB Group plc Annual Financial Report 2021 Annual Review Sustainability in AIB 51 1 2 2 3 3 4 4 5 5 6 6 SOCIAL & EMPLOYEE MATTERS CODE OF CONDUCT INCLUSION & DIVERSITY CODE SOCIAL HOUSING POLICY HEALTH & SAFETY POLICY Our Code of Conduct sets out how we are expected to behave in a manner consistent with our values and asks us, individually and collectively, to Do the Right Thing. It applies to anyone working in AIB. All employees are required to adhere to our Code and complete a declaration of compliance with our Code as part of their annual performance review. Annual e-learning on the Code is mandatory for all employees. We report annually to the Board Audit Committee in relation to the Code. on training completed and any breaches. The Code is available on www.aib.ie/sustainability. Our Inclusion & Diversity Code is based on an ethos that respecting, developing and harnessing the talents of all our employees creates an inclusive and supportive organisation. It enables the Group to deliver a superior experience for all our customers, provides an extraordinary place to work for our employees, and brings an appropriate financial return for our shareholders and the economies within which we operate. Our Social Housing policy, which is part of our Credit Risk policy suite, supports lending to our customers for social housing and helps us to manage and mitigate the associated risks. Credit Risk develops and maintains policies to ensure responsible lending practices, aligned with our Risk Appetite Statement (RAS). It was approved by our Group Credit Committee. Our Health & Safety policy is based on the safety of our customers and employees which are paramount. Our policy forms part of our Safety Statement. It sets out the practical steps each of us must take to ensure the safety of our employees, customers, contractors, visitors and our workplaces, and defines and communicates the roles and responsibilities for health and safety throughout AIB. It is supported by training (online, virtual and blended options) and regular accident awareness communications. For social and employee matters, our key performance indicators include: KPIs female representation of 44%, 45% and 42% respectively. • Diversity – In 2021, we maintained gender balance at Board, ExCo and across all management levels with • Social housing finance – In 2021, we fully allocated our €300m Social Housing Fund and in July we launched an additional €500m. The additional funds aim to provide a further 3,000 homes. PRINCIPAL RISKS See People and Culture Risk (see pages 167-168) and Credit Risk (see pages 83-144). 52 Sustainability in AIB Annual Review Annual Review AIB Group plc Annual Financial Report 2021 RESPECT FOR HUMAN RIGHTS HUMAN RIGHTS COMMITMENT CODE OF CONDUCT DATA PROTECTION POLICY RESPONSIBLE SUPPLIER CODE Our Human Rights Commitment, published in Q1 2021, was developed in line with the standards set out in the UN Guiding Principles on Business and Human Rights. During 2021, we conducted a pilot project to model the identification of our salient human rights issues, recognising our responsibilities relating to our role as an employer, as a procurer of goods and services, and as a provider of retail banking and corporate lending. The pilot project focused on two areas of our business (Corporate Banking and Supplier procurement and management). It centred on building internal awareness on human rights within our business and identifying priority salient human rights risks relevant to the bank for further review and action. Our Human Rights Commitment is publicly available at www.aib.ie/sustainability. Our Code of Conduct is our central policy for the human rights of our employees. In addition, our wider policy suite exists to protect our employees and respect their rights. Additional supporting policies include: our Inclusion & Diversity Code, Anti-Bullying & Harassment Policy, Domestic Abuse Handbook, Speak Up Policy, and Grievance Policy. We ensure that we not only fulfil our legislative requirements, but that we seek to go above and beyond the minimum standards for the jurisdictions in which we operate. The Code is available on www.aib.ie/ sustainability. Our Data Protection policy is part of the Regulatory Compliance Risk Management Framework. It aims to ensure that processes and controls are in place to minimise the risk of unfair or unlawful data processing and that all employees understand the responsibilities and obligations that must be adhered to under Data Protection regulation. It applies to our entire operation, including our suppliers. Material changes to the policy must be approved by our Group Risk Committee. While this policy is not publicly available, our Data Protection Notice and other information, including information on customers’ data rights, is available on www.aib.ie/dataprotection. Our Responsible Supplier Code, launched in October 2020, sets out our expectations that our suppliers conduct their business in a fair, lawful, and honest manner with all their stakeholders, employees, subcontractors, and any other third parties. It describes our expectations on human rights, health, safety and welfare, supply chain, and inclusion and diversity. Suppliers are expected to abide by it, along with all applicable laws, regulations, and standards in the countries in which their business is conducted. Our suppliers may be asked to provide a written attestation that they have read and understood the code, and will abide by it. The Code is available on our suppliers portal on www.aib.ie/suppliers. MODERN SLAVERY STATEMENT Our Modern Slavery and Human Trafficking Statement is released annually. AIB recognises our responsibility to comply with all relevant legislation, including the UK Modern Slavery Act 2015. Our 2021 statement (published in June 2021), sets out the steps we took during 2020 to prevent modern slavery and human trafficking in our business and supply chains. An updated statement will be published in June 2022. The current statement is available at www.aib.ie/content/dam/aib/group/Docs/modern-slavery-statement-2021.pdf. We report on these performance indicators annually in our Sustainability Report: KPIs • Breaches of data privacy: In 2021, we received 17 complaints from the Data Protection supervisory authorities in Ireland and the UK regarding breaches of data privacy, the majority of which related to 2020. • Personal data breaches: In 2021, we reported 141 breaches under GDPR to the Data Protection supervisory authorities in Ireland and the UK. While these may include losses of customer data or inaccuracy, the majority reported related to unauthorised disclosure of personal data. PRINCIPAL RISKS See People and Culture Risk (see pages 167-168), Credit Risk (see page 83) and Regulatory Compliance Risk (see pages 164-165). 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Annual Review Sustainability in AIB 53 ANTI-BRIBERY & CORRUPTION ANTI-BRIBERY & CORRUPTION POLICY Our Anti-Bribery & Corruption policy complies with applicable anti-bribery and anti-corruption legislation in all the jurisdictions in which we operate. It forms part of our Code of Conduct and it is publicly available on www.aib.ie/sustainability. CONFLICTS OF INTERESTS POLICY Our Conflicts of Interest Policy provides a clear statement of the standards for recognising and preventing potential conflicts of interest and for managing conflicts of interests where they cannot be avoided. Conflicts of interest situations may arise between the interests of two or more parties, (whether directly or indirectly involved) in any situation. It is the result of any activities, interests or relationships that interfere with (or appear to interfere with) the ability of employees, agency workers or contractors, or of AIB to act in the best interests of our customers, employees, or AIB as an organisation. All employees are required to complete annual Conflicts of Interests training which includes anti-bribery and anti-corruption matters. The policy forms part of our Code of Conduct and it is publicly available on www.aib.ie/sustainability. FINANCIAL CRIME FRAMEWORK Our robust Financial Crime Framework includes our Financial Crime policy and standards on Anti-Money Laundering (AML)/Countering the Financing of Terrorism (CFT), Fraud and Group Sanctions. The policy and standards are embedded within our operating procedures, and subject to at least an annual content verification to ensure they are kept up to date. All employees and Directors are made aware of our Financial Crime policy and standards. Employees must complete mandatory e-learning annually. Our Money Laundering Reporting Officer (or Deputy) provides comprehensive annual training to the Board. Bespoke training tailored to consider the money laundering / terrorism financing risks relevant to the specific roles is also provided to key staff. To further enhance awareness, Financial Crime AML and Sanctions Bulletins are issued periodically to our employees outlining key trends and other topical items. Our key performance indicators for these matters include: KPIs • Conflicts of Interests training – 90% completion rate in 2021. We target a completion rate of 90% annually, to allow for employees who are on leave during the training period. On returning from leave, they are expected to complete the training. • Incidents of corruption – Two incidents of corruption were confirmed in 2021 – one related to 2021 and the other related to a previous year. Both incidents arose from customer complaints and have been fully investigated. The monetary amount for both is not material. PRINCIPAL RISKS See Regulatory Compliance Risk (see pages 164-165) and Conduct Risk (see pages 165-166). 54 Sustainability in AIB Annual Review Annual Review AIB Group plc Annual Financial Report 2021 SUSTAINABILITY IN AIB EU TAXONOMY The EU Taxonomy is a sustainability classification system that translates the EU’s climate and environmental objectives into criteria for specific economic activities for investment purposes. Here we outline the background and methodology to our first EU Taxonomy disclosure, relating to 2021. CONTEXTUAL INFORMATION INCLUDING THE SCOPE OF ASSETS AND ACTIVITIES COVERED BY THE KPIs, INFORMATION ON DATA SOURCES AND LIMITATIONS Our EU Taxonomy disclosure covers AIB Group. Our proportion of in-scope assets exposure to taxonomy eligible economic activities is 38% which is driven by the proportion of retail mortgages on our balance sheet and the fact that the acquisition and ownership of buildings is an eligible activity. The main category of assets for eligibility considerations covered in our disclosure includes households. In our denominator, we include local government financing, financial corporations, non-financial corporations (NFCs), derivatives, on demand interbank loans, cash and cash-related assets and other assets (e.g. goodwill, commodities etc.). The scope of activities covered includes the eligible activities under climate change mitigation (CCM)1 and climate change adaptation (CCA)2. Total exposure for other assets not covered in either denominator or numerator has been provided for central governments, central banks and supranational issuers, and the trading portfolio. Given this is the first year of reporting, published counterparty data was limited by 10 February 2022. For this reason, financial corporations, and NFCs not subject to Non-financial Reporting Directive (NFRD) disclosure obligations were excluded from eligibility considerations. As data availability improves, we will look to include these assets in our numerator. For our numerator, we determined the proportion of Taxonomy-eligible assets using the associated Nomenclature of Economic Activities (NACE) codes within the Technical Screening Criteria. Our categorisation of the full book was reviewed. In AIB, sustainability forms a key pillar of our business strategy. We have set an ambition of green/transition lending to account for 70% of all new lending by 2030. To support this goal, we have developed a Sustainable Lending Framework (SLF) where we have used the EU Taxonomy as one of the considerations to inform our criteria for green, transition or social loans. This framework is reviewed annually and will continue to evolve as the EU Taxonomy expands. We have also published a list of excluded business activities with negative environmental impacts that AIB Group will not finance, such as deforestation and nuclear power generation. It has been incorporated into our Group Credit Risk policy, which supports the management of Credit Risk across the Group. AIB offers a range of products that promote Taxonomy-eligible activities and help our customers become more sustainable. For example, our green mortgages in Ireland and the UK are available to new and existing customers whose property has a Building Energy Rating (BER) of between A1-B3. We also launched our green consumer loans in early 2021 targeted with initiatives, for example, to help customers retrofit their homes and achieve a higher energy efficiency rating. Our ‘Power of Zero’ initiative in partnership with Nissan offers our customers the opportunity to buy a new Nissan LEAF electric vehicle and to move away from transport options reliant on fossil fuels. Looking forward, in 2022 we will continue to build out our green product offering further. AIB Private Banking also offers a range of ESG portfolios that contain underlying Sustainable Finance Disclosures Regulation Article 8 and Article 9 funds to our clients. We discuss ESG matters with our clients at the point of origination. Additionally, we collect data from our corporate customers as part of the Sustainable Lending Framework to enable loan classification as green or transition. 1. CCM: The process of holding the increase in the global average 2. CCA: The process of adjustment to actual and expected climate temperature to well below 2 °C and pursuing efforts to limit it to 1.5°C above pre-industrial levels, as laid down in the Paris Agreement. change and its impacts. AIB Group plc Annual Financial Report 2021 Annual Review Sustainability in AIB 55 OUR 2021 DISCLOSURE AIB carefully monitors progress towards the EU Taxonomy. The following table outlines the breakdown of Taxonomy-eligible assets on the balance sheet with reference to disclosure requirements for 2021. We will continue to develop our disclosures over the coming years as requirements and data availability increase. Our proportion of total assets exposure to taxonomy eligible economic activities is 38%, which is driven by the proportion of retail mortgages on our balance sheet and the fact that the acquisition and ownership of buildings is an eligible activity under climate change mitigation and climate change adaptation. 1 2 3 4 5 6 MANDATORY DISCLOSURE TOTAL GROSS AMT (€M)1 % IN-SCOPE ASSETS % TOTAL ASSETS ASSETS COVERED IN BOTH NUMERATOR AND DENOMINATOR (Loans & advances, debt securities and equity instruments) HOUSEHOLDS LOCAL GOVERNMENTS FINANCING (HOUSING) ASSETS EXCLUDED FROM THE NUMERATOR (COVERED IN THE DENOMINATOR) HOUSEHOLDS (non eligible) LOCAL GOVERNMENTS FINANCING (non eligible) 38% 38% 0% €29,664 €29,664 €0 €49,035 €2,963 €471 FINANCIAL CORPORATIONS (Loans & advances, debt securities and equity instruments) €12,467 Credit institutions Other financial corporations €8,923 €3,544 NON-FINANCIAL CORPORATIONS (Loans & advances, debt securities and equity instruments) €25,897 DERIVATIVES ON DEMAND INTERBANK LOANS CASH AND CASH-RELATED ASSETS OTHER ASSETS (e.g. Goodwill, commodities etc.) TOTAL ASSETS FOR DENOMINATOR OTHER ASSETS NOT COVERED IN EITHER DENOMINATOR OR NUMERATOR Sovereigns Central banks exposure Trading book TOTAL ASSETS 1. This table is prepared on the prudential scope of consolidation per FINREP. €423 €960 €545 €5,309 €78,699 €50,930 €7,997 €42,467 €466 €129,629 100% We p l e d g e t o D O M O R E S U S TA I N A B I L I T Y R E P O RT fo r t h e fi n a n c i a l ye a r e n d e d 3 1 D e ce m b e r 2 0 2 1 A I B G ro u p p l c For more information, see our Sustainability Report 2021 23% 23% 0% 38% 2% 0% 10% 7% 3% 20% 0% 1% 0% 4% 61% 39% 6% 33% 0% 56 Sustainability in AIB Annual Review AIB Group plc Annual Financial Report 2021 BACKING A SUSTAINABLE FUTURE At AIB, we want to ensure a greener tomorrow by backing those building it today. For more information about our Sustainable Communities strategy, targets and progress, see our detailed Sustainability Report 2021. AIB Group plc Annual Financial Report 2021 Business Review 57 Business review 1. Operating and financial review 2. Capital Page 58 73 1 2 3 4 5 6 58 Business Review AIB Group plc Annual Financial Report 2021 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 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 71. These measures should be considered in conjunction with IFRS measures as set out in the consolidated financial statements from page 229. A reconciliation between the IFRS and management performance summary income statements is set out on page 72. Figures presented in the operating and financial review may be subject to rounding and thereby differ to the risk management section and the consolidated financial statements. Basis of calculation Percentages are calculated on exact numbers and therefore may differ from the percentages based on rounded numbers. The impact of currency movements is calculated by comparing the results for the current reporting period to results for the comparative reporting period retranslated at exchange rates for the current reporting period. Management performance – summary income statement Net interest income Other income(1) Total operating income(1) Personnel expenses(1) General and administrative expenses(1) Depreciation, impairment and amortisation(1) Total operating expenses(1) Bank levies and regulatory fees(1) Operating profit before impairment losses and exceptional items(1) Net credit impairment writeback/(charge) Operating profit/(loss) before exceptional items(1) Share of equity accounted investments Profit/(loss) before exceptional items(1) Restitution costs Restructuring costs Inorganic transaction costs Covid product costs Other Total exceptional items(1) Profit/(loss) before taxation Income tax credit Profit/(loss) for the year 2021 € m 1,794 590 2,384 (738) (512) (284) (1,534) (162) 688 238 926 21 947 (173) (132) (21) – 8 (318) 629 16 645 2020 € m 1,872 499 2,371 (734) (514) (279) (1,527) (115) 729 (1,460) (731) 15 (716) (117) (73) (2) (22) (1) (215) (931) 190 (741) % change -4 18 1 1 -1 2 – 41 -6 – – 37 – – – – – – – – -92 – (1) Performance has been adjusted to exclude items viewed as exceptional by management and which management view as distorting comparability of performance year-on-year. The adjusted performance measure is considered an APM. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Business Review 59 Net interest income Net interest income €1,794m Net interest income 2021 € m 2020 % € m change The reduction in funding costs was primarily due to: • Deposits by banks which reflects the impact of TLTRO III Interest income(1) Interest expense(1) Net interest income Average interest earning assets 1,797 (3) 1,794 113,401 2,049 (177) 1,872 96,037 -12 -98 -4 18 % 1.58 % Change -0.36 1.94 Net interest margin (NIM) Net interest income €1,794m € 78 million or 4% compared to 2020. Net interest income of € 1,794 million decreased by Interest income Interest income of € 1,797 million in 2021 decreased by € 252 million compared to 2020 primarily due to: • Lower average customer loan volumes reflecting the redemption and disposal of non-performing loans and due to redemptions of performing loans exceeding new lending in 2020. • Higher volumes of excess liquidity held with the central bank at negative rates. • Reduced asset yields driven by the lower interest rate • environment. Lower income on investment securities due to maturities and disposals of higher yielding securities and reinvestment at lower yields. Interest expense Interest expense of € 3 million in 2021 decreased by € 174 million compared to 2020. funding including an additional income benefit of € 65 million (€ 15 million in respect of the March 2021 lending benchmark and the full € 50 million benefit in respect of the December 2021 lending benchmark) recognised when it was subsequently determined that the Group had a reasonable expectation that the relevant lending targets would be met.(2) • The lower cost of customer accounts which includes the impact from continuing to broaden the scope of accounts to which negative rates are applied. • Lower cost of other debt issued. Net interest margin 1.58% 1.94% in 2020 due to: • Higher excess liquidity impacting average interest earning NIM decreased by 36 bps to 1.58% in 2021 compared to assets c. -29 bps • Reduced interest income primarily due to lower average customer loan volumes, the impact of the lower interest rate environment and the decrease in investment security yields c. -20 bps partly offset by; Lower interest expense on customer accounts and other debt issued c. +7 bps and, • • Additional TLTRO III income benefit c. +6 bps. Average interest earning assets of € 113.4 billion in 2021 increased by € 17.4 billion from 2020 primarily due to funds placed with banks. This was driven by an increase in excess liquidity mainly due to higher customer account balances and TLTRO III funding drawdown. Average balance sheet Assets Loans and advances to customers Investment securities Loans and advances to banks(3) Average interest earning assets Non-interest earning assets Total average assets Liabilities & equity Deposits by banks Customer accounts Other debt issued Subordinated liabilities Lease liabilities Average interest earning liabilities Non-interest earning liabilities Equity Total average liabilities & equity Year ended 31 December 2021 Average rate % 3.20 0.37 (0.30) 1.58 (1.32) (0.01) 0.98 2.65 3.28 – Interest(1) € m 1,846 65 (114) 1,797 1,797 (102) (3) 55 41 12 3 3 Average balance € m 57,697 17,676 38,028 113,401 6,294 119,695 7,722 48,439 5,587 1,553 364 63,665 42,518 13,512 119,695 Year ended 31 December 2020 Interest(1) € m 1,965 112 (28) 2,049 Average rate % 3.29 0.61 (0.15) 2.13 Average balance € m 59,586 18,389 18,062 96,037 7,227 103,264 2,049 (3) 54 68 45 13 177 (0.15) 0.13 1.11 3.05 3.18 0.35 1,870 40,766 6,089 1,481 408 50,614 38,682 13,968 103,264 177 Net interest income 1,794 1.58 1,872 1.94 (1) Negative interest income on assets amounting to € 129 million in 2021 (2020: € 44 million) is offset against interest income. Negative interest expense on liabilities amounting to € 158 million in 2021 (2020: € 34 million) is offset against interest expense. (2) For further information see note 4 ‘Interest and similar income’ in the consolidated financial statements. (3) Loans and advances to banks includes Securities financing. 60 Business Review AIB Group plc Annual Financial Report 2021 Business review – 1. Operating and financial review Other income Other income(1) €590m Other income(1) Net fee and commission income Dividend income Net trading income/(loss) – Equity investment hedges – Other Net gain on equity investments (FVTPL) Net gain on loans and advances to customers (FVTPL) Other operating income Other income Other income(1) €590m compared to 2020. This reflects the impact from the acquisition of increased by € 91 million or 18% Other income of € 590 million 2021 € m 480 3 15 2 13 58 20 14 590 2020 € m % change 395 26 (32) (9) (23) 45 42 23 499 21 -90 – – – 29 -51 -38 18 Net trading income (excluding equity hedges) of € 13 million in 2021 increased by € 36 million compared to a net trading loss of € 23 million in 2020 mainly due to favourable movements on Goodbody for four months of 2021 of € 24 million and an underlying derivative valuation adjustments (XVA) and on non-customer increase of € 67 million or 13%. foreign exchange contracts. Net fee and commission income Customer accounts Card income Lending related fees Customer related foreign exchange Payzone Other fees and commissions Goodbody Net fee and commission income 2021 € m 208 78 50 67 15 38 456 24 480 2020 % € m change 179 69 40 54 15 38 395 – 395 15 13 26 23 1 – 15 – 21 Net income from equity investments of € 60 million in 2021 (2020: € 36 million) reflected the disposal and revaluation of equity investments. This comprises a net gain on equity investments (FVTPL) of € 58 million in 2021 (2020: € 45 million) and equity investment hedges of € 2 million (2020: loss of € 9 million). Net gain on loans and advances to customers (FVTPL) of € 20 million in 2021 (2020: € 42 million) represents income recognised on previously restructured loans carried at fair value through profit or loss. Other operating income of € 14 million in 2021 includes a € 7 million gain on disposal of investment securities (2020: Nil) Net fee and commission income of € 480 million in 2021 increased and a gain on disposal of individual loans for credit management by € 85 million compared to 2020 reflecting the impact from purposes of € 6 million (2020: € 23 million). Goodbody and an increase in underlying net fee and commission income of € 61 million or 15%. The increase in underlying net fee and commission income primarily reflected higher transaction volumes due to a recovery in economic activity and the removal of the exemption on customer account fees for customers that maintain a minimum credit balance. Dividend income in 2020 included € 23 million received on NAMA subordinated bonds, which were redeemed in 2020. IFRS basis On an IFRS basis other income, including a net loss of € 5 million on exceptional items(1), was € 585 million in 2021 compared to € 501 million in 2020. (1) Other income before exceptional items. A net loss of € 5 million on exceptional items in 2021 (2020: € 2 million gain) comprises: € 5 million loss on disposal of loan portfolios (2020: Net loss on loans and advances to customers (FVTPL) € 1 million and Other operating income gain on settlement € 3 million). 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Business Review 61 Cost income ratio(1)(2) 64% resulted in a cost income ratio of 64% in 2021 in line with 2020. income of € 2,384 million Costs of € 1,534 million and Bank levies and regulatory fees €162m Bank levies and regulatory fees Irish bank levy Deposit Guarantee Scheme Single Resolution Fund Other regulatory levies and charges 2021 € m 2020 € m 37 48 53 24 35 39 17 24 Bank levies and regulatory fees 162 115 Bank levies and regulatory fees of € 162 million increased by € 47 million compared to 2020 primarily due to Single Resolution Fund (SRF) and higher Deposit Guarantee Scheme fees. The SRF fee includes a provision of € 25 million following a reassessment of the liability due in respect of previous years. IFRS basis On an IFRS basis total costs, including bank levies and regulatory fees of € 162 million and the cost of exceptional items(2) of € 310 million, were € 2,006 million in 2021 compared to € 1,859 million in 2020. This results in a cost income ratio (IFRS basis) of 84% in 2021, compared to 78% in 2020. Operating expenses Total operating expenses(1)(2) €1,534m Operating expenses(1)(2) Personnel expenses General and administrative expenses Depreciation, impairment and amortisation Total operating expenses Staff numbers at period end(3) Average staff numbers(3) Total operating expenses(1)(2) 2021 € m 738 512 2020 % € m change 734 514 284 279 1,534 1,527 8,916 9,193 9,154 9,356 1 -1 2 – -3 -2 €1,534m line with 2020. This includes the impact from the acquisition of € 1,534 million were broadly in Total operating expenses of Goodbody for four months of 2021 of € 23 million and an underlying reduction in costs of € 16 million or 1%. Personnel expenses Personnel expenses increased by € 4 million compared to 2020 primarily due to the impact of Goodbody of € 16 million partly offset by a decrease in average staff numbers as the expected benefits of Strategy 2023 were realised towards the end of the year. General and administrative expenses General and administrative expenses were broadly in line with 2020 with an increase due to the impact of Goodbody offset by lower underlying costs. Depreciation, impairment and amortisation Depreciation, impairment and amortisation increased by € 5 million compared to 2020. (1)Before bank levies and regulatory fees and exceptional items. (2) The cost of exceptional items of € 310 million in 2021 (2020: € 217 million) comprised: Personnel expenses € 58 million (2020: € 42 million), General and administrative expenses € 209 million (2020: € 139 million) and Depreciation, impairment and amortisation € 43 million (2020: € 36 million). (3) Staff numbers are on a full time equivalent (“FTE”) basis. Staff numbers at 31 December 2021 include 333 FTEs following the acquisition of Goodbody in the second half of 2021. 2021 € m (173) (132) (51) (58) (10) (13) (21) – 8 2020 € m (117) (73) (30) (16) – (27) (2) (22) (1) 62 Business Review AIB Group plc Annual Financial Report 2021 Business review – 1. Operating and financial review Net credit impairment writeback Total exceptional items €238m There was a net credit impairment writeback of € 238 million in 2021 reflecting a more favourable economic environment and improved credit quality partially offset by post model adjustments. The net credit impairment writeback of € 238 million reflected a € 233 million writeback on loans and advances to customers (net remeasurement of expected credit loss (“ECL”) allowance €318m Total exceptional items Restitution costs Restructuring costs: – Termination benefits – Property transformation writeback of € 158 million and recoveries of amounts previously – UK portfolio sale written-off of € 75 million) and a € 6 million writeback for off-balance – Other restructuring sheet exposures. There was also a € 1 million charge on securities financing. There was a net credit impairment charge of € 1,460 million in 2020 comprising of a € 1,421 million charge on loans and advances to customers (net remeasurement of ECL allowance charge of € 1,493 million, offset by recoveries of amounts previously written-off of € 72 million) and a € 39 million charge for off-balance sheet exposures. For further information see pages 83 to 144 in the Risk Management section. Income tax credit €16m There was an income tax credit of € 16 million in 2021 due to an Inorganic transaction costs Covid product costs Other Total exceptional items (318) (215) These gains/costs were viewed as exceptional by management. Restitution costs includes provisions of € 100 million related to a series of investment property funds which were sold to individual investors during the period 2002 to 2006. See note 37 ‘Provisions for liabilities and commitments’ in the consolidated financial statements for further information. It also includes compensation in relation to customer redress of € 28 million, tracker mortgage examination redress of € 3 million, along with € 42 million of associated costs. Restructuring costs reflect the implementation of the Group’s increase in the deferred tax asset recognised for tax losses in the revised strategy (Strategy 2023) including termination benefits, UK in earlier years, driven by an increase in forecast profits and impairment and other costs associated with the reduction in the an increase in the UK corporation tax rate, partially offset by tax on Group’s property footprint, changes to the Retail network in ROI profits in the year at the applicable statutory rates. and the exit from the SME market in Great Britain. 2020 also included termination benefits of € 9 million relating to a previous In 2020 there was an income tax credit recognised of € 190 million. voluntary severance programme and € 30 million relating to the For further information see note 15 ‘Taxation’ and note 30 ‘Deferred In December 2020 the Group announced its revised strategy impairment of intangible assets. taxation’ of the consolidated financial statements. (Strategy 2023) and outlined restructuring costs of c. € 400 million to deliver annualised cost savings as a key driver in achieving the medium term targets. Restructuring costs of € 166 million have been incurred in 2020 and 2021 with the remaining costs expected to be incurred primarily in 2022. Inorganic transaction costs includes costs associated with the proposed acquisition of a portfolio of performing Ulster Bank corporate and commercial loans and the agreed creation of a joint venture with Great-West Lifeco Inc to provide life, pension and investment solutions. Other in 2021 reflects the writeback of a provision for regulatory fines and a profit on disposal of non-performing loan portfolios. Assets Net loans to customers New lending €56.5bn €10.4bn Assets(1) Gross loans to customers ECL allowance Net loans to customers Investment securities Loans and advances to banks Securities financing Other assets Total assets Net loans to customers 31 Dec 2021 € bn 31 Dec 2020 % € bn change 58.4 (1.9) 56.5 17.0 44.0 3.9 6.5 59.4 (2.5) 56.9 19.5 26.6 0.8 6.6 127.9 110.4 -2 -25 -1 -13 65 – -1 16 Net loans, excluding the impact of €56.5bn € 0.9 billion, decreased by € 1.3 billion compared to 31 December 2020 primarily due to the redemption and disposal of non-performing loans. currency movements of 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Business Review 63 New lending comprises € 9.1 billion term lending in 2021 (€ 7.7 billion in 2020) and € 1.3 billion transaction lending (€ 1.5 billion in 2020). Non-performing loans Non-performing loans ratio 5.4% €3.1bn Non-performing loans decreased by € 1.2 billion or 28% to € 3.1 billion at 31 December 2021 primarily reflecting the disposal of loan portfolios of € 1.0 billion and redemptions of € 0.7 billion partially offset by net flow to non-performing of € 0.5 billion. Legacy NPEs (exposures that entered into default prior to 31 December 2018) amount to € 0.9 billion or 1.5% of total loans at 31 December 2021. Non-performing loans ratio Non-performing loans as a percentage of gross loans to customers was 5.4% at 31 December 2021 compared to 7.3% at 31 December 2020. New lending €10.4bn 13% higher than in 2020. New lending of € 10.4 billion in ECL allowance Non-performing loans cover 2021 was € 1.2 billion or Mortgage lending was 29% higher at € 3.1 billion with property related lending up 31% to € 1.8 billion. Non-property lending was 1% higher at € 4.6 billion with strong new lending in renewable energy & infrastructure and an increase in corporate lending in Ireland partially offset by the reduction in UK lending. Irish SME lending was broadly in line with 2020 with higher term lending (which benefited from government supported schemes) offset by lower transaction lending. Personal lending was down 5% to € 0.9 billion. 32% €1.9bn The ECL allowance on non-performing loans (at amortised cost) of € 1.9 billion at 31 December 2021 decreased from € 2.5 billion at 31 December 2020 primarily reflecting the impact of the disposal of non-performing loan portfolios and the net credit impairment writeback in 2021. Non-performing loans cover The ECL allowance cover rate on non-performing loans has remained at 32% at 31 December 2021. Summary of movement in loans to customers The table below sets out the movement in loans to customers from 1 January 2021 to 31 December 2021. Loans to customers Gross loans (opening balance 1 January 2021) New lending Redemptions of existing loans Portfolio disposals Write-offs and restructures Net movement to non-performing Foreign exchange movements Gross loans (closing balance 31 December 2021) ECL allowance Net loans (closing balance 31 December 2021) Performing loans € bn Non-performing loans € bn Loans to customers € bn 55.1 10.4 (10.2) (0.3) – (0.5) 0.8 55.3 (1.0) 54.3 4.3 – (0.7) (1.0) (0.1) 0.5 0.1 3.1 (0.9) 2.2 59.4 10.4 (10.9) (1.3) (0.1) – 0.9 58.4 (1.9) 56.5 (1) Following a significant increase in securities borrowing and reverse repurchase agreements a new line item ‘Securities financing’ has been introduced. In previous years, securities borrowings were reported in ‘Loans and advances to banks’ and reverse repurchase agreements were reported in ‘Loans and advances to banks’ and ‘Loans and advances to customers’. The comparatives for 2020 have been restated accordingly. For further information see note 22 ‘Securities financing’ in the consolidated financial statements. 64 Business Review AIB Group plc Annual Financial Report 2021 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 Group’s risk profile and non-performing loans is available in the Risk management section on pages 77 to 168. At amortised cost At FVTPL(1) Residential mortgages € bn Other personal € bn Property and construction € bn Non- property business € bn Loan portfolio profile 31 December 2021 Gross loans to customers Of which: Stage 2 Of which: Non-performing loans Total ECL allowance Total ECL allowance cover (%) ECL allowance cover Stage 2 (%) 29.4 1.5 1.0 0.4 1.3% 2.8% ECL allowance cover non-performing (%) 30.1% 31 December 2020 Gross loans to customers Of which: Stage 2 Of which: Non-performing loans Total ECL allowance Total ECL allowance cover (%) ECL allowance cover Stage 2 (%) € bn 30.6 2.0 2.1 0.9 2.8% 3.7% ECL allowance cover non-performing (%) 33.9% 2.7 0.2 0.2 0.2 8.2% 15.5% 64.4% 7.4 1.4 0.6 0.3 4.3% 6.6% 27.5% € bn € bn 2.8 0.3 0.2 0.2 8.5% 15.4% 61.1% 7.3 2.1 1.0 0.4 5.4% 6.4% 22.0% 18.7 3.7 1.1 1.0 5.2% 14.4% 28.6% € bn 18.6 5.0 1.0 1.0 5.5% 11.6% 32.3% Total € bn 58.2 6.8 2.9 1.9 3.2% 10.4% 31.9% € bn 59.3 9.4 4.3 2.5 4.2% 9.0% 32.4% Total € bn 0.2 – 0.2 – – – – € bn 0.1 – – – – – – Total € bn 58.4 6.8 3.1 1.9 – – – € bn 59.4 9.4 4.3 2.5 – – – Investment securities Investment securities of € 17.0 billion, primarily held for liquidity Securities financing Securities financing of € 3.9 billion has increased by € 3.1 billion purposes, have decreased by € 2.5 billion from 31 December 2020 from 31 December 2020. due to sales and maturities exceeding purchases. Loans and advances to banks Loans and advances to banks of € 44.0 billion, including Other assets Other assets of € 6.5 billion comprised: • Deferred tax assets of € 2.8 billion(2), € 0.1 billion increase from € 42.7 billion of cash and balances at central banks, were 31 December 2020. € 17.4 billion higher than 31 December 2020. The increased • Derivative financial instruments of € 0.9 billion, € 0.5 billion placement with banks was primarily due to an increase in excess liquidity due to higher customer account balances and a further decrease from 31 December 2020 primarily reflecting interest rate and foreign exchange rate movements in the period. € 6 billion TLTRO III funding drawdown. • Remaining assets of € 2.8 billion, increased by € 0.3 billion from 31 December 2020 mainly due to proceeds from a loan sale awaiting settlement. (1)Loans at FVTPL relate to the property and construction asset class. (2)For further information see note 2 Critical accounting judgements and estimates ‘Deferred taxation’ in the consolidated financial statements. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Business Review 65 Liabilities & equity Customer accounts Equity €92.9bn €13.7bn 31 Dec 31 Dec 2020 % € bn change 2021 € bn 92.9 10.4 5.8 1.6 3.5 82.0 4.7 5.5 1.6 3.2 114.2 97.0 13.7 13.4 127.9 110.4 13 121 7 – 9 18 2 16 % 61 % Change 69 -8 Debt securities in issue Debt securities of € 5.8 billion increased by € 0.3 billion from 31 December 2020 following a further MREL related green bond issuance of € 0.75 billion partly offset by the maturity of a covered bond of € 0.5 billion. Subordinated liabilities Subordinated liabilities of € 1.6 billion were in line with 31 December 2020. Other liabilities Other liabilities of € 3.5 billion comprised: • Derivative financial instruments of € 1.1 billion, € 0.1 billion decrease from 31 December 2020. • Remaining liabilities of € 2.4 billion, € 0.4 billion increase from 31 December 2020. Liabilities & equity Customer accounts Deposits by banks Debt securities in issue Subordinated liabilities Other liabilities Total liabilities Equity Total liabilities & equity Loan to deposit ratio Customer accounts €92.9bn € 1.0 billion, increased by € 9.9 billion compared to 31 December impact of currency movements of Customer accounts, excluding the Equity €13.7bn € 13.4 billion at 31 December 2020 mainly driven by the profit to € 13.7 billion compared to Equity increased by € 0.3 billion 2020 reflecting substantially higher balances primarily due to for the year partly offset by movements in the cash flow hedging COVID-19 related dynamics of increased savings. reserve and AT1 coupons. Customer account balances subject to negative rates at 31 December 2021 were € 12 billion compared to € 5 billion at 31 December 2020. Loan to deposit ratio The loan to deposit ratio decreased to 61% at 31 December 2021 compared to 69% at 31 December 2020 due to increased customer accounts. Deposits by banks Deposits by banks of € 10.4 billion increased by € 5.7 billion compared to 31 December 2020 driven by a further € 6.0 billion TLTRO III funding drawdown in June 2021 bringing total TLTRO III funding to € 10.0 billion. 66 Business Review AIB Group plc Annual Financial Report 2021 Business review – 1. Operating and financial review Segment reporting Segment overview The Group’s performance is managed and reported across the Retail Banking, AIB Capital Markets (“Capital Markets”), AIB UK and Group segments. Segment performance excludes exceptional items. Retail Banking Retail Banking comprises Homes & Consumer, SME and Financial Solutions Group (“FSG”) in a single integrated segment, focused on meeting the current, emerging and future needs of our personal and SME customers. • Homes & Consumer is responsible for meeting the homes needs of customers in Ireland across the AIB, EBS and Haven brands and delivering innovative and differentiated products, propositions and services to meet our customers’ everyday banking needs through an extensive range of physical and digital channels. Our purpose is to achieve a seamless, transparent and simple customer experience in all of our propositions across current accounts, personal lending, payments & credit cards, deposits, insurance and wealth to maintain and grow our market leading position. • SME provides financial services to micro and small SMEs through our sector-led strategy and local expertise with an extensive product and proposition offering across a number of channels. Our purpose is to help our customers create and build sustainable businesses in their communities. • FSG is a dedicated workout unit to which the Group has migrated the management of the majority of its non-performing exposures (NPEs), with the objective of delivering the Group’s strategy to reduce NPEs. Capital Markets Capital Markets provides institutional, corporate and business banking services to the Group’s larger customers and customers requiring specific sector or product expertise. Capital Markets’ relationship driven model serves customers through sector specialist teams including: corporate banking, real estate finance, business banking and energy, climate action & infrastructure. In addition to traditional credit products, Capital Markets offers 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 advisory services, as well as Private Banking services and advice. Capital Markets also has syndicated and international finance teams based in Dublin and in New York. In 2021 Goodbody became part of Capital Markets, bringing additional capability in wealth management, corporate finance, asset management and wider capital markets propositions. AIB UK AIB UK offers corporate, retail and business banking services in two distinct markets, a sector-led corporate bank supporting businesses in Great Britain (“Allied Irish Bank (GB)”), and a retail and business bank in Northern Ireland (“AIB (NI)”). The Group’s revised strategy (Strategy 2023) identified changes to the AIB UK business model including the withdrawal from SME lending in Great Britain to refocus on our corporate business, particularly in renewables, infrastructure, health and manufacturing and a reduction in branch footprint in Northern Ireland. Group Group comprises wholesale treasury activities and Group control and support functions. Treasury manages the Group’s liquidity and funding positions and provides customer treasury services and economic research. The Group control and support functions include Technology, Operations, Finance, Risk, Legal, Corporate Governance & Customer Care, Human Resources, Corporate Affairs, Strategy & Sustainability and Group Internal Audit. Segment allocations The segments’ performance statements include all income and directly related costs, excluding overheads which are managed centrally, the costs of which are included in the Group segment. Funding and liquidity income/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. AIB Group plc Annual Financial Report 2021 Business Review 67 Retail Banking Retail Banking contribution statement Net interest income Other income Total operating income Total operating expenses Bank levies and regulatory fees Operating contribution before impairments and exceptional items Net credit impairment writeback/(charge) Operating contribution before exceptional items Share of equity accounted investments Contribution before exceptional items 2021 € m 2020 € m % change Retail Banking balance sheet metrics 31 Dec 31 Dec 2020 % € bn change 2021 € bn 1,024 1,115 367 334 1,391 1,449 (911) (908) (2) (2) 478 86 564 16 580 539 (485) 54 12 66 -8 10 -4 – 13 -11 – – 27 – Mortgages Personal Property Non-property business New lending Mortgages Personal Property Non-property business Gross loans ECL allowance Net loans Current accounts Deposits Customer accounts 2.9 0.9 0.1 0.9 4.8 2.3 0.9 0.1 1.1 4.4 27.7 29.0 2.6 0.6 3.2 34.1 (1.0) 33.1 37.9 27.3 65.2 2.6 0.7 3.2 35.5 (1.5) 34.0 31.7 25.2 56.9 9 -4 -31 -3 19 9 15 1 2 3 4 5 6 New lending €4.8bn New lending was 9% higher at € 4.8 billion due to a strong increase in mortgage lending of € 0.6 billion or 26% and higher SME term lending partly offset by lower transaction lending. Net loans €33.1bn Net loans decreased by € 0.9 billion primarily due to the redemption and disposal of non-performing loans. ECL allowance €1.0bn decreased by € 0.5 billion from € 1.5 billion at 31 December 2020 primarily reflecting the disposal of non-performing loan portfolios. The ECL allowance of € 1.0 billion in 2021 Customer accounts €65.2bn Customer accounts increased by € 8.3 billion compared to 31 December 2020 reflecting higher savings which elevated balances across all sectors. Net interest income €1,024m Net interest income has decreased by € 91 million compared to 2020. This was primarily due to lower average loan volumes reflecting the redemption and disposal of non-performing loans and due to redemptions of performing loans exceeding new lending in 2020. It also reflects the increase in customer account volumes coupled with the impact of the negative interest rate environment partially offset by lower funding costs. Other income increased by € 33 million compared Other income €367m to 2020, mainly due to an increase in net fee and commission income driven by customer accounts, card income and customer related foreign exchange income partly offset by lower income recognised on previously restructured loans. Customer accounts income has benefited from the removal of the exemption on customer account fees for customers that maintain a minimum credit balance. Total operating expenses were broadly in line with Total operating expenses €911m 2020 as reductions in personnel costs due to lower average staff numbers was offset by an increase in general and administration costs and depreciation and amortisation. There was a net credit impairment writeback Net credit impairment writeback €86m of € 84 million on loans and advances to customers (net remeasurement of ECL allowance writeback of € 15 million and recoveries of amounts previously written-off of € 69 million) and a € 2 million writeback for off-balance sheet exposures. There was a net credit impairment charge of € 485 million in 2020. 68 Business Review AIB Group plc Annual Financial Report 2021 Business review – 1. Operating and financial review Capital Markets Capital Markets contribution statement Net interest income Other income Total operating income Total operating expenses Bank levies and regulatory fees Operating contribution before impairments and exceptional items Net credit impairment writeback/(charge) Operating contribution before exceptional items Share of equity accounted investments Contribution before exceptional items 2021 € m 460 137 597 439 121 560 (154) (132) (1) – 442 137 579 1 580 428 (767) (339) – (339) 2020 % € m change Capital Markets balance sheet metrics 31 Dec 31 Dec 2020 % € bn change 2021 € bn 5 12 6 17 – 3 – – – – Mortgages Personal Property Non-property business New lending Mortgages Personal Property Non-property business Gross loans ECL allowance Net loans 0.0 0.0 1.3 2.8 4.1 0.5 0.0 5.1 10.4 16.0 (0.6) 15.4 0.0 0.0 0.9 2.2 3.1 0.6 0.1 4.7 9.9 15.3 (0.8) 14.5 Investment securities 1.5 1.1 Current accounts Deposits Customer accounts 11.1 3.4 14.5 9.0 3.7 12.7 33 5 -18 6 43 23 -9 14 Net interest income €460m compared to 2020. This was primarily due to lower funding costs Net interest income increased by € 21 million New lending €4.1bn € 1.0 billion compared to 2020 with strong new lending in property New lending of € 4.1 billion increased by partially offset by the impact of lower average loan volumes. and renewable energy & infrastructure as well as an increase in corporate lending. Other income €137m to 2020 driven by the impact of the acquisition of Goodbody for Other income increased by € 16 million compared four months of 2021, higher lending related and customer related Net loans €15.4bn Net loans of € 15.4 billion at 31 December 2021 increased by € 0.9 billion compared to 2020 primarily due to new foreign exchange fee income as well as an increase in income from lending exceeding redemptions, the impact of currency movements equity investments. This was partly offset by a reduction in FVTPL of € 0.3 billion and a reduction in the ECL allowance of € 0.2 billion. loan valuations and a decrease in gain on loan disposals. Total operating expenses €154m compared to 2020 due to the impact from Goodbody. Total operating expenses increased by € 22 million ECL allowance €0.6bn 2021 decreased by € 0.2 billion from 31 December 2020 driven by The ECL allowance of € 0.6 billion at 31 December the net credit impairment writeback recognised in 2021. Net credit impairment writeback €137m € 137 million in 2021 comprising of a € 133 million writeback on There was a net credit impairment writeback of loans and advances to customers and a € 4 million writeback for off-balance sheet exposures. There was a net credit impairment charge of € 767 million in 2020. Investment securities €1.5bn € 0.4 billion higher than 31 December 2020. Investment securities of € 1.5 billion were Customer accounts €14.5bn Current accounts of € 11.1 billion were € 2.1 billion higher than 31 December 2020. Deposits of € 3.4 billion decreased by € 0.3 billion compared to 31 December 2020. AIB Group plc Annual Financial Report 2021 Business Review 69 AIB UK AIB UK contribution statement Net interest income Other income Total operating income Total operating expenses Bank levies and regulatory fees Operating contribution before impairments and exceptional items Net credit impairment writeback/(charge) Operating contribution before exceptional items Share of equity accounted investments Contribution before exceptional items Contribution before exceptional items € m 2021 £ m 2020 % £ m change AIB UK balance sheet metrics 31 Dec 31 Dec 2020 % £ bn change 2021 £ bn 186 46 232 191 43 234 (140) (146) (1) (1) 91 13 87 (184) 104 3 107 124 (97) 2 (95) (108) -3 7 -1 -4 6 5 – – 42 – – AIB GB AIB NI New lending AIB GB AIB NI Gross loans ECL allowance Net loans Current accounts Deposits Customer accounts 0.9 0.4 1.3 4.9 2.0 6.9 (0.2) 6.7 6.9 3.0 9.9 1.1 0.4 1.5 5.6 2.1 7.7 (0.3) 7.4 6.8 3.0 9.8 -19 -13 -17 -11 -8 -10 -19 -10 2 -1 1 1 2 3 4 5 6 Net interest income £186m compared to 2020 primarily due to lower average loan volumes and Net interest income decreased by £ 5 million New lending £1.3bn £ 0.2 billion compared to 2020. There was an increase in mortgage New lending of £ 1.3 billion in 2021 was down lower average interest rates partially offset by lower funding costs. lending offset by a reduction in commercial and corporate lending. Other income £46m 2020 mainly due to favourable movements on derivative valuation Other income increased by £ 3 million compared to Net loans £6.7bn compared to 31 December 2020 primarily due to the Group’s Net loans of £ 6.7 billion decreased by £ 0.7 billion adjustments (XVA). decision to exit the SME market in Great Britain. Total operating expenses £140m compared to 2020 driven by lower personnel expenses. Total operating expenses decreased by £ 6 million Net credit impairment writeback £13m £ 13 million in 2021. There was a net credit impairment charge of There was a net credit impairment writeback of £ 184 million in 2020. In November 2021 AIB UK plc announced an agreement to sell c. £ 0.6 billion of performing small and medium enterprise (SME) loans in Great Britain (GB). At 31 December 2021 £ 0.3 billion of loans has been derecognised from the balance sheet with the remainder to be completed in 2022 subject to receipt of required external approvals. ECL allowance £0.2bn 31 December 2021 decreased by £ 0.1 billion from The ECL allowance of £ 0.2 billion at 31 December 2020. Customer accounts £9.9bn 31 December 2021 were broadly in line with 31 December 2020. Customer accounts of £ 9.9 billion at 70 Business Review AIB Group plc Annual Financial Report 2021 Business review – 1. Operating and financial review Group Group contribution statement Net interest income Other income Total operating income Total operating expenses Bank levies and regulatory fees Contribution before exceptional items 2021 € m 2020 % € m change 94 33 127 (306) (158) (337) 104 (4) 100 (323) (112) (335) -9 – 29 -5 42 1 Group balance sheet metrics Investment securities Customer accounts 31 Dec 31 Dec 2020 % € bn change 2021 € bn 15.5 1.3 18.4 1.4 -16 -5 Net interest income €94m by € 10 million compared to 2020 reflecting the impact of the Net interest income of € 94 million decreased Investment securities €15.5bn held for liquidity purposes, decreased by € 2.9 billion from Investment securities of € 15.5 billion, primarily lower interest rate environment and lower income on investment 31 December 2020 due to sales and maturities exceeding securities. purchases. Other income €33m to 2020 driven by favourable movements on derivative valuation Other income increased by € 37 million compared Customer accounts €1.3bn 31 December 2021 compared to € 1.4 billion at 31 December 2020. Customer accounts were € 1.3 billion at adjustments (XVA) and foreign exchange contracts, higher income from equity investments and a gain on disposal of investment securities. 2020 included € 23 million of dividend income on NAMA subordinated bonds, which were redeemed in 2020. Total operating expenses €306m decreased by € 17 million compared to 2020 driven by lower Total operating expenses of € 306 million general and administrative expenses. Bank levies and regulatory fees €158m in 2021 include the Single Resolution Fund (SRF) € 53 million, Bank levies and regulatory fees of € 158 million Deposit Guarantee Scheme of € 48 million, the Irish bank levy of € 37 million and other regulatory levies and charges of € 20 million. The SRF fee includes a provision of € 25 million following a reassessment of the liability due in respect of previous years. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Business Review 71 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 Interest income/expense for balance sheet categories divided by the corresponding average balance. 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. Absolute cost base Cost income ratio Total operating expenses excluding exceptional items, bank levies and regulatory fees. Total operating expenses excluding exceptional items, bank levies and regulatory fees divided by Cost income ratio (IFRS basis) Total operating expenses divided by total operating income. total operating income excluding exceptional items. Exceptional items Performance measures have been adjusted to exclude items viewed as exceptional by management and which management view as distorting comparability of performance year-on-year. The adjusted performance measure is considered an APM. A reconciliation between the IFRS and management performance summary income statements is set out on page 72. Exceptional items include: – Restitution costs includes provisions related to a series of investment property funds which were sold to individual investors during the period 2002 to 2006. It also includes compensation in relation to the tracker mortgage examination and other customer redress along with associated costs. – Restructuring costs reflect the implementation of the Group’s revised strategy (Strategy 2023) including termination benefits, impairment and other costs associated with the reduction in the Group’s property footprint, changes to the Retail network in ROI and the exit from the SME market in Great Britain. 2020 also included termination benefits relating to a previous voluntary severance programme and relating to the impairment of intangible assets. – Inorganic transaction costs includes costs associated with the proposed acquisition of a portfolio of performing Ulster Bank corporate and commercial loans and the agreed creation of a joint venture with Great-West Lifeco Inc to provide life, pension and investment solutions. – Covid product costs reflect the incremental cost of implementing a large volume of payment breaks on home mortgages, personal and SME loans to customers impacted by COVID-19. – Other in 2021 reflects the writeback of a provision for regulatory fines and a profit on disposal of non-performing loan portfolios. Loan to deposit ratio Net interest margin Net loans and advances to customers divided by customer accounts. Net interest income divided by average interest-earning assets. Non-performing exposures Non-performing exposures as defined by the European Banking Authority, include loans and advances to customers (Non-performing loans) and off-balance sheet exposures such as loan commitments and financial guarantee contracts. Non-performing loans cover ECL allowance on non-performing loans as a percentage of non-performing loans. Non-performing loans ratio Non-performing loans as a percentage of total gross loans. Return on Tangible Equity (RoTE) Profit after tax less AT1 coupons paid, divided by targeted (13.5 per cent.) CET1 capital on a fully loaded basis. Details of the Group’s RoTE is set out in the Capital Section on page 76. Management performance – The following line items in the management performance summary income statement are summary income statement considered APMs: • Other income • Total operating income • Personnel expenses • Operating profit before impairment losses and exceptional items • Operating profit/(loss) before • General and administrative expenses exceptional items • Depreciation, impairment and amortisation • Loss on disposal of property • Total operating expenses • Profit/(loss) before exceptional items • Bank levies and regulatory fees • Total exceptional items 72 Business Review AIB Group plc Annual Financial Report 2021 Business review – 1. Operating and financial review Reconciliation between IFRS and management performance summary income statements Performance has been adjusted to exclude items viewed as exceptional by management and which management view as distorting comparability of performance period on period. The adjusted performance measure is considered an APM. 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 set out below. IFRS – summary income statement Net interest income Other income Total operating income Total operating expenses Operating profit before impairment losses Net credit impairment writeback/(charge) Operating profit/(loss) Share of equity accounted investments Loss on disposal of property Profit/(loss) before taxation Income tax credit Profit/(loss) for the year Adjustments – between IFRS and management performance Other income of which: exceptional items Loss on disposal of loan portfolios Other Total operating expenses of which: bank levies and regulatory fees of which: exceptional items Restitution costs Restructuring costs Inorganic transaction costs Covid product costs Other 2021 € m 1,794 585 2,379 (2,006) 373 238 611 21 (3) 629 16 645 5 162 310 2020 € m 1,872 501 2,373 (1,859) 514 (1,460) (946) 15 – (931) 190 (741) (2) 115 217 1 (3) 117 73 2 22 3 6 (1) 173 122 21 – (6) Loss on disposal of property of which: exceptional items Other 3 3 – – Management performance – summary income statement Net interest income Other income(1) Total operating income(1) Total operating expenses(1) Bank levies and regulatory fees(1) Operating profit before impairment losses and exceptional items(1) Net credit impairment writeback/(charge) Operating profit/(loss) before exceptional items(1) Share of equity accounted investments Loss on disposal of property(1) Profit/(loss) before exceptional items(1) Total exceptional items(1) Profit/(loss) before taxation Income tax credit Profit/(loss) for the year 1,794 590 2,384 (1,534) (162) 688 238 926 21 – 947 (318) 629 16 645 1,872 499 2,371 (1,527) (115) 729 (1,460) (731) 15 – (716) (215) (931) 190 (741) (1) Performance has been adjusted to exclude items viewed as exceptional by management and which management view as distorting comparability of performance period on period. The adjusted performance measure is considered an APM. 1 2 3 4 5 6 Business review – 2. Capital AIB Group plc Annual Financial Report 2021 Business Review 73 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 2.3’ on page 153. Regulatory capital and capital ratios(1) Equity Less: Additional Tier 1 Securities Proposed ordinary dividend Regulatory adjustments: Intangible assets Cash flow hedging reserves IFRS 9 CET 1 transitional add-back Pension Deferred tax Calendar provisioning(2) Other Total common equity tier 1 capital Additional tier 1 capital Additional Tier 1 issuance Total additional tier 1 capital Total tier 1 capital Tier 2 capital Subordinated debt Instruments issued by subsidiaries that are given recognition in tier 2 capital IRB Excess of provisions over expected losses eligible IFRS 9 tier 2 transitional adjustment Total tier 2 capital Total capital Risk-weighted assets Credit risk Market risk Operational risk Credit valuation adjustment and settlement risk Total risk-weighted assets Common equity tier 1 ratio Tier 1 ratio Total capital ratio CRD lV transitional basis CRD lV fully loaded basis 31 December 2021 € m 31 December 2020 € m 31 December 2021 € m 31 December 2020 € m 13,664 (1,115) (122) (552) (149) 565 (39) (1,977) (136) (37) (2,325) 10,102 1,115 1,115 11,217 13,422 (1,115) – (485) (540) 796 (22) (1,654) (317) (38) (2,260) 10,047 1,115 1,115 11,162 13,664 (1,115) (122) (552) (149) – (39) (2,801) (136) (37) (3,714) 8,713 1,115 1,115 9,828 13,422 (1,115) – (485) (540) – (22) (2,721) (317) (38) (4,123) 8,184 1,115 1,115 9,299 1,500 1,500 1,500 1,500 24 133 (133) 1,524 12,741 47,646 446 4,435 110 52,637 % 19.2 21.3 24.2 19 131 (131) 1,519 12,681 47,807 429 4,686 114 53,036 % 18.9 21.0 23.9 28 133 – 1,661 11,489 47,367 446 4,435 110 52,358 % 16.6 18.8 21.9 24 131 – 1,655 10,954 47,350 429 4,686 114 52,579 % 15.6 17.7 20.8 (1) Prepared under the regulatory scope of consolidation. (2) Calendar provisioning is a Supervisory Review and Evaluation Process (“SREP”) recommendation to ensure minimum coverage levels on long term NPE exposures. The difference between the SREP recommended coverage levels and the IFRS 9 ECL coverage is taken as a CET1 deduction. *Forms an integral part of the audited financial statements 74 Business Review AIB Group plc Annual Financial Report 2021 Business review – 2. Capital Capital requirements The table below sets out the capital requirements at 31 December 2021 and the pro forma requirements for 31 December 2022 and 31 December 2023. The table does not include Pillar 2 Guidance (“P2G”) which is not publicly disclosed. Regulatory Capital Requirements CET1 Requirements Pillar 1 Actual 31 Dec 2021 Pro Forma 31 Dec 2022 31 Dec 2023 4.50% 4.50% 4.50% Pillar 2 requirement (P2R) 1.69% 1.55% 1.55% Capital Conservation Buffer (CCB) 2.50% 2.50% 2.50% Other Systemically Important Institutions Buffer (O-SII) 1.50% 1.50% 1.50% Countercyclical buffer (CCYB) Impact 0.01% 0.15% 0.35% CET1 Requirement 10.20% 10.20% 10.40% Capital ratios at 31 December 2021 Fully Loaded Ratio The fully loaded CET1 ratio increased to 16.6% at 31 December 2021 from 15.6% at 31 December 2020 due to profit for the year attributable to equity holders of the parent less proposed ordinary dividend (+1.0%), a decrease in calendar provisioning deduction following NPE disposals in the year (+0.3%) and RWA reduction (+0.1%). These were partially offset by the acquisition of Goodbody (-0.2%), AT1 coupon paid (-0.1%) and other capital adjustments (-0.1%). RWA reductions include increased application of Article 501/501A for SME exposures (+0.1%) and reduced operational risk RWAs (+0.1%). Elsewhere model related RWA increases (-0.4%) were offset by a reduction in loans and advances to customers (+0.3%) driven by business mix, volumes and credit grade movements. AT1 Tier 2 2.06% 2.02% 2.02% The fully loaded total capital ratio increased to 21.9% from 20.8% 2.75% 2.69% 2.69% at 31 December 2020. The increase in the ratio was driven by the Total Capital Requirement 15.01% 14.90% 15.10% movements outlined above. On 1 January 2022 the Group’s Pillar 2 Requirement (“P2R”) reduced to 2.75% from 3.00% in 2021. Under CRD V Article 104a, at least 1.55% must be held in CET1, 0.69% can be held in Tier 2, with the balance (c. 0.52%) held in AT1. The Bank of England (“BOE”) has announced the reintroduction of the UK Countercyclical capital buffer (“CCyB”) at 1% by December 2022, with an expected increase to 2% in quarter 2 2023. This equates to an estimated 0.15% Group requirement for 2022, and 0.35% for 2023. The Central Bank of Ireland is the authority responsible for setting the CCyB in Ireland. No change to the current 0% CCyB has been announced by the CBI and this position is reviewed every 3 months. It is anticipated that a phase- in period will be provided to any re-introduction of the buffer. Transitional Ratio The transitional CET1 ratio increased to 19.2% at 31 December 2021 from 18.9% at 31 December 2020. This increase is driven by the fully loaded movements detailed above, partially offset by an additional year’s phasing of the deferred tax asset deduction and the IFRS 9 transitional addback. At 31 December 2021 the transitional total capital ratio increased to 24.2% from 23.9% at 31 December 2020. Acquisition of Ulster Bank corporate and commercial loans Note 56 ‘Proposed acquisition’ sets out the details on the proposed transaction. The minimum requirement for the total capital ratio is 15.0% at 31 December 2021 and is expected to be 14.9% by the end of 2022. The Group estimates that had the transaction completed on 31 December 2021 the increase in the Group’s RWAs would have led to a reduction in the CET1 ratio of c. -1.3%. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Business Review 75 Distributions Proposed dividend The Board proposes to pay an ordinary dividend of 4.5 cent per Finalisation of Basel III The Group continues to closely monitor regulatory developments to ensure that the Group maintains a strong capital position. share totalling € 122 million from 2021 profits. This is subject to The final Basel III requirements in respect of Counterparty Credit shareholder approval at the Annual General Meeting in May 2022. Risk have been implemented as part of CRR2. Proposed buyback of ordinary shares Pursuant to the shareholder authorities granted at the 2021 Further regulatory developments in respect of the finalisation of Basel III are expected in the near term. Exact implementation AGM, AIB Group plc has the authority to undertake on-market details will be confirmed once the finalised requirements are purchases of up to 10% of its ordinary shares and, subject to transposed into law (i.e. the CRR is further updated). Initial the Minister for Finance’s agreement, off-market purchases from assessments signal some upward pressure on RWAs, mostly in the Minister for Finance of up to 4.99% of its ordinary shares relation to operational risk. (“Directed Buyback”). In this context, the Group has received regulatory approval from the European Central Bank to undertake In relation to RWA floors, the Group’s high RWA density makes it a buyback of its ordinary shares in an aggregate consideration less likely to be severely impacted by their introduction. amount of up to € 91 million. Any buyback of ordinary shares by the Group, whether by way of a Directed Buyback from the Minister for Finance or by way of open-market purchases, would be subject to the approvals of the Board and the Minister for Minimum Requirement for Own Funds and Eligible Liabilities (“MREL”) At 31 December 2021 the Group has a MREL ratio of 31.9% of Finance. RWAs. The combined proposed ordinary dividend and buyback represents 40% of distributable profits. In determining distributable profits, the Group considers profit after tax less AT1 coupons paid adjusted for the deferred tax asset utilisation. The pro forma capital impact of the proposed share buyback at 31 December 2021 is c. 15 basis points which would reduce the fully loaded CET1 ratio to 16.5% from the reported 16.6%. Leverage Ratio The fully loaded leverage ratio is 7.6% at 31 December 2021 (8.3% at 31 December 2020). The Single Resolution Board (“SRB”) has set the Group’s binding intermediate MREL target under the BRRD II legislative framework to be complied with by 1 January 2022. The intermediate binding target is 27.1% of RWAs including the January 2022 combined buffer requirement. The Group anticipates that the final target (1 January 2024) will be higher as the final elements of the MREL calibration are phased in. The MREL target including the combined buffer target will also be impacted by any changes in the overall capital requirement. The Group’s MREL ratio is in excess of the target for 2022 and there is currently sufficient loss absorption and re-capitalisation capability. The Group has now completed issuances of The decrease is driven by an increase in the exposure measure € 6.6 billion MREL qualifying liabilities of which € 0.75 billion was driven primarily by excess funding placed with central banks. issued in the first half of 2021. Leverage Ratio Metrics Total Exposure (Transitional Basis) Total Exposure (Fully Loaded) 2021 € m 130,894 129,373 2020 € m 113,344 111,378 Tier 1 Capital (Transitional Basis) 11,217 11,162 Tier 1 Capital (Fully Loaded) Leverage Ratio (Transitional Basis) Leverage Ratio (Fully Loaded) 9,828 8.6% 7.6% 9,299 9.8% 8.3% The Group continues to monitor changes in MREL requirements together with developments in the SRB’s MREL policy which has the potential to impact on the Group’s MREL target. Return on Tangible Equity (“RoTE”)* The RoTE for 2021 is 8.2% (2020: -11.2%). Return on Tangible Equity (RoTE) Profit/(loss) after tax AT1 coupons paid Attributable earnings 2021 € m 645 (65) 579 2020 € m (741) (76) (817) Average RWA RWA * 13.5% CET1 target 52,469 52,289 7,083 7,320(1) Return on Tangible Equity 8.2% (11.2)% (1)2020 based on a prior CET1 target of 14%. The Group has set a medium term target for RoTE of greater than 9%. * RoTE is considered an Alternative Performance Measure. Return on Assets The Return on Assets (RoA) at 31 December 2021 is 0.5% (2020: -0.7%). 76 Business Review AIB Group plc Annual Financial Report 2021 Business review – 2. Capital Ratings AIB Group plc and Allied Irish Banks, p.l.c. are rated at investment grade with all three rating agencies, Moody’s, Fitch and Standard & Poor’s (S&P). AIB Group plc On 13 July 2021, Moody’s upgraded the credit rating by one notch to Baa1 following the publication of their updated Banks Methodology. The stable outlook was reaffirmed. On 4 October 2021, Fitch revised the outlook to stable from negative and reaffirmed the ratings. S&P reaffirmed their ratings in January 2022 following the publication of their revised Financial Institutions Rating Methodology. Long term Ratings Long term Outlook Investment grade Long term Ratings Long term Outlook Investment grade Allied Irish Banks, p.l.c. Long term Ratings Long term Outlook Investment grade Long term Ratings Long term Outlook Investment grade Moody’s 31 December 2021 Fitch S&P Baa1 BBB- Stable Negative BBB Stable Moody’s 31 December 2020 Fitch S&P Baa2 BBB- BBB Stable Negative Negative Moody’s 31 December 2021 Fitch S&P A2 A- Stable Negative BBB+ Stable Moody’s 31 December 2020 Fitch S&P A2 BBB+ BBB+ Stable Negative Negative Risk management 1 Framework 1.1 Risk management principles 1.2 Risk governance and oversight 1.3 Three lines of defence model 1.4 Risk strategy 1.5 Risk management lifecycle 1.6 Risk culture 1.7 Testing and assurance 2 Individual risk types 2.1 Credit risk 2.2 Liquidity and funding risk 2.3 Capital adequacy risk 2.4 Financial risks (a) Market risk (b) Pension risk (c) Equity risk 2.5 Business model risk 2.6 Operational risk 2.7 Regulatory compliance risk 2.8 Conduct risk 2.9 People and culture risk 2.10 Model risk AIB Group plc Annual Financial Report 2021 Risk Management 77 1 2 3 4 5 6 Page 78 78 79 80 80 82 82 83 145 153 154 160 161 162 163 164 165 167 168 78 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 1. Framework 1. Introduction One of the Group’s core priorities is to continuously strengthen its risk management as this enables the Group to respond to changing circumstances in a dynamic manner while continuing to meet its purpose to back its customers to achieve their dreams and ambitions. The Group’s risk management approach is underpinned by a set of risk management principles, together with a risk culture embedded throughout the Group, a solid governance structure and advanced risk processes. The core aspects of the Group’s risk management approach are described below. The risk management structure in the Group includes defined lines of authority and accountability, effective processes to identify, manage, monitor and report the risks to which the Group is or might be exposed to. Clear responsibilities for the management of risk are defined across the Group through a three lines of defence model which distinguishes between risk governance, risk management, risk oversight and risk assurance in respect of key decisions. The Group’s Risk Management Framework sets out how risk is managed and articulates the integrated approach to risk management within the Group including its licenced subsidiaries. The Risk Management Framework is reviewed, updated and approved by the Board at least annually to reflect any changes to the Group’s business or consideration of external regulations, corporate governance requirements and industry best practice. In 2021 the Group announced the acquisitions of Goodbody and the proposed Ulster Bank’s commercial loan book, the joint ventures with Great-West LifeCo Inc and Autolease Fleet Management Limited. These transactions have been assessed as part of the Group’s risk management processes including the material risk assessment to identify any new material risks that may impact the Group, risk appetite statement and through the financial planning process. The Group is monitoring closely the rapidly developing situation in Ukraine and the potential impact it may have on the Group’s business. The Group has negligible direct credit exposure to Ukraine, Russia or Belarus and is closely monitoring payment flows. An initial risk assessment of the key impacts on the Group has identified the key risks as being operationalising complex sanctions regime, potential for increase in cyberattacks and financial and market risks arising from volatility in asset values, interest rates or foreign exchange markets. Regular updates on the changing situation will be provided to the Executive Committee and Board Risk Committee as appropriate. 1.1 Risk management principles The twelve principles below govern the design and operation of effective risk management within the Group. Strategy and appetite 1. The Board has ultimate responsibility for the governance of all risk taking activity in the Group 2. The Group has adopted a three lines of defence model and risks are managed in alignment with the model Identification and assessment 3. The Group identifies, assesses and reports all its material risks as per the material risk assessment taxonomy 4. The Group operates and manages its risks in line with the Group's Risk Appetite Statement 5. Risk Management is embedded in the strategic planning, performance management and strategic decision making processes of the Group 6. The Group develops and uses models across a range of risks and activities to inform key strategic business and financial processes Monitoring, escalating and reporting 7. The Group understands, manages, measures, monitors and reports all risk it takes or originates 8. The Group aims to provide clarity in all its communications which will help to better inform business decisions Risk culture 9. The Group supports the delivery of a strong risk culture 10. Risk Management capabilities are valued, encouraged and developed Control environment 11. The Group has in place a system of internal controls designed to mitigate rather than eliminate risk 12. A comprehensive, fit-for-purpose framework and policy architecture is in place to support risk management and is reviewed regularly 1.2 Risk governance and oversight The Group’s Governance and Organisation Framework encompasses the leadership, direction and control of the Group, reflecting guidelines, statutory obligations and ensures that control arrangements provide appropriate governance of the Group’s strategy, operations and mitigation of related material risks. This is achieved through a risk governance structure designed to facilitate the reporting, evaluation and escalation of risk concerns, from business segments and control functions upwards to the Board and its appointed committees and sub-committees. 1.2.1 Board of Directors The Board of Directors is ultimately responsible and accountable for the effective management of risks and for the system of internal controls in the Group. The Board has delegated a number of risk governance responsibilities to various committees. 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 176 to 185. 1.2.2 Executive Committee The Executive Committee has primary authority and responsibility for the day-to-day operations of, and the development of strategy for the Group. The core overarching areas of oversight and decision making for the Executive Committee are: • Strategy and Business Development • Performance and Operations • Business Structure and Risk Management • Talent and Culture • Stakeholder Management While the Executive Committee has delegated its powers and authorities to other committees, it retains ultimate accountability for the functions delegated. Group Risk Committee The Group Risk Committee is the most senior management risk committee and is accountable to the Executive Committee to set policy and monitor all risk types across the Group to enable delivery of the Group’s risk strategy. The roles and responsibilities of the Group Risk Committee are: • Approving risk frameworks, risk appetite statements, risk policies and limits to manage the risk profile of the Group; • Reviewing the Group’s risk profile (enterprise wide); • Periodically reviewing the effectiveness of the Group’s risk management policies for identifying, evaluating, monitoring, managing, and measuring significant risks; • Providing oversight and challenge of regulatory, operational and conduct risk related matters; • Providing oversight and challenge of credit risk management related matters and periodically reviewing the credit portfolio exposures and trends; • Providing oversight and challenge of risk measurement matters; • Overseeing the development of the Group’s risk management culture; • Monitoring and reviewing the Group’s risk profile for equity risk and the business segment limits for equity risk; • Providing advice to the Board Risk Committee on risk governance, current and future risk exposures and risk appetite; • Reviewing the annual risk assessments prepared by the first line of defence to identify and evaluate all significant risks and related risk management activities; • Considering the annual Money Laundering Reporting Officer’s report; and • Considering and assessing management’s response to Group Internal Audit findings. The sub-committees of the Group Risk Committee are the Group Credit Committee, the Regulatory and Conduct Risk Committee, the Risk Measurement Committee and the Operational Risk Committee: • The Group Credit Committee is responsible for the approval of material credit transactions in line with authority levels outlined in the Group Credit Risk policies, to review, approve or recommend to a higher authority Credit Risk Policies and to monitor and review credit management, performance and other credit matters that arise within the Group. The Group Credit Committee also reviews and challenges ECL levels for onward recommendation to the Board Audit Committee; • The Regulatory and Conduct Risk Committee is responsible for the governance and oversight of regulatory and conduct risks; • The Risk Measurement Committee is responsible for the governance, oversight and approval of all aspects of the Group’s risk measurement systems, material model methodologies as well as the maintenance of existing material models; and • The Operational Risk Committee is responsible for the governance and oversight of operational risks. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 79 Group Asset and Liability Management Committee (“ALCo”) ALCo has been established as a sub-committee of the Executive Committee. ALCo is the Group’s strategic and business decision making forum for balance sheet management matters. ALCo is tasked with decision-making in respect of the Group’s balance sheet structure, including capital, funding, liquidity, interest rate risk in the banking book (“IRRBB”) from an economic value and net interest margin (“NIM”) perspective, foreign exchange (“FX”) risks and other market risks to ensure it enables the delivery of the Group’s Strategic Plan. The Committee provides oversight of funding and liquidity, capital, market and equity/investments risk and balance sheet pricing in line with the relevant frameworks and policies across the Group and in accordance with Risk Appetite. 1.3 Three lines of defence model The Group operates a three lines of defence model where each line plays a distinct role within the Group’s wider risk governance, management, oversight and assurance responsibilities. The first line of defence lies with the business line managers who are required to have effective governance and controls in place for their business. The first line of defence comprises the revenue generating and client facing areas, along with all associated support functions. The second line of defence comprises the Risk function, headed by the Chief Risk Officer and oversees the first line, providing independent constructive challenge, setting the frameworks, policies and limits, consistent with the risk appetite of the Group. The third line of defence comprises Group Internal Audit who provide an independent view on the key risks facing the Group, and the adequacy and effectiveness of governance, risk management and the internal control environment in managing these risks. The Board, Board Risk Committee (“BRC”) and Board Audit Committee (“BAC”) are ultimately responsible for ensuring the effective operation of the three lines of defence model. They are supported by the Executive Committee (“ExCo”) and its sub-committees. The Terms of References for the BRC and BAC are available on the Group’s website. The following high level principles have been defined across the three lines of defence for risk management: Three lines of defence model high level principles First line of defence – Frontline, operational and support activities Provides risk ownership and oversight responsibilities Identifies, records, reports and manages the risks Ensures that the right controls and assessments are in place to mitigate the risks Second line of defence – Risk Sets the frameworks and policies for managing specific risk types Provides advice and guidance in relation to the risk Provides independent oversight and reporting on the Group’s risk profile Provides challenges to the effectiveness of the risk management and control processes Third line of defence – Group Internal Audit Provides independent and objective assurance on the adequacy of the design and operational effectiveness of risk management and control environment 80 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 1. Framework 1.4 Risk strategy Integration of key risk management processes The following section sets out at a high level the connection of key risk management activities within the Group. It illustrates the integration of the Group strategy through to recovery and resolution planning. Group strategy The Group’s strategic ambition is to be at the heart of its customers’ financial lives by meeting their evolving needs at every life-stage, and always providing an exceptional customer experience, while simultaneously delivering a bank with compelling, sustainable capital returns and a considered, transparent and controlled risk profile. The Group’s strategy is driven by the five strategic pillars that determine the areas of focus and drive investment. The strategy is defined within the boundaries of the Group’s Risk Appetite Statement and approved by the Board. The Group’s Risk Appetite Statement defines the amount and type of risk that the Group is willing to accept, in pursuit of its strategic goals. Risk strategy setting The risk strategy, articulated through the annual risk plan and the risk objectives, is a key element of the Board’s understanding of how risk is to be managed in the short, medium and long term. The Group has a set of strategic risk objectives which support the delivery of the Group’s strategy, with a specific focus on the Risk and Capital pillar. Sustainability Sustainability is a key strategic objective of the Group and Sustainable Communities is one of the Group’s five Strategic Pillars. Managing the sustainability related aspects of the Group involves identifying and managing all related risks that relate to both day-to-day and future operations. See pages 42 to 54 for more details on Sustainability in AIB. Material risk assessment The material risk assessment is a top down process performed on an at least annual basis for the Group which identifies the key material risks. This assessment takes into account the Group’s strategic objectives and incorporates both internal and external risk information. The Board Risk Committee is responsible for the annual approval of the Group material risk assessment whilst the Group Risk Committee is responsible for the annual review of the Group material risk assessment. Risk and control assessment The first line of defence is responsible for ensuring that detailed bottom up risk and control assessments are undertaken for all businesses or business processes falling under their responsibility. These assessments are performed regularly and whenever there is a material change in organisation, business processes or business environment. Setting risk appetite The Board sets the risk appetite for the Group informed by the material risk assessment. Risk appetite is the nature and extent of risk that the Group is willing to take, accept, or tolerate in pursuit of its business objectives and strategy. It also informs the Group’s strategy, and as part of the Risk Management Framework, is a boundary condition to strategy and guides the Group in its risk taking and related business activities. The financial plan is tested to ensure it is within the risk appetite. The Group Risk Appetite Statement is an articulation of the Group’s appetite for, and tolerance of risk expressed through qualitative statements and quantitative limits and thresholds. The Group Risk Appetite Statement seeks to encourage appropriate risk taking to ensure that risks are consistent with the Group strategy and risk appetite. The Group Risk Appetite Statement cascades into key business segments with separate Risk Appetite Statements for each licenced subsidiary reflecting the risk appetite of the subsidiary as a standalone entity. 1.5 Risk management lifecycle The key processes which support the Group’s approach to risk management are set out below: The Group’s risk appetite statement is built on the following overarching qualitative statements: • Aim to grow our business sustainably, recognising the positive 1.5.1 Identification and assessment Risk is identified and assessed in the Group through a combination of the following: • Material risk assessment; • Risk and control assessment; • Setting risk appetite; • Annual Financial Plan; • • • Stress testing; • Recovery planning; • Resolution planning. Internal Capital Adequacy Assessment Process (“ICAAP”); Internal Liquidity Adequacy Assessment Process (“ILAAP”); contribution we make to the communities we serve. We do this by identifying, understanding and managing all the risks that impact us, ensuring appropriate returns for risks and by building long term sustainable relationships with our customers which are resilient through the cycle; • Have a low appetite for income volatility and target steady, sustainable earnings to enable appropriate, regular and sustainable dividend payments; • Do not have an appetite for large proprietary market risk positions in our trading book; • 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; • Seek to attract and retain skilled staff and place great emphasis on the integrity of staff and accountability for both inaction and actions taken, rewarding behaviours consistent with our brand values and code of conduct; • Seek to offer our customers choice, by providing transparent, consistent and fair products and services and seek always to deliver fair customer outcomes; • Seek to maintain the highest level of availability of key services for our customers; • Seek at all times to comply with all relevant laws, regulations, codes and guidelines applicable to the Group’s activities and to proactively implement new regulatory obligations; • Seek to maintain a strong capital base that generates sustainable returns in line with stakeholder and market expectations; • Consideration will be given to opportunities for inorganic growth that would support the Group in terms of scale and/ or capability, where the Group has proven competence and capacity, and that maintain alignment with our qualitative Risk Appetite Statements; and • Seek resilient, diversified funding relying significantly on retail deposits. Annual Financial Plan The financial plan is integral to how the Group manages its business and monitors performance. It informs the delivery of the Group’s strategy and is aligned to the Risk Appetite Statement. It enables realistic business objectives to be set for management, identifies accountability in the Group’s delivery of planning targets and identifies the risks to the delivery of the Group’s strategic goals and the mitigants of those risks. The plan is produced under a base scenario and assessed under a range of alternative scenarios. This assessment forms the basis for consideration of business model risk and internal capital adequacy. Internal Capital Adequacy Assessment Process (“ICAAP”) It is the Group’s policy to maintain adequate capital resources at all times, having regard to the nature and scale of its business and the risks arising from its operations. The ICAAP is the process by which the Group performs a formal and rigorous assessment of its balance sheet, business plans, risk profile and risk management processes to determine whether it holds adequate capital resources to meet both internal objectives and external regulatory requirements. Multiple scenarios are considered for each ICAAP including both systemic and idiosyncratic stress tests ranging from moderate to extreme and are applied to the Group’s material risks as identified through its material risk assessment. The stress time horizon of three years is aligned with the planning horizon. Internal Liquidity Adequacy Assessment Process (“ILAAP”) The Internal Liquidity Adequacy Assessment Process (“ILAAP”) is the process by which the Group performs a formal and rigorous assessment of its balance sheet, business plans, risk profile and risk management processes to determine whether it holds sufficient financial resources of appropriate quality to meet both internal objectives and external regulatory requirements. Multiple scenarios are considered for each ILAAP including both firm specific and systemic risk events and a combination of both to ensure the continued stability of the Group’s liquidity position within the Group’s pre-defined liquidity risk tolerance levels. The stress time horizon of three years is aligned with the planning horizon. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 81 Stress testing Stress testing is recognised as a key risk management process by the Group. It seeks to ensure that risk assessment is dynamic and forward looking, and considers not only existing risks but also potential and emerging threats. Stress test methodologies are developed to assess the material risks identified in the material risk assessment process. The Group’s stress testing programme embraces a range of forward looking stress tests and takes all the Group’s material risks into account. These include: • ICAAP stress testing undertaken on an annual basis in support of the Internal Capital Adequacy Assessment Process and is integrated with the Group’s annual financial planning process. This aims to highlight the key vulnerabilities of the Group and inform potential future capital needs including capital buffers, in excess of minimum regulatory capital requirements and internal capital requirements under both base and stressed conditions over the planning horizon; Internal capital stress tests on all the material risks of the Group. These consider the implications of a severe shock across the Group’s material risks and additional supporting scenarios as deemed appropriate; Annual ILAAP stress testing applied to the funding and liquidity plan to formally assess the Group’s liquidity risks; Reverse stress testing undertaken at least annually to explore the vulnerabilities of the Group’s strategies and plans in extreme adverse events that would cause the Group to fail. The Group will adopt an action plan to prevent and mitigate in the strategic plans; Ad hoc stress testing on key core portfolios as required, of emerging risks identified from the material risk assessment process and as well as in response to regulatory requests; and Sensitivity analysis assesses the marginal impact of an incremental change in one risk parameter on the Group’s capital and liquidity position. • • • • • Stress testing methodology Across all of the Group’s material risks, the methodology will be an appropriate blend of model based and expert judgement approaches. Assumptions and outputs are reviewed by impacted businesses and central functions, and via Risk review, to ensure they are plausible and intuitive. All models used in the stress testing process are subject to model validation as per the Group’s Model Risk Management Framework. The stress tests comply with all regulatory requirements, achieved through the comprehensive review and challenge of macroeconomic scenarios and stress test outcomes, and the ongoing validation of stress testing models. The Group will be participating in the EBA’s inaugural European-wide Climate Stress Test in 2022. Recovery planning The Group’s recovery plan sets out the arrangements and measures that the Group could adopt in the event of severe financial stress to restore the Group to long term viability. A suite of indicators and options are included in the Group’s recovery plan, which together presents the identification of stress events and the tangible mitigating actions available to the Group to restore viability. 82 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 1. Framework Resolution planning Resolution is the restructuring of a bank by a resolution authority that has failed or is likely to fail, through the use of resolution tools in order to: • • • safeguard the public interest; ensure the continuity of the Group’s critical functions; ensure financial stability in the economy in which it operates; and • minimise costs to taxpayers. The Group is under the remit of the Single Resolution Board (“SRB”) due to its systemic importance. The SRB, in cooperation with the National Resolution Authorities, (Central Bank of Ireland for Ireland and Bank of England for the UK) draft the resolution plan for the Group. The resolution plan describes the Preferred Resolution Strategy (“PRS”), in addition to ensuring the continuity of the Group’s critical functions and the identification and addressing of any impediments to the Group’s resolvability. The PRS for the Group is a single point of entry bail-in via AIB Group plc. The resolution authorities set the loss absorbing capacity requirements for Minimum Requirements for own funds and Eligible Liabilities, in addition to any work programmes required to mitigate any perceived impediments to resolvability. Senior management are responsible for implementing the measures that are needed to ensure the Group’s resolvability and there are a number of governance fora such as subject matter working groups and Resolution Steering Committee that provides governance and oversight around resolution planning. Key deliverables to the SRB are approved by Resolution Steering Committee, GRC/ExCo (Group and UK) and Board (Group and UK). 1.5.2 Measurement and management Risk measurement Each of the material risks has a specific approach to how the risk is measured. The Group Risk Appetite Statement and the separate risk appetite statements for the licensed subsidiaries contain metrics which are measured on a monthly basis against the limits set. Risk management The material risk types are actively managed and measured against their respective frameworks, policies and processes on an ongoing basis. Risk models are used to measure credit, market, liquidity and funding risk, and where appropriate, capital is allocated (taking account of risk concentrations) to mitigate material risks. The management and measurement of the Group’s risk profile also informs the Group’s strategic and operational planning processes. 1.5.3 Monitoring, escalating and reporting The Group has designed risk appetite statement metrics for each of its material risk categories. Material risks are actively monitored under their respective frameworks and policies to ensure material risks are managed effectively in line with the Group’s Risk Appetite Statement. The material risk frameworks and policies set out the process for the escalation of the relevant risk appetite statement limit breaches. Risk reporting Risk reporting facilitates management decision-making and is a critical component of risk governance and oversight. Risk reporting processes are in place for each of the material risks under the relevant risk frameworks and policies. This enables management, governance committees and other stakeholders to oversee: the effectiveness of the risk management processes, adherence to risk policies, and (where relevant) adherence to regulatory requirements. The CRO reports actual performance against risk appetite statements to the Board Risk Committee. Should a breach of a risk appetite statement limit occur, it is reported to the Board and the Group’s regulator. 1.6 Risk culture Risk culture is an integral part of the Group’s overall culture and is vital for the Group to achieve its strategic objectives. The risk culture defines how risk is managed and owned throughout the Group. It is the values, behaviours, beliefs, knowledge, attitudes, awareness and understanding of, and towards risk shared by people. It sets the foundation for how the Group manages risk in a consistent and coherent manner. An effective Group Risk Appetite Statement is highly dependent on risk culture. Risk culture is one of the key elements of the Group’s Risk Management Framework; it is through the risk framework and policy documents that an awareness of risk and control is set and cascaded throughout the Group including a Conduct Risk Framework which emphasises the criticality of ensuring fair customer outcomes. The Group’s promotion of risk learning through recommended risk training and education supports the embedding of risk culture. These ongoing activities are supported by an annual Group wide risk awareness week to reinforce key risk themes. 1.7 Testing and assurance The Group has implemented testing and assurance activities with the objective to provide assurance to the Board, and its delegated sub-committees on the design and operating effectiveness of the control environment within the Group. The material risk types are continuously tested and assured in line with the Group assurance methodology, which distinguishes between risk management, risk control and risk assurance. Each line of defence is responsible for preparing business controls testing plans with consideration of the adequacy of the risk identified and the design and effectiveness of the controls in place. The combined assurance is the alignment of governance, risk and assurance activities, linked with the Group’s strategy with the objective to provide better co-ordinated efforts, risk reporting, and to continuously improve performance and resilience. 1 2 3 4 5 6 Risk management – 2. Individual risk types AIB Group plc Annual Financial Report 2021 Risk Management 83 2.1 Credit Risk Definition Credit risk organisation and structure Measurement, methodologies and judgements Credit risk monitoring Credit profile of the loan portfolio Loans and advances to customers – Asset class analysis Residential mortgages Other personal Property and construction Non-property business Gross loans and ECL movements Investment securities Credit ratings Large exposures Forbearance Page 84 85 89 102 106 112 119 121 123 132 139 141 141 142 84 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk Definition of 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. Based on the annual risk identification and materiality assessment, credit risk is grouped into the following four sub categories: i. Counterparty risk: The risk of losses arising as a result of the counterparty not meeting their contractual obligations in full and on time; ii. Credit default risk: The current or prospective risk to capital arising from the counterparties 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; securities financing; derivatives; investment securities; asset backed securities and partial failure of a trade in a settlement or payment system. Identification and assessment Group Risk Appetite Statement The Group’s Risk Appetite Statement (“RAS”) defines the amount and types of risks that the Group is willing to take, accept, or tolerate in pursuit of its business objectives and strategy as set by the Board. 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 qualitative and quantitative metrics. Risk appetite is stress tested to ensure limits are within the risk-taking capacity of the Group. The Group’s risk appetite for credit risk is reviewed and approved at least annually. 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 the principles of how the Group identifies, assesses, approves, monitors and reports credit risk to ensure that 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. Credit approval overview The Group operates credit approval criteria which: – – Include a clear indication of the Group’s target market(s), in line with Group and segment risk appetite statements; Require a thorough understanding and assessment of the borrower or counterparty, as well as the purpose and structure of credit, and the source of repayment; and – Enforce compliance with minimum credit assessment and facility structuring standards. Credit risk approval is undertaken by professionals operating within a defined delegated authority framework. However, for certain selected retail portfolios, scorecards and automated strategies (together referred to as ‘score enabled decisions’) are deployed to automate and to support credit decisions and credit management (e.g. score enabled auto-renewal of overdrafts). The Board is the ultimate credit approval authority in the Group. The Board has delegated credit authority to various credit committees and to the Chief Credit Officer (“CCO”). The CCO is permitted to further delegate this credit authority to individuals within the Group on a risk appropriate basis. 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. *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 85 2.1 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 of and challenge to credit risk-taking. 