ar-2013

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