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 through the initial credit approval and ongoing review process. All relevant exposures are assigned to a rating model and within that to an internal risk grade (rating). A grade is assigned on the basis of rating criteria within each rating model from which estimates of probability of default (PD) are derived. Internal credit grades are fundamental in assessing the credit quality of loan exposures, and for assessing capital requirements for portfolios where prior regulatory approval has been received. Internal credit grades are key to management reporting, credit portfolio analysis, credit quality monitoring and in determining the level and nature of management attention applied to exposures. Changes in the objective information are reflected in the credit grade of the borrower/loan with the resultant grade influencing the management of individual loans. In line with the Group’s credit management lifecycle, 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. Using internal models, the Group has designed and implemented a credit grading masterscale that gives it the ability to categorise credit risk across different rating models and portfolios in a consistent manner. The masterscale consolidates complex credit information into a single attribute, aligning the output from the risk models with the Group’s Forbearance and Definition of Default and Credit Impairment policies. Masterscale grades are driven by grading model appropriate PDs combined with other asset quality indicators such as default, forbearance and arrears 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/default loans. Page 106 and 107 sets out the profile of the Group’s loan portfolio under each of the above grade categories. 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 the current/recent arrears status or the current/recent forbearance status and macroeconomic 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 89 to 101. 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 or equal to 0.99% and less than 6.95%): Satisfactory credit with no weakness evident. Criticised Accounts of lower credit 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 non-performing forborne, but still require additional management attention to monitor for re-default and continuing improvement in terms of credit quality. Non-performing/default The Group’s definition of default is 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’, ‘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) which are no longer classified as credit impaired but continue to be classified as non-performing and in default. This alignment ensures consistency with the Group’s internal credit risk management and assessment practices. 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 borrower to be unlikely to pay their loans in full without realisation of collateral, regardless of the existence of any past-due amount; or – The borrower is 90 days or more past due on any material loan. Day count starts when any material amount of principal, interest or fee has not been paid by a borrower on the due date. The Group’s definition of financial distress and forbearance are included in the Group’s Forbearance policy. Identification of non-performing exposures and unlikeliness to pay are included in the Group’s Definition of Default and Credit Impairment policy. *Forms an integral part of the audited financial statements 86 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk Management and measurement Credit risk management The activities which govern the management of credit risk within the Group are as follows: – 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 Risk Appetite Statement and generate appropriate returns on capital within acceptable levels of credit quality; 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; 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; 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; Operate within a sound and well defined credit granting process where risks for new and existing lending exposures are identified, assessed, measured, managed and reported in line with risk appetite and the credit risk policy; 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; Ensure a sound methodology exists to proactively assess risk and to identify deteriorating credit quality to minimise losses and maximise recoveries in work out scenarios; Utilise management information and risk data of appropriate quality, to ensure an effective credit risk measurement process when reporting on the holistic credit risk profile of the Group including any changes in credit risk profile and emerging or horizon risks; and – – – – – – – – Mitigate potential credit risk arising from new or amended products or activities. The Group’s credit risk framework supports these credit activities and encompasses a suite of credit policies and standards which support the credit risk sanctioning policies and policy guidance and provide a common and consistent approach to the management of credit risk. 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 and/ or guarantees are usually required as a secondary source of repayment in the event of a 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. Occasionally, credit derivatives are purchased to hedge credit risk. Current levels are minimal and their use is subject to the normal credit approval process. The Group enters into netting agreements for derivatives with certain counterparties, to ensure that in the event of default, all amounts outstanding with those counterparties will be settled on a net basis. Derivative transactions with wholesale counterparties are typically collateralised under a Credit Support Annex in conjunction with the International Swaps and Derivatives Association (“ISDA”) Master Agreement. The Group also has in place an Interbank Exposure Policy which establishes the maximum exposure for each counterparty bank, depending on credit grade rating. Each bank is assessed for the appropriate maximum exposure limit in line with the policy. Risk generating business units in each segment are required to have an approved bank and country limit prior to granting any credit facility, or approving any credit 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 and/ or guarantees are required, they are usually taken as a secondary source of repayment in the event of a 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; – Charges over other assets such as plant and machinery, marine vessels etc.; – Mortgage/legal charge over residential and commercial real estate; and – Charges over financial instruments such as debt securities and equities. *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 87 2.1 Credit risk Credit risk mitigants* (continued) Collateral (continued) The nature and level of collateral required depends on a number of factors such as the type of the credit facility, the term of the credit facility and the amount of exposure. Collateral held as security for financial assets, other than for 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 or where the bank purchases covered bonds as part of its liquidity portfolio. For non-mortgage/non-property 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. Methodologies for valuing collateral Details on the valuation rule methodologies applied and processes used to assess the value of property assets taken as collateral are described in the Group Property Valuation Policy and Property Valuation Guidance. Both documents were reviewed and updated in 2021 due to changes required under the EBA Guidelines on Loan Origination and Monitoring which came into effect on 1 July 2021. The Group has updated property valuation guidance to assist case managers in determining market values given current COVID-19 related market uncertainty on impacted sectors. As property loans, including residential mortgages, represent a significant concentration within the Group’s loans and advances to customer’s portfolio, some key principles have been applied in respect of the valuation of property collateral held by the Group. In accordance with the Group Property Valuation Policy and Guidelines, the Group employs a number of methods to assist in reaching appropriate valuations for property collateral held. External Valuation firms on the Group’s Valuers Panel, are engaged by the Group to undertake valuations of Immovable Property collateral in accordance with the rules set out in the Group Property Valuation Policy. 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. iii. levels of current and likely future demand; iv. v. expected market prices of completed units. the development potential given the location of the asset; its current or likely near term planning status; the relevant costs associated with the completion of the project; and 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. Independent professional internal valuations are completed in limited circumstances (e.g. agricultural land) using a desktop valuation approach by professional qualified internal valuers who are independent of the credit process. The assets being valued by this means must have an independent professional external valuation completed within the past 3 years. 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 or if available stabilised EBITDA. When assessing the value of residential properties, the Central Statistics Office (“CSO”) Residential Property Price index in the Republic of Ireland and the UK Nationwide index for Great Britain and Northern Ireland is used. The value of property collateral is assessed at loan origination and at certain stages throughout the credit life cycle in accordance with the Group Property Valuation Policy e.g. at annual review where required. *Forms an integral part of the audited financial statements 88 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk Credit risk mitigants* (continued) Collateral and ECLs Applying one or a combination of the above methodologies, in line with the Group Property Valuation Policy, has resulted in an appropriate 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 in ECLs determination. Additionally, 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. 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. When undertaking an ECL review 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 required to realise such collateral is estimated. An ECL allowance is raised for the difference between this present value and the carrying value of the loan. 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 104. 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 2021 and 2020: Fully collateralised(1) Loan-to-value ratio: Less than 50% 50% - 70% 71% - 80% 81% - 90% 91% - 100% Partially collateralised Collateral value relating to loans over 100% loan-to-value Total collateral value Gross residential mortgages ECL allowance Net residential mortgages At amortised cost Stage 1 Stage 2 Stage 3 € m € m € m 13,192 8,657 3,843 1,040 102 703 486 158 54 19 447 237 86 51 51 2021 Total € m At amortised cost Stage 1 € m Stage 2 € m Stage 3 € m POCI € m 2020 Total € m 14,377 10,679 9,419 4,100 1,153 173 8,163 3,491 3,294 687 722 610 258 193 89 834 472 198 127 132 30 64 30 25 17 12,265 9,309 3,977 3,639 925 POCI € m 35 39 13 8 1 26,834 1,420 872 96 29,222 26,314 1,872 1,763 166 30,115 61 18 26,895 1,438 26,937 1,446 (34) (41) 26,903 1,405 28 900 921 (276) 645 1 97 108 29,330 151 55 155 7 368 26,465 1,927 1,918 173 30,483 103 29,407 26,535 1,950 1,980 184 30,649 (31) 72 (382) 29,025 (39) (73) (662) (69) (843) 26,496 1,877 1,318 115 29,806 (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 2021 and 2020 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 (Great Britain and Northern Ireland) to these values to take account of price movements in the interim. *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 89 2.1 Credit risk Credit risk mitigants* (continued) Securities financing In addition to the credit risk mitigants outlined on the previous page, the Group, from time to time, enters securities financing transactions. Securities financing consists of securities borrowing and lending and sale and repurchase agreements. At 31 December 2021, the total fair value of the collateral received was € 3,890 million (2020: € 811 million) in relation to repurchase agreements, reverse repurchase agreements and securities borrowing agreements (note 22 to the consolidated financial statements). 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 2021 amounted to € 882 million (2020: € 1,424 million) and those with a negative fair value are reported as liabilities which at 31 December 2021 amounted to € 1,062 million (2020: € 1,201 million). The enforcement of netting agreements would potentially reduce the statement of financial position carrying amount of derivative assets and liabilities by € 529 million at 31 December 2021 (2020: € 804 million). The Group also has Credit Support Annexes (“CSAs”) in place which provide collateral for derivative contracts. At 31 December 2021, € 570 million (2020: € 450 million) of CSAs are included within financial assets as collateral for derivative liabilities and € 100 million (2020: € 257 million) of CSAs are included within financial liabilities as collateral for derivative assets (note 43 to the consolidated financial statements). Additionally, the Group has agreements in place which may allow it to net the termination values of cross currency swaps upon occurrence of an event of default. Investment securities At 31 December 2021, government guaranteed senior bank debt which amounted to € 317 million (2020: € 294 million) was held within the investment securities portfolio. Measurement, methodologies and judgements* Introduction The Group has set out the methodologies used and judgements exercised in determining its expected credit loss (“ECL”) allowance for the year to 31 December 2021. The Group, in estimating its ECL allowance does so in line with the expected credit loss impairment model as set out by the International Financial Reporting Standard 9 Financial Instruments (“the standard”). This model requires a timely recognition of ECL across the Group. The standard does not prescribe specific approaches to be used in estimating ECL allowance, 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 and forward looking – 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 Purchased or Originated Credit Impaired (“POCI”); and – 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 the standard as the weighted average of credit losses across multiple macroeconomic scenarios, with weights assigned based on the probability of each scenario occurring 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 impact on credit risk parameters. *Forms an integral part of the audited financial statements 90 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk Measurement, methodologies and judgements* (continued) Bases of Measurement Under the standard, 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; and 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 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. Stage 1 characteristics Obligations are classified Stage 1 at origination, unless 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 in credit risk has occurred on its financial obligations since their initial recognition. This assessment is performed on individual obligations 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. SICR assessment The Group’s SICR assessment is determined based on both quantitative and qualitative measures: 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 origination lifetime probability of default (“LTPD”) (see ‘Credit risk at origination’) to its current estimated 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 transfers the financial obligation into Stage 2. Increases in LTPD may be due to credit deterioration of the individual obligation or due to macroeconomic factors or a combination of both. The Group has determined that an account had met the quantitative measure if the average residual LTPD at the reporting date was at least double the average residual LTPD at origination, and the difference between the LTPDs was at least 50bps or 85bps in the case of residential mortgages. The appropriateness of this threshold is kept under review by the Group. Qualitative measure: This measure reflects the assessment of the change in credit risk based on the Group’s credit management 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 including monitoring of account activity on an individual or portfolio level, knowledge of client behaviour, and cognisance of industry and economic trends. As a result of COVID-19 a suite of additional guidance documents to support identification of significant increase in credit risk have been applied by the Group. This guidance supplements the Group’s existing credit risk policies and frameworks. *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 91 2.1 Credit risk Measurement, methodologies and judgements* (continued) SICR assessment (continued) The criteria for this Qualitative trigger include, for example: – A downgrade of the borrower’s/facility’s credit grade reflecting the increased credit management focus on these accounts; and/or – Forbearance has been provided and the account is within the probationary period. Lender assessed SICR triggers: The qualitative SICR criteria for non-retail portfolio Stage 2 classification has been enhanced and expanded in the year in relation to the Group’s leverage lending portfolio and gross connected exposures >€/£ 10 million in Capital Markets and AIB UK. Further specific qualitative SICR indicators have been identified in order to ensure appropriate and timely identification of increased credit risk, which when occur, trigger a SICR event. The criteria for this lender assessed trigger include, for example: – A post distressed restructure payment default occurs where the borrower is neither in default nor forborne; – A material adverse event has occurred for the borrower which may impact the borrower’s ability to repay such as: adverse publicity which raises concerns over the viability of a business; loss of key personnel (CEO/CFO/COO) which raises concerns over the strategy/ viability of the business or significant negative macroeconomic events (including but not limited to economic or market volatility, changes in legislation and technological threats to an industry, changes in access to markets) where the financial impact to the borrower is deemed material. Backstop indicators: The Group has adopted the rebuttable presumption within IFRS 9 that loans greater than 30 days past due represent a significant increase in credit risk. Where SICR criteria are no longer a trigger, the account can exit Stage 2 and return to Stage 1. Stage 3 characteristics Defaulted loans (with the exception of newly originated loans that are in Stage 1 or POCI) are classed as credit impaired and allocated to Stage 3. Where default criteria are no longer met, the borrower exits Stage 3 subject to probation period, in line with regulatory requirements. The key criteria resulting in a classification of default are: – Where the Group considers a borrower to be unlikely to pay their loans in full without realisation of collateral, regardless of the existence of any past-due amount; or – The borrower is 90 days or more past due on any material loan (day count starts when any material amount of principal, interest or fee has not been paid by a borrower at the date it was due). Identification of non-performing exposures and unlikeliness to pay are included in the Group’s Definition of Default and Credit Impairment policy. Purchased or originated credit impaired (“POCI”) POCIs are assets originated credit impaired that have a discount of more than or equal to 5% of the contractual value when measured at fair value. The Group uses an appropriate discount rate for measuring ECL in the case of POCIs which is the credit-adjusted effective interest rate. This rate is used to discount the expected cash flows of such assets to fair value on initial recognition. POCI obligations remain outside of the normal stage allocation process for the lifetime of the obligation. The ECL for POCI obligations 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 change in lifetime expected credit losses since the initial recognition of the assets rather than the total amount of lifetime expected credit losses. Measurement of expected credit loss 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. The Group’s IFRS 9 models have been developed and approved in line with the Group’s Model Risk Management Framework. (An overview of credit risk models is outlined on pages 93 and 94). ii. Simplified approach: For portfolios not on the standard approach, 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 reliance on the qualitative criteria (along with the 30 days past due back-stop). *Forms an integral part of the audited financial statements 92 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk Measurement, methodologies and judgements* (continued) Measurement of expected credit loss (continued) 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). Multiple DCFs are captured where gross credit exposure is ≥ € 15 million (Republic of Ireland) or ≥ £ 10 million (UK) to reflect the case specific impacts of up and downside scenarios for these higher value exposures. 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. Where a single DCF is utilised this 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 ECL modelled sensitivities in the same/similar portfolio. Where a range of scenarios are captured through multiple DCF’s these are probability weighted to produce the final ECL. 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 considered appropriate for an adjustment to ECL. The management adjustment must consider all relevant and supportable information, including but not limited to, historical data analysis, predictive modelling and management experience. The methodology to incorporate the adjustment should consider the degree of any relevant over collateralisation (headroom) and should not result in a zero overall ECL unless there is sufficient headroom to support this. The key judgements in the 2021 year end ECL estimates are outlined on pages 100 and 101. 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. 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 The Group utilises practical expedients, as allowed by IFRS 9, 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. This low credit risk exemption is applied to particular assets within the debt securities investment portfolio and for loans and advances to banks, specifically, assets which have an internal grade equivalent to an external investment grade rating (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 allocated to Stage 2. Short term cash The Group’s IFRS 9 Impairment Policy does not require calculation of an ECL for short term cash at central banks and other banks which have a low risk of default 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 approach for both stage allocation and the ECL calculation and has elected to use an expedient (simplified approach) for trade receivables. *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 93 2.1 Credit risk Measurement, methodologies and judgements* (continued) 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 85, along with key factors such as 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 relevant costs expected to be incurred in the recovery process. If an account returns to performing from default (excluding 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 general 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 LGD used to estimate 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 based on historical experience of discounted recoveries. For secured loans, the value of the underlying collateral is estimated at the reporting date. This is used to estimate the ECL based on historical experience of discounted recoveries. 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. 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). 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 prepayment; – 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. *Forms an integral part of the audited financial statements 94 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk Measurement, methodologies and judgements* (continued) Forward looking indicators in the models For ECL calculations reliant on models in the standard and simplified approaches, forward looking indicators are incorporated into the models through the use of macroeconomic variables. These have been identified statistically as the key macroeconomic variables that drive the parameter being assessed (e.g. PD or LGD). The final model structure incorporates these as inputs with the 12 month and lifetime calculations utilising the macroeconomic forecasts for each scenario. See ‘macroeconomic scenarios and weightings’ below for more detail on the process for generating scenarios and associated key macroeconomic factors relevant for the models. Write-offs When the prospects of recovering a loan, either partially or fully, do not improve, a point may 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. The Group determines, based on specific criteria, the point at which there is no reasonable expectation of recovery. When the following criteria exist (or comparable circumstances arise), the loan can be subject to a partial or full write-off: – A decision has been taken to enforce on a loan, due to no agreement with the customer for a restructure / settlement and all customer engagement with the Bank regarding their loan agreement has ceased; Inception of informal insolvency proceedings has commenced or is about to commence; Receivership or other formal recovery action (e.g. where expectation of recovery of collateral is expected through enforcement activity but no additional recoveries above the collateral value are anticipated) has commenced or is about to commence; and A loan is substantially provided for or no material repayments have been received for a period of time (minimum 12 months) and all customer engagement with the Bank regarding their loan agreement has ceased. – – – 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). Details of forbearance are set out in Risk management 2.1 Additional credit quality and forbearance disclosures on loans and advances to customers. The contractual amount outstanding of loans written-off during the year that are still subject to enforcement activity are outlined on page 131 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 ECL allowance calculation purposes have been developed in a consistent way with that set out in the 2020 Annual Financial Report and have been subject to the Group’s established governance process covering the development and approval of macroeconomic scenarios used for planning and internal stress testing purposes. The macroeconomic scenarios and attached probabilities are reviewed by the Asset and Liability Committee (“ALCo”) regularly, and such reviews took place frequently during 2021 in response to economic developments. The macroeconomic scenarios are then reviewed by the Board Risk Committee (“BRC”) and approved for use by the Board. The scenario probabilities are approved by the Board Audit Committee (“BAC”). The parameters used within the Group’s ECL models include macroeconomic factors which have been established as drivers of the default risk and loss estimates. Therefore, a different credit loss estimate is produced for each scenario based on a combination of these identified macroeconomic factors. The credit loss estimates for each scenario are then weighted by the assessed likelihood of occurrence of the respective scenarios to yield the ECL outcome. Macroeconomic scenarios: The COVID-19 pandemic is the main risk to the short term economic outlook during the reporting period. The Irish and UK economies have been more robust than expected in 2021, supported by strong vaccine roll-out campaigns. However, the emergence of new variants of the virus during 2021 continue to have negative impacts on economic activity and employment levels. As part of the process of preparing the ECL calculation, a number of plausible scenarios were considered, as at the reporting date, which reflected a reasonable range of prevailing risks and uncertainties including inter alia possible trajectories for the public health crisis as well as for inflation that might trigger a future economic downturn. In total, four scenarios have been used in the ECL calculation. These four scenarios consist of a Base case scenario, along with three alternative scenarios (comprising one upside, one relatively mild downside scenario that considers unexpected prevalence of the virus and a more severe downside arising from persistently high inflation which necessitates a hike in official interest rates) with the consequent economic impacts. Non-linear effects are captured in the development of risk parameters as well as through the inclusion of both the single upside and two downside scenarios. *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 95 2.1 Credit risk Measurement, methodologies and judgements* (continued) Macroeconomic scenarios and weightings (continued) The Group’s Economic Research Unit (“ERU”) provide the scenario forecasts over five years. These are then independently reviewed and challenged, on both a quantitative and qualitative basis, by the Group Risk function. The Base case is benchmarked against the outlook available from official sources (e.g. Central Bank of Ireland, Bank of England, Department of Finance, ESRI, ECB, IMF, etc.) to ensure it is appropriate. Upside and downside scenarios, relative to the Base case, are provided to ensure a reasonable range of possible outcomes is available for the IFRS 9 process. These scenarios are benchmarked to alternative scenarios from official sources, where possible. The longer term economic projections (beyond five years) are sourced from a reputable external provider with the internal 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 kept under review by the Group ALCo and approved by the Board. The long term projections reflect the relatively limited climate change mitigation policies, mainly comprising the continued gradual substitution of gas for coal, that have been announced so far. Without significantly enhanced mitigating actions, the world is on course to warm by about 2°C above pre-industrial levels by 2050. The AIB long term baseline scenario seeks to follow the IEA’s “stated policies” scenario and implies emissions remaining roughly constant. The Group is also participating in the ECB Climate Stress Tests in early 2022 and the scale of the economic shocks applied is quite modest compared to those applied in stress testing for ICAAP and ECL calculations. The impacts considered under this ECB Climate Stress Test process will be repeated every second year. The nature of the shock is different with a long term horizon compared to front loaded shocks as part of quarterly stress tests. The scenarios used for the year-end ECL process are described below and reflect the views of the Group as at the reporting date. Base case: The scenario assumes that, with the rapid and successful roll-out of COVID-19 vaccines and the supportive role of fiscal and monetary policies, the outlook for the global economy improves. Very strong growth in economic activity is anticipated in most economies during 2022. The surge in GDP growth in Ireland, the UK, US and euro area reverts to a more normal pace from 2023 onwards. In this scenario, Irish economic activity (as measured by modified domestic demand) has returned to pre-pandemic levels, but this is unlikely to occur until the second quarter of 2022 in the UK. The rise in unemployment has been mitigated in many countries, including Ireland, by government income support schemes. Our projection for the unemployment rate estimates what this rate would be in the absence of such support measures. This estimate is conservative relative to the range provided by the traditional unemployment rate and the COVID-19 adjusted unemployment rate (which includes recipients of temporary pandemic unemployment payments) published by the Central Statistics Office. In this scenario, unemployment remains relatively high only reverting to a pre-pandemic ‘norm’ during 2024. House prices performed much better than expected in 2021 in both Ireland and the UK with supply shortages in the housing market exacerbated by the pandemic. Prices are forecast to rise by 8% on average in Ireland between 2021 and 2022. Expiry of a stamp duty cut and interest rate hikes could weigh on UK prices next year. CRE prices are expected to remain soft in Ireland and UK in 2022, with modest growth of 2% per annum during 2023-2026. Downside 1 (‘Lower growth in 2022’): This scenario assumes that the production and speed of vaccine deployment does not prove fast enough to stop transmission of the virus and emergence of new vaccine resistant variants. Economic activity is slower to recover as a result of the re-introduction of some containment measures during 2022 with business and consumer confidence impacted as uncertainty remains high. Economic growth, as measured by GDP, is two percentage points lower in 2022 and the additional scarring effects from this results in growth being between 2.3% and 2.9% lower, relative to the Base case, across the main economies over the 2022–2026 period. Irish unemployment rises from 10% at the end of 2021 to 12% in early 2023, before starting to decline while the unemployment rate in the UK remains two percentage points higher than in the Base case by 2026. House prices in Ireland and the UK are c. 7% and 10% lower, respectively, than in the Base case by the end of 2026. Commercial real estate prices remain under downward pressure in 2022–2023, with prices falling a further 8–9%. There is a moderate recovery in property prices in both countries during 2024–2026. *Forms an integral part of the audited financial statements 96 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk Measurement, methodologies and judgements* (continued) Macroeconomic scenarios and weightings (continued) Downside 2 (‘Persistent high inflation’): In this scenario, it is assumed that the rise in inflation in 2021 does not prove temporary with wage inflation picking up sharply, the rate of increase in the consumer price index remains elevated in 2022, with growing risks to price stability over the medium-term. Central banks are required to tighten policy aggressively during 2022, ending quantitative easing and hiking official rates significantly. This has very negative consequences for financial markets and the global economy. The policy stance begins to loosen in 2023 as inflation eases somewhat. This results in a marked deceleration in GDP growth over 2022-2024, with cumulative growth over 2022-2026 being c. 5.7% lower than in the Base case for both Ireland and the UK. Irish unemployment rises sharply to 14.5 % by the first quarter in 2023 and remains high over the forecast period, still averaging in excess of 11% in 2025 and 9.5% in 2026. The average rate of unemployment over the period 2022 to 2026 is more than 6 percentage points higher than in the Base case. In the UK, unemployment peaks at c. 9% in 2024, declining to 6.9% by 2026 (2.9 percentage points higher than the Base scenario). With both the Irish and UK economies in recession, there are very large residential property price falls in both markets (by c.18% and 24.0%, respectively) between 2022 and 2024 with values 23-26% lower than the base by the end of 2026. CRE prices in both Ireland and the UK fall by between 28-30% in the period 2022-2024 and values are 29-30% lower than the Base case by the end of 2026. Upside (‘Quick economic recovery’): More effective vaccine developments and rollouts reduce uncertainty which, in addition to a faster than anticipated rundown of personal savings, underpins a stronger recovery in this scenario than assumed in the Base case for the period 2022-2024. The boost to confidence of both households and businesses leads to a more robust pick-up in consumer spending and investment. In Ireland, GDP grows by 7.5% in 2022 and increases by 5% in 2023 and 4% in 2024. By 2026, the level of GDP is in excess of 3% above what it would be in the Base case. The table below sets out the five year average forecast for each of the key macroeconomic variables that are required to generate the scenarios or are material drivers of the ECL under (i) Base, (ii) Downside 1, (iii) Downside 2 and (iv) Upside scenarios at 31 December 2021 (average over 2022-2026) and at 31 December 2020 (average over 2021-2025). Base December 2021 5 year (2022-2026) average forecast Downside (‘Lower growth in 2022’) Downside (‘Persistent high inflation’) Upside (‘Quick economic recovery’) 3.8 2.9 5.7 1.7 2.6 3.5 1.7 2.4 2.0 4.6 1.5 2.0 3.4 1.4 9.7 0.3 2.0 2.6 1.3 1.8 (0.1) 6.6 (0.6) 1.7 2.6 (2.1) 11.9 (4.6) 1.4 1.8 2.4 1.1 (3.7) 8.0 (5.1) 2.5 4.5 5.0 4.8 4.0 2.9 3.8 2.2 3.0 3.0 4.3 3.6 2.4 December 2020 5 year (2021-2025) average forecast Downside (‘Lower growth in 2021’) Downside (‘Extended high unemploy- ment’) Upside (‘Quick economic recovery’) 3.0 0.8 8.9 1.1 1.9 1.4 1.0 2.3 0.4 6.8 1.2 1.5 2.0 (3.6) 11.9 (3.8) 1.0 1.3 0.9 1.1 (4.4) 10.1 (3.9) 1.2 4.4 3.4 6.6 3.1 2.5 2.5 1.4 3.7 2.9 4.6 3.1 1.8 Base 3.7 1.7 7.2 1.8 2.3 1.8 1.1 2.9 1.3 5.6 2.2 1.7 Macroeconomic factor (%) Republic of Ireland GDP growth Residential property price growth Unemployment rate Commercial property price growth Employment growth Average disposable income growth Inflation United Kingdom GDP growth Residential property price growth Unemployment rate Commercial property price growth Inflation *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 97 2.1 Credit risk Measurement, methodologies and judgements* (continued) Macroeconomic scenarios and weightings (continued) Additional information is provided in the table below which details the individual macroeconomic factor forecast for each year across the four scenarios, as at 31 December 2021. This is because, due to the increased variability as a result of COVID-19, the average for the five years 2022-2026 above does not provide sufficient insight for each factor across the impacted years. Macroeconomic factor Republic of Ireland GDP growth Residential property price growth Unemployment rate Commercial property price growth Employment growth Average disposable income growth Inflation United Kingdom GDP growth Residential property price growth Unemployment rate Commercial property price growth Inflation Macroeconomic factor Republic of Ireland GDP growth Residential property price growth Unemployment rate Commercial property price growth Employment growth Average disposable income growth Inflation United Kingdom GDP growth Residential property price growth Unemployment rate Commercial property price growth Inflation Estimate 2021 % 2022 % 2023 % 2024 % 2025 % Base 2026 % Downside 1 (‘Lower growth in 2022’) 2022 % 2023 % 2024 % 2025 % 2026 % 14.0 12.0 10.4 (3.0) 1.1 2.5 2.2 6.5 3.5 5.1 (0.5) 2.5 6.0 4.0 7.2 0.5 4.9 2.0 2.7 5.5 – 5.5 (0.5) 2.2 4.0 3.0 6.0 2.0 2.6 3.5 1.5 1.8 1.5 4.8 2.0 2.0 3.4 3.0 5.3 2.0 2.2 4.0 1.5 1.6 2.5 4.5 2.0 2.0 3.0 2.5 5.0 2.0 1.8 4.0 1.5 1.5 3.0 4.2 2.0 2.0 2.8 2.0 4.8 2.0 1.7 4.0 1.5 1.4 3.0 4.0 2.0 2.0 4.0 (3.5) 11.2 (8.5) 1.0 – 1.5 4.0 (6.0) 6.5 (6.0) 1.9 2.3 – 11.4 – 1.0 2.5 1.2 0.5 (2.5) 7.0 (2.5) 1.5 3.0 5.0 9.8 4.0 2.9 3.0 1.2 1.0 2.0 7.0 1.5 1.6 3.5 3.0 8.6 3.0 2.6 3.5 1.3 1.5 3.0 6.6 2.0 1.7 4.0 2.5 7.3 3.0 2.7 4.0 1.4 1.8 3.0 6.0 2.0 1.8 Downside 2 (‘Persistent high inflation’) Upside 1 (‘Quick economic recovery’) 2022 % 2023 % 2024 % 2025 % 2026 % 2022 % 2023 % 2024 % 2025 % 2026 % 2.5 1.0 (6.0) (12.5) 2.4 – 3.3 4.0 12.5 14.0 12.6 11.1 (12.5) (17.5) (1.0) (0.7) 1.0 4.0 (0.8) (0.5) 3.2 2.2 (1.2) (10.0) (15.0) 7.1 8.8 (12.0) (17.0) 4.0 3.3 2.7 2.0 2.0 1.0 (0.5) 9.1 (4.5) 2.2 4.0 2.8 2.8 1.4 1.7 4.0 8.1 3.5 1.6 4.0 4.0 9.5 4.0 3.0 3.5 1.2 2.0 3.0 6.9 4.5 1.4 7.5 7.0 6.7 4.5 5.4 2.7 3.2 7.0 5.0 5.2 5.0 2.5 5.0 6.0 5.2 5.5 3.0 3.7 2.0 3.0 3.0 4.5 4.5 2.5 4.0 5.0 4.4 5.5 2.4 4.1 2.0 2.2 3.0 4.1 4.0 2.4 3.0 4.0 4.0 2.5 2.0 4.3 2.0 1.5 2.0 3.9 2.5 2.4 2.8 3.0 3.9 2.0 1.8 4.1 2.0 1.4 2.0 3.7 2.0 2.3 The key changes to the scenario forecasts in the reporting period are driven by the COVID-19 pandemic. The extent of contagion and the wider economic impact of COVID-19 gave rise to elevated uncertainty regarding the outlook and possible outcomes at the previous reporting period (31 December 2020). The disruption to economic activity brought about by a series of public health measures designed to limit social mobility, and subsequent recoveries following the lifting of these restrictions, also resulted in a significant re-assessment of the outlook and balance of risks during 2021. The four scenarios detailed above are used to reflect a representative sample of possible outcomes. The ECL allowance reflects a weighted average of the credit loss estimates under the four scenarios. Similar to the scenario forecasts, the probability weight assigned to each scenario is proposed by the ERU, with a review and challenge from the Group Risk function. These are reviewed regularly at Group ALCo and are subject to approval at Board Audit Committee. The probabilities described below reflect the views of the Group at the reporting date. The weights for the scenarios are derived based on expert judgement, with reference to external market information where possible. Given the unprecedented nature and impact of COVID-19, the standard quantitative approaches (such as statistical distribution analysis of Irish GDP growth over different time horizons informed by historic patterns in the economic data) used to assess scenario likelihoods are less useful than normal in this environment. As a result, they have not been a key driver of the weightings at the reporting date. *Forms an integral part of the audited financial statements 98 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk Measurement, methodologies and judgements* (continued) Macroeconomic scenarios and weightings (continued) These weightings are reviewed regularly by Group ALCo and adjusted where required. The key drivers of the weightings are: – The higher weighting on the downside scenarios (versus the upside scenario) reflects AIB Group’s view that risks remain skewed to the downside due to rising COVID-19 cases and the spread of a new variant which was a cause for concern; rising inflationary pressures, continuing disruptions to supply chains and labour shortages that impede the pace of activity and raise the potential for greater than expected economic scarring. Additionally, other risks remain which also support AIB Group’s view that risks have become somewhat tilted to the downside. These include the risk that government supports to businesses and households may be delaying, but not preventing, future defaults and bankruptcies. There are also rising tensions between the UK and the EU relating to Brexit and the Northern Ireland protocol. In addition, excess savings built up during the pandemic may be retained for precautionary motives, rather than spent, impacting on economic growth. – The weightings also consider the fact that unemployment is trending lower than expected in many economies, with little evidence yet of major scarring in labour markets from the pandemic. House prices are performing better than anticipated. Meanwhile, a much greater than expected rundown of private sector savings in the next couple of years could fuel stronger than anticipated growth, especially given the extent of pent-up consumer demand. – Risks were adjudged to be evenly balanced at June 2021 (the weighting assigned to downside risks was 25% while the upside scenario weight was also 25%). In the final quarter of 2021, however, the AIB Group view was that the balance of risks had tilted more to the downside due to the above mentioned developments. The weightings that have been applied as at the reporting date are: Scenario Base Downside 1 (‘Lower growth in 2022’) Downside 2 (‘Persistent high inflation’) Upside (‘Quick economic recovery’) Weighting December 2021 50% 25% 5% 20% Base Downside 1 (‘Lower growth in 2021’) Downside 2 (‘Extended high unemployment’) Upside (‘Quick economic recovery’) Weighting December 2020 50% 25% 5% 20% In assessing the adequacy of the ECL allowance, the Group has considered all available forward looking information as of the balance sheet date in order to estimate the future expected credit losses. The Group, through its risk management processes (including the use of expert credit judgement and other techniques) assesses its ECL allowance 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 four scenarios. Should the credit environment deteriorate beyond the Group’s expectation, the Group’s estimate of ECL would increase accordingly. *Forms an integral part of the audited financial statements AIB Group plc Annual Financial Report 2021 Risk Management 99 2.1 Credit risk Measurement, methodologies and judgements* (continued) 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 which indicate the approximate impact on the current ECL allowance before the application of probability weights to the forward looking macroeconomic scenarios. The sensitivities provide an estimate of ECL movements that include changes in model parameters and quantitative ‘significant increase in credit risk’ (“SICR”) staging assignments. Relative to the base scenario, in the 100% downside ‘Lower growth in 2022’ and ‘Persistent high inflation’ scenarios, the ECL allowance increases by c. 16% and c. 34% respectively. In the 100% upside scenario, the ECL allowance declines by c. 3%, showing that the ECL impact of the two downside scenarios is greater than that of the upside scenario. For 31 December 2021, a 100% downside ‘Lower growth in 2022’ and ‘Persistent high inflation’ scenario sees a higher ECL allowance sensitivity of € 304 million and € 645 million respectively compared to base (€ 210 million and € 551 million respectively compared to reported). Lower relative impacts are observed for the AIB UK portfolio. 1 2 3 4 5 6 Loans and advances to customers Residential mortgages Other personal Property and construction Non-property business Total Off-balance sheet loan commitments Financial guarantee contracts Of which: AIB UK segment Loans and advances to customers Residential mortgages Other personal Property and construction Non-property business Total Off-balance sheet loan commitments Financial guarantee contracts Of which: AIB UK segment Reported 100% Base Total € m 382 222 313 968 1,885 53 26 1,964 Total € m 376 216 284 921 1,797 49 24 1,870 ECL allowance at 31 December 2021 100% Downside Scenario (‘Lower growth in 2022’) Total € m 100% Downside Scenario (‘Persistent high inflation’) Total € m 100% Upside Scenario (‘Quick economic recovery’) Total € m 392 237 378 1,074 2,081 63 30 2,174 434 257 473 1,236 2,400 80 35 2,515 370 213 266 895 1,744 45 22 1,811 268 266 277 321 253 Reported 100% Base Total € m 843 234 396 1,037 2,510 54 29 2,593 Total € m 832 229 383 1,011 2,455 51 28 2,534 100% Downside Scenario (‘Lower growth in 2021’) Total € m ECL allowance at 31 December 2020 100% Downside Scenario (‘Extended high unemployment’) Total € m 100% Upside Scenario (‘Quick economic recovery’) Total € m 869 245 444 1,113 2,671 62 31 2,764 990 271 529 1,257 3,047 82 39 3,168 804 223 337 950 2,314 45 25 2,384 306 294 347 424 252 *Forms an integral part of the audited financial statements 100 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk Measurement, methodologies and judgements* (continued) Management judgements Post model adjustments (PMAs) are applied where management believe that they are necessary to ensure an adequate level of overall ECL provision and to address known model limitations and/or emerging trends. All PMAs are approved under the ECL governance process through which, the completeness and accuracy of post model adjustments are considered against the backdrop of the risk profile of the loan book, recent loss history, changes in underlying resolution strategies not captured in the models, and where key uncertainties exist such as COVID-19. The PMAs approved for year end 2021 (and 2020 comparison), are set out below and categorised as follows: • NPE resolution strategy – ECL adjustments where the model does not take into account alternative strategies such as portfolio sales. Uncertainty due to the impact of COVID-19 – ECL adjustments are required as the modelled probability of default did not reflect • the uncertainties associated with the impact of COVID-19. Management determined that increased ECL was required, until further information on the impact of COVID-19 became known, particularly in relation to the withdrawal of government support programmes. Macroeconomic factors – ECL adjustments reflecting the changed impact of certain macroeconomic factors primarily as a result of the alternative recovery strategies now being adopted. • • Other – ECL adjustments where it was judged that amendment to the modelled ECL was required. Management Judgements NPE resolution strategy Uncertainty due to the impact of COVID-19 Macroeconomic factors Other PMA Total Management Judgements NPE resolution strategy Uncertainty due to the impact of COVID-19 Other PMA Total Residential mortgages € m Other personal € m Property and construction € m Non-property business € m 207 18 29 1 255 5 9 – – 14 26 5 – 1 32 28 153 – 72 253 Residential mortgages € m Other personal € m Property and construction € m Non-property business € m 442 24 9 475 1 9 – 10 – 22 (9) 13 – 128 63 191 2021 Total € m 266 185 29 74 554 2020 Total € m 443 183 63 689 NPE resolution strategy Similar to 2020, an ECL adjustment exists where it is expected that portfolio sale or other alternative strategies may be adopted which are not included within the current IFRS 9 models. LGD models are based on empirical internal data assuming business as usual resolution. Given that the models do not account for portfolio sale outcomes, post model adjustments have been applied to reflect the potential outcomes, pending model redevelopment. This post model adjustment primarily relate to mortgages which have been classified as non-performing for a considerable length of time. In the second half of 2021, an additional cohort of unresolved longer-dated non-performing loans across property, non-property business and other personal together with additional non-performing mortgages have also been included in scope for potential portfolio sales. The ECL PMA stock has reduced from € 443 million at 31 December 2020 to € 266 million at 31 December 2021 primarily reflecting portfolio sales during 2021 which reduced ECL by € 261 million. This is partially offset by new ECL PMA’s of € 110 million for additional exposures identified in the second half of 2021 as requiring increases to the LGD component of the modelled outcome to reflect the expected resolution strategy. The PMA is underpinned by an independent external benchmark exercise and a range of outcomes specific to collateral values underpinning the loans, market conditions and prior loan sale outcomes. *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 101 2.1 Credit risk Measurement, methodologies and judgements* (continued) Uncertainty due to the impact of COVID-19 Particular focus from Management was on ensuring that sectors which were severely impacted by Government measures to contain COVID-19 retain an appropriate level of ECL. The risk was not considered to be adequately captured in the modelled probability of default where certain sectors (e.g. hospitality) were identified to be highly impacted and where borrowers were receiving government supports which are likely to be withdrawn in the near future. For certain highly impacted non-property business sector exposures, within Capital Markets, a post model adjustment of € 117 million was applied (€ 13 million relating to Stage 1 and € 104 million relating to Stage 2). Similarly, in the Retail Banking business unit, € 68 million post model adjustment was applied (€ 56 million relating to Stage 1 and € 12 million relating to Stage 2) across residential mortgages € 18 million, other personal € 9 million, and other non-property business € 41 million in relation to where the borrower is either in receipt of ongoing government supports or the supports have been withdrawn for less than 3 months. Macroeconomic factors An ECL adjustment has been applied to reflect limitations within the mortgage model relating to two parameters, the house price index (HPI) growth and employment growth. This is to ensure that the ECL remains appropriate for the underlying portfolio acknowledging the limitations within the model. The HPI index parameter, which assumes growth over the long term, has reduced the LGD arising in business by the NPE resolution strategy impacting ECL cover on Stage 1, Stage 2 and Stage 3 loans (not covered by the NPE resolution strategy adjustment above). An adjustment has been made to reflect the Group’s potential alternative recovery strategies for the impacted loans that are or become credit impaired. Furthermore, due to the impact COVID-19, the employment growth rate parameter within the model had a temporary spike resulting in a reduction of the ECL allowance. This is expected to be a temporary event due to COVID-19 and the ECL was adjusted to reflect a more appropriate level of expected loss outcome. These adjustments amount to € 29 million (Stage 1 € 9 million, Stage 2 € 8 million and Stage 3 € 12 million). Other For the Syndicated & International Finance (SIF) portfolio in Capital Markets, it was previously determined that historically observed relationships between default rates and macroeconomic factors in the modelled probabilities of default needs to be increased for this portfolio. Accordingly, expert credit judgement has determined a post model adjustment is required of € 53 million at 31 December 2021 (Stage 1 € 24 million, Stage 2 € 29 million). Other post model adjustments in this category are not individually significant. 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 allowance approval process during 2021 were: – Model Risk Committee; – Asset and Liability Committee; – Business level ECL Committees; – Group Credit Committee; and – Board Audit Committee. For ECL governance, the Group management employs its expert judgement on the adequacy of ECL allowance. 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 and subsidiaries 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), which also includes subsidiaries, prior to onward submission to the Group Credit Committee (GCC). GCC reviews and challenges ECL levels for onward recommendation to the Board Audit Committee as the final approval authority. *Forms an integral part of the audited financial statements 102 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk Monitoring, escalating and reporting 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. Credit risk, at a portfolio level, is monitored and reported regularly to senior management and to the Board Risk Committee. Credit managers proactively manage the Group’s credit risk exposures at a transaction and relationship level. Monitoring includes 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 regular 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 regular basis highlighting changes to risk concentration in the Group’s loan book. 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/early warning list, the exposure is carefully monitored and where appropriate, exposure reductions are effected. In addition, exceptions to credit policy are reviewed regularly. As a matter of policy, non-retail facilities 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. Borrowers with a criticised grade 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. Through a range of forbearance solutions as outlined on page 142, the Group employs a dedicated approach to loan workout, monitoring and proactive management of non-performing loans. A specialised recovery function focuses on managing the majority of criticised loans and deals with customers in default, collection or insolvency. Their mandate is to support customers in difficulty while maximising the return on non-performing loans. 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. Further details on forbearance are set out in ‘Risk management 2.1 Additional credit quality and forbearance disclosures on loans and advances to customers’. 2021 Developments in response to COVID-19 and consideration of ESG risks Credit risk management response to COVID-19 The Group continued to adapt its credit risk management operating model including its underlying credit processes, in response to COVID-19 to ensure proactive and appropriate management of the heightened credit risk in the portfolio, particularly for those sectors believed to be most impacted by COVID-19. In adapting its credit operating model, the Group continued to provide a number of customer support measures as required in a streamlined, agile and risk appropriate manner. In 2021, the Group’s focus continued to be on supporting its existing customers and ensuring they were provided with appropriate measures (e.g. covenant reliefs) taking account of the expected financial impact and recovery outlook. As part of the Group’s credit risk management response to COVID-19, a range of actions were taken to ensure the appropriate measurement, classification, and reporting of its credit risk exposures during the year. These included: – The continued use of additional guidance documents to support credit risk assessment and management activities, such as credit grading, staging, unlikely-to-pay testing, and taking account of COVID-19 sector risk and expected recovery outlook. This guidance supplements the Group’s existing credit risk policies and frameworks. Enhanced scope and frequency of portfolio asset quality monitoring, particularly focused on those sectors believed to be most impacted by COVID-19 (for example, hospitality, non-food retail, travel etc.). Proactive bottom-up reviews of individual cases, in addition to top-down portfolio/sector reviews, prioritising higher value exposures and the more vulnerable segments of the balance sheet. – – Moving forward, the Group will continue to proactively review borrowers particularly where reliefs such as government supports are withdrawn. This has been considered as part of the governance process and was an explicit consideration as part of year-end and ECL appropriateness. Where an appropriate ECL has been taken to reflect any potential latent risk, this is outlined in the management judgements section “Uncertainty due to the impact of COVID-19”. *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 103 2.1 Credit risk Monitoring, escalating and reporting Credit risk management consideration of ESG risks The Group continues to adapt its credit risk management processes and policies to capture environmental, social, and governance (“ESG”) risks. Key additional steps taken during the year included: – – A heat mapping exercise was conducted to scale individual sub-sector exposures to levels of climate change and environment risks. Relevant Business Credit Application Guidelines/Procedures and Credit Sanctioning Policies were updated to require the assessment of certain borrower’s exposure to ESG factors, in particular environmental factors and impact of climate change and the appropriateness of mitigating strategies as set out by the borrower. – An ESG questionnaire was introduced for certain cohorts requiring a more intensive analysis of borrowers in sub-sectors considered as part of the heat mapping exercise to have a higher risk to climate change related and environment risks. – The property valuation process was updated to obtain BER/EPC ratings where applicable, which will be captured in collateral valuations and recorded on the Group’s systems going forward. – A new Sustainable Lending Framework was introduced which categorises relevant lending activities as green/transition for internal tracking and external disclosure purposes. – The impact of climate risk was considered as part of the ECL governance process for the position as at December 2021 and it was deemed that insufficient evidence of the likely loss impacts from climate events is available to adjust ECLs materially but that the Group’s approach to individual counterparty risk assessment adequately captures climate risk where appropriate. The impact of climate risk will continue to be monitored in 2022 to ensure ECLs appropriately reflect latent risk from potentially emerging climate risks. These enhancements are important building blocks in achieving our sustainability ambition of 70% of the Group’s new lending to be green/ transition lending by 2030, and also in increasingly understanding the Group’s exposure to ESG risk. Credit risk management in the ECL governance process* The Group considered climate risk in the ECL governance process as follows: – The Group’s approach to individual counterparty risk assessment adequately captures climate risk where appropriate. The impact of climate risk will continue to be monitored in 2022. *Forms an integral part of the audited financial statements 104 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Credit exposure overview 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 2021 and 2020: Maximum exposure to credit risk Balances at central banks(3) Items in course of collection Derivative financial instruments Loans and advances to banks Loans and advances to customers Securities financing Investment securities(4) Included elsewhere: Trade receivables Accrued interest Loan commitments and other credit related commitments Financial guarantees Amortised cost(1) € m 42,109 44 – 1,323 56,265 3,890 4,109 372 307 Fair value(2) € m – – 882 – 243 – 12,589 – – 2021 Total € m 42,109 44 882 1,323 56,508 3,890 16,698 372 307 Amortised cost(1) € m 24,932 43 – 1,092 56,766 811 3,603 87 212 Fair value(2) € m – – 1,424 – 75 – 2020 Total € m 24,932 43 1,424 1,092 56,841 811 15,675 19,278 – – 87 212 108,419 13,714 122,133 87,546 17,174 104,720 13,727 819 14,546 – – – 13,727 819 14,546 12,504 722 13,226 – – – 12,504 722 13,226 Total 122,965 13,714 136,679 100,772 17,174 117,946 (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 are classified as ‘fair value through profit or loss’ except investment securities at FVOCI, net investment hedge derivatives and cash flow hedging derivatives. (3)Included within cash and balances at central banks of € 42,654 million (2020: € 25,550 million). (4)Excluding equity shares of € 274 million (2020: € 201 million). *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 105 2.1 Credit risk – Credit exposure overview Credit risk exposure derives from standard on-balance sheet products such as mortgages, loans, overdrafts and credit cards. In addition, credit risk arises from other products and activities including, but not limited to: “off-balance sheet” guarantees and commitments; securities financing; investment securities; asset backed securities; and the failure/partial failure of a trade in a settlement or payments system. The following table summarises financial instruments in the statement of financial position at 31 December 2021 and 2020: Statement of financial position Exposure ECL allowance Carrying amount € m 42,654 44 1,323 € m – – – € m 42,654 44 1,323 58,150 (1,885) 56,265 243 58,393 3,891 16,699 36 13,727 819 n/a 243 (1,885) 56,508 (1) (1) (1) (53) (26) 3,890 16,698 35 (53) (26) 2021* Income statement Net credit impairment writeback/ (charge) € m – – – 233 – 233 (1) – – 2 4 238 Statement of financial position Exposure ECL allowance Carrying amount € m 25,550 43 1,092 € m – – – € m 25,550 43 1,092 2020* Income statement Net credit impairment (charge)/ writeback € m – – – 59,276 (2,510) 56,766 (1,421) 75 n/a 75 – 59,351 (2,510) 56,841 (1,421) 811 19,279 – 12,504 722 – (1) – (54) (29) 811 19,278 – (54) (29) – – – (35) (4) (1,460) Cash and balances at central banks Items in course of collection Loans and advances to banks Loans and advances to customers: at amortised cost at FVTPL Securities financing Investment debt securities(1) Other – Stockbroking client debtors Loan commitments Financial guarantee contracts Total (1)ECL allowance amounting to € 3 million (2020: € 3 million) included in carrying amount of investment securities at FVOCI. There was a € 238 million net credit impairment writeback in the year (2020: € 1,460 million charge). This comprised of a € 233 million writeback on loans and advances to customers (net remeasurement of ECL allowance writeback of € 158 million and recoveries of amounts previously written-off of € 75 million) and a € 6 million writeback for off-balance sheet exposures. There was also a € 1 million charge on securities financing measured at amortised cost. (2020: € 1,421 million charge, (net remeasurement € 1,493 million, offset by recoveries € 72 million) and a € 39 million charge for off-balance sheet exposures). Further details on the net credit impairment charge in the year to 31 December 2021 are set out on page 109 and 276. *Forms an integral part of the audited financial statements 106 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 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. The following table analyses loans and advances to customers at amortised cost by segment, internal credit ratings and ECL staging at 31 December 2021 and 2020: Amortised cost Gross carrying amount Residential mortgages Other personal Property and construction Non-property business Total Analysed by internal credit ratings(1) Strong Satisfactory Total strong/satisfactory Criticised watch Criticised recovery Total criticised Non-performing Retail Banking € m Capital Markets € m 27,744 2,550 548 63 636 4,800 3,225 10,351 34,155 15,762 23,406 6,888 9,578 4,010 30,294 13,588 1,389 567 1,956 1,905 449 1,309 1,758 416 € m 1,115 91 1,924 5,090 8,220 4,436 2,335 6,771 296 518 814 635 AIB UK Group 2021 Total € m € m 29,407 28,949 Retail Banking € m Capital Markets € m 2,569 712 3,236 610 62 4,584 9,954 35,466 15,210 24,589 5,544 7,781 4,898 30,133 12,679 1,654 1,429 628 2,282 3,051 307 1,736 795 AIB UK Group 2020 Total € m 1,090 112 1,964 5,398 8,564 4,233 3,214 7,447 567 47 614 503 € m € m – 23 – 13 36 – 36 36 – – – – 30,649 2,766 7,260 18,601 59,276 36,603 13,692 50,295 3,650 982 4,632 4,349 – – – 13 13 – 13 13 – – – – 2,704 7,360 18,679 58,150 37,420 13,246 50,666 2,134 2,394 4,528 2,956 Gross carrying amount 34,155 15,762 8,220 13 58,150 35,466 15,210 8,564 36 59,276 Analysed by ECL staging Stage 1 Stage 2 Stage 3 POCI Total ECL allowance – statement of financial position Stage 1 Stage 2 Stage 3 POCI Total ECL allowance cover percentage Stage 1 Stage 2 Stage 3 POCI Income statement Net remeasurement of ECL allowance Recoveries of amounts previously written-off Net credit impairment (writeback)/charge 30,135 11,985 2,083 1,834 103 3,361 416 – 6,261 1,324 635 – 13 48,394 29,500 – – – 6,768 2,885 103 2,924 2,858 184 9,364 5,132 714 – 6,709 1,352 503 – 36 45,609 – – – 9,408 4,075 184 34,155 15,762 8,220 13 58,150 35,466 15,210 8,564 36 59,276 120 138 722 31 1,011 % 0.4 6.6 39.4 29.9 € m (15) (69) (84) 79 465 75 – 619 % 0.7 13.8 18.2 – € m (131) (2) (133) 37 97 121 – 255 % 0.6 7.4 19.0 – € m (12) (4) (16) – – – – – % – – – – € m – – – % – 236 700 918 31 1,885 % 0.5 10.3 31.8 29.9 € m (158) (75) (233) 136 209 1,044 69 1,458 % 0.5 7.1 36.5 37.5 € m 545 (67) 478 90 523 144 – 757 % 1.0 10.2 20.2 – € m 740 – 740 55 113 127 – 295 % 0.8 8.4 25.1 – € m 208 (5) 203 % % % % (0.40) 1.33 4.65 2.31 – – – – – % – – – – € m – – – % – 281 845 1,315 69 2,510 % 0.6 9.0 32.3 37.5 € m 1,493 (72) 1,421 % 2.34 Net credit impairment (writeback)/charge on average loans (0.24) (0.87) (0.19) % % % (1)Further analysis of internal credit grade profile by ECL staging is set out on pages 110 and 111. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 107 2.1 Credit risk – Credit profile of the loan portfolio The following table analyses loans and advances to customers at FVTPL by segment and internal credit ratings at 31 December 2021 and 2020: FVTPL Carrying amount Property and construction Total Analysed by internal credit ratings Strong Satisfactory Total strong/satisfactory Total criticised Non-performing Total Retail Banking € m Capital Markets € m AIB UK Group € m € m – – – – – – – – 243 243 – 74 74 – 169 243 – – – – – – – – – – – – – – – – 2021 Total € m 243 243 – 74 74 – 169 243 Retail Banking € m Capital Markets € m – – 75 75 – – – – – – 75 – 75 – – 75 AIB UK Group € m € m – – – – – – – – – – – – – – – – 2020 Total € m 75 75 75 – 75 – – 75 Gross loans and advances to customers Total gross loans and advances to customers reduced by € 1.0 billion in the year to 31 December 2021. Of the total portfolio of € 58.4 billion, € 58.2 billion is measured at amortised cost with the remaining € 0.2 billion being measured at fair value through profit or loss. The reduction in the year was largely due to the sales of non-performing mortgage portfolios completed in the year which resulted in a € 1.0 billion reduction in non-performing loans. Overall, from a segment perspective, Retail Banking and AIB UK decreased by € 1.3 billion and € 0.4 billion respectively. The reduction in AIB UK was primarily due to the Group’s decision to exit the SME market in Great Britain. Capital Markets experienced a strong performance in new lending, particularly in the final quarter of 2021 as advances increased by € 0.7 billion in the year. The level of new lending activity in 2021 of € 10.4 billion continues to be impacted by the COVID-19 pandemic. New lending activity remains lower than pre-pandemic levels (2019: € 12.3 billion), however, there was a € 1.2 billion increase versus last year (2020: € 9.2 billion). The increase in new lending was driven by Capital Markets which increased by € 1.0 billion in the year with strong demand experienced in the property and energy sectors. Retail Banking new lending increased € 0.4 billion in the year due to new mortgage lending, however, this was offset by AIB UK which experienced a € 0.2 billion reduction in new lending activity due to reduced lending in key sectors classified as high risk due to the COVID-19 pandemic. Of the total loans to customers of € 58.4 billion, € 50.8 billion or 87% are rated as either ‘strong’ or ‘satisfactory’ which is an increase of € 0.4 billion (2020: € 50.4 billion or 85%), primarily evidenced within Capital Markets. The ‘criticised’ classification includes ‘criticised watch’ of € 2.1 billion and ‘criticised recovery’ of € 2.4 billion, the total of which has decreased by € 0.1 billion in the year. The ‘criticised recovery’ portfolio increased by € 1.4 billion in the year which was predominately driven by increased levels of customers in receipt of forbearance arrangements migrating from ‘criticised watch’. The total performing book has increased by € 0.3 billion to € 55.3 billion or 95% of gross loans and advances to customers (2020: € 55.0 billion or 93%). Despite the ongoing impact regarding the COVID-19 pandemic, the credit quality of the portfolio has improved in the year. Stage 2 loans have decreased by € 2.6 billion to € 6.8 billion as Stage 1 loans increased by € 2.8 billion to € 48.4 billion. The reduction in Stage 2 loans was driven by the non-property portfolio which decreased by € 1.3 billion, while the property and mortgage portfolios reduced by € 0.7 billion and € 0.5 billion respectively. Redemptions/repayments net of interest credited accounted for € 2.2 billion and net stage transfers from Stage 2 to Stage 1 resulted in a € 0.2 billion reduction. Stage 3 loans have decreased by € 1.2 billion to € 2.9 billion. The decrease was primarily due to the sales of non-performing mortgage portfolios completed in the year which accounted for € 1.0 billion. Net transfers to Stage 3 accounted for € 0.6 billion and were offset by redemptions/repayments net of interest credited of € 0.7 billion. Transfers to Stage 3 in the year predominately related to the non-property portfolio (€ 0.6 billion) as a result of cases in this sector directly impacted by COVID-19. The characteristics of each stage including the Group’s approach to identifying significant increase in credit risk are outlined on page 90. This incorporates additional forward looking information including the Group’s macroeconomic forecasts in addition to the quantitative and qualitative information utilised in determining the internal credit ratings. 108 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Credit profile of the loan portfolio Non-performing loans The table below sets out the Group’s non-performing loans and advances to customers by asset class and by time in default at 31 December 2021: Non-performing loans At amortised cost At FVTPL Total non-performing loans and advances to customers Non-performing loans as a % of total loans and advances Residential mortgages € m Other personal € m Property and construction € m Non-property business € m 991 – 991 247 – 247 628 169 797 1,090 – 1,090 5.8% 2021 Total € m 2,956 169 3,125 5.4% to customers 3.4% 9.1% 10.5% ECL allowance as a % of total loans and advances to customers carried at amortised cost 30% 64% 28% 29% 32% Split of non-performing loans and advances by time in default Legacy/Pre 31 December 2018 Non Legacy/Post 31 December 2018 499 492 991 71 176 247 161 636 797 151 939 1,090 Non-performing loans Total non-performing loans and advances to customers Non-performing loans as a % of total loans and advances to customers ECL allowance as a % of total loans and advances to customers carried at amortised cost Residential mortgages € m 2,156 Other personal € m 234 Property and construction € m Non-property business € m 955 1,004 7.0% 34% 8.5% 61% 13.2% 22% 5.4% 32% 882 2,243 3,125 2020 Total € m 4,349 7.3% 32% Total Group non-performing loans have decreased by € 1.2 billion or 28% to € 3.1 billion in the year (2020: € 4.3 billion). The decrease reflects the sales of non-performing mortgage portfolios completed in the year of € 1.0 billion and other net underlying decreases of € 0.2 billion to non-performing loans. The total Group non-performing loans portfolio consists of € 2.9 billion in loans and advances to customers measured at amortised cost together with € 0.2 billion of loans measured at FVTPL. The ECL allowance cover rate on non-performing loans (at amortised cost) has remained at 32% at 31 December 2021 (2020: 32%). Non-performing loans as a percentage of total loans and advances to customers is 5.4% compared to 7.3% at 31 December 2020. Exposures that entered into default prior to 31 December 2018 amount to € 0.9 billion or 1.5% of total loans and advances to customers and are classified as legacy. These balances relate to exposures which may form part of alternative recovery strategies including future loan sales. Exposures that have defaulted after 31 December 2018 amount to € 2.2 billion or 3.8% of total loans and advances to customers and are classified as non-legacy. These exposures were largely impacted by COVID-19 and spread across all asset classes. The non-property portfolio (€ 0.9 billion) includes sectors most significantly impacted by COVID-19 restrictions. The ECL allowance reflects stronger credit underwriting standards and asset valuations in addition to a higher propensity to cure, particularly as the macroeconomic environment improves post COVID-19. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 109 2.1 Credit risk – Credit profile of the loan portfolio ECL allowance The ECL allowance on loans and advances to customers has decreased by € 0.6 billion to € 1.9 billion in the year. The decrease was predominately in Stage 3 which reduced by € 0.4 billion due to the sales of non-performing mortgage portfolios and net remeasurements within stage. The total ECL cover rate has decreased from 4.2% at 31 December 2020 to 3.2% at 31 December 2021. Income statement There was a € 233 million net credit impairment writeback in the year to 31 December 2021 which comprised a net remeasurement of ECL allowance writeback of € 158 million and recoveries of amounts previously written-off of € 75 million (2020: € 1,421 million charge comprising € 1,493 million charge offset by € 72 million of recoveries). The key drivers of the ECL writeback in the year were improvements in credit quality and stage transfers, along with improvements in the macroeconomic scenarios and weightings. These writebacks were partially offset by an increase in post model adjustments in the second half of the year relating to the Group’s NPE reduction strategy and the Group’s decision to maintain a cautious ECL approach in specific sectors where evidence of latent risk remains. There were three components which contributed to the net remeasurement of ECL allowance writeback of € 158 million. There was a € 161 million writeback comprising of a € 240 million ECL writeback occurring within stage driven by improvements in credit quality, offset by a charge of € 79 million due to net stage movements. Updated macroeconomic scenarios and weightings applied during 2021 resulted in a € 132 million writeback, which was evident across all asset classes due to improvements in the macroeconomic outlook. Post model adjustments resulted in a net € 135 million ECL charge. The updated post model adjustments take into consideration the broadening of the portfolio in scope as part of the Group’s NPE reduction strategy which may form part of future loan sales. In addition, following improvements in the macroeconomic scenarios and weightings, post model adjustments relating to COVID-19 have been updated to retain the ECL allowance where appropriate in order to protect against latent risk for exposures in high risk sectors as government supports are withdrawn. Further details are outlined under the management judgements section on pages 100 and 101. Further details on the ECL allowance movements are outlined on pages 132 to 136. Recoveries of amounts previously written-off of € 75 million (2020: € 72 million) included € 50 million recoveries (2020: € 56 million) which reflects cash recoveries against legacy non-performing exposures in line with the Group’s resolution strategies. 110 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Credit profile of the loan portfolio Internal credit grade profile by ECL staging The table below analyses the internal credit grading profile by ECL staging for loans and advances to customers at 31 December 2021 Gross carrying amount 48,394 6,768 and 2020: Amortised cost Total Strong Satisfactory Total strong/satisfactory Criticised watch Criticised recovery Total criticised Non-performing ECL allowance Carrying amount Analysis by asset class Residential mortgages Strong Satisfactory Total strong/satisfactory Criticised watch Criticised recovery Total criticised Non-performing Gross carrying amount ECL allowance Carrying amount Other personal Strong Satisfactory Total strong/satisfactory Criticised watch Criticised recovery Total criticised Non-performing Gross carrying amount ECL allowance Carrying amount Property and construction Strong Satisfactory Total strong/satisfactory Criticised watch Criticised recovery Total criticised Non-performing Gross carrying amount ECL allowance Carrying amount Stage 1 Stage 2 Stage 3 € m € m € m POCI € m 2021* Total € m Stage 1 € m Stage 2 € m Stage 3 € m POCI € m 36,521 11,023 47,544 755 93 848 2 895 2,220 3,115 1,377 2,276 3,653 – – – – – – – 2,885 2,885 4 3 7 2 25 27 69 37,420 13,246 50,666 2,134 2,394 4,528 2,956 35,341 9,307 44,648 834 27 861 100 1,257 4,384 5,641 2,814 953 3,767 – 103 58,150 45,609 9,408 – – – – – – 5 1 6 2 2 4 4,075 4,075 174 184 (236) (700) (918) (31) (1,885) (281) (845) (1,315) (69) (2,510) 48,158 6,068 1,967 72 56,265 45,328 8,563 2,760 115 56,766 2020* Total € m 36,603 13,692 50,295 3,650 982 4,632 4,349 59,276 22,071 4,464 26,535 395 6 401 1 306 192 498 549 399 948 – 26,937 1,446 (34) (41) 26,903 1,405 1,259 913 2,172 65 1 66 – 2,238 (30) 2,208 3,948 1,261 5,209 58 79 137 – 34 89 123 74 22 96 – 219 (33) 186 413 613 1,026 143 217 360 – 5,346 1,386 (50) (91) 5,296 1,295 – – – – – – 921 921 (276) 645 – – – – – – 247 247 (159) 88 – – – – – – 628 628 (172) 456 4 3 7 2 25 27 69 22,381 4,659 27,040 946 430 1,376 991 23,478 2,654 26,132 395 6 318 574 892 602 456 401 1,058 2 – 103 29,407 26,535 1,950 – – – – – – 1,980 1,980 (39) (73) (662) 5 1 6 2 2 4 174 184 (69) 23,801 3,229 27,030 999 464 1,463 2,156 30,649 (843) (31) 72 (382) 29,025 – – – – – – – – – – – – – – – – – – – – 1,293 1,002 2,295 139 23 162 247 2,704 (222) 2,482 4,361 1,874 6,235 201 296 497 628 7,360 (313) 7,047 26,496 1,877 1,318 115 29,806 1,243 885 2,128 70 2 72 1 2,201 (41) 2,160 2,981 1,175 4,156 71 2 73 90 51 154 205 84 43 127 – 332 (51) 281 757 924 1,681 317 78 395 – 4,319 2,076 (75) (133) 4,244 1,943 – – – – – – 233 233 (142) 91 – – – – – – 865 865 (188) 677 – – – – – – – – – – – – – – – – – – – – 1,294 1,039 2,333 154 45 199 234 2,766 (234) 2,532 3,738 2,099 5,837 388 80 468 955 7,260 (396) 6,864 *Forms an integral part of the audited financial statements AIB Group plc Annual Financial Report 2021 Risk Management 111 1 2 3 4 5 6 2020* Total € m 7,770 7,325 15,095 2,109 393 2,502 1,004 18,601 (1,037) 17,564 2021* Total € m 9,385 5,711 Stage 1 € m Stage 2 € m Stage 3 € m POCI € m 7,639 4,593 15,096 12,232 848 1,645 2,493 1,090 298 17 315 7 131 2,732 2,863 1,811 376 2,187 – 18,679 12,554 5,050 (968) (126) (588) 17,711 12,428 4,462 – – – – – – 997 997 (323) 674 – – – – – – – – – – POCI € m – – – – – – – – – – 2.1 Credit risk – Credit profile of the loan portfolio Internal credit grade profile by ECL staging (continued) Stage 1 Stage 2 Stage 3 € m € m € m Non-property business Strong Satisfactory Total strong/satisfactory Criticised watch Criticised recovery Total criticised Non-performing Gross carrying amount ECL allowance Carrying amount 9,243 4,385 13,628 237 7 244 1 142 1,326 1,468 611 1,638 2,249 – 13,873 3,717 (122) (535) 13,751 3,182 – – – – – – 1,089 1,089 (311) 778 *Forms an integral part of the audited financial statements 112 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis Loans and advances to customers – Residential mortgages Residential mortgages amounted to € 29.4 billion at 31 December 2021, with the majority (96%) relating to residential mortgages in the Republic of Ireland and the remainder relating to the United Kingdom. This compares to € 30.6 billion at 31 December 2020, of which 96% related to residential mortgages in the Republic of Ireland. The split of the residential mortgage portfolio was owner-occupier € 27.6 billion and buy-to-let € 1.8 billion (2020: owner-occupier € 28.5 billion and buy-to-let € 2.1 billion). Income statement During 2021, there was a net credit impairment writeback of € 80 million to the income statement, compared to a € 306 million charge in 2020. This was driven by a net remeasurement of ECL allowance writeback of € 55 million and by recoveries of previously written-off loans of € 25 million. There were three components which contributed to the net remeasurement of ECL allowance writeback of € 55 million. There was a € 40 million writeback comprising of a € 50 million ECL writeback occurring within stage due to improved credit quality and a charge of € 10 million due to net stage movements. Updated macroeconomic scenarios and weightings applied during 2021 resulted in a writeback of € 59 million. Post model adjustments impacting the residential mortgage portfolio were updated to take into consideration the broadening of the portfolio in scope as part of the Group’s NPE reduction strategy which may form part of future loan sales, which is the primary reason for a € 44 million increase in ECL charge due to post model adjustments. Further details are outlined under the management judgements section on pages 100 to 101. At 31 December 2021, the ECL allowance for the Group’s residential mortgages portfolio totalled € 0.4 billion, or 1.3% total cover rate (2020: € 0.8 billion and 2.8%). Residential mortgages – page 113 – Residential mortgage portfolio at amortised cost by segment, internal credit ratings and ECL staging Republic of Ireland residential mortgages – pages 114 to 118 – By ECL staging – 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. AIB Group plc Annual Financial Report 2021 Risk Management 113 2.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis Loans and advances to customers – Residential mortgages (continued) The following table analyses the residential mortgage portfolio at amortised cost by segment, internal credit ratings and ECL staging at AIB UK Group 2021* Total AIB UK Group 2020* Total € m € m € m € m 1 2 3 4 5 6 31 December 2021 and 2020: Gross carrying amount Owner occupier Buy-to-let Total Analysed by internal credit ratings Strong Satisfactory Total strong/satisfactory Criticised watch Criticised recovery Total criticised Non-performing Retail Banking € m Capital Markets € m 26,181 1,563 27,744 21,337 4,165 25,502 889 415 1,304 938 429 119 548 352 175 527 12 5 17 4 € m 1,038 77 1,115 692 319 1,011 45 10 55 49 Gross carrying amount 27,744 548 1,115 Analysed by ECL staging Stage 1 Stage 2 Stage 3 POCI Total ECL allowance – statement of financial position Stage 1 Stage 2 Stage 3 POCI Total ECL allowance cover percentage Stage 1 Stage 2 Stage 3 POCI 25,393 1,380 868 103 511 33 4 – 1,033 33 49 – 27,744 548 1,115 34 40 270 31 375 % 0.1 2.9 31.1 29.9 – 1 – – 1 % – 1.8 – – – – 6 – 6 % – – 10.9 – – – – – – – – – – – – – – – – – – – – – – % – – – – Income statement € m € m € m € m € m Net remeasurement of ECL allowance Recoveries of amounts previously written-off Net credit impairment (writeback)/charge (42) (24) (66) % (5) – (5) % (8) (1) (9) % Net credit impairment (writeback)/charge on average loans (0.24) (0.96) (0.76) – – – % – *Forms an integral part of the audited financial statements Retail Banking € m Capital Markets € m 27,648 1,759 29,407 27,051 1,898 28,949 22,381 4,659 27,040 946 430 1,376 991 22,648 2,856 25,504 928 443 1,371 2,074 452 158 610 545 43 588 7 10 17 5 € m 1,005 85 1,090 608 330 938 64 11 75 77 29,407 28,949 610 1,090 26,937 1,446 921 103 25,043 1,824 1,898 184 534 71 5 – 958 55 77 – 29,407 28,949 610 1,090 34 66 641 69 810 % 0.1 3.6 33.8 37.5 € m 322 (31) 291 34 41 276 31 382 % 0.1 2.8 29.9 29.9 (55) (25) (80) % 1 5 – – 6 % 0.1 6.8 – – 4 2 21 – 27 % 0.4 4.9 26.6 – € m € m € m 4 – 4 13 (2) 11 – – – % % % % % (0.27) 1.00 0.64 0.95 – 0.99 – – – – – – – – – – – – – – – – – – – – – % – – – – 28,508 2,141 30,649 23,801 3,229 27,030 999 464 1,463 2,156 30,649 26,535 1,950 1,980 184 30,649 39 73 662 69 843 % 0.1 3.7 33.4 37.5 € m 339 (33) 306 114 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 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 at amortised cost by ECL staging at 31 December 2021 and 2020: Gross carrying amount Analysed as to ECL staging Stage 1 Stage 2 Stage 3 POCI Total ECL allowance – statement of financial position Stage 1 Stage 2 Stage 3 POCI Total Republic of Ireland residential mortgages at amortised cost ECL allowance cover percentage Stage 1 Stage 2 Stage 3 POCI Income statement Net remeasurement of ECL allowance Recoveries of amounts previously written-off Net credit impairment (writeback)/charge Owner- occupier € m 26,610 24,572 1,226 714 98 Buy-to-let € m 1,682 1,332 187 158 5 2021* Total € m 28,292 25,904 1,413 872 103 Owner- occupier € m 27,503 Buy-to-let € m 2,056 2020* Total € m 29,559 24,082 1,495 25,577 1,611 1,631 179 284 272 5 1,895 1,903 184 26,610 1,682 28,292 27,503 2,056 29,559 32 35 203 28 298 2 6 67 3 78 34 41 270 31 376 29 51 553 66 699 6 20 88 3 117 35 71 641 69 816 26,312 1,604 27,916 26,804 1,939 28,743 % 0.1 2.8 28.4 28.8 € m (37) (16) (53) % 0.1 3.2 42.6 51.7 € m (10) (8) (18) % 0.1 2.9 30.9 29.9 € m (47) (24) (71) % % % % 0.1 3.1 33.9 37.0 € m 284 (26) 258 % % 0.4 7.1 32.5 56.0 € m 42 (5) 37 % % 0.1 3.7 33.7 37.5 € m 326 (31) 295 % Net credit impairment (writeback)/charge on average loans (0.20) (0.98) (0.25) 0.93 1.67 0.99 *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 115 2.1 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 Ireland amounted to € 28.3 billion at 31 December 2021 compared to € 29.6 billion at 31 December 2020. The decrease in the portfolio was primarily due to the sale of non-performing mortgage portfolios of € 1.0 billion and loan repayments exceeding new lending. Total drawdowns during the year were € 3.0 billion (2020: € 2.4 billion), of which 99% was to owner-occupiers, whilst the weighted average indexed loan-to-value for new residential mortgages was 67% (2020: 69%). The split of the Irish residential mortgage portfolio is 94% owner-occupier and 6% buy-to-let and comprises 21% tracker rate, 39% variable rate and 40% fixed rate mortgages. Non-performing loans decreased from € 2.1 billion at 31 December 2020 to € 0.9 billion at 31 December 2021, primarily due to the sale of non-performing mortgage portfolios completed in the year. Income statement There was a net credit impairment writeback of € 71 million to the income statement in the year compared to a net credit impairment charge of € 295 million in 2020. The net remeasurement of ECL allowance writeback of € 47 million was driven by improvements in the grade profiles within stage. ECL writebacks from improvements in the revised macroeconomic assumptions were partially offset by ECL charges associated with post model adjustments. In addition, the Group also recovered € 24 million on loans previously written-off. The ECL allowance provision cover level at 31 December 2021 for the Irish residential mortgage portfolio is 1.3% (2020: 2.8%), due to the sale of non-performing mortgage portfolios. For the Stage 3 element of the Irish residential mortgage portfolio, € 0.3 billion of ECLs are held providing Stage 3 cover of 31% (2020: € 0.6 billion and 34% respectively). Residential mortgage arrears Total loans in arrears (including non-performing loans) by value decreased by 58% during the year, due to the sale of non-performing mortgage portfolios. Total value of arrears in the owner-occupier and buy-to-let portfolios decreased by 60% and 45% respectively. The number of loans in arrears (based on number of accounts) greater than 90 days was 2.2% at 31 December 2021 and remains below the industry average of 5.6%(1). For the owner-occupier portfolio, the number of loans in arrears greater than 90 days at 1.9% were below the industry average of 4.7%(1). For the buy-to-let portfolio, loans in arrears greater than 90 days at 6.0% were below the industry average of 12.4%(1). (1) Source: Central Bank of Ireland (“CBI”) Residential Mortgage Arrears and Repossessions Statistics as at 30 September 2021, based on numbers of accounts. Forbearance Irish residential mortgages subject to forbearance measures decreased by € 0.9 billion from € 2.1 billion at 31 December 2020 to € 1.2 billion at 31 December 2021. The decrease in the forbearance portfolio was due to the sales of non-performing mortgage portfolios. Details of forbearance measures are set out on pages 142 to 144. 116 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis Loans and advances to customers – Republic of Ireland residential mortgages (continued) Actual and weighted average indexed loan-to-value ratios of Republic of Ireland residential mortgages. The following table profiles the Republic of Ireland residential mortgage portfolio by the indexed loan-to-value ratios and the weighted average loan-to-value ratios at 31 December 2021 and 2020: At amortised cost Stage 1 Stage 2 Stage 3 € m € m 24,771 1,322 1,058 28 42 68 9 13 25,899 1,412 5 1 25,904 1,413 € m 739 97 19 12 867 5 872 2021* POCI Overall total € m € m 86 10 – – 96 7 26,918 1,233 56 67 28,274 18 At amortised cost Stage 1 Stage 2 Stage 3 POCI € m € m € m € m 2020* Overall total € m 21,567 1,559 1,461 124 24,711 3,853 275 251 42 4,421 103 50 39 21 99 78 7 2 248 151 25,573 1,894 1,889 175 29,531 4 1 14 9 28 103 28,292 25,577 1,895 1,903 184 29,559 23,460 1,158 632 1,052 24 35 56 4 8 24,571 1,226 1 – 24,572 1,226 60 14 6 712 2 714 85 10 – – 95 3 98 25,335 1,178 42 49 26,604 6 26,610 20,183 1,325 1,282 123 22,913 3,773 247 195 42 4,257 89 35 28 11 86 61 7 1 210 108 24,080 1,611 1,624 173 27,488 2 – 7 6 15 24,082 1,611 1,631 179 27,503 Less than 80% 81-100% 100-120% Greater than 120% Total with LTVs Unsecured Total Of which: Owner occupier Less than 80% 81-100% 100-120% Greater than 120% Total with LTVs Unsecured Total The weighted average indexed loan-to-value of the stock of residential mortgages at 31 December 2021 was 50% (2020: 57%), new residential mortgages issued during the year was 67% (2020: 69%) and Stage 3 residential mortgages was 54% (2020: 61%). *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 117 2.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis Republic of Ireland residential mortgages – aged analysis The following table provides an age profile of the Republic of Ireland residential mortgage portfolio by ECL staging at 31 December 2021 and 2020: 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 Carrying value Of which: Owner-occupier Not past due 1 - 30 days 31 - 60 days 61 - 90 days 91 - 180 days 181 - 365 days Over 365 days Total At amortised cost Stage 1 Stage 2 Stage 3 € m € m € m 2021 Total € m POCI € m At amortised cost Stage 1 € m Stage 2 € m Stage 3 € m POCI € m 2020 Total € m 25,897 1,363 440 92 27,792 25,575 1,852 779 155 28,361 7 – – – – – 27 18 5 – – – 25,904 1,413 (34) (41) 25,870 1,372 10 13 7 36 65 301 872 (270) 602 – 1 1 2 2 5 44 32 13 38 67 306 2 – – – – – 21 19 3 – – – 22 27 8 39 114 914 1 2 – 1 4 21 46 48 11 40 118 935 103 28,292 25,577 1,895 1,903 184 29,559 (31) (376) (35) (71) (641) (69) (816) 72 27,916 25,542 1,824 1,262 115 28,743 24,568 1,182 365 89 26,204 24,080 1,574 674 151 26,479 4 – – – – – 22 17 5 – – – 24,572 1,226 9 12 7 34 56 231 714 – 1 1 2 1 4 35 30 13 36 57 235 2 – – – – – 17 17 3 – – – 16 26 6 35 83 1 2 – 1 4 36 45 9 36 87 791 20 811 98 26,610 24,082 1,611 1,631 179 27,503 118 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis Republic of Ireland residential mortgages – properties in possession(1) The Group seeks to avoid repossession through working with customers. However, in situations where an agreement cannot be reached, the Group proceeds with the repossession of the property or the appointment of a receiver. The Group uses 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 2021 and 2020 is set out below: Owner-occupier Buy-to-let Total Stock 103 12 115 2021 Balance outstanding € m 18 5 23 Stock 432 16 448 2020 Balance outstanding € m 100 3 103 (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 333 properties in 2021 (2020: 67 properties). This decrease relates to the disposal of 66 properties (2020: 93 properties) which were slightly offset by the addition of 15 properties (2020: 39 properties), the majority of which were voluntary surrenders or abandonments. The remaining reductions were primarily due to the inclusion of properties in the sales of non-performing mortgage portfolios which concluded during 2021. The disposal of 66 residential properties in the Republic of Ireland resulted in a total loss on disposal of € 3 million at 31 December 2021 (before ECL allowance) and compares to 31 December 2020 when 93 residential properties were disposed of resulting in a total loss of € 7 million. COVID-19 has continued to impact the closing of sales throughout 2021. 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 2021 and 2020: Owner-occupier Buy-to-let Total Owner-occupier Buy-to-let Total (1)Before ECL allowance. Number of disposals Outstanding balance at repossession date € m 64 2 66 13 – 13 Gross sales proceeds on disposal Costs to sell 2021 (1) Loss on sale € m 12 – 12 € m € m 2 – 2 3 – 3 Number of disposals 90 3 93 Outstanding balance at repossession date € m 21 1 22 Gross sales proceeds on disposal € m 16 1 17 Costs to sell 2020 (1) Loss on sale € m € m 2 – 2 7 – 7 AIB Group plc Annual Financial Report 2021 Risk Management 119 2.1 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 at amortised cost by segment, internal credit ratings and ECL staging at 31 December 2021 and 2020: Gross carrying amount Credit cards Loans/overdrafts Total Analysed by internal credit ratings Strong Satisfactory Total strong/satisfactory Criticised watch Criticised recovery Total criticised Non-performing Retail Banking € m Capital Markets € m AIB UK Group € m € m 590 1,960 2,550 1,208 944 2,152 135 23 158 240 6 57 63 16 42 58 2 – 2 3 24 67 91 69 16 85 2 – 2 4 2021* Total € m 620 2,084 2,704 1,293 1,002 2,295 139 23 162 247 Retail Banking € m Capital Markets € m 558 2,011 2,569 1,179 973 2,152 149 40 189 228 6 56 62 35 19 54 2 4 6 2 AIB UK Group € m 22 90 112 80 24 104 3 1 4 4 € m – 23 23 – 23 23 – – – – 2020* Total € m 586 2,180 2,766 1,294 1,039 2,333 154 45 199 234 2,704 2,569 62 112 23 2,766 1 2 3 4 5 6 Gross carrying amount 2,550 63 91 Analysed by ECL staging Stage 1 Stage 2 Stage 3 POCI Total ECL allowance – statement of financial position Stage 1 Stage 2 Stage 3 POCI Total ECL allowance cover percentage Stage 1 Stage 2 Stage 3 POCI Income statement Net remeasurement of ECL allowance Recoveries of amounts previously written-off Net credit impairment (writeback)/charge 2,102 208 240 – 2,550 30 33 156 – 219 % 1.4 16.0 65.1 – € m 12 (15) (3) % 54 6 3 – 63 – – 1 – 1 % – – 82 5 4 – 91 – – 2 – 2 % – – 21.7 – 42.1 – (2) – (2) % – – – % Net credit impairment (writeback)/charge on average loans (0.10) (3.13) (0.16) *Forms an integral part of the audited financial statements 2,238 2,032 219 247 – 310 227 – 2,704 2,569 30 33 159 – 222 % 1.3 15.4 64.2 – € m 10 (15) (5) 40 50 139 – 229 % 1.9 16.0 61.2 – € m 91 (12) 79 47 13 2 – 62 – 1 1 – 2 % – 10.5 53.1 – 1 – 1 99 23 2,201 9 4 – – – – 332 233 – 112 23 2,766 41 51 142 – 234 % 1.8 15.4 60.9 – € m 92 (12) 80 1 – 2 – 3 % 1.0 – 44.7 – – – – – – % – – – – – – – – – – % – % % % (0.16) 3.05 1.42 % % – 2.87 € m € m € m € m € m € m – – – – – – – – – – – – – – – – – – – – – % – – – – – – – % – 120 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis Loans and advances to customers – Other personal (continued) At 31 December 2021, the other personal lending portfolio of € 2.7 billion comprises € 2.1 billion in loans and overdrafts and € 0.6 billion in credit card facilities (2020: € 2.8 billion, € 2.2 billion and € 0.6 billion respectively). Despite the impact of COVID-19, the credit quality of the portfolio improved slightly throughout the year, with 15% categorised as less than satisfactory, of which defaulted loans amounted to € 0.2 billion (2020: 16% and € 0.2 billion). New lending totalled € 0.9 billion for the year to 31 December 2021 (2020: € 0.9 billion). Demand for personal loans, which accounts for the largest portion of the portfolio, increased in the final quarter of 2021 compared to the same period in 2020 as Government COVID-19 protection measures were comparatively less restrictive to consumer activity. Stage 3 loans, predominately in Retail Banking increased by € 14 million in 2021, primarily due to COVID-19. At 31 December 2021, the ECL allowance cover was 8% with Stage 3 cover at 64% (2020: 8% and 61% respectively). Income statement There was a net credit impairment writeback of € 5 million to the income statement in the year to 31 December 2021 compared to a € 80 million charge for the year to 31 December 2020. The writeback was mainly due to recoveries of amounts previously written-off which amounted to € 15 million. This was offset by net stage transfers and remeasurements within stage which resulted in a € 13 million charge. ECL writebacks from improvements in the revised macroeconomic assumptions were partially offset due to an ECL charge in post model adjustments regarding potential latent risk due to COVID-19 which resulted in a net writeback of € 3 million. AIB Group plc Annual Financial Report 2021 Risk Management 121 2.1 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 at amortised cost by segment, internal credit ratings and ECL staging at 31 December 2021 and 2020: Retail Banking € m Capital Markets € m AIB UK Group 2021* Total € m € m € m Retail Banking € m Capital Markets € m AIB UK Group 2020* Total € m € m € m 1 2 3 4 5 6 Gross carrying amount Investment: Commercial investment Residential investment Land and development: Commercial development Residential development Contractors Housing associations Total Analysed by internal credit ratings Strong Satisfactory Total strong/satisfactory Criticised watch Criticised recovery Total criticised Non-performing Gross carrying amount Analysed by ECL staging Stage 1 Stage 2 Stage 3 POCI Total ECL allowance – statement of financial position Stage 1 Stage 2 Stage 3 POCI Total ECL allowance cover percentage Stage 1 Stage 2 Stage 3 POCI Income statement Net remeasurement of ECL allowance Recoveries of amounts previously written-off Net credit impairment (writeback)/charge 281 89 370 106 50 156 110 – 636 113 213 326 58 25 83 227 636 312 97 227 – 636 5 10 107 – 122 % 1.8 10.0 47.3 – € m 3 (18) (15) 2,907 724 614 676 3,631 1,290 377 606 983 78 108 34 124 158 115 361 4,800 1,924 3,187 1,061 994 667 4,181 1,728 98 246 344 275 45 25 70 126 4,800 1,924 3,358 1,167 275 – 1,676 122 126 – 4,800 1,924 33 77 39 – 149 % 1.0 6.6 14.4 – € m (52) – (52) 12 4 26 – 42 % 0.7 3.8 20.7 – (4) (1) (5) % – – – – – – – – – – – – – – – – – – – – – – – – – – – % – – – – 3,802 1,489 5,291 517 780 1,297 303 469 7,360 4,361 1,874 6,235 201 296 497 628 7,360 5,346 1,386 628 – 7,360 50 91 172 – 313 % 0.9 6.6 27.5 – (53) (19) (72) % – – – % – 353 127 480 93 51 144 88 – 3,109 633 723 673 3,742 1,396 275 447 722 42 78 37 120 157 119 292 712 4,584 1,964 120 185 305 109 29 138 269 712 315 137 260 – 2,617 1,001 1,125 789 3,742 1,790 240 42 282 560 39 9 48 126 4,584 1,964 2,350 1,755 479 – 1,654 184 126 – 712 4,584 1,964 11 10 35 – 56 % 0.7 5.2 11.2 27.9 – – 13 15 99 – 51 108 54 – 127 213 % 3.9 11.2 38.1 – € m 19 (13) 6 % 2.2 6.2 € m 195 – 195 – – – – – – – – – – – – – – – – – – – – – – – – – – – % – – – – 4,185 1,433 5,618 405 618 1,023 249 370 7,260 3,738 2,099 5,837 388 80 468 955 7,260 4,319 2,076 865 – 7,260 75 133 188 – 396 % 1.7 6.4 21.7 – € m 245 (14) 231 % € m € m € m € m € m 31 (1) 30 % – – – % Net credit impairment (writeback)/charge on average loans (2.31) (1.14) (0.27) *Forms an integral part of the audited financial statements % % % % (1.00) 0.78 4.48 1.43 – 3.20 122 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis Loans and advances to customers – Property and construction (continued) The property and construction portfolio consists of € 7.4 billion in loans and advances to customers measured at amortised cost together with € 0.2 billion of loans measured at FVTPL (total € 7.6 billion). The portfolio measured at amortised cost amounted to 13% of total loans and advances to customers. The portfolio comprised of 72% investment loans (€ 5.3 billion), 18% land and development loans (€ 1.3 billion) and 10% other property and construction loans (€ 0.8 billion). The Capital Markets and AIB UK segments continue to account for the majority of this portfolio at 65% and 26% respectively. The portfolio measured at amortised cost increased by € 0.1 billion in the year as new lending of € 1.8 billion was mainly offset by redemptions/repayments net of interest credited of € 1.6 billion. Increase in new lending was predominately in the Capital Markets segment which increased by € 0.4 billion in the year. At 31 December 2021, € 6.2 billion of the portfolio was in a strong/satisfactory grade, which is an increase of € 0.4 billion in the year. The level of non-performing loans have reduced by € 0.3 billion in the year to € 0.6 billion. However, this reduction mainly reflects two significant customer loans; one which exited default having completed the probation period and a further defaulted customer loan was reclassified as FVTPL in the year following a restructure and changes to the terms and conditions relating to this loan. Property and construction loans measured at FVTPL increased by € 168 million to € 243 million in the year, as a result of the aforementioned significant defaulted customer loan which was reclassified as FVTPL. Income statement There was a net credit impairment writeback of € 72 million to the income statement in the year to 31 December 2021, compared to a € 231 million charge in 2020. This comprises a net remeasurement writeback of € 53 million and recoveries of previously written-off loans of € 19 million. The net remeasurement writeback of € 53 million was driven by net transfers and remeasurements within stage of € 38 million and a further writeback of € 35 million due to improvements in the revised macroeconomic assumptions. These writebacks were partially offset by a € 20 million post model adjustment charge which primarily relates to a cohort of unresolved longer-dated non-performing property loans which have been included in scope for future loan sales. The ECL allowance for the portfolio totalled € 0.3 billion providing ECL allowance cover of 4%. For the Stage 3 portfolio, the ECL allowance cover is 28% (2020: € 0.4 billion, 5% and 22% respectively). Investment Investment property loans amounted to € 5.3 billion at 31 December 2021 (2020: € 5.6 billion) of which € 3.8 billion related to commercial investment. The geographic profile of the investment property portfolio is predominately in the Republic of Ireland (€ 3.4 billion) and the United Kingdom (€ 1.3 billion). Commercial Investment in the retail sector, including shopping centres in particular, have been adversely impacted by COVID-19, with 60% of the Group’s € 1.1 billion exposure to this sector now designated Stage 2 or Stage 3, with an associated ECL of € 0.1 billion. At 31 December 2021, there was a net credit impairment writeback of € 78 million to the income statement on the investment property element of the property and construction portfolio (2020: € 168 million charge). Land and development At 31 December 2021, land and development loans amounted to € 1.3 billion (2020: € 1.0 billion) of which € 1.0 billion related to loans in the Capital Markets segment, € 0.1 billion in the Retail Banking segment and € 0.2 billion in the AIB UK segment. 2021 was a mixed year for the construction sector in Ireland. The first half of 2021 was characterised by limited construction activity due to COVID-19 restrictions on development sites. These restrictions impacted on the delivery of existing development schemes and delayed the commencement of new schemes. In the second half of 2021, all schemes were fully reopened. This coincided with significant demand for residential development which resulted in an increase in new lending as existing borrowers increased their activity to commence new schemes. Challenges facing the sector include increasing construction costs and disruptions to supply chains. The Group is also monitoring broader government policy for residential and commercial development and potential changes in taxation and planning. The income statement net credit impairment charge for the year was € 5 million (2020: € 41 million charge). 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 123 2.1 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 at amortised cost by segment, internal credit ratings and ECL staging at 31 December 2021 and 2020: Gross carrying amount Agriculture Energy Manufacturing Distribution: Hotels Licensed premises Retail/wholesale Other distribution Transport Financial Other services Total Analysed by internal credit ratings Strong Satisfactory Total strong/satisfactory Criticised watch Criticised recovery Total criticised Non-performing Retail Banking € m Capital Markets € m 1,232 21 185 146 179 474 93 892 212 14 669 351 996 2,109 1,136 135 1,040 195 2,506 1,494 359 2,536 3,225 10,351 748 1,566 2,314 307 104 411 500 6,023 2,799 8,822 337 1,058 1,395 134 AIB UK Group € m 94 1,197 248 806 108 233 140 1,287 503 135 1,626 5,090 2,614 1,333 3,947 204 483 687 456 € m – – – – – – – – – 13 – 13 – 13 13 – – – – Retail Banking € m Capital Markets € m 2021* Total € m 1,677 2,214 2,542 2,088 422 1,747 428 4,685 2,209 521 4,831 1,202 17 200 153 185 496 86 920 224 16 657 18,679 3,236 9,385 5,711 15,096 848 1,645 2,493 1,090 642 1,530 2,172 468 116 584 480 AIB UK Group 2020* Total € m 104 1,049 324 891 103 340 147 1,481 421 137 1,882 5,398 2,544 2,071 4,615 461 26 487 296 € m – – – – – – – – – 13 – 13 – 13 13 – – – – € m 1,671 1,815 2,547 2,192 501 1,867 426 4,986 1,829 526 5,227 18,601 7,770 7,325 15,095 2,109 393 2,502 1,004 365 749 2,023 1,148 213 1,031 193 2,585 1,184 360 2,688 9,954 4,584 3,711 8,295 1,180 251 1,431 228 Gross carrying amount 3,225 10,351 5,090 13 18,679 3,236 9,954 5,398 13 18,601 Analysed by ECL staging Stage 1 Stage 2 Stage 3 POCI Total ECL allowance – statement of financial position Stage 1 Stage 2 Stage 3 POCI Total ECL allowance cover percentage Stage 1 Stage 2 Stage 3 POCI Income statement Net remeasurement of ECL allowance Recoveries of amounts previously written-off Net credit impairment (writeback)/charge Net credit impairment (writeback)/charge on average loans 2,328 398 499 – 8,062 2,155 134 – 3,470 1,164 456 – 13 13,873 2,110 – – – 3,717 1,089 – 653 473 – 6,433 3,293 228 – 3,998 1,104 296 – 13 12,554 – – – 5,050 997 – 3,225 10,351 5,090 13 18,679 3,236 9,954 5,398 13 18,601 51 55 189 – 295 % 2.2 13.9 37.9 – € m 12 (12) – % – 46 387 35 – 468 % 0.6 18.0 26.2 – 25 93 87 – 205 % 0.7 7.9 19.2 – – – – – – % – – – – 122 535 311 – 968 % 0.9 14.4 28.6 – € m € m € m € m (72) (2) (74) % – (2) (2) % (0.72) (0.04) – – – % – (60) (16) (76) % 49 78 165 – 292 % 2.3 12.0 34.8 – € m 113 (11) 102 38 409 89 – 536 % 0.6 12.4 39.1 – € m 540 – 540 39 101 69 – 209 % 1.0 9.1 23.3 – € m 164 (2) 162 – – – – – % – – – – € m – – – 126 588 323 – 1,037 % 1.0 11.6 32.4 – € m 817 (13) 804 % % % % % (0.40) 3.12 4.97 3.00 – 4.10 *Forms an integral part of the audited financial statements 124 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 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 includes small and medium enterprises (“SMEs”) which are reliant on the domestic economies in which they operate. In addition to SMEs, the portfolio also includes exposures to larger corporate and institutional borrowers which are impacted by global economic conditions. The largest geographic concentration of the portfolio exposure is to Irish borrowers (48%) with the UK (29%) and USA (12%) being the other main geographic concentrations. The portfolio increased slightly by € 0.1 billion to € 18.7 billion in the year to 31 December 2021 (31 December 2020: € 18.6 billion). The increase was primarily due to new lending of € 4.5 billion (31 December 2020: € 4.5 billion) and foreign exchange adjustments of € 0.6 billion exceeding redemptions/repayments net of interest credited of € 4.8 billion and disposals of € 0.3 billion. The non-property business portfolio amounted to 32% of total Group loans and advances to customers in the year (31 December 2020: 31%). COVID-19 continues to impact the asset quality of the non-property business portfolio. Timing of recovery is dependent on sector specific dynamics. Loans graded as strong/satisfactory were unchanged in the year to 31 December 2021 at 81%. The value of loans graded less than satisfactory (including defaulted loans) increased from € 3.5 billion at 31 December 2020 to € 3.6 billion at 31 December 2021. This was specifically evident in the non-property forbearance portfolio as the criticised recovery category increased by € 1.2 billion to € 1.6 billion at 31 December 2021 (31 December 2020: € 0.4 billion). Interest only and term extensions were the most prominent forbearance solutions availed of by customers. Additional disclosures on the non-property business portfolio are outlined on the following page. The following are the key themes within the main sub-sectors of the non-property business portfolio: – The agriculture sub-sector represents 9% of the portfolio at € 1.7 billion. The sector has proven to be resilient and robust throughout 2021. Demand for credit to support on-farm investment has been strong and above 2020 levels. Increased input costs are being offset by higher output prices, which is expected to continue assuming normalised weather conditions; The energy sub-sector comprises 12% of the portfolio at € 2.2 billion. The increase of € 0.4 billion is driven by new lending to renewable energy initiatives (wind and solar). To date, this sub-sector is proving very resilient to COVID-19; The manufacturing sub-sector comprises 14% of the portfolio at € 2.6 billion. Food manufacturing continued to adapt effectively to mitigate the impact of COVID-19 and the sector delivered strong levels of profitability with strong liquidity evident. Non-food manufacturing had a positive year with increasing production and employment levels. However, challenges exist for manufacturing due to inflation, labour (availability and cost) and supply chain pressures; The hotels sub-sector comprises 11% of the portfolio at € 2.1 billion. This sector has been severely impacted by Government measures to contain COVID-19. Hotels were either closed or operating at significantly reduced occupancy for a significant proportion of 2020 and the first half of 2021. Hotels catering to domestic leisure visitors experienced strong trade during the summer months. However, hotels reliant on international tourism, conferencing and corporate bookings did not fare as strongly. The emergence of new variants towards the end of the year has impacted trade again and the sector is also facing into increasing cost challenges. A return to pre-COVID-19 occupancy levels is expected to be slow, particularly for those most reliant on international tourism/corporate sector; The licensed premises sub-sector comprises 2% of the portfolio at € 0.4 billion. This sector has been severely negatively impacted by Government measures to contain COVID-19. Licensed premises were either closed or operating at significantly reduced capacity in Ireland from March 2020 to June 2021. The reopening of the sector in June 2021 generated a relatively strong sector performance, particularly in suburban and regional locations. The emergence of new variants towards the end of the year has impacted trade again. In the UK, restrictions were less severe throughout 2021 but restrictions towards the end of the year impacted the strongest trading quarter. While near term outlook is improving some challenges remain in the sector including staff availability, labour cost and reduced footfall in urban locations; The retail/wholesale sub-sector comprises 9% of the portfolio at € 1.8 billion. There has been a strong recovery in consumer spending following the easing of restrictions. Grocery retail/wholesalers continued to trade well with many businesses experiencing increases in profitability despite increased costs. Non grocery retail continues to face challenges including the transition of ‘bricks and mortar’ to online, rising inflation, staff shortages and reduced footfall, particularly in urban locations; The transport sub-sector comprises 12% of the portfolio at € 2.2 billion and consists primarily of logistic, storage and travel businesses. After initial negative impacts due to COVID-19 and Brexit in 2020, logistics and storage rebounded strongly due to increased demand for logistics and warehousing to deal with increased online retail purchasing. However, cost challenges remain due to border and custom delays, fuel costs and labour (cost and availability). The travel sector continued to be severely impacted by COVID-19 throughout 2021 due to international travel restrictions; The financial sub-sector comprises 3% of the portfolio at € 0.5 billion. This sub-sector is proving resilient to COVID-19 as companies have been able to operate remotely; and The other services sub-sector comprises 26% of the portfolio at € 4.8 billion, which includes businesses such as solicitors, accounting, audit, tax, computer services, research and development, consultancy, hospitals and nursing homes. Performance across this sub-sector has been mixed depending on the impact of COVID-19 on specific sub-sectors throughout 2021. – – – – – – – – AIB Group plc Annual Financial Report 2021 Risk Management 125 2.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis Loans and advances to customers – Non-property business (continued) Income statement There was a net credit impairment writeback of € 76 million to the income statement in the year to 31 December 2021, compared to a € 804 million charge in 2020. This comprises a net remeasurement writeback of € 60 million and recoveries of previously written-off loans of € 16 million. The net remeasurement writeback of € 60 million was driven by net stage transfers and remeasurements within stage which accounted for a € 96 million writeback. In addition, the revised macroeconomic assumptions accounted for a further € 31 million writeback. These writebacks were partially offset by post model adjustments which resulted in a net € 67 million charge primarily relating to the Capital Markets non-property portfolio post model adjustment reflecting potential latent risk in sectors highly impacted by COVID-19 and longer- dated non-performing non-property loans which have also been included in scope for future loan sales as outlined under the management judgements section on pages 100 and 101. The ECL allowance for the portfolio totalled € 1.0 billion providing ECL allowance cover of 5%. For the Stage 3 portfolio, the ECL allowance cover is 29% (2020: € 1.0 billion, 6% and 32% respectively). 1 2 3 4 5 6 126 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Credit profile of the loan portfolio – Asset class analysis Loans and advances to customers – Non-property business (continued) Additional disclosures The following table provides further analyses by industry sector of the non-property business portfolio, by gross carrying amount and ECL allowance at 31 December 2021 and 2020. Given the international profile of the Syndicated & International Finance (“SIF”) business, all exposures within this business unit are reported separately. Agriculture Energy Manufacturing Distribution: Hotels Licensed premises Retail/Wholesale Other distribution Transport Financial Other services Total SIF Total Agriculture Energy Manufacturing Distribution: Hotels Licensed premises Retail/Wholesale Other distribution Transport Financial Other services Total SIF Total Analysed by ECL stage profile Stage 1 Stage 2 Stage 3 € m 1,397 2,054 1,322 119 83 1,171 222 1,595 1,306 264 3,031 € m 188 139 264 1,524 199 184 40 1,947 271 14 497 10,969 3,320 € m 87 2 56 362 140 146 25 673 43 4 210 1,075 Gross carrying amount € m 1,672 2,195 1,642 2,005 422 1,501 287 4,215 1,620 282 3,738 15,364 2,904 397 14 3,315 Analysed by ECL stage profile Stage 1 Stage 2 Stage 3 2021 ECL allowance € m 9 11 8 9 4 17 5 35 7 2 26 98 24 € m 13 19 15 255 34 26 6 321 26 1 42 437 98 535 € m 36 2 15 44 36 53 12 145 25 2 84 309 2 311 € m 58 32 38 308 74 96 23 501 58 5 152 844 124 968 13,873 3,717 1,089 18,679 122 Analysed by ECL stage profile Stage 1 Stage 2 Stage 3 € m 1,183 1,700 1,050 321 113 1,017 200 1,651 878 269 2,948 9,679 2,875 € m 365 47 431 1,573 242 442 69 2,326 379 29 767 4,344 706 12,554 5,050 € m 94 15 71 223 146 143 19 531 69 9 193 982 15 997 Gross carrying amount € m 1,642 1,762 1,552 2,117 501 1,602 288 4,508 1,326 307 3,908 15,005 3,596 18,601 Analysed by ECL stage profile Stage 1 Stage 2 Stage 3 2020 ECL allowance € m 13 10 6 9 6 20 2 37 5 2 30 103 23 126 € m 20 3 29 237 39 51 9 336 18 2 63 471 117 588 € m 32 2 25 40 53 46 12 151 35 4 70 319 4 € m 65 15 60 286 98 117 23 524 58 8 163 893 144 323 1,037 The SIF business unit, which is a specialised lending unit within Capital Markets, are involved in participating in the provision of finance to US and European corporations for mergers, acquisitions, buy-outs and general corporate purposes. The SIF non-property portfolio has reduced by € 0.3 billion to € 3.3 billion at 31 December 2021 (2020: € 3.6 billion). At 31 December 2021, 94% of the SIF lending portfolio is in a strong/satisfactory grade (2020: 96%). 88% of the SIF portfolio is rated by S&P, with 67% rated B+ or above, 18% rated B and 3% rated B- or below. The majority of the loans (70%) are to large borrowers with EBITDA > € 250 million. Exposures are well diversified by name and sector with the top 20 borrowers accounting for 24% of total exposure. 63% of the borrowers in this portfolio are domiciled in the USA, 3% in the UK, and 34% in the Rest of the World (primarily Europe) (2020: 63% in the USA, 3% in the UK and 34% in the Rest of the World (primarily Europe) respectively). The SIF portfolio had a net credit impairment writeback to the income statement in 2021 of € 12 million (2020: € 195 million charge). AIB Group plc Annual Financial Report 2021 Risk Management 127 2.1 Credit risk – Credit profile of the loan portfolio The following tables set out the concentration of credit by industry sector and geography for loans and advances to customers and loan commitments and financial guarantee contracts issued together with the related ECL allowance analysed by the ECL stage profile at 31 December 2021 and 2020: Gross exposures to customers Gross carrying amount Analysed by ECL stage profile At amortised cost 2021 At FVTPL 1 2 3 4 5 6 Loans and advances to customers € m 1,677 2,214 2,542 4,685 2,209 521 4,831 7,360 29,407 2,704 58,150 44,583 8,605 2,232 2,730 Loan commitments and financial guarantees issued € m 614 1,100 1,733 1,308 632 504 2,189 2,365 1,245 2,856 14,546 11,306 2,572 182 486 58,150 14,546 Total Stage 1 Stage 2 Stage 3 POCI Total Total € m € m € m € m € m € m € m 2,291 3,314 4,275 5,993 2,841 1,025 7,020 9,725 30,652 5,560 72,696 55,889 11,177 2,414 3,216 72,696 1,970 3,130 3,821 2,880 2,448 957 6,108 7,571 28,167 4,909 61,961 48,089 8,993 2,196 2,683 223 146 387 2,404 347 65 686 1,483 1,452 393 7,586 5,556 1,486 206 338 98 38 67 709 46 3 226 671 930 258 3,046 – – – – – – – – 103 – 103 2,141 103 698 12 195 – – – 2,291 3,314 4,275 5,993 2,841 1,025 7,020 9,725 30,652 5,560 72,696 55,889 11,177 2,414 3,216 – – – – – – – 243 – – 243 243 – – – 61,961 7,586 3,046 103 72,696 243 Gross carrying amount Analysed by ECL stage profile At amortised cost 2021 Total Stage 1 Stage 2 Stage 3 POCI Total Loans and advances to customers € m 59 32 53 557 67 25 175 313 382 222 1,885 1,471 266 50 98 1,885 Loan commitments and financial guarantees issued € m 4 1 9 20 3 2 13 20 – 7 79 62 13 3 1 79 € m € m € m € m € m € m 63 33 62 577 70 27 188 333 382 229 10 13 17 40 11 5 41 53 35 32 15 18 27 388 34 20 62 93 41 38 1,964 257 736 1,533 279 53 99 1,964 182 44 19 12 257 516 109 32 79 736 38 2 18 149 25 2 85 187 275 159 940 804 126 2 8 940 – – – – – – – – 31 – 31 31 – – – 31 63 33 62 577 70 27 188 333 382 229 1,964 1,533 279 53 99 1,964 Concentration by industry sector Non-property business: Agriculture Energy Manufacturing Distribution Transport Financial Other services Property and construction Residential mortgages Other personal Total Concentration by location(1) Republic of Ireland United Kingdom North America Rest of the World ECL allowance Concentration by industry sector Non-property business: Agriculture Energy Manufacturing Distribution Transport Financial Other services Property and construction Residential mortgages Other personal Total Concentration by location(1) Republic of Ireland United Kingdom North America Rest of the World (1)Based on country of risk. 128 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Credit profile of the loan portfolio Gross exposures to customers Gross carrying amount Analysed by ECL stage profile At amortised cost 2020 At FVTPL Total Stage 1 Stage 2 Stage 3 POCI Total Total € m € m € m € m € m € m 439 91 707 2,911 452 96 1,139 2,321 1,956 556 10,668 8,102 1,689 419 458 1,740 2,607 3,346 2,773 1,810 991 5,977 5,977 27,354 4,837 57,412 44,431 9,087 1,971 1,923 € m 99 36 87 573 73 9 225 902 1,992 242 4,238 – – – – – – – – 184 – 184 3,424 184 605 17 192 – – – 2,278 2,734 4,140 6,257 2,335 1,096 7,341 9,200 31,486 5,635 72,502 56,141 11,381 2,407 2,573 57,412 10,668 4,238 184 72,502 – – – – – – – 75 – – 75 75 – – – 75 Loans and advances to customers € m 1,671 1,815 2,547 4,986 1,829 526 5,227 7,260 30,649 2,766 59,276 45,813 8,879 2,304 2,280 Loan commitments and financial guarantees issued € m 607 919 1,593 1,271 506 570 2,114 1,940 837 2,869 13,226 10,328 2,502 103 293 59,276 13,226 Loans and advances to customers € m 66 15 84 590 63 22 197 396 843 234 2,510 2,000 322 61 127 2,510 Loan commitments and financial guarantees issued € m 4 2 8 17 2 1 12 30 – 7 83 67 12 2 2 83 Concentration by industry sector Non-property business: Agriculture Energy Manufacturing Distribution Transport Financial Other services Property and construction Residential mortgages Other personal Total Concentration by location(1) Republic of Ireland United Kingdom North America Rest of the World ECL allowance Concentration by industry sector Non-property business: Agriculture Energy Manufacturing Distribution Transport Financial Other services Property and construction Residential mortgages Other personal Total Concentration by location(1) Republic of Ireland United Kingdom North America Rest of the World (1)Based on country of risk. 2,278 2,734 4,140 6,257 2,335 1,096 7,341 9,200 31,486 5,635 72,502 56,141 11,381 2,407 2,573 72,502 € m 70 17 92 607 65 23 209 426 843 241 Gross carrying amount Analysed by ECL stage profile At amortised cost 2020 Total Stage 1 Stage 2 Stage 3 POCI Total € m € m € m € m € m 15 12 15 42 10 4 43 82 39 42 23 3 50 412 20 15 92 140 73 56 884 609 130 43 102 884 32 2 27 153 35 4 74 204 662 143 1,336 1,175 143 5 13 – – – – – – – – 69 – 69 70 17 92 607 65 23 209 426 843 241 2,593 69 2,067 – – – 334 63 129 1,336 69 2,593 2,593 304 2,067 334 63 129 2,593 214 61 15 14 304 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 129 2.1 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 ECL staging and segment at 31 December 2021 and 2020. At amortised cost Industry sector Non-property business: Agriculture Energy Manufacturing Distribution Transport Financial Other services Property and construction Residential mortgages Other personal Total gross carrying amount ECL staging Stage 1 Stage 2 Stage 3 POCI Segment Retail Banking Capital Markets AIB UK Group 1–30 days € m 31–60 days € m 14 – 4 34 6 – 25 30 50 40 203 65 86 52 – 203 119 17 67 – 203 5 – 2 8 2 – 17 10 34 10 88 – 43 43 2 88 58 14 16 – 88 61–90 days 91–180 days 181–365 days € m € m € m 1 – – 13 1 – 1 4 14 9 43 – 15 27 1 43 35 – 8 – 43 > 365 days € m 21 2 8 85 8 2 42 163 322 139 792 – – 786 6 792 688 47 57 – 792 % 1.36 2021 Total € m 50 2 19 251 31 3 106 271 530 248 1,511 65 144 1,291 11 1,511 1,148 149 214 – 1,511 % 2.60 5 – 2 47 13 – 12 14 42 21 4 – 3 64 1 1 9 50 68 29 156 229 – – 155 1 156 104 19 33 – 156 % 0.27 – – 228 1 229 144 52 33 – 229 % 0.39 As a percentage of total gross loans at amortised cost % 0.35 % 0.15 % 0.07 The figures reported are inclusive of overdrafts, bridging loans and cases with expired limits. There were no contractually past due loans measured at FVTPL at 31 December 2021 and 2020. 130 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Credit profile of the loan portfolio Aged analysis of contractually past due loans and advances to customers (continued) 1–30 days € m 31–60 days € m 61–90 days € m 91–180 days 181–365 days € m € m > 365 days € m At amortised cost Industry sector Non-property business: Agriculture Energy Manufacturing Distribution Transport Financial Other services Property and construction Residential mortgages Other personal 18 – 2 103 4 1 17 26 49 37 6 – 8 73 7 1 22 18 51 12 Total gross carrying amount 257 198 ECL staging Stage 1 Stage 2 Stage 3 POCI Segment Retail Banking Capital Markets AIB UK Group As a percentage of total gross loans at amortised cost 68 109 79 1 257 165 23 69 – 257 % 0.43 – 88 108 2 198 111 46 41 – 198 % 0.33 1 – 1 23 7 – 10 8 11 9 70 – 28 42 – 70 40 5 25 – 70 3 – 3 43 3 – 11 15 42 19 139 – – 138 1 139 102 9 28 – 139 7 – 1 37 1 – 13 63 124 42 288 – – 285 3 288 216 48 24 – 288 2020 Total € m 52 2 29 319 28 4 102 302 1,245 236 2,319 68 225 1,997 29 2,319 17 2 14 40 6 2 29 172 968 117 1,367 – – 1,345 22 1,367 1,275 1,909 7 85 – 138 272 – 1,367 2,319 % 0.12 % 0.23 % 0.49 % 2.30 % 3.90 At 31 December 2021, total loans past due reduced by € 0.8 billion to € 1.5 billion or 2.6% of total loans and advances to customers (2020: € 2.3 billion or 3.9%).The reduction is directly attributed to the sales of non-performing mortgage portfolios completed in the year as the total residential mortgage loans past due reduced by € 0.7 billion. This reduction was predominantly in the greater than 365 days past due category as the total residential mortgage loans past due at 31 December 2021 amounted to € 0.5 billion or 35% of total loans past due (31 December 2020: € 1.2 billion or 54%). Non-property business loans which were past due represent 31% or € 0.5 billion (2020: 23% or € 0.5 billion), with property and construction at 18% or € 0.3 billion (2020: 13% or € 0.3 billion), and other personal at 16% or € 0.2 billion (2020: 10% or € 0.2 billion). All loans past due by 90 days or more on any material obligation are considered non-performing/defaulted. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 131 2.1 Credit risk – Credit profile of the loan portfolio Loans written-off and recoveries of previously written-off loans The following table analyses loans written-off and recoveries of previously written-off loans by geography and industry sector for the years ended 31 December 2021 and 2020: Concentration by industry sector Non-property business: Agriculture Energy Manufacturing Distribution Transport Financial Other services Property and construction Residential mortgages Other personal Total Concentration by location(1) Republic of Ireland United Kingdom Rest of the World (1)By country of risk Loans written-off € m 0.9 – 1.8 6.8 0.1 0.1 5.2 24.6 44.4 21.4 105.3 88.6 15.2 1.5 105.3 2021 Recoveries of amounts previously written-off € m 3.9 0.3 0.8 5.6 0.4 – 5.4 19.4 24.8 14.8 75.4 70.5 4.6 0.3 75.4 Loans written-off € m – – 14.3 10.7 1.5 – 11.1 19.8 60.4 33.0 150.8 113.3 24.6 12.9 150.8 2020 Recoveries of amounts previously written-off € m 2.2 0.2 1.4 4.7 0.7 – 4.2 13.6 33.3 11.6 71.8 65.7 5.4 0.7 71.8 The contractual amount outstanding of loans written-off during the year that are subject to enforcement activity amounted to € 5 million (2020: € 23 million) which includes both full and partial write-offs. Total cumulative non-contracted loans written-off at 31 December 2021 amounted to € 1,082 million (2020: € 1,730 million).* *Forms an integral part of the audited financial statements 132 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Credit profile of the loan portfolio Gross loans(1) and ECL movements The following tables set out the movements in the gross carrying amount and ECL allowance for loans and advances to customers by ECL staging between 1 January 2021 and 31 December 2021 and the corresponding movements between 1 January 2020 and 31 December 2020. Accounts that triggered movements between Stage 1 and Stage 2 as a result of failing/curing a quantitative measure only (as disclosed on page 90) and that subsequently reverted within the year to their original stage, are excluded from ‘Transferred from Stage 1 to Stage 2’ and ‘Transferred from Stage 2 to Stage 1’. The Group believes this presentation aids the understanding of the underlying credit migration. Gross carrying amount movements – total Stage 3 € m 4,075 POCI € m 184 Stage 1 € m 45,609 (3,817) 4,012 (116) 55 10,460 (9,324) 1,363 – (295) 641 (209) 15 Stage 2 € m 9,408 3,817 (4,012) (912) 335 – (2,390) 240 – (138) 170 209 41 Stage 1 € m 54,723 (11,954) 2,534 (459) 105 8,578 (8,911) 1,471 – (221) (651) 519 (125) Stage 2 € m 3,992 11,954 (2,534) (1,483) 352 – (2,224) 285 – (214) (120) (519) (81) – – 1,028 (390) – (751) 69 (104) (988) 45 – (99) – – 1,942 (457) – (616) 72 (148) (86) (23) – 251 (16) (12,481) 4 (1) (72) – – 4 1,676 (105) (1,493) 856 – (39) 2021* Total € m 59,276 – – – – 10,460 2020* Total € m 62,049 – – – – 8,578 – – – – – – – – – – (17) (11,768) 8 (3) – – – 2 1,836 (151) (521) (794) – 47 48,394 6,768 2,885 103 58,150 Stage 3 € m 3,140 POCI € m 194 45,609 9,408 4,075 184 59,276 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 New loans originated/top-ups Redemptions/repayments Interest credited Write-offs Derecognised due to disposals Exchange translation adjustments Impact of model, parameter and overlay changes Other movements At 31 December 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 New loans originated/top-ups Redemptions/repayments Interest credited Write-offs Derecognised due to disposals Exchange translation adjustments Impact of model, parameter and overlay changes Other movements At 31 December (1)Movements on the gross loans table have been prepared on a ‘sum of the months’ basis. *Forms an integral part of the audited financial statements AIB Group plc Annual Financial Report 2021 Risk Management 133 1 2 3 4 5 6 2021* Total € m 2,510 143 (107) 81 (38) (234) 62 (68) 135 (132) (158) (105) (393) 31 1,885 2020* Total € m 1,238 195 (34) 143 (40) 406 82 (98) 438 401 1,493 (151) (57) (17) 4 2,510 – – – – – – – (13) – (13) (1) (24) – 31 POCI € m 31 – – – – – – – 33 8 41 (3) – – – 69 2.1 Credit risk – Credit profile of the loan portfolio Gross loans and ECL movements (continued) ECL allowance movements – total 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 Net remeasurement New loans originated/top-ups Redemptions/repayments Impact of model and overlay changes Impact of credit or economic risk parameters Income statement net credit impairment (writeback)/charge Write-offs Derecognised due to disposals Exchange translation adjustments At 31 December Stage 1 € m Stage 2 € m 281 (61) 87 (7) 3 (43) 62 (25) (4) (58) (46) – (4) 5 236 845 204 (194) (125) 32 (38) – (43) 53 (41) (152) – (8) 15 700 Stage 3 € m 1,315 POCI € m 69 – – 213 (73) (153) – – 99 (33) 53 (104) (357) 11 918 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 Net remeasurement New loans originated/top-ups Redemptions/repayments Impact of model and overlay changes Impact of credit or economic risk parameters Income statement net credit impairment charge Write-offs Derecognised due to disposals Exchange translation adjustments Other movements At 31 December Stage 1 € m Stage 2 € m Stage 3 € m 141 (110) 78 (42) 10 (61) 82 (9) 74 129 151 – (5) (2) (4) 281 202 305 (112) (197) 33 362 – (89) 144 227 673 – (18) (8) (4) 845 864 – – 382 (83) 105 – – 187 37 628 (148) (34) (7) 12 1,315 *Forms an integral part of the audited financial statements 134 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Credit profile of the loan portfolio Gross loans and ECL movements (continued) Total exposures to which an ECL applies decreased during the year by € 1.1 billion from € 59.3 billion at 1 January 2021 to € 58.2 billion at 31 December 2021. Stage transfers are a key component of ECL allowance movements (i.e. Stage 1 to Stage 2 to Stage 3 and vice versa) in addition to the net remeasurement of ECL due to change in risk parameters within a stage. An ECL writeback of € 161 million due to stage transfers and net remeasurement within stage occurred due to underlying credit management activity and improvement in credit parameters which inform the modelled outcomes. The updated macroeconomic scenarios and weightings resulted in a release of € 132 million. This ECL movement is presented separately within ‘Impact of credit or economic risk parameters’. This release was most significant within the mortgage portfolio accounting for a release of € 59 million within the portfolio. This was driven by an improvement in macroeconomic forecasts specific to the residential property market and is largely offset by an ECL charge resulting from model and overlay changes. Model and overlay changes resulted in an ECL charge of € 135 million and further detail on the changes is outlined within the management judgements section on pages 100 and 101. These ensure exposures subject to risk not adequately reflected in the modelled outcomes retain an appropriate ECL. The gross loan transfers from Stage 1 to Stage 2 of € 3.8 billion are due to underlying credit management 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. 64% of the movements relied on a qualitative or backstop indicator of significant increase in credit risk (e.g. forbearance or movement to a watch grade) of which 6% was caused solely by the backstop of 30 days past due. Of the € 3.8 billion which transferred from Stage 1 to Stage 2 in the year approximately € 2.1 billion is reported as Stage 2 at 31 December 2021. Where a movement to Stage 2 is triggered by multiple drivers simultaneously these are reported in the following order: quantitative; qualitative; backstop. Similarly, transfers from Stage 2 to Stage 1 of € 4.0 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 and incorporates loans which transferred due to the impact of the updated macroeconomic scenarios and weightings. Transfers from Stage 2 to Stage 3 of € 0.9 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 loans 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 borrowers that are 90 days or more past due on a material obligation. Of the transfers from Stage 2 to Stage 3 € 0.3 billion had transferred from Stage 1 to Stage 2 earlier in the year. Transfers from Stage 3 to Stage 2 of € 0.3 billion were mainly driven by resolution activity with the customer, through either restructuring or forbearance previously granted and which 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. In summary, the staging movements of the overall portfolio were as follows: Stage 1 loans increased by € 2.8 billion in the year to € 48.4 billion with an ECL of € 0.2 billion and resulting cover of 0.5% (31 December 2020: 0.6%). Stage 2 loans decreased by € 2.6 billion in the year to € 6.8 billion with an ECL of € 0.7 billion and resulting cover of 10.3% (31 December 2020: 9.0%). This was primarily driven by loans returning to Stage 1 where the triggers for significant increase in credit risk no longer apply including loans that have fulfilled a probation period and repayments. Stage 3 exposures decreased by € 1.2 billion in the year to € 2.9 billion with the ECL cover decreasing from 32.3% to 31.8%. The key driver was portfolio sales of distressed loans. Further details on stage movements by asset class are set out in the following tables: AIB Group plc Annual Financial Report 2021 Risk Management 135 – – – – m € l a t o T 1 0 6 , 8 1 – – m € 7 9 9 9 7 5 ) 4 4 1 ( 3 2 6 , 4 – m € 0 5 0 , 5 5 1 7 , 1 m € ) 5 1 7 , 1 ( 4 5 5 , 2 1 ) 7 2 7 , 1 ( 7 2 7 , 1 ) 5 3 5 ( – 8 1 1 ) 4 4 ( 6 2 3 2 6 , 4 ) 5 1 ( 6 3 5 ) 1 2 3 ( 3 3 6 – ) 5 3 ( 0 3 ) 5 1 ( ) 7 4 ( – 7 2 0 3 – 6 3 1 ) 4 1 1 ( 1 8 4 1 8 8 1 – 0 7 3 ) 0 6 1 ( 8 5 4 ) 6 6 ( ) 8 8 1 ( ) 3 4 3 , 5 ( ) 8 6 3 ( ) 3 6 2 , 1 ( ) 2 1 7 , 3 ( – – – – m € l a t o T 2 1 3 , 0 2 – – m € 8 3 4 3 9 8 ) 0 4 1 ( 5 9 0 , 4 – m € 3 3 1 , 1 5 1 5 , 6 ) 2 0 4 ( ) 3 7 6 ( – 4 8 m € ) 5 1 5 , 6 ( 1 4 7 , 8 1 2 0 4 ) 0 2 2 ( 6 5 5 9 0 , 4 ) 8 3 ( 7 3 6 ) 1 1 5 ( ) 9 8 5 ( – ) 6 6 ( 6 2 ) 8 3 ( ) 6 7 ( ) 4 1 ( – 7 5 1 – 8 4 1 ) 4 1 2 ( ) 0 0 1 ( – – 3 6 4 ) 1 2 2 ( ) 5 7 4 ( – ) 3 1 1 ( ) 0 1 1 ( ) 9 3 2 , 5 ( ) 9 4 2 ( ) 8 2 3 , 1 ( ) 2 6 6 , 3 ( 0 2 0 2 9 7 6 , 8 1 9 8 0 , 1 7 1 7 , 3 3 7 8 , 3 1 0 6 3 , 7 – – – – m € l a t o T 0 6 2 , 7 2 4 8 , 1 ) 3 4 8 , 1 ( ) 5 2 ( 7 0 2 ) 9 4 1 ( 0 4 1 – ) 2 7 ( – – – – m € l a t o T 9 9 2 , 7 2 7 1 , 1 ) 8 2 3 , 1 ( ) 0 2 ( ) 0 1 ( 2 1 2 ) 0 3 1 ( – 5 6 – – – – – – – – – – – – – – m € I C O P – – – – – – – – – – – – – – m € I C O P – – m € 5 6 8 ) 4 4 ( 1 3 1 – 5 1 ) 5 2 ( ) 3 1 ( – 2 1 ) 5 5 1 ( 8 2 6 – – m € 7 6 3 ) 6 5 ( 6 2 6 – ) 4 9 ( 2 1 ) 0 2 ( ) 0 1 ( ) 4 ( – 4 4 5 6 8 m € m € 6 7 0 , 2 9 1 3 , 4 7 7 6 ) 1 8 5 ( ) 6 0 1 ( – 9 2 – 7 4 ) 0 2 ( 8 1 9 1 0 1 ) 7 7 6 ( 1 8 5 ) 5 2 ( 5 1 ) 2 0 9 ( 5 4 1 – ) 6 1 1 ( 0 1 1 ) 9 1 ( 3 7 m € 7 2 4 m € 5 0 5 , 6 9 8 1 , 3 ) 9 8 1 , 3 ( ) 5 6 2 ( ) 1 3 4 ( – 3 3 ) 9 7 4 ( – – 4 5 ) 4 1 ( ) 9 1 5 ( 1 8 5 6 2 ) 5 9 1 ( 3 2 ) 5 5 7 ( 6 4 1 2 7 1 , 1 – – ) 2 1 1 ( ) 0 6 ( 9 1 5 1 2 3 4 5 6 1 0 6 , 8 1 7 9 9 0 5 0 , 5 4 5 5 , 2 1 0 6 2 , 7 6 7 0 , 2 9 1 3 , 4 6 6 7 , 2 3 e g a t S 2 e g a t S 1 e g a t S 3 e g a t S 2 e g a t S 1 e g a t S s s e n s u b i y t r e p o r p - n o N n o i t c u r t s n o c d n a y t r e p o r P l a n o s r e p r e h t O s e g a g t r o m l a i t n e d s e R i 3 e g a t S 2 e g a t S 1 e g a t S 3 e g a t S 2 e g a t S 1 e g a t S 3 e g a t S 2 e g a t S 1 e g a t S 1 2 0 2 s s e n i s u b y t r e p o r p - n o N n o i t c u r t s n o c d n a y t r e p o r P l a n o s r e p r e h t O s e g a g t r o m l a i t n e d i s e R s s a l c t e s s A – s t n e m e v o m t n u o m a g n i y r r a c s s o r G : 0 2 0 2 d n a 1 2 0 2 r e b m e c e D 1 3 o t r a e y e h t r o f i g n g a t s L C E d n a s s a c l t e s s a y b s r e m o t s u c o t s e c n a v d a d n a s n a o l r o f e c n a w o l l a L C E d n a t n u o m a i g n y r r a c s s o r g e h t n i s t n e m e v o m e h t t u o t e s l s e b a t g n w o i l l o f e h T o i l o f t r o p n a o l e h t f o e l i f o r p t i d e r C – k s i r t i d e r C 1 . 2 ) d e u n i t n o c ( s t n e m e v o m L C E d n a ) 1 ( s n a o l s s o r G 2 4 8 , 1 9 5 8 ) 8 5 1 ( ) 3 8 7 ( ) 8 2 1 , 1 ( ) 6 5 ( ) 1 1 1 ( 6 8 3 , 1 6 4 3 , 5 4 0 7 , 2 8 3 2 , 2 7 0 4 , 9 2 3 0 1 1 2 9 6 4 4 , 1 7 3 9 , 6 2 – – – – m € l a t o T 6 6 7 , 2 ) 1 2 ( ) 3 2 ( 3 2 2 7 – 1 2 – – m € 3 3 2 3 9 ) 1 2 ( – m € 2 3 3 2 5 2 ) 1 1 2 ( ) 0 8 ( – 8 1 5 ) 3 ( ) 1 2 ( – – 7 1 7 4 2 – 5 2 ) 1 ( 1 1 ) 7 ( 9 1 2 m € 1 0 2 , 2 ) 2 5 2 ( ) 3 1 ( 1 1 2 3 9 5 8 ) 1 6 9 ( 3 9 1 – ) 9 1 ( 6 ) 1 ( 1 1 m € l a t o T 9 4 6 , 0 3 – – – – 6 3 1 , 3 – – – – – m € 4 8 1 m € 0 8 9 , 1 – – 5 2 2 ) 1 8 1 ( – m € 0 5 9 , 1 3 7 1 , 1 m € ) 3 7 1 , 1 ( 5 3 5 , 6 2 ) 3 9 4 , 1 ( 3 9 4 , 1 ) 1 9 1 ( 0 7 1 – ) 4 3 ( 1 1 6 3 1 , 3 I C O P 3 e g a t S 2 e g a t S 1 e g a t S ) 7 6 1 , 4 ( ) 6 1 ( ) 9 6 1 ( ) 3 3 2 ( ) 9 4 7 , 3 ( ) 4 4 ( 0 1 7 4 ) 1 ( 9 1 ) 3 4 ( – 2 3 ) 0 0 0 , 1 ( ) 2 7 ( ) 5 2 9 ( ) 3 ( – 6 7 7 4 – – 4 6 – 9 3 1 7 3 – – ) 1 ( ) 3 ( 7 6 5 5 6 s e g n a h c y a l r e v o d n a r e t e m a r a p , l e d o m f o t c a p m I s t n e m t s u d a j l n o i t a s n a r t e g n a h c x E s t n e m e v o m r e h O t r e b m e c e D 1 3 t A 2 e g a t S o t 1 e g a t S m o r f d e r r e f s n a r T 1 e g a t S o t 2 e g a t S m o r f d e r r e f s n a r T y r a u n a J 1 t A s p u - p o t / d e t a n g i r o i s n a o l w e N s t n e m y a p e r / s n o i t p m e d e R 3 e g a t S m o r f d e r r e f s n a r T 3 e g a t S o t d e r r e f s n a r T l s a s o p s d i o t e u d i d e s n g o c e r e D d e t i d e r c t s e r e n t I s f f o - e t i r W m € l a t o T 4 8 9 , 2 – – – – 1 4 8 – – m € 2 9 1 1 1 1 ) 8 2 ( – m € 8 8 2 8 3 4 ) 8 9 ( ) 5 7 1 ( – 5 2 m € 4 0 5 , 2 ) 8 3 4 ( ) 3 1 ( 5 7 1 3 1 4 8 3 e g a t S 2 e g a t S 1 e g a t S m € l a t o T 4 5 4 , 1 3 – – – – 0 7 4 , 2 I C O P 3 e g a t S 2 e g a t S 1 e g a t S – – – – – m € 4 9 1 m € 3 4 1 , 2 – – 2 1 3 ) 3 3 2 ( – m € 4 4 1 , 2 2 1 8 , 1 m € ) 2 1 8 , 1 ( 3 7 9 , 6 2 ) 2 9 6 , 1 ( 2 9 6 , 1 ) 1 8 2 ( 0 1 2 – ) 1 3 ( 3 2 0 7 4 , 2 ) 2 7 2 , 1 ( ) 9 4 ( ) 6 5 1 ( ) 7 6 0 , 1 ( ) 9 2 9 , 3 ( ) 7 1 ( ) 4 2 2 ( ) 1 6 2 ( ) 7 2 4 , 3 ( 2 e g a t S o t 1 e g a t S m o r f d e r r e f s n a r T 1 e g a t S o t 2 e g a t S m o r f d e r r e f s n a r T y r a u n a J 1 t A s p u - p o t / d e t a n g i r o i s n a o l w e N s t n e m y a p e r / s n o i t p m e d e R 3 e g a t S m o r f d e r r e f s n a r T 3 e g a t S o t d e r r e f s n a r T ) 3 3 ( 2 2 2 – ) 7 ( – 1 3 9 ) 3 3 ( – – – 1 3 3 3 2 – – 3 3 ) 1 ( – ) 2 2 ( 2 3 3 – – ) 6 ( – 2 2 0 8 1 ) 0 6 ( 5 6 7 – ) 8 6 ( – 7 1 8 ) 3 ( – – – 2 5 2 ) 7 5 ( – ) 5 ( – 9 1 – – 0 5 ) 5 ( – ) 7 2 ( – – 2 8 6 ) 8 5 ( – 3 2 1 0 2 , 2 9 4 6 , 0 3 4 8 1 0 8 9 , 1 0 5 9 , 1 5 3 5 , 6 2 s e g n a h c y a l r e v o d n a r e t e m a r a p , l e d o m f o t c a p m I s t n e m t s u d a j l n o i t a s n a r t e g n a h c x E s t n e m e v o m r e h O t r e b m e c e D 1 3 t A l s a s o p s d i o t e u d i d e s n g o c e r e D d e t i d e r c t s e r e n t I s f f o - e t i r W i . s s a b ’ s h t n o m e h t f o m u s ‘ a n o d e r a p e r p n e e b e v a h e b a t l s n a o l s s o r g e h t n o s t n e m e v o M ) 1 ( s s e n s u b i y t r e p o r p - n o N n o i t c u r t s n o c d n a y t r e p o r P l a n o s r e p r e h t O s e g a g t r o m l a i t n e d s e R i l a t o T m € 5 0 3 1 3 1 ) 3 ( 3 8 ) 2 1 ( 3 7 3 1 2 ) 0 6 ( 4 7 1 0 1 1 7 1 8 ) 8 3 ( ) 1 5 ( ) 2 1 ( 6 1 7 3 0 , 1 – – m € 2 4 1 3 9 1 ) 8 2 ( 6 4 – – 4 3 1 ) 8 3 ( ) 8 2 ( ) 3 ( 8 2 2 2 2 3 2 3 4 8 m € 4 8 1 ) 0 4 ( ) 7 9 ( 0 1 7 4 3 – ) 6 4 ( 8 1 1 7 5 – 3 3 5 ) 8 1 ( ) 7 ( ) 4 ( 9 7 m € ) 3 5 ( 7 3 ) 3 1 ( 6 ) 0 2 ( 1 2 ) 4 1 ( 2 5 0 4 6 5 – ) 5 ( ) 2 ( ) 2 ( 8 8 5 6 2 1 3 e g a t S 2 e g a t S 1 e g a t S m € 9 8 1 l a t o T 6 ) 5 ( 6 1 ) 3 ( 6 8 2 4 ) 8 2 ( 0 1 1 2 1 5 4 2 ) 0 2 ( ) 6 ( ) 4 ( ) 8 ( 6 9 3 – – – – – – – – – – – – – – – – m € I C O P m € 2 3 1 – – 0 9 ) 8 ( 1 3 – – – ) 3 2 ( 0 9 ) 0 2 ( ) 6 ( ) 3 ( ) 5 ( 6 2 9 3 m € ) 0 2 ( ) 6 4 ( 4 – 0 6 ) 8 3 ( 3 7 0 1 1 3 m € ) 3 3 ( 5 1 ) 8 2 ( 1 ) 5 ( 2 4 0 1 7 7 3 9 0 1 6 4 – – ) 1 ( ) 1 ( – – – ) 2 ( 5 7 8 8 1 3 3 1 3 e g a t S 2 e g a t S 1 e g a t S m € 5 7 1 l a t o T 2 2 ) 2 ( 5 1 ) 9 ( ) 3 ( 5 1 ) 4 ( 9 9 4 2 9 ) 3 3 ( – – – 4 3 2 – – m € 4 1 1 0 5 ) 6 1 ( 6 2 – – – 2 2 6 ) 3 3 ( – – ) 1 ( 2 4 1 m € 0 4 9 2 ) 5 ( ) 4 3 ( 7 ) 1 1 ( – ) 2 ( 4 3 2 1 1 – – – – 1 5 m € 1 2 ) 7 ( 3 ) 1 ( – ) 8 1 ( 5 1 ) 2 ( 5 4 2 9 1 – – – 1 1 4 m € 9 6 5 6 3 ) 4 2 ( 9 2 ) 6 1 ( ) 0 5 ( 4 ) 6 ( 5 4 2 1 2 1 ) 0 6 ( 9 3 3 – ) 1 ( ) 4 ( 1 3 m € – – – – – – – 8 3 3 ) 3 ( 1 4 – – – – – m € 6 7 4 9 4 ) 1 3 ( 2 – – 5 4 3 8 1 ) 7 5 ( 8 4 2 – ) 1 ( ) 4 ( 2 5 3 5 m € ) 7 4 ( ) 0 2 ( 2 1 ) 4 3 ( – ) 3 ( 9 1 0 4 0 2 – – – 1 3 4 8 9 6 2 6 6 3 7 0 1 m € ) 7 1 ( 3 2 – 3 4 ) 3 ( 0 1 8 2 ) 8 1 ( – – – 0 3 ) 1 ( 9 3 3 e g a t S 2 e g a t S 1 e g a t S l a t o T I C O P 3 e g a t S 2 e g a t S 1 e g a t S 136 Risk Management AIB Group plc Annual Financial Report 2021 m € l a t o T 7 3 0 , 1 4 7 ) 1 6 ( 6 4 ) 5 1 ( 8 1 ) 5 3 ( 7 6 ) 1 3 ( ) 0 6 ( ) 5 1 ( ) 2 2 ( 4 4 2 8 6 9 0 2 0 2 ) 3 2 1 ( ) 3 0 1 ( – – m € 3 2 3 1 2 1 ) 1 3 ( – – 0 2 ) 3 ( 4 ) 5 1 ( ) 1 1 ( 6 4 m € 8 8 5 0 1 1 ) 7 1 1 ( ) 1 7 ( 4 1 ) 4 2 ( – ) 3 2 ( 5 6 ) 5 1 ( ) 1 6 ( – ) 8 ( 4 1 2 m € 6 2 1 ) 6 3 ( 6 5 ) 4 ( 2 4 8 1 ) 2 1 ( ) 8 1 ( ) 3 1 ( ) 3 ( – ) 3 ( 4 ) 2 ( 3 e g a t S 2 e g a t S 1 e g a t S 3 e g a t S 2 e g a t S 1 e g a t S l a t o T 3 e g a t S 2 e g a t S 1 e g a t S l a t o T 3 e g a t S 2 e g a t S 1 e g a t S 0 2 0 2 s s e n i s u b y t r e p o r p - n o N n o i t c u r t s n o c d n a y t r e p o r P l a n o s r e p r e h t O s e g a g t r o m l a i t n e d i s e R o i l o f t r o p n a o l e h t f o e l i f o r p t i d e r C – k s i r t i d e r C 1 . 2 ) d e u n i t n o c ( s t n e m e v o m L C E d n a s n a o l s s o r G s s a l c t e s s A – s t n e m e v o m e c n a w o l l a L C E 1 1 3 5 3 5 2 2 1 2 2 2 9 5 1 3 3 m € 6 9 3 l a t o T 8 ) 8 ( 5 ) 3 ( ) 5 4 ( 9 2 ) 4 2 ( 0 2 ) 5 3 ( ) 3 5 ( ) 5 2 ( ) 7 ( 5 ) 3 ( 3 1 3 – – – – – – – – – – – – – – – – m € I C O P – – m € 8 8 1 6 1 ) 5 ( ) 5 1 ( – – 5 2 ) 4 ( 7 1 ) 5 2 ( ) 6 ( 3 ) 5 ( 2 7 1 m € 3 3 1 8 1 ) 9 1 ( ) 9 ( 2 ) 7 ( – ) 2 ( ) 9 ( ) 6 1 ( 5 7 m € ) 0 1 ( 1 1 ) 2 ( – ) 3 2 ( 9 2 ) 8 ( ) 3 ( ) 2 2 ( ) 2 4 ( ) 8 2 ( – – 1 ) 1 ( 1 9 – ) 1 ( 1 3 0 5 m € 4 3 2 9 3 ) 2 2 ( 4 1 ) 8 ( ) 8 1 ( 2 1 ) 4 ( 4 ) 7 ( 0 1 ) 1 ( ) 1 2 ( – – – – m € 2 4 1 6 4 ) 2 1 ( 3 – – 1 – 8 3 ) 1 ( ) 1 2 ( – 1 1 5 9 4 m € ) 0 3 ( ) 1 3 ( 4 ) 4 ( – ) 1 ( ) 3 ( ) 2 ( 1 4 m € ) 0 1 ( 8 ) 1 ( – ) 7 1 ( 2 1 ) 3 ( 6 ) 5 ( ) 8 1 ( ) 0 1 ( – – – – – – – ) 1 ( 0 3 m € 3 4 8 2 2 ) 6 1 ( 6 1 ) 2 1 ( ) 8 4 ( 3 ) 5 ( 4 4 ) 9 5 ( ) 5 5 ( ) 4 4 ( ) 3 6 3 ( 2 ) 1 ( 2 8 3 9 6 m € I C O P – – – – – – – – ) 3 1 ( ) 3 1 ( ) 1 ( ) 4 2 ( – – 1 3 – – m € 2 6 6 0 3 ) 5 2 ( ) 8 3 ( – – 3 5 ) 6 2 ( ) 6 ( ) 3 4 ( ) 9 3 3 ( 2 – 6 7 2 ) 1 3 ( ) 5 ( – – – ) 1 ( 1 4 – – – – 4 3 3 7 7 2 m € ) 8 2 ( ) 4 1 ( 2 1 ) 3 ( – ) 3 ( ) 7 ( 9 3 ) 5 ( 2 1 – 1 ) 7 ( 3 ) 2 ( 1 1 m € 2 1 e g a t S o t e g a t S o t 1 2 e g a t S m o r f d e r r e f s n a r T e g a t S m o r f d e r r e f s n a r T y r a u n a J 1 t A s p u - p o t / d e t a n g i r o i s n a o l w e N s t n e m y a p e r / s n o i t p m e d e R 3 e g a t S m o r f d e r r e f s n a r T 3 e g a t S o t d e r r e f s n a r T t n e m e r u s a e m e r t e N s e g n a h c y a l r e v o d n a l e d o m f o t c a p m I ) 5 1 ( ) 8 1 ( s r e t e m a r a p k s i r i c m o n o c e r o t i d e r c f o t c a p m I 2 1 e g a t S o t e g a t S o t 1 2 e g a t S m o r f d e r r e f s n a r T e g a t S m o r f d e r r e f s n a r T y r a u n a J 1 t A s p u - p o t / d e t a n g i r o i s n a o l w e N s t n e m y a p e r / s n o i t p m e d e R 3 e g a t S m o r f d e r r e f s n a r T 3 e g a t S o t d e r r e f s n a r T t n e m e r u s a e m e r t e N s r e t e m a r a p k s i r i c m o n o c e r o t i d e r c f o t c a p m I s e g n a h c y a l r e v o d n a l e d o m f o t c a p m I t i d e r c t e n t n e m e t a t s e m o c n I e g r a h c t n e m r i a p m i s t n e m t s u d a j l n o i t a s n a r t e g n a h c x E s t n e m e v o m r e h O t r e b m e c e D 1 3 t A s t n e m t s u d a j l n o i t a s n a r t e g n a h c x E s t n e m e v o m r e h O t r e b m e c e D 1 3 t A l s a s o p s d i o t e u d i d e s n g o c e r e D s f f o - e t i r W t i d e r c t e n t n e m e t a t s e m o c n I e g r a h c t n e m r i a p m i l s a s o p s d i o t e u d i d e s n g o c e r e D s f f o - e t i r W 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 137 2.1 Credit risk – Credit profile of the loan portfolio Movements in off-balance sheet exposures The following tables set out the movements in the nominal amount and ECL allowance for loan commitments and financial guarantees by ECL staging for the year to 31 December 2021 and 2020: Loan commitments Financial guarantee contracts 2021* Stage 1 Stage 2 Stage 3 € m € m € m Total € m Stage 1 Stage 2 Stage 3 € m € m € m 11,259 1,113 132 12,504 (266) 814 (17) 11 1,023 12,824 266 (814) (7) 5 205 768 – – 24 (16) (5) – – – – 1,223 135 13,727 544 (17) 101 (1) 1 115 743 147 17 (101) (1) 1 (13) 50 31 – – 2 (2) (5) 26 Total € m 722 – – – – 97 819 2020* Loan commitments Financial guarantee contracts Stage 1 € m Stage 2 € m Stage 3 € m Total € m Stage 1 € m Stage 2 € m Stage 3 € m 11,098 (647) 158 (35) 27 658 323 647 (158) (12) 3 310 118 11,539 – – 47 (30) (3) – – – – 965 657 (112) 3 (1) 3 (6) 11,259 1,113 132 12,504 544 11 112 (3) – 1 26 147 43 – – 1 (4) (9) 31 Total € m 711 – – – – 11 722 Nominal amount movements 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 Net movement At 31 December 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 Net movement At 31 December *Forms an integral part of the audited financial statements 138 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Credit profile of the loan portfolio Movements in off-balance sheet exposures (continued) ECL allowance movements Loan commitments Financial guarantee contracts 2021* 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 Net remeasurement Net income statement (credit)/charge Other movements At 31 December 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 Net remeasurement Net income statement (credit)/charge Other movements At 31 December Stage 1 Stage 2 Stage 3 € m € m € m 20 (4) 7 – – (7) (4) – 16 30 15 (18) (1) – 3 (1) – 29 4 – – 2 – 1 3 1 8 Total € m 54 11 (11) 1 – (3) (2) 1 53 Stage 1 Stage 2 Stage 3 € m € m € m 3 (1) 3 – 1 (2) 1 1 5 8 4 (9) – – 3 (2) 1 7 18 – – – (1) (2) (3) (1) 14 Total € m 29 3 (6) – – (1) (4) 1 26 2020* Loan commitments Financial guarantee contracts Stage 1 € m Stage 2 € m Stage 3 € m Total € m Stage 1 € m Stage 2 € m Stage 3 € m 10 (7) 10 – – 7 10 – 20 8 18 (8) (1) – 13 22 – 30 1 – – 2 – 1 3 – 4 19 11 2 1 – 21 35 – 54 3 (1) 2 – – (1) – – 3 Total € m 23 5 – 1 (1) (1) 4 2 29 2020* € m 8,187 4,445 413 18 163 18 – – 2 (2) (3) (3) 3 18 2 6 (2) (1) 1 3 7 (1) 8 2021* € m 9,564 4,399 327 95 161 14,546 13,226 The internal credit grade profile of loan commitments and financial guarantees is set out in the following table: Strong Satisfactory Criticised watch Criticised recovery Default Total Non-performing off-balance sheet commitments Total non-performing off-balance sheet commitments amounted to € 161 million (2020 € 163 million). *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 139 2.1 Credit risk – Investment securities The following table categorises the debt securities portfolio by contractual residual maturity and weighted average yield at 31 December 2021 and 2020: Within 1 year € m Yield % After 1 but within 5 years After 5 but within 10 years After 10 years Total € m Yield % € m Yield % € m Yield % € m Yield % 2021 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 Total at FVOCI At amortised cost Irish Government securities Euro government securities Non Euro government securities Supranational banks and government agencies Asset backed securities Euro bank securities Euro corporate securities Non Euro corporate securities Total at amortised cost – 279 10 42 – – 1,005 297 – – 1,633 – – – – – – – – – – 1,884 2.0 0.9 1.8 – – 0.4 1.5 – – 0.9 – – – – – – – – – 503 63 299 – – 1,994 1,236 210 68 6,257 – – – – – – 17 16 33 2.6 1.3 0.5 0.9 – – 0.4 1.3 0.9 2.0 1.4 – – – – – – 2.2 3.0 2.6 1,434 359 34 584 3 – 903 130 191 48 3,686 1,855 70 55 175 265 87 113 22 2,642 0.8 0.3 0.1 0.3 2.1 – 0.1 1.1 0.8 3.1 0.5 0.3 0.2 0.4 0.2 1.9 0.1 1.8 3.6 0.5 186 – – 335 425 67 – – – – 0.7 – – 1.7 1.1 0.4 – – – – 3,504 1,141 107 1,260 428 67 3,902 1,663 401 116 1,013 1.2 12,589 545 20 – 33 836 – – – 0.5 1.1 – 0.3 1.5 – – – 2,400 90 55 208 1,101 87 130 38 1,434 1.1 4,109 1.8 1.2 0.4 0.8 1.1 0.4 0.3 1.3 0.8 2.5 1.1 0.3 0.4 0.4 0.2 1.6 0.1 1.8 3.4 0.7 2020 Within 1 year € m Yield % After 1 but within 5 years After 5 but within 10 years After 10 years Total € m Yield % € m Yield % € m Yield % € 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 1,804 (0.4) 1,458 122 13 244 – – 799 247 – – 1.8 0.9 1.2 – – 0.6 0.9 – – 807 70 205 – – 3,286 1,271 189 39 Total at FVOCI 3,229 0.2 7,325 At amortised cost Irish Government securities Euro government securities Non Euro government securities Supranational banks and government agencies Asset backed securities Euro bank securities Euro corporate securities Non Euro corporate securities Total at amortised cost – – – – – – – – – – – – – – – – – – – – – – – – 3 15 18 3.0 1.6 0.6 1.4 – – 0.4 1.3 0.8 2.3 1.3 – – – – – – 1.0 3.0 2.7 1,727 348 12 476 5 – 1,088 102 203 54 4,015 1,637 70 55 175 82 87 104 20 2,230 0.9 0.3 0.1 0.1 2.3 – 0.2 1.6 0.9 2.7 0.6 0.2 0.2 0.4 0.2 1.8 0.1 1.8 3.6 0.3 432 0.4 – – 255 329 85 – – 5 – 1,106 657 20 – 33 645 – – – – – 2.6 1.4 0.2 – – 0.7 – 1.2 0.6 1.1 – 0.3 1.9 – – – 5,421 1,277 95 1,180 334 85 5,173 1,620 397 93 15,675 2,294 90 55 208 727 87 107 35 1,355 1.2 3,603 1.0 1.2 0.6 1.1 1.4 0.2 0.4 1.2 0.8 2.5 0.9 0.3 0.4 0.4 0.2 1.9 0.1 1.8 3.4 0.7 140 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk – Investment securities Debt securities and related ECL analysed by IFRS 9 staging at 31 December 2021 and 2020* 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 4,110 (1) 4,109 12,589 (3) 16,698 Stage 2 € m Stage 3 € m – – – – – – – – – – – – 2021* Total € m 4,110 (1) 4,109 12,589 (3) 16,698 Stage 1 € m Stage 2 € m Stage 3 € m 3,604 (1) 3,603 15,675 (3) 19,278 – – – – – – – – – – – – 2020* Total € m 3,604 (1) 3,603 15,675 (3) 19,278 Debt securities at FVOCI Debt securities held at fair value through other comprehensive income (“FVOCI”) decreased to € 12.6 billion (nominal € 12.2 billion) at 31 December 2021 from a fair value of € 15.7 billion (nominal € 14.9 billion) at 31 December 2020. The main drivers were a decrease in euro bank securities of € 1.3 billion and a decrease in euro commercial paper issued by the Irish Government of € 1.8 billion. Debt securities at amortised cost In addition to the existing business model Hold-to-Collect-and-Sell (“HTCS”) within Treasury, the Group previously introduced on 1 January 2020 a Hold-to-Collect (“HTC”) business model. This business model reflects the updated strategy to invest in long term high quality bonds to maturity for yield enhancement purposes given the increasingly liability led nature of the balance sheet. *Forms an integral part of the audited financial statements AIB Group plc Annual Financial Report 2021 Risk Management 141 2.1 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 2021 and 2020. These include loans and advances to banks of € 1,323 million (2020: € 1,092 million), securities financing of € 3,890 million (2020: € 811 million), and investment debt securities (at amortised cost of € 4,109 million (2020: € 3,603 million) and at FVOCI of € 12,589 million (2020: € 15,675 million)). Information on the credit ratings for loans and advances to customers where an external credit rating is available is disclosed on page 126. At amortised cost Bank Corporate Sovereign € m € m € m 597 3,756 25 1 – – 920 2 105 62 296 2,420 37 – – Other € m 895 201 5 – – Total € m 1,788 7,297 69 106 62 4,379 1,089 2,753 1,101(1) 9,322 AAA/AA A/A- BBB+/BBB/BBB- Sub investment Unrated Total Of which: Stage 1 4,379 1,089 2,753 1,101 9,322 Stage 2 Stage 3 – – – – – – – – – – At FVOCI Bank Corporate Sovereign € m € m € m 3,883 1,283 399 – – 5,565 5,565 – – 72 248 197 – – 517 486 31 – Other € m 495 – – – – Total € m 5,632 5,252 1,705 – – 2021 Total € m 7,420 12,549 1,774 106 62 495 12,589 21,911 1,182 3,721 1,109 – – 6,012(2) 6,012 495 12,558 21,880 – – – – 31 – 31 – 1 2 3 4 5 6 At amortised cost Bank Corporate Sovereign € m € m € m 733 1,134 18 1 – – – – 73 69 295 2,314 38 – – Other € m 510 212 5 – – Total € m 1,538 3,660 61 74 69 AAA/AA A/A- BBB+/BBB/BBB- Sub investment Unrated Total At FVOCI Bank Corporate Sovereign € m € m € m 5,032 1,380 381 – – 1,227 5,527 1,219 – – 37 257 165 31 – 490 Other € m 419 – – – – Total € m 6,715 7,164 1,765 31 – 2020 Total € m 8,253 10,824 1,826 105 69 1,886 142 2,647 727 (1) 5,402 6,793 7,973 (2) 419 15,675 21,077 Of which: Stage 1 1,886 142 2,647 722 5,397 6,793 490 7,973 419 15,675 21,072 Stage 2 Stage 3 – – – – – – 5 – 5 – – – – – – – – – – – 5 – (1)Relates to asset backed securities. (2)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 2021, the Group’s top 50 drawn exposures amounted to € 4.9 billion, and accounted for 8.5% (2020: € 4.7 billion and 7.8%) of the Group’s on-balance sheet total gross loans and advances to customers. In addition, these customers have undrawn facilities amounting to € 1,089 million (2020: € 862 million). No single customer exposure exceeded regulatory requirements. *Forms an integral part of the audited financial statements 142 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk Additional credit quality and forbearance disclosures on loans and advances to customers Forbearance* Overview Forbearance occurs when a customer is granted a temporary or permanent concession or an agreed change to the existing contracted terms of a facility (‘forbearance measure’), for reasons relating to the actual or apparent financial stress or distress of that customer. This also includes a total or partial refinancing of existing debt due to a customer availing of an embedded forbearance clause(s) in their contract. A forbearance agreement is entered into where the customer is in financial difficulty to the extent that they are unable to meet their loans to the Group in compliance with the existing agreed contracted terms and conditions. A concession or an agreed change to the contracted terms 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 its customers. The Group considers requests from customers who are experiencing cash flow difficulties on a case by case basis in line with the Group’s Forbearance Policy and relevant procedures, and completes an affordability/repayment capacity assessment taking account of factors such as current and likely future financial circumstances, the customer’s willingness to resolve such difficulties, and all relevant legal and regulatory obligations to ensure appropriate and sustainable measures are put in place. Group credit policies, supported by relevant processes and procedures, are in place which set out the policy rules and principles underpinning the Group’s approach to forbearance, ensuring the forbearance measure(s) provided to customers are affordable and sustainable, and in line with relevant regulatory requirements. Key principles include supporting viable Small Medium Enterprises (“SMEs”), and providing support to enable customers remain in their family home, whenever possible. The Group has implemented the standards for the Codes of Conduct in relation to customers in actual or apparent financial stress or distress, as set out by the Central Bank of Ireland (“the Central Bank”), ensuring these customers are dealt with in a professional and timely manner. 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 measure. This may result in the downgrading of the credit grade assigned and an increase in the expected credit loss. Facilities to which forbearance has been applied continue to be classified as forborne until an appropriate probation period has passed. The effectiveness of forbearance measures over the lifetime of the arrangements are subject to ongoing management review and monitoring of forbearance. A forbearance measure is deemed to be effective if the customer meets the revised or original terms of the contract over a sustained period of time resulting in an improved outcome for the Group and the customer. 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’s finances; – Assessment – Using the financial information to assess the customer’s situation; and – Resolution – We work with the customer to find an appropriate resolution. The core objective of the process is to determine appropriate and sustainable solutions that, where possible, help to keep customers in their family home. In addition to relevant temporary forbearance measures (such as interest only and capital and interest moratorium), this includes permanent forbearance measures which have been devised to assist existing Republic of Ireland primary residential mortgage customers in financial difficulty. This process may result in debt write-off, where appropriate. The types of existing permanent forbearance solutions currently include; arrears capitalisation, term extension, split mortgages, negative equity trade down, mortgage to rent and voluntary sale for loss. Non-mortgage portfolio The Group also has in place forbearance measures for customers in the non-mortgage portfolio who are in financial difficulty. This approach is based on customer affordability and sustainability 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 appropriately provided where customers are co-operative, and are willing but unable to pay. The forbearance process is one of structured engagement to assess the long term levels of sustainable and unsustainable debt. The commercial aspects of this process require that customer affordability is viewed comprehensively, to include all available sources of finance for debt repayment, including unencumbered assets. Types of non-mortgage forbearance include temporary measures (such as interest only and capital and interest moratorium) and permanent measures (such as term extension and arrears capitalisation). This process may result in debt write-off, where appropriate. See accounting policy (s) ‘Impairment of financial assets’ in note 1 to the consolidated financial statements. *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 143 2.1 Credit risk Additional credit quality and forbearance disclosures on loans and advances to customers Forbearance The following tables set out the internal credit ratings and ECL staging of forborne loans and advances to customers at 31 December 2021 and 2020: Analysed by forbearance type Temporary forbearance Permanent forbearance Analysed by internal credit ratings Strong Satisfactory Total strong/satisfactory Criticised watch Criticised recovery Total criticised Non-performing Gross carrying amount Analysed by ECL staging Stage 1 Stage 2 Stage 3 POCI Total ECL allowance Analysed by forbearance type Temporary forbearance Permanent forbearance Analysed by internal credit ratings Strong Satisfactory Total strong/satisfactory Criticised watch Criticised recovery Total criticised Non-performing Gross carrying amount Analysed by ECL staging Stage 1 Stage 2 Stage 3 POCI Total ECL allowance At amortised cost Residential mortgages € m Other personal € m Property and construction € m Non-property business € m 629 564 1,193 – – – – 430 430 763 1,193 6 399 694 94 1,193 272 37 77 114 – – – – 23 23 91 114 1 22 91 – 114 61 169 348 517 – – – – 296 296 221 517 79 217 221 – 517 139 1,039 1,293 2,332 – – – – 1,645 1,645 687 2,332 7 1,638 687 – 2,332 537 At amortised cost Residential mortgages € m Other personal € m Property and construction € m Non-property business € m 1,033 1,146 2,179 – – – – 466 466 1,713 2,179 8 457 1,537 177 2,179 631 46 94 140 – – – – 45 45 95 140 2 43 95 – 140 63 154 171 325 – – – – 80 80 245 325 92 78 155 – 325 85 414 334 748 – – – – 393 393 355 748 20 376 352 – 748 193 2021 Total € m 1,874(1) 2,282(2) 4,156 – – – – 2,394 2,394 1,762 4,156 93 2,276 1,693 94 4,156 1,009 2020 Total € m 1,647(1) 1,745(2) 3,392 – – – – 984 984 2,408 3,392 122 954 2,139 177 3,392 972 (1) Of which: interest only € 1,161 million, reduced payment € 164 million, payment moratorium € 521 million (2020: of which: interest only € 1,002 million, reduced payment € 171 million, payment moratorium € 413 million). (2) Of which: arrears capitalisation and term extension € 864 million, restructure € 255 million, breech/adjustment of covenant € 416 million (2020: of which: arrears capitalisation and term extension € 898 million, restructure € 274 million, low fixed interest rate € 149 million). 144 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.1 Credit risk Additional credit quality and forbearance disclosures on loans and advances to customers Forbearance (continued) The Group’s focus continues to be on supporting its existing customers and ensuring they are provided with the appropriate forbearance measures, particularly in the current environment by providing support to customers impacted by COVID-19. The total forbearance portfolio has increased by € 0.8 billion to € 4.2 billion in the year (31 December 2020: € 3.4 billion). The increase in the year was predominately in the non-property business portfolio which increased by € 1.6 billion to € 2.3 billion (31 December 2020: € 0.7 billion) as permanent and temporary forbearance measures increased by € 1.0 billion and € 0.6 billion respectively. Term extensions and interest only requests were the most prevalent. The Capital Markets and AIB UK segment non-property forbearance portfolios both experienced increases of € 0.8 billion in the year. The increase reflects specific sectors in this portfolio which are highly impacted by COVID-19 such as hotels, licensed premises and retail. These sectors continue to be closely monitored by the Group. Republic of Ireland residential mortgages Residential mortgages subject to forbearance measures decreased by € 1.0 billion from € 2.2 billion at 31 December 2020 to € 1.2 billion at 31 December 2021. The decrease in the forbearance portfolio was impacted by the sales of non-performing mortgage portfolios completed during the year. The Group continues to closely monitor the residential mortgage portfolio for potential latent risk as the expiry of government support measures to support customers during COVID-19, may be delaying the realisation of forbearance and affordability issues. The residential mortgage portfolio subject to forbearance consists of € 0.6 billion relating to temporary arrangements and € 0.6 billion relating to permanent solutions. Interest only and arrears capitalisation were the most prominent forbearance solutions availed of by customers. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 145 2.2 Liquidity and funding risk Liquidity risk is the risk that the Group will not be able to fund its assets and meet its payment obligations as they fall due, without incurring unacceptable costs or losses. Funding is the means by which liquidity is generated, e.g. secured or unsecured, corporate or retail. In this respect, funding risk is the risk that a specific form of liquidity cannot be obtained at an acceptable cost. Identification and assessment Liquidity and funding risk is identified and assessed by the Group’s Material Risk Assessment (“MRA”) process in support of the Internal Liquidity Adequacy Assessment Process (“ILAAP”). The MRA process is a ‘top-down’ assessment performed on at least an annual basis and identifies the key material risks to the Group, taking into account its strategic objectives, in addition to internal and external risk information. The ILAAP is fully integrated and embedded in the strategic, financial and risk management processes of the Group. Embedding of the ILAAP is facilitated through the setting of risk appetite, liquidity and funding planning and the dynamic review thereof in light of key strategic decisions. The Group has a comprehensive ILAAP Framework for managing the Group’s liquidity risk and complying with the Board’s risk appetite as well as evolving regulatory standards. This is delivered through a combination of policy formation, governance, analysis, stress testing and limit setting and monitoring, and is part of the wider Risk Management Framework. Management and measurement* 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. The ILAAP framework and supporting Funding and Liquidity risk policy set out the key requirements for managing the risk. These include: • Adherence to both internal limits and regulatory defined liquidity ratios including the Liquidity Coverage Ratio (“LCR”) and the Net Stable Funding Ratio (“NSFR”). The LCR is designed to promote short term resilience of the Group’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; • Performing a multiyear projection of the Group’s funding sources taking into account its baseline scenario, strategy and operational plans as outlined in the Group’s Funding and Liquidity Plan. The purpose of this Plan is to set out a comprehensive, forward looking liquidity and funding strategy for the Group including subsidiary companies; • Assessing the Funding and Liquidity Plan under a range of adverse scenarios, the outcomes of which should ensure sufficient liquidity to implement a sustainable strategy even in a stressed environment; • Maintaining a Contingency Funding Plan that identifies and quantifies actions that are available to the Group in deteriorating liquidity conditions and emerge from a temporary liquidity crisis as a credit worthy institution; • Monitoring a further set of triggers and liquidity options outlined in the Group’s Recovery Plan, which presents the actions available to the Group to restore viability in the event of extreme stress; and • Having an approved liquidity cost-benefit allocation mechanism in place to attribute funding costs, benefits and risks to the Group’s business lines. Monitoring, escalating and reporting The Group liquidity and funding position is reported regularly to the Finance and Risk functions, Group Asset and Liability Committee (“ALCo”), Group Risk Committee (“GRC”) and Board Risk Committee (“BRC”). In addition, the Executive Committee (“ExCo”) and the Board are briefed on liquidity and funding on an ongoing basis. On an annual basis, the Board attests to the Group’s liquidity adequacy via the liquidity adequacy statement as part of ILAAP. The Group’s ILAAP encompasses all aspects of liquidity and funding management, including planning, analysis, stress testing, control, governance, policy and contingency planning. This document is submitted to the Joint Supervisory Team and forms the basis of their supervisory review and evaluation process. *Forms an integral part of the audited financial statements 146 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.2 Liquidity and funding risk (continued) Management of the Group liquidity pool The Group manages the liquidity pool on a centralised basis. The composition of the liquidity pool is subject to limits recommended by the Risk function and approved by the Board. The liquidity pool assets primarily comprise government guaranteed bonds, balances with central banks and internal and external covered bonds. At 31 December 2021, the Group held € 67,240 million (2020: € 53,816 million) in qualifying liquid assets “QLA”(1)/contingent funding of which € 17,366 million (2020: € 10,028 million) was not available due to repurchase, secured loans and other restrictions. The available Group liquidity pool is held to cover contractual and stress outflows. At 31 December 2021, the Group liquidity pool was € 49,874 million (2020: € 43,788 million). During 2021, the liquidity pool ranged from € 43,602 million to € 50,932 million (2020: € 29,176 million to € 45,241 million) and the average balance was € 47,196 million (2020: € 38,118 million). (1) QLA are assets 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. The Group’s liquidity pool increased in 2021 by € 6,086 million which was predominantly due to an increase in customer deposits in Ireland, senior debt issuance, customer loan redemptions and proceeds from the sale of loan portfolios offset by covered bond maturities and securities financing activities where cash was exchanged for non QLA eligible collateral. Other contingent liquidity The Group has access to other unencumbered assets providing a source of contingent liquidity which are not in the Group’s liquidity pool. However, these assets may be monetised in a stress scenario to generate liquidity through use as collateral for secured funding or outright sale. Liquidity stress testing Liquidity stress testing is a key component of the ILAAP framework. The Group undertakes liquidity stress testing that includes both firm specific and systemic risk events and a combination of both as a key liquidity control. Stressed assumptions are applied to the Group’s liquidity buffer and liquidity risk drivers. This estimates the potential impact of a range of stress scenarios on the Group’s liquidity position including its available liquid assets and contingent liquidity. 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. Liquidity stress test results are reported to the ALCo, ExCo and Board. Liquidity regulation The 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. The Group adheres to these requirements. Liquidity metrics Liquidity Coverage Ratio Net Stable Funding Ratio Loan to Deposit Ratio 2021 % 203 160 61 2020 % 193 148 69 The Group monitors and reports its current and forecast position against CRD IV and other related liquidity metrics and has fully complied with the minimum LCR requirement of 100% during 2021. The calculated NSFR is based on the second Capital Requirements Regulation (CRR2) that came into force in June 2021 and introduced a binding NSFR requirement of 100% (December 2020 comparative based on the legacy Basel standard). AIB Group plc Annual Financial Report 2021 Risk Management 147 2.2 Liquidity and funding risk (continued) Funding structure* The Group’s funding strategy is to deliver a sustainable, diversified and robust customer deposit base at economic pricing and to further enhance and strengthen the wholesale funding franchise with appropriate access to term markets to support core lending activities. The strategy aims to deliver a solid funding structure that complies with internal and regulatory policy requirements and reduces the probability of a liquidity stress, i.e. an inability to meet funding obligations as they fall due. Customer deposits represent the largest source of funding for the Group with the core retail franchises and accompanying deposit base in both Ireland and the UK providing a stable and reasonably predictable source of funds. Customer accounts Total Of which: Euro Sterling US dollar Other currencies 2021 € m 92,866 77,129 13,200 2,347 190 2020 € m 81,957 67,998 12,207 1,546 206 Customer accounts increased by € 10,909 million in 2021 predominantly due to continued COVID-19 related dynamics of precautionary savings and lower consumer consumption. This was reflected across the Group’s three significant currencies (EUR, GBP, USD) primarily in Euro current and demand deposit accounts. There was an increase in the value of both GBP and USD deposits of € 1,043 million due to currency movements coupled with an underlying increase in GBP and USD deposits of € 751 million on a constant currency basis. 1 2 3 4 5 6 *Forms an integral part of the audited financial statements 148 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.2 Liquidity and funding risk (continued) Composition of wholesale funding(1) The Group maintains access to a variety of sources of wholesale funding including bank deposits, securities financing, debt securities and subordinated debt. At 31 December 2021, total wholesale funding outstanding was € 17,802 million (2020: € 11,705 million) of which € 879 million is due to mature in less than one year (2020: € 927 million). Deposits by central banks and banks Securities financing Senior debt ACS Subordinated liabilities and other capital instruments Total 31 December Of which: Secured Unsecured Deposits by central banks and banks Securities financing Senior debt ACS Subordinated liabilities and other capital instruments Total 31 December Of which: Secured Unsecured < 1 month € m 1–3 months € m 3–6 months € m 6–12 months € m Total < 1 year € m 84 28 – – – 112 28 84 112 – 17 – 750 – 767 767 – 767 – – – – – – – – – – – – – – – – – – 1–3 years € m 10,000 – 1,911 1,000 – 3–5 years € m 298 – 1,383 – – 84 45 – 750 – 879 12,911 1,681 2021 Total € m 10,382 45 4,044 1,775 > 5 years € m – – 750 25 1,556 2,331 1,556 17,802 795 84 879 11,000 1,911 12,911 298 1,383 1,681 25 12,118 2,306 2,331 5,684 17,802 < 1 month € m 1–3 months € m 3–6 months € m 6–12 months € m Total < 1 year € m 217 185 – – – 402 185 217 402 – 25 – 500 – 525 525 – 525 – – – – – – – – – – – – – – – – – – 217 210 – 500 – 927 710 217 927 1–3 years € m 4,278 – 1,111 1,750 – 3–5 years € m – – 2,064 – – > 5 years € m – – – 25 2020 Total € m 4,495 210 3,175 2,275 1,550 1,550 7,139 2,064 1,575 11,705 6,028 1,111 7,139 – 2,064 2,064 25 1,550 6,763 4,942 1,575 11,705 (1)The maturity analysis has been prepared using the residual contractual maturity of the liabilities. The Group continued to participate in the ECB three year Targeted Long Term Refinancing Operation III (“TLTRO III”) scheme. These ECB operations are aimed to support the continued access of firms and households to bank credit by applying favourable interest rates to TLTRO III operations of participating banks subject to achieving prescribed lending targets and have the option of early repayment after the first year. Deposits by central banks and banks increased by € 5,887 million to € 10,382 million predominantly due to the Group’s € 6 billion drawdown in TLTRO III operations in June 2021. For further details, see note 32 ‘Deposits by central banks and banks’ to the consolidated financial statements. During 2021, senior debt increased € 869 million primarily reflecting a € 750 million issuance and a € 119 million USD foreign currency translation increase. Over the twelve months to 31 December 2021, outstanding asset covered securities (“ACS”) decreased € 500 million to € 1,775 million due to a contractual maturity. For further details, see note 34 ‘Debt securities in issue’ to the consolidated financial statements. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 149 2.2 Liquidity and funding risk (continued) Currency composition of wholesale debt At 31 December 2021, 89% (2020: 84%) of wholesale funding was in Euro with the remainder held in GBP and USD. The Group manages cross-currency refinancing risk against foreign exchange cash flow limits. Deposits by central banks and banks Securities financing Senior debt ACS Subordinated liabilities and other capital instruments Total wholesale funding % of wholesale funding EUR € m 10,083 15 2,500 1,775 1,512 15,885 % 89 GBP € m 298 – – – 44 342 % 2 USD € m Other € m – 30 1,544 – – 1,574 % 9 1 – – – – 1 % – 2021 Total € m 10,382 45 4,044 1,775 1,556 17,802 % 100 2020 Total € m 4,495 210 3,175 2,275 1,550 11,705 Other € m – – – – – – USD € m 16 65 1,425 – – 1,506 % 13 % – % 100 GBP € m 283 – – – 40 323 % 3 EUR € m 4,196 145 1,750 2,275 1,510 9,876 % 84 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. As part of managing its funding requirements, the Group encumbers assets as collateral to support wholesale funding initiatives. This would include covered bonds, securities repurchase agreements and other structures that are secured over customer loans. The Group manages encumbrance levels to ensure that the Group has sufficient contingent collateral to maximise balance sheet flexibility. The Group’s encumbrance ratio has increased to 15% at 31 December 2021 (2020: 11%) with € 19,841 million of the Group’s assets encumbered (2020: € 12,971 million). The increase in encumbered assets was due to the € 6 billion TLTRO III drawdown during the year. The encumbrance level is based on the amount of assets that are required in order to meet regulatory and contractual commitments. 150 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.2 Liquidity and funding risk (continued) 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 2021 and 2020: Financial assets(1) Derivative financial instruments(2) Loans and advances to banks(3) Loans and advances to customers(3) Securities financing Investment securities(4) Other financial assets Financial liabilities Deposits by central banks and banks Customer accounts Securities financing Derivative financial instruments(2) Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities Financial assets(1) Derivative financial instruments(2) Loans and advances to banks(3) Loans and advances to customers(3) Securities financing Investment securities(4) Other financial assets Financial liabilities Deposits by central banks and banks Customer accounts Securities financing Derivative financial instruments(2) Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities On demand € m – 1,209 2,225 – – – <3 months but not on demand € m 3 months to 1 year 1–5 years Over 5 years 2021 Total € m € m € m € m 58 113 1,489 853 522 842 28 1 1,993 1,324 1,111 – 211 – 585 – 16,776 35,910 1,713 6,290 – – 8,775 – 882 1,323 58,393 3,890 16,698 842 3,434 3,877 4,457 24,990 45,270 82,028 78 87,634 – – – – 1,375 89,087 6 4,161 45 116 750 – – – 851 – 104 – – – 10,298 192 – 170 4,294 – – – 28 – 672 775 1,556 – 10,382 92,866 45 1,062 5,819 1,556 1,375 5,078 955 14,954 3,031 113,105 On demand € m – 1,052 2,829 – – – <3 months but not on demand € m 103 40 1,494 648 689 365 3 months to 1 year 1–5 years Over 5 years 2020 Total € m 56 – 1,867 163 2,540 – € m 372 – € m € m 893 – 1,424 1,092 16,664 36,497 59,351 – 7,343 – – 811 8,706 19,278 – 365 3,881 3,339 4,626 24,379 46,096 82,321 212 69,302 – – – – 970 70,484 5 8,377 210 20 500 – – – 2,961 – 42 – – – 4,278 1,291 – 197 4,925 – – – 26 – 942 25 1,550 – 4,495 81,957 210 1,201 5,450 1,550 970 9,112 3,003 10,691 2,543 95,833 (1)Excludes balances at central banks – 2021: € 42,109 million (2020: € 24,932 million). (2)Shown by maturity date of contract. (3)Shown gross of expected credit losses. (4)Excluding equity shares. *Forms an integral part of the audited financial statements AIB Group plc Annual Financial Report 2021 Risk Management 151 2.2 Liquidity and funding risk (continued) 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 2021 and 2020: 1 2 3 4 5 6 <3 months but not on demand € m 6 4,160 45 140 771 – – 3 months to 1 year 1–5 years Over 5 years € m € m – 10,124 853 – 152 94 38 – 194 – 391 4,512 159 – € m – 32 – 355 780 1,857 – 2021 Total € m 10,208 92,873 45 1,038 6,157 2,054 1,375 5,122 1,137 15,380 3,024 113,750 <3 months but not on demand € m 5 8,378 210 67 533 – – 3 months to 1 year 1–5 years Over 5 years € m € m (15) 2,966 – 179 85 28 – 4,237 1,293 – 562 5,215 153 – € m – 26 – 371 31 1,847 – 2,275 9,193 3,243 11,460 2020 Total € m 4,439 81,965 210 1,179 5,864 2,028 970 96,655 Financial liabilities Deposits by central banks and banks Customer accounts Securities financing 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 Securities financing Derivative financial instruments Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities On demand € m 78 87,634 – – – – 1,375 89,087 On demand € m 212 69,302 – – – – 970 70,484 *Forms an integral part of the audited financial statements 152 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.2 Liquidity and funding risk (continued) 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. The Group has given commitments to provide funds to customers under undrawn facilities. The undiscounted cash flows have been classified on the basis of the earliest date that the facility can be drawn. The Group does not expect all facilities to be drawn, and some may lapse before drawdown. For further details see note 44 ‘Contingent liabilities and commitments’ to the consolidated financial statements. The following table analyses undiscounted cash flows potentially payable under guarantees and similar contracts at 31 December 2021 and 2020: Contingent liabilities Commitments Contingent liabilities Commitments On demand € m 819 13,727 14,546 On demand € m 722 12,504 13,226 <3 months but not on demand € m – – – <3 months but not on demand € m – – – 3 months to 1 year 1–5 years Over 5 years € m € m € m – – – – – – – – – 3 months to 1 year 1–5 years Over 5 years € m € m € m – – – – – – – – – 2021 Total € m 819 13,727 14,546 2020 Total € m 722 12,504 13,226 *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 153 2.3 Capital adequacy risk* Capital adequacy risk is the risk that the Group breaches or may breach regulatory capital ratios and internal targets, measured on a forward looking basis across a range of scenarios, including a severe but plausible stress. Identification and assessment Capital adequacy risk is primarily evaluated through the annual financial planning and the Group’s ICAAP processes where the level of capital required to support growth plans and meet regulatory requirements is assessed over the three year planning horizon. Plans are assessed across a range of scenarios ranging from base case and moderate downside scenarios to a severe but plausible stress using the Group’s stress testing methodologies. An annual material risk assessment is conducted to identify all relevant (current and anticipated) material risks which are then assessed from a capital perspective. Management and measurement The ICAAP is fully integrated and embedded in the strategic, financial and risk management processes of the Group. The Business Model and Capital Adequacy Framework 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. The impact of changing regulatory requirements, changes in the risk profile of the Group’s balance sheet and other internal factors, and changing external risks are regularly assessed by first line of defence and second line of defence teams via regular monitoring of performance against the agreed financial plan, monthly capital updates to ALCo and Group Risk Committees and are also assessed via quarterly internal stress testing. 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. The Group uses risk adjusted return on capital for capital allocation purposes and as a behavioural driver of sound risk management. The use of risk adjusted return on capital for portfolio management and in new 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. The Board reviews and approves the ICAAP on an annual basis and is also responsible for approving a capital adequacy statement attesting that the Board has reviewed and is satisfied with the capital adequacy of the Group. Monitoring, escalating and reporting The Group monitors its capital adequacy on a monthly basis when a capital reporting pack is presented to senior executives and Board setting out the evolution of the Group’s capital position. The risk profile including performance against risk appetite is presented to the Board Risk Committee and Board via the CRO report. The escalation process as stipulated under the RAS policy is commenced in the event of a breach of either the RAS watch trigger or limit for any of the metrics. This ensures Board and Regulator notification within approved timeframes. The output of quarterly stress tests is reviewed by 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. The ICAAP 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. *Forms an integral part of the audited financial statements 154 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.4 Financial risks (a) Market risk Market risk is the uncertainty of returns attributable to fluctuations in market factors. Where the uncertainty is expressed as a potential loss in earnings or value, it represents a risk to the income and capital position of the Group. 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 also an important component of market risk. Identification and assessment The key risks that the Group assumes in market risk as a result of its banking and trading book activities that have been identified as part of the MRA are: • Credit spread risk is the exposure of the Group’s financial position to adverse movements in the credit spreads of bonds held in the 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. The Group also monitors the credit spread risk in its hold-to-collect (“HTC”) bond portfolio; • 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; and • 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 Group’s Treasury function. Market risk scenarios are developed to test the capital requirements for this risk in the quarterly stress-testing process and the annual ICAAP. Management and measurement* The Market Risk Management framework and policies set out the key requirements for managing market risk. The key aspects of this are: • 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 with risk tolerances approved on an annual basis through the Group’s Risk Appetite process; • The Group documents its 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; and • Market risk is managed against a range of Board approved VaR limits which cover market risk in the trading book, interest rate risk 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. Market risk is managed and measured 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 year(1) time horizon, a 99% confidence level and a longer set of data. Credit risk issues inherent in the market risk portfolios are also subject to the credit risk framework that is described in Section 2.1. (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. Monitoring, escalating 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 Group Risk Committee (“GRC”) and Board Risk Committee (“BRC”) on a monthly basis through the CRO Report. *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 155 2.4 Financial risks (a) Market risk (continued) The following table sets out financial assets and financial liabilities at 31 December 2021 and 2020 subject to market risk analysed between trading and non-trading portfolios, showing the principal market risks to which the assets and liabilities are exposed: Market risk measures Carrying amount € m Trading portfolios € m Non-trading portfolios € m Risk factors 2021 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 Securities financing Investment securities Liabilities subject to market risk Deposits by central banks and banks Customer accounts Securities financing Trading portfolio financial liabilities 42,654 8 882 1,323 56,508 3,890 16,972 10,382 92,866 45 2 – 8 458 – – – – – – – 2 Derivative financial instruments 1,062 565 42,654 Interest rate, foreign exchange – 424 1,323 56,508 3,890 16,972 Interest rate, foreign exchange, equity Interest rate, foreign exchange, credit spreads, equity, inflation swap rates Interest rate, foreign exchange Interest rate, foreign exchange Interest rate, credit spreads, foreign exchange Interest rate, foreign exchange, credit spreads, equity 10,382 92,866 Interest rate, foreign exchange Interest rate, foreign exchange 45 – 497 Interest rate, credit spreads, foreign exchange Interest rate, foreign exchange, equity Interest rate, foreign exchange, credit spreads, equity, inflation swap rates Debt securities in issue Subordinated liabilities and other capital instruments 5,819 1,556 – – 5,819 Interest rate, credit spreads, foreign exchange 1,556 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 Securities financing Investment securities Liabilities subject to market risk Deposits by central banks and banks Customer accounts Securities financing Derivative financial instruments Debt securities in issue Subordinated liabilities and other capital instruments Market risk measures Carrying amount € m Trading portfolios € m Non-trading portfolios € m Risk factors 2020 25,550 1,424 1,092 56,841 811 19,479 4,495 81,957 210 1,201 5,450 1,550 – 650 – – – – – – – 646 – – 25,550 Interest rate, foreign exchange 774 1,092 56,841 811 19,479 4,495 81,957 210 555 5,450 Interest rate, foreign exchange, credit spreads, equity, inflation swap rates Interest rate, foreign exchange Interest rate, foreign exchange Interest rate, credit spreads, foreign exchange Interest rate, foreign exchange, credit spreads, equity Interest rate, foreign exchange Interest rate, foreign exchange Interest rate, credit spreads, foreign exchange Interest rate, foreign exchange, credit spreads, equity, inflation swap rates Interest rate, credit spreads, foreign exchange 1,550 Interest rate, credit spreads 156 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.4 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, +25 basis point and +50 basis point movement in interest rates, in terms of the impact on net interest income on a forward looking basis over a twelve month period, assuming no change in the balance sheet: Sensitivity of projected net interest income to interest rate movements: December 2021 Euro Sterling Other (mainly US $) Total € m - 100bps € m + 25bps € m + 50bps € m + 100bps (193) (59) (20) (272) 13 14 5 32 33 29 10 72 195 57 20 272 December 2020 Euro Sterling Other (mainly US $) Total € m - 100bps € m + 25bps € m + 50bps € m + 100bps (134) (63) (5) (202) 12 19 1 32 23 37 3 63 139 74 6 219 The above sensitivity table is computed under the assumption that all market rates (RFRs/Euribors/Swaps) move upwards or downwards in parallel, however, for upward rates only, the ECB refinancing rate increases by 50% of the market rates. In the downward scenario, market interest rates are floored at -1%, consistent with EBA IRRBB guidance. Euro currency NII sensitivity to rising rates is subdued while Euribor rates are below zero due to the impact of floors on reference rates in certain loan contracts. The interest rate sensitivity increased during the year as a result of additional balances held at the Central Bank, driven by the c. € 11 billion increase in deposits from customers throughout the year. 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. Group interest rate and foreign exchange rate VaR are calculated to a 95% confidence level with a one day holding period, and equity VaR is calculated to a 99% confidence level with a one day holding period. All VaR measures remained within limits throughout 2021 and at 31 December 2021, interest rate VaR stood at € 7.5 million, foreign exchange rate VaR at € 0.07 million and equity VaR at € 0.15 million. The Group 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 sensitivity* The net interest rate sensitivity of the Group at 31 December 2021 and 2020 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 rate sensitive financial instruments, and are shown separately below. *Forms an integral part of the audited financial statements AIB Group plc Annual Financial Report 2021 Risk Management 157 * 1 2 0 2 l a t o T m € 8 3 2 3 , 1 8 0 5 , 6 5 0 9 8 , 3 2 7 9 , 6 1 4 7 1 , 9 4 5 7 8 , 7 2 1 2 8 3 , 0 1 6 6 8 , 2 9 2 5 4 9 1 8 , 5 6 5 5 , 1 5 4 5 , 3 0 6 6 , 3 1 5 7 8 , 7 2 1 m € 8 – – – – 8 5 4 6 6 4 – – – 2 – – 5 6 5 – 7 6 5 – – ) 1 0 1 ( m € ) 3 0 1 ( ) 8 3 4 , 1 ( ) 8 1 ( m $ 1 9 0 , 1 m £ 9 1 0 6 4 m € g n i r a e b – 5 7 2 ) 7 9 9 , 1 ( – 4 7 2 7 0 6 , 6 9 5 1 , 5 – 9 6 1 , 1 4 – – – – – 0 8 9 , 2 0 6 6 , 3 1 9 0 8 , 7 5 ) 0 5 6 , 2 5 ( 1 0 1 m € ) 5 3 3 , 1 ( ) 7 5 7 , 3 4 ( m $ ) 2 0 4 , 1 ( 9 0 1 , 1 m £ ) 8 2 4 , 7 ( 1 4 4 m € – – – 2 8 6 6 1 6 , 6 – 8 9 2 , 7 – 6 2 – – 5 2 6 5 – – 7 0 1 ) 0 1 4 ( 1 0 6 , 7 1 5 7 , 2 5 m € 4 8 8 , 5 2 2 4 , 2 4 ) 1 4 ( m $ 1 1 5 , 2 m £ 8 5 7 , 1 9 6 8 , 7 i g n d a r T t s e r e t n i - n o N + s r a e y 5 5 < 4 m € s r a e Y – – 9 5 7 , 2 – 9 5 4 , 1 – 8 1 2 , 4 – – – – – – 0 5 7 0 0 0 , 1 0 5 7 , 1 ) 4 3 4 , 1 ( 2 0 9 , 3 0 5 1 , 5 4 m € 2 7 9 , 2 8 3 5 , 6 3 m $ 0 5 1 2 5 5 , 2 m £ 0 7 7 1 1 1 , 6 4 < 3 m € s r a e Y – – 7 5 7 , 2 – – 8 1 9 5 7 6 , 3 – – – – – – – 0 0 5 0 0 5 ) 8 2 2 ( 3 0 4 , 3 8 4 2 , 1 4 m € 4 0 0 , 3 6 6 5 , 3 3 0 3 m $ 2 0 4 , 2 m £ 0 7 3 1 4 3 , 5 3 < 2 m € s r a e Y – – 4 5 4 , 3 – – 2 2 2 , 1 6 7 6 , 4 – – – – – – 0 0 5 2 3 6 , 1 2 3 1 , 2 ) 6 6 9 , 1 ( 0 1 5 , 4 5 4 8 , 7 3 m € 2 5 1 , 4 2 6 5 , 0 3 ) 1 3 ( m $ 2 7 3 , 2 m £ 0 9 3 1 7 9 , 4 2 < 1 m € s r a e Y – – 6 9 9 , 2 – 9 8 9 , 1 – 5 8 9 , 4 – – – 2 6 1 2 6 1 , 2 – – – 4 2 3 , 2 ) 9 9 1 , 2 ( 0 6 8 , 4 5 3 3 , 3 3 m € 3 0 1 , 4 0 1 4 , 6 2 ) 0 2 ( m $ 3 0 4 , 2 m £ 6 7 7 1 8 5 , 4 m € 2 1 < 3 s h t n o M 3 < 1 m € s h t n o M – 1 8 9 4 , 3 – – 1 7 0 , 1 0 7 5 , 4 – 0 5 8 – – – – – – 0 5 8 ) 3 0 8 , 1 ( 3 2 5 , 5 5 7 4 , 8 2 m € 1 0 1 , 3 7 0 3 , 2 2 6 5 m $ 3 2 4 , 2 m £ 7 6 3 , 2 5 0 8 , 3 – – 1 9 1 , 7 – – 3 8 7 4 7 9 , 7 – 5 8 3 – 7 1 0 5 7 – – – 2 5 1 , 1 ) 9 1 3 , 2 ( 1 4 1 , 9 2 5 9 , 2 2 m € 2 6 8 , 4 6 0 2 , 9 1 m $ 6 8 5 7 6 3 , 2 m £ 3 3 6 , 3 8 3 4 , 1 1 < 0 m € h t n o M – 7 4 0 , 1 8 6 1 , 5 3 0 9 8 , 3 0 4 6 , 2 9 0 1 , 2 4 4 5 8 , 4 8 8 2 2 8 3 , 0 1 4 7 2 , 0 5 – – – – – 4 8 6 , 0 6 9 5 3 , 0 1 1 1 8 , 3 1 1 1 8 , 3 1 m € 4 4 3 , 4 1 4 4 3 , 4 1 m $ 1 8 7 , 1 1 8 7 , 1 m £ ) 5 9 1 , 2 ( ) 5 9 1 , 2 ( 1 ) 3 1 1 ( ) 3 6 ( ) 4 1 1 ( – ) 1 5 ( 0 1 ) 1 5 ( – ) 1 6 ( – ) 1 6 ( – ) 1 6 ( – ) 1 6 ( 9 5 ) 1 6 ( ) 0 2 1 ( ) 0 2 1 ( m € r e h t O m € r e h t O m € r e h t O m € r e h t O m € r e h t O m € r e h t O m € r e h t O m € r e h t O m € r e h t O m € r e h t O s t n e m u r t s n i l a t i p a c r e h t o d n a s e i t i l i b a i l i d e t a n d r o b u S y t i v i t i s n e s e t a r t s e r e t n i g n i t c e f f a s e v i t a v i r e D p a g y t i v i t i s n e s t s e r e n t I y t i u q e d n a s e i t i l i b a i l l t a o T s e i t i l i b a i l r e h O t y t i u q E s k n a b d n a s k n a b l a r t n e c y b s t i s o p e D s e i t i l i b a i l l i a c n a n i f o i l o f t r o p i g n d a r T e u s s i n i s e i t i r u c e s t b e D s t n u o c c a r e m o t s u C i g n c n a n i f s e i t i r u c e S s e i t i l i b a L i s t e s s a l i a c n a n i f o i l o f t r o p i g n d a r T s k n a b o t s e c n a v d a d n a s n a o L s r e m o t s u c o t s e c n a v d a d n a s n a o L s t e s s A s e i t i r u c e s t n e m t s e v n I i g n c n a n i f s e i t i r u c e S s t e s s a r e h O t s t e s s a l t a o T p a g y t i v i t i s n e s t s e r e t n i e v i t l a u m u C ) s t n u o m a y c n e r r u c o r u E ( p a g y t i v i t i s n e s t s e r e n t I p a g y t i v i t i s n e s t s e r e t n i e v i t l a u m u C p a g y t i v i t i s n e s t s e r e t n i e v i t l a u m u C p a g y t i v i t i s n e s t s e r e n t I l ) s t n e a v u q e i o r u e n i £ ( p a g y t i v i t i s n e s t s e r e n t I l ) s t n e a v u q e i o r u e n i $ ( p a g y t i v i t i s n e s t s e r e t n i e v i t l a u m u C l ) s t n e a v u q e i o r u e n i i s e c n e r r u c r e h O t ( p a g y t i v i t i s n e s t s e r e n t I p a g y t i v i t i s n e s t s e r e t n i e v i t l a u m u C ) d e u n i t n o c ( y t i v i t i s n e s e t a r t s e r e t n I – k s i r t e k r a M ) a ( s k s i r l a i c n a n F 4 . 2 i 1 2 3 4 5 6 s t n e m e t a t s l i a c n a n i f d e t i d u a e h t f o t r a p l a r g e t n i n a s m r o F * 158 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types * 0 2 0 2 l a t o T m € 2 9 0 , 1 1 4 8 , 6 5 1 1 8 9 7 4 , 9 1 2 6 1 , 2 3 5 8 3 , 0 1 1 5 9 4 , 4 7 5 9 , 1 8 0 1 2 0 5 4 , 5 0 5 5 , 1 2 0 3 , 3 1 2 4 , 3 1 5 8 3 , 0 1 1 m € – – – – 0 5 6 0 5 6 – – – – – 6 4 6 – 6 4 6 – 4 – ) 2 ( m € ) 2 0 1 ( ) 3 ( m $ ) 2 6 5 ( m £ 1 1 1 5 1 m € g n i r a e b 2 6 2 ) 0 0 6 , 2 ( – 1 0 2 9 7 5 , 6 2 4 4 , 4 – – – – 1 1 3 , 9 3 – 6 5 6 , 2 1 2 4 , 3 1 8 8 3 , 5 5 ) 6 4 9 , 0 5 ( ) 4 ( m € ) 0 0 1 ( ) 0 0 7 , 2 4 ( m $ ) 9 5 5 ( ) 3 8 5 , 1 ( m £ 0 4 1 ) 5 0 2 , 7 ( m € – 4 6 8 – 9 9 8 , 6 – 3 6 7 , 7 – 3 2 – 5 2 – – 0 5 0 , 1 8 9 0 , 1 ) 4 8 3 , 1 ( 9 4 0 , 8 2 4 9 , 0 5 m € 0 9 4 , 6 0 0 6 , 2 4 m $ 6 5 4 2 0 , 1 m £ 3 0 5 , 1 5 4 3 , 7 i g n d a r T t s e r e t n i - n o N + s r a e y 5 5 < 4 m € s r a e Y – 7 7 5 , 2 – 1 0 9 – 8 7 4 , 3 – 4 – 0 0 5 – – – 4 0 5 ) 9 3 5 ( 3 1 5 , 3 3 9 8 , 2 4 m € 2 9 2 , 3 0 1 1 , 6 3 ) 9 4 ( m $ 8 6 9 m £ 0 7 2 2 4 8 , 5 4 < 3 m € s r a e Y – 6 7 0 , 2 – – 3 2 5 , 1 9 9 5 , 3 – – 4 2 2 0 0 5 5 6 5 , 1 – – 9 8 2 , 2 ) 2 1 3 , 1 ( 2 2 6 , 2 0 8 3 , 9 3 m € 7 3 3 , 2 3 < 2 m € s r a e Y – 1 7 5 , 2 – – 1 0 3 , 2 2 7 8 , 4 – – 7 5 1 0 1 1 , 2 – – – 7 6 2 , 2 ) 7 1 3 , 1 ( 2 2 9 , 3 8 5 7 , 6 3 m € 8 7 5 , 3 2 < 1 m € s r a e Y – 2 3 9 , 1 – 0 3 5 , 1 – 2 6 4 , 3 – 5 7 7 – 0 5 7 – – – ) 4 1 1 ( 5 2 5 , 1 1 5 0 , 2 6 3 8 , 2 3 m € 0 6 6 , 1 m € 2 1 < 3 s h t n o M – 5 6 2 , 3 3 6 1 0 9 4 , 2 – 8 1 9 , 5 – 3 5 8 , 2 – – – – – 3 5 8 , 2 ) 9 4 5 , 1 ( 4 1 6 , 4 5 8 7 , 0 3 m € 0 2 4 , 2 3 < 1 m € s h t n o M – 4 5 5 , 8 4 4 5 6 0 3 , 1 – 4 0 4 , 0 1 – 8 4 8 5 2 0 0 5 – – – ) 9 8 5 ( 3 7 3 , 1 0 2 6 , 9 1 7 1 , 6 2 m € 3 2 8 , 7 8 1 8 , 2 3 1 8 4 , 0 3 3 0 9 , 6 2 3 4 2 , 5 2 3 2 8 , 2 2 3 m $ 7 1 0 , 1 m £ 2 8 2 2 7 5 , 5 m $ 4 2 4 1 0 , 1 m £ 0 2 3 0 9 2 , 5 m $ 6 2 0 9 9 m £ 5 6 3 0 7 9 , 4 m $ 7 2 2 4 6 9 m £ 7 6 9 , 1 5 0 6 , 4 m $ 3 3 4 7 3 7 m £ 8 5 3 , 1 8 3 6 , 2 1 < 0 m € h t n o M 0 3 8 2 0 6 , 7 3 4 0 1 8 2 3 , 2 3 3 9 , 4 2 7 9 7 , 5 6 5 8 1 5 9 4 , 4 2 6 7 , 7 3 – – – – 2 4 4 , 2 4 4 0 8 , 6 1 5 5 , 6 1 1 5 5 , 6 1 m € 0 0 0 , 5 1 0 0 0 , 5 1 m $ 4 0 3 4 0 3 m £ 0 8 2 , 1 0 8 2 , 1 ) 2 ( 3 1 5 2 4 5 5 1 5 – ) 7 2 ( – ) 7 2 ( – ) 7 2 ( – ) 7 2 ( – ) 7 2 ( – ) 7 2 ( 6 ) 7 2 ( ) 3 3 ( ) 3 3 ( m € r e h t O m € r e h t O m € r e h t O m € r e h t O m € r e h t O m € r e h t O m € r e h t O m € r e h t O m € r e h t O m € r e h t O s t n e m u r t s n i l a t i p a c r e h t o d n a s e i t i l i b a i l i d e t a n d r o b u S y t i v i t i s n e s e t a r t s e r e t n i g n i t c e f f a s e v i t a v i r e D p a g y t i v i t i s n e s t s e r e n t I y t i u q e d n a s e i t i l i b a i l l t a o T s e i t i l i b a i l r e h O t y t i u q E s k n a b d n a s k n a b l a r t n e c y b s t i s o p e D e u s s i n i s e i t i r u c e s t b e D s t n u o c c a r e m o t s u C i g n c n a n i f s e i t i r u c e S s r e m o t s u c o t s e c n a v d a d n a s n a o L s k n a b o t s e c n a v d a d n a s n a o L s t e s s A s e i t i r u c e s t n e m t s e v n I i g n c n a n i f s e i t i r u c e S s t e s s a r e h O t s t e s s a l t a o T s e i t i l i b a L i p a g y t i v i t i s n e s t s e r e t n i e v i t l a u m u C p a g y t i v i t i s n e s t s e r e t n i e v i t l a u m u C ) s t n u o m a y c n e r r u c o r u E ( p a g y t i v i t i s n e s t s e r e n t I p a g y t i v i t i s n e s t s e r e t n i e v i t l a u m u C l ) s t n e a v u q e i o r u e n i $ ( p a g y t i v i t i s n e s t s e r e n t I l ) s t n e a v u q e i o r u e n i £ ( p a g y t i v i t i s n e s t s e r e n t I p a g y t i v i t i s n e s t s e r e t n i e v i t l a u m u C l ) s t n e a v u q e i o r u e n i i s e c n e r r u c r e h O t ( p a g y t i v i t i s n e s t s e r e n t I p a g y t i v i t i s n e s t s e r e t n i e v i t l a u m u C ) d e u n i t n o c ( y t i v i t i s n e s e t a r t s e r e t n I – k s i r t e k r a M ) a ( s k s i r l a i c n a n F 4 . 2 i s t n e m e t a t s l i a c n a n i f d e t i d u a e h t f o t r a p l a r g e t n i n a s m r o F * 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 159 2.4 Financial risks (a) Market risk (continued) Interest rate benchmark reform Authorities and regulators have been facilitating the market’s transition from interbank offered rates, referred to as “IBOR” benchmark rates (e.g. LIBOR), to alternative Risk Free Rates (“RFRs”) by the end of 2021. In line with regulatory guidance and transformed market practice, SONIA (Sterling Overnight Index Average) has effectively replaced GBP LIBOR and SOFR (Secured Overnight Financing Rate) has been adopted to replace USD LIBOR in pricing new loans. The transition not only impacted financial market participants, but also many of the Group’s customers who had an IBOR referenced in their contract. IBORs were extensively embedded within the Group’s processes, hence, the transformation had far reaching impacts in terms of pricing, operations, risk, accounting, data and technology infrastructure, along with potential conduct risk implications. The Group established a bank-wide Interest Rate Benchmark Reform Transition Programme (“the Programme”) with sponsorship from the Chief Financial Officer to manage the effort. The Programme spanned all business lines and had cross-functional support to ensure an orderly transition was achieved by the 31 December 2021 deadline. The Programme, which is formally concluding in the first quarter of 2022, oversaw the successful execution of all business readiness, technology, GBP LIBOR contract re-papering, customer communication and conduct activities. The Group proactively engaged with its customer base and market counterparties to complete the repapering of substantially all GBP LIBOR contracts by 31 December 2021, with a minimum number transitioning to synthetic GBP LIBOR (a regulatory-approved form of Libor with limited application) at that point. New RFR lending products have also been introduced and adopted across the Group’s key currencies. Following the conclusion of the formal Programme, residual IBOR transition activities will be undertaken by the relevant business and support functions under established procedures. In particular, the focus will move to proactively managing the € 2.4 billion of USD LIBOR lending and € 2.4 billion of USD LIBOR related derivatives. Details on the Group’s adoption of the “Amendments to IFRS 9, IAS 39 and IFRS 7 Interest Rate Benchmark Reform” can be found in note 1 accounting policy (q). Structural foreign exchange risk Structural foreign exchange risk is the exposure of the Group’s capital ratios to changes in exchange rates and results from net investment in subsidiaries, associates and branches, the functional currencies being currencies other than Euro. The Group is exposed to foreign exchange risk as it translates foreign currencies into Euro at each reporting period and the currency profile of the Group’s capital may not necessarily match that of its assets and risk-weighted assets. Exchange differences on structural exposures are recognised in ‘other comprehensive income’ in the financial statements. The Group ALCo monitors structural foreign exchange risk and the foreign exchange sensitivity of consolidated capital ratios. This impact is measured in terms of basis point sensitivities using scenario analysis. 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 CET1 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 2021 (0.18%) 0.20% 2020 (0.17%) 0.16% The above analysis is subject to certain simplifying assumptions such as GBP/EUR and USD/EUR foreign exchange rates moving in the same direction and at the same time. 160 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.4 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; and – 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 Group maintains a number of defined benefit pension schemes for current and former employees. All defined benefit schemes operated by the Group closed to future accrual no later than the 31 December 2013 and staff transferred to defined contribution schemes for future pension benefits. Each scheme has a separate trustee board and the Group has agreed funding plans to deal with deficits where they exist. As part of any funding agreement, the Group engages with each trustee regarding an appropriate investment strategy to reduce the risk in that 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. 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 the Internal Capital Adequacy Assessment Process (“ICAAP”) as well as quarterly internal stress tests and monthly reporting of pension risk against risk appetite. Management and measurement* The pension risk framework and policies set out the key risk management rules in place for this risk. 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. The Group has developed a strategy 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 and funding plans, taking into account the nature of their liabilities. The Irish scheme continued to de-risk in 2021, with further allocations to liability matching assets. As part of a strategy to increase the holding in inflation linked assets, the allocation to the Liability Driven Investment (“LDI”) portfolio, which is used to hedge the scheme’s liabilities against both interest rate and inflation risk, has increased. Inflation swap exposures account for 12% of scheme assets as at 31 December 2021 and inflation linked bond holdings account for 31% of assets, an increase from 23% as at 31st December 2020. The LDI fund is comprised of a mixture of nominal bonds, inflation linked bonds and inflation derivatives. The scheme maintained a similar weighting in equities in 2021 and continues to have an equity protection strategy in place. Independent actuarial valuations for the AIB Group Irish Pension Scheme and the AIB Group UK Pension 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. The next actuarial valuation of the Irish scheme as at 30 June 2021 is ongoing and due to be completed by no later than 31 March 2022. No deficit funding is anticipated at this time as the Irish scheme continues to meet the minimum funding standard. The most recent valuation of the UK scheme was carried out at 31 December 2017. The next actuarial valuation of the UK scheme as at 31 December 2020 is due to be completed by no later than 31 March 2022. The Group and the Trustee of the UK scheme agreed funding payments under an arrangement agreed in December 2019 which is described below. As part of the investment strategy in the UK scheme, it was significantly de-risked in In December 2019. The Group agreed a revised funding arrangement for the UK scheme with the Scheme Trustee to support the purchase of the pensioner buy-in policy in respect of the pensioner members and an assured payment policy (“APP”) in respect of the deferred members. A contribution of £ 18.5 million was made in 2021. Under this funding arrangement, the Group also expects to make payments of £ 18.5 million in both 2022 and 2023, with a final balancing payment, based on latest estimates of c. £ 60 million. This is subject to change prior to finalisation. *Forms an integral part of the audited financial statements 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 161 2.4 Financial risks (b) Pension risk (continued) Monitoring, escalating and reporting* Pension risk is monitored and controlled in line with the requirements of the Group’s pension risk framework and policy. The surplus or deficit is monitored on a monthly basis by the Group’s risk team and is currently reported monthly in both the financial risk report to the Group Assets and Liabilities Committee and the Group Chief Risk Officer (“CRO”) report to Group Risk Committee and Board Risk Committee. Pension risk is also included in the quarterly internal stress test. The output of quarterly stress tests is reviewed by 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 measured and reported monthly in the CRO report against a Group Risk Appetite Statement watch trigger. 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. 2.4 Financial risks (c) Equity risk Banking book equity investment risk refers to the possibility of losses arising in the equity investment portfolio of the Group due to changes in the economic value of the investments. Where the uncertainty is expressed as a potential loss in value, it represents a risk to the income and capital position of the Group. Identification and assessment All equity proposals are considered to ensure all aspects of the proposal are fully and consistently addressed. Where a proposal for a new equity investment or divestment opportunity arises, the business sponsor must engage with the Equity Capital team when developing the proposal, and liaise with Finance to assess the accounting and regulatory implications. The business will review and comment on all proposals and recommend proposals for approval through the appropriate governance process. All new investments need to adhere to relevant regulatory and accounting requirements. Management and measurement Exposures are reported on in line with Risk appetite requirements. Risk measurement is also captured through stress testing. A forward looking stress test must be produced on a quarterly basis. The stress test will project the impact on the capital requirements for the business, of stresses to the underlying risk factor. Management projections of the future business mix must be factored into the analysis and be consistent with projections included in business area plans for equity risk. Where appropriate, risk exposures must be proxied with historical data to enable standard risk measurement techniques to be applied. Monitoring, escalating and reporting The Equity Capital team reviews risk exposure levels on an ongoing basis, ensures there is no undue risk concentration and considers whether the level of risk exposures remains appropriate. Exposures are currently reported monthly to Risk and the Group Assets and Liabilities Committee (“ALCo”) and any limit/policy breaches or exceptions are recorded that arose during the period. Risk provide management with an independent perspective on the risk-taking activities within the equity investment portfolio monthly via the Financial Risk ALCo report, RAS limit report and the CRO report. Additionally, there is a quarterly valuation review process in place and Board and segment limits are applied and reported on and an escalation process is set out in the Equity Policy. *Forms an integral part of the audited financial statements 162 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.5 Business model risk Business model risk is the risk of not achieving the agreed strategy or approved business plan either as a result of an inadequate implementation plan, or failure to execute the implementation plan as a result of inability to secure the required investment, or due to factors in the economic, political, competitive or regulatory environment. This also includes the risk of implementing an unsuitable strategy, or maintaining an obsolete business model, in light of known internal and external factors. Identification and assessment The Group’s material risk assessment process identifies the key elements of business model risk. The process includes identifying the associated sub-risks such as strategic planning risk, strategic execution risk and governance risk and the emerging risk drivers including weak credit demand, increased competition and market volatility. The Group also identifies and assesses the risk as part of its integrated planning process, which encapsulates strategic, business and financial planning. This process drives delivery of 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 processes. Every year, the Group prepares three-year business plans at a Group level based on macroeconomic and market forecasts across a range of scenarios (including a range of “downside” 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 discussions on new lending volumes and pricing, deposits volumes and pricing, other income, cost management initiatives and credit performance. The plan is subject to robust review and challenge through the governance process including an independent second line of defence review and challenge by the Risk function. The impact of inorganic initiatives such as the recent acquisition of Goodbody and the proposed Ulster Bank commercial loan book on the Group’s financial outcomes and business model risk profile is assessed as part of the approval process and through the financial planning process. 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 business 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. The Group reviews underlying assumptions on its external operating environment to identify potential risks 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. Management and measurement 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 Executive Committee performance scorecards. Monitoring, escalating and reporting Performance against plan is monitored at business 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 Executive Committee and Board. Monitoring of the risk profile via the CRO report, including performance against risk appetite is presented to the Board Risk Committee and Board. The escalation process, as stipulated under the RAS policy, is commenced in the event of a breach of either the RAS watch trigger or limit for any of the metrics. This ensures Board and Regulator notification within approved timeframes. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 163 2.6 Operational risk Operational risk is the risk arising from inadequate or failed internal processes, people and systems, or from external events. This includes legal risk – the potential for loss arising from the uncertainty of legal proceedings and potential legal proceedings. Identification and assessment Operational risk is identified and assessed by the Group’s material risk assessment which is a top-down process and it also identifies the sub risks such as information security (including cyber risk), change risk, physical safety and property risk, continuity and resilience risk, product and proposition risk, third party risk, IT risk, data risk (including data quality risk) and legal risk. The risk and control assessment is the Group’s core bottom-up process for the identification and assessment of operational risk across the Group. The risk and control assessment 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 system. Service assessments and risk assessments are performed on all critical or important outsourcing arrangements and are recorded on SHIELD. SHIELD provides all areas with one consistent view of the operational risks, controls, actions and events across the Group. Risk and control assessments are regularly reviewed and updated by business unit management. The potential impact of the identified risks are then assessed through the ICAAP and stress-testing processes where scenarios relating to this risk such as internal/external fraud, systems failure, property damage, third party technical issues, disruptive weather conditions, are developed and incorporated into the overall outcomes. Management and measurement The Operational Risk Framework sets out the principles, supporting policies, roles and responsibilities, governance arrangements and processes for operational risk management across the Group. Each sub risk has a supporting policy in place to outline the minimum control standards and core policy rules that must be adhered to. The nine material operational sub risks are owned and actively monitored under the Operational Risk Framework and underlying Policies to ensure material operational risks are managed effectively within the Group RAS limits. The Operational Risk Framework and policies set out the process for risk and control assessments, identification of the key non-financial risks arising from key business processes and activities. It also includes the process for the escalation of the relevant RAS metric limit and watch-trigger breaches. 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 such as: • • • comprehensive crime/computer-crime/cyber/professional indemnity/civil liability; employment practices liability; and directors and officers liability and a suite of general insurance policies to cover such things as property and business interruption, terrorism, employee and public liability and personal accident. Operational risk is measured through a series of risk appetite metrics and key risk indicators, these include metrics on operational risk losses and events; cyber security, change initiatives, quality and accessibility of priority data, service availability and third party risks. Monitoring, escalating and reporting In addition to risk appetite measures and limits, operational risk is monitored on a regular basis via the Group’s risk governance committees. This provides senior management, through the Operational Risk Committee and Group Risk Committee and the Board through Board Risk Committee with timely updates on the Group’s operational risk profile. The profile update details the current status of the Group’s key operational risks and includes an overview of current trends. It also includes an update on recent major risk events and any remediation actions/lessons identified following events. Operational risk events are identified and captured in the SHIELD system. These are escalated through a defined process depending on impact and severity. Root causes of events are determined, and action plans are implemented to ensure there are enhanced controls in place to keep customers and the business safe. 164 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.7 Regulatory compliance risk Regulatory compliance risk is defined in the Regulatory Risk Management Framework as the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with principal laws, regulations, rules, related self- regulatory organisation standards, and codes of conduct applicable to its banking activities as outlined in its regulatory compliance universe. This includes the suite of Conduct of Business, Prudential, Data Protection and Financial Crime laws, codes and regulations. Identification and assessment The Group’s material risk assessment and risk and control assessment forms the basis for identifying the key drivers of regulatory compliance risk. The associated sub-risks risk include prudential regulation, conduct of business regulation, financial crime and data protection. The material risk assessment has identified other key risks in this regard as: • The complexity and volume of regulatory change for example PSD2 eCommerce SCA, AMLD, CRR II, Loan Origination and the rapidly evolving international sanctions environment, raises the risk of regulatory compliance failure and/or regulatory sanction. The key areas of focus of both the Central Bank of Ireland (“CBI”) and the Joint Supervisory Teams (“JST”) includes: • CBI Consumer Protection Outlook report and Dear CEO letters; • Tracker Mortgage Examination; • Regulated firms that are subject to the regulation from the CBI and JST are fully compliant with their obligations and are treating their customers, existing and new, in a fair and transparent way, including the embedding of directives and regulations; • Consumer protection following the COVID-19 pandemic; • Continued focus on the full implementation of the suite of prudential requirements including Capital Requirements Directive (“CRD”) and Capital Requirements Regulation (“CRR”), and the binding technical standards and guidelines; and • Climate and ESG issues where the CBI has noted its expectations for firms to follow including the requirements relating to governance, risk management frameworks, scenario analysis, disclosures and strategy, and business model risks. Management and measurement The Regulatory Compliance Risk Management Framework sets out the principles, roles and responsibilities, and governance arrangements and is supported by a number of key policies. The upstream regulation team identifies and communicates new and/or amended regulations, within the regulatory compliance universe, to the relevant business area for impact assessment. The key steps in upstream regulation risk management are: • Upstream regulation team identifies regulatory compliance change through horizon scanning; • Impact assessment is performed by the relevant business unit or stakeholder area to establish high level change, potential impact and timeframe for completion; • Stakeholder engagement in the consultation process, including identification of business sponsors and communication of same to the relevant compliance relationship managers; • If required, such as in the event of a policy or framework update as a result of impacting regulations, the regulatory gap analysis is performed and documented by the business unit; • If required as a result of impacting regulations, a regulatory change project is established by the business unit with relevant impacted stakeholders. Impacted areas are required to review their procedures and processes to ensure compliance with regulations by the implementation date; • Regulatory interpretations are drafted and managed by the regulation/article owner, with second line of defence review and challenge completed by the compliance advisory team; • Regulatory compliance universe is updated as required as new regulation is issued which sits in the regulatory compliance universe. The horizon is monitored to capture any updates required; and • A regulatory compliance risk appetite statement metric exists in relation to upstream monitoring and it considers issues impacting the ability to meet regulatory implementation dates. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 165 2.7 Regulatory compliance risk (continued) Monitoring, escalating and reporting Regulatory compliance risks are monitored on a monthly basis via the Group’s risk governance committees. This occurs initially at the Regulatory and Conduct Risk Committee (“RCR”) and key items are brought through to Group Risk Committee and Board Risk Committee for discussion and escalation where appropriate. This includes an update on recent significant events and any remediation actions or lessons identified following events. The RCR is the forum that provides risk oversight of regulatory and conduct risks of the Group including oversight of its subsidiaries. The RCR was established by, and is accountable to, the Group Risk Committee, to oversee regulatory and conduct risks across the Group, including monitoring, reviewing the regulatory and conduct risk profile, compliance with risk appetite and other approved policy limits. It is also responsible for reviewing risk policies and recommending these for approval to the Group Risk Committee. Compliance Advisory establish written guidance to staff on the appropriate implementation of relevant laws, rules and standards through relevant regulatory compliance policies and support the first line business units in understanding and implementing their regulatory compliance obligations and management of the associated regulatory compliance risks in line with the Regulatory Compliance and Conduct Risk Appetite Statements. As part of their role engaging with the first line, Compliance Advisory assist the business in maintaining a positive and transparent relationship with the Regulators in respect of regulatory compliance and conduct matters. Group Risk Assurance (“GRA”) provides independent review and objective assurance on the quality and effectiveness of the Group’s internal control system, including the Risk Governance Policies and Frameworks in accordance with a Board approved risk-based assurance plan. 2.8 Conduct risk Conduct risk is defined as the risk that inappropriate actions or inactions by the Group cause poor and unfair customer outcomes or negatively impact market integrity. The effective management of conduct risk requires embedding of a strong conduct culture with a customer centric approach to conduct risk management as articulated in the Group’s values, behaviours and code of conduct. The conduct risk priorities for the Group include: • A Customer First culture, as articulated by the brand values, behaviours and code of conduct, is embedded and demonstrated throughout the organisation; • A mature Group Conduct Risk Framework aligned with the Group’s Strategy, is embedded in the organisation that provides oversight of conduct risks at Executive Committee and Board level; and • Customers, existing and new, are treated in a fair and transparent way. Identification and assessment The Group’s material risk assessment and risk and control assessment forms the basis for identifying the key elements of conduct risk. The Group has identified the main risk drivers pertaining to conduct risk and these are reviewed on an annual basis as part of the material risk assessment process. These include, inter alia: • The pace and complexity of changing industry best practice and clarifications received in relation to regulatory expectations can drive an accelerated process for changing products, practices, services and cultures; • Changing societal expectations of banks can influence the conduct decisions by the appropriate authorities; • Increased competition in terms of resources, skills, financial service industry participants including competitors where the customer engages digitally and remuneration practices; • Negative macroeconomic environment can result in unexpected bank and/or employee behaviour and potential increased market instability and wholesale market conduct risk; and • Climate change-related risks (both physical and transition) may result in poor customer outcomes such as products not aligned to climate risk drivers. Conduct risks are identified during the risk and control assessment process which provides documentary evidence of risk assessments. It determines the risk profile of the business, drives risk management and actions plans including key risk indicator development and reporting. A risk register of the Group’s material risks is also maintained. The risk and control assessment has identified a number of key conduct risks relating to customer satisfaction, employee behaviour and clients, business and product practice. Group Conduct completes horizon scanning and benchmarking to identify future conduct risk considerations within business and regulatory environments. In addition, Risk, through the Compliance and Group Risk Assurance function, identify upstream conduct risk and communicate to the relevant business areas. 166 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.8 Conduct risk (continued) Management and measurement The Group has a Conduct Risk Framework and Conduct Risk Policy which applies to the Group including all subsidiaries. This Framework and Policy, as well as other supporting policies, are in place to drive the consistent management of this risk such as: • An approved Group conduct strategy, aligned with the Group’s purpose, strategy and core values, is supported by the annual business segment action plans, delivering against key strategic objectives, ensuring continued progress on embedding conduct and meeting evolving regulatory expectations. These are subject to review by the Group Conduct Risk function prior to approval and also throughout the year to test the embeddedness of the strategy; • All new products, propositions, training and awareness building are independently assessed by the Group Conduct Risk function to ensure they are aligned to the Group’s conduct strategy and cannot be implemented without their approval. More consistent complaints management has been developed by differentiating between complex and less complex complaints, with business areas managing and addressing the more straightforward complaints while complex complaints are increasingly addressed centrally via the Group’s Customer Care Centre of Excellence. This has resulted in improved closure times, customer satisfaction rates, improvements to products as feedback from complaints to product areas has improved; and • The Conduct risk RAS is owned by the Compliance function, consisting of qualitative statements and key risk indicator metrics. The key risk indicators establish specific limits, ceilings and floors that relate to the qualitative RAS. Risk, through the Compliance and Group Risk Assurance function, provide independent challenge of potential and identified conduct risks and provide advice to business segments on Conduct risk issues. Business conduct dashboards measure key management information trends under the five key conduct risk areas, as reflected in the Group’s conduct strategy. • Trends and themes are monitored including social media and root cause analysis is conducted of underlying issues. • The Group Head of Conduct in the first line of defence is a member of a number of key working groups and fora regarding the management and measurement of conduct risk, and provides challenge on RAS metrics which are monitored monthly, customer solutions and the resolution of materialised conduct risks. Monitoring, escalating and reporting The Group Conduct Committee together with Business Conduct Committees operating to standard terms of reference actively drive the conduct agendas and manage conduct risk within their businesses. Conduct risks are assessed and monitored across the Group in line with risk management procedures. Significant conduct events are assessed and remedial actions implemented where necessary. These are escalated based on a materiality assessment, in line with the Conduct Risk Framework. Conduct risks and controls are monitored on a monthly basis via the Group’s risk governance committees. This provides the Group Risk Committee and the Board Risk Committee with relevant updates on the conduct risk profile. The profile update details the current status of the Group’s key conduct risks, includes an overview of current trends, an update on recent significant events and any remediation actions or lessons identified following events. From a Prudential perspective the Group reports the financial impact of conduct risk events through the annual operational risk ICAAP, quarterly COREP submissions and the biennial EBA Stress Testing exercise. The Regulatory and Conduct Risk Committee (“RCR”) is the forum that provides risk oversight of regulatory and conduct risks of the Group including oversight of its subsidiaries. The RCR was established by, and is accountable to, the Group Risk Committee to oversee regulatory and conduct risks across the Group. This includes monitoring and reviewing the Group’s regulatory and conduct risk profile, compliance with risk appetite and other approved policy limits, reviewing risk policies and recommending these for approval to the Group Risk Committee. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Risk Management 167 2.9 People and culture risk 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 the inability to evolve the culture aligned to its values and behaviours. Identification and assessment The material risk assessment identifies the Group’s key material risks including people and culture risk and its sub-risks including attrition risk, engagement risk, capability risk and culture risk and the emerging risk drivers including changing workforce demographics, future COVID-19 variants, remote/hybrid working for longer term, changing market perceptions as employer of choice, changing business model, ineffective leadership and negative media coverage through the completion of a top-down review. Bottom-up risk assessments are then captured through the risk and control assessment process in each business area across the Group. The risk and control assessment in 2021 has identified the key people and culture risks to be capacity, resourcing, recruitment and retention. The risk and control assessment is the Group’s core bottom-up process which serves to ensure that key risks are proactively identified, evaluated, monitored and reported, and that appropriate action is taken. The risk and control assessment includes a requirement to perform a self-assessment of the risks at each business unit level. The potential impact of these risks are then assessed through the ICAAP and stress-testing processes where scenarios relating to this risk such as employment practices and workplace safety are developed and incorporated into the overall outcomes. Management and measurement There is a People and Culture Risk Framework in place which is supported by various HR policies to drive the consistent management of this risk. Key management actions include: • Significant enhancement of the Group’s wellbeing, engagement, inclusion and diversity strategies which has been one of the Group’s key response strategies and mitigants to the unprecedented challenges of COVID-19. • 2021 has seen an acceleration in the competition for talent with expectations that the external environment is going to remain strong in terms of demand for talent. The Group has responded with a very strong focus on senior talent identification and has in particular generated increased internal talent mobility. There has also been significant investment in terms of developing staff capabilities across the Group. • Continuing the Group’s Culture development journey with progress being made throughout the year. The Group continues to be an active member of the Irish Banking Culture Board. • Continued embedding of 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. • Further re-iteration of the Group’s ‘Speak up’ policy through the “Speak Your Mind” week held in 2021 that encouraged employees to speak their mind, and in particular the importance of reporting wrongdoing. This 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 ongoing quantum and pace of the transformation and change agenda across the Group impacting on resource contention and capacity, together with the accelerated pace of recruitment across the external market in certain highly skilled and specialised areas. A number of positive initiatives are underway to address these issues. • Ongoing use of the Aspire Performance Management Programme (“Aspire”), which facilitates quality performance discussions with staff that contributes 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 completion. Aspire allows the Group embrace the right behaviours and outcomes with equal weighting, to achieve the Group’s strategic ambition. • There has been significant investment in terms of developing capabilities across the bank including running a number of Leadership Development and Talent Management programs during the year. Efforts are also underway to develop an internal talent repository capturing the existing skills, capabilities, knowledge and experience of the workforce enabling the bank to scenario plan for the future. • People and culture risk is measured through a series of RAS metrics such as taking accountability using the ‘How’ performance management metric, top performers attrition rates, senior attrition rates and mandatory training completion rates. 168 Risk Management AIB Group plc Annual Financial Report 2021 Risk management – 2. Individual risk types 2.9 People and culture risk (continued) Monitoring, escalating and reporting In addition to risk appetite measures and limits, people and culture risks are monitored on a monthly basis via the Group’s risk governance committees. This provides senior management, through the Operational Risk Committee, Group Risk Committee and the Board with timely updates on the Group’s operational risk profile. The profile update details the current status of the Group’s key people and culture risks. It also includes an overview of current trends, an update on recent significant events and any remediation actions or lessons identified following events. This allows the Group Risk Committee and Board Risk Committee to understand and discuss key people and culture risk metrics, with escalation to the Board where appropriate. 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, reviews progress and oversight of senior management in relation to the Group’s people and culture ambitions through a number of datasets including iConnect, the balanced scorecard and culture dashboard. As the Group deals with the extended uncertainly of COVID-19, phased-based approach of the Group’s return-to-work program in line with Government requirements, a number of challenges remain in the Group’s efforts to support the workforce to remain connected, engaged and address the mental, physical, social and financial challenges. 2.10 Model risk Model risk is 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. Identification and assessment The Group’s material risk assessment and the risk and control assessment forms the basis for identifying the key elements of the risk. The material risk assessment identifies the key sub-risks including oversight, data, development, implementation and use and the emerging risk drivers such as climate risk through a top-down review. The risk and control assessment is the Group’s core bottom-up process in the identification and assessment of model risk across the Group. The RCA includes a requirement to perform a self-assessment of the risks at each business unit level. The potential impact of model risk is assessed through the ICAAP. As model risk is generally mitigated through specific model adjustments, there is no explicit capital requirement generated from this risk, it is indirectly assessed through the other risks. Management and measurement There is a Model Risk Framework and supporting policies in place to drive the consistent management of this risk. This sets out the key controls required to mitigate model risk across the model lifecycle, from initiation of a model build through to implementation, use and ongoing monitoring. The key controls include: • A complete inventory of all models in the Group, with a clear tiering of models to ensure key controls such as model validation and monitoring are being applied on a risk-based approach. Requirement for clear hand-offs between each stage in the lifecycle to mitigate the risk of issues propagating through the lifecycle of the model. Models are built, validated and monitored by suitably qualified analytical personnel, supported by relevant business, risk and finance functions. The best available data, both internal and external, must be used, and any data weaknesses are appropriately mitigated through the model build. • • • • The use of industry standard techniques are applied for stages in the model lifecycle where appropriate. • All material models are validated by an appropriately qualified team which is independent of the model build process. Where issues are identified, appropriate mitigants are applied. This can include temporary post model adjustments which are put in place until a model is re-developed. Model risk is measured using a composite assessment of model outcomes across the lifecycle for all models in the inventory. Monitoring, escalating and reporting The Risk Measurement Committee and its sub-committee, the Model Risk Committee, are the primary committees for overseeing model risk in the Group. Depending on materiality, the outcomes of validation and other reviews are brought to the appropriate committees based on the model materiality assessment, for oversight to ensure all models remain fit for their intended use and that any issues are appropriately escalated. Model monitoring on material models is reported to committees quarterly to ensure the model is performing as expected, with appropriate actions raised when models fall below the required performance levels. An overall assessment of model risk is performed on a quarterly basis and is reported to the Group Risk Committee and Board Risk Committee. The status of model risk is reported on a monthly basis in the CRO report, which includes an update on recent significant events and any remediation actions that are underway. 1 2 3 4 5 6 Governance and oversight AIB Group plc Annual Financial Report 2021 Governance and Oversight 169 – Directors' Report – Schedule to the 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 – Report of the Sustainable Business Advisory Committee – Report of the Technology and Data Advisory Committee – Viability statement – Internal controls – Other governance information – Supervision and regulation Page 170 173 176 186 193 196 199 201 208 209 210 211 213 214 170 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Directors’ report for the financial year ended 31 December 2021 The Directors of AIB Group plc (‘the Company’) present their report and the audited financial statements for the financial year ended 31 December 2021. The Statement of Directors’ Responsibilities is shown on page 216. For the purposes of this report ‘AIB Group’ or ‘the Group’ comprises the Company and its subsidiaries in the financial year ended 31 December 2021. Results The Group’s profit attributable to the ordinary shareholders of the Company amounted to € 647 million and was arrived at as shown in the consolidated income statement on page 229. Dividend The Board is recommending a dividend of 4.5 cent per share, totalling € 122 million, payable on 13 May 2022 to shareholders on the Company’s Register of Members at the close of business on 1 April 2022. There was no dividend paid to shareholders during 2021. Buyback of ordinary shares Each year at the Annual General Meeting (“AGM”) the Board seeks, and has received, a renewal of its authority from shareholders to undertake on-market purchases of up to 10 percent of its ordinary shares. In addition, at the AGM on 6 May 2021, shareholders also approved the Company entering into a Directed Buyback Contract (the “DBB Contract”) with the Minister for Finance, the terms of which would permit the Company to make off-market purchases of shares from the Minister of up to 4.99 percent of the Company’s issued share capital in any 12 month period, with the agreement of the Minister at that time. Any such off-market purchases would be made at the relevant market price, the calculation of which was set out in the DBB Contract. No such off-market purchases have been made to date. In accordance with the “Joint Decision of the European Central Bank (“ECB”) and Prudential Regulatory Authority” of 25 November 2016 as updated on 3 December 2019, the Company is required to obtain prior approval from the ECB in order to make any distribution from earnings whether through dividends or share buybacks (including a Directed Buyback). In this context, the company has received regulatory approval from the ECB to undertake a buyback of its ordinary shares in an aggregate consideration amount of up to € 91 million. Going concern The financial statements for the financial year ended 31 December 2021 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 this Annual Financial Report (“AFR”). 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 2022 to 2024, 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 28 to 30. 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) and section 1374). 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. 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 173 to 175 and is part of note 39 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 Chair on pages 6 and 7, the review by the Chief Executive Officer on pages 9 to 14, and the operating and financial review on pages 58 to 72 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 2021, the Board of Directors of the Company was comprised of Mr Jim Pettigrew, Ms Anik Chaumartin, Mr Donal Galvin, Mr Basil Geoghegan, Ms Tanya Horgan, Dr Colin Hunt, Ms Sandy Kinney Pritchard, Ms Carolan Lennon, Ms Elaine MacLean, Mr Andy Maguire, Mr Brendan McDonagh, Ms Helen Normoyle, Ms Ann O’Brien, Mr Fergal O’Dwyer, Mr Jan Sijbrand and Mr Raj Singh. Since 31 December 2020, the following Board changes occurred with effect from the dates shown: – Mr Fergal O’Dwyer was appointed as Independent Non-Executive Director on 22 January 2021. – Mr Andy Maguire was appointed as Independent Non-Executive Director on 15 March 2021. – Mr Donal Galvin was appointed as Executive Director on 28 May 2021. – Ms Anik Chaumartin was appointed as Independent Non-Executive Director on 1 July 2021. – Ms Tanya Horgan was appointed as Independent Non-Executive Director on 14 September 2021. – Mr Jan Sijbrand was appointed as Independent Non-Executive Director on 14 September 2021. – Mr Jim Pettigrew was appointed as Non-Executive Director and Chair on 28 October 2021. He was considered independent on appointment. Biographical details of each Director are provided on pages 36 to 39. AIB Group plc Annual Financial Report 2021 Governance and Oversight 171 1 2 3 4 5 6 sustainable and ethically responsible corporate and social practices in every aspect of its business. The table included on pages 50 to 53 of the Annual Financial Report, together with the information it refers to, is intended to assist shareholders to understand the Group’s position on key non-financial matters. A description of the Group’s business model is included on pages 4 and 5 of the Annual Financial Report and the table on pages 28 to 30 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 operational risk, credit risk, people and culture risk, regulatory compliance risk and conduct risk. Further details of the Group’s risk management governance and organisational framework can be found on pages 78 to 82. Substantial interests in the share capital At 31 December 2021, the Company had been notified of the following substantial interests: – the Minister for Finance in Ireland held 1,930,436,543 ordinary shares representing 71.12% of the total voting rights attached to the issued share capital. – Massachusetts Financial Services Company held 90,955,080 ordinary shares representing 3.35% of the total voting rights attached to the issued share capital. In December 2021, the Minister for Finance announced the planned sell down of a part of the State’s shareholding in the Company through a pre-arranged trading plan. This has resulted in the reduction of the State’s shareholding to 70.97% as at 2 March 2022. On 25 February 2022, Massachusetts Financial Services Company notified the Company that as of 23 February 2022, following a disposal of voting rights, it held an interest in 79,913,716 ordinary shares, representing 2.94% 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 2021 to 2 March 2022. Corporate governance The Directors’ Corporate Governance report is set out on pages 176 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 Directors’ Report on pages 173 to 175. Political donations The Directors of the Company have satisfied themselves that there were no political contributions that require disclosure under the Electoral Act 1997. 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 in the Schedule on pages 173 to 175. Directors’ and Secretary’s Interests in Shares The beneficial interests of the Directors and the Company Secretary in office at 31 December 2021, and of their spouses and minor children, in the Company’s ordinary shares as disclosed to the Company are as follows: Ordinary shares Directors: Anik Chaumartin Donal Galvin Basil Geoghegan Tanya Horgan Colin Hunt Sandy Kinney Pritchard Carolan Lennon Elaine MacLean Andy Maguire Brendan McDonagh Helen Normoyle Ann O'Brien Fergal O'Dwyer Jim Pettigrew Jan Sijbrand Raj Singh 31 December 2021 1 January 2021* – – 9,835 – 40,000 10,000 7,700 – – 20,000 2,000 – 10,000 – – – – – 9,835 – 22,500 10,000 7,700 – – 20,000 2,000 – – – – – Company Secretary: Conor Gouldson *Or date of appointment if later. 15,210 15,210 There is no requirement for Directors, or the Company Secretary, to hold shares in the Company. There were no changes in the interests of the Directors and the Company Secretary shown above between 31 December 2021 and 2 March 2022. Directors’ Remuneration The Group’s policy with respect to Directors’ remuneration is included in the Corporate Governance Remuneration Statement on pages 201 to 207. Details of the total remuneration of the Directors in office during 2021 and 2020 are shown in the Corporate Governance Remuneration Statement on pages 201 to 207. Non-Financial Statement 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 as amended by Statutory Instrument No. 410 of 2018, require that the Group reports 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 172 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Directors’ report for the financial year ended 31 December 2021 Accounting records The measures taken by the Directors to secure compliance Auditor The auditor, Deloitte Ireland LLP (“Deloitte”), were appointed to with the Company’s obligation to keep adequate accounting the Group on 20 June 2013 following shareholder approval at the records include the use of appropriate systems and procedures, 2013 Annual General Meeting (“AGM”) on that date. Furthermore, incorporating those set out within ‘Internal controls’ in the Deloitte were re-appointed as auditor of the Company at the Corporate Governance report on pages 211 and 212, and the last AGM held on 6 May 2021 and shall hold office until the employment of competent persons. The accounting records conclusion of the next AGM of the Company pursuant to section are kept at the Company’s Registered Office at 10 Molesworth 382 of the Companies Act 2014. Their continued appointment Street, Dublin 2, Ireland and at the principal addresses outlined will be proposed to the shareholders for approval at the next on page 375. 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 on pages 28 to 30. 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., previously established branches in the United Kingdom and the United States of America. AGM. Deloitte have indicated a willingness to continue in office in accordance with section 383(2) of the Companies Act 2014. Subject to this approval at the next AGM, Deloitte will step down as auditor at the conclusion of the 2023 AGM, having at that point served as the Group’s statutory auditor for the maximum legally permitted unbroken tenure in office of 10 years. 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. Other information Other information relevant to the Directors’ Report may be found in the following pages of the report: 2021 Results – Financial Performance Risk management Non-adjusting events after the reporting period Page 2 77 to 168 357 The Directors’ Report for the financial year ended 31 December 2021 comprises these pages and the sections of the report referred to under ‘Other information’ above, which are incorporated into the Directors’ Report by reference. Jim Pettigrew Chair 2 March 2022 Colin Hunt Chief Executive Officer 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 173 Governance and oversight – Schedule to the Directors’ report for the financial year ended 31 December 2021 Additional information required to be contained in the Directors’ Annual Report by the European Communities (Takeover Bids (Directive 2004/25/EC)) Regulations 2006. As required by these Regulations, the information contained below represents the position of the Company as at 31 December 2021. not be entitled to transfer such shares except by sale through a Stock Exchange to a bona fide unconnected third party. Such sanctions will cease to apply after not more than seven days from the earlier of receipt by the Company of notice that the member has sold the shares to an unconnected third party or due compliance, to the satisfaction of the Company, with the notice served as provided for above. Capital structure The authorised share capital of the Company is € 2,500,000,000 divided into 4,000,000,000 ordinary shares of € 0.625 each (‘Ordinary Shares’). The issued share capital of the Company is 2,714,381,237 Ordinary Shares of € 0.625 each. Rights and obligations of each class of share The following rights attach to Ordinary Shares: – – – – – – – the right to receive duly declared dividends, in cash or, where offered by the Directors, by allotment of additional Ordinary Shares; the right to attend and speak, in person or by proxy, at general meetings of the Company; the right to vote, in person or by proxy, at general meetings of the Company having, in a vote taken by a show of hands, one vote, and, on a poll, a vote for each Ordinary Share held; the right to appoint a proxy, in the required form, to attend and/or vote at general meetings of the Company; the right to receive, (by post or electronically), at least 21 days before the Annual General Meeting, a copy of the Directors’ and Auditor’s reports accompanied by copies of the balance sheet, profit and loss account and other documents required by the Companies Act to be annexed to the balance sheet or such summary financial statements as may be permitted by the Companies Act; the right to receive notice of general meetings of the Company; and in a winding-up of the Company, and subject to payments of amounts due to creditors and to holders of shares ranking in priority to the Ordinary Shares, repayment of the capital paid up on the Ordinary Shares and a proportionate part of any surplus from the realisation of the assets of the Company. There is, attached to the Ordinary Shares, an obligation for the holder, when served with a notice from the Directors requiring the holder to do so, to inform the Company in writing within not more than 14 days after service of such notice, of the capacity in which the shareholder holds any share of the Company and, if such shareholder holds any share other than as beneficial owner, to furnish in writing, so far as it is within the shareholder’s knowledge, the name and address of the person on whose behalf the shareholder holds such share or, if the name or address of such person is not forthcoming, such particulars as will enable or assist in the identification of such person, and the nature of the interest of such person in such share. Where the shareholder served with such notice (or any person named or identified by a shareholder on foot of such notice) fails to furnish the Company with the information required within the time period specified, the shareholder shall not be entitled to attend meetings of the Company, nor to exercise the voting rights attached to such share, and, if the shareholder holds 0.25% or more of the issued Ordinary Shares, the Directors will be entitled to withhold payment of any dividend payable on such shares, and the shareholder will Restrictions on the transfer of shares Save as set out below, there are no limitations in Irish law or in the Company’s Constitution on the holding of Ordinary Shares, and there is no requirement to obtain the approval of the Company, or of other holders of Ordinary Shares, for a transfer of Ordinary Shares. The Ordinary Shares are, in general, freely transferable, but the Directors may decline to register a transfer of Ordinary Shares upon notice to the transferee, within two months after the lodgement of a transfer with the Company, in the following cases: i. a lien held by the Company on the shares; ii. a purported transfer to an infant or a person lawfully declared to be incapable for the time being of dealing with their affairs; or iii. a single transfer of shares which is in favour of more than four persons jointly. Ordinary Shares held in certificated form are transferable upon production to the Company’s Registrars of the original share certificate and the usual form of stock transfer duly executed by the holder of the shares. Shares held in uncertificated form are transferable in accordance with the rules or conditions imposed by the operator of the relevant system that enables title to the Ordinary Shares to be evidenced and transferred without a written instrument, and in accordance with the Companies Act 2014. The rights attaching to Ordinary Shares remain with the transferor until the name of the transferee has been entered on the Register of Members of the Company. Exercise of rights of shares in Employee share schemes The AIB Approved Employee Profit Sharing Scheme 1998 and the Allied Irish Banks, p.l.c. Share Ownership Plan (UK) provide that voting rights in respect of shares held in trust for employees who are participants in those schemes are, on a poll, to be exercised only in accordance with any directions in writing by the employees concerned to the Trustees of the relevant scheme. Following the establishment of the Company, the shares previously held in trust in Allied Irish Banks, p.l.c. were exchanged, on a one-for-one basis, for new shares in the Company. Deadlines for exercising voting rights Voting rights at general meetings of the Company are exercised when the Chair puts the resolution at issue to a vote of the meeting. A vote decided by a show of hands is taken forthwith. A vote taken on a poll for the election of the Chair or on a question of adjournment is also taken forthwith, and a poll on any other question is taken either immediately or at such time (not being more than 30 days from the date of the meeting at which the poll was demanded or directed) as the Chair of the meeting 174 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Schedule to the Directors’ report for the financial year ended 31 December 2021 directs. Where a person is appointed to vote for a shareholder – One-third of the Directors for the time being (or, if their as proxy, the instrument of appointment must be received by the number is not three or a multiple of three, not less than one- Company not less than 48 hours before the time appointed for third) are obliged to retire from office at each Annual General holding the meeting or adjourned meeting at which the appointed Meeting on the basis of the Directors who have been longest proxy proposes to vote, or, in the case of a poll, not less than in office since their last appointment. While not obliged to do 48 hours before the time appointed for taking the poll. so, the Directors have, in recent years, adopted the practice Rules concerning amendment of the Company’s Constitution As provided in the Companies Act 2014, the Company may, by special resolution, alter or add to its Constitution. A resolution is a special resolution when it has been passed by not less than three-fourths of the votes cast by shareholders entitled to vote and voting in person or by proxy, at a general meeting at which not less than 21 clear days’ notice specifying the intention to propose the resolution as a special resolution, has been duly given. A resolution may also be proposed and passed as a special resolution at a meeting of which less than 21 clear days’ notice has been given if it is so agreed by a majority in number of the members having the right to attend and vote at any such meeting, being a majority together holding not less than 90% in nominal value of the shares giving that right. Rules concerning the appointment and replacement of Directors of the Company – Other than in the case of a casual vacancy, Directors are appointed on a resolution of the shareholders at a general meeting, usually the Annual General Meeting. – No person, other than a Director retiring at a general meeting is eligible for appointment as a Director without a recommendation by the Directors for that person’s appointment unless, not less than 42 days before the date of the general meeting, written notice by a shareholder duly qualified to be present and vote at the meeting of the intention to propose the person for appointment, and notice in writing signed by the person to be proposed of willingness to act, if so appointed, have been given to the Company. – A shareholder may not propose himself or herself for appointment as a Director. – The Directors have the power to fill a casual vacancy or to appoint an additional Director (within the maximum number of Directors fixed by the Company in a general meeting), and any Director so appointed holds office only until the conclusion of the next Annual General Meeting following – his/her appointment, when the Director concerned shall retire, but shall be eligible for reappointment at that meeting. of all (those wishing to continue in office) offering themselves for re-election at the Annual General Meeting. – A person is disqualified from being a Director, and their office as a Director ipso facto vacated, in any of the following circumstances: – if at any time the person has been adjudged bankrupt or has made any arrangement or composition with his/her creditors generally; – if found to no longer have adequate decision making 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/she be absent from meetings of the Directors for six successive months (without an alternate attending) and the Directors resolve that his/her office be vacated on that account; – if, unless the Directors or a court otherwise determine, he/ she be convicted of an indictable offence; – if he/she be requested, by resolution of the Directors, to resign his/her office as Director on foot of a unanimous resolution (excluding the vote of the Director concerned) passed at a specially convened meeting at which every Director is present (or represented by an alternate) and of which not less than seven days’ written notice of the intention to move the resolution and specifying the grounds therefore has been given to the Director; or – if he/she has reached an age specified by the Directors as being that at which that person may not be appointed a Director or, being already a Director, is required to relinquish office and a Director who reaches the specified age continues in office until the last day of the year in which he/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/her capacity as a Director, he/she resigns their office by a written notice given to the Company, upon the expiry of such notice; or – being the holder of an executive office other than for a fixed term, the Director ceases to hold such executive office on retirement or otherwise; or – the Director tenders his/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. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 175 – 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/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 arrangements 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. 176 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Corporate Governance report The Group’s corporate governance arrangements have proven to be resilient and capable of operating effectively when faced with the challenges of the pandemic. Jim Pettigrew, Chair Chair’s introduction Dear Shareholder, Corporate Governance Framework Statements of Compliance This report, in conjunction with the Statement of Directors’ Responsibilities, Corporate Governance Remuneration Statement, On behalf of the Board, I am pleased to present our Corporate Risk Governance section of the Risk Management Framework report Governance Report for 2021. This report sets out how corporate and the Statement on Internal Control, sets out the Group’s approach governance standards are applied across the Group and includes to governance in practice, the work of the Board and its Committees, statements of compliance with our key corporate governance and explains how the Group applied the principles of the Central requirements. This report provides information on the Group’s Bank of Ireland’s Corporate Governance Requirements for Credit governance arrangements presented under the five headings of the Institutions 2015 (the ‘2015 Requirements’), European Union (Capital UK Corporate Governance Code 2018. This report should be read Requirements) Regulations 2014 (S.I. 158/2014) (‘CRD’) and UK in conjunction with ‘Governance in AIB’ at the start of this Annual Corporate Governance Code 2018 (the ‘Code’) during 2021 under the Financial Report and the Board Committee Reports which follow. headings prescribed by the Code. Further information on governance practices in place in the Group Central Bank of Ireland’s Corporate Governance are available on the Group’s website at www.aib.ie/investorrelations. Requirements for Credit Institutions 2015 and European Union The Board strives to ensure ongoing adherence to the various (Capital Requirements) Regulations 2014 AIB Group plc is authorised as a financial holding company and is applicable requirements as well as to the underlying principles and not directly required to comply with the 2015 Requirements (which ways of working recommended by those requirements. are publicly available on www.centralbank.ie). However, Allied Irish Banks, p.l.c., the principal subsidiary of AIB Group plc, is a I am satisfied that the Board and the Group has operated within credit institution and is subject to the 2015 Requirements, including an effective and robust corporate governance environment which compliance with requirements specifically relating to ‘high impact provides the framework to ensure sound and timely decision making institutions’ and additional corporate governance obligations on in the best interests of the Group and its stakeholders. credit institutions deemed significant for the purposes of the CRD Jim Pettigrew Chair (which is publicly available on www.irishstatutebook.ie). As the governance structures of AIB Group plc and Allied Irish Banks, p.l.c. are mirrored, and acknowledging the importance of adherence to the 2015 Requirements, the compliance status of Allied Irish Banks, p.l.c. is noted herein. During 2021, Allied Irish Banks, p.l.c. was materially compliant with all of the 2015 Requirements and with the corporate governance aspects of CRD. As previously reported, Mr Richard Pym retired as Chair in March 2020. At the Board’s request, the Deputy Chair, Mr Brendan McDonagh, carried out the role and responsibilities of a Chair in the period from March 2020 up to the appointment of Mr Jim Pettigrew as Chair in October 2021. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 177 UK Corporate Governance Code 2018 AIB Group plc, by virtue of its primary listing on the Main Securities Market of the Euronext Dublin Stock Exchange and its premium listing on the Main Market of the London Stock Exchange, is subject to the provisions of the Code (which is publicly available on www.frc.org.uk). Throughout the year, the Group applied the principles and complied with all provisions of the Code other than in instances related to Section 5: Remuneration, in particular Principles R and Provisions 36, 37 and 38, and the rationale is set out below. Provisions to “Explain” under the Code “Comply or Explain” Rationale process Principle R: Exercise of independent judgement and discretion when authorising remuneration outcomes. Provision 36: Remuneration schemes should promote long term shareholdings by executive directors that support alignment with long term shareholder interests. Provision 37: Remuneration schemes and policies should enable the use of discretion to override formulaic outcomes. Due to certain agreements in place with the Irish State, variable remuneration structures are not generally permitted. As such, both decisions relating to Principle R and certain associated provisions (particularly Provisions 36 and 37) and the timing of when the remuneration restrictions may change are outside of the Board’s sphere of influence or control. Further detail on the background to these restrictions can be found in the Corporate Governance Remuneration Statement on pages 201 to 207. Provision 38: The pension contribution rates for executive directors, or payments in lieu, should be aligned with those available to the workforce. In relation to Provision 38, the current pension arrangements are considered to be fair due to the remuneration restrictions in place at this time. The rates of contribution for Executive Directors and all employees are fully transparent and are set out in the Corporate Governance Remuneration Statement on pages 201 to 207. Irish Corporate Governance Annex Additional obligations apply to the Group under the Irish The Board ensures a clear division of responsibilities between the Chair, who is responsible for the overall leadership of the Corporate Governance Annex (publicly available on www.ise.ie), Board and for ensuring its effectiveness, and the CEO, who which applies to relevant Irish companies with a primary listing manages and leads the business. The governance framework on the Main Securities Market of the Euronext Dublin Stock and organisational structure are sufficient to ensure that no Exchange. The Group is fully compliant with the Irish Corporate one individual has unfettered powers of decision or exercises Governance Annex. Board Leadership and Company Purpose Role of the Board The Group is headed by an effective Board which is collectively responsible for the long term, sustainable success of the Group, generating value for shareholders and contributing to wider society. The Board, including the Chief Executive Officer (CEO), is supported by the Executive Committee, being the most senior management committee of the Group. The Executive Committee has primary responsibility for the operations of, and the development of strategy for, the Group. The Board supports, and strives to operate in accordance with, the Group’s purpose and values at all times and challenges Management as to whether the purpose, values and strategic direction of the Group align with its desired culture, or if they do not, whether there are options to mitigate negative stakeholder impacts. excessive influence. Key roles and responsibilities are clearly defined, documented and communicated to key stakeholders via the Group’s website (www.aib.ie/investorrelations). The Board is supported in discharging its duties by a number of Board and Advisory Committees. Whilst arrangements have been made by the Directors for the delegation of the management, organisation and administration of the Group’s affairs, certain matters are reserved specifically for decision by the Board. These matters are reviewed at least annually to ensure that they remain relevant and are available on the Group’s website (www.aib.ie/investorrelations). 178 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Corporate Governance report Board Focus 2021 was year two of the Group’s three year strategy and therefore, a key focus of the Board was on strategy delivery and execution which included the delivery of a number of inorganic growth initiatives. In parallel, the delivery of key regulatory programmes across the Group was also a significant area of focus for the Board. While most of the Board’s meetings and engagements happened virtually due to COVID-19 restrictions, the Board continued to execute its business as usual duties in line with its work programme, and also focused on a number of additional matters that arose during the year. The following is a high level overview of material matters considered by the Board throughout the year: Financial Strategy Governance 2022–2024 Financial Plan Group Strategy Approval and Implementation Board Effectiveness Evaluation 2020 results and analyst presentations Mortgage Market Strategy Dividend considerations Transformation Plan Implementation Macroeconomic environment Inorganic growth initiatives Expected Credit Losses Sustainability Strategy and Conference ICAAP/ILAAP Cyber Strategy Quarterly Trading Updates NPE Strategy and Loan Portfolio Sales Corporate Governance Frameworks and Policies Board Succession including Chair Search Central Securities Depositary Migration Extraordinary General Meeting Annual General Meeting 2021 Half-Yearly Financial Report Stakeholder Perspectives Risk Management Culture and Values Customer First Business Updates Group Risk Appetite Statement Culture Evolution Programme Updates Regulatory Risk Culture People updates IBCB Survey Results Regulatory engagement updates Outcome of Supervisory Review and Evaluation Process Employee communication and COVID-19 related supports Related Party Lending Market Abuse Regulation Vulnerable Customer Programme Speak Up Policy and Framework Anti-Money Laundering and Criminal Terrorist Financing Updates Open Banking/SCA Implementation IRB Rollout Plan Material Risk Assessments Recovery Planning and Resolvability Plan Risk Policies and Frameworks Pillar 3 Reporting Cyber Security and E-Fraud Reports Regular Updates Executive Management Updates Business and Financial Performance Chair’s Activities Board Committee Updates Group Company Secretary Updates Matters considered by the Board Committees, which in certain cases were also considered by the Board as a whole, are detailed in individual Board Committee reports which follow over pages 186 to 200. Conflicts of Interest The Board approved Code of Conduct and Conflicts of Interest Policy for Directors 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. Stakeholder Engagement The five principal stakeholder groups in AIB are Customers, Employees, Investors, Society, and the Group’s Regulators. In order for the Group to meet its responsibilities to its stakeholders and to take stakeholder views into consideration in its decision making, the Board strives to ensure that effective engagement is maintained with these groups. The Group engages with stakeholders through various means such as face-to-face meetings including regular and structured engagement and also out of course meetings on specific topics, research, focus groups and surveys, media engagement, direct partnerships and collaboration, sponsorship and community initiatives, participation in expert forums and events, and through the Group’s in-house experts liaising directly with associated business, public or charitable groups. The Group’s Investor Relations team manages an extensive programme of engagement which includes the Chair, CEO and CFO and major shareholders and other institutional investors. The results of such engagement are communicated to the other Directors to ensure that the views of major shareholders and the investment community are understood by the Board as a whole. 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. Shareholders are invited to attend and participate in the AGM. Details in relation to the 2022 AGM along with other shareholder-related information can be found on page 367 and on the Group’s website at www.aib.ie/investorrelations. There is a Designated Non-Executive Director for workforce engagement whose role is described under ‘Key Roles and Responsibilities’ below. Further detail on how the Board engages with each of the principal groups can be found on page 34 and 35 in the ‘Engaging Our Stakeholders’ section. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 179 Relationship with the Irish State The Group received significant support from the Irish State (the ‘State’) in the context of the financial crisis due to its systemic importance to the Irish financial system. Following a reduction in its shareholding during 2017, and a further reduction in 2022 to date, the State currently holds 70.97% of the issued ordinary shares of AIB Group plc. The relationship between the Group and the State is governed by a Relationship Framework which is available on the Group’s website at www.aib.ie/investorrelations. Within the Relationship Framework, with the exception of a number of important items requiring advance consultation with or approval by the State, the Board retains responsibility and authority for all of the operations and business of the Group in accordance with its legal and fiduciary duties and retains responsibility and authority for ensuring compliance with the Group’s regulatory and legal obligations. In considering the matters reserved for the Board, it should be noted that certain of those matters require advance consultation with, or consent from, the Minister for Finance. The conditions under which such prior consultation or approvals are required are outlined in the Relationship Framework. Division of Responsibilities Key Roles and Responsibilities Chair The Chair leads the Board, setting its agenda, ensuring Directors receive adequate and timely information, facilitating the effective contribution of Non-Executive Directors, ensuring the ongoing training and development of all Directors, and reviewing the performance of individual Directors. Mr Jim Pettigrew was appointed as Chair on 28 October 2021. His biographical details are available on page 36. Deputy Chair The Deputy Chair deputises for the Chair as may be required from time to time and is available to the Directors for consultation and advice. Mr Brendan McDonagh was appointed as Deputy Chair on 24 October 2019 and, in his capacity as Deputy Chair, led the Board from the former Chair, Mr Richard Pym’s retirement on 6 March 2020 until the appointment of Mr Jim Pettigrew. Mr McDonagh’s biographical details are available on page 38. Senior Independent Director As Senior Independent Director (‘SID’), Ms Carolan Lennon acts as a conduit for the views of shareholders and is available as an alternate point of contact to address any concerns or issues they feel have not been adequately dealt with through the usual channels of communication. The SID also leads the annual review of the Chair’s performance and succession planning for the Chair role. Ms Lennon was appointed as SID with effect from 29 April 2020 and her biographical details are available on page 37. Ms Lennon has advised the Board that she intends to step down as Director with effect from 30 June 2022. An announcement regarding the appointment of a new SID will be made in due course. Designated Non-Executive Director for Workforce Engagement Ms Elaine MacLean was appointed as the Group’s Designated Non-Executive Director for workforce engagement in 2020 in order to enhance the Group’s existing workforce engagement mechanisms. The purpose of this role is to engage directly with employees, facilitate two way communication between employees and the Board, and enhance the Board’s understanding of workforce views. Ms MacLean’s biographical details are available on page 37. Independent Non-Executive Directors Independent Non-Executive Directors represent a key layer of oversight, scrutinising the performance of Management in meeting agreed objectives and monitoring reporting against performance. They bring an independent viewpoint to the deliberations of the Board that is objective and independent of the activities of the Management and of the Group. They constructively challenge and help develop proposals on strategy and other key matters. Biographical details for each Independent Non-Executive Director are available on pages 36 to 39. Chief Executive Officer (CEO) Dr Colin Hunt manages the Group on a day-to-day basis and makes decisions on matters affecting the operation, performance and strategy of the Group. The Executive Committee assists and advises him in reaching decisions on the Group’s strategy, governance and internal controls, performance and risk management. Dr Hunt was appointed with effect from 8 March 2019 and his biographical details are available on page 39. Company Secretary The Directors have access to the advice and services of Mr Conor Gouldson, the Company Secretary, who advises the Board on all governance matters, ensuring that Board procedures are followed and that the Group is in compliance with applicable rules and regulations. Both the appointment and removal of the Company Secretary is a matter for the Board as a whole. Board and Advisory Committees The Board is assisted in the discharge of its duties by a number of Board Committees, whose purpose is to consider, in greater depth than would be practicable at Board meetings, matters for which the Board retains responsibility. Each Committee operates under terms of reference approved by the Board and their terms of reference are available on the Group’s website at www.aib.ie/investorrelations. The Board governance structure is available on page 33 and reports from the Board Audit Committee, the Board Risk Committee, the Nomination and Corporate Governance Committee and the Remuneration Committee are presented later in the Annual Financial Report. In addition to the four main Board Committees, the Board also has a Sustainable Business Advisory Committee and a Technology and Data Advisory Committee. Each of the advisory committees comprise of Non-Executive Directors and members of senior management from relevant business areas. Overviews of the role and areas of focus of both the Sustainable Business Advisory Committee and the Technology and Data Advisory Committee are available on pages 208 and 209. 180 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Corporate Governance report Board Meetings The Board met on 18 occasions during 2021. The Chair and the Chairs of each Committee ensure Board and Committee meetings are structured to facilitate open discussion, constructive challenge and debate. The Board receives a comprehensive Executive Management report on a regular basis. The remainder of its agenda is built from the indicative annual work programme, strategic items for consideration, any activities out of the ordinary course of business, requested in depth reviews and scheduled updates on key projects. There is a set escalation process in place through Executive and Board Committees which ensures the Board receives the necessary information at the appropriate time to enable the right decisions to be taken. The Chair leads the agenda setting process, supported by the CEO and Company Secretary. In its work, the Board is supported by its Committees which make recommendations where appropriate on matters delegated to them under their respective terms of reference. Each Committee Chair provides an update to the Board on matters considered at the preceding Committee meeting. Attendance at the Board and Board Committee meetings is outlined below. Attendance at the Advisory Committees is captured within their respective reports on pages 208 and 209. The Non-Executive Directors also met throughout the year in the absence of the Executive Directors or other Members of Management. Board Board Audit Committee Board Risk Committee Eligible to attend Attended Eligible to attend Attended Eligible to attend Attended Nomination and Corporate Governance Committee Attended Eligible to attend Remuneration Committee Eligible to attend Attended Anik Chaumartin Appointed 01/07/2021 Donal Galvin Appointed 28/05/2021 Basil Geoghegan Tanya Horgan Appointed 14/09/2021 Colin Hunt Sandy Kinney Pritchard Carolan Lennon Elaine MacLean Andy Maguire Appointed 15/03/2021 Brendan McDonagh Helen Normoyle Ann O’Brien Fergal O’Dwyer Appointed 22/01/2021 Jim Pettigrew Appointed 28/10/2021 Jan Sijbrand Appointed 14/09/2021 Raj Singh 7 9 18 4 18 18 18 18 13 18 18 18 18 2 4 18 7 9 18 4 18 18 16 18 12 18 18 18 18 2 4 18 8 8 12 12 16 16 16 16 16 15 16 16 13 4 13 10 11 13 13 4 13 10 10 13 4 13 4 12 3 10 10 10 2 10 10 10 2 2 8 8 8 8 8 8 Professional Development and Continuous Education Programme The Board’s professional development and continuous education programme continued throughout 2021 and was designed in conjunction with the indicative work programme to ensure that training was delivered at a time when it would be of most benefit or relevance to the Board. The sessions were delivered by a mix of internal and external subject matter experts and the topics included the Internal Capital and Liquidity Adequacy Assessment Processes, Stress Corporate Governance Library and a suite of AIB Group specific online training courses. Additional training and individual sessions with subject matter experts on areas of interest to the Directors are facilitated upon request. A structured induction programme is ready to be delivered to any incoming Director and includes a series of meetings with senior management, relevant briefings, together with any specific training identified during the course of the appointment of the individual. Testing, Sustainability and Climate Risk, IFRS 9 and Internal Rating Based Models, Anti-Money Laundering and Financial Access to Advice There is a procedure in place to enable the Directors to take Crime, Cyber Security, Recovery and Resolution Planning, independent professional advice, at the Group’s expense, on Fitness and Probity Pre-Approval Controlled Function Ongoing matters concerning their role as Directors. The Group holds Obligations, Regulatory Reporting Requirements, the European Banking Market, Market Abuse and Inside Information, and Anti- insurance to protect Directors and Officers against liability arising from legal actions brought against them in the course of Bribery and Corruption. Directors also have access to an online their duties. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 181 Composition, Succession and Evaluation Board Composition At 31 December 2021, the Board consisted of the Chair, who was deemed independent on appointment, thirteen Independent Non-Executive Directors and two Executive Directors, being the Chief Executive Officer and the Chief Financial Officer. A number of Board and Committee changes occurred in 2021 which are set out below. Appointments during 2021(1) Board and Committee Roles Fergal O’Dwyer Andy Maguire Donal Galvin Anik Chaumartin Tanya Horgan Jan Sijbrand Jim Pettigrew Non-Executive Director Member of the Board Audit Committee Non-Executive Director Member of the Board Risk Committee Member of the Technology and Data Advisory Committee Executive Director Non-Executive Director Member of the Board Audit Committee Non-Executive Director Member of the Board Risk Committee Non-Executive Director Member of the Board Risk Committee Non-Executive Chair of the Board Member of the Nomination and Corporate Governance Committee When January 2021 March 2021 May 2021 July 2021 September 2021 September 2021 October 2021 (1) Ms Tanya Horgan and Mr Jim Pettigrew were appointed to the Technology and Data Advisory Committee and Remuneration Committee, respectively, from 1 January 2022. Board Succession Planning and Appointments The review of the appropriateness of the composition of the Board and Board Committees is a continuous process, and recommendations are made based on merit and objective criteria, having regard to the collective skills, experience, independence and knowledge of the Board along with its diversity requirements. The Board Succession Plan is reviewed alongside the Board Skills Matrix by the Nomination and Corporate Governance Committee at each scheduled meeting to allow for proactive and continuous succession planning and, in turn, the timely commencement of Director search processes. The Board Succession Plan details planned Board composition as well as Board Committee membership, the likely tenure of Non-Executive Directors and upcoming actions to be undertaken. The skills included in the Board Skills Matrix were identified taking into account the Group’s strategic priorities and relevant regulatory requirements. Each Director was selected for appointment on the basis of their knowledge, skills and experience which enable them to effectively discharge their duties, ensure the effective governance of the Group, and contribute to its long term, sustainable success. The biographies on pages 36 to 39 set out the key skills and experience which each Director brings to the Board. In addressing appointments to the Board, a role profile for the proposed new Directors is prepared by the Company Secretary on the basis of the criteria laid down by the Nomination and Corporate Governance Committee, taking into account the existing skills and expertise of the Board and the anticipated time commitment required. The services of experienced third party professional search firms are retained for Non-Executive Director appointments where required and deemed necessary by the Nomination and Corporate Governance Committee. In all Director selection activity, the Group ensures a formal and rigorous process is followed. Prior to a recommendation for appointment of any given candidate, a comprehensive due diligence process is undertaken, which includes the candidate’s self-certification of probity and financial soundness, external checks and enhanced due diligence. The due diligence process enables the Nomination and Corporate Governance Committee to satisfy itself as to the candidate’s independence, fitness and probity, and capacity to devote sufficient time to the role. A final recommendation is made to the Board by the Nomination and Corporate Governance Committee. The Relationship Framework specified by the Minister for Finance (the ‘Minister’), which governs the relationship between AIB and the Minister, on behalf of the Irish State as shareholder, requires the Group to consult with the Minister before appointing, reappointing or removing the Chair or Chief Executive Officer and in respect of any other proposed Board appointments. A Board-approved Policy is in place for the assessment of the suitability of Members of the Board, which outlines the Board appointment process, and is in compliance with applicable joint guidelines issued by the European Securities and Markets Authority and the European Banking Authority. 182 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Corporate Governance report Q&A with Tanya Horgan, Non-Executive Director and Member of the Board Risk Committee and the Technology and Data Advisory Committee Q&A with Anik Chaumartin, Non-Executive Director and Member of the Board Audit Committee Q: As a new director what were your first impressions of AIB and its culture? A: The emphasis that the Group and the Board place on ensuring that AIB’s culture continues to evolve has been clear from the outset. I believe that an organisation’s people are its key asset and I have seen the level of commitment there is across the Group to continuing this culture journey, leveraging off the talent that exists in the organisation and ensuring that the positive momentum on culture is maintained. In particular, I was impressed with the Group’s commitment to inclusion and diversity, demonstrated not just through the tone set by the Group’s leadership but also in tangible and measurable outcomes. Another of my key motivations for joining the Board was the Group’s commitment to sustainability and playing its part in addressing the climate change challenge. From my first meetings with executive Management it was made clear to me that driving the sustainability agenda and leading innovation in this space was fundamental to the Group’s strategy. I have seen ongoing evidence of that commitment permeating throughout the organisation and driving principle based decision making. The Group continues to be a vocal and active leader in pursuing a sustainable agenda in the financial services industry. This commitment is a very strong indicator of a positive culture and a recognition across the Group of the importance of business being a responsible part of society. My background is predominantly in risk, compliance and internal audit and I was particularly interested in seeing, and supporting, the risk culture and the customer and conduct focus of the Group. I have seen how the Board applies a customer lens to its discussions and how it strives to achieve positive customer outcomes. An example of where this is evident is at the Board Risk Committee where oversight of conduct risk management and fair customer outcomes is a key consideration. Continuing focus on the Group’s risk culture will remain on the agenda for 2022 and I look forward to supporting initiatives in this area. Q: What were your experiences of the strategy development process? A: The Board and Executive Committee held the annual strategy offsite across a number of days in November 2021 and it was a positive experience in a number of ways. It was one of the few times that the Board was able to meet in person during the year and I felt those face-to-face interactions were important, particularly for newer Directors like myself. It was an opportunity to work alongside the Executive Committee with a sole focus on the strategic direction of the Group at a time of significant change both within the Group and in the external environment. Defining a strategy that meets the current and future needs of the Group has many strands and takes into account not only the main business units but also the key enablers including the sustainability agenda, digital and technology, and the future of work. There was, of course, challenge from the Non-Executives to Management but the discussions were always open and constructive as the ultimate goal is to design a strategy that is fit for purpose to meet the Group’s targets and deliver sustainable success for our stakeholders. Q: As a new director what were your first impressions of AIB and its culture? A: I was formally appointed to the Board on 1 July 2021 following the regulatory assessment process. In advance of this date and since the beginning of March, the Deputy Chair and Chair of the Board Audit Committee invited me to attend both Board and Board Audit Committee meetings as an observer while a Director Designate. This helped with my onboarding and also gave me a first opportunity to see the Group’s culture in action by observing the Board’s discussions and decision-making, interactions with Management, and regular reporting on culture matters. I was eager to learn about the existing culture in AIB and to draw on my own experience of leading culture and behavioural change programmes as I am deeply aware of the importance of an organisation’s culture to how it achieves its goals. I was pleased to see the focus and resources that the Group has on its Culture programme and also the Board’s commitment to demonstrating a strong ‘tone from the top’ through its leadership and oversight. I also have seen the Non-Executive Directors’ deep involvement in this area by regularly reviewing, scrutinising and challenging Management’s proposals. It is vital that our discussions take the Group’s stakeholders into consideration and that our customers are truly at the heart of our decision making. I found the Board’s engagement to be open and direct and such constructive challenge promotes a culture of respectful discussion and diversity of viewpoints which ensures the best outcome for our customers. Q: What were your experiences of the strategy development process? A: I joined the Board at a very interesting time in terms of the Group’s strategy. In 2021, the Group was in the second year of its three-year strategy cycle with large-scale strategic transformation and inorganic growth initiatives underway. It was also a time when the Group, like every other organisation, was having to deal with the challenges of operating in the midst of a global pandemic. We were fortunate that government and public health guidelines in force in Ireland in November 2021 enabled the Board and Executive Committee Members to come together for a multi-day strategy offsite. It was a welcome opportunity for the Board and Executive Committee to really focus on and get into in-depth discussion on the various elements of the Group Strategy at such a critical stage in the process. The fact that these sessions were held over a number of days meant that the Executive Committee were able to take away and incorporate Directors’ feedback for the following day’s discussions which made it a dynamic and iterative process. On a more personal note, it was wonderful to be able to gather in person with my fellow Board Members, when, like so many of us, the majority of our interactions during 2021 were online or virtual. We did so following all health and safety guidelines and I feel that this experience helped cement relationships and enhance Board dynamics. I look forward to continuing to work with my fellow Directors and management throughout 2022 and beyond. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 183 Terms of appointment Non-Executive Directors are generally appointed for a three year term, with the possibility of renewal for a further three years on the recommendation of the Nomination and Corporate Governance Committee. Any additional term beyond six years will be subject to annual review and approval by the Board. In accordance with practice in recent years and the provisions of the Code, all Directors submit themselves for re-election at each Annual General Meeting. Details of the appointment dates and length of tenure of each Director is available from their appointment dates included in their biographies on pages 36 to 39. The independence of each Non-Executive Director is considered by the Nomination and Corporate Governance Committee prior to appointment and reviewed annually thereafter. It was determined that the following Non-Executive Directors in office during 2021, namely Ms Anik Chaumartin, Mr Basil Geoghegan, Ms Tanya Horgan, Ms Carolan Lennon, Ms Elaine MacLean, Mr Andy Maguire, Mr Brendan McDonagh, Ms Helen Normoyle, Ms Ann O’Brien, Mr Fergal O’Dwyer, Ms Sandy Kinney Pritchard, Mr Jan Sijbrand, and Mr Raj Singh were independent in character and judgement and free from any business or other relationship with the Group that could affect their judgement. Letters of appointment, as well as dealing with terms of appointment and appointees’ responsibilities, stipulate that a specific time commitment is required from Directors. Copies of Directors’ letters of appointment are available to shareholders for inspection at the Annual General Meeting, at the registered office during business hours or on request from the Company Secretary. Time commitment Non-Executive Directors are required to devote such time as is necessary for the effective discharge of their duties. The estimated minimum time commitment set out in the letters of appointment is 30 to 60 days per annum including attendance at Committee meetings. Before being appointed, Directors disclose details of their other significant commitments along with a broad indication of the time absorbed by such commitments. Before accepting any additional external commitments, including other directorships that might impact on the time available to devote to their role, the agreement of the Chair and the Company Secretary, and in certain cases the Board as a whole and/or the Central Bank of Ireland, must be sought. There is a procedure in place to assess and seek Board approval for any additional external roles proposed by Directors to ensure that there will be no impact on their ongoing suitability or ability to continue to dedicate sufficient time to their Group roles. During 2021, the Board considered and approved the proposal that Ms Helen Normoyle assume an executive directorship of My Menopause Centre, a company which she co-founded, and also considered and approved a proposal that Ms Tanya Horgan assume the role of Chief Risk Officer of Primark. In reaching its decision to approve the external roles, the Board took into consideration the Directors’ existing commitments, the limitations on the number of directorships permitted to be held, any potential conflicts of interest, and ongoing suitability requirements. There is a procedure in place to monitor Non-Executive Director time commitment on an ongoing basis and the results of this monitoring are reported to the Nomination and Corporate Governance Committee. Balance and Independence Responsibility has been delegated by the Board to the Nomination and Corporate Governance Committee for ensuring an appropriate balance of experience, skills and independence on the Board. Non-Executive Directors are appointed so as to provide strong and effective leadership and appropriate challenge to Management. In determining independence, the Board had particular regard to the fact that Ms O’Brien and Mr Singh were appointed in 2019 following their nomination by the Minister for Finance in Ireland. In determining that they should properly be considered to be independent, the Board gave due regard to the following matters: the nature and history of the shareholding and the alignment of the Irish State’s interests with other shareholders, the nature of the individuals nominated and the process followed in identifying them for nomination, their performance and nature of their contribution to the business of and matters discussed at the Board, and the Relationship Framework with the Irish State. The Board is satisfied that in carrying out their duties as Directors, Ms O’Brien and Mr Singh are able to exercise independent and objective judgement without external influence. The Chair, Mr Jim Pettigrew, was determined as independent on appointment. Inclusion and Diversity Employee inclusion and diversity in the Group is addressed through policy, practices and values which recognise that a productive workforce comprises of diverse backgrounds, cultures, experiences, characteristics and work styles. The Group has implemented a Diversity and Inclusion Code and opposes all forms of unlawful or unfair discrimination. The efficacy of related policy and practices and the embedding of the Group’s values is overseen by the Board which in 2021 endorsed the Group’s inclusion and diversity strategy supported by short term activities and targets as one of the key focus areas of the Culture Programme. The Board also considers inclusion and diversity as part of the Group’s People strategy and Future of Work strategy. The Board is supported in its oversight by its Committees, specifically by the Nomination and Corporate Governance Committee which considers diversity as a key element within the context of succession planning for the Executive Committee and its succession pipeline within the Group. In addition, the Sustainable Business Advisory Committee considers inclusion and diversity in the Group as it relates to that Committee’s role in overseeing the Group’s efforts to promote economic and social inclusion as part of the sustainability agenda. With regard to diversity among Directors, there is a Board Diversity Policy in place which sets out the approach to diversity on the Board. This Policy is available on the Group’s website at www.aib.ie/investorrelations. 184 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Corporate Governance report The Nomination and Corporate Governance Committee (the “Committee”) is responsible for developing measurable objectives to effect the implementation of this Policy and for monitoring progress towards achievement of the objectives. The Policy and performance relative to the target is reviewed annually by the Committee, in conjunction with Board succession and skills planning, and any proposed changes to the Policy are presented to the Board for approval. In 2021, the Committee recommended and the Board approved an increase in the Policy’s target from 30% to 40% female representation on the Board in recognition of the Group’s strong track record and commitment to continued progress. The Board recognises that diversity in its widest sense is important, is inclusive of all individuals and is focused on ensuring a truly diverse board. The Board embraces the benefits of diversity among its members and through its succession planning, is committed to achieving the most appropriate blend and balance of diversity possible over time. In terms of implementation of the Board Diversity Policy, the Committee reviews and assesses the Group Board composition and has responsibility for leading the process for identifying and nominating, for approval by the Board, candidates for appointment as Directors. In reviewing the 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 and in consideration of the Group’s future strategic plans. Where external search firms are engaged to assist in a candidate search, they are requested to aim for a fair representation of both genders to be included in the initial list of potential candidates so the Committee has a balanced list from which to select candidates for interview. All Board succession planning processes during 2021 were conducted in line with the Policy. At 31 December 2021, the percentage of females on the Board stood at 44% and thus exceeded the target of 40% set out in the Policy. Board 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 an external evaluation in 2020 facilitated by Praesta Ireland, the Board agreed to conduct an internal evaluation in 2021, which was facilitated by the Corporate Governance function. The process undertaken in 2021 included an anonymous online survey of Board Members and a shorter survey of Executive Committees Members, as well as one-to-one meetings between the Directors, the Deputy Chair and the newly appointed Chair to discuss the overall effectiveness of the Board and the individual performance of Directors. The evaluation included the Board and each of its Committees. Overall, the final report was positive and demonstrated the strength of the Board and its Committees. The areas reviewed included: role of the Board; chairing of the Board; Board papers and reporting; strategic focus and culture; Board composition and competence; Board structure and processes; Board Committees; Communication and Stakeholder Management; Board Dynamics and Board Evaluations. Arising from the evaluation process, a number of recommendations and actions were agreed by the Board and will be implemented throughout 2022 with regular check-ins to ensure progress is being made against these actions. The key areas for continued improvement and action include: – Enhanced strategic focus by the Board on culture, resourcing, market trends and competition, technology, data and cyber strategy, including a stronger focus at Board meetings on the delivery of the regulatory compliance agenda. – Continued enhancement of Board papers to ensure clarity and conciseness as well as a clear focus on outcomes. – Board Succession Planning to ensure a smooth transition through any potential Director changes. – Forging good Board dynamics with the new Chair and Directors. – Continued engagement by the Board with its key stakeholders. The recommendations from the evaluation on Board composition will be considered on a continuous basis to ensure the current Board Succession Plan continues to ensure continuity of leadership taking account of the most appropriate size of the Board and Directors’ tenure. Alongside this process, the Deputy Chair and Chair conducted evaluations of the individual performance of each of the Non-Executive Directors and also led a discussion in private session with the other Non-Executive Directors in December 2021 to consider the performance of the Executive Directors. The outcome of these evaluations was positive, noting that each Director continues to contribute effectively. The outcome also aligned to the findings of the external evaluation conducted in 2020 which noted the strength of the Board as a whole. Each of the six Board Committees considered the Board Evaluation report insofar as it related to that particular Committee and adopted any actions considered necessary. The Board also reviewed the actions arising from the 2020 external effectiveness evaluation and noted that each action had been satisfactorily completed. The existing Board priorities were maintained with some minor amendments to the descriptors to more accurately reflect the Group’s current focus. AIB Group plc Annual Financial Report 2021 Governance and Oversight 185 Audit, Risk and Internal Control The Board has delegated responsibility for the consideration and approval of certain items pertaining to audit, risk and internal control to the Board Audit Committee and Board Risk Committee. Where required, topics will be referred onward to the Board as a whole for further discussion or approval. Information on the activities of the Board Audit Committee and Board Risk Committee in 2021 can be found in their respective reports on pages 186 to 193. Remuneration The Board has delegated responsibility for the consideration and approval of the remuneration arrangements of the Chair, Executive Directors, Executive Committee Members, the Company Secretary and certain other senior executives to the Remuneration Committee. A group of senior management is responsible for recommending to the Board the fees to be paid to Non-Executive Directors within the limits set by shareholders in accordance with the Articles of Association. Information on the activities of the Remuneration Committee in 2021 can be found in the Report of the Remuneration Committee on pages 199 to 200. 1 2 3 4 5 6 186 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Governance and oversight – Report of the Board Audit Committee Report of the Board Audit Committee Despite unprecedented COVID-19 pandemic challenges to the business and to our customers, I report with confidence that the opinion of the Audit Committee continues to be that the Group has met its obligations for financial reporting and disclosure, and that the internal control framework is both effectively designed and operated. Sandy Kinney Pritchard, Committee Chair Chair’s Overview On behalf of the Board Audit Committee (the “Committee”), I am pleased to report on the Committee’s focus of attention and how it has discharged its responsibilities for the year ended 31 December 2021. 2021 proved to be another challenging year in terms of monitoring the effectiveness of internal and business control environments alongside reviewing the Group’s financial performance in light of the COVID-19 pandemic, however, encouragingly it was a year in which the resilience of the Group was proven. In line with its Terms of Reference, which can be found on the Group’s website at www.aib.ie/investorrelations, the Committee ensured that it was fully aligned with the Group’s strategy and values and supported the Board in its responsibilities relating to the monitoring of the Group’s financial and narrative reporting process, reviewing and monitoring the effectiveness of risk management and internal control systems, overseeing the Group’s Internal Audit function, ensuring appropriate whistleblowing arrangements and advising the Board on the appointment and independence of the Group’s external Auditor. Over the year, the Committee continued to focus on the impact of the COVID-19 pandemic on the credit risk profile of the Group and the calculation of credit impairment allowances remained a priority. Whilst there were significant positive developments over the year, including portfolio sales and recovery rates, the Committee remained cognisant of a number of headwinds to the credit environment, most notably the potential impact of the removal of government supports, the pace of economic recovery and inflation challenges. With these factors in mind, the Committee is satisfied that the closing ECL stock amount of € 1,885 million is appropriate at this time. Deloitte will complete their maximum allowable term of 10 years in office as statutory Auditor when they report in 2023 on the financial year ending 31 December 2022. As such, during the year, the Committee oversaw the process for the selection of a new Auditor. Following a competitive and transparent tender process, which included presentations by relevant firms, the Committee recommended to the Board the appointment of PricewaterhouseCoopers (“PwC”) as Auditor in 2023. This appointment will be subject to approval by the shareholders in a general meeting in due course. The Committee look forward to working with the current Auditor, Deloitte, and PwC on the smooth and effective transition of the audit. The Committee reviewed the outcomes of half-year and year end overall assessments of the control environment undertaken by Group Internal Audit (“GIA”), noting that the system of internal controls is designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material misstatement or loss. On reviewing these reports from GIA, alongside reports from the Auditor, the Committee concurred that it was satisfied with the overall effectiveness of the control environment. Committee Membership The Committee currently comprises five Non-Executive Directors, all of whom are considered by the Board to be independent and whom the Board have determined have the skills, competence and recent and relevant experience to enable the Committee to discharge its responsibilities. Mr Basil Geoghegan left the Committee in August 2021. I would like to take this opportunity to thank Basil for his significant contribution during his tenure on the Committee. Following their appointments to the Board, Mr Fergal O’Dwyer and Ms Anik Chaumartin joined the Committee in January 2021 and July 2021, respectively. Both Fergal and Anik have provided valuable insights and enriched the Committee’s deliberations, given their significant experience in the areas of finance, accounting and audit. To ensure co-ordination of the work of the Committee with the Board Risk Committee, two members of the Committee are also Members of the Board Risk Committee, with this common membership providing ongoing oversight of risk and finance issues. Additionally, a number of joint meetings of the Committee and the Board Risk Committee were also held during the year. The biographies of Committee Members are set out on pages 36 to 39, with details of the Committee’s membership and attendance at meetings outlined on page 180. The Chief Financial Officer, Chief Risk Officer, Group Head of Internal Audit and the Lead Audit Partner from Deloitte normally attend all Committee meetings. In order to provide additional opportunity for open dialogue and feedback, the Committee holds closed sessions with members of Executive Management, the Group Head of Internal Audit and the Lead Audit Partner throughout the year without members of Management being present. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 187 The Committee has exercised its authority delegated by the Board for ensuring the integrity of the Group’s published financial information by reviewing and challenging the judgements and disclosures made by Management, and the assumptions and estimates on which they are based. The Committee has applied judgement in deciding which of the issues it considered to be significant in the financial statements, and the following pages set out the material matters that it has considered in these deliberations. Management reporting to the Committee from across the business has provided the opportunity for the Committee to challenge, probe and seek assurance from management, enabling the Committee to provide an independent perspective. Into 2022, the Committee will continue to focus on delivery against its mandated responsibilities, with oversight of the ongoing effectiveness of the three lines of defence model across the Group and continued scrutiny of the overall control environment, particularly in light of the programme of change delivered by the Group’s transformation programme and inorganic growth initiatives. In addition to the Committee’s standing obligations, I expect there to be increased focus on the evolving areas of climate-related disclosures and audit reform, both of which will be kept to the forefront of the Committee’s attention. Ongoing critical priorities will include further consideration of ECL outcomes, monitoring of the Group’s material restitution programmes, and overseeing the smooth transition of the Group Auditor ahead of 2023 year end. I would like to take this opportunity to sincerely thank my fellow Committee colleagues for their continued support and diligence during 2021. Sandy Kinney Pritchard Committee Chair 188 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Report of the Board Audit Committee Financial Reporting – Activities for the year A key activity for the Committee is the consideration of significant matters relating to the Annual Financial Report, with key accounting judgements and disclosures subject to in depth review with Management and Deloitte. A summary of these judgements is set out below, and the judgements are disclosed in detail within note 2 “Critical accounting judgements and estimates” on page 263. Key Issue Committee Consideration Committee Conclusion IFRS 9 and the Impairment of Financial Assets Following detailed assessment of the conclusions made by Management, and the approval of the underlying scenarios therein, the Commitee is satisfied that the judgements and assumptions utilised in determining the total ECL provision stock of € 1,885 million, and year end writeback of € 238 million, are appropriate. The process for undertaking the assessment of ECL amounts requires use of a number of accounting judgements, estimates and assumptions, some of which are highly subjective and very sensitive to risk factors such as changes to economic conditions, including determining the criteria for a significant increase in credit risk and for being classified as credit impaired; applying the definition of default policy for classifying financial instruments as credit impaired; assumptions for measuring ECL and the estimation and methodology for post-model adjustments. In assessing these key judgements and estimates, the Committee received and reviewed regular reports from Management on the ECL position. The Committee met in joint session with the Board Risk Committee in order to review, challenge and subsequently approve the proposed changes to the macroeconomic scenarios in use in the ECL models, as well as the weightings applied to these scenarios. Modelled outcomes were adjusted for management judgements and post model adjustments amounting to € 550 million were approved. The Committee reviewed regular reports from the Risk function on the outcome of assurance processes relating to ECL levels and the strength of the underlying governance in place to support the ECL calculation. Going Concern and Long Term Viability The Directors are required to make an assessment of the Group’s ability to operate as a going concern for at least a 12 month period from publication of this Annual Financial Report. The Committee was asked to express an opinion to the Board as to whether a statement to this effect could properly be made. In considering this statement, the Committee assessed the Group’s detailed forecasts, as well as the capital position of the Group, with due regard for potential stress events and the impact of the macroeconomic environment. The Committee recommended to the Board that the financial statements be prepared on a going concern basis, in the absence of any material uncertainties or doubts as to the Group’s ability to continue as a going concern. The Board is also required to make a Viability Statement in the Annual Financial Report, with the Committee required to express an opinion to the Board as to whether this Viability Statement could properly be made. In doing so, the Committee assessed a number of activities undertaken by the management body over the course of the year relating to the risk profile, capital, liquidity and funding positions, and recovery and resolution planning. Retirement Benefit Obligations There is a significant degree of judgement and estimation in the calculation of retirement benefit liabilities. The Committee gave due consideration to the reasonableness of defined benefit obligations and of the underlying actuarial assumptions in use, including the discount rate, inflation rates and pensions in payment increases, and approved these assumptions as inputs in the calculation of the IAS 19 pensions position and specifically for the AIB Group Irish pension scheme. Based on the assessment undertaken, the Committee was satisfied that three years was a suitable timeframe for the Viability Statement, and recommended the Viability Statement to the Board for approval. The Viability Statement is available for review on page 210. Based on the work performed, the Committee is satisfied that the assumptions supporting the retirement benefit obligations are reasonable. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 189 Key Issue Committee Consideration Committee Conclusion Deferred Taxation Provisions for Liabilities and Commitments Investment in Subsidiary in the Separate Financial Statements The Group has recognised deferred tax assets for unutilised losses of € 2,840 million (€ 2,763 million in 2020). The recognition of deferred tax assets is reliant on the assessment of future profitability and the sufficiency of those profits to absorb losses carried forward. A number of significant judgements are made as to the projection of long term future profitability due to the period over which recovery extends. In assessing the recognition of the deferred tax assets, the Committee considered a range of evidence presented by Management. The Committee noted, for unutilised losses in Ireland which represent the vast majority of the Group’s deferred tax assets, that based on the Group’s three year financial plan, with the application of a profit growth rate of 2% from 2025, that it is assessed that it will take in excess of 20 years for the deferred tax assets to be utilised. In considering the utilisation period the Committee noted that this is subject to economic growth rates and the effect of idiosyncratic or market wide effects that may impact the Group’s long term profitability. For the UK, 15 years is the period that taxable profits are considered more likely than not. The Committee considered the current uncertainties in longer term profitability forecasting in the context of the early stage of implementation of the new AIB UK strategy at 31 December 2021. 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. Further details of the Group’s provisions for liabilities and commitments are shown in note 37 to the financial statements, with further detail regarding the Belfry investment funds and related review programme within this note. Significant management judgement and estimation is required in this process which, of its nature, may require revisions to earlier judgements and estimates, particularly in establishing provisions and the range of reasonable potential losses. It is accepted that a range of outcomes are possible, however, the provision in place at 31 December 2021 reflects Management’s best estimate of provision amounts based on the information available. The Company undertook an impairment review by comparing the carrying value of the equity investment in Allied Irish Banks, p.l.c. with its estimated recoverable amount. At 31 December 2021, the market capitalisation of AIB Group plc was € 5.8 billion which is a proxy for the fair value of Allied Irish Banks, p.l.c. This was below the carrying amount of the Company’s equity investment in Allied Irish Banks, p.l.c. Accordingly, the Company tested its investment for impairment and this resulted in a reversal of an earlier impairment amounting to € 2,707 million. Testing for impairment requires considerable estimation and judgement. The key estimates and assumptions used in assessing the value in use of the Company’s investment in the subsidiary, which were considered by the Committee are as follows: • The estimation of expected cash flows; • The assumption of an appropriate growth rate; and • The assumption of an appropriate discount rate. In light of the evidence presented by Management, the Committee agreed that they were supportive of the recognition policy in place for the deferred tax assets, and agreed that the management judgement applied was appropriately supported by the Group’s long term financial and strategic plans. Based on the assessments undertaken, the Committee is satisfied that the provision for liabilities and commitments is reasonable, and reflective of the related uncertainties and the judgemental nature of key assumptions. Based on an assessment of the information provided, the Committee is satisfied that the judgements and estimates that support the reversal of an earlier impairment are reasonable. 190 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Report of the Board Audit Committee Other Key Areas of Focus Financial Reporting Internal Audit During the course of the year, the Committee considered each of the areas above and the significant matters pertaining to this Annual Financial Report and the Group’s Half-Yearly Financial Report for the six months ended 30 June 2021. The Committee concluded that it could recommend to the Board for approval on the basis that the information therein was a fair, balanced and understandable assessment of the Company’s position and prospects. In addition, as integral to that review of both this Annual Financial Report and the Half-Yearly Financial Report, the Committee considered the minutes of the Group Disclosure Committee, in advance of making any recommendations. The Company’s Pillar 3 report is subject to the same review processes as its Annual Financial Report and accounts. The Committee therefore reviewed the year end 2020 and Half-Yearly 2021 Pillar 3 disclosures, as well as the Pillar 3 Policy, and made positive recommendations in that regard. The Committee is responsible for considering and approving the remit of the Internal Audit function, approving the internal audit plan, and ensuring it has adequate resources and appropriate access to information to enable it to perform its function effectively and in accordance with the relevant professional standards. It also receives the function’s reports and evaluates the adequacy of the Group’s responses to them. The Committee ensures that the Internal Audit function has adequate standing and is free from management or other restrictions which may impair its independence. Given the significant change in Committee composition over 2021, outlined earlier in the report, coupled with a newly appointed Group Head of Internal Audit in 2020, the Committee Chair requested that an independent External Quality Assessment of Internal Audit be undertaken. The outcome of that review, which concluded in mid-2021, reported that the Internal Audit function operates efficiently within the Group. However, in response to the Group’s Strategy and external environment, it was agreed that the function would benefit from additional resourcing, with a focus on specific skills and capabilities in critical domains such as Credit Risk. The function will also focus on the further adoption of best in class Data Analytics audit techniques, thus ensuring that the team continues to be in the best possible position to protect the Group into the future. In December 2020, the Committee considered and approved the annual internal audit plan for 2021, which was based on an assessment of the key risks faced by the Group. Progress in respect of the plan was monitored throughout the year. With the approval of the Committee, the audit plan may be revised during the year based on the ongoing assessment of the key risks or in response to the requirements of the Group. Due to the demands of the COVID-19 pandemic in 2021, the plan was subject to revisions, with a number of audits added during the year and a number of intended audits for completion being moved to the first quarter of 2022. Any revisions to the annual plan were considered with due regard for the overall risk profile of the Group. The Group Head of Internal Audit provides the Committee with regular assessments of the skills required to conduct the audit plan and whether the internal audit budget is sufficient to recruit and retain staff, or to procure subject matter expert resources with relevant experience. Significant findings of internal audit reports and Management’s responses were discussed at meetings of the Committee throughout the year. Any overdue actions were reviewed and challenged by the Committee. During the year, the Chair of the Committee met regularly with the Group Head of Internal Audit between scheduled meetings of the Committee to discuss audit issues arising and insights into the control environment. The Group Head of Internal Audit has unrestricted access to the Chair of the Board Audit Committee. The Committee also considered the annual and half-year internal audit opinion in relation to the overall control environment, as well as enhancements to the methodology utilised to arrive at that assessment. Additionally, the Committee considered Group Internal Audit’s approach for ensuring adherence to Article 191 of the Capital Requirements Regulation including the output of the Annual General Risk Assessment relating to Internal Models and the related annual work plan as detailed in the 2022–2024 Audit Plan. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 191 External Audit The Committee has primary responsibility for overseeing the relationship with, and performance of the Group’s existing Auditor, Deloitte. The Audit Committee reviewed the terms of engagement and monitored the independence and effectiveness of the Auditor. The remuneration of the Auditor for the year 2021 was also considered by the Committee and recommended to the Board for approval. The Committee provided oversight of the Auditor, including a review of the Auditor’s internal policies and procedures for maintaining independence and objectivity and consideration of their approach to audit quality and materiality. The Committee reviewed and approved the audit plan (for both the half-year and annual audit) as presented by Deloitte at the Audit Committee meetings in 2021. The Committee also reviewed the performance of the Auditor and assessed the qualifications and expertise of their resources as well as considering the Auditor’s findings, conclusions and recommendations arising from their work. In line with monitoring the objectivity, independence and effectiveness of the Auditor and in accordance with the EU Audit Regulations 537/2014 and Directive 2014/56/EU, which was transposed into Irish law on 25 July 2018, an update was received in relation to the Group’s policy on the hiring of former employees of the Auditor. The Group’s policy is that the Auditor and its affiliates may be used for non-audit services that are not in conflict with the Auditor’s independence and where sound commercial reasons exist. This policy, which outlines the types of non-audit fees for which the use of the Auditor is pre-approved or requires specific approval, was reviewed and approved by the Committee and all non-audit services and fees were approved in accordance with Group policy. Further details on the approach can be found at the Group’s website at: https://aib.ie/investorrelations. Details of fees paid for audit and non-audit services are outlined in note 14. Appointment of External Auditor Deloitte were appointed as the Group’s Auditor in 2013 and, in accordance with the relevant regulatory requirements, will complete their maximum term of 10 years with the audit for the year ended 31 December 2022. The Committee oversaw the tender process of the appointment of the next Group Auditor. It was agreed that the tender process should be concluded in 2021 to ensure future compliance with the UK Corporate Governance Code and EU legislation. In mid-2021, following an evaluation by the Committee, a number of firms who were considered to have the required resources and competencies were invited to participate in the process. Written submissions and presentations from the proposed firms were evaluated and a shortlist of firms, who demonstrated the calibre, resources and experience needed to deliver the audit were selected to make presentations to the Audit Tender Selection Committee, a subcommittee chaired by the Audit Committee Chair. This subcommittee also included Non-Executive Director, Executive Director and Executive Management membership, including the Chair of the UK Audit Committee. Following the presentations and an evaluation of the capabilities, competencies and resources of the shortlisted firms, a recommendation was made to the Board that PwC be selected as Auditor of the Group with effect for financial year end 31 December 2023. A resolution to this effect will be presented to the shareholders at the Annual General Meeting of the Company in due course. A transition plan setting out the agreed principles, framework and timeline to ensure the efficient transfer of the audit from the existing Auditor Deloitte to PwC will be prepared and considered by the Committee to ensure a smooth transition. 192 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Report of the Board Audit Committee Speak Up and Code of Conduct The Committee reviews the arrangements in place that allow workers to raise any concerns, in confidence, about possible wrongdoings in financial reporting or other matters. Given this important role in relation to whistleblowing and protected disclosures, the Committee Chair met with the Group Head of Speak Up to discuss material cases and enhancements to Speak Up arrangements over the course of the year. The Group has a Speak Up Policy, which allows workers to safely and confidentially report concerns about suspected wrongdoing related to the Group through designated channels, including through a dedicated Speak Up channel and to nominated senior leaders. To ensure that the Speak Up policy and whistleblowing options are embedded in the operations of the Group, all employees received training and were tested to ensure their understanding. The Committee also considered the operation of the enhanced Code of Conduct Framework and assisted the Board in its assessment of the adequacy of the arrangements. The Committee also received updates from Management on the operation of the Speak Up process and the Committee further considered reports on the operation of the Group Code of Conduct. Internal Controls The Group’s internal control and risk management systems are embedded within the organisation structure and it is the Committee’s responsibility to review the adequacy and effectiveness of the control environment on behalf of the Board. Throughout the year the Committee: • Received updates from the Chief Financial Officer, aligned to the half-year and year end reporting timelines, regarding the testing, operation and effectiveness of the system of controls over financial reporting. Reviewed and advised the Board on the appropriateness of the Directors’ statements in this Annual Financial Report relating to the Group’s systems of internal controls. Reviewed the outcomes of half-year and year end overall assessments of the control environment undertaken by Group Internal Audit. Reviewed quarterly reports from the Chief Credit Officer regarding the credit control environment. Received an update on the continuous improvement initiatives and streamlining efficiencies in relation to “Key Control Enhancement Themes” – IT, Governance, Change and Third Party Management. Considered the approach to combined assurance across the Group, as well as the operation of the three lines of defence model. • • • • • Subsidiary Oversight The Committee, having assessed the above information over the year, is satisfied that the internal control and risk management framework is operating effectively. This year, the Committee sought to further strengthen collaboration between the Group Audit Committees. The Committee Chair met with the material subsidiary audit committee Chairs outside of the regular scheduled Committee meetings in order to discuss audit committee priorities and to gain a full understanding of matters of relevance for the individual subsidiaries. To develop a better understanding of the key issues and challenges across the Group, the Committee Chair also attended a number of material subsidiary audit committee meetings throughout the Group. The Committee received an annual report from the audit committees of each of AIB Group (UK) p.l.c., EBS d.a.c. and AIB Mortgage Bank u.c., and also regularly reviewed the minutes of those audit committees to ensure effective oversight and awareness of any issues and discussion themes. AIB Group plc Annual Financial Report 2021 Governance and Oversight 193 Governance and oversight – Report of the Board Risk Committee During the year, the Committee maintained oversight of the risks arising from the impact of COVID-19, as well as considering the potential impact of the delivery and implementation of the Group’s inorganic growth initiatives on the overall risk profile. Brendan McDonagh, Committee Chair 1 2 3 4 5 6 Chair’s Overview On behalf of the Board Risk Committee (the “Committee”), I am The Group Chief Risk Officer has unrestricted access to the Committee, and attends all Committee meetings. The Chief pleased to report on how the Committee has discharged its duties Financial Officer, Group Head of Internal Audit, the lead External during 2021. The objective of this report is to provide an insight Audit partner and the Chair of AIB Group (UK) p.l.c. are also into the workings of, and the key matters considered by, the invited to attend all Committee meetings. Committee during the course of 2020. Looking ahead to 2022, delivery against the ongoing regulatory The primary purpose of the Committee is to assist and advise compliance commitments and obligations of the Group will the Board in fulfilling its risk governance and oversight role. In continue to be reviewed on an ongoing basis. In addition, the addition to satisfying the wide-ranging responsibilities of the Committee will continue to focus on the management of strategic Committee as set out in its Terms of Reference, during the year and emerging risks for the Group throughout the delivery of the the Committee maintained oversight of the risks arising from overall strategic objectives. Aligned to the emerging risk profile the impact of COVID-19, and considered the potential impact of and the external operating environment, there will also be an the delivery and implementation of the Group’s inorganic growth increased emphasis on the increasingly prevalent Environmental, initiatives on the overall risk profile. A detailed summary of the key Social and Governance risk agenda and on the threats posed areas of focus for the Committee throughout 2021 has been set from the external cyber risk landscape. Other risk areas, including out for your information overleaf. Committee Membership The Committee currently consists of seven Non-Executive Directors, all considered by the Board to be independent. Ms Carolan Lennon stepped down from the Committee in October 2021. I would like to take this opportunity to thank Carolan for her significant contribution during her time as Committee Member. I am very pleased to welcome Mr Andy Maguire who joined the Committee in March 2021, and the Committee was further strengthened by the addition of two new Members in September, Mr Jan Sijbrand and Ms Tanya Horgan. I look forward to working with our new Committee Members over the coming years. To ensure co-ordination of the work of the Committee with the Board Audit Committee, both myself and Ms Sandy Kinney Pritchard, the Board Audit Committee Chair, are members of both Committees. This approach assists with providing effective oversight of risk and finance matters. To ensure the Group’s remuneration policies and practices are consistent with and promote sound and effective risk management, I also sit on the Remuneration Committee. Details of each Committee’s membership and attendance at meetings are outlined on page 180. any potential tail risk arising from the COVID-19 pandemic, will continue to be monitored through the ongoing reporting provided to the Committee. In what has been a busy year for the Committee, I would also like to thank my fellow Committee Members for their contributions over the past twelve months. I would also like to take this opportunity to extend my thanks to the outgoing Chief Risk Officer (“CRO”), Ms Deirdre Hannigan, for her commitment and dedication to the role since she joined the Group in 2017. Deirdre has made a significant contribution to driving the positive risk culture which has developed in the organisation, and has delivered enhancements to the three lines of defence model. The Committee wishes her well in the next stage of her career. Brendan McDonagh Committee Chair 194 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Report of the Board Risk Committee Key Areas of Focus Credit Risk Regulatory Compliance Risk Management Business Model, Financial and Market Risks During 2021, the Committee considered overall credit quality and received regular updates on customers impacted by COVID-19. The Committee also considered the impact of the pandemic on individual sectors, and the associated risk ratings applied to those sectors. The focus of the Committee shifted from the initial response by the Group to COVID-19 to the ongoing credit management and oversight of the Group credit portfolio. The Committee assessed the credit risk profile and trends, including the performance of significant credit transactions on a regular basis. The Committee also met in conjunction with the Board Audit Committee to review, challenge, and approve the macroeconomic scenarios for use in the Group’s Expected Credit Loss (“ECL”) models. An improvement in the Credit Risk profile was reported to the Committee during 2021, reflective of a slowdown in the migration to default across portfolios, and the trajectory of new lending quality across all asset classes. Notwithstanding these improvements, the Committee has remained cognisant of the external pressures on inflation and the impact of COVID-19 restrictions, as well as the long term impact of Brexit for customers. Oversight of the Group’s adherence to, and delivery of, regulatory compliance commitments is a key focus for the Committee. Throughout the year, both the CRO and the Group Chief Compliance Officer provided updates regarding the status of the regulatory compliance risk profile at each of its scheduled meetings. The Committee also received regular updates regarding the delivery of specific regulatory change programmes, including the Payment Services Directive 2 (“PSD2”) Strong Customer Authentication eCommerce programme, and a review of progress against the delivery of adherence to the European Banking Authority (“EBA”) guidelines on Loan Origination and Monitoring (“LOaM”). The area of financial crime was considered on a regular basis throughout the year, through ongoing reporting as well as a number of standalone updates provided by the Money Laundering Reporting Officer. The Committee received reports regarding the outcome of the 2021 Group Financial Crime Business Risk Assessment, which reviewed the Anti-Money Laundering/Counter Terrorist Financing and Financial Sanctions risks and controls across the Group, including relevant subsidiaries. Given the importance of ensuring that the Group keep pace with the external threat landscape and related legal and regulatory requirements, the Committee also received updates in relation to the establishment of a programme to manage the implementation of the 5th Anti-Money Laundering Directive (“5AMLD”), as well as the embedding of a revised Financial Crime Operating Model. The Group continued to be active from a corporate development perspective, with a number of inorganic transactions undertaken during the year with a view to strengthening the Group’s overall business model. The Committee is cognisant of the potential risks arising from the delivery of the strategic aims of the Group, both in terms of the business model risk profile and the potential impact on the operational risk profile of the Group. In providing oversight of the risks associated with these key change initiatives, the Committee received updates in terms of the manner in which entities, including Goodbody, would be integrated into the overall risk management framework of the Group. The Committee also received regular reports regarding the status of business model risk in the context of delivery of the Financial Plan and medium term targets. Given the potential impact of external factors outside the direct influence of the Group, including economic cycles and technological changes, financial and market risk is also managed through Board-approved risk appetite limits with comprehensive polices in place to ensure that the risks posed by changes and mismatches in interest rates are effectively managed. In terms of their oversight role, the Committee considered a financial risk deep-dive during the course of the year with particular attention given to the Interest Rate Risk in the Banking Book (“IRRBB”) and macroeconomic factors, including inflation. Conduct Risk Delivery of fair customer outcomes and the related management of conduct risk continue to be a central objective for the Group. To that end, the Committee received regular reporting regarding the status of the conduct risk profile throughout the year, including an overview of current trends, the status of open restitution programmes, and customer complaints metrics, including the status of SME complaints. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 195 Risk Appetite, Risk Profile and Risk Strategy The Committee provided oversight of the Group Risk Appetite Statement (“RAS”) throughout the year, and made recommendations to the Board in that regard. The risk profile of the Group was monitored on an ongoing basis against agreed Group RAS Metrics through regular reports from the CRO which provided an overview of the status of the Group’s key material risks, as well as emerging risk drivers. The Committee also considered and recommended the assessment of the material risks facing the Group to the Board for approval. Capital, Funding and Liquidity Regular reviews are undertaken to ensure that the Group is compliant with internal minimum capital and liquidity targets and regulatory liquidity requirements. With this in mind, the Committee reviewed the results of regular stress testing, as well as documents underpinning the ICAAP and ILAAP. In conjunction Operational Risk with the Board Audit Committee, the Committee also reviewed the macroeconomic scenarios for use in stress testing and the ICAAP models, and recommended those scenarios to the Board for approval. The Committee is satisfied that the capital and liquidity adequacy of the Group has been well demonstrated in a range of possible scenarios. Managing operational risk continues to be a key focus for the Group, due to the complexity and volume of change, the IT infrastructure and cyber risk. The Committee focused on ensuring that the Group has an effective framework for managing operational risk, including the use of key risk and control indicators for flagging operational risk events. The Committee received regular updates on the Operational Risk profile and considered a deep-dive on organisational operational challenges over the course of 2021. Updates were also received on the Group’s approach to third party management, providing enhanced oversight of key outsourcing and critical arrangements across the Group in line with the EBA Guidelines on outsourcing. Cyber Security Risk Throughout 2021, the Committee received regular updates from the Chief Technology Officer on cyber security. Additionally, cyber training was provided to the Board as part of the continuous education programme. There continues to be significant focus on cyber capability and IT resilience, with the development of an enhanced Cyber Strategy Framework into 2022 which will form the basis for future iterations of the Group’s Cyber Strategy. Model Risk Regulatory Engagement Climate Risk The Committee received regular updates on model capabilities and considered a revision to the IRB Rollout plan, which was subsequently recommended to the Board for approval. Additionally, quarterly Model Risk Reports were considered, with an assessment of model risk improvements and progress against deadlines undertaken. The various model risk improvements and the status of the quality and adequacy of those models was assessed through independent validation, the outcome of which was also reported to the Committee. Throughout the year, the Committee considered the management action plans put in place to address findings identified as part of regulatory inspections, and also received regular updates on ongoing regulatory programmes. The Committee received regular reports on the structured and holistic approach to engagement with all regulators across the Group, given the importance of continuously fostering strong stakeholder relationships. During the year, the Committee approved amendments to the Risk Management Framework and the Group Credit Risk Policy in relation to climate risk. Qualitative risk appetite statements were updated for two of the Group’s material risks, Credit and Business Model risk. These take into account Environmental, Social and Governance (“ESG”) issues when considering Group strategy and when lending in climate related risk areas. Management will continue to monitor transitional and physical climate change risks in 2022 with plans to identify key risk indicators and develop quantitative risk appetite metrics for managing climate and environmental exposure in line with Group strategy. 196 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Report of the Nomination and Corporate Governance Committee There was significant progress made on the Board Succession Plan over the course of the year with the appointment of the Chair, five other Non-Executive Directors and one Executive Director to the Board. Elaine MacLean, Committee Chair Committee Membership The Committee currently consists of five Members: four Non- Executive Directors considered by the Board to be independent and the Non-Executive Chair of the Board who was deemed independent on appointment. Ms Carolan Lennon and Mr Jim Pettigrew were appointed on 1 October and 28 October 2021, respectively, and joined myself, Mr Brendan McDonagh and Ms Helen Normoyle on the Committee. The biographies of the Committee Members and a record of attendance at meetings are set out on pages 36 to 39 and page 180. The Chief Executive Officer and Chief People Officer normally attend Committee meetings except where the business of the meeting relates to their successors. The Committee also met with no Management present on a number of occasions. I would like to thank my fellow Committee Members for their continued commitment through another busy year. Elaine MacLean Committee Chair Chair’s Overview I am pleased to present the report of the Nomination and Corporate Governance Committee (the “Committee”) for the year ended 31 December 2021 which sets out the Committee’s main areas of focus over the past year and priorities for 2022. 2021 saw significant changes in Board composition and built on the succession planning work undertaken by the Committee in recent years, most notably on the Chair selection process which culminated with the appointment of Mr Jim Pettigrew as Non-Executive Chair of the Board on 28 October 2021. I would like to thank Ms Carolan Lennon, our Senior Independent Director, for leading this search process. There was significant progress made on the Board Succession Plan over the course of the year with the appointment of the Chair, five other Non-Executive Directors and one Executive Director to the Board. These appointments mark the successful conclusion of a number of Director selection processes which had sought to enhance the overall skills profile of the Board taking into account the Board Skills Matrix and the future strategic direction of the Group. The Committee is satisfied that the new Board Members bring a diverse range of skills that complement the skills of existing Directors and ensure an effective and appropriate balance of knowledge, skills and experience on the Board. The current Board size of sixteen Directors reflects the need to balance the onboarding of newer Directors and ensure an appropriate transition period and continuity of leadership to position the Board to remain effective in its leadership and oversight of the Group into the future as Board members with longer tenure prepare to retire from the Board in the coming years. The number of Board appointments during 2021 meant a considerable amount of time was dedicated to the onboarding and induction of the new Non-Executive Directors and the Committee oversaw this process. In addition, the Group’s acquisition of Goodbody meant additional subsidiary board composition planning and appointments for the Committee to consider. A summary of the other key areas of focus for the Committee throughout 2021 is set out below. Looking ahead, the Committee’s key priorities for 2022 will include ensuring the orderly and planned retirement of longer-serving Directors, material subsidiary board composition, and Executive Committee succession planning and appointments. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 197 Key Areas of Focus Board Succession Planning, Renewals and Board Committee Composition Chair Search The size, structure, composition and succession plans of the Board and Board Committees was a standing item on the agenda of scheduled Committee meetings in 2021. Considerations in this regard included oversight and monitoring of the search processes which concluded in 2021, reviewing Director tenure and ongoing suitability, and making recommendations to the Board to refresh Board Committee composition. The Committee used the services of both Egon Zehnder and MERC Partners Spencer Stuart during 2021 to support Non-Executive Director searches. The search firms have no other connection to the Group other than, from time to time, assisting with executive searches, providing leadership development and assessment services and leadership advisory services. The search firms have no other connection to individual Directors other than, from time to time, assisting external entities, of which the individual directors may be a Director, in candidate searches or considering individual Directors as potential candidates for external roles. The appointment of a number of new Non-Executive Directors to the Board over the course of 2021 provided the opportunity for the Committee to consider and make recommendations to refresh Committee membership where appropriate. Details of changes to Committee membership during 2021 are available in each of the Committee reports. The current Committee memberships and any additional roles held by Directors are set out on pages 36 to 39. As previously reported, Mr Richard Pym retired as Chair on 6 March 2020. While work to identify a successor had commenced prior to his resignation, the process took longer than anticipated. The search was led by the Senior Independent Director, Ms Carolan Lennon, and Egon Zehnder were engaged as the external search agents. The Committee considered the shortlisted candidates’ skills and experience, independence, fitness and probity, capacity to devote sufficient time to the role and broader diversity and collective suitability requirements before recommending the final preferred candidate to the Board. The process concluded successfully with the appointment of Mr Jim Pettigrew as Chair on 28 October 2021. Executive Succession Planning and Appointments Executive succession planning was considered on an ongoing basis by the Committee during the year. In addition to broader succession planning activities, the Committee considered specific proposals regarding Head of Control Function and Executive Committee member appointments. The Committee recommended a preferred candidate for the role of the Chief Risk Officer to the Board for approval. The Committee oversaw the process to identify a successor for the role of AIB Group UK Managing Director and approved a proposal in February 2022. Diversity The Committee reviewed the Board Diversity Policy and recommended an increase in the gender diversity target to 40% to reflect the Group’s ambition and to build on its strong track record on diversity. At 31 December 2021, the percentage of females on the Board was 44%. In relation to management, the Committee considered diversity as a key component within the succession plan for the Executive Committee and its succession pipeline which aims for gender balance, a number of female talent development initiatives, and the further embedding of broader inclusion and diversity considerations within senior selection processes. In line with reporting requirements under the UK Code, at 31 December 2021, the gender balance of senior management, which for this purpose is considered to be the Executive Committee, was 45% female and 55% male, and of their direct reports was 41% female and 59% male. 198 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Report of the Nomination and Corporate Governance Committee Corporate Governance The Committee undertook its annual schedule of work in relation to the Group’s governance arrangements, corporate governance compliance, and related policies including: • a review of the internal policies on the assessment of suitability of members of the Board and key function holders; a review of the Board’s Code of Conduct and Conflicts of Interest Policy for Directors; a review of the Board Diversity Policy and diversity target; a review of the ongoing independence of Non-Executive Directors; a review and assessment of sufficient time commitment for incoming Directors and existing Board members; a review of the ongoing collective suitability of the Board; oversight of compliance with applicable corporate governance requirements and guidelines; oversight of upstream regulatory developments in corporate governance and best practice; oversight of the internal Board Effectiveness Evaluation 2021; and consideration of workforce engagement processes via the Designated Non-Executive Director. • • • • • • • • • Further details on a number of these matters are available in the Corporate Governance Report on pages 176 to 185. Subsidiary Board and Committee Composition The Committee considered a number of executive and non-executive appointments to the Group’s material subsidiary boards and their committees, including for AIB Group (UK) p.l.c., AIB Mortgage Bank u.c., EBS d.a.c. and Goodbody Stockbrokers u.c. Such appointments included the recommended appointment of independent Non-Executive members of the Group Board to the subsidiary boards and committees, where established, to ensure appropriate information flow, oversight, consistency and alignment between the Group and its subsidiaries. The Committee also considered Non-Executive Director term anniversaries and made recommendations for re-appointment to the subsidiary boards where relevant, taking account of ongoing suitability considerations. AIB Group plc Annual Financial Report 2021 Governance and Oversight 199 Governance and oversight – Report of the Remuneration Committee The Committee would like to see the implementation of a competitive, performance- based remuneration model across the Group which meets regulatory requirements and best practice guidance. Elaine MacLean, Committee Chair 1 2 3 4 5 6 Chair’s Overview I am pleased to present the report of the Remuneration Committee (the “Committee”) for the year ended 31 December 2021. This report provides an overview of the Committee’s key areas of focus in 2021 and its priorities for the year ahead. The remuneration restrictions contained in certain agreements with the Irish State following the recapitalisation of the Group in 2010 and 2011 continue to impact the Group’s remuneration structures and the Committee’s independent judgement and discretion to authorise remuneration outcomes that are linked to the delivery of the Group’s long term strategy. The Committee awaits the outcome of the Minister for Finance’s review into the retail banking sector and the remuneration restrictions in place. The Committee would like to see the implementation of a competitive, performance-based remuneration model across the Group which meets regulatory requirements and best practice guidance and operates in the best interests of employees, shareholders and other stakeholders by supporting and promoting the long term, sustainable success of the Group. Further detail on the Group Remuneration Policy and the Committee’s oversight of same is available in the Corporate Governance Remuneration Statement which follows this report. The Committee’s remit broadened in 2021 following the acquisition of Goodbody which remains a separately regulated legal entity within the Group and will continue to operate a variable remuneration structure for its employees. The Committee spent a considerable amount of time in 2021 deliberating the most appropriate governance approach for the Goodbody variable remuneration structures. Other key areas of focus for the Committee during 2021 are set out below. A priority for the Committee in 2022 is continued focus on the implementation, governance and oversight of the remuneration structures in place across the Group. This will include oversight of the variable remuneration arrangements for Goodbody employees, engaging with the Board Risk Committee as required. Committee Membership The Committee currently consists of four Members: three Independent Non-Executive Directors, namely myself, Mr Brendan McDonagh and Ms Ann O’Brien, and the Chair of the Board, Mr Jim Pettigrew, who was considered independent on appointment. Mr Pettigrew joined the Committee with effect from 1 January 2022. In addition to being a Committee Member, Mr Brendan McDonagh is also the Chair of the Board Risk Committee and this cross-membership supports information flow and co-ordination between the work of the two Committees. The biographies of the Committee Members and a record of attendance at meetings are outlined on pages 36 to 39 and page 180. The Committee was supported in its work by the Group Reward team and by PricewaterhouseCoopers LLP (PwC UK). PwC UK was appointed as independent remuneration adviser by the Committee in 2019, following a review of potential advisers and the services provided. PwC UK is a signatory to the voluntary code of conduct in relation to remuneration consulting in the UK. Aside from their work supporting the Committee, during 2021, PwC UK and its network firms provided professional services in the ordinary course of business including advisory, regulatory and taxation related services to AIB and may, from time to time, provide services to individual Directors as part of directorship or executive roles held outside of the Group. The Committee is satisfied that the advice received is independent and objective. The Chief Executive Officer, the Chief People Officer and other members of Management are invited to attend meetings at the Committee’s request and where required for the business of the meeting. The Chief Risk Officer is a permanent attendee at meetings to provide a risk view on any matters submitted for the Committee’s consideration except where the Committee is considering the Chief Risk Officer’s own remuneration or that of peers. The Committee operates under the principle that no individual shall be involved in decisions regarding their own remuneration and no member of Management is permitted to attend where a matter for discussion relates to their own remuneration. I would like to thank my fellow Committee Members for the commitment they have shown throughout 2021. Elaine MacLean Committee Chair 200 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Report of the Remuneration Committee Key Areas of Focus Remuneration Policy Goodbody Remuneration Governance Remuneration of Individuals Subsidiary Chair and Non-Executive Director Fees Gender Pay Gap Reporting Committee Briefings Compliance and Annual Reviews The Committee conducted its annual review of the Group Remuneration Policy and was satisfied that the Policy was operating effectively and as intended. The Committee also considered how executive remuneration aligned to wider employee remuneration, how the Policy aligned to the culture of the Group and its five strategic pillars, and how the Group’s remuneration policies and practices were transparent to the wider employee population. Further details on the Remuneration Policy is available in the Corporate Governance Remuneration Statement which follows this report. During the year the Committee: • considered and approved the remuneration governance approach, establishing responsibility for oversight of remuneration matters within Goodbody and the appropriate engagement and communication mechanism between the Goodbody Board and the Group Board on remuneration matters; • considered and approved the identification of a number of Goodbody roles as Material Risk Takers (MRTs) of the Group; and • considered and approved the recommended approach for 2021 variable remuneration subject to the appropriate risk adjustment at an organisational and individual level. The Committee considered a number of individual remuneration proposals at Executive Director, Executive Committee and Head of Control Function level in line with its terms of reference. The Committee considered proposals to revise the fee structure in place for the Chair and Non-Executive Directors of a number of the Group’s material subsidiaries. These changes were recommended to the Board for approval with a view to ensuring alignment in the fee structure across the Group’s entities, with the market and best practice. The Committee received updates on analysis and benchmarking undertaken with regard to the Group’s preparation for the introduction of Gender Pay reporting requirements in Ireland. In preparation for the integration of Goodbody into the Group, the Committee received briefings on the applicable regulatory requirements under the Capital Requirements Directive V and the Investment Firms Directive. The Committee conducted its programme of annual reviews including a review of the process for identifying MRTs and the limited variable commission schemes in operation across the Group. Each review was accompanied by a view from the Risk function to support the Committee in its oversight of same. The Committee approved a change to the timing of the MRT process to make the process more pro-active going forward. Further details on the identification of MRTs is available in the Corporate Governance Remuneration Statement which follows this report. Directors’ Remuneration Details of the total remuneration of the Directors in office during 2021 and 2020 are provided in the Corporate Governance Remuneration Statement on pages 201 to 207. External Directorships held by Executive Directors Dr Colin Hunt is a Non-Executive Director of The Ireland Funds, Irish Chapter. Dr Hunt is also a Non-Executive Director and President for 2021/2022 of the Institute of Bankers in Ireland. Both are registered charities and he receives no remuneration from either role. Mr Donal Galvin does not hold any Non-Executive Directorships outside of the Group. He is a Non-Executive Director of Goodbody. Mr Galvin does not receive remuneration for this role. Limitations on such external directorships are outlined in the Capital Requirements Directive and both of the Group’s Executive Directors are fully compliant with these limitations. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 201 Governance and oversight – Corporate Governance Remuneration statement Remuneration Constraints The Group has been required to comply with certain executive The Remuneration Policy is governed by the Remuneration Committee on behalf of the Board. The Committee is responsible pay and compensation restrictions following the Group’s for determining the Remuneration Policy and for overseeing its re-capitalisation by the Irish Government in 2010 and 2011. implementation. The Committee oversees the operation and The application of market aligned remuneration policies and effectiveness of the Remuneration Policy, including the process practices are significantly constrained by the terms of Subscription for the identification of material risk takers. The Committee’s and Placing Agreements entered into between AIB and the Irish governance role in this respect is outlined in its Terms of Government. In particular, AIB is precluded from introducing any Reference. new bonus or incentive schemes, allowances or other fringe benefits without prior agreement with the State. Consequently, the The Committee further ensures that the Remuneration Policy absence of performance based variable pay, combined with the and practices are subject to a review at least annually, taking into requirement to operate within an overall cap on individual salaries account the alignment of remuneration to the Group’s culture and allowances of € 500,000, precludes AIB from aligning the for all employees and directors. The annual review is informed remuneration of key executives and other key employees with by appropriate input from the Group’s risk and internal audit the achievement of longer term customer, financial and strategic functions to ensure that remuneration policies and practices are targets for the vast majority of employees. operating as intended, are consistently applied across the Group and are compliant with regulatory requirements. The Group’s inability to apply market aligned remuneration practices and, in particular, the inability to offer executive Taking into account the constraints on variable remuneration remuneration on an equal footing with competitors for talent in in place, the Group has historically and continues to comply the market represents a key risk to the Group. The Remuneration with the UK Corporate Governance Code where such matters Committee endeavours to monitor and address this risk on an are within the Group’s control, and uses the Code to inform the ongoing basis. Group’s decision making and disclosures. The Group complies with the relevant remuneration requirements of S.I. No. 81 of As part of the acquisition of Goodbody in 2021 (see note 28), it 2020 – European Union (Shareholders’ Rights) Regulations 2020, was agreed with the Department of Finance that the remuneration although the constraints on variable remuneration in AIB mean restrictions that apply to AIB would not apply to Goodbody that some of the requirements of both it and the Code are not employees, and that they could continue to remain eligible for applicable to the Group at this time. This is something the Group variable remuneration. will continue to keep under review. Remuneration Policy and Governance The Group Remuneration Policy sets the framework for all remuneration related policies, procedures and practices for all employees and directors of the Group. The principal aim of the Remuneration Policy is to support AIB in becoming a bank to believe in, recognised for outstanding customer experience and superior financial performance. The Remuneration Policy is designed to foster a truly customer focused culture; to create long term sustainable value for the Group’s customers and shareholders; to attract, develop and retain the best people and to safeguard the Group’s capital, liquidity and risk positions. The Board recognises that the long term success of the Group is dependent on the talent of employees and, in particular, the ability to consistently perform at the highest level in the best interests of our customers. The Group’s remuneration philosophy aims to ensure that remuneration is aligned with performance and that employees are rewarded fairly and competitively for their contribution to the Group’s future success and growth. The Group is committed to a simple, transparent and affordable reward structure which is fair, performance based, externally aligned and risk aligned. The scope of the Remuneration Policy includes all financial benefits available to all employees and directors of the Group and extends to all areas, including all individual subsidiaries, entities, branches and to all employees of the Group, including at consolidated and sub-consolidated levels. The Remuneration Policy and the Committee’s Terms of Reference were previously updated to incorporate amendments relating to the UK Corporate Governance Code 2018. Regarding provision 40 of the Code, the Remuneration Policy sets the framework which underpins remuneration policies and practices equally for Executive Directors. In particular: • Clarity – Remuneration arrangements are clearly outlined and the Policy is publicly available; • Simplicity – The Group is committed to a simple reward structure as outlined in the Policy; • Risk – The Group’s fixed remuneration arrangements operate under strict remuneration constraints. If variable schemes were introduced in the future, the design of any such schemes would include a full risk assessment and discretionary flexibility to accommodate this requirement; • Predictability – If variable schemes were introduced in the future, specific details, including worked examples, of future Directors’ remuneration would be included in any new proposed remuneration policy; • Proportionality – The Group’s existing remuneration structure does not provide for the awarding of material individual awards; and • Alignment to culture – While for the majority of employees, including the Executive Directors, the Group does not currently operate any incentive schemes, the Group’s Remuneration Policy is aligned to the Group’s culture and values. 202 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Corporate Governance Remuneration statement In relation to provision 41 of the Code: • Executive Director remuneration is governed by the Policy and determined by the Committee; Material Risk Takers and Risk Oversight The Group is required to maintain a list of employees whose professional activities have a material impact on the Group’s • Career levels have been established with market related risk profile. The list of Material Risk Takers is prepared using a pay ranges for each level. All employees are mapped to a combination of qualitative and quantitative criteria in accordance career level and associated pay range based on their level of with the relevant EU regulations and guidelines together with accountability; additional criteria specific to the Group’s structure, business • The Report of the Remuneration Committee describes the activities and risk profile. The list is prepared at Group, parent operation of the Policy; and subsidiary levels for the Republic of Ireland and the United • As the same remuneration restrictions generally remained in Kingdom. place and there were no material changes to remuneration policy during 2021, shareholder engagement was not required Group Risk provide an assessment of the risks impacting the in this area; Group and performance against the Group’s Risk Appetite • The Corporate Governance report references engagement Statement to ensure that the Remuneration Policy is aligned with the workforce; and with the Group’s risk profile. The Chief Risk Officer reviews the • In the absence of variable remuneration, discretion is not a list of Material Risk Takers in conjunction with Group Reward material factor. and provides the Remuneration Committee with an annual assessment of the risks facing the Group to ensure that policies It should be noted that some of the provisions of the Code and practices are consistent with and promote sound and (including provisions 36 and 37) are not currently applicable to effective risk management. the Group, as the Group does not operate variable incentive arrangements for the Executive Directors. European Banking Authority (EBA) Guidelines Remuneration policies, procedures and practices reflect the Reward Structure and Operation in 2021 The continued existence of remuneration constraints significantly impedes the Group’s ability to apply its desired remuneration policy and to implement market aligned remuneration policies and provisions, where applicable, of national and EU legislation, practices. State Agreements and commitments provided to the Irish Government, the Capital Requirements Directive (CRD V), the During 2021, remuneration across the Group continued to be Investment Firms Directive (IFD) and relevant guidelines issued principally comprised of fixed pay elements encompassing base by the European Banking Authority (EBA) and other regulatory salary, allowances, employer pension contributions and non- authorities. In the general absence of variable incentive schemes, financial benefits. Base salary is the principal component of fixed there was little scope in practice to apply the provisions of remuneration and is designed to be fair and competitive and set the EBA Guidelines pertaining to variable remuneration. The according to appropriate salary ranges which reflect the size Remuneration Policy incorporates the provisions of the EBA and level of responsibilities attaching to each role. Allowances Guidelines in relation to the ongoing design, implementation and mainly consist of non-pensionable cash allowances which are governance of remuneration. Pillar 3 and Other Remuneration Disclosures The Group publishes additional remuneration disclosures in the annual Group Pillar 3 Report. These disclosures provide further details in relation to the Group’s decision making process and governance of remuneration, the link between pay and performance, the remuneration of those employees whose payable to eligible senior employees which recognise equivalent benefits and allowances available in the market. The Group places considerable emphasis on the need for employees to plan for an appropriate standard of living in retirement and an appropriate pension scheme is available to all employees for that purpose. Further details in respect of the Group’s fixed pay elements (including standard pension contributions and those for Executive Directors and ExCo Members) are outlined in the table professional activities are considered to have a material impact on page 204. All of the Group’s defined benefit pension schemes on the Group’s risk profile and the key components of the Group’s were closed to future accrual by 31 December 2013 and all Group remuneration structure. The Group’s Pillar 3 Report is available on the Group website. employees accrue pension benefits on a defined contribution basis from 1st January 2014. Further details in respect of the Group’s fixed pay elements are provided in the table below. EBA remuneration benchmarking requirements require the Group to disclose remuneration data in respect of material risk takers Increases to salary in 2021 were awarded following the annual and high earners (those earning above € 1 million) to the Central pay review process, through promotion, progression and, in Bank of Ireland. The Group continued to comply with these exceptional cases, through out-of-course increases to retain key reporting requirements during 2021. There were no employees talent and skills. whose total remuneration exceeded € 1 million during 2021. The Group published its gender pay gap report for 2020 in 2021 in relation to its UK based employees. The disclosures are available on the AIB (GB) website, www.aibgb.co.uk. For 2021, a decision was taken to award flat pay increases of € 600/ £ 540/ $ 705 to our non-manager employees (Career Levels 1–3). Managers at Level 4 and above received no increase in 2021, irrespective of their performance. These AIB Group plc Annual Financial Report 2021 Governance and Oversight 203 1 2 3 4 5 6 The Chief Executive Officer and the Chief Financial Officer were Executive Directors of the Group during 2021. In line with the cap on salaries and allowances imposed by existing remuneration restrictions, the Chief Executive Officer was paid a base salary of € 500,000 together with an employer pension contribution of 20% (€ 100,000) to a defined contribution scheme. The Chief Financial Officer receives a base salary of € 485,000, with a non-pensionable allowance of € 15,000 and an employer pension contribution of 20% (€ 97,000) to a defined contribution scheme. There were no bonuses, shares or other incentive schemes paid or awarded to Executive Directors or ExCo members in 2021. The Committee undertakes a periodic review of the remuneration of Executive Directors and ExCo members against external benchmark data. increases represented a one year agreement with employee representatives. The next annual pay review is due to take place in April 2022. Through the Appreciate programme, recognition awards were made to all employees, apart from members of the Executive Committee, during 2021, which they could choose to redeem for Appreciate programme points, or have a donation made to charity. All eligible employees received at least one award (total value of € 125). The remuneration of Executive Directors and members of the Executive Committee was determined and approved by the Remuneration Committee within the remuneration constraints set by the State. The Group operates three business specific variable commission schemes which are designed to protect the rights and interests of customers via robust customer centric performance criteria, the prevention of conflicts of interest and the assessment and mitigation of risks to the customer. For those limited numbers of employees who currently participate in these schemes, sustainability risk is considered as part of the determination of final award outcomes. As stated earlier, a separate reward structure applies to employees of Goodbody, which is not subject to the remuneration restrictions of the Group, as agreed with the Department of Finance. The remuneration structures at Goodbody comply with all applicable remuneration regulatory requirements. Remuneration of Executive Directors and ExCo The remuneration of Executive Directors and Executive Committee (“ExCo”) members is determined on appointment by reference to external benchmarks to provide an appropriate level of competitive remuneration commensurate with the size and functional responsibilities attaching to their roles. Remuneration is approved by the Board following review and recommendation by the Remuneration Committee. Executive Directors will not participate in the decision making process around their own remuneration. In line with current remuneration restrictions on the introduction of variable pay and a cap on individual salaries and allowances of € 500,000, which were established in 2010, remuneration principally consists of base salary, allowances and pension contributions. Allowances consist of non-pensionable cash allowances of up to € 30,000, subject to salary and allowances remaining within the € 500,000 cap, while employer pension contributions of 20% of base salary are payable in respect of Executive Directors and ExCo members. Following a review of compliance with the UK Corporate Governance Code, the pension arrangements of Executive Directors and ExCo members were considered by the Committee and deemed to be appropriate, due to the remuneration restrictions in place at this time. 204 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Corporate Governance Remuneration statement Fixed Pay Elements Pay Element Rationale and alignment to Strategy Design and Operation Performance Assessment and Maximum Potential Value Base Salary To attract, motivate and retain the right calibre of individuals to support the Group’s future success and growth. Allowances To provide a contribution to market aligned benefits and allowances generally available in the market. Base salary is set according to appropriate salary ranges which reflect the size, skills and level of responsibilities attaching to each role. Base salaries are typically reviewed annually as part of the annual pay review process with increases taking effect from 1 April. Base salaries of Executive Directors and members of the ExCo are reviewed by the Remuneration Committee on behalf of the Board. Increases in base salary are typically performance based, determined by performance against objectives which reflect the Group’s strategy, goals and values and typically occur as part of the annual pay review process. Increases may also arise through progression and promotion and, in exceptional cases, through out of-course increases to retain key talent and skills. Base salaries of all employees (excluding Goodbody 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. Non-pensionable cash allowances are provided to eligible employees according to their career level. Non-pensionable allowances for senior career levels range from € 10,000 to € 20,000 per annum (£ 8,300 to £ 11,000 in the UK). Pension To enable employees plan for an appropriate standard of living in retirement. Employees are entitled to participate in one of the Group’s defined contribution schemes with a monthly contribution based on a percentage of base salary. Executive Directors and ExCo members are also entitled to participate in one of the Group’s defined contribution schemes. In the UK, employees may elect to receive cash in lieu of their pension contribution. Allowances of up to € 30,000 per annum (£ 14,000 in the UK) are payable to ExCo members A standard contribution of 10% of base salary is made plus an additional matching contribution of up to 8%, which can be availed of depending on the age of the employee. Executive Directors and ExCo members are entitled to an employer pension contribution of 20% of base salary. Other Benefits To provide affordable benefits in accordance with general market practice. Benefits include medical insurance (US and UK employees only), income protection, death-in-service cover and free banking services. A functional car policy is in place based on role requirements. The Group does not provide company cars outside of the functional car policy. Executive Directors and ExCo members may occasionally avail of a pool car and driver. Relocation costs, including 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 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 205 Directors’ remuneration* The following tables detail the total remuneration of the Directors in office during 2021 and 2020: Directors’ fees Parent and Irish subsidiary companies(1) € 000 Directors’ fees AIB Group (UK) p.l.c.(2) € 000 Salary Annual taxable benefits(3) Pension contribution(4) 2021 Total € 000 € 000 € 000 € 000 500 283 783 – 13 13 100 56 156 38 81 22 95 109 85 64 218 85 95 71 63 22 80 30 1,128 30 59 – 8 600 352 952 38 81 22 95 109 85 64 218 115 95 71 63 22 80 1,158 17 67 2,194 Remuneration Executive Directors Colin Hunt Donal Galvin (Appointed 28 May 2021) Non-Executive Directors Anik Chaumartin Basil Geoghegan Tanya Horgan Sandy Kinney Pritchard Carolan Lennon Elaine McLean Andy Maguire Brendan McDonagh(1(a)) (Deputy Chair) Helen Normoyle Ann O'Brien Fergal O'Dwyer Jim Pettigrew (Chair) Jan Sijbrand Raj Singh Former Directors Anne Maher(5) Tomás O’Midheach(6) Total (1)Fees paid to Non-Executive Directors in 2021 were as follows: (a) In 2020, the Board resolved to pay additional remuneration of € 100,000 per annum to Mr Brendan McDonagh, Deputy Chair, reflecting the substantial additional work undertaken by him in the absence of the Chair of the Board until such time as the Chair of the Board was appointed in October 2021. This additional remuneration ceased at that time; (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 Chair or, Senior Independent 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, Ms Helen Normoyle earned fees as quoted during 2021; (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 Chair, Deputy Chair and Non-Executive Directors are non-pensionable; and (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 Defined Contribution Scheme, in respect of which she earned fees as quoted, during 2021. (6) Mr O’Midheach, a former Executive Director, resigned from the Group with effect from the end of January 2021. The amount quoted represents his normal salary, pension contributions and allowances, in accordance with Mr O’Midheach’s employment contract, up to the date of his resignation. *Forms an integral part of the audited financial statements 206 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Corporate Governance Remuneration statement Directors’ remuneration* (continued) Directors’ fees Parent and Irish subsidiary companies € 000 Directors’ fees AIB Group (UK) p.l.c. € 000 Salary Annual taxable benefits Pension contribution 2020 Total € 000 € 000 € 000 € 000 500 500 – – 100 100 56 485 15 97 85 95 100 81 220 78 84 80 823 68 56 600 600 85 95 100 81 220 78 84 80 823 68 112 597 41 2,241 Remuneration Executive Directors Colin Hunt Non-Executive Directors Basil Geoghegan Sandy Kinney Pritchard Carolan Lennon Elaine McLean Brendan McDonagh (Deputy Chair) Helen Normoyle Ann O'Brien Raj Singh Former Directors Richard Pym Tom Foley Tomás O'Midheach Anne Maher Total *Forms an integral part of the audited financial statements AIB Group plc Annual Financial Report 2021 Governance and Oversight 207 1 2 3 4 5 6 Service contracts All Executive Directors have a service contract whereas all Non-Executive Directors have a letter of appointment. In respect of Executive Directors, no service contract exists between the Company and any Director which provides for a notice period from the Group of greater than one year. 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 and appropriate. All Directors, should they choose to stand, are subject to annual re-election by shareholders. Directors’ remuneration* (continued) Interests in shares The beneficial interests of the Directors and the Company Secretary in office at 31 December 2021, and of their spouses and minor children, in the Company’s ordinary shares are set out in the Directors’ Report on page 171. Share options No share options were granted or exercised during 2021, and there were no options to subscribe for ordinary shares outstanding in favour of the Executive Directors or Company Secretary at 31 December 2021. Performance shares There were no conditional grants of awards of ordinary shares outstanding to Executive Directors or the Company Secretary at 31 December 2021. Apart from the interests set out in the Directors’ Report on page 171, the Directors and Company Secretary in office at 31 December 2021 and their spouses and minor children, have no other interests in the shares of the Company. The year end closing price of the Company’s ordinary shares on the Main Market of the Euronext Dublin Stock Exchange was € 2.41 per share. *Forms an integral part of the audited financial statements 208 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Report of the Sustainable Business Advisory Committee Sustainability and generating value sustainably are fundamental to the Group’s policies and goals of achieving economic, environmental and social outcomes. The delivery of these outcomes is subject to rigorous oversight by the Committee, which oversees and challenges the implementation of the Sustainability Strategy in order to drive meaningful change across the Group and in the communities in which we operate. Helen Normoyle, Committee Chair Chair’s Overview On behalf of the Sustainable Business Advisory Committee (the “Committee”), I am pleased to report on the Committee’s activities during the financial year end 31 December 2021 and provide an insight into the workings of, and key matters considered by, the Committee during the course of 2021. The Committee was established by the Board as an Advisory Committee to support the execution of the Group’s sustainable communities strategy (the “Strategy”), one of the Group’s five strategic pillars. Specifically, the Committee considers and advises on the Strategy’s key areas of focus: Climate and Environment, Economic and Social Inclusion, and Future Proof Business. It oversees and challenges the development, implementation and embedding of this Strategy in order to drive meaningful change across the Group and in the communities in which the Group operates. The Committee currently consists of four Non-Executive Directors, one Executive Director (the Chief Executive Officer), and three other members of senior management being the Director of Corporate Affairs, Strategy and Sustainability and 2021 Highlights During 2021, the Committee considered and challenged a number of key areas including the: – Group’s Sustainability Ambition and Targets; – Group Sustainable Lending Framework and ESG Questionnaire for its customers; – Delivery of the Group’s Green products and propositions to its customers; – Responsible Supplier Code; – Corporate Power Purchase Agreement; – Embedding of Climate Risk across the Group; – Employee communications and training approach; – Group’s Community Strategy including Social Bond Framework; – Regulatory expectations and requirements on Climate Risk and the mechanisms in place to deliver same; – UN Global Compact Signatory, with its related Human Rights Commitment; and – Sustainability disclosures in the Group’s annual reporting including signing up to using the World Economic forum (WEF) Stakeholder Capitalism metrics in its reporting. The Committee also provided support to the Group’s Sustainability Teams across the organisation to ensure momentum during the year as well as supported the annual AIB the Chief People Officer, both of whom are also Executive Sustainability Conference and Climate Finance Week events. Committee members, and the Head of Energy, Climate Action and Infrastructure. The Chief Sustainability Officer and the Chief Risk Officer are invited to attend all meetings of the Committee. There were no changes to Committee membership during 2021. Sustainable Business Advisory Committee Geraldine Casey Chief People Officer Colin Hunt Chief Executive Officer Carolan Lennon Non-Executive Director Helen Normoyle Non-Executive Director, Chair Ann O'Brien Non-Executive Director Raj Singh Paul Travers Non-Executive Director Head of Energy, Climate Action and Infrastructure Mary Whitelaw Director of Corporate Affairs, Strategy and Sustainability Eligible to attend Attended 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 Looking ahead to 2022 Over the course of 2022, our strategic priorities will be to continue to embed and integrate sustainability and climate action into the Group’s strategy via quantification of risks and opportunities, appropriate training, development of Science Based Targets and integration into our risk management framework and supporting policies and credit processes. I would like to take this opportunity to thank my fellow Committee Members and wider Sustainability Team for their steadfast commitment to this important area in what has been another busy year. Helen Normoyle Committee Chair AIB Group plc Annual Financial Report 2021 Governance and Oversight 209 Governance and oversight – Report of the Technology & Data Advisory Committee The Committee further established itself in 2021, and supported the Board in fulfilling its oversight responsibilities by reviewing, challenging and advising the Board on the strategy, governance and execution of technology, data and cyber matters. Ann O’Brien, Committee Chair 1 2 3 4 5 6 Chair’s Overview On behalf of the Technology & Data Advisory Committee (the 2021 Highlights During 2021, the Committee considered and challenged a number “Committee”), I am pleased to report on the Committee’s activities of key areas including: and provide an insight into the workings of the Committee during – Technology & Data Strategy to support the delivery of the the financial year ended 31 December 2021. Group Strategy including the integration of inorganic growth initiatives; The Committee was constituted in September 2020 in recognition – Cyber Strategy prior to recommendation to the Board for of the Group’s substantial investment into technology and data approval; to support the delivery of the Group’s strategy. The Committee – Technology & Data Operating Effectiveness including was appointed by the Board to assist in fulfilling its oversight investment priorities and delivery of key change programmes; responsibilities by reviewing and challenging the strategy, – Technology & Data Governance including management governance and execution of matters relating to Technology information and change control, data protection and data and Data. privacy, and key programmes, for example, business credit Specifically, the Committee considers and advises on the – Strategic & Commercial Opportunities and developing our Technology Strategy’s key areas of focus: Cyber, Data, Digital, thought leadership in new and evolving technology and data Operating Model and Sustainment & Simplification. It oversees areas including Cloud; and DevSecOps model and our future and challenges the development and implementation of this ambitions in these areas. accounting; Strategy across the Group with a key focus on measureable outcomes and deliverables. The Committee also focuses on areas of thought leadership to help influence and shape the Strategy into the future. The Committee currently consists of four Non-Executive Directors Looking ahead to 2022 Over the course of 2022, our strategic priorities will be to continue to embed and integrate the technology strategy across the Group with a key focus on how technology is delivered to, and adopted by, the Group as well as ensuring AIB is truly a digital bank for our and two members of senior management, the Chief Technology customers. Officer and the Chief Operating Officer (Designate), who are both members of the Executive Committee. During 2021, two Non-Executive Directors joined the Committee. Ms Helen Normoyle joined the Committee in January 2021 and Mr Andy Maguire joined in March 2021. Ms Tanya Horgan also joined the Committee in January 2022. The Chair of the AIB UK Technology & Operational Resilience Advisory Committee, the Chief Risk Officer, Group Head of Internal Audit, and the Data Protection Officer also attend the meetings of the Committee by invitation. I would like to take this opportunity to thank my fellow Committee Members and wider Technology and Data Teams for their significant commitment throughout 2021. Technology & Data Advisory Committee CJ Berry Chief Operating Officer, Designate Fergal Coburn Chief Technology Officer Andy Maguire Non-Executive Director Helen Normoyle Non-Executive Director Ann O'Brien Non-Executive Director, Chair Eligible to attend Ann O’Brien Attended Committee Chair 4 4 3 4 4 4 4 3 4 4 210 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Viability statement Viability statement In accordance with provision 31 of the UK Corporate Governance There is a continued focus on the impact of the COVID-19 pandemic on the risk profile of the Group. There have been Code published in July 2018, the Directors have assessed the positive developments during the year including the vaccine viability of the Group taking into account its current position, rollout and the re-opening of economies, however, the Board the prevailing economic and trading conditions and principal risks remains cognisant of and monitors a number of headwinds to facing the Group over the next three years to the end of 2024. the credit environment, most notably the potential impact of the Horizon period The Directors concluded that three years was an appropriate period to assess the viability of the Group for the following reasons: • It is the same period used within the Group for strategic and financial planning process; removal of government supports, the pace of economic recovery, inflation challenges and geopolitical risks. The Group is also working to understand and prepare to manage risks that could arise in relation to climate risk, both in terms of the transition to net zero and the physical risks from climate change. • The Group prepares its annual Internal Capital Adequacy Assessment (ICAAP) and Internal Liquidity Adequacy Assessment (ILAAP) on an annual basis using a three year Assessment of risks During the year, the Directors rely on the following processes to identify and assess risks which could impact on the continued time horizon; • A three year time horizon is used for both internal and regulatory stress testing. Where certain impacts can be assessed reliably beyond the 3 year forecast horizon, a quantification is performed (for example the ECB Prudential provisioning backstop for non-performing exposures) and considered; and • A three year time horizon is consistent with the internal risk management practices within the Group, including but not limited to: setting of the Risk Appetite, the Material Risk Assessment as well as Recovery and Resolution planning. Considerations in assessing viability of the Group Assessment of prospects The assessment of the Group’s prospects is built up based on the current financial position of the Group including its liquidity and funding and capital position. The Group’s regulatory capital has increased on a transitional and fully loaded basis by € 55 million and € 529 million respectively from year end 2020, as profit for the year more than offset the additional years phasing of the transitional adjustments. The Group’s transitional total capital ratio of 24.2% is comfortably above regulatory requirements as set out on pages 73 to 75. The Group’s LCR of 203% and NSFR of 160% demonstrate a very strong liquidity position as described on pages 145 and 146. The Group announced a refreshed three-year strategy and Transformation Programme in December 2020. Throughout 2021, the Group accelerated the delivery of the strategy and began the year with the announcement of the acquisition of Goodbody. This was followed by an agreement to set up a joint venture with Great-West Life Co and the announcement of the Ulster Bank corporate and commercial loan book acquisition, for which the competition authority approval process is underway. This strategy which is described on pages 83 to 168, continues to inform the Board planning process covering the period of assessment. As part of the delivery of the Group’s Strategy, the Directors consider the risks facing the Group including those that would threaten the competitive position of the business, its operational capacity as well as the Group’s governance and internal control systems. viability of the Group: • The Group’s Material Risk Assessment process 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. • As part of the setting of the Group’s risk appetite, consideration is given to the amount of risk the Group is willing to accept in pursuit of its strategic objectives. • On a quarterly basis, internal stress testing of the Group’s capital and liquidity position is performed. This is conducted using a variety of different macroeconomic scenarios. • In recovery and resolution planning, consideration is given to market factors and the operational resiliency of the Group. • The regular reporting of the Group’s financial performance by the Chief Financial Officer and the reporting of the Group’s risk profile by the Chief Risk Officer. • The provision of independent and objective assurance of the adequacy of the design and operational effectiveness of the risk and control environment by Group Internal Audit to the Board Audit Committee. • The Board Risk Committee oversees the Group’s risk management. A full description of the principal risks facing the Group is provided in the Risk management section – Individual risk types pages 83 to 168. As part of the internal capital adequacy assessment process, material risks to the Group’s financial performance are considered in terms of their potential impact on the Group’s position. These risks are set out on pages 153. Stress testing not only includes changes in macroeconomic forecasts but also other factors such as; financial crime losses, disruption to IT systems or cost of a cyber incident as well as financial loss arising from compliance or conduct issues. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 211 Governance and oversight – Viability statement / Internal controls Assessment of viability The financial planning process is the main tool for assessing the continued financial prospects of the Group. The plan is a detailed three year financial forecast for each segment, and includes forecasts of operating results, headcount, investment expenditure and new strategic initiatives. Progress against the plan is reported monthly to the Executive Committee and the Board. Updated forecasts are prepared as required and mitigating management actions are taken where required. The Board considers independent review of the plan by the Risk function covering the alignment of the plan with Group strategy and the risk appetite. This review also identifies the key risks to delivery of the Group’s plan. The Group’s base case underpins the financial plan, which forecasts improved prospects for the global economy following the roll out of vaccines but also includes consideration of downside scenarios. In 2021, the Group considered two downside scenarios; (i) further transmission of COVID-19 and emergence of new vaccine resistant variants and (ii) a severe but plausible scenario which is used for internal stress testing of the Group’s capital position. The Group also considers the impacts of transitioning to a low-carbon economy and physical risks as part of climate risk stress testing. In addition, the Group performs regular stress testing of its liquidity position. After assessing the Group’s prospects, risks, and reviewing the financial plan as well as the results of stress testing scenarios, the Group continues to: • Demonstrate internal capital generation through continued profitability in each of the forecast years; • Demonstrate capacity to carry out the proposed distribution strategy to shareholders as well as the buyback strategy to return the state’s investment in the Group; • Remain in excess of its regulatory capital requirements; and • Have significant liquidity over its liquidity coverage ratio and net stable funding ratio. Statement of viability On the basis of the above, the Directors have a reasonable expectation, taking into account the Group’s current position, and subject to the identified risks and mitigating actions, that the Group will be able to continue in operation and meet its liabilities as they fall due over the three year period of assessment. Internal controls Directors’ Statement on risk management and internal controls The Board of Directors is responsible for the Group’s system of internal control, which is designed to manage the risk of failure to achieve business objectives, and can provide only reasonable and not absolute assurance against material misstatement or loss. The Group has implemented a framework and policy architecture covering business and financial planning, corporate governance and risk management. The system of internal controls is designed to ensure that there is thorough and regular evaluation of the Group’s risks in order to react accordingly, rather than to eliminate risk. This is done through a process of identification, measurement, monitoring and reporting. 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 has ultimate responsibility for reviewing the effectiveness of the system of internal control on a continuous basis and is supported by a number of sub-committees including Board Audit Committee (“BAC”), Board Risk Committee (“BRC”), Remuneration Committee, Sustainability Business Advisory Committee (“SBAC”), Technology and Data Advisory Committee (“TDAC”), and Nomination & Corporate Governance Committee. – The BRC is appointed by the Board to assist the Board in fulfilling its oversight responsibilities. It is responsible for fostering sound risk governance across all of the Group’s finances and operations (including all operations, legal entities and branches in ROI, the UK and USA) taking a forward looking perspective and anticipating changes in business conditions. The Committee discharges its responsibilities in ensuring that risks within the Group are appropriately identified, reported, assessed, managed and controlled to include commission, receipt and consideration of reports on key strategic and operational risk issues. It ensures that the Group’s overall actual and future risk appetite statement and strategy, taking into account all types of risks, are aligned with the business strategy, objectives, corporate culture and values of the institution while promoting a risk awareness culture within the Group. BRC oversees and challenges the risk management function, which is managed on a day-to-day basis by the Chief Risk Officer (“CRO”), and liaises regularly with the CRO to ensure the Risk Function is adequately resourced and has appropriate access to information to enable it to perform its functions effectively and in accordance with relevant professional standards. The Committee further provides advice on the ongoing viability of the Group, taking into account the Group’s overall position and principal risks. 212 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Internal controls – The BAC is appointed by the Board to assist it in fulfilling its oversight responsibilities in relation to the quality and integrity of the Group’s accounting policies, financial and narrative reports, and disclosure practices. The Committee also ensures the effectiveness of the Group’s internal control, risk management, and accounting and financial reporting systems and the adequacy of arrangements by which staff may, in confidence, raise concerns about possible improprieties in matters of financial reporting or other matters. It also ensures the independence and performance of the internal and external auditors. – The Chief Financial Officer (“CFO”), the Chief Risk Officer (“CRO”) and the Group Internal Auditor are involved in all meetings of the BAC and BRC. – The Remuneration Committee is responsible for the design and implementation of the Group’s overall Remuneration Policy for employees and directors, designed to support the long term business strategy, values and culture of the Group as well as to promote effective risk management, and reward fairly and responsibly, with a clear link to corporate and individual performance in compliance with applicable legal and regulatory requirements. – The SBAC was established by the Board and Senior Executive Management to act as an Advisory Committee, supporting the execution of the Group’s sustainable business strategy in accordance with the approved Group Strategic and Financial Plan. The Strategy includes the development and safe guarding of the Group’s ‘social licence to operate’ through the demonstration of its Purpose, such that the Group is actively seen as supporting Ireland’s economic and social progress as an integral part of the Group’s business and operations. In particular, the SBAC considers and advises on customers and conduct, communities/local markets, employees, climate and broader environmental impacts, reputation and trust and external reporting. – The TDAC is appointed by the Board to assist in fulfilling its oversight responsibilities by reviewing and challenging the strategy, governance and execution of matters relating to technology, data and cyber security. – The Nomination and Corporate Governance Committee’s responsibilities include, amongst others, supporting and advising the Board in fulfilling its oversight responsibilities in relation to the composition of the Board by ensuring it is comprised of individuals who are best able to discharge the duties and responsibilities of Directors, to include leading the process for nominations and appointments to the Board and Board Committees as appropriate, and making the recommendations in this regard to the Board for its approval. It also supports and advises the Board in fulfilling its oversight responsibilities in relation to the composition of the Group’s Executive Committee and the composition of the Boards of its material subsidiaries. It keeps Board governance arrangements, corporate governance compliance and related policies under review and makes appropriate recommendations to the Board to ensure corporate governance practices are consistent with best practice standards. Executive risk management and controls – The Executive Committee (“ExCo”) is the most senior executive committee of the Group. Subject to financial and risk limits set by the Board, and excluding those matters which are reserved specifically for the Board, the ExCo has primary authority and responsibility for the day-to-day operations of, and the development of strategy for the Group. The ExCo works with and advises the CEO, ensuring a collaborative approach to decision making and collective ownership of strategy development and implementation, including promoting action to address performance issues as required. – The Group Risk Committee (“GRC”) was established by, and is accountable to, the ExCo to set policy and monitor all risk types across the Group and to enable delivery of the Group’s risk strategy. It is the primary second line of defence risk management committee of the Group. It provides oversight and monitors strategic business initiatives that have material implications for the Group to ensure they align and are consistent with the Group risk appetite and other risk policies as approved by the BRC. – The Group Asset and Liability Committee (“ALCo”) is a sub- committee of the ExCo and acts as the Group’s strategic and business decision making forum for balance sheet management matters. It sets policy and is responsible for effective balance sheet management and alignment to Group strategy for funding and liquidity risk, market risk and capital adequacy risk. – There is a centralised risk control function headed by the CRO, who is responsible for ensuring that risks are understood, managed, measured, monitored and reported on, and for reporting on risk mitigation actions. – The Risk function is responsible for establishing and embedding risk management frameworks, ensuring that material risk policies are reviewed, and reporting on adherence to risk limits as set by the Board of Directors. – The Group’s risk profile is measured against its risk appetite and exceptions are reported to the GRC and BRC through the CRO report. Elements of the CRO report are also contained in the Executive Management Report reported to the full Group Board. Material breaches of risk appetite are escalated to the Board and reported to the Central Bank of Ireland/Joint Supervisory Team (“JST”). – The centralised credit function is headed by a Chief Credit Officer who reports to the CRO. – Compliance, which is part of the Risk function, provides interpretation and assessment of compliance risk, specifically, laws, regulations, rules and codes of conduct applicable to its banking activities. – 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 reports directly to the Chair of the BAC. – AIB employees who perform pre-approved controlled functions/controlled functions meet the required standards as outlined in the Group’s Fitness and Probity programme. For further information on the risk management framework of the Group, see pages 78 to 82 of this report. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Governance and Oversight 213 Governance and oversight – Internal controls / Other governance information In the event that material failings or weaknesses in the systems of risk management or internal control are identified, Management is required to attend the relevant Board forum to provide an explanation of the issue and to present a proposed remediation plan. Agreed remediation plans are tracked to conclusion, with regular status updates provided to the relevant Board forum. Given the work of the Board, BRC, BAC and representations made by the ExCo 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. Other governance information Relations with shareholders The Group has a number of procedures in place to allow its shareholders and other stakeholders to stay informed about matters affecting their interests. In addition to this Annual Financial Report, which is 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: Website The Group’s website contains, for the years since 2000, the Annual Financial Report, the 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 half-yearly 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 are subsequently published on the Group’s website. It is usual for all Directors to attend the AGM and to be available to meet shareholders before and after the meeting. The Chairs of the Board Committees are available to answer questions about the Committee’s activities. A help desk facility is available to shareholders attending the AGM. The Company’s 2022 AGM is scheduled to be held on 5 May 2022. 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 the Financial Reporting Council’s Board Effectiveness guidelines. The location of the meeting and attendance options will be communicated with the distribution of the aforementioned Notice. 214 Governance and Oversight AIB Group plc Annual Financial Report 2021 Governance and oversight – Supervision and Regulation Throughout 2021, the Group continued to work with its regulators, which include the European Central Bank (“ECB”), the Central Bank of Ireland (“CBI”), the Prudential Regulation Authority (“PRA”), the Financial Conduct Authority (“FCA”) in the United Kingdom (“UK”), the New York State Department of Financial Services (“NYSDFS”) and the Federal Reserve Bank of New York in the United States of America (“USA”) to focus on ensuring compliance with existing regulatory requirements together with the management of regulatory change. AIB Group plc is the holding company of Allied Irish Banks, p.l.c. (the principal operating company of AIB Group) and as such AIB Group plc is subject to consolidated supervision with respect to Allied Irish Banks, p.l.c. and other credit institutions and investment firms in the Group. Current climate of regulatory change The level of regulatory change remained high in 2021 as the regulatory landscape for the banking sector continued to evolve. 2021 saw a continued focus by the Group’s regulators on regulatory change implementation dates amidst this evolving regulatory landscape. The Regulatory focus on Conduct and Culture will continue in 2022 and beyond, with expected finalisation of the Senior Executive Accountability Regime, and the onset of the review of the Consumer Protection Code. The Group is committed to proactively identifying regulatory obligations arising in each of the Group’s operating markets in Ireland, the UK and the USA and ensuring the timely implementation of regulatory change. Throughout 2021 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 5th AML Directive in 2021, the PSD2 Regulatory Technical Standards, the EBA Guidelines on Loan Origination and Monitoring, Climate change/Sustainability and LIBOR transition. Although 2022 will see a heightened focus by regulators and supervisors assessing how recent key regulatory requirements have been implemented and the process for implementation, the level of regulatory change is expected to still remain at high levels in 2022 and beyond. United Kingdom During 2021, AIB Group (UK) p.l.c. continued to prioritise compliance with its regulatory obligations in Great Britain and Northern Ireland and will remain focused on this throughout 2022. Regulatory change horizon – UK Since the UK left the EU, the regulatory regime within the UK has remained closely aligned with EU regulation. EU regulation has effectively been onshored onto the UK statute book. There remains a risk that UK regulation may diverge over time and AIB UK is well position to identify and comply with any changes. 2021 saw the satisfactory transition of loans away from LIBOR onto risk free interest rates by the regulatory deadline. Preparations continued for the implementation of Secure Customer Authentication in respect of online transactions conducted using cards. This regulatory requirement will better protect customers from fraud and will be implemented by 14 March 2022. There were a number of strategic initiatives implemented within AIB UK during 2021. Each of these were implemented in line with regulatory requirements and all customers risks and the associated mitigating actions were fully considered through our Conduct Committee. 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 AIB New York continues to prioritise compliance with its regulatory obligations in the USA and will remain focused on this throughout 2022. The level of regulatory change remained high in 2021. The passing of the Anti-Money Laundering Act 2020 which represents the most significant amendments and enhancements to US AML laws in two decades will continue to be a focus throughout 2022 with the implementation of new rules. The Regulatory focus on BSA/AML/OFAC, climate change, LIBOR transition, cybersecurity, 3rd party risk management and corporate compliance continues in 2022 and beyond, with anticipated regulatory developments in cybersecurity, including an increased focus on reporting, increased state and federal regulation and enforcements. AIB New York will continue to maintain the Transaction Monitoring and Filtering Programme (DFS 504) and Cybersecurity (DFS 500) Programme and annually certify Compliance of these regulations to the NYSDFS. AIB New York will work closely with AIB Group on regulatory changes, in particular the LIBOR transition and sustainability and the implementation of relevant EU requirements taking into consideration the NYSDFS and FRB guidance/regulations. AIB Group plc Annual Financial Report 2021 Financial Statements 215 Financial statements 1 2 Statement of Directors’ Responsibilities 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 216 217 229 235 358 361 1 2 3 4 5 6 216 Financial Statements AIB Group plc Annual Financial Report 2021 Statement of Directors’ Responsibilities 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 Article 4 of the IAS Regulation 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 Euronext Dublin (the Irish Stock Exchange) and the UK Listing Authority. 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 36 to 39 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 and Article 4 of the IAS Regulation, give a true and fair view of the state of the Group’s affairs as at 31 December 2021 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 2021; – 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 Jim Pettigrew Chair 2 March 2022 Colin Hunt Chief Executive Officer Independent Auditor’s Report AIB Group plc Annual Financial Report 2021 Financial Statements 217 Independent auditor’s report to the members of AIB Group plc Report on the audit of the European Single Electronic Format financial statements (the ‘financial statements’) Opinion on the financial statements of AIB Group plc (the ‘Company’) In our opinion the Group and Company financial statements: • give a true and fair view of the assets, liabilities and financial position of the Group and Company as at 31 December 2021 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. 1 2 3 4 5 6 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 Changes in Equity; the Consolidated Statement of Cash Flows; and the related notes 1 to 58, including a summary of significant accounting policies as set out in note 1. The Company financial statements: • • • • the Statement of Financial Position; the Statement of Changes in Equity; the Statement of Cash Flows; and the related notes a to m, including a summary of significant accounting policies as set out in note a. The relevant financial reporting framework that has been applied in their preparation is the Companies Act 2014 and International Financial Reporting Standards (IFRS) as adopted by the European Union (“the relevant financial reporting framework”). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (Ireland) (ISAs (Ireland)) and applicable law. Our responsibilities under those standards are described below in the “Auditor’s responsibilities for the audit of the financial statements” section of our report. We are independent of the Group and Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Ireland, including the Ethical Standard issued by the Irish Auditing and Accounting Supervisory Authority (IAASA), as applied to public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Summary of our audit approach Key audit matters The key audit matters that we identified in the current year were: • Expected credit losses on loans and advances to customers; • Recognition of deferred tax assets; • Defined benefit obligations; • Provisions for liabilities and commitments; • IT systems and controls; and • Recoverability of investment in subsidiary (Company only key audit matter). 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 € 55 million which is 0.4% of Total Equity of the Group; and the Company to be € 55 million which is 0.5% of Total Equity of the Company. 218 Financial Statements AIB Group plc Annual Financial Report 2021 Independent Auditor’s Report Scoping Significant changes in our approach We focused the scope of our Group audit primarily on the audit work in AIB Group plc and four legal entities, all of which were subject to individual statutory audit work, whilst the other legal entities were subject to specified audit procedures, where the extent of our testing was based on our assessment of the risks of material misstatement and of the materiality of the Group’s operations in those entities. These audits and specified audit procedures covered over 94% of the Group’s total assets and 92% of the Group’s total operating income. There were no significant changes in our approach which we feel require disclosure. Conclusions relating to going concern In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the financial statements is appropriate. Our evaluation of the directors’ assessment of the Group and Company’s ability to continue to adopt the going concern basis of accounting included consideration of the inherent risks to the Group’s and Company’s business models. We analysed how those risks might affect the Group’s and Company’s financial resources or ability to continue operations twelve months from the date of approval of these annual financial statements. The risks that we considered most likely to adversely affect the Group’s and Company’s available financial resources over this period were: • availability of funding and liquidity in the event of a market wide stress scenario, including the potential prolonged impacts of COVID-19 and the continuing impacts of Brexit on the ecomony; and • impact on regulatory capital requirements in the event of an economic slowdown or recession. As these were risks that could potentially cast significant doubt on the Group’s and the Company’s ability to continue as a going concern, our evaluation of the directors’ assessment included: • • • • • • evaluating the design and determining the implementation of key controls over the preparation of financial plans and budgets; understanding the Group and Company’s Capital and Liquidity process, including under stressed scenarios; obtaining the updated financial planning exercise covering the period 2022 to 2024 undertaken by the Group in the second half of 2021; assessing whether the level of forecasted profits in the updated financial plan were appropriate by challenging the growth, profitability and economic assumptions within; testing the accuracy of Management’s forecasting process by reviewing previous forecasts and comparing to actual results; challenging the key assumptions used in the directors’ assessment of the Group and the Company’s ability to continue as a going concern; and • evaluating the adequacy of the relevant disclosures made in the financial statements. Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the Group and Company’s ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue. In relation to the reporting on how the Group has applied the UK Corporate Governance Code and the Irish Corporate Governance Annex, we have nothing material to add or draw attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the going concern basis of accounting. Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report. 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. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 219 Expected credit losses on loans and advances to customers Key audit matter description In line with IFRS 9, losses on financial assets which are classified at amortised cost, are recognised 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 in the calculations require Management to develop methodologies involving the use of significant judgements. Expected credit loss allowances on loans and advances to customers was € 1,885 million at 31 December 2021 (2020: € 2,510 million). 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; – The definition of default; – 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; – 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 potential prolonged impacts of COVID-19 and the continuing impacts of Brexit. This results in a wide range of possible outcomes. Please also refer to page 186 (Report of the Board Audit Committee), page 254 (Accounting Policy (s) – Impairment of financial assets), Note 2 – Critical accounting judgements and estimates, Note 13 – Net credit impairment writeback/(charge) and Note 23 – ECL allowance on financial assets. How the scope of our audit responded to the key audit matter We tested the operating effectiveness of 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 the definition of default 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 at, and observation of, Board Risk Committee and Group Credit Committee meetings. We evaluated IT system controls including assessing data inputs and general IT controls. 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 challenged judgements and assumptions supporting the ECL requirements of IFRS 9. 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. We challenged the macroeconomic scenarios chosen and changes to the weightings applied. This included benchmarking the economic data used to recognised external data sources. We also considered the impact of key uncertainties, including the potential prolonged impacts of COVID-19. 220 Financial Statements AIB Group plc Annual Financial Report 2021 Independent Auditor’s Report 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 and application. In examining a risk based sample of DCF individually assessed loan cases, we challenged Management on 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 adequacy of 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. Recognition of deferred tax assets Key audit matter description Deferred tax assets of € 2,840 million (2020: € 2,763 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 potential longer term residual impacts of COVID-19 and post-Brexit EU/UK trade deal on the economy. The Group has reassessed profitability and growth forecasts for the period 2022 to 2024. Growth assumptions and profitability levels underpinning the plan have been revised upwards compared to previous years and results in a decrease in the expected deferred tax utilisation period. The key audit matter relates to the Management judgement involved in recognition and measurement of the deferred tax asset. Please refer to page 186 (Report of the Board Audit Committee), page 244 (Accounting Policy (k) – Income tax, including deferred income tax), Note 2 – Critical accounting judgements and estimates and Note 30 – Deferred taxation. How the scope of our audit responded to the key audit matter We have evaluated the design and determined the 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 comparing 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 are within a range we consider to be reasonable. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 221 Defined benefit obligations Key audit matter description The key audit matter is that the recognition and measurement of defined benefit obligations of € 6,241 million (2020: € 6,226 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 (Report of the Board Audit Committee), page 243 (Accounting Policy (j) – Employee benefits), and Note 2 – Critical accounting judgements and estimates and Note 31 – Retirement benefits. How the scope of our audit responded to the key audit matter We have evaluated the design and determined the implementation of key 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 determined the implementation of the relevant controls for determining the actuarial assumptions and the approval of those assumptions by Management. We 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 liabilities and commitments Key audit matter description The calculation of provisions for liabilities and commitments, including the Financial Services and Pensions Ombudsman (“FSPO”) decision, the tracker mortgage examination and the sale of a series of property investment funds, known as Belfry, is highly judgemental and involves the use of several Management assumptions including the identification of relevant impacted customers, related redress costs and potential enforcement fines. There is also a risk that known and emerging issues may not be appropriately disclosed in the financial statements. As a result, we consider this a key audit matter. Included in Note 37 – Provisions for liabilities and commitments, the Group has recorded a provision of € 79 million (2020: € 80 million) in regard to the FSPO Decision. In regard to the tracker mortgage examination the Group has recorded a provision of € 70 million (2020: € 70 million) for related enforcement fines expected to be imposed. The Group has recorded a provision of € 75 million (2020: Nil) for the anticipated cost of redress and other related costs that may be payable under the Belfry programme. Please refer to page 186 (Report of the Board Audit Committee), page 259 (Accounting Policy (z) – Non- credit risk provisions), Note 2 – Critical accounting judgements and estimates, Note 37 – Provisions for liabilities and commitments, and Note 44 – Contingent liabilities and commitments. How the scope of our audit responded to the key audit matter We have evaluated the design and determined the implementation of the Group’s relevant controls over the identification, measurement and the disclosure of provisions for liabilities and commitments, and we also assessed Management review and governance controls. We reviewed the relevant regulatory and legal correspondence. We challenged the reasonableness of assumptions used by Management and tested the underlying data and assumptions used in the determination of the provisions recorded. We reviewed the basis for recording and retaining a provision taking into consideration the information available and the requirements of IAS 37. 222 Financial Statements AIB Group plc Annual Financial Report 2021 Independent Auditor’s Report IT systems and controls Key audit matter description Given the inherent uncertainty in the calculation of the provisions and their judgemental nature, we evaluated the adequacy of 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 and the significant uncertainties that exist in respect of the provisions. Based on the evidence obtained, we found that the assumptions used by Management in measurement of the provisions for liabilities and commitments are within a range we consider to be reasonable. The Group’s financial reporting processes are reliant on processes, controls and data managed by IT systems. The IT environment is complex and pervasive to the operations of the Group due to the large volume of transactions processed daily and the reliance on automated and IT dependent manual controls. This risk is also impacted by dependency on third parties and outsourced arrangements. Our planned audit approach relies extensively on IT applications and the operating effectiveness of the control environment. As part of our assessment of the IT environment, we considered privileged user access management controls to be critical in ensuring that only appropriately authorised changes are made to relevant IT systems. Moreover, appropriate access controls contribute to mitigating the risk of potential fraud or error as a result of changes to applications or processing unauthorised transactions. We regard this area as a key audit matter owing to the high level of IT dependency within the Group, as well as the associated complexity and the risk that automated controls are not designed and operating effectively. How the scope of our audit responded to the key audit matter We examined the design of the governance framework associated with the Group’s IT architecture. We gained an understanding and tested relevant General IT Controls for systems we considered relevant to the financial reporting process, including access management, programme development and change management. We gained an understanding of relevant IT controls over applications, operating systems and databases that are relevant for the financial reporting process and tested their operating effectiveness. We assessed the relevant automated controls within business processes and the reliability of relevant reports used as part of manual controls. This included assessing the integrity of system interfaces, the completeness and accuracy of data feeds and automated calculations. We tested user access by assessing the controls in place for in-scope applications and verifying the addition and removal of users. While we identified certain design and operating effectiveness deficiencies in relation to user access controls, we tested validation activities performed by Management and compensating controls to mitigate the risk of fraud or error as a result of unauthorised transactions. Based on this testing we were able to place reliance on IT controls for the purpose of our audit. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 223 Recoverability of investment in subsidiary (Company only key audit matter) Key audit matter description The key audit matter relates to the recoverability of the Company’s investment in its subsidiary undertaking and the significant judgements and estimates required to determine its recoverable amount. Following a corporate reorganisation during 2017, the Group implemented a new holding Company, AIB Group plc, which holds the Group’s investment in Allied Irish Banks, p.l.c. The Company accounts for its investment in subsidiary at cost less provisions for impairment. At the end of each reporting period, the Company reviews its investment for impairment if there are indications that impairment may have occurred. As at 31 December 2021, the Company tested its investment in Allied Irish Banks, p.l.c. for impairment. An impairment test was performed by the Company using a value-in-use (”VIU”) model to calculate an estimated recoverable amount. The assumptions used in the VIU model involved significant Management judgement and estimation. This includes determining future cash flow projections during the period of the financial plan and the selection of growth and discount rates. The carrying amount of the Company’s investment in subsidiary at 31 December 2021 was € 6,362 million. As a result of the impairment test, the recoverable amount at 31 December 2021 was calculated at € 9,069 million and this resulted in an impairment reversal of € 2,707 million. Please refer to page 186 (Report of the Board Audit Committee), page 238 (Accounting Policy (d) – Basis of consolidation), Note 2 – Critical accounting judgements and estimates and Note e – Investment in subsidiary undertaking (AIB Group Company financial statements). We evaluated the design and determined the implementation of key controls over the preparation of financial plans and budgets. We assessed whether the level of forecasted profits was appropriate by challenging the growth, profitability and economic assumptions. We tested the accuracy of Management’s forecasting process by reviewing previous forecasts and comparing to actual results. In conjunction with our Deloitte valuation specialists, we evaluated the methodology utilised by the Company in preparing the VIU calculation. In particular, we challenged the assumptions used in assessing the recoverability of the investment. We independently sourced market information around discount rates and growth rates. We determined a range of estimates around these assumptions and the resulting impairment charge. Given the inherent uncertainty in the calculation of a recoverable amount for the investment, we evaluated the adequacy of the disclosures made in the financial statements. We challenged Management on the disclosures, in particular whether they are sufficiently clear in highlighting the key assumptions and the sensitivity of the investment to changes in the underlying assumptions. Based on the evidence obtained, we concluded that the assumptions used by Management in assessing the recoverability of the investment in Allied Irish Banks, p.l.c. are within a range we consider reasonable. How the scope of our audit responded to the key audit matter 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. 224 Financial Statements AIB Group plc Annual Financial Report 2021 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 € 55 million which is approximately 0.4% of the Group’s Total Equity. We have considered Total Equity to be a critical component for determining materiality as it is one of the principal measures for users of the financial statements in assessing the Group’s financial position. 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 € 55 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. Materiality Total Equity € 13,660 m Total Equity Group materiality Group materiality € 55 m Component materiality range € 55 m to € 9 m Board Audit Committee reporting threshold € 2.75 m We agreed with the Board Audit Committee that we would report to them any audit differences in excess of € 2.75 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 disclosure matters that we identified when assessing the overall presentation of the financial statements. An overview of the scope of our audit Identification and scoping of components 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 45 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 94% of the Group’s total assets and 92% 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 whether there were any additional significant risks of material misstatement arising from the aggregated financial information of the remaining entities not subject to audit or specified audit procedures. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 225 An overview of the scope of our audit (continued) Working with other auditors 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 virtual Group planning meetings, maintaining communications on the status of the audits and continuing with a programme of virtual meetings and workshops designed so that the Group audit team engaged with each significant component audit team during the year. At these meetings, the findings reported to the Group team were discussed in more detail, and any further work required by the Group team was then performed by the component auditor. Our consideration of climate-related risks In planning our audit, we have considered the potential impacts of the climate-related risks identified by management on the Group’s business and its financial statements. The Group has set out its strategic ambition on climate and the related risks and governance processes on pages 26–55 of the annual financial report and in more detail throughout their sustainability report. Management have identified that climate-related risks could have a material impact on the strategy and operations of the Group, and the timing and ultimate impact of these risks contain an inherent level of uncertainty. As part of our audit, we have made inquiries of management to understand their process for considering the impact of climate-related risks including their qualitative loan sector analysis. In addition, we are required to read the Group’s disclosure of climate related information in the front half of the annual report, including the TCFD disclosures listed on pages 48–49, to consider whether they are materially inconsistent with the financial statements or knowledge obtained in the audit. We did not identify any material inconsistencies as a result of these procedures. 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. The directors are responsible for the other information contained within the Annual Financial Report. 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. 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. Responsibilities of Directors As explained more fully in the Statement of Directors’ Responsibilities, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view and otherwise comply with the Companies Act 2014, 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’s or to cease operations, or have no realistic alternative but to do so. 226 Financial Statements AIB Group plc Annual Financial Report 2021 Independent Auditor’s Report 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 entity (or where relevant, the Group) to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the business activities within the Group to express an opinion on the (consolidated) financial statements. The Group auditor is responsible for the direction, supervision and performance of the Group audit. The Group auditor remains solely responsible for the audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that the auditor identifies during the audit. 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), and communicates with them all relationships and other matters that may reasonably be thought to bear on the auditor’s independence, and where applicable, related safeguards. 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 public interest benefits of such communication. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 227 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 required by the Companies Act 2014 We report, in relation to information given in the Corporate Governance Statement on pages 169 to 214 that • In our opinion, based on the work undertaken during the course of the audit, the information given in the Corporate Governance Statement pursuant to subsections 2(c) and (d) of section 1373 of the 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 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. Corporate Governance Statement The Listing Rules and ISAs (Ireland) require us to review the directors’ statement in relation to going concern, longer-term viability and the part of the Corporate Governance Statement relating to the Group’s compliance with the provisions of the UK Corporate Governance Code and Irish Corporate Governance Annex specified for our review. Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance Statement is materially consistent with the financial statements and our knowledge obtained during the audit: • the directors’ statement with regards the appropriateness of adopting the going concern basis of accounting and any material uncertainties identified set out on page 170; • the directors’ explanation as to its assessment of the Group’s prospects, the period this assessment covers and why the period is • • appropriate set out on page 210; the directors’ statement on fair, balanced and understandable set out on page 216; the board’s confirmation that it has carried out a robust assessment of the emerging and principal risks and the disclosures in the annual report that describe the principal risks and the procedures in place to identify emerging risks and an explanation of how they are being managed or mitigated set out on page 31; • the section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on page 211; and • the section describing the work of the Board Audit Committee set out on pages 186 to 192. 228 Financial Statements AIB Group plc Annual Financial Report 2021 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 those parts of the directors’ report as specified for our review. The Companies Act 2014 requires us to report to you if, in our opinion, the Company has not provided the information required by Regulation 5(2) to 5(7) of the European Union (Disclosure of Non-Financial and Diversity Information by certain large undertakings and groups) Regulations 2017 (as amended) for the financial year ended 31 December 2021. We have nothing to report in this regard. The Companies Act 2014 also requires us to report to you if, in our opinion, the Company has not provided the information required by Section 1110N in relation to its remuneration report. We have nothing to report in this regard. 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 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 9 years, covering the years ending 2013 to 2021. Following the corporate restructure of AIB Group plc in 2017 which led to the implementation of AIB Group plc, 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 5 years, covering the years ending 2017 to 2021. 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 we are required to provide in accordance with ISA (Ireland) 260. Use of our report 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. John McCarroll For and on behalf of Deloitte Ireland LLP Chartered Accountants and Statutory Audit Firm Deloitte & Touche House, Earlsfort Terrace, Dublin 2 2 March 2022 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. AIB Group plc Annual Financial Report 2021 Financial Statements 229 Consolidated income statement for the financial year ended 31 December 2021 Interest income calculated using the effective interest rate method Other interest income and similar income Interest and similar income Interest and similar expense Net interest income Dividend income Fee and commission income Fee and commission expense Net trading income/(loss) 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 Operating expenses Impairment and amortisation of intangible assets Impairment and depreciation of property, plant and equipment Total operating expenses Operating profit before impairment losses Net credit impairment writeback/(charge) Operating profit/(loss) Share of equity accounted investments Loss on disposal of property Profit/(loss) before taxation Income tax credit Profit/(loss) for the year Attributable to: – Equity holders of the parent – Non-controlling interests Profit/(loss) for the year Earnings per share Basic earnings/(loss) per ordinary share Diluted earnings/(loss) per ordinary share Notes 4 4 4 5 6 7 7 8 9 10 11 12 26 27 13 25 15 41 16(a) 16(b) 1 2 3 4 5 6 2020 € m 2,050 77 2,127 (255) 1,872 26 564 (169) (32) 86 24 2 501 2,373 (1,544) (214) (101) (1,859) 514 (1,460) (946) 15 – (931) 190 (741) (769) 28 (741) (30.0)c (30.0)c 2021 € m 2,003 81 2,084 (290) 1,794 3 640 (160) 15 78 1 8 585 2,379 (1,679) (198) (129) (2,006) 373 238 611 21 (3) 629 16 645 647 (2) 645 21.4c 21.4c 230 Financial Statements AIB Group plc Annual Financial Report 2021 Consolidated statement of comprehensive income for the financial year ended 31 December 2021 Notes 15 15 15 15 15 Profit/(loss) for the year Other comprehensive income Items that will not be reclassified subsequently to profit or loss Remeasurement of defined benefit asset/(liability), 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 of tax Net change in cash flow hedges, 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 Other comprehensive income for the year, net of tax Total comprehensive income for the year Attributable to: – Equity holders of the parent – Non-controlling interests Total comprehensive income for the year 2021 € m 645 17 – 17 87 (391) (54) (358) (341) 304 306 (2) 304 2020 € m (741) (38) (18) (56) (70) 71 (55) (54) (110) (851) (879) 28 (851) 1 2 3 4 5 6 Consolidated statement of financial position as at 31 December 2021 AIB Group plc Annual Financial Report 2021 Financial Statements 231 Notes 2021 € m 2020 € m 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 Securities financing Investment securities Investments accounted for using the equity method Intangible assets and goodwill 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 Securities financing Trading portfolio financial liabilities Derivative financial instruments Debt securities in issue Lease liabilities 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 Non-controlling interests Total equity Total liabilities and equity Jim Pettigrew Chair 2 March 2022 Colin Hunt Chief Executive Officer 49 17 18 19 20 21 22 24 25 26 27 29 30 31 32 33 22 18 19 34 35 30 31 36 37 38 39 40 41 42,654 25,550 44 8 8 882 1,323 56,508 3,890 16,972 127 996 631 483 37 2,834 424 54 43 14 – 1,424 1,092 56,841 811 19,479 98 937 725 235 57 2,711 339 29 127,875 110,385 10,382 92,866 45 2 1,062 5,819 346 10 53 54 1,235 284 501 1,556 114,215 1,696 10,850 12,546 1,115 (1) 13,660 127,875 4,495 81,957 210 – 1,201 5,450 382 1 44 68 955 255 396 1,550 96,964 1,696 10,609 12,305 1,115 1 13,421 110,385 232 Financial Statements AIB Group plc Annual Financial Report 2021 Consolidated statement of changes in equity for the financial year ended 31 December 2021 At 1 January 2021 Total comprehensive income for the year Profit for the year Other comprehensive income (note 15) Total comprehensive income for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners of the Group Distributions paid to other equity interests (note 40) Other movements Total contributions by and distributions to owners of the Group At 31 December 2021 Attributable to equity holders of parent Share capital Other equity interests Capital reserves Merger reserve € m 1,696 € m 1,115 € m 1,133 € m (3,622) Capital redemp- tion reserves € m 14 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,696 1,115 1,133 (3,622) 14 Reval- uation reserves € m 14 – – – – (1) (1) 13 Invest- ment securities reserves € m Cash flow hedging reserves € m Revenue reserves € m Foreign currency translation reserves € m Total Non- controlling interests Total equity € m € m € m 206 540 12,923 (599) 13,420 1 13,421 – (54) (54) – (391) (391) – – – – – – 647 17 664 (65) 1 (64) – 87 87 – – – 647 (341) 306 (65) – (65) (2) – (2) – – – 645 (341) 304 (65) – (65) 152 149 13,523 (512) 13,661 (1) 13,660 Consolidated statement of changes in equity for the financial year ended 31 December 2021 Consolidated statement of changes in equity for the financial year ended 31 December 2020 AIB Group plc Annual Financial Report 2021 Financial Statements 233 Attributable to equity holders of parent Share capital Other Capital Merger Capital equity reserves reserve redemp- Reval- uation Invest- ment Cash Revenue Foreign Total Non- Total flow reserves currency controlling equity interests tion reserves securities hedging reserves reserves reserves translation reserves interests € m 1,696 € m 1,115 € m 1,133 € m (3,622) € m 14 € m 540 € m 12,923 € m € m € m € m (599) 13,420 1 13,421 At 1 January 2021 Profit for the year Total comprehensive income for the year Other comprehensive income (note 15) Total comprehensive income for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners of the Group Distributions paid to other equity interests (note 40) Other movements Total contributions by and distributions to owners of the Group At 31 December 2021 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – € m 14 – – – – (1) (1) 13 € m 206 – (54) (54) – – – – (391) (391) – – – 647 17 664 (65) 1 (64) – 87 87 – – – 647 (341) 306 (65) – (65) (2) – (2) – – – 645 (341) 304 (65) – (65) 1,696 1,115 1,133 (3,622) 14 152 149 13,523 (512) 13,661 (1) 13,660 At 1 January 2020 Total comprehensive income for the year Loss for the year Other comprehensive income (note 15) Total comprehensive income for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners of the Group Non-controlling interests in subsidiary (note 41) Redemption of capital instruments (note 41) Issue of Additional Tier 1 Securities (note 40) Distributions paid to other equity interests (note 40) Distributions paid to non-controlling interests (note 41) Total contributions by and distributions to owners of the Group Realised gains on equity shares held at fair value through other comprehensive income Attributable to equity holders of parent Share capital Other equity interests € m 1,696 € m 496 Capital reserves Merger reserve € m € m Capital redemp- tion reserves € m 1,133 (3,622) 14 Reval- uation reserves € m 14 Invest- ment securities reserves € m Cash flow hedging reserves € m Revenue reserves € m Foreign currency translation reserves € m Total Non- controlling interests Total equity € m € m € m 623 469 13,441 (529) 13,735 495 14,230 – – – – – – – – – – – – – – – 619 – – 619 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – (73) (73) – 71 71 (769) (38) (807) – (70) (70) (769) (110) (879) – – – – – – – – – – – – – – (9) – (46) – (55) 344 – – – – – – – – (9) 619 (46) – – 564 (522) 28 – 28 2 (494) – – (30) – 1 (741) (110) (851) 2 (503) 619 (46) (30) 42 – 13,421 At 31 December 2020 1,696 1,115 1,133 (3,622) 540 12,923 (599) 13,420 – 14 – 14 (344) 206 1 2 3 4 5 6 234 Financial Statements AIB Group plc Annual Financial Report 2021 Consolidated statement of cash flows for the financial year ended 31 December 2021 Cash flows from operating activities Profit/(loss) before taxation for the year Adjustments for: – Non-cash and other items – Change in operating assets – Change in operating liabilities – Taxation refund/(paid) Net cash inflow from operating activities Cash flows from investing activities Purchase of investment securities Proceeds from sales, redemptions and maturity of investment securities Additions to property, plant and equipment Disposal of property, plant and equipment Additions to intangible assets Acquisition cost of subsidiary Investments accounted for using the equity method Net cash inflow/(outflow) from investing activities Cash flows from financing activities Net proceeds on issue of Additional Tier 1 Securities Net proceeds on issue of € 1 billion Tier 2 Notes Redemption of capital instruments Proceeds on issue of debt securities – MREL Distributions paid to other equity interests Distributions paid to non-controlling interests Repayment of lease liabilities Interest paid on debt securities – MREL Interest paid on subordinated liabilities and other capital instruments Net cash inflow 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 50 50 50 24 24 27 26 28 25 40 38 34 40 41 27 49 2021 € m 629 270 (2,312) 15,344 13 13,944 (2,517) 4,928 (31) 10 (204) (60) (8) 2,118 – – – 750 (65) – (43) (97) (28) 517 16,579 26,559 419 43,557 2020 € m (931) 2,079 1,982 13,304 (28) 16,406 (6,444) 4,074 (21) 11 (236) – – (2,616) 619 1,000 (1,253) – (46) (30) (50) (98) (41) 101 13,891 12,923 (255) 26,559 1 2 3 4 5 6 Notes to the consolidated financial statements AIB Group plc Annual Financial Report 2021 Financial Statements 235 Note 1 Accounting policies 2 Critical accounting judgements and estimates 3 Segmental information 4 5 Interest and similar income Interest and similar expense 6 Dividend income 7 Net fee and commission income 8 Net trading income/(loss) 9 Net gain on other financial assets measured at FVTPL 10 Net gain on derecognition of financial assets measured at amortised cost 11 Other operating income 12 Operating expenses 13 Net credit impairment writeback/(charge) 14 Auditor’s remuneration 15 Taxation 16 Earnings per share 17 Disposal groups and non-current assets held for sale 18 Trading portfolio 19 Derivative financial instruments 20 Loans and advances to banks 21 Loans and advances to customers 22 Securities financing 23 ECL allowance on financial assets 24 Investment securities 25 Investments accounted for using the equity method 26 Intangible assets and goodwill 27 Property, plant and equipment 28 Acquisition of subsidiary 29 Other assets 30 Deferred taxation Page Note Page 236 263 269 273 273 274 274 274 275 275 275 276 276 277 278 280 280 280 281 291 292 293 294 295 299 300 301 304 305 306 31 Retirement benefits 32 Deposits by central banks and banks 33 Customer accounts 34 Debt securities in issue 35 Lease liabilities 36 Other liabilities 37 Provisions for liabilities and commitments 38 Subordinated liabilities and other capital instruments 39 Share capital 40 Other equity interests 41 Non-controlling interests in subsidiaries 42 Capital reserves, merger reserve and capital redemption reserves 43 Offsetting financial assets and financial liabilities 44 Contingent liabilities and commitments 45 Subsidiaries and consolidated structured entities 46 Off-balance sheet arrangements and transferred financial assets 47 Classification and measurement of financial assets and financial liabilities 48 Fair value of financial instruments 49 Cash and cash equivalents 50 Statement of cash flows 51 Related party transactions 52 Employees 53 Regulatory compliance 54 Financial and other information 55 Dividends 56 Proposed acquisition 57 Non-adjusting events after the reporting period 58 Approval of financial statements 309 315 316 316 317 317 318 320 321 322 323 323 324 328 331 332 336 338 346 347 348 355 356 356 356 357 357 357 236 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 1 Accounting policies Index (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) Reporting entity Statement of compliance Basis of preparation Basis of consolidation Foreign currency translation Interest income and expense recognition Dividend income Fee and commission income Net trading income Employee benefits Income tax, including deferred income tax Financial assets (m) Financial liabilities and equity (n) (o) (p) (q) (r) (s) (t) (u) (v) (w) (x) (y) (z) (aa) (ab) (ac) (ad) Leases Determination of fair value of financial instruments Sale and repurchase agreements (including securities borrowing and lending) Derivatives and hedge accounting Derecognition Impairment of financial assets Collateral and netting Financial guarantees and loan commitment contracts Property, plant and equipment Intangible assets Impairment of property, plant and equipment, goodwill and intangible assets Disposal groups and non-current assets held for sale Non-credit risk provisions Equity Cash and cash equivalents Segment reporting Prospective accounting changes 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 237 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 10 Molesworth Street, Dublin 2, Ireland. AIB Group plc is registered under the Companies Act 2014 as a public limited company under the company number 594283 and is the holding company of the Group. The consolidated financial statements for the year ended 31 December 2021 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/joint ventures 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. (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 2021. 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 and Article 4 of the IAS Regulation. The accounting policies have been consistently applied by Group entities and are consistent with the previous year, unless otherwise described. (c) Basis of preparation Functional and presentation currency The financial statements are presented in euro, which is the functional currency of the parent company and a significant number of its subsidiaries, rounded to the nearest million. Basis of measurement The financial statements have been prepared under the historical cost basis, with the exception of the following assets and liabilities which are stated at their fair value: derivative financial instruments, financial instruments at fair value through profit or loss, certain hedged financial assets and financial liabilities and investment securities at fair value through other comprehensive income (“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, Financial Instruments: Disclosures and IAS 1, Presentation of Financials Statements, contained in the ‘Business 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. Voluntary change in accounting policy – presentation of securities financing The Group has voluntarily changed its accounting policy for the presentation of certain financial instruments relating to securities financing. A new line item and a related note (note 22) ‘Securities Financing’ was introduced for both assets and liabilities in the consolidated statement of financial position. In previous years, securities borrowings were reported in ‘Loans and advances to banks’, reverse repurchase agreements were reported in ‘Loans and advances to banks’ and ‘Loans and advances to customers’ and securities sold under agreements to repurchase were reported in ‘Deposits by central banks and banks’ and ‘Customer accounts’. The comparatives for 2020 have been restated accordingly. This approach was adopted following a significant increase in securities borrowing and reverse repurchase agreement transactions. The Group believes this accounting policy changes provides reliable and more relevant information as it provides greater transparency of the level of securities financing activity by the Group. 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 may involve 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 judgements 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 263 to 268. 238 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 1 Accounting policies (continued) (c) Basis of preparation (continued) Going concern The financial statements for the year ended 31 December 2021 have been prepared on a going concern basis as the Directors are satisfied, having considered the risks and uncertainties impacting the Group, that it has the ability to continue in business for the period of assessment. In making this assessment, the Directors have considered a wide range of information relating to present and future conditions. This includes capital forecasts and internally generated stress scenarios with additional scenarios to take account of the inorganic initiatives that the Group has committed to. The scenarios include the potential prolonged impacts of COVID-19 and the continuing impacts of Brexit. The period of assessment used by the Directors is 12 months from the date of approval of these annual financial statements. Adoption of new accounting standards/amendments to standards During the financial year to 31 December 2021, the Group applied for the first time certain standards and amendments which are effective for annual periods beginning on or after 1 January 2021 (unless otherwise stated), The following are amendments to standards and interpretations which had an insignificant impact on these annual financial statements: – Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform – Phase 2. Interest Rate Benchmark Reform – Phase 2 Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 The amendments provide temporary reliefs which address the financial reporting effects when an interbank offered rate (“IBOR”) is replaced with an alternative nearly risk-free interest rate (“RFR”). The amendments include a number of practical expedients. These amendments had no material impact on the consolidated financial statements of the Group. (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; (v) reclassify to profit or loss, or transfer directly to retained earnings if required by IFRS, the amounts recognised in other comprehensive income in relation to the subsidiary; and (vi) 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. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 239 1 Accounting policies (continued) (d) Basis of consolidation (continued) Business combinations The Group accounts for the acquisition of a business using the acquisition method except for a business under common control. Under the acquisition method, the consideration transferred in a business combination is measured at fair value, which is calculated as the sum of: – – – the acquisition date fair value of assets transferred by the Group; liabilities incurred by the Group to the former owners of the acquiree; and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition related costs are recognised in the income statement as incurred. Goodwill is measured as the excess of the sum of: – – – – the fair value of the consideration transferred; the amount of any non-controlling interests in the acquiree; and the fair value of the acquirer’s previously held equity interest in the acquiree, if any; less the net of the acquisition date fair value of the identifiable assets acquired and liabilities assumed. The Group in its capacity as a trustee 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 and 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 (aa) ‘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. Investments accounted for using the equity method The Group’s investments accounted for using the equity method comprise its investments in associates and joint ventures. 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. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. 240 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 1 Accounting policies (continued) (d) Basis of consolidation (continued) Investments in associated undertakings and joint ventures 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 or joint venture. 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 or joint venture after tax reflects the Group’s proportionate interest 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. The Company reviews its equity investment for impairment at the end of each reporting period if there are indications that impairment may have occurred. The testing for possible impairment involves comparing the estimated recoverable amount of an investment with its carrying amount. Where the recoverable amount is less than the carrying amount, the difference is recognised as an impairment provision in the Company’s financial statements. The recoverable amount is the higher of fair value less costs to sell and value-in-use (“VIU”). 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. (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 a financial instruments designated as a hedge of the net investment in a foreign operation are reported in other comprehensive income. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 241 1 Accounting policies (continued) (e) Foreign currency translation (continued) 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 rate 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 rate 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. 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. 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’ in the income statement, as applicable. 242 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 1 Accounting policies (continued) (f) Interest income and expense recognition (continued) Presentation Interest income and expense presented in the consolidated income statement include: – – – Interest on financial assets and financial liabilities measured at amortised cost calculated on an effective interest rate basis; Interest on investment debt securities measured at FVOCI calculated on an effective interest rate basis; Interest on financial assets measured at FVTPL; – Net interest income and expense on qualifying hedge derivatives designated as cash flow hedges or fair value hedges which are recognised in interest income or interest expense; and – Interest income and funding costs of trading portfolio financial assets. The Group policy for the recognition of leasing income is set out in Accounting policy (n). Targeted Long Term Refinancing Operation III (“TLTRO III”) Eurosystem refinancing operations are credit facilities from the Eurosystem secured by a fixed charge over securities and relates to Targeted Long Term Refinancing Operation III (“TLTRO III”). TLTRO III has specific terms attached to it which are different from other sources of funding available to banks including other sources of funds provided by the European Central Bank (“ECB”). The financial conditions incorporated into TLTRO III reflect ECB monetary policy initiatives to prospectively reduce the cost of funding for banking institutions. Accordingly, the Group has concluded that the ECB has established a separate market for TLTRO programmes and TLTRO III transactions are at market rates and the requirements of IAS 20 Accounting for Government Grants do not apply. The borrowing rate applicable to the TLTRO III loans is linked to the lending patterns of the Group and are subject to the achievement of predefined lending performance thresholds based on the eligible net lending of the Group in certain specified periods. The amount of interest income recognised during the period on TLTRO III depends on whether the Group had a reasonable expectation of meeting the relevant lending performance thresholds. The Group interprets reasonable expectations as highly probable (i.e. the probability of meeting the lending targets is substantially greater than the probability that it will not). As a result, if interest income is recognised during the period based on the expectation of meeting the targets, there should be only a limited possibility that the interest may need to be reversed in future periods. If the Group does not have a reasonable expectation that the lending targets will be met but subsequently determines it will meet the relevant lending performance thresholds, it revises its estimates of receipts and recalculates the present value of the estimated future contractual cash flows that are discounted at the original effective interest rate and recognises the adjustment in the Group’s consolidated income statement as negative interest on financial liabilities at amortised cost. (g) Dividend income Dividends on equity investments measured at FVTPL/FVOCI are recognised in the income statement when the entity’s right to receive payment is established and 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, either at a ‘point in time’ or ‘over time’ if the performance obligation is performed over a period of time unless the income has been included in the effective interest rate calculation. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 243 1 Accounting policies (continued) (h) Fee and commission income (continued) 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. 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. Fee income and fee expenses in respect of services and prepaid credits for cellular phone and utilities sold to third parties are classified as specialised payment services and are recognised when the performance obligation is satisfied. (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 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, except for insurance policies acquired as part of a buy in. If the policies are qualifying policies under IAS 19 Employee Benefits and if the timing and amount of payments under the policies exactly match some or all of the benefits payable under the scheme, then the present value of the related obligation is determined and is deemed to be the fair value of the insurance policies to be included in plan assets. 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. 244 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 1 Accounting policies (continued) (j) Employee benefits (continued) Retirement benefit obligations (continued) The cost of providing defined benefit pension schemes to employees, comprising the net interest on the net defined benefit liability/(asset), calculated by applying the discount rate to the net defined benefit liability/(asset) at the start of the annual reporting period, taking into account contributions and benefit payments during the period, is charged to the income statement within personnel expenses. Remeasurements of the net defined benefit liability/(asset), comprising actuarial gains and losses and the return on scheme assets (excluding amounts included in net interest on the net defined benefit liability/(asset)) are recognised in other comprehensive income. Amounts recognised in other comprehensive income in relation to remeasurements of the net defined benefit liability/(asset) will not be reclassified to profit or loss in a subsequent period. In early 2017, the Board reassessed its obligation to fund increases in pensions in payment. The Board confirmed that funding of increases in pensions in payment is a decision to be made by the Board each year where increases are discretionary. This was based on actuarial and external legal advice obtained. The Group recognises the effect of an amendment to a defined benefit scheme when the plan amendment occurs, which is when the Group introduces or withdraws a defined benefit scheme, or changes the benefits payable under existing defined benefit schemes. A curtailment is recognised when a significant reduction in the number of employees covered by a defined benefit scheme occurs. A settlement is a transaction that eliminates all further legal or constructive obligations for part or all of the benefits provided under a defined benefit scheme. Gains or losses on plan amendments, curtailments and settlements are recognised in the income statement. 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) 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. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 245 1 Accounting policies (continued) (k) Income tax, including deferred income tax (continued) 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 it is probable 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, temporary differences are not provided for 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. (l) 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. In a situation where the Group commits to purchase financial assets under a contract which is not considered a regular-way transaction, the assets to be acquired are not recognised until the acquisition contract is settled. In this case, the contract to acquire the financial asset is a derivative that is measured at FVTPL in the period between the trade date and the settlement date. 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: 246 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 1 Accounting policies (continued) (l) Financial Assets (continued) – 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 rate 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. 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, for other basic lending risks and costs (i.e. liquidity, administrative costs) and profit margin. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 247 1 Accounting policies (continued) (l) Financial Assets (continued) 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 when, and only when, the Group changes 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. (m) 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. 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 rate 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 rate 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. 248 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 1 Accounting policies (continued) (n) 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 Lease rentals payables are recognised, measured and presented in line with IFRS 16 Leases. Identifying a lease The Group assesses whether a contract is, or contains, a lease at inception of the contract. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. This assessment involves the exercise of judgement about whether it depends on a specified asset, whether the Group obtains substantially all the economic benefits from the use of that asset, and whether the Group has the right to direct the use of the asset. Lease term The lease term comprises the non-cancellable period of the lease contract for which the Group has the right to use an underlying asset together with: – – periods covered by an option to extend the lease if the Group is reasonably certain to exercise that option; and periods covered by an option to terminate the lease if the Group is reasonably certain not to exercise that option. Recognition The Group recognises a right-of-use asset and a lease liability at the commencement date of the contract for all leases except for short term leases of 12 months or less or leases where the underlying asset is of low value i.e. the value of the underlying asset, when new, is less than € 5,000/£ 5,000. The commencement date is the date on which a lessor makes an underlying asset available for use by the Group. Initial measurement of right-of-use asset The right-of-use asset is initially measured at cost, which comprises the amount of the initial measurement of the lease liability, any lease payments made at or before the commencement date, less any lease incentives, any initial direct costs incurred by the Group and an estimate of costs to be incurred by the Group in dismantling and removing the underlying asset or restoring the site on which the asset is located. The Group provides for dilapidations/restoration costs where it has been identified or planned that it intends on exiting the premises, and/or where it has completed extensive modifications. The Group recognises asset restoration obligations mainly in relation to leased head office locations and branches and any other space which would need to be restored to their previous condition when the lease ends. Subsequent measurement of right-of-use asset After the commencement date, a right-of-use asset is measured at cost less any accumulated depreciation and any accumulated impairment losses and adjusted for any remeasurement of the lease liability. The Group applies IAS 36 Impairment of Assets as set out in the Group’s accounting policy (x) ‘Impairment of property, plant and equipment, goodwill and intangible assets’ to determine whether the right-of-use asset is impaired and to account for any impairment loss identified. The Group depreciates the right-of-use asset from the commencement date to the earlier of the end of the useful life of the right-of-use asset and the end of the lease term on a straight-line basis. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 249 1 Accounting policies (continued) (n) Leases (continued) Initial measurement of lease liability The lease liability is initially measured at the present value of the lease payments that are payable over the lease term, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. The Group uses its incremental borrowing rate as the discount rate. The lease payments include fixed payments (including in-substance fixed payments), variable lease payments that depend on an index or a rate and amounts expected to be payable by the Group under a residual value guarantee. The lease payments also include the exercise price of a purchase option if the Group is reasonably certain to exercise, lease payments in an optional renewal period if the Group is reasonably certain to exercise an extension option and payments of penalties for terminating the lease, if the lease term reflects the Group exercising an option to terminate the lease. Lease payments exclude variable elements which are dependent on external factors, e.g. payments that are based on transaction volume/ usage. Variable lease payments that are not included in the initial measurement of the lease liability are recognised directly in the income statement in the period in which the event or condition that triggers these payments occurs. Subsequent measurement of lease liability After the commencement date, the Group measures the lease liability by increasing the carrying amount to reflect interest on the lease liability, reducing the carrying amount to reflect lease payments made and remeasuring the carrying amount to reflect any reassessment or lease modifications. The lease liability is measured at amortised cost using the effective interest rate method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to Nil. Lease modifications Lease modifications arise from changes to the underlying contract between the Group and the lessor. The accounting for the modification is dependent on whether the modification is considered a separate lease or not. A lease modification is accounted for as a separate lease if both the modification increases the scope of the lease by adding the right to use one or more underlying assets and the consideration for the lease increases by an amount commensurate with the standalone price for the increase in scope. If both criteria are met, the Group adopts the accounting policy on the initial recognition and measurement of lease liabilities and right-of-use assets. If a lease modification fails the test above or the modification is of any other type (e.g. a decrease in scope from the original contract), the Group must allocate the consideration in the modified contract to the lease components, determine the lease term of the modified lease and remeasure the lease liability by discounting the revised lease payments using a revised discount rate. Sublease accounting Where the Group sub-leases an asset (intermediate lessor) which it has leased from another lessor (the ‘head lessor’ who ultimately owns the asset from a legal perspective), the Group assesses whether the sub-lease is a finance or operating lease by reference to the right-of- use asset being leased, not the actual underlying asset. 250 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 1 Accounting policies (continued) (o) Determination of fair value of financial instruments The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Group has access at that date. The Group considers the impact of non-performance risk when valuing its financial liabilities. Financial instruments are initially recognised at fair value and, with the exception of financial assets at fair value through profit or loss, the initial carrying amount is adjusted for direct and incremental transaction costs. In the normal course of business, the fair value on initial recognition is the transaction price (fair value of consideration given or received). If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is determined by a quoted price in an active market for the same financial instrument, or by a valuation technique which uses only observable market inputs, the difference between the fair value at initial recognition and the transaction price is recognised as a gain or loss. If the fair value is calculated by a valuation technique that features significant market inputs that are not observable, the difference between the fair value at initial recognition and the transaction price is deferred. Subsequently, the difference is recognised in the income statement on an appropriate basis over the life of the financial instrument, but no later than when the valuation is supported by wholly observable inputs; the transaction matures; or is closed out. Subsequent to initial recognition, the methods used to determine the fair value of financial instruments include quoted prices in active markets where those prices are considered to represent actual and regularly occurring market transactions. Where quoted prices are not available or are unreliable because of market inactivity, fair values are determined using valuation techniques. 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. 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. 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. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 251 1 Accounting policies (continued) (o) Determination of fair value of financial instruments (continued) All adjustments in the calculation of the present value of future cash flows are based on factors market participants would take into account in pricing the financial instrument. Certain financial instruments (both assets and liabilities) may be valued on the basis of valuation techniques that feature one or more significant market inputs that are not observable. When applying a valuation technique with unobservable data, estimates are made to reflect uncertainties in fair values resulting from a lack of market data, for example, as a result of illiquidity in the market. For these instruments, the fair value measurement is less reliable. Inputs into valuations based on non-observable data are inherently uncertain because there is little or no current market data available from which to determine the price at which an orderly transaction between market participants would occur under current market conditions. However, in most cases there is some market data available on which to base a determination of fair value, for example historical data, and the fair values of most financial instruments will be based on some market observable inputs even where the non-observable inputs are significant. All unobservable inputs used in valuation techniques reflect the assumptions market participants would use when fair valuing the financial instrument. The Group tests the outputs of the valuation model to ensure that it reflects current market conditions. The calculation of fair value for any financial instrument may require adjustment of the quoted price or the valuation technique output to reflect the cost of credit risk and the liquidity of the market, if market participants would include one, where these are not embedded in underlying valuation techniques or prices used. The choice of contributors, the quality of market data used for pricing and the valuation techniques used are all subject to internal review and approval procedures. Transfers between levels of the fair value hierarchy The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change occurred. (p) Sale and repurchase agreements (including securities 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 rate 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. (q) Derivatives and hedge accounting Derivatives, such as interest rate swaps, options and forward rate agreements, futures, currency swaps and options, and equity index options are used for trading purposes whereas 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. 252 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 1 Accounting policies (continued) (q) Derivatives and hedge accounting (continued) Derivatives (continued) 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. Hedging The Group has opted to remain with the IAS 39 Financial Instruments: Recognition and Measurement 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 Financial Instruments. 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, 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. The Group applies the IBOR reform Phase 1 reliefs to hedging relationships directly affected by IBOR reform during the period before the replacement of an existing interest rate benchmark with an alternative risk-free rate (RFR). A hedging relationship is affected if IBOR reform gives rise to uncertainties about the timing and/or amount of benchmark-based cash flows of the hedged item or the hedging instrument. The reliefs require that for the purpose of determining whether a forecast transaction is highly probable, it is assumed that the IBOR on which the hedged cash flows are based is not altered as a result of IBOR reform. IBOR reform Phase 1 requires that for hedging relationships affected by IBOR reform, the Group must assume that for the purpose of assessing expected future hedge effectiveness, the interest rate is not altered as a result of IBOR reform. Also, the Group is not required to discontinue the hedging relationship if the results of the assessment of retrospective hedge effectiveness fall outside the range of 80% to 125%, although any hedge ineffectiveness must be recognised in profit or loss, as normal. The reliefs cease to apply once certain conditions are met. These include when the uncertainty arising from IBOR reform is no longer present with respect to the timing and amount of the benchmark-based cash flows of the hedged item, if the hedging relationship is discontinued or once amounts in the cash flow hedge reserve have been released. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 253 1 Accounting policies (continued) (q) Derivatives and hedge accounting (continued) Fair value hedge accounting Changes in fair value of derivatives that qualify and are designated as fair value hedges are recorded in the income statement, together with changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the fair value hedging adjustment cumulatively made to the carrying value of the hedged item is, for items carried at amortised cost, amortised over the period to maturity of the previously designated hedge relationship using the effective interest rate method. For debt securities measured at FVOCI, the fair value adjustment for hedged items is recognised in the income statement using the effective interest rate method. If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised immediately in the income statement. Cash flow hedge accounting The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is initially recognised directly in other comprehensive income and included in the cash flow hedging reserve in the statement of changes in equity. The amount recognised in other comprehensive income is reclassed to profit or loss as a reclassification adjustment in the same period as the hedged cash flows affect profit or loss, and in the same line item in the statement of comprehensive income. Any ineffective portion of the gain or loss on the hedging instrument is recognised in the income statement immediately. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss recognised in other comprehensive income from the time when the hedge was effective remains in equity and is reclassified to the income statement as a reclassification adjustment as the forecast transaction affects profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was recognised in other comprehensive income from the period when the hedge was effective is reclassified to the income statement. Net investment hedge Hedges of net investments in foreign operations, including monetary items that are accounted for as part of the net investment, are accounted for similarly to cash flow hedges. The effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income and the ineffective portion is recognised immediately in the income statement. The cumulative gain or loss previously recognised in other comprehensive income is recognised in the income statement on the disposal or partial disposal of the foreign operation. Hedges of net investments may include non-derivative liabilities as well as derivative financial instruments. Derivatives that do not qualify for hedge accounting Certain derivative contracts entered into as economic hedges do not qualify for hedge accounting. Changes in the fair value of these derivative instruments are recognised immediately in the income statement. (r) 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. 254 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 1 Accounting policies (continued) (r) Derecognition (continued) Financial assets (continued) 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. (s) 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 and accordingly, expected credit losses (“ECLs”) 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”). 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 255 1 Accounting policies (continued) (s) Impairment of financial assets (continued) 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 financial 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. 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 the income statement. 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 and a modification gain or loss is 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. 256 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 1 Accounting policies (continued) (s) Impairment of financial assets (continued) 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 that 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). 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. (t) 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 securities 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. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 257 1 Accounting policies (continued) (u) 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 that 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, Contingent Liabilities and Contingent Assets. (v) Property, plant and equipment Property, plant and equipment are stated at cost, or deemed cost, less accumulated depreciation and provisions for impairment, if any. Additions and subsequent expenditures are capitalised only to the extent that they enhance the future economic benefits expected to be derived from the asset. No depreciation is provided on freehold land. Property, plant and equipment are depreciated on a straight line basis over their estimated useful economic lives. Depreciation is calculated based on the gross carrying amount, less the estimated residual value at the end of the assets’ economic lives. The Group uses the following useful lives when calculating depreciation: Freehold buildings and long-leasehold property 50 years Short leasehold property life of lease, up to 50 years Costs of adaptation of freehold and leasehold property Branch properties Office properties Computers and similar equipment Fixtures and fittings and other equipment up to 10 years(1) up to 15 years(1) 3 – 7 years 5 – 10 years The Group depreciates right-of-use assets arising under lease obligations from the commencement date of a lease to the earlier of the end of the useful life of the right-of-use asset and the end of the lease term on a straight-line basis. 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. 258 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 1 Accounting policies (continued) (w) 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 9 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. Acquired intangible assets Customer related intangible assets and brands acquired in a business combination are recognised at fair value at acquisition date. Customer related intangible assets and brands have a finite useful life and are carried at cost less accumulated amortisation and provision for impairment, if any. Amortisation is calculated using the straight line basis to allocate the cost over their estimated useful life (6 years). (x) 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, goodwill 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 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, goodwill 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. (y) 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. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 259 1 Accounting policies (continued) (z) 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 rate method. Changes in the present value of the liability as a result of movements in interest rates are included in other income. These are reported within Provisions for liabilities and commitments in the statement of financial position. 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. (aa) 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 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. 260 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 1 Accounting policies (continued) (aa) Equity (continued) Dividends and distributions Dividends on ordinary shares are recognised in equity in the period in which they are approved by the Company’s shareholders, or in the case of the interim dividend when 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 55. Other equity interests Other equity interests include – Additional Tier 1 Perpetual Contingent Temporary Write-down Securities (“AT1s”) (note 40); and – 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. Distributions on the AT1s are recognised in equity when approved for payment by the Board of Directors. Other capital reserves Other capital reserves represent transfers from retained earnings in accordance with relevant legislation. Capital contributions Capital contributions represent the receipt of non-refundable considerations arising from transactions with the Irish Government (note 51). 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 in the statement of financial position arose during 2011 from (a) EBS transaction and (b) 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. Non-refundable receipts of € 6,054 million from the Irish Government and the NPRFC are distributable. These are included in revenue reserves. 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 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. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 261 1 Accounting policies (continued) (aa) Equity (continued) 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. 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 The merger reserve arose following the Scheme of Arrangement approved by the Irish High Court in December 2017 where a new company, AIB Group plc (‘the Company’), was introduced as the holding company of AIB Group (note 42). In the consolidated financial statements of AIB Group plc, 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. In AIB Group plc’s company financial statements, impairment losses which arise 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. Non-controlling interests Non-controlling interests comprise equity interests which relate to the interests of outside shareholders in consolidated subsidiaries. They also include other equity instruments such as additional tier 1 securities issued by consolidated subsidiaries. (ab) 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. (ac) 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. The Executive Committee 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 revenue is based primarily on the location of the office recording the transaction. The geographic distribution of loans and related impairment is based on the country of risk. 262 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 1 Accounting policies (continued) (ad) Prospective accounting changes The following 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 will consider the impact of these amendments as the situation requires. The amendments which are most relevant to the Group are detailed below. Amendments to IAS 1 Classification of Liabilities as Current or Non-current In January 2020, the IASB issued amendments to paragraphs 69 to 76 of IAS 1 to specify the requirements for classifying liabilities as current or non-current. The amendments clarify: – what is meant by a right to defer settlement; – – – that a right to defer must exist at the end of the reporting period; that classification is unaffected by the likelihood that an entity will exercise its deferral right; and; that only if an embedded derivative in a convertible liability is itself an equity instrument would the terms of a liability not impact its classification. Effective date: Annual reporting periods beginning on or after 1 January 2023. Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting Policies The amendments to IAS 1 and IFRS Practice Statement 2 regarding disclosure of accounting policies which were issued in February 2021, amends IAS 1 in the following way: – Disclosure of material accounting policy information is now required instead of significant accounting policies. – Amendments have been included to clarify that accounting policy information may be material because of its nature, even if the related amounts are immaterial and if users of an entity’s financial statements would need it to understand other material information in the financial statements. Effective date: Annual reporting periods beginning on or after 1 January 2023. Amendments to IAS 8 Accounting policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates The amendments to IAS 8 regarding accounting policies, changes in accounting estimates and errors were issued in February 2021 to help entities to distinguish between accounting policies and accounting estimates. The changes relate entirely to accounting estimates and clarify the following: – The definition of a change in accounting estimates is replaced with a definition of accounting estimates. – Entities develop accounting estimates if accounting policies require items in financial statements to be measured in a way that involves measurement uncertainty. – A change in accounting estimate that results from new information or new developments is not the correction of an error. – A change in an accounting estimate may affect only the current period’s profit or loss, or the profit or loss of both the current period and future periods. Effective date: Annual reporting periods beginning on or after 1 January 2023. Amendments to IAS 12 Income Taxes: Deferred Tax related to Assets and Liabilities arising from a Single Transaction The amendments to IAS 12 regarding deferred taxes related to assets and liabilities arising from a single transaction which were issued in May 2021, require the following change: – an exemption from the initial recognition exemption provided in IAS 12.15(b) and IAS 12.24. Accordingly, the initial recognition exemption does not apply to transactions in which equal amounts of deductible and taxable temporary differences arise on initial recognition. Effective date: Annual reporting periods beginning on or after 1 January 2023. Other The IASB has published a number of minor amendments to IFRSs through standalone amendments. None of the other amendments are expected to have a significant impact on reported results or disclosures. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 263 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 judgements that are deemed critical to the Group’s results and financial position, in terms of the materiality of the items to which the judgements are applied and the estimates that have a significant risk of material adjustment in the next year are also discussed. Significant judgements The significant judgements made by the Group in applying its accounting policies are set out below. The application of certain of these judgements also necessarily involves estimations which are discussed separately. – Deferred taxation; – Impairment of financial assets; – Retirement benefit obligations; and – Provisions for liabilities and commitments. Deferred taxation The Group’s accounting policy for deferred tax is set out in accounting policy (k) in note 1. Details of the Group’s deferred tax assets and liabilities are set out in note 30. A key judgement in relation to the recoverability of deferred tax assets is that it is probable that there will be sufficient future taxable profits against which the losses can be used: • The estimated utilisation period for such losses in Ireland is within the timeframe that taxable profits are considered more likely than not; and • 15 years is the period that taxable profits are considered more likely than not in the UK. 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 these deferred tax assets 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; the changing banking landscape in Ireland following the commitment by KBC and Ulster Bank to exit the Irish market and evidenced by the proposed acquisition of certain Ulster Bank loans by the Group; the recent inorganic activity of the Group including the recently completed acquisition of Goodbody; the turnaround evident in the financial performance over the years 2014–2019 and 2021 including the growth in the Irish economy in this period; – external forecasts for Ireland and the UK which indicate a return to economic growth through the period of the medium-term financial plans; – 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 the 2009 to 2013 prior years. 264 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 2 Critical accounting judgements and estimates (continued) Deferred taxation (continued) The Board considered negative evidence and the inherent uncertainties in any long term financial assumptions and projections, including: – the enduring impact of COVID-19 in 2020 and 2021 with its severe impact on the economy and the resultant impairment charge taken in 2020 which resulted in a loss in that year; 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 potential longer term residual impacts of COVID-19 and post-Brexit EU/UK trade deal on the Irish economy; potential instability in the eurozone and global economies over an extended period; and taxation changes (including Organisation for Economic Co-operation and Development (“OECD”) tax reform, 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. – – – – – – Profitability and growth were reassessed in the annual planning exercise covering the period 2022 to 2024 undertaken by the Group in the second half of 2021. Growth assumptions and profitability levels underpinning the plan have been revised upwards compared to previous years reflecting the revised macroeconomic outlook, however, these are within current market norms. Taking account of all relevant factors, and in the absence of any expiry date for tax losses in Ireland, the Group further believes that it is more likely than not that there will be future profits in the medium term, and beyond, in the relevant Irish Group companies against which to use the tax losses. In this regard, the Group has carried out an exercise to determine the likely number of years required to utilise the deferred tax asset under the following scenario. Using the Group’s financial plan 2022 to 2024 as a base and a profit growth rate of 2% from 2025, it was assessed that it will take in excess of 20 years for the deferred tax asset (€ 2.8 billion) to be utilised. Furthermore, under this scenario, it is expected that c. 92% will be utilised within 20 years (2020: c. 72%) and c. 64% utilised within 15 years (2020: c. 50%). If the growth rate assumption was decreased by 1%, then the utilisation period increases by a further c. 2 years. The Group’s analysis of this and other scenarios examined would not alter the basis of recognition or the current carrying value. In 2020, the Group reported that it expected that it would take in excess of 25 years for the deferred tax asset to be utilised. Given the relative size of the Group’s operations in the UK compared to the role that the Irish operations play in supporting a functioning banking environment, a different judgement has been applied to the period that taxable profits are considered more likely than not in the UK. Despite 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. 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 € 2,840 million (2020: € 2,763) of which € 2,645 million (2020: € 2,675 million) relates to Irish tax losses and € 195 million (2020: € 88 million) relates to UK tax losses. IAS 12 Income Tax 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. Impairment of financial assets The Group’s accounting policy for impairment of financial assets is set out in accounting policy (s) in note 1. Details of the Group’s expected credit loss (“ECL”) allowance are set out in note 23. The calculation of the ECL allowance is complex and requires the use of a number of accounting judgements. The most significant judgements applied by the Group in determining the ECL allowance are as follows: – Determining the criteria for a significant increase in credit risk and for being classified as credit impaired; – Applying the definition of default policy for classifying financial assets as credit impaired; – Choosing the appropriate models for measuring ECL; and – Determining an appropriate methodology for post-model adjustments. The significant management judgements and the governance process, relating to ECL, are set out on page 100 and 101 in the Risk Management section. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 265 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 most significant judgement, applied by the Group, is that a constructive obligation has not been created, notwithstanding certain decisions by the Group in the past, following an annual process, to fund discretionary increases in pensions in payment. 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 2017, the Board implemented this process which has continued to date. Under this process, the Group decided in February 2021 and February 2022 that the funding of discretionary increases was not appropriate in either year in relation to the Irish scheme. This process does not reflect the ability of the Trustee to grant increases at any point in the future when the financial position of the scheme would enable such an increase at that point in time. A discussion on the assumption of the Trustee’s ability to grant increases at any point in the future is set out in the section below on critical accounting estimates. Provisions for liabilities and commitments The Group’s accounting policy for provisions for liabilities and commitments is set out in accounting policy (z) ‘Non-credit risk provisions’ in note 1. Details of the Group’s provision for liabilities and commitments are shown in note 37. Significant management judgement is required to determine whether the Group has a present obligation as a result of a past event and whether it is probable an outflow of resources will be required to settle the obligation. 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. Judgement is required in determining whether the Group has a present obligation and whether it is probable that an outflow of economic benefits will be required to settle this obligation. This judgement is applied to information available at the time of determining the provision including, but not limited to, judgements around interpretations of legislation, regulations and case law depending on the nature of the provision. Critical accounting estimates The accounting estimates with a significant risk of material adjustment to the carrying amounts of assets and liabilities within the next financial year were in relation to: – Deferred taxation; – Impairment of financial assets; – Retirement benefit obligations; – Provisions for liabilities and commitments; – Determination of fair value of financial instruments; and – Investment in subsidiary in the separate financial statements. Deferred taxation The Group’s accounting policy for deferred tax is set out in accounting policy (k) in note 1. Details of the Group’s deferred tax assets and liabilities are set out in note 30. The most significant source of estimation uncertainty in relation to deferred tax is the forecast profit that is used to determine the Group’s UK deferred tax asset, which is based on the Group’s annual plan. The deferred tax asset for unutilised tax losses in the UK amounts to £ 164 million at 31 December 2021 (31 December 2020: £ 79 million). On an annual basis profitability and growth are reassessed in the annual planning exercise undertaken by the Group. Growth assumptions and profitability levels underpinning the plan are reassessed and reflect the revised macroeconomic outlook and the current market as well as revised business strategies. Recognising the current uncertainties in longer term profitability forecasting and, given the early stage of implementation of the new AIB UK strategy at 31 December 2021, minimal growth has been forecast beyond 2023. The forecast expected profits for the 15 year period have increased compared to expected profits in 2020 reflecting the benefits of the revised UK strategy together with the impact of a higher rate environment. Separately, legislation has been enacted to increase the UK Corporation Tax rate from 19% to 25% from 1 April 2023. This change has resulted in an increase of the Group’s UK deferred tax asset from unutilised losses by £ 22 million. Forecast profits are subject to uncertainty with a range of possibilities. Subsequent forecasts of profits in future years may be higher or lower which could result in a significant risk of adjustment to the carrying amounts of deferred tax assets, within the next financial year. 266 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 2 Critical accounting judgements and estimates (continued) Impairment of financial assets The Group’s accounting policy for impairment of financial assets is set out in accounting policy (s) in note 1. Details of the Group’s expected credit loss (“ECL”) allowance are set out in note 23. The calculation of the ECL allowance is complex and therefore an entity must consider large amounts of information in their determination. This process requires significant use of estimates and assumptions, some of which by their nature, are highly subjective and very sensitive to risk factors such as changes to economic conditions. Changes in the ECL allowance can materially affect net income. ECL allowance for Loans and advances to customers at 31 December 2021 amounted to € 1,885 million (2020: € 2,510 million). The ECL for financial assets represents management’s best estimate of the expected credit losses on the various portfolios at the respective reporting dates. The key estimates and assumptions that the Directors have used in determining the ECL allowance are as follows: – Discounted cash-flows (“DCFs”) for certain Stage 3 credit impaired obligors; – Establishing the number and relative weightings for forward looking scenarios; – The assumptions for measuring ECL (e.g. PD, LGD and EAD and the parameters to be included within the models); and – The estimation of post model adjustments where required. Certain of these estimates may have a significant risk of material adjustment to carrying amounts of assets within the next financial year. 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 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 macroeconomic variables used in models to calculate ECL allowance are based on assumptions, forecasts and estimates against a backdrop of the COVID-19 pandemic and the economic landscape which are continuously evolving. Accordingly, developments with regard to the pandemic and changes in local and international factors could have a material bearing on the ECL allowance within the next financial year. The Group’s sensitivity to a range of macroeconomic factors under (i) base forecast; (ii) upside; and (iii) downside scenarios is set out on page 99 of the Risk Management section of this report. The Group has developed a standard approach for the measurement of ECL for the majority of the Group’s exposures where each ECL input parameter (e.g. PD, LGD and EAD) is developed in line with standard modelling methodology. These are discussed further on page 91 and 92 of the Risk Management section. In addition, 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 may consider it appropriate for an adjustment to ECL. These are referred to as post model adjustments and are set out in detail on page 100. On an ongoing basis, the various 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. The management process for the calculation of ECL allowance is underpinned by second-line levels of review. The ECL allowance is, 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 101. Retirement benefit obligations The Group’s accounting policy for retirement benefit obligations is set out in accounting policy (j) in note 1. Details of the Group’s retirement benefit obligations are set out in note 31. The key estimates and assumptions that the Directors have used in determining the retirement benefit obligation are as follows: – In a situation where the Group believes the Trustee has the ability to grant discretionary increases without any funding being provided by the Group, the Group has assumed that the Trustee will grant increases and as a result the scheme’s liabilities include an estimate for this matter; and – The significant actuarial assumptions used to determine the present value of the retirement benefit obligation. During the second half of 2020 the Trustee of the Irish scheme awarded an increase of 1.1% in respect of pensions eligible for discretionary pension increases backdated to 1 April 2020 notwithstanding the decision by the Group not to fund increases in pensions in payment. This reflected the ability of the Trustee to grant an increase when the financial position of the scheme would enable such an increase at that point in time. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 267 2 Critical accounting judgements and estimates (continued) Retirement benefit obligations (continued) Taking this decision by the Trustee into consideration, the long term assumption for future increases in pension in payment should now reflect an assessment of the Trustee’s ability to grant further increases without any funding from the Group. At 31 December 2021, this has been assessed as an assumed rate of pension increase of 0.65% per annum (2020: 0.2%) and has increased Scheme’s liabilities as at that date by € 350 million (2020: € 100 million). The actuarial valuation of the schemes’ liabilities is dependent upon a number of financial and demographic assumptions which are inherently uncertain. Changes to those assumptions could materially impact the reported amount for schemes’ liabilities and the actuarial gains/losses reported in equity. Details of the assumptions adopted by the Group in calculating the schemes’ liabilities are set out in note 31 to the financial statements. A sensitivity analysis for the principal assumptions used to measure the schemes’ liabilities is set out in note 31 to the financial statements. Provisions for liabilities and commitments The Group’s accounting policy for provisions for liabilities and commitments is set out in accounting policy (z) in note 1. Details of the Group’s provision for liabilities and commitments are shown in note 37. The most significant source of estimation uncertainty, in relation to provisions, is the assumptions that the Group makes about future events affecting different classes of provisions including the future outcome of litigation and regulatory proceedings as well as the outcome of restitution activities. 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. 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. The estimated potential losses will change over time and the actual losses may vary significantly. The overall provision amounting to € 501 million comprised: € 79 million in respect of the FSPO decision relating to tracker mortgage customers; € 70 million in respect of CBI penalties; € 75 million in respect of the anticipated cost of redress and other related costs that may be payable in relation to the review of the sale of Belfry funds during the period 2002 to 2006 and a number of separate provisions, the majority of which are not individually significant and do not have a significant risk of a material adjustment in the next financial year. The Group has not disclosed a range of outcomes for such provisions given their diverse nature and the number of provisions involved. Note 37 sets out the background and the current position as regards the FSPO decision regarding a tracker complaint and the level of provisions that were set aside. Notwithstanding the near completion of payments to customers based on the FSPO decision, the level of provision required for other costs, including tax liabilities arising that the Group will be required to discharge on behalf of impacted customers, has been assessed at € 79 million. These issues are subject to uncertainty with a range of outcomes possible with the final outcome being higher or lower depending on finalisation of such issues. As detailed in notes 37 and 44, 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 this regard, the Group has created a provision of € 70 million for the impact of monetary penalties that are expected to be imposed on the Group by the CBI being its best estimate based on external developments in the industry. This matter is progressing and the amount provided for is subject to uncertainty with a range of outcomes possible, with the final outcome being higher or lower depending on finalisation of all matters associated with the investigation. Accordingly, this is a critical accounting estimate which could result in a material adjustment in the next financial year but it is not practicable to quantify a range of outcomes. Note 37 sets out the background on the Group’s sale of a series of investment property funds, known as Belfry, to c. 2,500 individual investors (c. £ 214 million invested) during the period 2002 to 2006. The Group instigated a programme, which is ongoing, to review all investments in the Belfry funds on a case by case basis and to determine if redress may be due in certain instances. The Group has recorded a provision of € 75 million for the anticipated cost of redress and other related costs that may be payable under this programme. While the programme principles and its approach are established, the redress strategy is currently being defined. As a result the anticipated cost of redress is subject to uncertainty, with a range of possible outcomes, with the final outcome being higher or lower depending on finalisation of such matters. Other than the above, there is no individually significant provision where there is a significant risk of a material adjustment in the next financial year. 268 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 2 Critical accounting judgements and estimates (continued) 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 (o) in note 1. Details of the fair value of financial instruments are shown in note 48. The best evidence of fair value is quoted prices in an active market but in the absence of quoted prices increased reliance is placed on valuation techniques. The key estimates and assumptions that the Directors have used, in determining the fair value of the financial instruments, are as follows: – The estimation of expected cash flows for the instruments; – The assumption of an appropriate risk free rate; and – The assumption of an appropriate credit spread. Valuation techniques that rely to a greater extent on non-observable data than those based wholly on observable data require a higher level of subjective management judgement relating to the applicability and functionality of internal valuation models, the significance of inputs to the valuation of an instrument and the degree of illiquidity in certain markets to calculate a fair value. Financial instruments which are classified under the fair value hierarchy as level 3 require a higher level of management judgement in their valuation. 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 particular in the case of derivatives, the income statement. A sensitivity analysis to possible changes in key variables of the fair value of financial instruments classified under the fair value hierarchy as level 3 is set out in note 48. Investment in subsidiary in the separate financial statements The Group’s accounting policy for the impairment of investments in subsidiaries is set out in accounting policy (d) in note 1 of the Group financial statements. Details of the Company’s investment in subsidiary are shown in note e to the Company’s financial statements. The key estimates and assumptions that the Directors have used, in assessing the VIU of its investment in subsidiary, are as follows: – The estimation of expected cash flows based on the financial plan for 2022–2024; – The assumption of an appropriate growth rate; and – The estimation of an appropriate discount rate including the assumption of an appropriate risk free rate and the assumption of an appropriate credit spread. The investment in subsidiary in the separate financial statements of the Company are reviewed for impairment when there are indications that impairment losses may have occurred. If any such indications exist, the Company undertakes an impairment review by comparing the carrying value of the investment in the subsidiary with its estimated recoverable amount with any shortfall being reported as an impairment charge in the Company’s financial statements. The estimated recoverable amount is based on value-in-use (VIU) calculations. The Company tested its investment in Allied Irish Banks, p.l.c. for impairment at 31 December 2021 as the carrying value was below the market capitalisation of the Group. In determining the VIU, the estimated pre-tax cash flow projections in the Company’s financial plan for the period 2022 to 2024 were used as a base and a growth rate of 2% from 2024 was assumed into perpetuity. These projections were discounted at a risk adjusted interest rate of 10%. The VIU was calculated at € 9,069 million which resulted in a reversal of an earlier impairment of € 2,707 million. Given the uncertainties and the high level of subjectivity involved in the estimation process, it is possible that the outcomes in the next financial year could differ from the expectations on which Company’s estimates are based resulting in the recognition and measurement of material different amounts from those estimated in these financial statements. Details of the VIU calculation and the sensitivity of current estimates to possible changes in key variables are set out in note e to the Company’s financial statements. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 269 3 Segmental information Segment overview The Group’s performance is managed and reported across the Retail Banking, AIB Capital Markets (“Capital Markets”) (previously Corporate, Institutional & Business Banking), AIB UK and Group segments. Segment performance excludes exceptional items. Retail Banking Retail Banking comprises Homes & Consumer, SME and Financial Solutions Group (“FSG”) in a single integrated segment, focused on meeting the current, emerging and future needs of our personal and SME customers. • Homes & Consumer is responsible for meeting the homes needs of customers in Ireland across the AIB, EBS and Haven brands and delivering innovative and differentiated products, propositions and services to meet our customers’ everyday banking needs through an extensive range of physical and digital channels. Our purpose is to achieve a seamless, transparent and simple customer experience in all of our propositions across current accounts, personal lending, payments and credit cards, deposits, insurance and wealth to maintain and grow our market leading position. • SME provides financial services to micro and small SMEs through our sector-led strategy and local expertise with an extensive product and proposition offering across a number of channels. Our purpose is to help our customers create and build sustainable businesses in their communities. • FSG is a dedicated workout unit to which the Group has migrated the management of the majority of its non-performing exposures (“NPEs”), with the objective of delivering the Group’s strategy to reduce NPEs. Capital Markets Capital Markets provides institutional, corporate and business banking services to the Group’s larger customers and customers requiring specific sector or product expertise. Capital Markets’ relationship driven model serves customers through sector specialist teams including: corporate banking, real estate finance, business banking and energy, climate action & infrastructure. In addition to traditional credit products, Capital Markets offers 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 advisory services, as well as Private Banking services and advice. Capital Markets also has syndicated and international finance teams based in Dublin and in New York. In 2021 Goodbody became part of Capital Markets, bringing additional capability in wealth management, corporate finance and wider capital markets propositions. AIB UK AIB UK offers corporate, retail and business banking services in two distinct markets, a sector-led corporate and commercial bank supporting businesses in Great Britain (“Allied Irish Bank (GB)”), and a retail and business bank in Northern Ireland (“AIB NI”). The Group’s revised strategy (Strategy 2023) identified changes to the AIB UK business model including the withdrawal from SME lending in Great Britain to refocus on corporate business, particularly in renewables, infrastructure, health and manufacturing and a reduction in branch footprint in Northern Ireland. Group Group comprises wholesale treasury activities and Group control and support functions. Treasury manages the Group’s liquidity and funding positions and provides customer treasury services and economic research. The Group control and support functions include Technology, Operations, Finance, Risk, Legal, Corporate Governance & Customer Care, Human Resources, Corporate Affairs, Strategy & Sustainability and Group Internal Audit. Segment allocations The segments’ performance statements include all income and directly related costs, excluding overheads which are managed centrally, the costs of which are included in the Group segment. Funding and liquidity income/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. 2021 Total € m 1,794 480 105 585 2,379 270 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 3 Segmental information (continued) Retail Banking Capital Markets AIB UK Group Total € m € m € m € m € m Excep- tional items(1) € m Operations by business segment Net interest income Net fee and commission income* Other Other income Total operating income Other operating expenses Of which: Personnel expenses General and administrative expenses Depreciation, impairment and amortisation Bank levies and regulatory fees Total operating expenses Operating profit/(loss) before impairment losses Net credit impairment writeback Operating profit/(loss) Share of equity accounted investments Loss on disposal of property Profit/(loss) before taxation 1,024 333 34 367 1,391 (911) (397) (326) (188) (2) (913) 478 86 564 16 – 580 460 106 31 137 597 (154) (107) (36) (11) (1) (155) 442 137 579 1 – 216 45 8 53 269 (163) (88) (53) (22) (1) (164) 105 15 120 4 – 94 (4) 37 33 1,794 480 110 590 127 2,384 – – (5)(4)(6) (5) (5) (306) (146) (97) (63) (158) (464) (337) – (337) – – (1,534) (310) (1,844) (738) (512) (284) (58)(2)-(4) (209)(3)-(6) (43)(4)(6) (796) (721) (327) (162) – (1,696) (310) (162) (2,006) 688 238 926 21 – 947 (315) – (315) – (3)(4) (318) 373 238 611 21 (3) 629 580 124 (337) (1) Exceptional items are shown separately above. These are items that Management view as distorting comparability of performance year-on-year. Exceptional items include: (2)Termination benefits; (3)Restitution costs; (4)Restructuring costs; (5)Inorganic transaction costs; and (6)Other. For further information on these items see page 62. *Analysis of net fee and commission income Customer accounts Card income Foreign exchange fees Credit related fees Specialised payment services fees Other fees and commissions Fee and commission income Specialised payment services expenses Card expenses Other fee and commission expenses Fee and commission expense Retail Banking € m Capital Markets € m AIB UK Group € m € m 160 93 38 9 133 50 483 (118) (28) (4) (150) 333 15 7 25 27 – 35 109 – (1) (2) (3) 106 15 11 8 14 – 1 49 – (4) – (4) 45 18 – (4) – – (15)(1) (1) – – (3) (3) (4) 2021 Total € m 208 111 67 50 133 71 640 (118) (33) (9) (160) 480 (1) Reflects the allocation of the Group’s segment fee and commission income to Retail Banking and Capital Markets segments. Further information on ‘Net fee and commission income’ is set out in note 7. AIB Group plc Annual Financial Report 2021 Financial Statements 271 1 2 3 4 5 6 2020 Total € m 1,872 395 106 501 2,373 3 Segmental information (continued) Retail Banking Capital Markets AIB UK Group Total € m € m € m € m € m Excep- tional items(1) € m Operations by business segment Net interest income Net fee and commission income* Other Other income Total operating income Other operating expenses Of which: Personnel expenses General and administrative expenses Depreciation, impairment and amortisation Bank levies and regulatory fees Total operating expenses Operating profit/(loss) before impairment losses Net credit impairment charge Operating profit/(loss) Share of equity accounted investments Profit/(loss) before taxation 1,115 291 43 334 1,449 (908) (404) (320) (184) (2) (910) 539 (485) 54 12 66 439 66 55 121 560 214 43 5 48 262 104 1,872 (5) 1 (4) 395 104 499 100 2,371 – – 2(2)(7) 2 2 (132) (164) (323) (1,527) (217) (1,744) (93) (28) (11) – (132) 428 (767) (339) – (339) (90) (51) (23) (1) (165) 97 (208) (111) 3 (108) (147) (115) (61) (734) (514) (279) (42)(3)-(5) (139)(4)-(7) (36)(5)(8) (112) (435) (115) – (1,642) (217) (335) 729 – (1,460) (215) – (335) – (335) (731) (215) 15 – (716) (215) (776) (653) (315) (115) (1,859) 514 (1,460) (946) 15 (931) (1) Exceptional items are shown separately above. These are items that Management view as distorting comparability of performance year-on-year. Exceptional items include: (2)Loss on disposal of loan portfolios; (3)Termination benefits; (4)Restitution costs; (5)Restructuring costs; (6)Covid product costs; (7)Other; and (8)Impairment of intangibles. For further information on these items see page 62. *Analysis of net fee and commission income Customer accounts Card income Foreign exchange fees Credit related fees Specialised payment services fees Other fees and commissions Fee and commission income Specialised payment services expenses Card expenses Other fee and commission expenses Fee and commission expense Retail Banking € m Capital Markets € m 132 83 32 10 146 48 451 (131) (25) (4) (160) 291 14 7 20 17 – 10 68 – (2) – (2) 66 AIB UK Group € m 16 9 9 13 – – 47 – (4) – (4) 43 € m 18 – (7) – – (13)(1) (2) – – (3) (3) (5) 2020 Total € m 180 99 54 40 146 45 564 (131) (31) (7) (169) 395 (1) Reflects the allocation of the Group’s segment fee and commission income to Retail Banking and Capital Markets segments. Further information on ‘Net fee and commission income’ is set out in note 7. 272 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 3 Segmental information (continued) Other amounts – statement of financial position 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 Geographic information(1)(2) Gross external revenue Inter-geographical segment revenue Total revenue Geographic information(1)(2) Gross external revenue Inter-geographical segment revenue Total revenue Retail Banking € m Capital Markets € m 31 December 2021 AIB UK Group Total € m € m € m 33,144 15,143 7,965 – 243 – 33,144 65,227 15,386 14,470 7,965 11,831 13 – 13 1,338 56,265 243 56,508 92,866 Retail Banking € m Capital Markets € m 31 December 2020 AIB UK Group Total € m € m € m 34,008 14,453 8,269 – 34,008 56,874 75 14,528 12,735 – 8,269 10,959 36 – 36 1,389 56,766 75 56,841 81,957 Ireland € m 2,197 (105) 2,092 Ireland € m 1,946 170 2,116 Year to 31 December 2021 United Kingdom € m Rest of the World € m 180 100 280 2 5 7 Total € m 2,379 – 2,379 Year to 31 December 2020 United Kingdom € m Rest of the World € m 406 (153) 253 21 (17) 4 Total € m 2,373 – 2,373 Revenue from external customers comprises interest and similar income (note 4) and interest and similar expense (note 5), and all other items of income (notes 6 to 11). Geographic Information Non-current assets(3) Geographic Information Non-current assets(3) Ireland € m 1,562 Ireland € m 1,587 31 December 2021 United Kingdom € m Rest of the World € m 62 3 Total € m 1,627 31 December 2020 United Kingdom € m 71 Rest of the World € m 4 Total € m 1,662 (1)The geographical distribution of total revenue is based primarily on the location of the office recording the transaction. (2)For details of significant geographic concentrations, see the Risk management section. (3)Non-current assets comprise intangible assets and goodwill and property, plant and equipment. AIB Group plc Annual Financial Report 2021 Financial Statements 273 4 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 securities financing at amortised cost Interest on investment securities Interest income on financial assets Deposits by central banks and banks at amortised cost Customer accounts at amortised cost Negative interest on financial liabilities Interest income calculated using the effective interest rate 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 2 3 4 5 6 2021 € m 1,765 7 3 70 1,845 103 55 158 2,003 74 7 81 2020 € m 1,888 12 – 116 2,016 7 27 34 2,050 75 2 77 2,084 2,127 The Group presents interest resulting from negative effective interest rates on financial liabilities as interest income rather than as offset against interest expense. Included in “negative interest on financial liabilities” is negative interest expense of € 102 million (2020: € 5 million), from the TLTRO programme. The accounting policy and related judgements made by the Group in relation to interest income recognition for TLTRO are set out in note 1 (f). Under the conditions of the TLTRO programme, interest rates can be as favourable as 50 basis points below the average interest rate on the ECB’s deposit facility. This applies to all TLTRO operations outstanding over the discrete periods from 24 June 2020 to 23 June 2021, and from 24 June 2021 to 23 June 2022, for banks that show growth in lending volumes equal to or above 0% between the special reference periods of 1 March 2020 to 31 March 2021 and 1 October 2020 to 31 December 2021 respectively. Interest income of c. € 36 million was initially based on an EIR of -0.5% (the Main Refinancing Operations rate minus 50 bps), as the Group assessed that it did not have a reasonable expectation that the relevant lending targets would be met. When it was subsequently determined that the Group had a reasonable expectation that the relevant lending targets would be met, the Group recognised additional interest income of € 66 million in the year (c. € 15 million for the special reference period from 1 March 2020 to 31 March 2021 and c. € 51 million for the special reference period from 1 October 2020 to 31 December 2021). Interest income includes a credit of € 161 million (2020: a credit of € 145 million) transferred from other comprehensive income in respect of cash flow hedges which is included in ‘Interest on loans and advances to customers’ at amortised cost. 5 Interest and similar expense Interest on deposits by central banks and banks Interest on customer accounts Interest on securities financing Interest on debt securities in issue Interest on lease liabilities Interest on subordinated liabilities and other capital instruments Interest expense on financial liabilities Cash and balances at central banks Loans and advances to banks Securities financing Investment securities Negative interest on financial assets Interest expense calculated using the effective interest rate method 2021 € m 1 53 – 54 12 41 161 115 3 6 5 129 290 2020 € m 3 82 1 67 13 45 211 36 3 1 4 44 255 The Group presents interest resulting from negative effective interest rates on financial assets as interest expense rather than as offset against interest income. Interest expense reported above, calculated using the effective interest rate method, relates to financial liabilities not carried at fair value through profit or loss. Interest expense includes a charge of € 19 million (2020: a charge of € 24 million) transferred from other comprehensive income in respect of cash flow hedges which is included in ‘Interest on customer accounts’. 274 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 6 Dividend income NAMA subordinated bonds at FVOCI Equity investments at FVTPL Total 7 Net fee and commission income Customer accounts(1) Card income(1) Foreign exchange fees Credit related fees Specialised payment services fees(2) Other fees and commissions(3) Fee and commission income Specialised payment services expenses(2) Card expenses(4) Other fee and commissions expenses Fee and commission expense 2021 € m – 3 3 2021 € m 208 111 67 50 133 71 640 (118) (33) (9) (160) 480 2020 € m 23 3 26 2020 € m 180 99 54 40 146 45 564 (131) (31) (7) (169) 395 (1) Customer accounts income amounting to € 180 million and card income of € 99 million were reported together as ‘Retail banking customer fees’ at 31 December 2020. For 31 December 2021, these items are reported separately to better represent the various fees included in each category. The comparatives have been reclassified accordingly. (2) Specialised payment services: fee income and fee expenses in respect of services and prepaid credits for cellular phone and utilities sold to third parties. (3) Other fees and commissions includes asset management and advisory fees € 6 million (2020: Nil), stockbroking client fees and commissions € 18 million (2020: Nil), wealth commissions € 23 million (2020: € 17 million), insurance commissions € 12 million (2020: € 14 million), and other commissions € 12 million (2020: € 14 million). (4) Card expenses includes credit card commissions of € 31 million (2020: € 28 million) and ATM expenses of € 2 million (2020: € 3 million). Fees and commissions which are an integral part of the effective interest rate are recognised as part of interest and similar income (note 4) or interest and similar expense (note 5). 8 Net trading income/(loss) Foreign exchange contracts Interest rate contracts and debt securities(1) Credit derivative contracts Equity investments, index contracts and warrants 2021 € m (16) 29 (3) 5 15 2020 € m (11) 7 (11) (17) (32) (1) Includes a gain of € 16 million (2020: loss of € 5 million) in relation to XVA adjustments. (XVA comprises counterparty valuation adjustments (“CVA”) and funding valuation adjustments (“FVA”)). The total hedging ineffectiveness on cash flow hedges reflected in the consolidated income statement amounted to Nil (2020: Nil). AIB Group plc Annual Financial Report 2021 Financial Statements 275 9 Net gain on other financial assets measured at FVTPL Loans and advances to customers(1) Investment securities – equity Total (1)Excludes interest income (note 4). 10 Net gain on derecognition of financial assets measured at amortised cost 2021 € m 20 58 78 2020 € m 41 45 86 1 2 3 4 5 6 Loans and advances to customers Loans and advances to customers Carrying value of derecognised financial assets measured at amortised cost € m 1,100 Carrying value of derecognised financial assets measured at amortised cost € m 464 2021 Gain from derecognition € m 1 2020 Gain from derecognition € m 24 Derecognition in 2021 arose from the sale of portfolios of non-performing loans, the sale of a portfolio of performing small and medium enterprise (“SME”) loans in AIB UK and the sale of individual loans (for credit management purposes) from a specific loan portfolio where credit deterioration had occurred. Derecognition in 2020 arose from the sale of individual loans from a specific loan portfolio. The loans were disposed of for credit management purposes after credit deterioration had occurred. 11 Other operating income Gain on disposal of investment securities at FVOCI – debt Loss on termination of hedging swaps(1) Miscellaneous operating income 2021 € m 18 (12) 2 8 2020 € m 17 (17) 2 2 (1) The majority of the loss on termination of hedging swaps relates to the disposal of debt securities at FVOCI. In addition, it includes a € 1 million charge (2020: € 1 million) transferred from other comprehensive income in respect of cash flow hedges. 276 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 12 Operating expenses Personnel expenses: Wages and salaries Termination benefits(1) Retirement benefits(2) Social security costs Other personnel expenses(3)(4) Less: staff costs capitalised(5) Personnel expenses General and administrative expenses Restitution and associated costs Bank levies and regulatory fees Operating expenses 2021 € m 597 51 91 67 15 821 (25) 796 548 173(6) 721 162(7) 2020 € m 593 31 92 65 20 801 (25) 776 536 117 653 115 1,679 1,544 (1) Includes charges for voluntary severance programmes of € 51 million (2020: € 31 million). This includes a charge of £ 10 million (2020: £ 19 million) for the anticipated cost of voluntary severance arising as part of the restructuring of the UK business. (2) Comprises a defined contribution charge of € 79 million (2020: a charge of € 78 million), a charge of € 3 million in relation to defined benefit expense (2020: a charge of € 5 million), and a long term disability payments/death in service benefit charge of € 9 million (2020: a charge of € 9 million). For details of retirement benefits, see note 31. (3)Share-based payment* charge of Nil (2020: Nil). (4)Other personnel expenses include staff training, recruitment and various other staff costs (5) Staff costs capitalised relate to intangible assets. (6) Relates primarily to the Belfry provisions (see note 37) and the associated costs related to the Tracker Mortgage Examination. (7) This includes a provision of € 31 million (of which € 25 million relates to prior periods) in relation to the annual fee to the Single Resolution Fund. For details of provisions, see note 37. The average number of employees for 2021 and 2020 is set out in note 52. * No shares have been awarded under the ‘AIB Approved Employees’ Profit Sharing Scheme 1998’ (‘the Scheme’) since 2008. (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. 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.) 13 Net credit impairment writeback/(charge) The following table analyses the income statement net credit impairment writeback/(charge) on financial instruments for the years to 31 December 2021 and 2020. Credit impairment writeback/(charge) on financial instruments Net remeasurement of ECL allowance Loans and advances to banks Loans and advances to customers Securities financing Loan commitments Financial guarantee contracts Investment securities – debt Credit impairment writeback/(charge) Recoveries of amounts previously written-off Net credit impairment writeback/(charge) Measured at amortised cost € m 2021 Total Measured at FVOCI € m € m Measured at amortised cost € m 2020 Total Measured at FVOCI € m € m – 158 (1) 2 4 – 163 75 238 – – – – – – – – – – 158 (1) 2 4 – 163 75 238 – (1,493) (35) (4) (1) (1,533) 72 (1,461) – – – – 1 1 – 1 – (1,493) (35) (4) – (1,532) 72 (1,460) 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 277 14 Auditor’s remuneration The disclosure of auditor’s remuneration is in accordance with Section 322 of the Companies Act 2014. This mandates disclosure of remuneration paid/payable to the Group Auditor only (Deloitte Ireland LLP) for services relating to the audit of the Group and relevant subsidiary financial statements in the categories set out below. Auditor’s remuneration (excluding VAT): Audit of Group financial statements Other assurance services Other non-audit services Taxation advisory services 2021 € m 2.7 0.8 0.1 – 3.6 2020 € m 2.8 0.6 0.9 – 4.3 All the above amounts were paid to the Group Auditor for services provided to the Group and its subsidiaries including Allied Irish Banks, p.l.c. Other assurance services include remuneration for additional assurance issued by the firm outside of the audit of the statutory financial statements of the Group and subsidiaries. This remuneration includes assignments where the Auditor, in Ireland, provides assurance to third parties. The Group policy on the provision of non-audit services to the parent and its subsidiary companies includes the prohibition on the provision of certain services and the pre-approval by the Board Audit Committee of the engagement of the Auditor for non-audit work. The Board Audit Committee has reviewed the level of non-audit services remuneration and is satisfied that it has not affected the independence of the Auditor. It is Group policy to subject all large consultancy assignments to competitive tender, where appropriate. The following table shows total remuneration paid to overseas auditors (excluding Deloitte Ireland LLP): Auditor’s remuneration excluding Deloitte Ireland LLP (excluding VAT) 2021 € m 1.2 2020 € m 0.7 278 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 15 Taxation Current tax Corporation tax in 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 Current tax (charge)/credit for the year Deferred tax Origination and reversal of temporary differences Adjustments in respect of prior years Deferred tax assets written down Recognition of deferred tax assets in respect of current period losses Increase in carrying value of deferred tax assets in respect of carried forward losses Deferred tax credit for the year Total tax credit for the year Effective tax rate 2021 € m 2020 € m (8) 3 (5) (13) – (13) (18) (26) 7 – 4 49 34 16 – 61 61 28 – 28 89 (2) 24 (32) 103 8 101 190 (2.5)% 20.4% Factors affecting the effective tax rate The following table sets out the difference between the tax (charge)/credit that would result from applying the standard corporation tax rate in Ireland of 12.5% and the actual tax charge for the year: Profit/(loss) before tax Tax (charge)/credit at standard corporation tax rate in Ireland of 12.5% Effects of: Foreign (profits)/losses taxed at other rates Expenses not deductible for tax purposes Exempted income, income at reduced rates and tax credits Share of results of investments accounted for using the equity method shown post tax in the income statement (Income)/losses taxed at higher tax rates Tax legislation on equity distributions (Deferred tax assets not recognised)/reversal of amounts previously not recognised Deferred tax assets written down Other differences Change in tax rates Adjustments to tax charge in respect of prior years Tax credit 2021 2020 € m 629 (79) (9) (12) 2 2 (11) 8 82 – 1 22 10 16 % 12.5 1.4 1.9 (0.3) (0.3) 1.7 (1.3) (13.0) – – (3.5) (1.6) (2.5) € m (931) 116 12 (15) – 2 7 10 (7) (32) 1 11 85 190 % 12.5 1.3 (1.6) – 0.2 0.8 1.1 (0.8) (3.4) – 1.2 9.1 20.4 As noted in accounting policy note 1(k), ‘Income tax, including deferred income tax’, current and deferred tax is provided for based on legislation and rates expected to apply when income taxes become payable/refundable or deferred tax assets are realised/deferred tax liabilities are settled. This necessarily involves some estimation because the tax law is uncertain and its application requires a degree of judgement which authorities may dispute. During 2020, following resolution of a specific tax matter where uncertainty had existed relating to prior years, previously recognised net liabilities for this and related matters of € 81 million were released. Liabilities are recognised based on best estimates of the probable outcome, taking into account all available evidence and external advice, where appropriate. The Group does not expect significant liabilities to arise in excess of the amounts provided. Any difference between the final outcome and the amounts provided will affect the income tax charge in the period when the matter is resolved. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 279 15 Taxation (continued) Analysis of selected other comprehensive income Property revaluation reserves Net change in property revaluation reserves Total Retirement benefit schemes Remeasurement of defined benefit asset/(liability) Total Foreign currency translation reserves Amounts reclassified from the foreign currency translation 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 Recognised in other comprehensive income: – Net (losses) on net investment hedges – Exchange differences on translation of foreign operations Total Cash flow hedging reserves Amounts reclassified from the 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 (losses)/gains recognised in other comprehensive income Total Investment debt securities at FVOCI reserves Fair value (gains) transferred to income statement Fair value (losses) recognised in other comprehensive income Total Investment equity securities measured at FVOCI reserves Fair value (losses) recognised in other comprehensive income Total Gross € m Tax € m 2021 Net € m Gross € m Tax € m 2020 Net € m – – 19 19 – – (100) 174 74 – (141) (307) (448) (18) (44) (62) – – – – (2) (2) – – 13 – 13 – 18 39 57 2 6 8 – – – – 17 17 – – (87) 174 87 – (123) (268) (391) (16) (38) (54) – – – – – – – – (50) (50) 12 12 (38) (38) – – – (70) (70) – – – – – – – – (70) (70) – – – (120) 201 81 15 (25) (10) (105) 176 71 (17) (45) (62) (21) (21) 2 5 7 3 3 (15) (40) (55) (18) (18) 280 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 16 Earnings per share The calculation of basic earnings/(loss) per unit of ordinary shares is based on the profit/(loss) attributable to ordinary shareholders divided by the weighted average number of ordinary shares in issue, excluding own shares held. The diluted earnings/(loss) per share is based on the profit/(loss) 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/(loss) attributable to equity holders of the parent Distributions on other equity interests (note 40) Profit/(loss) attributable to ordinary shareholders of the parent Weighted average number of ordinary shares in issue during the year Earnings/(loss) per share – basic (b) Diluted Profit/(loss) attributable to ordinary shareholders of the parent (note 16 (a)) Weighted average number of ordinary shares in issue during the year Potential weighted average number of shares Earnings/(loss) per share – diluted 2021 € m 647 (65) 582 2020 € m (769) (46) (815) Number of shares (millions) 2,714.4 2,714.4 EUR 21.4c EUR (30.0)c 2021 € m 582 2020 € m (815) Number of shares (millions) 2,714.4 2,714.4 2,714.4 2,714.4 EUR 21.4c EUR (30.0)c The ordinary shares are included in the weighted average number of shares on a time apportioned basis. Warrants The Minister for Finance was issued warrants in 2017 to subscribe for 271,166,685 ordinary shares of AIB Group plc. The warrants are exercisable during the period commencing 27 June 2018 and ending 27 June 2027 (see note 39 for further detail). These warrants were not included in calculating the diluted earnings per share as they were antidilutive. 17 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 2021 € m 8 8 2020 € m 14 14 (1)Includes property surplus to requirements and repossessed assets which are expected to be disposed of within one year. 18 Trading portfolio Equity securities Trading portfolio financial assets 2021 € m 2020 € m 8 8 – – Trading portfolio financial liabilities 2021 € m 2 2 2020 € m – – 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 281 19 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 2021 and 2020: Derivative financial instrument(1) Interest rate contracts Exchange rate contracts Equity contracts Credit derivatives Total Notional principal amount € m 51,694 11,277 174 175 2021 Fair values Assets Liabilities € m 806 76 – – € m (839) (200) (17) (6) Notional principal amount € m 50,430 7,848 49 350 2020 Fair values Assets Liabilities € m 1,353 € m (1,145) 70 – 1 (46) (1) (9) 63,320 882 (1,062) 58,677 1,424 (1,201) (1)Interest rate, exchange rate, equity and credit derivative contracts are entered into for both hedging and trading purposes. 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. During the year there was increased forward hedging of foreign currency funding, and management of Euro surplus liquidity, in light of uncertainty in markets regarding COVID-19, ongoing EU/UK trade discussions and geopolitical tensions. 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 + 2021 Total € m € m Less than 1 year € m 1 to 5 years € m 5 years + 2020 Total € m € m Notional principal amount 22,480 20,804 20,036 63,320 18,180 19,064 21,433 58,677 Positive fair value 86 211 585 882 159 372 893 1,424 282 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 19 Derivative financial instruments (continued) 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. Ireland United Kingdom United States of America Notional principal amount 2020 € m 2021 € m Positive fair value 2020 € m 2021 € m 59,897 3,304 119 63,320 55,688 2,857 132 58,677 576 295 11 882 992 418 14 1,424 Trading book 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. Banking book 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. The fair values of derivatives fluctuate as the underlying market interest rates or foreign exchange rates change. If the derivatives are purchased or sold as hedges of statement of financial position items, the change in fair value 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 risk that counterparties to derivative contracts (both trading and banking book) 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 Netting Agreements and increased clearing of derivatives through Central Clearing Counterparties (CCP’s). As the traded instruments are recognised at market value, any changes in market value directly affect reported income for a given period. The notional principal and fair value amounts for instruments held for risk management purposes entered into by the Group at 31 December 2021 and 2020, are presented within this note. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 283 19 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 2021 and 2020. A description of how the fair values of derivatives are determined is set out in note 48. 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 rates derivatives – OTC – central clearing Interest rate swaps Total interest rate derivatives – OTC – central clearing Total interest rate derivatives 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 – central clearing Credit derivatives Total credit derivatives Notional principal amount € m 2021 Fair values Assets Liabilities € m € m Notional principal amount € m 2020 Fair values Assets Liabilities € m € m 5,286 – 1,776 7,062 5,311 5,311 12,373 9,809 1 9,810 12 162 174 175 175 334 (353) – 4 – (3) 338 (356) 5,134 42 1,564 6,740 556 (475) 1 1 (1) (1) 558 (477) 44 44 382 76 – 76 – – – – – (26) (26) (382) (160) – (160) – (17) (17) (6) (6) 4,273 21 (113) 4,273 11,013 21 579 (113) (590) 7,742 106 7,848 18 31 49 350 350 70 – 70 – – – 1 1 (46) – (46) – (1) (1) (9) (9) Total derivatives held for trading 22,532 458 (565) 19,260 650 (646) 284 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 19 Derivative financial instruments (continued) Notional principal amount € m 2021 Fair values Assets Liabilities € m € m Notional principal amount € m 2020 Fair values Assets Liabilities € m € m Derivatives held for hedging Derivatives designated as fair value hedges – OTC Interest rate swaps Total derivatives designated as fair value hedges – OTC Derivatives designated as fair value hedges – OTC – central clearing Interest rate swaps Total interest rate fair value hedges – OTC – central clearing Total derivatives designated as fair value hedges 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 Derivatives designated as net investment hedges – OTC Forward exchange contracts Total derivatives designated as net investment hedges – OTC Total derivatives held for hedging Total derivative financial instruments 2,324 2,324 16,902 16,902 19,226 1,940 82 2,022 18,073 18,073 20,095 1,467 1,467 40,788 63,320 22 22 234 234 256 35 – 35 133 133 168 – – 424 882 (28) (28) (164) (164) (192) (53) (6) (59) (206) (206) (265) (40) (40) (497) 3,626 3,626 41 41 (59) (59) 15,483 177 (382) 15,483 19,109 3,114 880 3,994 177 218 89 73 162 (382) (441) (79) – (79) 16,314 394 (35) 16,314 20,308 394 556 (35) (114) – – – – – – 39,417 774 (555) (1,062) 58,677 1,424 (1,201) 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 and fixed rate liabilities. The fair values of financial instruments are set out in note 48. The net mark to market on fair value hedging derivatives, excluding accrual and risk adjustments at 31 December 2021 is positive € 26 million (2020: negative € 252 million) and the net mark to market on the related hedged items at 31 December 2021 is negative € 27 million (2020: positive € 248 million). Netting financial assets and financial liabilities Derivative financial instruments are shown on the statement of financial position at their fair value. Those with a positive fair value are reported as assets and those with a negative fair value are reported as liabilities. Details on offsetting financial assets and financial liabilities are set out in note 43. AIB Group plc Annual Financial Report 2021 Financial Statements 285 19 Derivative financial instruments (continued) Nominal values and average interest rates by residual maturity At 31 December 2021 and 2020, the Group held the following hedging instruments of interest rate risk and foreign exchange rate risk in fair value, cash flow and net investment hedges respectively: Less than 1 month 1 to 3 months 3 months to 1 year 1 to 5 years 5 years + 2021 Total 1 2 3 4 5 6 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) Hedges of financial liabilities Nominal principal amount (€ m) Average interest rate (%)(3) Net investment hedges – Forward exchange contracts Nominal principal amount (€ m) Forward FX rate(4) 283 0.34 – – – – 94 0.22 422 0.22 387 0.87 166 0.09 750 0.63 – – 1,567 0.08 1,508 0.21 850 0.87 676 0.65 4,163 0.43 6,618 0.23 11,906 0.32 – – – – 5,045 2.17 1,500 2.54 25 5.12 – – 5,820 1.99 1,500 2.54 2,238 0.43 4,687 0.48 7,689 0.29 16,275 0.34 280 0.54 230 0.86 767 0.95 – – 843 1.75 – – 3,820 0.72 1,467 0.87 2020 Total Less than 1 month 1 to 3 months 3 months to 1 year 1 to 5 years 5 years + 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) Hedges of financial liabilities Nominal principal amount (€ m) Average interest rate (%)(3) 140 0.60 – – – – 152 0.55 452 0.05 288 0.61 500 2.25 – – 480 0.83 4,605 0.43 6,645 0.26 12,158 0.36 – – – – 4,926 2.14 25 5.12 5,451 2.16 500 1.88 1,000 2.88 1,500 2.54 1,760 0.23 2,425 0.21 4,140 0.60 7,460 0.37 15,937 0.39 2,168 0.04 444 0.19 580 0.93 727 2.24 4,371 0.54 (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 swapped for a fixed rate. (4) Being the forward FX rates on the hedging derivatives which are being used to hedge the Group’s net investment in foreign operations. 286 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 19 Derivative financial instruments (continued) 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 2021 and 2020: Carrying amount(1) Nominal Assets Liabilities (a) Hedging instruments € m € m € m 2021 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 Line item in the income statement that includes hedge ineffectiveness Interest rate swaps hedging: Investment securities – debt Debt securities in issue Subordinated debt 11,906 5,820 1,500 139 117 – (171) Derivative financial instruments (11) Derivative financial instruments (10) Derivative financial instruments 401 (149) 22 4 – – Net trading income Net trading income Net trading income 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 SOFP* where hedged item is included Change in fair value of hedged items used for calculating hedge ineffectiveness for the year (b) Hedged items Assets Liabilities € m € m Assets Liabilities € m € m Investment securities – debt 12,264 9 Investment securities Debt securities in issue Subordinated debt (5,828) (1,527) (9) Debt securities in issue (27) Subordinated liabilities and other capital instruments € m (397) 149 (22) 2021 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 – – – 2020 Carrying amount(1) Nominal Assets Liabilities (a) Hedging instruments € m € m € m 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 Line item in the income statement that includes hedge ineffectiveness Interest rate swaps hedging: Investment securities – debt Debt securities in issue Subordinated debt 12,158 5,451 1,500 3 212 (441) Derivative financial instruments – Derivative financial instruments 3 – Derivative financial instruments (81) 59 (4) Carrying amount of hedged items recognised in the SOFP* Assets € m Liabilities € m (b) Hedged items Investment securities – debt 12,822 Debt securities in issue Subordinated debt (5,602) (1,504) Accumulated amount of fair value hedge adjustments on the hedged items included in the carrying amount of the hedged items Liabilities € m Assets € m 404 Line item in SOFP* where hedged item is included Change in fair value of hedged items used for calculating hedge ineffectiveness for the year Investment securities (152) Debt securities in issue (4) Subordinated liabilities and other capital instruments € m 78 (59) 4 (3) Net trading income – Net trading income – Net trading income 2020 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 – – – (1) The net mark to market on fair value hedging derivatives, excluding accruals of € 38 million is positive € 26 million (2020: € 29 million and negative € 252 million). *Statement of financial position AIB Group plc Annual Financial Report 2021 Financial Statements 287 e h t n i m e t i e n L i t a h t s t n u o m A r o f s t n u o m A e m o c n i n e e b e v a h e g d e h h c i h w t n e m e t a t s d e r r e f s n a r t d a h g n i t n u o c c a n i m e t i e n L i e m o c n i e h t t n e m e t a t s n o i t a c i f i s s a l c e r m e t i d e g d e h d e g d e h e h t h c i h w e g d e h e h t y b d e t c e f f a e h t e s u a c e b r o f t u b d e s u n e e b s e d u l c n i t a h t t n e m e t a t s e m o c n i e h t e g d e H n i d e s i n g o c e r s s e n e v i t c e f f e n I d e t c e f f a s a h s w o l f h s a c e r u t u f s s e n e v i t c e f f e n i s t n e m u r t s n i g n i t a l u c l a c r o f e u l a v r i a f n i e g n a h C i g n g d e h f o r i a f n i e g n a h C i g n g d e h f o e u l a v d e s u s t n e m u r t s n i d e s i n g o c e r e g d e h n i I C O n i r a e y e h t r a e y e h t n i s s e n e v i t c e f f e n i * P F O S e h t i g n g d e h e r e h w s t n e m u r t s n i d e d u l c n i e r a n i m e t i e n L i s e i t i l i b a i L s t e s s A i l a n m o N t n u o m a t a s s e n e v i t c e f f e n i e g d e h d e t a e r l e h t h t i w r e h t e g o t k s i r e t a r t s e r e t n i f o s e g d e h w o l f h s a c n i s m e t i d e g d e h e h t ) b ( d n a s t n e m u r t s n i i g n g d e h s a d e t a n g s e d i s m e t i ) a ( o t g n i t l a e r s t n u o m a e h t t u o l t e s w o e b s e b a t l e h T 1 2 0 2 w o l f h s a c m o r f d e i f i s s a l c e r s t n u o m A t n e m e t a t s e m o c n i e h t o t s e v r e s e r g n g d e h i s s e n e v i t c e f f e n i e g d e H t n u o m a g n i y r r a C : 0 2 0 2 d n a 1 2 0 2 r e b m e c e D 1 3 ) d e u n i t n o c ( s t n e m u r t s n i l a i c n a n i f e v i t a v i r e D 9 1 e t a r t s e r e t n i f o s e g d e h w o l f h s a C e s n e p x e r a l i m i s e m o c n i r a l i m i s d n a t s e r e t n I 1 6 1 d n a t s e r e t n I ) 9 1 ( m € t n e m e t a t s e m o c n i e h t – – m € r e g n o l o n e r a r u c c o o t d e t c e p x e i g n d a r t t e N e m o c n i i g n d a r t t e N e m o c n i – – ) 4 1 5 ( ) 6 0 6 ( l a i c n a n i f e v i t a v i r e D ) 9 0 2 ( s t n e m u r t s n i 6 6 7 6 l a i c n a n i f e v i t a v i r e D ) 6 5 ( s t n e m u r t s n i 3 5 1 5 1 5 7 2 , 6 1 0 2 8 , 3 ) 1 ( s p a w s e t a r t s e r e t n I s t e s s a e v i t a v i r e D s e i t i l i b a i l e v i t a v i r e D m € m € m € m € m € m € s t n e m u r t s n I i g n g d e H ) a ( . k s i r e t a r t s e r e t n i i g n g d e h e r a h c h w i f o h t o b , s p a w s e t a r t s e r e t n i y c n e r r u c s s o r c d n a s p a w s e t a r t s e r e t n i h t o b e d u c n l i e s e h T . k s i r e t a r t s e r e t n i i g n g d e H ) 1 ( 1 2 3 4 5 6 . t n e m e t a t s e m o c n i e h t n i i d e s n g o c e r s s e n e v i t c e f f e n i e g d e h y n a h t i w e m o c n i i e v s n e h e r p m o c r e h t o n i i d e s n g o c e r s i s e v r e s e r i g n g d e h w o l f h s a c e h t n i e g n a h c e h t y b t e s f f o s i t a h t n o i t r o p e h T n o i t i s o p l i a c n a n i f f o t n e m e t t a S * . e g d e h e h t f o n o i t p e c n i m o r f m e t i d e g d e h e h t f o ) e u a v l t n e s e r p ( e u a v l r i a f n i e g n a h c l e v i t a u m u c e h t r o s s o l i r o n a g e v i t a u m u c l e h t r e h t i e f o r e w o l e h t o t d e t s u d a j e r a s e v r e s e r i g n g d e h w o l f h s a c e h T ) 1 ( i g n g d e h w o l f h s a c i g n g d e h w o l f h s a c i g n g d e h 1 2 0 2 s t n u o m A s t n u o m A e h t n i i g n n i a m e r e h t n i i g n n i a m e r n i s t n u o m A w o l f h s a c e h t m € 3 9 1 – m € 1 2 2 – x a t t s o p i g n g d e h y n a m o r f s e v r e s e r e g d e h h c i h w i r o f p h s n o i t a l e r d e i l p p a r e g n o l o n s i g n i t n u o c c a x a t e r p i g n g d e h y n a m o r f s e v r e s e r e g d e h h c i h w i r o f p h s n o i t a l e r d e i l p p a r e g n o l o n s i g n i t n u o c c a ) 1 1 ( m € ) 3 3 ( x a t t s o p ) 1 ( s e g d e h i g n u n i t n o c r o f s e v r e s e r n i t n u o m A w o l f h s a c e h t x a t e r p i g n g d e h ) 1 ( s e g d e h i g n u n i t n o c r o f s e v r e s e r r a e y e h t r o f r i a f n i e g n a h C r o f d e s u s m e t i d e g d e h f o e u l a v s s e n e v i t c e f f e n i e g d e h g n i t a l u c l a c d e d u l c n i s i m e t i d e g d e h h c i h w n i * P F O S n i m e t i e n L i ) 3 1 ( m € ) 8 3 ( m € 6 0 6 ) 7 6 ( s r e m o t s u c o t s e c n a v d a d n a s n a o L k s i r e t a r t s e r e t n I s t n u o c c a r e m o t s u C k s i r e t a r t s e r e t n I s m e t i d e g d e H ) b ( 288 Financial Statements AIB Group plc Annual Financial Report 2021 n o i t a c i f i s s a c e r l e h t m e t i d e g d e h e h t n i m e t i e n L i t a h t s t n u o m A t n e m e t a t s e m o c n i n e e b e v a h d e r r e f s n a r t y b d e t c e f f a e h t e s u a c e b r o f s t n u o m A e g d e h h c h w i d a h g n i t n u o c c a r o f t u b d e s u n e e b d e g d e h e h t h c h w i e g d e h n i m e t i e n L i e m o c n i e h t t n e m e t a t s s e d u c n l i t a h t t n e m e t a t s e m o c n i e h t e g d e H n i i d e s n g o c e r s s e n e v i t c e f f e n I d e t c e f f a s a h s w o l f h s a c e r u t u f s s e n e v i t c e f f e n i e u a v l r i a f n i e g n a h C i g n g d e h f o s t n e m u r t s n i i d e s n g o c e r n i I C O n i r a e y e h t r i a f n i e g n a h C i g n g d e h f o e u a v l d e s u s t n e m u r t s n i l g n i t a u c a c l r o f e g d e h r a e y e h t n i s s e n e v i t c e f f e n i e r e h w * P F O S s t n e m u r t s n i d e d u c n l i e r a i g n g d e h e h t n i m e t i e n L i s e i t i l i b a L i s t e s s A l i a n m o N t n u o m a 0 2 0 2 w o l f h s a c m o r f d e i f i s s a c e r l s t n u o m A t n e m e t a t s e m o c n i e h t o t s e v r e s e r g n g d e h i s s e n e v i t c e f f e n i e g d e H t n u o m a i g n y r r a C ) d e u n i t n o c ( s t n e m u r t s n i l a i c n a n i f e v i t a v i r e D 9 1 ) d e u n i t n o c ( e t a r t s e r e t n i f o s e g d e h w o l f h s a C e s n e p x e r a l i m s i e m o c n i r a l i m s i d n a t s e r e t n I 5 4 1 d n a t s e r e t n I ) 4 2 ( m € t n e m e t a t s e m o c n i e h t – – m € r e g n o l o n e r a r u c c o o t d e t c e p x e i g n d a r t t e N e m o c n i i g n d a r t t e N e m o c n i – – 3 9 ) 2 1 ( 2 8 ) 5 ( l i a c n a n i f e v i t a v i r e D ) 6 ( s t n e m u r t s n i s t n e m u r t s n i l i a c n a n i f e v i t a v i r e D ) 8 0 1 ( – m € m € m € m € m € 6 5 5 m € s t n e m u r t s n I i g n g d e H ) a ( 7 3 9 , 5 1 1 7 3 , 4 ) 1 ( s p a w s e t a r t s e r e t n I s t e s s a e v i t a v i r e D s e i t i l i b a i l e v i t a v i r e D e h t n i i i g n n a m e r e h t n i i i g n n a m e r i g n g d e h y n a m o r f s e v r e s e r i g n g d e h y n a m o r f s e v r e s e r i g n g d e h w o l f h s a c i g n g d e h w o l f h s a c 0 2 0 2 s t n u o m A s t n u o m A . k s i r e t a r t s e r e t n i i r o f p h s n o i t a e r l i r o f p h s n o i t a e r l m € 0 8 1 – m € 5 0 2 – x a t t s o p e g d e h h c h w i d e i l p p a r e g n o l o n s i g n i t n u o c c a x a t e r p e g d e h i h c h w d e i l p p a r e g n o l o n s i g n i t n u o c c a i g n g d e h e r a h c h w i f o h t o b , s p a w s e t a r t s e r e t n i y c n e r r u c s s o r c d n a s p a w s e t a r t s e r e t n i h t o b e d u c n l i e s e h T . k s i r e t a r t s e r e t n i i g n g d e H ) 1 ( m € 1 5 4 ) 1 9 ( n i s t n u o m A w o l f h s a c e h t i g n g d e h r o f s e v r e s e r x a t t s o p ) 1 ( s e g d e h i g n u n i t n o c m € 5 1 5 ) 4 0 1 ( n i t n u o m A w o l f h s a c e h t i g n g d e h r o f s e v r e s e r x a t e r p ) 1 ( s e g d e h i g n u n i t n o c r i a f n i e g n a h C r o f d e s u s m e t i d e g d e h f o e u a v l e g d e h g n l i t a u c a c l m € ) 2 8 ( 5 r a e y e h t r o f s s e n e v i t c e f f e n i d e d u c n l i s i m e t i d e g d e h i h c h w n i * P F O S n i m e t i e n L i s r e m o t s u c o t s e c n a v d a d n a s n a o L k s i r e t a r t s e r e t n I s t n u o c c a r e m o t s u C k s i r e t a r t s e r e t n I s m e t i d e g d e H ) b ( . e g d e h e h t f o n o i t p e c n i m o r f m e t i d e g d e h e h t f o ) e u a v l t n e s e r p ( e u a v l r i a f n i e g n a h c l e v i t a u m u c e h t r o s s o l r o n a g i l e v i t a u m u c e h t r e h t i e f o r e w o l e h t o t d e t s u d a j e r a s e v r e s e r i g n g d e h w o l f h s a c e h T ) 1 ( . t n e m e t a t s e m o c n i e h t n i i d e s n g o c e r s s e n e v i t c e f f e n i e g d e h y n a h t i w e m o c n i i e v s n e h e r p m o c r e h t o n i i d e s n g o c e r s i s e v r e s e r i g n g d e h w o l f h s a c e h t n i e g n a h c e h t y b t e s f f o s i t a h t n o i t r o p e h T n o i t i s o p l i a c n a n i f f o t n e m e t t a S * 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 289 19 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 62 50 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 52 24 125 28 102 21 Within 1 year € m 12 46 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 7 44 6 99 14 37 2021 Total € m 341 123 2020 Total € m 39 226 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 62 118 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 52 77 125 118 102 50 Within 1 year € m 12 111 Between 1 and 2 years € m Between 2 and 5 years € m More than 5 years € m 7 96 6 177 14 49 2021 Total € m 341 363 2020 Total € m 39 433 Ineffectiveness reflected in the income statement that arose from cash flow hedges at 31 December 2021 amounted to Nil (2020: 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 2021 was a loss of € 391 million (2020: a gain of € 71 million). 290 Financial Statements AIB Group plc Annual Financial Report 2021 e h t n i m e t i e n L i t a h t s t n u o m A r o f s t n u o m A e m o c n i n e e b e v a h e g d e h h c i h w t n e m e t a t s d e r r e f s n a r t d a h g n i t n u o c c a n i m e t i e n L i e m o c n i e h t t n e m e t a t s n o i t a c i f i s s a l c e r m e t i d e g d e h d e g d e h e h t h c i h w e g d e h e h t y b d e t c e f f a e h t e s u a c e b r o f t u b d e s u n e e b s e d u l c n i t a h t t n e m e t a t s e m o c n i e h t e g d e H n i d e s i n g o c e r s s e n e v i t c e f f e n I d e t c e f f a s a h s w o l f h s a c e r u t u f s s e n e v i t c e f f e n i s t n e m u r t s n i g n i t a l u c l a c r o f e u l a v r i a f n i e g n a h C i g n g d e h f o r i a f n i e g n a h C i g n g d e h f o e u l a v d e s u s t n e m u r t s n i d e s i n g o c e r e g d e h n i I C O n i r a e y e h t r a e y e h t n i s s e n e v i t c e f f e n i * P F O S e h t i g n g d e h e r e h w s t n e m u r t s n i d e d u l c n i e r a n i m e t i e n L i s e i t i l i b a i L s t e s s A i l a n m o N t n u o m a 1 2 0 2 y c n e r r u c n g i e r o f m o r f d e i f i s s a l c e r s t n u o m A t n e m e t a t s e m o c n i e h t o t s e v r e s e r n o i t a l s n a r t s s e n e v i t c e f f e n i e g d e H t n u o m a g n i y r r a C . 1 2 0 2 r e b m e c e D 1 3 t a s s e n e v i t c e f f e n i e g d e h d e t a e r l e h t h t i w r e h t e g o t s n o i t a r e p o i n g e r o f n i t n e m t s e v n i t e n e h t f o s e g d e h n i s m e t i d e g d e h e h t ) b ( d n a s t n e m u r t s n i i g n g d e h s a d e t a n g s e d i s m e t i ) a ( o t g n i t l a e r s t n u o m a e h t t u o l t e s w o e b s e b a t l e h T ) d e u n i t n o c ( s t n e m u r t s n i l a i c n a n i f e v i t a v i r e D 9 1 s n o i t a r e p o n g i e r o f n i t n e m t s e v n i t e n f o s e g d e H e m o c n I r e h t O e m o c n I r e h t O – – m € t n e m e t a t s e m o c n i e h t – – m € r e g n o l o n e r a r u c c o o t d e t c e p x e i g n d a r t t e N e m o c n i i g n d a r t t e N e m o c n i – – ) 0 0 1 ( ) 0 0 1 ( l a i c n a n i f e v i t a v i r e D ) 0 4 ( s t n e m u r t s n i – – l a i c n a n i f e v i t a v i r e D – s t n e m u r t s n i – – – 7 6 4 , 1 s t c a r t n o c e g n a h c x e n g e r o F i s t e s s a e v i t a v i r e D s e i t i l i b a i l e v i t a v i r e D m € m € m € m € m € m € s t n e m u r t s n I i g n g d e H ) a ( 1 2 0 2 s t n u o m A e h t n i i g n n i a m e r y c n e r r u c n g i e r o f s t n u o m A e h t n i i g n n i a m e r y c n e r r u c n g i e r o f i g n g d e h y n a m o r f i g n g d e h y n a m o r f s e v r e s e r n o i t a l s n a r t s e v r e s e r n o i t a l s n a r t – m € x a t t s o p e g d e h h c i h w i r o f p h s n o i t a l e r d e i l p p a r e g n o l o n s i g n i t n u o c c a – m € x a t e r p e g d e h h c i h w i r o f p h s n o i t a l e r d e i l p p a r e g n o l o n s i g n i t n u o c c a s e g d e h x a t t s o p n o i t a l s n a r t r o f s e v r e s e r i g n u n i t n o c s e g d e h x a t e r p n o i t a l s n a r t r o f s e v r e s e r i g n u n i t n o c e h t n i s t n u o m A y c n e r r u c n g i e r o f e h t n i t n u o m A y c n e r r u c n g i e r o f r a e y e h t r o f r i a f n i e g n a h C r o f d e s u s m e t i d e g d e h f o e u l a v s s e n e v i t c e f f e n i e g d e h g n i t a l u c l a c d e d u l c n i s i m e t i d e g d e h h c i h w n i * P F O S n i m e t i e n L i ) 7 8 ( m € m € ) 0 0 1 ( m € 0 0 1 s e v r e s e R s m e t i d e g d e H ) b ( y r a i d i s b u s K U n i t n e m t s e v n i t e N n o i t i s o p l i a c n a n i f f o t n e m e t t a S * 20 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 Loans and advances to banks by geographical area(1) Ireland United Kingdom United States of America AIB Group plc Annual Financial Report 2021 Financial Statements 291 1 2 3 4 5 6 2021 € m 361 962 1,323 – 1,323 2021 € m 814 505 4 1,323 2020 € m 378 714 1,092 – 1,092 2020 € m 569 521 2 1,092 (1)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 € 590 million (2020: € 445 million) placed with derivative counterparties in relation to net derivative positions and placed with repurchase agreement counterparties. In addition, these include € 4 million relating to restricted balances held in trust in respect of certain payables which are included in ‘other liabilities’ (note 36). 292 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 21 Loans and advances to customers At amortised cost Loans and advances to customers 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 Additional information: Amounts which are repayable on demand or at short notice Amounts due from associated undertakings(1) 2021 € m 56,496 1,654 58,150 (1,885) 56,265 243 56,508 2020 € m 57,684 1,592 59,276 (2,510) 56,766 75 56,841 2,225 3 2,829 1 (1)Undrawn commitments amount to € 81 million and are for less than one year (2020: € 117 million). Loans and advances to customers include cash collateral amounting to € 12 million (2020: € 14 million) placed with derivative counterparties. 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 1 year and not later than 2 years Later than 2 years and not later than 3 years Later than 3 years and not later than 4 years Later than 4 years and not later than 5 years Later than five years Total Unearned future finance income Deferred costs incurred on origination Present value of minimum payments ECL allowance for uncollectible minimum payments receivable(1) (1)Included in ECL allowance on financial assets (note 23). 2021 € m 653 453 332 203 97 18 1,756 (116) 14 1,654 87 2020 € m 618 431 320 200 101 20 1,690 (114) 16 1,592 81 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 293 22 Securities financing Securities financing consists of (a) securities borrowing and lending and (b) sale and repurchase transactions. Securities borrowing and securities lending transactions are generally entered into on a collateralised basis, with debt securities and equities, usually advanced or received as collateral. Sale and repurchase transactions involve purchases (or sales) of investments with agreements to resell (or repurchase) substantially identical investments at a certain date in the future at a fixed price. These are referred to as reverse repurchase agreements and securities sold under agreements to repurchase. As set out in note 1(c), the Group has elected to voluntarily change its accounting policy for the presentation of financial instruments relating to securities financing. Following a significant increase in securities borrowing and reverse repurchase agreements a decision was taken to introduce this new line item ‘Securities financing’ for both assets and liabilities in the consolidated statement of financial position. The comparatives for 2020 have been restated accordingly. Assets Reverse repurchase agreements Securities borrowing transactions Total Liabilities Securities sold under agreements to repurchase Total Banks Customers € m € m 1,463 1,506 2,969 45 45 – 921 921 – – 2021 Total € m 1,463 2,427 3,890(1) 45 45 Banks € m Customers € m 194 513 707 195 195 104 – 104 15 15 2020 Total € m 298 513 811 210 210 (1)Classified as ECL Stage 1 and have an ECL of € 1 million at 31 December 2021. In accordance with the terms of the reverse repurchase agreements and securities borrowing agreements, the Group accepts collateral that it is permitted to sell or repledge in the absence of default by the owner of the collateral. At 31 December 2021, the total fair value of the collateral received was € 3,890 million (2020: € 811 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 and securities borrowing agreements. Securities sold under agreements to repurchase mature within six months and are secured by debt securities and eligible assets. At 31 December 2021, in relation to securities sold under agreements to repurchase, the Group had pledged collateral with a fair value of € 45 million (2020: € 209 million). These transactions were conducted under the normal market agreements for standard repurchase transactions. 294 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 23 ECL allowance on financial assets The following table shows the movements on the ECL allowance on financial assets. Further information is disclosed in the ‘Risk management’ section of this report. At 1 January Exchange translation adjustments Net remeasurement of ECL allowance – investment securities-debt Net remeasurement of ECL allowance – banks Net remeasurement of ECL allowance – customers Net remeasurement of ECL allowance – securities financing Changes in ECL allowance due to write-offs Changes in ECL allowance due to disposals Acquisition of subsidiary – stockbroking client debtors Other At 31 December Amount included in financial assets measured at amortised cost: Investment securities – debt Loans and advances to banks Loans and advances to customers Securities financing Other assets – stockbroking client debtors At 31 December 2021 € m 2,511 30 – – (158) 1 (105) (393) 1 1 2020 € m 1,238 (17) 1 – 1,493 – (151) (57) – 4 1,888 2,511 1 – 1 – 1,885 2,510 1 1 – – 1,888 2,511 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 295 24 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 2021 and 2020. Carrying value Unrealised gross gains Unrealised gross losses € m 3,504 1,141 107 1,260 428 67 3,902 1,663 401 116 € m 199 25 1 10 1 – 31 11 10 5 12,589 293 € m (4) (1) (1) (18) (2) – (15) (5) (1) – (47) Net unrealised gains/ (losses) € m 195 24 – (8) (1) – 16 6 9 5 246 Tax effect € m (24) (3) – 1 – – (2) (1) (1) (1) (31) 2021 Net after tax € m 171 21 – (7) (1) – 14 5 8 4 215 2,400 90 55 208 1,101 87 130 38 4,109 – 274 274 16,972 – 133 133 – (5) (5) – 128 128 – (24) (24) – 104 104 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 Total debt securities at FVOCI Debt securities at amortised cost Irish Government securities Euro government securities Non Euro government securities Supranational banks and government agencies Asset backed securities Euro bank securities Euro corporate securities Non Euro corporate securities Total debt securities at amortised cost Equity securities Equity investments at FVOCI Equity investments at FVTPL Total equity securities Total investment securities 296 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 24 Investment securities (continued) 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 Total debt securities at FVOCI Debt securities at amortised cost Irish Government securities Euro government securities Non Euro government securities Supranational banks and government agencies Asset backed securities Euro bank securities Euro corporate securities Non Euro corporate securities Carrying value Unrealised gross gains Unrealised gross losses € m 5,421(1) 1,277 95 1,180 334 85 5,173 1,620 397 93 € m 348 51 3 27 4 – 90 35 18 9 € m – – – (1) – – – – – – Net unrealised gains/ (losses) € m Tax effect € m 2020 Net after tax € m 348 (44) 304 51 3 26 4 – 90 35 18 9 (7) – (3) (1) – (11) (4) (2) (1) (73) 44 3 23 3 – 79 31 16 8 511 15,675 585 (1) 584 2,294 90 55 208 727 87 107 35 Total debt securities at amortised cost 3,603 Equity securities Equity investments at FVOCI Equity investments at FVTPL Total equity securities Total investment securities – 201 201 19,479 – 84 84 – (7) (7) – 77 77 – (25) (25) – 52 52 (1)The carrying value includes € 1,804 million in Euro commercial paper issued by the Irish Government. Credit impairment losses recognised in the income statement in 2021 amounted to Nil (2020: Nil). For further details see note 13. AIB Group plc Annual Financial Report 2021 Financial Statements 297 24 Investment securities (continued) The following table sets out an analysis of movements in investment securities: At 1 January Exchange translation adjustments Purchases/acquisitions Sales/disposals/redemptions Maturities Amortisation of discounts net of premiums Net change in FVTPL Movement in unrealised losses At 31 December Of which: Listed Unlisted At 1 January Exchange translation adjustments Purchases/acquisitions New business model transfer Sales/disposals/redemptions Maturities Amortisation of discounts net of premiums Net change in FVTPL Movement in unrealised gains/(losses) At 31 December Of which: Listed Unlisted Debt securities at FVOCI € m 15,675 198 1,956 (1,329) (3,548) (43) – (320) Debt securities at amortised cost € m 3,603 18 515 – (20) (7) – – 12,589 4,109 12,589 – 12,589 4,109 – 4,109 Debt securities at FVOCI € m 15,881 (156) 3,985 (614) (1,130) (2,272) (54) – 35 Debt securities at amortised cost € m 635 (21) 2,429 577 (5) – (12) – – 15,675 3,603 15,675 – 15,675 3,603 – 3,603 Equity investments measured at FVOCI FVTPL 274 16,972 Equity investments measured at FVOCI FVTPL 1 2 3 4 5 6 2021 Total € m 19,479 216 2,517 (1,360) (3,568) (50) 58 (320) 16,724 248 16,972 2020 Total € m 17,331 (178) 6,444 (37) (1,802) (2,272) (66) 45 14 € m 201 – 46 (31) – – 58 – 26 248 274 € m 357 (1) 30 – (230) – – 45 – 201 19,479 24 177 201 19,302 177 19,479 € m – – – – – – – – – – – – € m 458 – – – (437) – – – (21) – – – – 298 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 24 Investment securities (continued) The following table distinguishes 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 at 31 December 2021 and 2020: Investments with unrealised losses of less than 12 months € m Fair value Investments with unrealised losses of more than 12 months € m 3,074 2 3,076 151 42 193 Investments with unrealised losses of less than 12 months € m Fair value Investments with unrealised losses of more than 12 months € m 249 12 261 156 22 178 2021 Total € m (47) (5) (52) 2020 Total Unrealised losses of less than 12 months Unrealised losses Unrealised losses of more than 12 months € m (45) – (45) € m (2) (5) (7) Unrealised losses Unrealised losses of less than 12 months Unrealised losses of more than 12 months € m € m € m (1) (2) (3) – (5) (5) (1) (7) (8) Total € m 3,225 44 3,269 Total € m 405 34 439 Debt securities at FVOCI Equity securities at FVTPL Total Debt securities at FVOCI Equity securities at FVTPL Total For details of the credit quality of the investment securities portfolio, see the ‘Risk management’ section of this report. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 299 25 Investments accounted for using the equity method Included in the income statement is the contribution net of tax from investments accounted for using the equity method as follows: Income statement Share of equity accounted investments – joint ventures – associates Share of net assets including goodwill At 1 January Investments in associated undertakings(2) Investment in joint venture(3) Income for the year At 31 December(4) Of which listed on a recognised stock exchange 2021 € m – 21 21(1) 2021 € m 98 5 3 21 127 – 2020 € m – 15 15(1) 2020 € m 83 – – 15 98 – (1)Includes AIB Merchant Services € 22 million (2020: € 15 million). (2)In 2021, this includes an investment amounting to € 5 million in Synch Payments d.a.c. (3)In 2021, this relates to an initial investment amounting to € 3 million in AIB JV Holdings Limited being the Group’s joint venture with Great-West LifeCo Inc. (4)Comprises the Group’s investment in AIB Merchant Services, Fulfil Holdings Limited, Synch Payments d.a.c, Clearpay d.a.c and AIB JV Holdings Limited. The following is the principal associate company of the Group at 31 December 2021 and 2020: Name of associate Principal activity Place of incorporation and operation Zolter Services d.a.c. trading as AIB Merchant Services Provider of merchant payment solutions Registered Office: Unit 6, Belfield Business Park, Clonskeagh, Dublin 4 Ireland Proportion of ownership interest and voting power held by the Group 2020 % 2021 % 49.9 49.9 All associates and joint ventures are accounted for using the equity method in these consolidated financial statements. Banking transactions between the Group and its associated undertakings/joint ventures are entered into in the normal course of business. For further information see notes 21 and 33. Disclosures relating to the Group’s potential exposure to chargeback risk in AIB Merchant Services are set out in note 44. 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 or joint ventures at 31 December 2021 or 2020. Change in the Group’s ownership interest in associates During 2020 and 2021, there was no change in the Group’s ownership interest in associates. Significant restrictions There is no significant restriction on the ability of associates or joint ventures to transfer funds to the Group in the form of cash or dividends, or to repay loans or advances made by the Group. 300 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 26 Intangible assets and goodwill Software externally purchased € m Software internally generated € m Software under construction € m Goodwill Other 2021 Total € m 1,908 204 51 – (130) 4 2,037 971 197 1 (130) 2 1,041 996 2020 Total 292 10 – – (64) – 238 274 9 – (64) – 219 19 1,334 99 1(1) 99 (65) 4 1,472 685 182 – (65) 2 804 668 172 95 – (99) (1) – 167 – – 1 (1) – – 167 120 € m 70 – 50(2) – – – 120 – – – – – – € m 40 – – – – – 40 12 6 – – – 18 22 Software externally purchased € m Software internally generated € m Software under construction € m Goodwill(1) Other € m € m € m 296 11 – (15) – 292 279 10 – (15) – 274 18 1,153 103 114 (33) (3) 1,334 529 166 24 (33) (1) 685 649 170 122 (114) (6) – 172 – – 6 (6) – – 70 – – – – 70 – – – – – – 172 70 40 – – – – 40 4 8 – – – 12 28 1,729 236 – (54) (3) 1,908 812 184 30 (54) (1) 971 937 Cost At 1 January Additions Acquisition of subsidiary Transfers in/(out) Amounts written-off(3) Exchange translation adjustments At 31 December Amortisation/impairment At 1 January Amortisation for the year Impairment for the year(4) Amounts written-off(3) Exchange translation adjustments At 31 December Carrying value at 31 December Cost At 1 January Additions Transfers in/(out) Amounts written-off(3) Exchange translation adjustments At 31 December Amortisation/impairment At 1 January Amortisation for the year Impairment for the year(4) Amounts written-off(3) Exchange translation adjustments At 31 December Carrying value at 31 December (1)Relates to intangible assets recognised on the acquisition of subsidiary (note 28). (2) Relates to the acquisition of subsidiary (note 28). The goodwill was tested for impairment at 31 December 2021 and no impairment was identified. (3)Relates to assets which are no longer in use with a Nil carrying value. (4)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 27. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 301 27 Property, plant and equipment Owned assets Property Long leasehold € m Leasehold under 50 years € m 43 128 – – – – – 2 1 1 – – (2) (9) – 41 14 1 – (2) – – 13 28 1 124 46 11 5 (9) – – 53 71 Freehold € m 172 2 4 – – (4) (1) 1 174 45 5 2 (1) (1) – 50 124 Equipment Assets under construction Leased assets Right-of-use assets Other Property 2021 Total € m 397 1 23 2 – – (47) 1 377 308 24 4 (47) – 1 290 87 € m € m € m € m 8 (5) 3 – – – (1) – 5 – – 1 (1) – – – 5 491 – 5 5 (11) – (14) 3 479 103 44 30 (14) – 1 164 315 3 – 1 – – – (1) – 3 1 2 – (1) – – 2 1 1,242 – 37 8 (11) (4) (75) 6 1,203 517 87 42 (75) (1) 2 572 631 Cost At 1 January Transfers in/(out) Additions Acquisition of subsidiary (note 28) Net remeasurements Transfers (to)/from 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) Amounts written-off(1) Transfers (to)/from held for sale Exchange translation adjustments At 31 December Carrying value at 31 December (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. 302 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 27 Property, plant and equipment (continued) Owned assets Freehold Property Long leasehold € m € m Leasehold under 50 years € m 167 8 – – – (2) (1) 172 43 1 – – – (1) – 43 42 13 5 – (2) – – 45 127 1 1 (1) – – 14 29 122 11 – – 1 (5) (1) 128 40 10 1 (5) – – 46 82 Equipment Assets under construction Leased assets Right-of-use assets Other Property 2020 Total € m 367 13 21 – 3 (6) (1) 397 288 22 2 (6) 1 1 308 89 € m € m € m € m 44 (33) – – – (2) (1) 8 2 – – (2) – – – 8 501 – 5 (1) – (12) (2) 491 57 55 3 (12) – – 103 388 2 – 2 – – (1) – 3 1 1 – (1) – – 1 2 1,246 – 28 (1) 4 (29) (6) 1,242 443 94 7 (29) 1 1 517 725 Cost At 1 January Transfers in/(out) Additions Net remeasurements Transfers (to)/from 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) Amounts written-off(1) Transfers (to)/from held for sale Exchange translation adjustments At 31 December Carrying value at 31 December (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 € 223 million (2020: € 238 million) in relation to owned assets and € 305 million in relation to right-of-use assets (2020: € 388 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 Nil (2020: Nil). AIB Group plc Annual Financial Report 2021 Financial Statements 303 27 Property, plant and equipment (continued) Future capital expenditure The table below shows future capital expenditure in relation to both property, plant and equipment and intangible assets (excluding right-of- use assets). Estimated outstanding commitments for capital expenditure not provided for in the financial statements Capital expenditure authorised but not yet contracted for 2021 € m 1 18 2020 € m 1 32 Leased assets Property The Group leases property for its offices and retail branch outlets. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. Most of these leases carry statutory renewal rights, or include an option to renew the lease for an additional period after the end of the contract term. Where the Group is likely to exercise these options, this has been taken into account in determining the lease liability and the right-of-use asset. 1 2 3 4 5 6 Other The Group leases motor vehicles, ATM offsite locations and IT equipment. Lease liabilities A maturity analysis of lease liabilities is shown in note 35. Amounts recognised in income statement Depreciation expense on right-of-use assets Interest on lease liabilities (note 5) Expense relating to short term leases Income from sub-leasing right-of-use assets Amounts recognised in statement of cash flows Total cash outflow for leases during the year(1) 2021 € m 46 12 1 – 2021 € m 55 2020 € m 56 13 1 2 2020 € m 63 (1) Includes amounts reported as interest expense on lease liabilities of € 12 million (2020: € 13 million) and amounts reported as principal repayments on lease liabilities of € 43 million (2020: € 50 million). 304 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 28 Acquisition of subsidiary The accounting policy for business combinations is set out in note 1(d) to the financial statements in ‘Basis of consolidation’. On 31 August 2021, following receipt of all regulatory approvals, the Group acquired Goodbody, a leading Irish provider of wealth management, corporate finance and capital markets services, by acquiring 100% of the voting shares of GANMAC Holdings (BVI) Limited and its subsidiaries. AIB Group’s acquisition of Goodbody is a critical advancement in the Group’s strategy to provide enhanced customer offerings, particularly in capital markets, corporate finance and wealth management. Under the terms of the agreement, AIB acquired the entire share capital for a total consideration, including deferred contingent consideration, of € 139 million. The Group incurred acquisition- related costs amounting to € 2 million on legal fees and due diligence costs which were incurred and expensed in 2020. These are included in ‘General and administrative expenses’ (note 12). Identifiable assets acquired and liabilities assumed The fair values of the identifiable assets and liabilities of Goodbody at the date of acquisition were as follows: Assets Loans and advances to banks Intangible assets Property, plant and equipment Trading portfolio financial assets Other assets(1) Prepayments Total assets Liabilities Lease liabilities Trading portfolio financial liabilities Other liabilities(2) Deposits by central banks and banks Current tax liabilities Accruals and deferred income Total liabilities Total identifiable net assets at fair value Goodwill arising on acquisition Total consideration Consideration satisfied by: Cash payments Deferred contingent consideration Total consideration Net cash outflow arising on acquisition Cash consideration Less: cash and cash equivalents acquired Total outflow in the Consolidated Statement of Cash Flows (1)Includes stockbroking client debtors of € 81 million. (2)Includes stockbroking client creditors of € 69 million. 2021 € m 62 1 8 11 101 2 185 5 2 76 3 1 9 96 89 50 139 122 17 139 122 (62) 60 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 305 28 Acquisition of subsidiary (continued) Measurement of fair values The fair value of the trade receivables amounts to € 80 million. The gross amount of trade receivables is € 81 million and it is expected that the full contractual amounts can be collected. The principal factor contributing to the recognition of goodwill of € 50 million is the expected future earnings of Goodbody. This reflects, in particular, the expected returns from AIB’s existing customer base. This is also enabled by skilled employees providing a differentiated service offering. In addition, due to the fungibility of existing Goodbody customers and the nature of the industry in which Goodbody operates no material separately identifiable intangible assets were identified or recognised by the Group. None of the goodwill recognised is expected to be deductible for income tax purposes. Deferred contingent consideration Deferred contingent consideration amounting to € 17 million has been agreed with certain shareholders of Goodbody. This comprises a payment of € 8 million on the first anniversary of the acquisition date and a payment of € 9 million on the second anniversary of the acquisition date. The Group has recognised the full value of contingent consideration that could be paid under the agreement on the basis that it expects to make those payments and any potential decreases, are not considered material. Revenue and profit For the four months to 31 December 2021, Goodbody contributed revenue amounting to € 24 million and a loss of € 2 million to the Group’s results. If the acquisition had occurred on 1 January 2021, consolidated revenue would have been € 75 million, and consolidated profit for the year would have been € 3 million. Goodbody is reported in the Capital Markets operating segment for the four months to 31 December 2021. 29 Other assets Proceeds due from disposal of loan portfolio(1) Fair value of hedged asset positions(2) Stockbroking client debtors Items in transit Other(3) Total (1)ECL – Nil. (2)The fair value of the hedged asset positions only relates to when the hedged item is at amortised cost. (3)Includes sundry debtors € 33 million (2020: € 84 million). 2021 € m 302 (38) 35 97 87 483 2020 € m – 80 – 34 121 235 306 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 30 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 Assets used in the business Investment securities Acquisition of subsidiary Other Total gross deferred tax liabilities Net deferred tax assets Represented on the statement of financial position: Deferred tax assets Deferred tax liabilities 2021 € m 15 14 13 15 2,840 7 2,904 (1) – (20) (15) (22) (26) (3) (36) (123) 2,781 2,834 (53) 2,781 For each of the years ended 31 December 2021 and 2020, full provision has been made for capital allowances and other temporary differences. Analysis of movements in deferred taxation At 1 January Exchange translation and other adjustments Deferred tax through other comprehensive income Income statement (note 15) At 31 December 2021 € m 2,667 4 76 34 2,781 2020 € m 24 13 13 15 2,763 8 2,836 (1) (1) (77) (7) (21) (34) (4) (24) (169) 2,667 2,711 (44) 2,667 2020 € m 2,557 (3) 12 101 2,667 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 307 30 Deferred taxation (continued) 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 263 and 264. At 31 December 2021, recognised deferred tax assets on tax losses and other temporary differences, net of deferred tax liabilities, totalled € 2,781 million (2020: € 2,667 million). The most significant tax losses arise in the Irish tax jurisdiction and their utilisation is dependent on future taxable profits. The amount of recognised deferred tax assets arising from unused tax losses amounts to € 2,840 million (2020: € 2,763 million) of which € 2,645 million (2020: € 2,675 million) relates to Irish tax losses and € 195 million (2020: € 88 million) relates to UK tax losses. 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 2021 of € 2,738 million (2020: € 2,646 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. Legislation has been enacted to increase the UK Corporation Tax rate from 19% to 25% from 1 April 2023. This change has resulted in an increase of the Group’s UK deferred tax asset for unutilised losses by £ 22 million. Furthermore, the expected profits for the 15 year period has increased reflecting the benefits of the revised UK strategy. The deferred tax asset for unutilised tax losses in the UK subsidiary amounts to £ 164 million at 31 December 2021 (2020: £ 79 million). 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 2021 of € 161 million (2020: € 161 million); overseas tax (UK and USA) on unused tax losses of € 3,142 million (2020: € 3,270 million); and foreign tax credits for Irish tax purposes of € 12 million (2020: € 12 million). Of these tax losses totalling € 3,303 million for which no deferred tax is recognised: € 8 million expires in 2032; € 39 million in 2033; € 25 million in 2034; and € 5 million in 2035. The Irish Government agreed to the statement on new international tax rules issued in October 2021 by the OECD/G20 Inclusive Framework. This included the proposal for a new global minimum effective tax rate of 15% on multinationals from 2023. In December 2021, the OECD published “model rules” for the minimum effective tax rate, and the European Commission published a draft Directive which is broadly aligned with the model rules. It is expected that the Group will be within the scope of the new rules. During 2022 the Group will review the expected guidance from the OECD, as well as any legislation introduced in Ireland. It is not possible at this time to estimate the impact, if any, on the Group’s deferred tax assets and liabilities. 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 (2020: Nil). Deferred tax recognised directly in equity amounted to Nil (2020: Nil). 308 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 30 Deferred taxation (continued) Analysis of income tax relating to other comprehensive income Profit for the year Net change in foreign currency translation reserves Net change in cash flow hedging reserves Net change in fair value of investment securities at FVOCI Remeasurement of defined benefit asset/(liability) Total comprehensive income for the year Attributable to: Equity holders of the parent Non-controlling interests Loss for the year Net change in foreign currency translation reserves Net change in cash flow hedging reserves Net change in fair value of investment securities at FVOCI Remeasurement of defined benefit asset/(liability) Total comprehensive income for the year Attributable to: Equity holders of the parent Non-controlling interests Gross Tax Net of tax € m 629 74 (448) (62) 19 212 214 (2) € m 16 13 57 8 (2) 92 92 – € m 645 87 (391) (54) 17 304 306 (2) Gross Tax Net of tax € m (931) (70) 81 (83) (50) (1,053) (1,081) 28 € m 190 – (10) 10 12 202 202 – € m (741) (70) 71 (73) (38) (851) (879) 28 Non- controlling interests net of tax € m (2) – – – – (2) – (2) Non- controlling interests net of tax € m 28 – – – – 28 – 28 2021 Net amount attributable to equity holders of the parent € m 647 87 (391) (54) 17 306 306 – 2020 Net amount attributable to equity holders of the parent € m (769) (70) 71 (73) (38) (879) (879) – 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 309 31 Retirement benefits The Group operates a number of defined contribution and defined benefit schemes for employees. All defined benefit schemes are closed to future accrual. Defined contribution schemes From 1 January 2014, all Group staff accrue future pension benefits on a defined contribution (“DC”) basis 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 operating expenses in respect of DC schemes is € 79 million (2020: € 78 million) (note 12). 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 15,792 members comprising 4,238 pensioners and 11,554 deferred members at 31 December 2021. 7,648 members have benefits accrued from 2007 to 2013 under a hybrid arrangement. In addition, there are 969 members comprising 133 pensioners and 836 deferred members at 31 December 2021 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 pages 160 and 161 of this report. Valuations Independent actuarial valuations for the AIB Group Irish Pension Scheme and the AIB Group UK Pension 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. The next actuarial valuation of the Irish scheme as at 30 June 2021 is ongoing and due to be completed by no later than 31 March 2022. No deficit funding is anticipated at this time as the Irish scheme continues to meet the minimum funding standard. The most recent valuation of the UK scheme was carried out at 31 December 2017. The next actuarial valuation of the UK scheme as at 31 December 2020 is due to be completed by no later than 31 March 2022. De-risking of the UK scheme The Group and the Trustee undertook a substantial de-risking of the UK scheme in 2019. A transaction entered into involved the acquisition of two insurance contracts from Legal and General Assurance Society (“LGAS”) using the majority of the assets of the UK scheme. These insurance contracts are: a pensioner buy-in contract in respect of the pensioner members and an assured payment policy (“APP”) in respect of deferred members. The ultimate obligation to pay the members benefits still remains with the scheme. The pensioner buy-in contract removes financial and demographic risk attaching to the current UK pensioners. This pensioner buy-in contract is effectively a qualifying insurance contract, and exactly matches the amount and timing of the benefits covered. Accordingly, the fair value of the pensioner buy-in contract is set equal to the corresponding value of the liabilities, using the same assumptions. The APP significantly reduces the inflation and interest rate risk attaching to UK deferred members although demographic risks remain. The APP can (at the UK Trustee’s election) be partially surrendered on an annual basis for the purpose of wholly or partially funding buy-in of further tranches of deferred members over a defined period of time. This will remove exposure to the risks not covered by the APP over time. The fair value of the APP is measured as the estimated cost of purchasing the contract on the open market. Since the initial de-risking transaction in 2019, additional members (including deferred and subsequent retirees) have been added to the buy-in policy, with a partial surrender of a portion of the APP to fund the cost. The Group agreed with the Scheme Trustee a revised funding arrangement for the UK scheme to support the purchase of the pensioner buy-in contract and the APP. Under this funding arrangement, the Group expects to make payments of £ 18.5 million in both 2022 and 2023, with a final balancing payment, based on latest estimates of c. £ 60 million. This is subject to change prior to finalisation. 310 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 31 Retirement benefits (continued) Contributions Total contributions to all defined benefit pension schemes operated by the Group in 2021 amounted to € 22 million (2020: € 36 million). There were no contributions made to the Irish Scheme in 2021 (2020: Nil). Contributions of £ 18.5 million were made to the UK scheme (2020: £ 30.5 million) as part of the revised funding arrangement which was implemented in December 2019. Total contributions to all defined benefit pension schemes operated by the Group for the year to 31 December 2022 are estimated to be € 22.5 million. 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 2021 and 2020. 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 2021 % 0.65 1.38 2.00 3.30 1.80 3.30 2020 % 0.20 1.10 0.95 2.90 1.40 2.90 0.00 – 3.30 1.38 – 2.75 2.00 – 3.30 0.00 – 2.90 1.10 – 2.40 0.95 – 2.90 (1) In 2020, the Group revised the basis of the long term rate of increase of pensions in payment assumption for the Irish scheme as set out below. (2)The inflation assumption applies to the revaluation of deferred members’ benefits up to their retirement date. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 311 31 Retirement benefits (continued) Funding of increases in pensions in payment for the Irish defined benefit schemes The Board has determined that the funding of discretionary increases to pensions in payment is a decision to be made by the Board each year. A process, taking account of all relevant interests and factors has been implemented by the Board. These interests and factors include: the advice of the Actuary; the interests of the members of the scheme; the interests of the employees; the Group’s financial circumstances and ability to pay; the views of the Trustees; the Group’s commercial interests and any competing obligations to the State. Under this process, the Group decided in February 2021 and February 2022 that the funding of discretionary increases was not appropriate in either year in relation to the Irish scheme. Rate of increase of pensions in payment – Irish scheme Notwithstanding a decision by the Board in February 2020 not to fund discretionary increases, the Trustee of the Irish scheme awarded a 1.1% increase to pensions eligible for discretionary pension increases with effect from 1 April 2020. This increase resulted in an actuarial loss in 2020. Taking this decision by the Trustee into consideration, the long term assumption for future discretionary increases in pension in payment now reflects an assessment of the Trustee’s ability to grant further discretionary increases without funding from the Group. This change does not apply to the other Group pension schemes. The Group, having taken actuarial advice, has adopted a rate of 0.65% (31 December 2020: 0.2%) for the long term assumption for future discretionary increases in pension in payment reflecting an assessment of the ability of the Trustee to grant future discretionary increases without funding from the Group. This has adjusted the scheme liabilities by € 350 million at 31 December 2021 (31 December 2020: € 100 million). Mortality assumptions The life expectancies underlying the value of the scheme liabilities for the Irish and UK schemes at 31 December 2021 and 2020 are shown in the following table. Retiring today age 63 Retiring in 10 years at age 63 Life expectancy – years Irish scheme 2021 2020 UK scheme 2021 2020 24.9 26.7 25.5 27.5 25.3 27.2 26.1 28.2 25.0 26.8 25.4 27.8 25.0 26.8 25.4 27.7 Males Females Males Females The mortality assumptions for the Irish and UK schemes were updated in 2021 to reflect emerging market experience. The table shows that a member of the Irish scheme retiring at age 63 on 31 December 2021 is assumed to live on average for 24.9 years for a male (25.0 years for the UK scheme) and 26.7 years for a female (26.8 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 2021 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. 312 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 31 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 2021 and 2020. Defined benefit obligation Fair value of scheme assets Asset ceiling/ minimum funding(1) € m € m (6,226) 6,627 € m (440) 2021 Net defined benefit (liabilities) assets € m Defined benefit obligation Fair value of scheme assets Asset ceiling/ minimum funding(1) € m € m (39) (5,904) 6,474 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 interest income – Asset ceiling/minimum funding adjustments Translation adjustment on non-euro schemes Other Contributions by employer Benefits paid – (72) – (72) 109 95 (288) – – (82) (166) – 223 223 – 77 (3) 74 – – – 393 – (5) – (5) – – – – – (290) 83 476 22 (223) (201) – (290) – – – – – (3) (3) 109 95 (288) 393 (290) 19(2) 1 20 22 – 22 – 2020 Net defined benefit (liabilities) assets € m (21) (1) – (4) (5) (11) 3 (502) 301 159 (50)(2) 1 (49) 36 – 36 (39) € m (591) – (8) – (8) – – – – – 98 (4) 94 – – – 301 – 159 (63) 238 36 (215) (179) – 159 – – – (1) (90) – (91) (11) 3 (502) – – 64 (446) – 215 215 At 31 December (6,241) 6,976 (735) (6,226) 6,627 (440) 31 December 2021 € m 31 December 2020 € 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 deficit 44 10 54 – (31) (23) (54) – 26 3 29 – (43) (25) (68) (39) (1) In recognising the net surplus or deficit on a pension scheme, the funded status of each scheme is adjusted to reflect any minimum funding requirement and any ceiling on the amount that the sponsor has a right to recover from a scheme. (2)After tax € 17 million (2020: € 38 million), see page 230. AIB Group plc Annual Financial Report 2021 Financial Statements 313 1 2 3 4 5 6 2021 € m 138 71 114 168 91 235 189 155 305 121 49 1,498 – 1,498 874 1,557 2,431 295 7 23 284 10 266 125 42 470 16 – 1,236 1,236 214 1,157 6,976 2020 € m 193 70 109 150 66 204 168 140 249 113 48 1,317 – 1,317 881 1,775 2,656 257 14 11 279 6 262 128 40 117 12 – 855 855 238 1,097 6,627 31 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 investment Multi-asset Property Total quoted investment funds Total investment funds Mortgage backed securities(2) Insurance contracts(3) Fair value of scheme assets at 31 December (1)Located in Europe. (2)A quoted market price in an active market is not available. (3)For valuation see page 309. 314 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 31 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 liabilities 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 2021. It is not considered appropriate to give a sensitivity analysis for the rate of increase of pensions in payment for the Irish scheme as it is dependent on actuarial advice at the reporting date. 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 UK scheme defined benefit obligation Increase € m Decrease € m Increase € m Decrease € m (182) 65 113 202 (62) (113) (52) 51 49 53 (48) (48) Maturity of the defined benefit obligation The weighted average duration of the Irish scheme at 31 December 2021 is 17 years and of the UK scheme at 31 December 2021 is 19 years. Asset-liability matching strategies The Irish scheme continued to de-risk in 2021, with further allocations to liability matching assets. As part of a strategy to increase the holding in inflation linked assets, the allocation to the Liability Driven Investment (“LDI”) portfolio, which is used to hedge the scheme’s liabilities against both interest rate and inflation risk, has increased. The LDI fund is comprised of a mixture of nominal bonds, inflation linked bonds and inflation derivatives. Due to an increase in values from market movements, the scheme maintained a similar weighting in equities in 2021 and continues to have an equity protection strategy in place. As part of the investment strategy of the UK scheme, it was significantly de-risked in 2019 when the Scheme entered into two insurance contracts with LGAS as described above (a pensioner buy-in contract in respect of the pensioner members and an APP contract in respect of the deferred members). Other long term employee benefits Other long term employee benefits include additional benefits which the Group provides to employees who suffer prolonged periods of sickness, subject to the 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. Furthermore, on the death of an employee before their normal retirement date, the Group has in place insurance policies to cover the additional financial costs to the Group under the terms of the schemes. In 2021, the Group contributed € 9 million (2020: € 9 million) towards insuring these benefits which are included in Operating expenses (note 12). 32 Deposits by central banks and banks Central Banks Eurosystem refinancing operations Borrowings – secured – unsecured Banks Other borrowings – unsecured AIB Group plc Annual Financial Report 2021 Financial Statements 315 1 2 3 4 5 6 2021 € m 10,000 298 – 10,298 84 10,382 2020 € m 4,000 278 – 4,278 217 4,495 Eurosystem refinancing operations are credit facilities from the Eurosystem secured by a fixed charge over securities and relates to TLTRO III. The Group participated in TLTRO III for € 4 billion in September 2020 and a further € 6 billion in June 2021. For further details on TLTRO III see notes 4 and 51. Deposits by central banks and banks include cash collateral at 31 December 2021 of € 51 million (2020: € 204 million) received from derivative counterparties in relation to net derivative positions and from repurchase agreement counterparties. Financial assets pledged Financial assets pledged 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 11,011 Banks 2021 Total € m € m 16 11,027 5,751 5,260 16 – 5,767 5,260 Central banks € m 4,768 2,473 2,295 Banks 2020 Total € m € m 17 4,785 17 – 2,490 2,295 (1) The Group has issued covered bonds secured on pools of residential mortgages. Securities, other than those issued to external investors, have been pledged as collateral in addition to other securities held by the Group. 316 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 33 Customer accounts Current accounts Demand deposits Time deposits Other – non-controlling interests(1) Of which: Non-interest bearing current accounts Interest bearing deposits, current accounts and short term borrowings Amounts include: Due to associated undertakings (1) Relates to long term loans from minority shareholders in Augmentum Limited, see note 41. 2021 € m 57,895 29,762 5,183 26 92,866 41,169 51,697 92,866 2020 € m 49,013 20,426 12,493 25 81,957 39,310 42,647 81,957 280 277 Customer accounts include cash collateral of € 59 million (2020: € 81 million) received from derivative counterparties in relation to net derivative positions. At 31 December 2021, the Group’s five largest customer deposits amounted to 1% (2020: 1%) of total customer accounts. 34 Debt securities in issue Issued by AIB Group plc Euro Medium Term Note Programme Global Medium Term Note Programme Issued by subsidiaries 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 Exchange translation adjustments At 31 December 2021 € m 2,500 1,544 4,044 – 1,775 1,775 5,819 2021 € m 5,450 750 (500) 119 5,819 2020 € m 1,750 1,425 3,175 – 2,275 2,275 5,450 2020 € m 6,831 – (1,250) (131) 5,450 In May 2021, AIB Group plc issued € 750 million Senior Unsecured 0.50% Notes maturing on 17 November 2027. The notes bear interest on the outstanding nominal amount, payable annually in arrears on 17 November each year, commencing on 17 November 2021 up to and including the maturity date. All the issuances by AIB Group plc are eligible to meet the Group’s MREL requirements. These instruments are redeemable for tax or for regulatory reasons, subject to the permission of the relevant regulation authority. AIB Group plc Annual Financial Report 2021 Financial Statements 317 1 2 3 4 5 6 2021 € m 346 52 169 185 406 2021 € m 382 (55) 12 5 5 (1) (3) 1 2020 € m 382 53 182 240 475 2020 € m 429 (63) 13 6 – – (1) (2) 346 382 35 Lease liabilities At 31 December Maturity analysis – contractual undiscounted cash flows: Not later than one year Later than one year and not later than five years Later than five years Total undiscounted lease liabilities at end of year Analysis of movements in lease liabilities At 1 January Lease payments(1) Interest expense(1) Additions Acquisition of subsidiary Disposals Net remeasurements Foreign exchange translation adjustments At 31 December (1)Repayment of principal portion of the lease liabilities amounted to € 43 million (2020: € 50 million), i.e. lease payments net of interest expense. 36 Other liabilities Notes in circulation Items in transit Creditors Fair value of hedged liability positions(1) Stockbroking client creditors Bank drafts Items in course of collection Other(2) (1) The fair value of the hedged liability positions only relates to when the hedging item is at amortised cost. (2) Includes invoice discounting credit balances on customer accounts € 103 million (2020: € 96 million). 2021 € m 96 71 32 36 35 421 180 364 1,235 2020 € m 145 81 42 156 – 193 11 327 955 318 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 37 Provisions for liabilities and commitments Onerous contracts Legal claims ROU(1) commit- ments Other provisions € m € m 2 – – – – – 2 34 30(2) (4)(2) – (29) – 31 € m 15 – – 2 – – 17 € m 262 166(2) (11)(2) – (47) 2 372 Onerous contracts Legal claims ROU(1) commit- ments Other provisions € m 10 – – – (8) – 2 € m 37 (3) 6(2) (3)(2) (3) – 34 € m 15 – – – – – 15 € m 399 3 93(2) (16)(2) (216) (1) 262 ECLs on loan commit- ments € m ECLs on financial guarantee contracts € m 54 38(3) (40)(3) – – 1 53 29 7(3) (11)(3) – – 1 26 ECLs on loan commit- ments € m ECLs on financial guarantee contracts € m 19 – 46(3) (11)(3) – – 54 23 – 14(3) (7)(3) – (1) 29 2021 Total € m 396 241 (66) 2 (76) 4 501(4) 2020 Total € m 503 – 159 (37) (227) (2) 396(4) At 1 January 2021 Charged to income statement Released to income statement Dilapidation provisions Provisions utilised Exchange translation adjustments At 31 December 2021 At 1 January 2020 Transfers in Charged to income statement Released to income statement Provisions utilised Exchange translation adjustments At 31 December 2020 (1)Provisions for dilapidations included in measurement of right-of-use assets (‘ROU’). (2)Included in note 12 ‘Operating expenses’. (3) Included in ‘Net credit impairment writeback/(charge)’ (note 13). In 2020, a debit of € 3 million was also included in ‘Net gain on derecognition of financial assets measured at amortised cost’ (note 10). (4) Excluding ECLs on loan commitments and financial guarantee contracts, the total provisions for liabilities and commitments expected to be settled within one year amount to € 368 million (31 December 2020: € 228 million). (a) Other provisions Includes the provisions for customer redress and related matters, UK restructuring provision, other restitution provisions and miscellaneous provisions. FSPO Decision and Tracker Mortgage Examination related provisions FSPO Decision: The provision at 31 December 2021 for customer redress and compensation and other related costs amounted to € 79 million (31 December 2020: € 80 million) in respect of certain mortgage customers – the ‘06-09 Ts & Cs(1) who never had a tracker’ cohort. In 2020, following a Financial Services and Pensions Ombudsman (‘FSPO’) decision in relation to a complaint by a customer from the ‘06-09 Ts & Cs who never had a tracker’ cohort, which found that the Bank had breached the terms of the customer’s mortgage loan contract and directed it to remedy the matter in what the FSPO believed was a fair and proportionate manner, the Group decided to accept the decision in full. Furthermore, the Group decided to apply the remedy to all other customers within this cohort, and payments to customers were substantially completed by December 2020. The Group continued to engage with stakeholders during 2020 and 2021 and a number of related issues also exist that have yet to be resolved, including tax liabilities arising that the Group will be required to discharge on behalf of impacted customers. Notwithstanding the near completion of payments to customers based on the FSPO decision, the level of provision required for these other costs has been assessed at € 79 million, following utilisations of € 1 million in the year. These issues are subject to uncertainty with a range of outcomes possible with the final outcome being higher or lower depending on finalisation of such issues. (1)Terms and conditions. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 319 37 Provisions for liabilities and commitments (continued) (a) Other provisions (continued) Tracker Mortgage Examination: In respect of customer redress and compensation a provision of € 8 million is held at 31 December 2021 (31 December 2020: € 8 million) for the ongoing appeals process and any individual impacted accounts which may be identified under the Tracker Mortgage Examination. The provision at 31 December 2021 for ‘Other costs’ amounted to € 8 million (31 December 2020: € 8 million). 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, the Group previously created a provision of € 70 million in 2019 for the impact of monetary penalties that is expected to be imposed on the Group by the CBI. However, this matter is still ongoing, and the Group has retained the provision of € 70 million, as it remains the Group’s best estimate. This is subject to uncertainty with a range of outcomes possible with the final outcome being higher or lower depending on finalisation of all matters associated with the investigation. Further disclosures in relation to the wider impact of Tracker Mortgage Examination are contained in note 44: Contingent liabilities and commitments, in the section ‘Legal Proceedings’. UK restructuring provision Provisions for restructuring costs arising from the implementation of the UK’s strategy increased by € 20 million in 2021. Following utilisations of € 29 million, the closing provision at 31 December 2021 was € 19 million (2020: € 28 million) and this includes € 13 million for the expected cost of termination benefits for staff who have yet to leave under the restructuring. Regulatory provision The Group conducted a review of certain technical matters relating to previous submissions to the Single Resolution Board which was the basis of the annual fee to the Single Resolution Fund. Arising from this review, the Group has provided € 31 million (of which € 25 million relates to prior periods) in relation to matters arising from this review. This is still subject to finalisation with the relevant regulatory authorities. (b) Belfry related provisions – legal claims/other provisions During the period 2002 to 2006 the Group sold a series of investment property funds, known as Belfry, to c. 2,500 individual investors (c. £ 214 million invested). Following losses in those funds, c. 270 investors (who had invested c. £ 30 million) served claims against the Group which had been ongoing in the Courts since 2015. In July 2021 the Group agreed to settle those claims. As a result, a charge was recorded under “legal claims” amounting to € 25 million, including amounts for all legal and settlement costs associated with these claims. These were utilised in full by 31 December 2021. The Group instigated a programme, which is ongoing, to review all investments in the Belfry funds on a case by case basis and to determine if redress may be due in certain instances. The Group has recorded an additional provision of € 75 million under “other provisions” above for the anticipated cost of redress and other related costs that may be payable under this programme. While the programme principles and its approach are established, the redress strategy is currently being defined. As a result the anticipated cost of redress is subject to uncertainty, with a range of possible outcomes, with the final outcome being higher or lower depending on finalisation of such matters. (c) ECLs on loan commitments and financial guarantee contracts The ECL allowance on loan commitments and financial guarantee contracts are presented as a provision in the balance sheet (i.e. as a liability under IFRS 9) and separate from the ECL allowance on financial assets. For details of the internal credit ratings and geographic concentration of contingent liabilities and commitments, see pages 127 and 138 in the ‘Risk management’ section of this report. 320 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 38 Subordinated liabilities and other capital instruments Dated loan capital – European Medium Term Note Programme: Issued by AIB Group plc € 500 million Subordinated Tier 2 Notes due 2029, Callable 2024 € 1 billion Subordinated Tier 2 Notes due 2031, Callable 2026 Issued by subsidiaries € 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) (a) (b) (c) (c) (c) Maturity of dated loan capital Dated loan capital outstanding is repayable as follows: 5 years or more 2021 € m 500 1,000 12 43 1 56 1,556 2021 € m 1,556 2020 € m 500 1,000 11 38 1 50 1,550 2020 € m 1,550 Dated loan capital The dated loan capital in this section is subordinated in right of payment to senior creditors, including depositors, of the respective issuing entities. Following the implementation in Ireland of the EU (Bank Recovery and Resolution) Regulations 2015, these notes are loss absorbing at the point of non-viability. (a) € 500 million Subordinated Tier 2 Notes due 2029, Callable 2024 On 19 November 2019, AIB Group plc issued € 500 million Subordinated Tier 2 Notes due 2029, Callable 2024. These notes mature on 19 November 2029 but may be redeemed in whole, but not in part, at the option of the Group on the optional redemption date on 19 November 2024, subject to the approval of the regulatory authorities, 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 1.875%, payable annually in arrears on 19 November each year. The interest rate will be reset on 19 November 2024 to Eur 5 year Mid Swap rate plus the initial margin of 215 basis points. (b) € 1 billion Subordinated Tier 2 Notes due 2031, Callable 2026 On 23 September 2020, AIB Group plc issued € 1 billion Subordinated Tier 2 Notes due 2031, Callable 2026. These notes mature on 30 May 2031 but may be redeemed in whole, but not in part, at the option of the Group on the optional redemption date on 30 May 2026, subject to the approval of the regulatory authorities, 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 2.875%, payable annually in arrears on 30 May each year. The interest rate will be reset on 30 May 2026 to Eur 5 year Mid Swap rate plus the initial margin of 330 basis points. (c) Other dated subordinated loan capital Following liability management exercises and the Subordinated Liabilities Order (“SLO”) in 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 2021 Financial Statements 321 31 December 2021 31 December 2020 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 2,714.4 1,696 1 2 3 4 5 6 39 Share capital Authorised Ordinary share capital Ordinary shares of € 0.625 each Issued and fully paid Ordinary share capital Ordinary shares of € 0.625 each(1) (1)Number of shares in issue: 2,714,381,237. There were no movements in issued share capital during 2021 and 2020. Warrants In 2017, AIB issued warrants to the Minister for Finance 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. 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 38) Total capital resources 31 December 2021 31 December 2020 Authorised share capital % Issued share capital % Authorised share capital % Issued share capital % 100 100 100 100 31 December 2021 € m 13,660 1,556 15,216 2020 € m 13,421 1,550 14,971 322 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 40 Other equity interests Issued by AIB Group plc € 500 million Additional Tier 1 Perpetual Contingent Temporary Write-Down Securities issued 2019 € 625 million Additional Tier 1 Perpetual Contingent Temporary Write-Down Securities issued 2020 Total 2021 € m 496 619 1,115 (a) (b) 2020 € m 496 619 1,115 Distributions amounting to € 65 million (2020: € 46 million) were paid in 2021 on the Additional Tier 1 Securities issued by AIB Group plc. Other equity interests are included in the Group’s capital base. (a) In 2019, the Company issued € 500 million nominal value of Additional Tier 1 Perpetual Contingent Temporary Write-Down Securities (‘AT1s’). Interest on the securities, at a fixed rate of 5.250% per annum, is payable semi-annually in arrears on 9 April and 9 October, commencing on 9 April 2020. On the first reset date on 9 April 2025, in the event that the securities are not redeemed, interest will be reset to the relevant 5 year fixed rate plus a margin of 570.2 bps per annum. The interest payment is fully discretionary and non- cumulative and conditional upon the Company being solvent at the time of payment, having sufficient distributable reserves and not being required by the regulatory authorities to cancel an interest payment. The securities are perpetual securities with no fixed redemption date. The Company may, in its sole and full discretion, subject to regulatory approval, redeem all (but not some only) of the securities on any day falling in the period commencing on (and including) 9 October 2024 and ending on (and including) the first reset date or on any interest payment date thereafter at the prevailing principal amount together with accrued but unpaid interest. In addition, the securities are redeemable at the option of the Company for certain regulatory or tax reasons, subject to regulatory approval. The securities, which do not carry voting rights, rank pari passu with holders of other tier 1 instruments (excluding the Company’s ordinary shares). They rank ahead of the holders of ordinary share capital of the Company but junior to the claims of senior creditors and to Tier 2 capital of the Company. Under the EU (Bank Recovery and Resolution) Regulations 2015, these securities are loss absorbing at the point of non-viability. Furthermore, if the CET1 ratio of the Group at any time falls below 7%, subject to certain conditions, the Company shall write down the AT1s by the write-down amount and irrevocably cancel any accrued and unpaid interest up to (but excluding) the write-down date. To the extent permitted, in order to comply with regulatory capital and other requirements, the Company may reinstate any previously written down amount. (b) In 2020, the Company issued € 625 million nominal value of Additional Tier 1 Perpetual Contingent Temporary Write-Down Securities (‘AT1s’). Interest on the securities, at a fixed rate of 6.250% per annum, is payable semi-annually in arrears on 23 June and 23 December, commencing on 23 December 2020. On the first reset date on 23 December 2025, in the event that the securities are not redeemed, interest will be reset to the relevant 5 year fixed rate plus a margin of 662.9 bps per annum. The interest payment is fully discretionary and non-cumulative and conditional upon the Company being solvent at the time of payment, having sufficient distributable reserves and not being required by the regulatory authorities to cancel an interest payment. The securities are perpetual securities with no fixed redemption date. The Company may, in its sole and full discretion, subject to regulatory approval, redeem all (but not some only) of the securities on any day falling in the period commencing on (and including) 23 June 2025 and ending on (and including) the first reset date or on any interest payment date thereafter at the prevailing principal amount together with accrued but unpaid interest. In addition, the securities are redeemable at the option of the Company for certain regulatory or tax reasons, subject to regulatory approval. The securities, which do not carry voting rights, rank pari passu with holders of other tier 1 instruments (excluding the Company’s ordinary shares). They rank ahead of the holders of ordinary share capital of the Company but junior to the claims of senior creditors and to Tier 2 capital of the Company. Under the EU (Bank Recovery and Resolution) Regulations 2015, these securities are loss absorbing at the point of non-viability. Furthermore, if the CET1 ratio of the Group at any time falls below 7%, subject to certain conditions, the Company shall write down the AT1s by the write-down amount and irrevocably cancel any accrued and unpaid interest up to (but excluding) the write-down date. To the extent permitted by regulatory capital requirements, the Company may reinstate any previously written down amount. AIB Group plc Annual Financial Report 2021 Financial Statements 323 41 Non-controlling interests in subsidiaries At 1 January Additions Non-controlling interests share of net (loss)/profit Redemption of Additional Tier 1 Securities issued by subsidiary Distributions paid on Additional Tier 1 Securities issued by subsidiary At 31 December Of which: Equity interests in subsidiary Additional Tier 1 Securities issued by subsidiary 1 2 3 4 5 6 2021 € m 1 – (2) – – (1) (1) – 2020 € m 495 2 28 (494) (30) 1 1 – Non-controlling interests in subsidiary undertaking Augmentum Limited is 75% owned by AIB and 25% owned by First Data Global Services Limited. Augmentum Limited, in turn, holds 96.77% of the equity share capital of Semeral Limited with non-controlling interests holding the residual. During 2020 additional equity was contributed by the shareholders in Augmentum. Semeral/Payzone place of business: 4 Heather Road, Sandyford Industrial Estate, Dublin 18. 42 Capital reserves, merger reserve and capital redemption reserves Capital contribution reserves € m 955 (1) Other capital reserves € m 2021 Total € m 178 1,133 Capital contribution reserves € m Other capital reserves € m 955(1) 178 2020 Total € m 1,133 Capital reserves At beginning and end of year (1)Relates to the acquisition of EBS d.a.c. For details regarding the capital contribution reserves, refer to accounting policy (aa) in note 1. Merger reserve At beginning and end of year For details regarding merger reserve, refer to accounting policy (aa) in note 1. Capital redemption reserves At beginning and end of year 2021 € m 2020 € m (3,622) (3,622) 2021 € m 14 2020 € m 14 324 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 43 Offsetting financial assets and financial liabilities The disclosures set out in the tables below include financial assets and financial liabilities that: – – are offset in the Group’s statement of financial position; or are subject to enforceable master netting arrangements or similar agreements that cover similar financial instruments, irrespective of whether they are offset in the statement of financial position. The similar agreements include derivative clearing agreements, global master repurchase agreements and global master securities lending agreements. Similar financial instruments include derivatives, sales and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and lending agreements. Financial instruments such as loans and 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 € 529 million at 31 December 2021 (2020: € 804 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 2021, € 570 million (2020: € 450 million) of CSAs are included within financial assets and € 100 million (2020: € 257 million) of CSAs are included within financial liabilities. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 325 43 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 2021 and 2020: Related amounts not offset in the statement of financial position 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 Gross amounts of recognised financial assets € m Note Financial instruments € m 19 22 22 788 – 788 (529) 4,788 2,427 8,003 (3,325) – (3,325) 1,463 2,427 4,678 (1,463) (2,427) (4,419) Financial collateral (including cash collateral) received € m (56) (10) – (66) 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 Note 2021 Net amount € m 203 (10) – 193 2021 Net amount € m 22 19 3,370 1,049 4,419 (3,325) – (3,325) 45 1,049 1,094 (45) (529) (574) (32) (526) (558) (32) (6) (38) Financial assets Derivative financial instruments Securities financing Reverse repurchase agreements Securities borrowings Total Financial liabilities Securities financing Securities sold under agreements to repurchase Derivative financial instruments Total 326 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 43 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 Gross amounts of recognised financial assets € m Related amounts not offset in the statement of financial position Financial collateral (including cash collateral) received € m Financial instruments € m 1,244 – 1,244 (804) (202) 3,116 513 4,873 (2,818) – 298 513 (301) (510) (2,818) 2,055 (1,615) (27) – (229) 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 Gross amounts of recognised financial liabilities € m Related amounts not offset in the statement of financial position Financial collateral (including cash collateral) pledged € m Financial instruments € m 2020 Net amount € m 238 (30) 3 211 2020 Net amount € m 3,028 1,181 4,209 (2,818) – (2,818) 210 1,181 1,391 (209) (804) (1,013) (8) (394) (402) (7) (17) (24) Note 19 22 22 Note 22 19 Financial assets Derivative financial instruments Securities financing Reverse repurchase agreements Securities borrowings Total Financial liabilities Securities financing Securities sold under agreements to repurchase Derivative financial instruments 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; and securities financing – amortised cost. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 327 43 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 2021 and 2020: Net amounts of financial assets presented in the statement of financial position € m Line item in statement of financial position Carrying amounts in statement of financial position € m 2021 Financial assets not in scope of offsetting disclosures € m 788 Derivative financial instruments 882 1,463 2,427 Securities financing 3,890 94 – Net amounts of financial liabilities presented in the statement of financial position € m Line item in statement of financial position Carrying amounts in statement of financial position € m 2021 Financial liabilities not in scope of offsetting disclosures € m Financial assets Derivative financial instruments Securities financing Reverse repurchase agreements Securities borrowing Financial liabilities Securities financing Securities sold under agreement to repurchase 45 Securities financing Derivative financial instruments 1,049 Derivative financial instruments 45 1,062 – 13 Net amounts of financial assets presented in the statement of financial position € m Line item in statement of financial position Carrying amounts in statement of financial position € m 2020 Financial assets not in scope of offsetting disclosures € m 1,244 Derivative financial instruments 1,424 180 298 513 Securities financing 811 – 2020 Net amounts of financial liabilities presented in the statement of financial position € m Line item in statement of financial position Carrying amounts in statement of financial position € m Financial liabilities not in scope of offsetting disclosures € m Financial assets Derivative financial instruments Securities financing Reverse repurchase agreements Securities borrowing Financial liabilities Securities financing Securities sold under agreement to repurchase 210 Securities financing Derivative financial instruments 1,181 Derivative financial instruments 210 1,201 – 20 328 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 44 Contingent liabilities and commitments In the normal course of business, the Group is a party to financial instruments with off-balance sheet risk to meet the financing needs of customers. These instruments involve, to varying degrees, elements of credit risk which are not reflected in the consolidated statement of financial position. Credit risk is defined as the possibility of sustaining a loss because the other party to a financial instrument fails to perform in accordance with the terms of the contract. The Group’s maximum exposure to credit loss under contingent liabilities and commitments to extend credit, in the event of non-performance by the other party where all counterclaims, collateral or security prove valueless, is represented by the contractual amounts of those instruments. The Group uses the same credit control and risk management policies in undertaking off-balance sheet commitments as it does for ‘on-balance sheet lending’. The following 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 1 year and over Contract amount 2021 € m 775 44 819 129 9,135 4,463 13,727 14,546 2020 € m 631 91 722 92 8,537 3,875 12,504 13,226 (1) Contingent liabilities are off-balance sheet products and include guarantees, irrevocable 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. For details of the credit ratings and geographic concentration of contingent liabilities and commitments, see pages 127 and 138 in the ‘Risk management’ section of this report. Provisions for ECLs on loan commitments and financial guarantee contracts are set out in note 37. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 329 44 Contingent liabilities and commitments (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. Specifically, litigation has been served on the Group by customers that are pursuing claims in relation to tracker mortgages. Customers have also lodged complaints to the Financial Services and Pensions Ombudsman (“FSPO”) in relation to tracker mortgages issues which are outlined in note 37. Further claims may also be served in the future in relation to tracker mortgages. The Group will also receive further rulings by the FSPO in relation to complaints concerning tracker mortgages. Based on the facts currently known and the current stages that the litigation and the FSPO’s complaints process is at, it is not practicable at this time to predict the final outcome of this litigation/FSPO complaints, nor the timing and possible impact on the Group. Chargeback risk As outlined in note 25, the Group has a 49.9% equity interest in Zolter Services d.a.c. which owns a 100% subsidiary, First Merchant Processing Ireland d.a.c. (FMPI), trading as AIB Merchant Services (AIBMS). FMPI activities are principally focused on the provision of merchant processing services (acquiring) in respect of card transactions to merchants in Ireland, UK, Europe and a number of markets globally. As a merchant acquirer, FMPI processes payments for point of sale and ecommerce transactions on behalf of its merchants. If a merchant fails to deliver goods or services which have been paid for by card transactions supported by FMPI, the purchaser of the goods or services may seek a refund from the merchant or raise a claim from their card issuer, also known as a “chargeback” under VISA, MasterCard and Other Schemes rules. In the event that the merchant is unwilling or unable to pay a valid chargeback, FMPI bears the potential financial loss. The FMPI management team and Board of Directors regularly monitors and assesses the potential financial losses arising from chargebacks. At 31 December 2021, FMPI carries a gross exposure to potential chargebacks amounting to c. € 4 billion across many areas of economic activity, including wholesale independent sales organisations, retail, airlines, hotels, restaurants and government. The FMPI Directors have undertaken a risk assessment of these key chargeback exposures and is of the view that FMPI does not need to make any material provision for this potential chargeback exposure. While the COVID-19 vaccine rollout has been successful to date and many of the business restrictions previously in place have been removed there remains residual uncertainty in relation to potential chargeback loss due to the related concerns affecting merchants and the sustainability of their business models. However, the underlying assumption continues to be that merchants will recommence providing, or continue to provide, goods and services to cardholders, thus reducing and mitigating potential gross chargeback losses. In the unlikely event that FMPI is unable to meet its obligations arising from chargebacks, the exposure reverts to AIB Group (Allied Irish Banks, p.l.c. or AIB Group (UK) p.l.c.) as the principal members of the card schemes for FMPI. An indemnity is in place whereby the owner of the remaining 50.1% of Zolter would bear 50.1% of any of such potential losses. 330 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 44 Contingent liabilities and commitments (continued) 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 existence 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 permit 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. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 331 45 Subsidiaries and consolidated structured entities The material Group subsidiary companies at 31 December 2021 and 2020 are: Name of company Principal activity Allied Irish Banks, p.l.c. A direct subsidiary of AIB Group plc 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 Place of incorporation Ireland Registered Office 10 Molesworth Street, Dublin 2, Ireland. AIB Mortgage Bank Unlimited Company Issue of mortgage covered securities – a licensed bank Ireland EBS d.a.c. Mortgages and savings – a licensed bank Ireland AIB Group (UK) p.l.c. trading as Allied Irish Bank (GB) in Great Britain and AIB (NI) in Northern Ireland Banking and financial services – a licensed bank Northern Ireland 10 Molesworth Street, Dublin 2, Ireland. The EBS Building, 2 Burlington Road, Dublin 4, Ireland. 92 Ann Street, Belfast BT1 3HH. The proportion of ownership interest and voting power held by AIB Group plc in Allied Irish Banks, p.l.c. is 100% of the ordinary share capital. All subsidiaries of Allied Irish Banks, p.l.c., being the immediate subsidiary of AIB Group plc, are wholly owned apart from Augmentum Limited in which there are non-controlling interests (note 41). 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: – Burlington Mortgages No. 1 DAC; – AIB PFP Scottish Limited Partnership. Further details on these SPEs are set out in note 46. 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 year, 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. 332 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 46 Off-balance sheet arrangements and transferred financial assets Under IFRS, transactions and events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form. As a result, the substance of transactions with a special purpose entity (“SPE”) forms the basis for their treatment in the Group’s financial statements. An SPE is consolidated in the financial statements when the substance of the relationship between the Group and the SPE indicates that the SPE is controlled by the entity and meets the criteria set out in IFRS 10 Consolidated Financial Statements. The 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. Securities 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. 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 ‘Securities financing’ (note 22). 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 note 22. 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. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 333 46 Off-balance sheet arrangements and transferred financial assets (continued) 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 subsidiary, AIB Mortgage Bank Unlimited Company. (During 2020, EBS Mortgage Finance (“EBSMF”) transferred its loan portfolio to EBS d.a.c. and at the request of EBSMF, its regulators the European Central Bank and Central Bank of Ireland confirmed the withdrawal of EBSMF’s banking licence and designated mortgage credit institution authorisation with effect from 2 February 2021 and accordingly EBSMF will no longer issue covered bonds.) The Group retains all the risks and rewards of these mortgage loans, including credit risk and interest rate risk, and therefore, the loans continue to be recognised on the Group’s statement of financial position with the related covered bonds held by external investors included within ‘Debt securities in issue’ (note 34). As the Group segregates the assets which back these debt securities into “cover asset pools” it does not have the ability to otherwise use such segregated financial assets during the term of these debt securities. However, of the total debt securities of this type issued amounting to € 9.5 billion, internal Group companies hold € 7.8 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 34). 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. Burlington Mortgages No. 1 DAC In 2020, the Group securitised € 4 billion of its residential mortgage portfolio held in two of its subsidiaries, EBS d.a.c. and Haven Mortgages Limited. These mortgages were transferred to a securitisation vehicle, Burlington Mortgages No. 1 DAC “Burlington”. In order to fund the acquired mortgages, Burlington issued twelve classes of notes to EBS d.a.c. and Haven in the same proportion as the mortgages securitised. The transferred mortgages have not been derecognised as the Group retains substantially all the risks and rewards of ownership and continue to be reported in the Group’s financial statements. Burlington is consolidated into the Group’s financial statements with all the notes being eliminated on consolidation. At 31 December 2021, the carrying amount of the transferred financial assets which the Group continues to recognise is € 3.2 billion (2020: € 3.7 billion) (fair value is € 2.9 billion (2020: € 3.8 billion)) and the carrying amount of the associated liabilities is Nil (2020: Nil). Arising from the acquisition of EBS on 1 July 2011, the Group took control of the following special purpose entities which had previously been set up by EBS: Emerald Mortgages No. 5 d.a.c. and Mespil 1 RMBS d.a.c. Emerald Mortgages No. 5 d.a.c. The liquidation of this company was completed in February 2021. Mespil 1 RMBS d.a.c. The liquidation of this company was completed in February 2021. 334 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 46 Off-balance sheet arrangements and transferred financial assets (continued) The following table summarises as at 31 December 2021 and 2020, the carrying value and fair value of financial assets which did not qualify for derecognition together with their associated financial liabilities. Sale and repurchase agreements/similar products Covered bond programmes Residential mortgage backed Carrying amount of transferred assets € m 3,368(1)(2) Carrying amount of associated liabilities € m Fair value of transferred assets € m Fair value of associated liabilities € m 45(1) 3,371 45 2021 Net fair value position € m 3,326 2,820(3) 1,775(4) 2,693 1,799 894 Sale and repurchase agreements/similar products 3,039 (1)(2) 210 (1) Carrying amount of transferred assets € m Carrying amount of associated liabilities € m Fair value of transferred assets € m 3,039 Fair value of associated liabilities € m 210 2020 Net fair value position € m 2,829 Covered bond programmes Residential mortgage backed 3,184 (3) 2,275 (4) 3,314 2,327 987 (1)See note 22. (2)Includes € 3,306 million of assets pledged in relation to securities lending arrangements (2020: € 2,813 million). (3) The asset pools of € 15 billion (2020: € 15 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 € 2,820 million (2020: € 3,184 million) above refers to those assets apportioned to external investors. (4) Included in ‘Bonds and other medium term notes’ issued by subsidiaries (note 34). AIB Group (UK) p.l.c. Pension Scheme interest in the AIB PFP Scottish Limited Partnership In December 2013, the Group agreed with the Trustee of the AIB UK Defined Benefit Pension Scheme (“the UK scheme”) a restructure of the funding of the deficit in the UK scheme. The 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 entitled 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 2017 triennial valuation in May 2019, the annual payments were set at £ 15 million per annum, commencing 1 January 2019. However, this funding plan was replaced in December 2019, as part of the de-risking of the UK scheme (note 31). Under this funding arrangement, the Group expects to make payments of £ 18.5 million in both 2022 and 2023, with a final balancing payment, based on latest estimates of c £ 60 million. This is subject to change prior to finalisation. 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. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 335 46 Off-balance sheet arrangements and transferred financial assets (continued) (ii) Transferred financial assets derecognised in their entirety but the Group retains some continuing involvement AIB has a continuing involvement in transferred financial assets where it retains any of the risks and rewards of ownership of the transferred financial assets. Set out below are transactions in which AIB has a continuing involvement in assets transferred. Pension scheme On 31 July 2012, AIB entered into a Contribution Deed with the Trustee of the AIB Group Irish Pension Scheme (‘the Irish Scheme’), whereby it agreed to make contributions to the scheme to enable the Trustee ensure that the regulatory Minimum Funding Standard position of non-pensioner members of the pension scheme was not affected by the agreed early retirement scheme. These contributions amounting to € 594 million were settled through the transfer to the Irish Scheme of interests in 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 2021, the Group recognised € 0.5 million (cumulative € 8.7 million) (2020: € 0.6 million (cumulative € 8.2 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. 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 2021, the Group recognised € 2 million (cumulative € 98 million) (2020: € 2 million (cumulative € 96 million)) in the income statement for the servicing of financial assets transferred to NAMA. 336 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 47 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 (l) and financial liabilities in note 1 (m), describes how the classes of financial instruments are measured, and how income and expenses, including fair value gains and losses, are recognised. The following table analyses the carrying amounts of the financial assets and financial liabilities by measurement category and by statement of financial position heading at 31 December 2021 and 2020. At fair value through profit or loss At fair value through other comprehensive income At amortised cost Mandatorily Debt investments Hedging derivatives 2021 Total 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 Securities financing Investment securities Other financial assets Financial liabilities Deposits by central banks and banks Customer accounts Securities financing Trading portfolio financial liabilities Derivative financial instruments Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities € m – – 8 714(2) – 243 – 274 – 1,239 – – – 2 757(3) – – – 759 € m – – – – – – – 12,589 – 12,589 – – – – – – – – – € m – – – 168 – – – – – € m € m 42,654(1) 42,654 44 – – 1,323 56,265 3,890 4,109 842 44 8 882 1,323 56,508 3,890 16,972 842 168 109,127 123,123 – – – – 305 – – – 10,382 92,866 45 – – 5,819 1,556 1,375 10,382 92,866 45 2 1,062 5,819 1,556 1,375 305 112,043 113,107 (1)Includes cash on hand € 545 million. (2)Held for trading € 458 million and fair value hedges € 256 million. (3)Held for trading € €565 million and fair value hedges € 192 million. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 337 47 Classification and measurement of financial assets and financial liabilities (continued) At fair value through profit or loss At fair value through other comprehensive income At amortised cost 2020 Total 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 Securities financing Investment securities Other financial assets Financial liabilities Deposits by central banks and banks Customer accounts Securities financing Mandatorily € m – – 868(2) – 75 – 201 – 1,144 – – – Derivative financial instruments 1,087(3) Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities – – – 1,087 (1)Includes cash on hand € 618 million. (2)Held for trading € 650 million and fair value hedges € 218 million. (3)Held for trading € 646 million and fair value hedges € 441 million. Debt investments € m – – – – – – 15,675 – 15,675 – – – – – – – – Hedging derivatives € m – – 556 – – – – – 556 – – – 114 – – – 114 € m € m 25,550(1) 43 – 1,092 56,766 811 3,603 365 88,230 4,495 81,957 210 – 5,450 1,550 970 94,632 25,550 43 1,424 1,092 56,841 811 19,479 365 105,605 4,495 81,957 210 1,201 5,450 1,550 970 95,833 338 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 48 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 market, 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 note 1 accounting policy (o). 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 classified 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 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 2021. The methods used for calculation of fair value in 2021 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. The combination of CVA and FVA is referred to as XVA. CVA is calculated as: Expected positive exposure (“EPE”) multiplied by probability of default (“PD”) multiplied by loss given default (“LGD”). EPE profiles are generated at a counterparty netting set through simulation. PDs are derived from market based credit default swaps (“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 smaller exposures where security valuations are not individually assessed, an LGD of 60% is applied 2020: 60%). 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 339 48 Fair value of financial instruments (continued) FVA is calculated as: Expected exposure (“EE”) multiplied by funding spread (“SF”) multiplied by counterpart survival probability (1-PD). EE profiles (net of expected positive and negative exposures) are generated at a counterparty netting set through simulation. Funding spreads used are an average implied by CDSs for the Group’s most active external derivative counterparties. The rationale in applying these spreads is to best estimate the FVA which a counterparty would apply in a transaction to close out the Group’s existing positions. The application of FVA, while an overall negative adjustment, contains within it the benefit of own credit. Where XVA valuation adjustments have been applied to a derivative instrument, the entire instrument is classified as Level 3 in the fair value hierarchy on the basis that a component of the XVA valuation is derived from unobservable inputs. 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 345. 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 funding spreads. Investment securities The fair value of investment securities has been estimated based on expected sale proceeds. The expected sale proceeds are based on bid prices which have been analysed and compared across multiple sources for reliability. Where bid 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. With regard to the above 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. 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 above under the heading ‘Loans and advances to customers’. 340 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 48 Fair value of financial instruments (continued) Securities financing The fair value of securities financing assets and liabilities approximate their carrying amount as these balances are generally short-dated and fully collateralised. 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 44. Fees for these instruments may be billed in advance or in arrears on an annual, quarterly or monthly basis. In addition, the fees charged vary on the basis of instrument type and associated credit risk. As a result, it is not considered practicable to estimate the fair value of these instruments because each customer relationship would have to be separately evaluated. The 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 2021 and 2020: AIB Group plc Annual Financial Report 2021 Financial Statements 341 48 Fair value of financial instruments (continued) Carrying amount Fair Value Financial assets measured at fair value Trading portfolio financial assets: Equity securities Derivative financial instruments: Interest rate derivatives Exchange rate 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 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(3) Non-mortgages Total loans and advances to customers Securities financing: Reverse repurchase agreements Securities borrowing Investment debt securities measured at amortised cost Other financial assets Financial liabilities measured at fair value Trading portfolio financial liabilities: Equity 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 financing: Securities sold under agreements to repurchase Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities Fair value hierarchy Level 2 € m Level 1 € m Level 3 € m 8 – – – 4,752 1,260 456 5,565 517 26 12,584 545(2) – – – – – – – 2,982 – 3,527 2 – – – – 2 – – – – – – 5,953 1,620 – 7,573 – 505 76 – – – 39 – – – 620 42,109 – 361 – – – – – – – 42,470 – 743 200 17 6 966 – 10,298 – – – – 13 – – 10,311 – 301(1) – 243 – – – – – 248 792 – 44 962 27,509 27,245 54,754 1,463 2,427 1,138 842 61,630 – 96(1) – – – 96 84 – 57,895 29,762 5,220 45 20 16 1,375 94,417 € m 8 806 76 243 4,752 1,260 495 5,565 517 274 13,996 42,654 44 1,323 29,088 27,177 56,265 1,463 2,427 4,109 842 109,127 2 839 200 17 6 1,064 84 10,298 57,895 29,762 5,209 45 5,819 1,556 1,375 112,043 1 2 3 4 5 6 2021 Total € m 8 806 76 243 4,752 1,260 495 5,565 517 274 13,996 42,654 44 1,323 27,509 27,245 54,754 1,463 2,427 4,120 842 107,627 2 839 200 17 6 1,064 84 10,298 57,895 29,762 5,220 45 5,986 1,636 1,375 112,301 (1) Includes € 244 million derivative assets and € 38 million derivative liabilities categorised as level 3 on the basis that a component of the XVA valuation is derived from unobservable inputs. (2)Comprises cash on hand. (3)Includes residential and commercial mortgages. 342 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 48 Fair value of financial instruments (continued) Carrying amount Fair Value Fair value hierarchy € m Level 1 € m Level 2 € m Level 3 € m Financial assets measured at fair value Derivative financial instruments: Interest rate derivatives Exchange rate derivatives Credit 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(3) Non-mortgages Total loans and advances to customers Securities financing: Reverse repurchase agreements Securities borrowing Investment debt securities measured 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 financing: Securities sold under agreements to repurchase Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities 1,353 70 1 75 6,793 1,180 419 6,793 490 – 201 17,375 25,550 43 1,092 29,901 26,865 56,766 298 513 3,603 365 88,230 1,145 46 1 9 1,201 217 4,278 49,013 20,426 12,518 210 5,450 1,550 970 94,632 – – – – 6,793 1,180 344 6,793 490 – 24 15,624 618(2) – – – – – – – 2,973 – 3,591 – – – – – – – – – – – 5,689 1,571 – 7,260 864 70 1 – – – 75 – – – – 1,010 24,932 – 378 – – – – – – – 25,310 1,065 46 1 9 1,121 – 4,278 – – – – 36 68 – 489(1) – – 75 – – – – – – 177 741 – 43 714 30,459 26,983 57,442 298 513 796 365 60,171 80(1) – – – 80 217 – 49,013 20,426 12,561 210 – – 970 2020 Total € m 1,353 70 1 75 6,793 1,180 419 6,793 490 – 201 17,375 25,550 43 1,092 30,459 26,983 57,442 298 513 3,769 365 89,072 1,145 46 1 9 1,201 217 4,278 49,013 20,426 12,561 210 5,725 1,639 970 (1) Includes € 440 million derivative assets and € 36 million derivative liabilities categorised as level 3 on the basis that a component of the XVA valuation is derived from unobservable inputs. (2)Comprises cash on hand. (3)Includes residential and commercial mortgages. 4,382 83,397 95,039 AIB Group plc Annual Financial Report 2021 Financial Statements 343 48 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 2021 and 2020. 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: 1 2 3 4 5 6 Financial assets Loans and advances at FVTPL Equities at FVTPL 2021 Financial liabilities Total Derivatives Total Derivatives € m 489 – (188) – (188) – – – – – – 301 € m 447 – 42 – 42 – – – – – – At 1 January 2021 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 Cash received: Principal At 31 December 2021 At 1 January 2020 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 Cash received: Principal At 31 December 2020 489 Investment securities Debt € m Equities at FVOCI € m – – – – – – – – – – – – € m – – – – – – – – – – – – – – – – – – – – – – – – € m 458 – – – – (21) – (21) – (437) – – € m 75 – – 21 21 – – – 181(2) (1) (33) 243 € m 77 – – 41 41 – – – – – (43) 75 € m 177 – – 58 58 – – – 44 (31) – 248 € m 311 – – 29 29 – – – 30 (193) – 177 € m 741 – (188) 79 (109) – – – 225 (32) (33) 792 € m 1,293 – 42 70 112 (21) – (21) 30 (630) (43) 741 € m 80 € m 80 16 – 16 – – – – – – 96 € m 107 – (27) – (27) – – – – – – 80 16 – 16 – – – – – – 96 2020 € m 107 – (27) – (27) – – – – – – 80 (1) Transfers between levels of the fair value hierarchy are recognised at the end of the reporting period during which the change occurred. (2)Relates to the restructuring of loans measured at FVTPL, that were previously carried at amortised cost. 344 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 48 Fair value of financial instruments (continued) 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 categorised as Level 3 in the fair value hierarchy held at 31 December 2021 and 2020: Net trading income – (losses)/gains Gains on equity investments at FVTPL Losses on loans and advances at FVTPL 2021 € m (151) 51 (12) (112) 2020 € m 89 23 – 112 Significant unobservable inputs The table below sets out information about significant unobservable inputs used in measuring financial instruments categorised as Level 3 in the fair value hierarchy: Fair value 2021 € m 2020 € m Valuation technique Asset Liability 301 96 489 CVA 80 Range of estimates Significant unobservable input LGD PD 31 December 2021 29% – 46% (Base 38%) 0.5% – 2.6% 31 December 2020 58% – 74% (Base 68%) 0.4% – 1.9% (Base 1.2%, 1 year PD) (Base 0.9%, 1 year PD) FVA Funding spreads (0.2%) to 0.3% Final conversion rate 0% – 90% (0.2%) to 0.3% 0% – 90% Asset 50 Asset 243 31 Quoted market price (to which a discount has been applied) 75 Discounted cash flows* Collateral values Discount on market value Collateral changes (1)% – 9% (1)% – 5% n/a n/a Financial instrument Uncollateralised customer derivatives 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 Interest rate derivatives (assets and liabilities) include negative XVA valuation adjustments amounting to net € 28 million (2020: € 41 million). The sensitivity to unobservable inputs for this XVA valuation adjustment at 31 December 2021 ranges from (i) negative € 23 million to positive € 12 million for CVA (2020: negative € 38 million to positive € 19 million) and (ii) negative € 5 million to positive € 3 million for FVA (2020: negative € 7 million to positive € 3 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. 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 is convertible into Class A Common Stock of Visa Inc. over time, with the first partial conversion having occurred in 2020. The remaining 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. 69% haircut (2020: 80%). 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) 90% discount for conversion rate variability. AIB Group plc Annual Financial Report 2021 Financial Statements 345 48 Fair value of financial instruments (continued) 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 € 21 million at 31 December 2021 (2020: negative € 1 million to positive € 4 million). 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. 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 2021 and 2020: 1 2 3 4 5 6 Classes of financial assets Derivative financial instruments Investment securities – equity Loans and advances to customers measured at FVTPL Total Classes of financial liabilities Derivative financial liabilities Total Classes of financial assets Derivative financial instruments Investment securities – equity Loans and advances to customers measured at FVTPL Total Classes of financial liabilities Derivative financial liabilities Total Level 3 2021 Effect on income statement Effect on other comprehensive income Favourable Unfavourable € m € m Favourable Unfavourable € m € m 14 48(1) 21 83 – – (27) (34)(1) (2) (63) (1) (1) – – – – – – – – – – – – 2020 Level 3 Effect on income statement Effect on other comprehensive income Favourable € m Unfavourable € m Favourable € m Unfavourable € m 20 46 (1) 4 70 2 2 (43) (15)(1) (1) (59) (2) (2) – – – – – – – – – – – – (1) Relates to a significant equity investment, the carrying value of which was € 50 million at 31 December 2021 (2020: € 31 million). Sensitivity information has not been provided for other equities as the portfolio comprises several investments, none of which is individually material. 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. 346 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 49 Cash and cash equivalents For the purposes of the statement of cash flows, cash and 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)(2) Securities financing(3) Total 2021 € m 42,654 903 – 2020 € m 25,550 659 350 43,557 26,559 (1)Included in ‘Loans and advances to banks’ total of € 1,323 million (2020: € 1,092 million) set out in note 20. (2)Includes € 4 million relating to restricted balances held in trust in respect of certain payables which are included in ‘Other liabilities’ (note 36). (3)Certain securities financing transactions may meet the definition of cash equivalents. These amounted to Nil at 31 December 2021 (2020: € 350 million). Cash and balances at central banks (net of ECL allowance of Nil) comprise: Central Bank of Ireland Bank of England Federal Reserve Bank of New York Other (cash on hand) Total 2021 € m 35,222 6,555 331 545 2020 € m 19,256 5,522 154 618 42,654 25,550 The Group is required to hold minimum reserve balances with the Central Bank of Ireland. The Group is also required by law to maintain reserve balances with the Bank of England. At 31 December 2021, these amounted to € 361 million (2020: € 378 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. AIB Group plc Annual Financial Report 2021 Financial Statements 347 50 Statement of cash flows Non-cash and other items included in profit before taxation Non-cash items Loss on disposal of property Net gain on derecognition of financial assets measured at amortised cost Dividends received from equity investments Investments accounted for using the equity method Net credit impairment writeback/(charge) Change in other provisions Retirement benefits – defined benefit expense Depreciation, amortisation and impairment Interest on subordinated liabilities and other capital instruments Interest on debt securities – MREL Gain on disposal of investment securities Loss on termination of hedging swaps Amortisation of premiums and discounts Net gain on equity investments at FVTPL Net loss 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 on equity investments Total other items Non-cash and other items for the year ended 31 December Change in operating assets(1) Change in items in course of collection Change in trading portfolio assets Change in derivative financial instruments Change in loans and advances to banks Change in loans and advances to customers Change in securities financing Change in other assets Change in operating liabilities(1) Change in deposits by central banks and banks Change in customer accounts Change in securities financing Change in debt securities in issue Change in notes in circulation Change in other liabilities 1 2 3 4 5 6 2021 € m 3 (1) (3) (21) (163) 183 3 327 41 97 (18) 12 50 (58) 12 (81) 7 (101) 289 (22) 3 (19) 270 2021 € m (1) 3 (2) 45 1,022 (3,415) 36 (2,312) 2021 € m 5,859 9,923 (165) (500) (49) 276 2020 € m – (24) (26) (15) 1,532 80 5 315 45 97 (17) 17 66 (45) – 22 (83) 120 2,089 (36) 26 (10) 2,079 2020 € m 14 – (13) (79) 1,799 (223) 484 1,982 2020 € m 3,708 10,916 210 (1,250) (68) (212) (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. 15,344 13,304 348 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 51 Related party transactions Related parties in the Group include the parent company, AIB Group plc, subsidiary undertakings including their non-controlling interests, 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 10 Molesworth Street, Dublin 2. (a) Transactions with subsidiary undertakings AIB Group plc is the ultimate parent company of the Group. Banking transactions between the parent company and its subsidiaries and between subsidiaries are entered into in the normal course of business. These include loans, deposits, provision of derivative contracts, foreign currency contracts and the provision of guarantees on an ‘arm’s length basis’. In 2020, reviews were completed of pricing arrangements between Allied Irish Banks, p.l.c. and certain Irish subsidiaries, and between certain Irish subsidiaries. Arising from these reviews, new pricing agreements were signed and implemented during 2020. The agreements reflect revised OECD guidelines on transfer pricing, which are the internationally accepted principles in this area, and take account of the functions, risks and assets involved. Details of related party transactions and balances between AIB Group plc and its subsidiaries are set out in note k to AIB Group plc Company financial statements. In accordance with IFRS 10, ‘Consolidated Financial Statements’, transactions between the parent company and its subsidiaries and between subsidiaries have been eliminated on consolidation. (b) Associated undertakings and joint arrangements From time to time, the Group provides certain banking and financial services for associated undertakings. These transactions are made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than the normal risk of collectability or present other unfavourable features. Details of loans to associates are set out in note 21 to the consolidated financial statements. (c) Non-controlling interests The Group has accepted a deposit from the non-controlling interests in a subsidiary which is detailed in note 33. (d) 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 46). During 2012, AIB agreed to make certain contributions to the pension scheme which were settled through the transfer to the AIB Group Irish Pension Scheme of interests in a special purpose 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 46). 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 349 51 Related party transactions (continued) (e) 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. As at 31 December 2021, the Group had 24 KMP (2020: 17 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 205 to 207. Short term compensation(1) Post-employment benefits(2) Termination benefits Total 2021 € m 5.7 0.8 – 6.5 2020 € m 5.9 0.9 – 6.8 (1) Comprises (a) in the case of Executive Directors and Senior Executive Officers: salary and a non-pensionable cash allowance in lieu of company car, medical insurance and other contractual benefits including, where relevant, payment in lieu of notice, and (b) in the case of Non-Executive Directors: Directors’ fees and travel and subsistence expenses incurred in the performance of the duties of their office, which are paid by the Group. (2) Comprises payments to defined benefit or defined contribution pension schemes, in accordance with actuarial advice, to provide post-retirement pensions. The Group’s defined benefit pension schemes closed to future accrual with effect from 31 December 2013 and all employee pension benefits have accrued on the basis of defined contributions since that date. (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 2021 € m 1.56 – (0.05) 1.51 2020 € m 3.00 – (1.44) 1.56 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 2021 were € 0.13 million (2020: € 0.13 million). Deposit and other credit balances held by KMP and their close family members as at 31 December 2021 amounted to € 3.21 million (2020: € 2.28 million). 350 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 51 Related party transactions (continued) (f) 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. There were 16 Directors in office during the year, 6 of whom availed of credit facilities (2020: 6). Of the Directors who availed of credit facilities, 3 had balances outstanding at 31 December 2021 (2020: 3 of 6). Details of transactions with Directors for the year ended 31 December 2021 are as follows: Tanya Horgan Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Colin Hunt: 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** Balance at 31 December 2020 € 000 Amounts advanced during 2021 € 000 Amounts repaid during 2021 € 000 Balance at 31 December 2021 € 000 59 – 59 741 12 753 – 13 13 – – – – – – – – – 4 – 4 50 – 50 – – – 55 – 55 2 59 691 12 703 5 760 – 8 8 – 15 * 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. Ms Helen Normoyle and Mr Fergal O’Dwyer held overdraft facilities which were not used during the year. Ms Ann O’Brien held a credit card facility with the Group, which had a Nil opening and closing balance, and a maximum debit balance of less than € 100 in the period. Ms Anik Chaumartin, Mr Donal Galvin, Mr Basil Geoghegan, Ms Sandy Kinney Pritchard, Mr Andy Maguire, Ms Elaine MacLean, Mr Brendan McDonagh, Mr Jim Pettigrew, Mr Jan Sijbrand and Mr Raj Singh had no credit facilities with the Group in 2021. All facilities are performing to their terms and conditions. An expected credit loss allowance is held for all loans and advances. Accordingly, a total expected credit loss allowance of under € 500 was held on the above facilities at 31 December 2021. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 351 51 Related party transactions (continued) (f) Companies Act 2014 disclosures (continued) (i) Loans to Directors (continued) Details of transactions with Directors for the year ended 31 December 2020 are as follows: Tom Foley: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Colin Hunt: 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** Ann O'Brien: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Tomas O'Midheach: Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Balance at 31 December 2019 € 000 Amounts advanced during 2020 € 000 Amounts repaid during 2020 € 000 Balance at 31 December 2020 € 000 – – – 790 10 800 – 4 4 – – – 361 7 368 – – – – – – – – – – – – – – – – – – 49 – 49 – – – – – – 38 – 38 – – – – 51 741 12 753 6 807 – 13 13 – 14 – – – – 1 323 9 332 9 374 * 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. Ms Helen Normoyle held an overdraft facility which was not used during the year. Mr Tom Foley held a credit card facility with the Group, which held an opening, closing and maximum debit balance of less than € 500 at the beginning and end of the reporting period. Ms Ann O’Brien held a credit card facility with the Group, which had a closing balance of less than € 500, and a maximum debit balance as represented in the preceding table. Mr Brendan McDonagh, Mr Richard Pym, Mr Raj Singh, Ms Sandy Kinney Pritchard, Mr Basil Geoghegan and Ms Elaine MacLean had no credit facilities with the Group in 2020. All facilities are performing to their terms and conditions. An expected credit loss allowance of under € 500 was held on the above facilities at 31 December 2020. 352 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 51 Related party transactions (continued) (f) Companies Act 2014 disclosures (continued) (ii) Connected persons The aggregate of loans to connected persons of Directors, in office during the year, at 31 December, as defined in Section 220 of the Companies Act 2014, are as follows (aggregate of 7 persons; 2020: 9 persons): Loans Overdraft/credit card* Total Interest charged during the year Maximum debit balance during the year** Balance at 31 December 2021 € 000 Balance at 31 December 2020 € 000 691 8 699 15 927 369 9 378 5 426 An expected credit loss allowance is held for all loans and advances. Accordingly, a total expected credit loss allowance of € 32,000 was held on the above facilities at 31 December 2021. * 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 2021 represents c. 0.01% of the net assets of the Group (2020: c. 0.01%). (g) Summary of relationship with the Irish Government The Irish Government is recognised as a related party under IAS 24 Related Party Disclosures as it is in a position to exercise control over AIB. 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 framework, the authority and responsibility for strategy and commercial policies (including business plans and budgets) and conducting AIB’s day-to-day operations rest with the Board and AIB’s management team, however, AIB remains subject to certain obligations which require advance consultation with or approval by the State. These obligations relate to, inter alia: – The composition of the board; – Declaration and payment of dividends; – Restrictions on various types of remuneration; – Buy-backs or redemptions by the Group of its shares; and – Material acquisitions/disposals. The relationship of the Irish Government with AIB is outlined under the following headings: – Ordinary shares At 31 December 2021, the Irish Government held 1,930,436,543 ordinary shares in AIB Group plc (71.12% of total), accordingly, AIB is under the control of the Irish Government. Subsequent to the year end, the State’s shareholding in the Company reduced to 70.97% as at 2 March 2022 as part of a pre-arranged trading plan that was previously announced. – Issue of warrants to the Minister for Finance In 2017, AIB issued warrants to the Minister to subscribe for 271,166,685 ordinary shares of AIB representing 9.99% of the issued share capital. For further details see note 39. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 353 51 Related party transactions (continued) (g) Summary of relationship with the Irish Government (continued) – Guarantee schemes European Communities (Deposit Guarantee Scheme) Regulations 2015 Eligible deposits (including credit balances in current accounts, demand deposit accounts and term deposit accounts) of up to € 100,000 per depositor per credit institution are covered under this scheme. The scheme is administered by the CBI and is funded by the credit institutions covered by the scheme. Strategic Banking Corporation of Ireland Scheme The Group through its participation in the Strategic Banking Corporation of Ireland (“SBCI”) Support loan Schemes (the ‘Schemes’) benefits from an 80% Government guarantee against losses on qualifying finance agreements on amounts advanced under the Schemes. At 31 December 2021, c. € 474 million is outstanding across the following individual schemes: Future Growth Loan Scheme; Brexit/COVID-19 Working Capital Loan Schemes and the COVID-19 Credit Guarantee Scheme. Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 The Credit Institutions (Eligible Liabilities Guarantee) Scheme 2009 was one of various stabilisation measures implemented by the State to support the Irish banking system including the Group. The Group no longer has any guaranteed liabilities under the scheme however, certain of the covenants in the scheme continue to apply to the Group including reporting covenants, until the scheme is terminated by the Minister for Finance. – 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. In early 2020, the NAMA subordinated bonds were fully redeemed. – Funding support The Group has availed of Targeted Long Term Refinancing Operation III (“TLTRO III”) funding from the ECB, through the Central Bank and in September 2020 drew down € 4 billion of funding and a further € 6 billion in June 2021. At 31 December 2021, the amounts outstanding, totalling € 10 billion, are included in ‘Deposits by central banks and banks’ in the table below. The term of the TLTRO III is three years with AIB having the option to repay after one year. See notes 4 and 32 for further details in relation to the Group’s participation in the TLTRO programme. These facilities, together with other assets and liabilities with Irish Government entity counterparties, are set out below. – Other transactions with the Irish Government and entities under its control In addition to the above matters, AIB also enters into other normal banking transactions with the Irish Government, its agencies and entities under its control. This includes transactions with (i) Government related entities, (ii) local government and commercial semi- state bodies and (iii) financial institutions under Irish Government control/significant influence. Other transactions include the payment of taxes, pay related social insurance, local authority rates, and the payment of regulatory fees, as appropriate. (i) Irish Government and related entities The following table outlines the amounts outstanding at 31 December 2021 and 2020 with Irish Government and related entities which are considered individually significant (excluding accrued interest). Related entities includes 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 also included. 354 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 51 Related party transactions (continued) (g) Summary of relationship with the Irish Government (continued) Assets Cash and balances at central banks(1) Investment securities(2) Liabilities Deposits by central banks and banks(3) Customer accounts(4) 2021 Balance € m 35,222 5,904 2020 Balance € m 19,256 7,715 10,000 165 4,000 293 (1) Cash and balances at the central bank represent the placements which the Group holds with the Central Bank. (2) Investment securities at 31 December 2021 comprise € 5,904 million (2020: € 7,715 million) in Irish Government securities held in the normal course of business. (3) This relates to funding received from the ECB through the Central Bank which is detailed under ‘Funding Support’ above. (4) Includes € 20 million (2020: € 130 million) borrowed from the Strategic Banking Corporation of Ireland (“SBCI”), the ordinary share capital of which is owned by the Minister for Finance. All other balances, both assets and liabilities are carried out in the ordinary course of banking business on normal terms and conditions. (ii) Local government(1) and Commercial semi-state bodies(2) During 2021 and 2020, AIB entered into banking transactions in the normal course of business with local government bodies and semi-state bodies. These transactions include the granting of loans and the acceptance of deposits, as well as derivative and clearing transactions. There were no individually significant amounts outstanding in the period with local government or with semi-state bodies. (1) This category includes local authorities, borough corporations, county borough councils, county councils, boards of town commissioners, urban district councils, non-commercial public sector entities, public voluntary hospitals and schools. (2) Semi-state bodies is the name given to organisations within the public sector operating with some autonomy. They include commercial organisations or companies in which the State is the sole or main shareholder. (iii) Financial institutions under Irish Government control/significant influence The Irish Government has a controlling interest in Permanent tsb plc and also had significant influence over Bank of Ireland. Due to AIB’s related party relationship with the Irish Government, balances between these financial institutions and AIB are considered related party transactions in accordance with IAS 24. 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. 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 2021 and 2020: Assets Loans and advances to banks Investment securities 2021 € m 1 85 2020 € m – 117 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 355 51 Related party transactions (continued) (g) Summary of relationship with the Irish Government (continued) 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 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. Significant progress was made towards a conclusion and any residual matters are expected to close in 2022. AIB maintains its position that no financial loss is expected to occur. Irish bank levy The bank levy is calculated based on each financial institution’s Deposit Interest Retention Tax (“DIRT”) payment in a base year with 2019 being the base year for 2021. The annual levy paid by the Group for 2021 and reflected in operating expenses (note 12) in the income statement amounted to € 37 million (2020: € 35 million). (h) 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 Ireland defined benefit pension scheme and defined contribution pension scheme, respectively, against any actions, claims or demands arising out of their actions as Directors of the trustee companies, other than by reason of wilful default. 52 Employees The following table shows the geographical analysis of average employees for 2021 and 2020: Average number of staff (Full time equivalents) Ireland United Kingdom United States of America Total The following table shows the segmental analysis of average employees for 2021 and 2020: Retail Banking(1) Capital Markets AIB UK Group(1)(2) Total 2021 8,188 922 44 9,154 2021 4,376 766 844 3,168 9,154 2020 8,305 997 54 9,356 2020 4,251 667 920 3,518 9,356 (1) Following changes in the organisation structure during the year, there has been a net transfer of c. 350 FTEs from Group to Retail Banking. (2) Group comprises wholesale treasury activities and Group control and support functions. Treasury manages the Group’s liquidity and funding positions and provides customer treasury services and economic research. The Group control and support functions include Technology, Operations, Finance, Risk, Legal, Corporate Governance & Customer Care, Human Resources, Corporate Affairs, Strategy & Sustainability and Group Internal Audit. The average number of employees for 2021 and 2020 set out above excludes employees on career breaks and other unpaid long term leaves. Actual full time equivalent numbers at 31 December 2021 were 8,916 (2020: 9,193). 356 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to the consolidated financial statements 53 Regulatory compliance During the years ended 31 December 2021 and 2020, the Group and its regulated subsidiaries complied with their externally imposed capital ratios. 54 Financial and other information Operating ratios Operating expenses/operating income Other income/operating income Rates of exchange €/$* Closing Average €/£* Closing Average 2021 % 84.3 24.6 2020 % 78.3 21.1 2021 2020 1.1326 1.1831 0.8403 0.8598 1.2271 1.1417 0.8990 0.8897 *Throughout this report, US dollar is denoted by $ and Pound sterling is denoted by £. Currency Information Euro Other Assets Liabilities and equity 2021 € m 103,920 23,955 127,875 2020 € m 89,330 21,055 110,385 2021 € m 105,495 22,380 127,875 2020 € m 90,364 20,021 110,385 55 Dividends Final dividends are not accounted for until they have been approved at the Annual General Meeting of shareholders or in the case of the interim dividend, when they become irrevocable having already been approved for payment by the Board of Directors. Interim dividends may be cancelled at any time prior to the actual payment. No final dividend on ordinary shares was paid in respect of the financial year ended 31 December 2020. The Board is recommending that a final dividend of 4.5 cent per ordinary share, amounting in total to € 122 million, be paid on 13 May 2022. The financial statements for the year ended 31 December 2021 do not reflect this dividend which will be accounted for in shareholders’ equity as an appropriation of distributable reserves in 2022. AIB Group plc Annual Financial Report 2021 Financial Statements 357 56 Proposed acquisition Ulster Bank loans On 28 June 2021, the Group confirmed that Allied Irish Banks, p.l.c. had entered into a binding agreement with NatWest Holdings Limited and Ulster Bank Ireland DAC for the acquisition of performing Ulster Bank corporate and commercial loans (portfolio of c. € 4.2 billion for a total consideration of c. € 4.1 billion). The exact size of the portfolio and consideration payable depends on movements in the portfolio up to completion which will occur on a phased basis. The transaction remains subject to regulatory approval. Based on information as at 31 December 2021, the eligible portfolio of loans, that are subject to the agreement, amounted to € 3.7 billion reflecting repayments and new business drawdowns during the period. Additional movements are anticipated in the portfolio up to completion. 1 2 3 4 5 6 57 Non-adjusting events after the reporting period No significant non-adjusting events have taken place since 31 December 2021. 58 Approval of financial statements The financial statements were approved by the Board of Directors on 2 March 2022. 358 Financial Statements AIB Group plc Annual Financial Report 2021 AIB Group plc company statement of financial position as at 31 December 2021 Assets Loans and advances to banks – subsidiary Investments in subsidiary undertaking Current taxation Prepayments and accrued income Total assets Liabilities Debt securities in issue Subordinated liabilities and other capital instruments Accruals and deferred income Total liabilities Equity Share capital Merger reserve Revenue reserves Total shareholders' equity Other equity interests Total equity Total liabilities and equity Notes d e f g h i 2021 € m 5,547 10,194 – 53 15,794 4,044 1,500 68 5,612 1,696 2,364 4,997 9,057 1,125 10,182 15,794 2020 € m 4,686 7,487 – 41 12,214 3,175 1,500 61 4,736 1,696 – 4,657 6,353 1,125 7,478 12,214 The Company recorded a profit after taxation of € 2,769 million for the year ended 31 December 2021 (2020: loss € 3,088 million). Jim Pettigrew Chair 2 March 2022 Colin Hunt Chief Executive Officer AIB Group plc company statement of changes in equity for the financial year ended 31 December 2021 AIB Group plc Annual Financial Report 2021 Financial Statements 359 Attributable to equity holders of the parent At 1 January 2021 Total comprehensive income for the year Profit after tax Other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity Distributions paid to other equity interests (note 40 to the consolidated financial statements) Transfer between merger and revenue reserves (note i) Total contributions by and distribution to owners Share capital € m 1,696 Other equity interests € m 1,125 – – – – – – – – – – – – At 31 December 2021 1,696 1,125 Merger reserve Revenue reserves € m – – – – – 2,364 2,364 2,364 € m 4,657 2,769 – 2,769 (65) (2,364) (2,429) 4,997 Attributable to equity holders of the parent At 1 January 2020 Total comprehensive income for the year Loss after tax Other comprehensive income Total comprehensive income for the year Transactions with owners, recorded directly in equity Issue of Additional Tier 1 Securities (note j) Distributions paid to other equity interests (note 40 to the consolidated financial statements) Transfer between merger and revenue reserves (note i) Total contributions by and distribution to owners At 31 December 2020 1,696 Share capital € m 1,696 Other equity interests € m 500 Merger reserve Revenue reserves – – – – – – – – – – – – 625 – – 625 1,125 € m 2,791 – – – – – – (2,791) (2,791) – € m 5,000 – (3,088) (3,088) – – (3,088) (3,088) – (46) 2,791 2,745 4,657 625 (46) – 579 7,478 1 2 3 4 5 6 2021 Total € m 7,478 2,769 – 2,769 (65) – (65) 10,182 2020 Total € m 9,987 – 360 Financial Statements AIB Group plc Annual Financial Report 2021 AIB Group plc company statement of cash flows for the financial year ended 31 December 2021 Cash flows from operating activities Profit/(loss) before taxation for the year Adjustments for: – Non-cash and other items Distributions from Additional Tier 1 Securities issued by subsidiary Net credit impairment charge Interest on subordinated liabilities and other capital instruments Interest on debt securities – MREL Change in prepayments and accrued income Change in accruals and deferred income Impairment of subsidiary undertaking (note e) Other income – Change in operating assets Change in loans and advances to banks – subsidiary – Taxation refund Net cash outflow from operating activities Cash flows from investing activities Distributions received from Additional Tier 1 Securities issued by subsidiary Investment in subsidiary undertaking (note e) Net cash inflow/(outflow) from investing activities Cash flows from financing activities Net proceeds on issue of Additional Tier 1 Securities (note j) Net proceeds on issue of € 1 billion Tier 2 Notes due 2031 (note g) Proceeds on issue of debt securities – MREL (note f) Distributions paid to other equity interests Interest paid on debt securities – MREL Interest paid on subordinated liabilities and other capital instruments Net cash inflow from financing activities Change in cash and cash equivalents Opening cash and cash equivalents Effect of exchange translation adjustments Closing cash and cash equivalents 2021 € m 2020 € m 2,769 (3,088) (67) – 38 97 (11) (3) (2,707) – (2,653) (750) – (634) 67 – 67 – – 750 (65) (97) (28) 560 (7) 12 – 5 (47) 1 17 97 (6) 5 3,134 1 3,202 (1,000) – (886) 47 (625) (578) 625 1,000 – (46) (98) (9) 1,472 8 4 – 12 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. 1 2 3 4 5 6 Notes to AIB Group plc company financial statements AIB Group plc Annual Financial Report 2021 Financial Statements 361 Background AIB Group plc is a company domiciled in Ireland with its Registered Office address at 10 Molesworth Street, Dublin 2, 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. 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 236 to 262. The parent company financial statements and related notes set out on pages 358 to 366 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 2021. 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 263 to 268. 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. b Operating expenses Amounts payable to subsidiary under Master Service Agreement 2021 € m 8 8 2020 € m 6 6 c Auditor’s remuneration The disclosure of auditor’s remuneration is in accordance with Section 322 of the Companies Act 2014. This mandates disclosure of remuneration paid/payable to the Group Auditor only (Deloitte Ireland LLP) for services relating to the audit of the Group and relevant subsidiary financial statements. No audit remuneration was paid/payable to the Group Auditor (Deloitte Ireland LLP) or to overseas auditors (excluding Deloitte Ireland LLP) for services relating to the audit of the financial statements of AIB Group plc during the year to 31 December 2021. d Loans and advances to banks At amortised cost Funds placed with subsidiary, Allied Irish Banks, p.l.c. ECL allowance 2021 € m 5,550 (3) 5,547 2020 € m 4,689 (3) 4,686 In May 2021, AIB Group plc lent € 750 million to Allied Irish Banks, p.l.c. repayable on 17 November 2027 with an optional redemption date of 17 November 2026 at a fixed interest rate of 0.625% up to the optional redemption date. These borrowings by Allied Irish Banks, p.l.c. are unsecured and subordinated. 362 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to AIB Group plc company financial statements e Investment in subsidiary undertaking At 1 January Additions – Additional Tier 1 Securities Reversal of impairment/(impairment) of equity shares At 31 December 2021 € m 7,487 – 2,707 10,194 2020 € m 9,996 625 (3,134) 7,487 AIB Group plc (‘the Company’) holds the entire ordinary share capital of Allied Irish Banks, p.l.c. (‘the subsidiary’) which it acquired in 2017 (2,714,381,237 ordinary shares of nominal value € 0.625 each) and which had a book value at acquisition of € 12,940 million and has a carrying value at 31 December 2021 of € 9,069 million (2020: € 6,362 million). Separately, the Company invested € 1,125 million in Additional Tier 1 Securities (AT1) issued by Allied Irish Banks, p.l.c. These investments follow the Company’s own issuance of AT1 securities as detailed in note j. Allied Irish Banks, p.l.c. is a financial services company incorporated and registered in Ireland with a Registered Office at 10 Molesworth Street, Dublin 2. It is the parent company of a number of subsidiaries, both credit institutions and others, all of which are 100% owned apart from Augmentum Limited in which there are non-controlling interests (note 41 to the consolidated financial statements). 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 Ireland, AIB Mortgage Bank Unlimited Company and EBS d.a.c. 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. Impairment of equity shares The Company reviews its equity investment for impairment at the end of each reporting period if there are indications that impairment may have occurred. The testing for possible impairment involves comparing the estimated recoverable amount of an investment with its carrying amount. Where the recoverable amount is less than the carrying amount, the difference is recognised as an impairment provision in the Company’s financial statements. The recoverable amount is the higher of fair value less costs to sell and value-in-use (“VIU”). The subsidiary’s fair value is largely that of the Company since the net assets of the subsidiary are, in effect, the same as those of the Company. Accordingly, AIB Group plc’s market capitalisation is a proxy for the fair value of Allied Irish Banks, p.l.c. At 31 December 2021, the market capitalisation of AIB Group plc was € 5.8 billion. This was below the carrying amount of its equity investment in the subsidiary of € 6,362 million. Accordingly, AIB Group plc tested its investment for impairment and reviewed the recoverable amount as determined by a VIU calculation compared with the carrying amount. The Company uses a discounted cash flow to equity model to derive a VIU, in line with industry practice. Under this approach, recoverable value is determined by the present value of future distributable items which takes into consideration the requirement to retain earnings in line with relevant target capital ratios and risk-weighted assets. Accordingly, the principal inputs to the model are (a) future profitability; (b) risk-weighted asset levels; (c) the discount rate used; and (d) target capital ratios. The VIU was determined at € 9,069 million which was higher than the carrying amount (i.e. € 6,362 million) and accordingly, the Company recognised a reversal of an earlier impairment amounting to € 2,707 million in 2021. Accordingly, the VIU is higher than the market capitalisation noted above. Amongst the main reasons for this are the low liquidity and limited free-float of the Group’s shares; uncertainties relating to the potential longer term residual impacts of COVID–19 and Brexit; and the subdued market appetite for financial stocks. At 31 December 2020, the VIU was calculated at € 6,362 million and an impairment loss amounting to € 3,134 million was recognised. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 363 e Investment in subsidiary undertaking (continued) Basis used to calculate recoverable amount In determining VIU, the Company used discounted cash flow projections attributable to equity shareholders. These projections were the output arising from the recent three year Strategic Plan (2022 to 2024) approved by the Board. This output from the Plan will be used by the Company on an ongoing basis during the three year planning cycle. The Strategic Plan involved significant judgements which were subject to review and validation at a number of levels of governance and is the current best estimate of the expected cash flows over the planning period. For cash flows beyond the planning period, the Company extrapolated into perpetuity the year 3 expected cash flows as a base, using a long term growth rate to derive a terminal value. Risk-weighted assets are assumed to grow at the same rate as that for long term profit growth. The Company used the following key assumptions in the VIU calculation: Long term profit/risk-weighted asset growth rate after 2024: 2%; and Discount rate: 10%. Future profitability and growth rates are dependent on several factors, including the economic environment both local and international, which has been impacted by COVID-19, the impact of Brexit and the United Kingdom’s future relationship with Ireland and the EU, the impact of regulatory requirements on the banking industry and the continuing developments in the financial services sector. However, as a result of the better than expected performance of economies in 2021, the rapid roll-out of highly effective vaccines and additional fiscal supports, growth forecasts for the global economy has been revised further upwards in recent months. Profitability and growth were reassessed in the annual planning exercise covering the period 2022 to 2024 undertaken by the Group in the second half of 2021. Profitability levels underpinning the plan have been revised upwards compared to last year reflecting the revised macroeconomic outlook. The discount rate to be used in future periods may increase/decrease due to changes to the risk free rate or to the risk premium. Changes to these inputs may increase or decrease the impairment loss allowance/reversal in future periods. The following table sets out the sensitivity of the VIU calculation to key input variables. The table reflects the impact of the variables individually and not any interrelationships. It is possible that more than one favourable and/or unfavourable change will occur at the same time. Long term profit/risk-weighted assets growth rate Discount rate Favourable change bps Increase in VIU € m 100 (100) 154 1,242 31 December 2021 Unfavourable change bps Decrease in VIU € m (100) 100 (177) (977) In addition, if year 3 expected cash flows that are used as a base to derive the terminal value were increased/decreased by € 100 million, the VIU calculation would increase by c. € 449 million/decrease by c. € 656 million. Given the interrelationship of changes set out in the sensitivity table above, the Company estimates that the reasonable possible range of estimates for VIU is € 8,092 million to € 10,311 million. 31 December 2020 The Company recognised an impairment loss provision amounting to € 3,134 million, as the VIU calculation at 31 December 2020 amounted to € 6,362 million, which was lower than the carrying value of € 9,496 million. 364 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to AIB Group plc company financial statements 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 2021 € m 2,500 1,544 4,044 2021 € m 3,175 750 119 4,044 For details of debt securities issued by the Company during 2021, refer to note 34 to the consolidated financial statements. The instruments issued by AIB Group plc were issued for the purpose of meeting Group MREL requirements. g Subordinated liabilities and other capital instruments Dated loan capital – European Medium Term Note Programme: € 500 million Subordinated Tier 2 Notes due 2029, Callable 2024 € 1 billion Subordinated Tier 2 Notes due 2031, Callable 2026 2021 € m 500 1,000 1,500 2020 € m 1,750 1,425 3,175 2020 € m 3,306 – (131) 3,175 2020 € m 500 1,000 1,500 The dated loan capital above issued under the European Medium Term Note Programme, is subordinated in right of payment to the ordinary creditors, including depositors, of the Group. For details of the above issuances, refer to note 38 to the consolidated financial statements. h Share capital The ordinary share capital of AIB Group plc is detailed in note 39 to the consolidated financial statements. i Merger reserve At 1 January Transfer from revenue reserves At 31 December 2021 € m – 2,364 2,364 2020 € m 2,791 (2,791) – Under the Scheme of Arrangement (“the Scheme”) approved by the Irish 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. In the Company’s financial statements, impairment losses which arise from the Company’s investment in Allied Irish Banks, p.l.c. will be charged to profit or loss and subsequently transferred to the merger reserve in so far as a credit balance remains in the merger reserve. In 2020, while an impairment loss of € 3,134 million was recognised in the profit or loss account (note e), only € 2,791 million could be transferred from the revenue reserves to the merger reserve, bringing the balance on the merger reserve to Nil. In 2021, the Company recognised an impairment reversal amounting to € 2,707 million which resulted in a transfer from revenue reserves leaving a balance of € 2,364 million in merger reserves. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 Financial Statements 365 j Other equity interests Issued by AIB Group plc € 500 million Additional Tier 1 Perpetual Contingent Temporary Write-Down Securities issued 2019 € 625 million Additional Tier 1 Perpetual Contingent Temporary Write-Down Securities issued 2020 Total 2021 € m 500 625 1,125 2020 € m 500 625 1,125 Additional Tier 1 Perpetual Contingent Temporary Write-Down Securities For further details in relation to AT1s issued by the Company, see note 40 to the consolidated financial statements. k Related party transactions Related parties of AIB Group plc include subsidiary undertakings including their non-controlling interests, 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. 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). The following were the principal transactions during 2021 between AIB Group plc (the parent company) and Allied Irish Banks, p.l.c. (the subsidiary company): Amounts included in AIB Group plc company’s income statement in relation to transactions with its immediate subsidiary, Allied Irish Banks, p.l.c. are as follows: Interest income Operating expenses Distributions received from Additional Tier 1 Securities Notes b 2021 € m 138 8 67 2020 € m 121 6 47 Amounts included in AIB Group plc company’s statement of financial position in relation to balances with its immediate subsidiary, Allied Irish Banks, p.l.c. are as follows: Investment in subsidiary undertaking Loans and advances to banks Prepayments and accrued income Accruals and deferred income Notes e d 2021 € m 10,194 5,547 53 17 2020 € m 7,487 4,686 41 21 The following financing transactions occurred between AIB Group plc and its subsidiary, Allied Irish Banks, p.l.c. during 2021. (a) AIB Group plc lent € 750 million to Allied Irish Banks, p.l.c. (note d). 366 Financial Statements AIB Group plc Annual Financial Report 2021 Notes to AIB Group plc company financial statements l 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 2021 and 2020: 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. 2021 Total € m 5,547 53 5,600 m Liquidity and funding 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 2021 and 2020: On demand € m 5 – 5 – – 68 68 On demand € m 13 – 13 – – 61 61 <3 months but not on demand € m – 53 53 – – – – <3 months but not on demand € m – 41 41 – – – – Financial assets Loans and advances to banks(1) Other financial assets Financial liabilities Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities Financial assets Loans and advances to banks(1) Other financial assets Financial liabilities Debt securities in issue Subordinated liabilities and other capital instruments Other financial liabilities (1)Shown gross of expected credit losses. 3 months to 1 year 1–5 years Over 5 years € m € m € m € m – – – – – – – 3,295 – 3,295 2,250 – 2,250 5,550 53 5,603 3,295 750 4,045 – – 3,295 1,500 – 2,250 3 months to 1 year 1–5 years Over 5 years € m € m € m € m – – – – – – – 3,176 1,500 – – 3,176 1,500 4,689 41 4,730 3,175 – 3,175 – – 1,500 – 3,175 1,500 1,500 61 4,736 2020 Total € m 4,686 41 4,727 2021 Total 1,500 68 5,613 2020 Total 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 General Information 367 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); and – 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 Euronext Dublin and the premium listing segment of the Official List of the London Stock Exchange. Registrar and Shareholder Enquiries: The Company’s Registrar for shareholder enquiries is: Computershare Investor Services (Ireland) Ltd., 3100 Lake Dr, Citywest Business Campus, Dublin 24, 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 1,926,309,424 ordinary shares representing 70.97% of the total voting rights attached to issued share capital. Financial calendar Annual General Meeting: 5 May 2022, at 10 Molesworth Street, Dublin 2. Interim results The unaudited Half-Yearly Financial Report 2022 will be announced on 29 July 2022 and will be available on the Company’s website – www.aib.ie. 368 General Information AIB Group plc Annual Financial Report 2021 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 on pages 28 to 30 in the 2021 Annual Financial Report. In addition to matters relating to the Group’s business, future performance will be impacted by direct and indirect impacts of the COVID-19 pandemic and 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 28 to 30 of the 2021 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. 1 2 3 4 5 6 Glossary of terms AIB Group plc Annual Financial Report 2021 General Information 369 Additional Tier 1 Capital Additional Tier 1 Capital (“AT1”) are securities issued by AIB and included in its capital base as fully CRD IV compliant additional tier 1 capital on a fully loaded basis. Arrears 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. Bank Recovery and Resolution Directive Banking book 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. 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 Buy-to-let mortgage Capital Requirements Directive Capital Requirements Directive IV 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. 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 obligation A collateralised bond obligation (“CBO”)/collateralised debt obligation (“CDO”) is an investment vehicle (generally an SPE) which allows third party investors to make debt and/or equity investments in a vehicle containing a portfolio of loans and bonds with certain common features. In the case of synthetic CBOs/CDOs, the risk is backed by credit derivatives instead of the sale of assets (cash CBOs/CDOs). Commercial paper 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 Common equity tier 1 capital (“CET1”) 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 Common equity tier 1 ratio – A measurement of a bank’s common equity tier 1 capital expressed as a percentage of its total risk- weighted assets. Concentration risk 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. Contractual maturity Contractual residual maturity 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. 370 General Information AIB Group plc Annual Financial Report 2021 Glossary of terms Credit default swaps 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 rating An evaluation of the creditworthiness of an entity seeking to enter into a credit agreement. Credit risk The risk that one party to a financial instrument will cause a financial loss to the other party by failing to discharge an obligation. Credit risk mitigation Credit spread Credit support annex 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 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 (“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 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. Debt restructuring This is the process whereby customers in arrears, facing cash flow or financial distress, renegotiate the terms of their loan agreements in order to improve the likelihood of repayment. Restructuring may involve altering the terms of a loan agreement including a partial write-down of the balance. In certain circumstances, the loan balance may be swapped for an equity stake in the counterparty. 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 Default Liabilities of the Group which are represented by transferable certificates of indebtedness of the Group to the bearer of the certificates. Default is considered to have occurred with regard to a credit obligor when either or both of the following events have taken place: i. ii. a credit obligor is past due 90 days or more on any material credit obligation to the Group; and/or the Group considers that the credit obligor is unlikely to pay their credit obligations, without recourse by the Group to actions such as realising collateral (if held), or if for any other reason, the Group determines that the credit obligor is unlikely to pay their credit obligations in full. Derecognition The removal of a previously recognised financial asset or financial liability from the Group’s statement of financial position. EBITDA Earnings before interest, tax, depreciation and amortisation. ECB refinancing rate The main refinancing rate or minimum bid rate is the interest rate which banks have to pay when they borrow from the ECB under its main refinancing operations. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 General Information 371 ECLs Eurozone Exposure at default Exposure value Forbearance Expected credit loss (“ECLs”) – The weighted average of credit losses with the respective risks of a default occurring as the weights. 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. The expected or actual amount of exposure to the borrower at the time of default. 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. 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. Funding value adjustment 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. Interest rate risk in the banking book (IRRBB) Internal Capital Adequacy Assessment Process Internal liquidity adequacy assessment process The current or prospective risk to both the earnings and capital of the Group as a result of adverse movements in interest rates that affect the banking book positions. 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. The Internal Liquidity Adequacy Assessment Processes (“ILAAP”) is a key element of the risk management framework for credit 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 The Internal Ratings Based Approach (“IRBA”) allows banks, subject to regulatory approval, to use their own estimates of certain risk components to derive regulatory capital requirements for credit risk across different asset classes. The relevant risk components are: Probability of Default (“PD”); Loss Given Default (“LGD”); and Exposure at Default (“EAD”). ISDA Master Agreements Standardised contracts, developed by the International Swaps and Derivatives Association (“ISDA”), used as an umbrella under which bilateral derivatives contracts are entered into. Leverage ratio To prevent an excessive build-up of leverage on institutions’ balance sheets, Basel III introduces a non-risk-based leverage ratio to supplement the risk-based capital framework of Basel II. It is defined as the ratio of tier 1 capital to total exposures. Total exposures include on-balance sheet items, off-balance sheet items and derivatives, and should generally follow the accounting measure of exposure. Liquidity Coverage Ratio Liquidity Coverage Ratio (“LCR”): The ratio of the stock of high quality liquid assets to expected net cash outflows over the next 30 days under a stress scenario. 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. 372 General Information AIB Group plc Annual Financial Report 2021 Glossary of terms Loans past due Loss Given Default 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: – – – When a borrower is past due, the entire exposure is reported as past due, rather than the amount of any excess or arrears. has breached an advised limit; has been advised of a limit lower than the then current amount outstanding; or has drawn credit without authorisation. 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 Medium term notes (“MTNs”) are notes issued by the Group across a range of maturities under the European Medium Term Notes (“EMTN”) Programme. Minimum requirement for own funds and eligible liabilities (MREL) National Asset Management Agency Net interest income Net interest margin Net Stable Funding Ratio New transaction lendings Non-performing exposures A European Union wide requirement under the Bank Recovery and Resolution Directive for all European banks and investment banks to hold a minimum level of equity and/or loss absorbing eligible liabilities to ensure the operation of the bail-in tool to absorb losses and recapitalise an institution in resolution. 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 Ratio (“NSFR”): The ratio of available stable funding to required stable funding over a 1 year time horizon. 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 items Off-balance sheet items include undrawn commitments to lend, guarantees, letters of credit, acceptances and other items as listed 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. Prime loan A loan in which both the criteria used to grant the loan (loan-to-value, debt-to-income, etc.) and to assess the borrower’s history (no past due reimbursements of loans, no bankruptcy, etc.) are sufficiently conservative to rank the loan as high quality and low-risk. 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 Equity securities in operating companies not quoted on a public exchange, often involving the investment of capital in private companies. 1 2 3 4 5 6 AIB Group plc Annual Financial Report 2021 General Information 373 Probability of Default Probability of Default (“PD”) is the likelihood that a borrower will default on an obligation to repay. Regulatory capital Regulatory capital is determined in accordance with rules established by the SSM/ECB for the consolidated Group and by local regulators for individual Group companies. Re-pricing risk Re-pricing risk is a form of interest rate risk (i.e. a type of market risk) that occurs when asset and liability positions are mismatched in terms of re-pricing (as opposed to final contractual) maturity. Where these interest rate gaps are left unhedged, it can result in losses arising in the Group’s portfolio of financial instruments. Repurchase agreement Repurchase agreement (“Repo”) is a short term funding agreement that allows a borrower to create a collateralised loan by selling a financial asset to a lender. As part of the agreement, the borrower commits to repurchase the security at a date in the future repaying the proceeds of the loan. For the counterparty to the transaction, it is termed a reverse repurchase agreement or a reverse repo. Residential mortgage-backed securities Risk-weighted assets Securities financing transactions Securitisation Single Resolution Fund Residential mortgage-backed securities (“RMBS”) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. 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. Securities financing transactions allow investors and firms to use assets, such as the shares or bonds they own, to secure funding for their activities. 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. The Single Resolution Fund (“SRF”) is an emergency fund that can be called upon in times of crisis. Single Supervisory Mechanism The Single Supervisory Mechanism ("SSM") is a system of financial supervision comprising the European Central Bank (“ECB”) and the national competent authorities of participating EU countries. 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. 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. 374 General Information AIB Group plc Annual Financial Report 2021 Glossary of terms 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 settlement date accounting Value at Risk 1. 2. Trade date accounting records the transaction on the date on which an agreement has been entered (the trade date), instead of on the date the transaction has been finalised (the settlement date). 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. 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. AIB Group plc Annual Financial Report 2021 General Information 375 Principal addresses AIB Group plc 10 Molesworth Street, Dublin 2. AIB Group (UK) p.l.c. 92 Ann Street, Belfast BT1 3HH. Telephone: + 353 1 772 5861 Telephone: + 44 345 600 5925 Allied Irish Banks, p.l.c. 10 Molesworth Street, Dublin 2. Telephone: + 353 1 772 5861 AIB Mortgage Bank Unlimited Company 10 Molesworth Street, Dublin 2. Telephone: +353 1 772 5861 EBS d.a.c. The EBS Building, 2 Burlington Road, Dublin 4. Telephone: + 353 1 665 9000 AIB (NI) 92 Ann Street, Belfast BT1 3HH. Telephone: + 44 345 600 5925 Allied Irish Bank (GB) St Helen’s, 1 Undershaft, London EC3A 8AB. Telephone: + 44 20 7647 3300 1 2 3 4 5 6 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. 376 General Information AIB Group plc Annual Financial Report 2021 Index A Accounting policies Page 236 E Earnings per share Annual General Meeting Approval of financial statements Auditor’s remuneration Average balance sheets and interest rates B Board Audit Committee Board Committees Board and Executive Officers Board Risk Committee Business model risk C Capital Capital adequacy risk Capital contributions Capital reserves Capital redemption reserves Chair’s statement Chief Executive’s review Company secretary Conduct risk Contingent liabilities and commitments 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 Disposal groups and non-current assets held for sale Dividend income Dividends 367 357 277 59 186 179 177 193 162 73 153 323 323 323 6 9 179 165 328 176 276 83 263 356 316 316 306 315 281 36 171 205 280 274 356 85 and 141 ECL ECL allowance on financial assets Employees Equity risk 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 Forward looking statements G Gain on financial assets Glossary Going concern Governance and oversight I Income statement Independent auditor’s report Intangible assets Interest and similar income Page 280 89 294 355 161 356 338 292 356 150 367 151 229 142 368 275 369 238 169 229 217 300 273 M Market risk Model risk Page 154 168 N Net fee and commission income Net trading income/(loss) Nomination and Corporate Governance Committee Non-adjusting events after the reporting period Notes to the financial statements O Off-balance sheet arrangements and transferred financial assets Offsetting financial assets and financial liabilities Operating and financial review Operating expenses Operational risk Other equity interests Other liabilities Other operating income P Pension risk People and culture risk Principal addresses Property, plant and equipment Prospective accounting changes Provisions for liabilities and commitments Interest and similar expense 273 Interest rate risk in the banking book 154 Interest rate sensitivity Internal Audit Investments accounted for using the equity method Investment securities 156 190 299 295 Investments in Group undertakings 331 Irish Government L Lease liabilities Liquidity and funding risk Liquidity risk Loans and advances to banks 352 317 145 145 291 Loans and advances to customers 292 R Regulatory capital and capital ratios Regulatory compliance Regulatory compliance risk Related party transactions Report of the Directors Retirement benefits Risk appetite Risk framework Risk governance structure Risk identification and assessment process Risk management Risk management and internal controls 274 274 196 357 235 332 324 58 276 163 322 317 275 160 167 375 301 262 318 73 356 164 348 170 309 80 80 78 80 77 211 AIB Group plc Annual Financial Report 2021 General Information 377 1 2 3 4 5 6 S Schedule to the Directors’ report Securities financing Segmental information Share-based compensation schemes Share capital Page 173 293 269 276 321 Statement of cash flows 234 Statement of comprehensive income 230 Statement of changes in equity 232 Statement of Directors’ Responsibilities Statement of financial position Stock exchange listings Structural foreign exchange risk Subordinated liabilities and other capital instruments Subsidiaries and consolidated structured entities Supervision and regulation Sustainable Business Advisory Committee T Taxation Technology & Data Advisory Committee Transferred financial assets V Viability statement W Website 216 231 367 159 320 331 214 208 278 209 332 210 367 AIB Group plc 10 Molesworth Street, Dublin 2, D02 R126 +353 (1) 660 0311 aib.ie/investorrelations
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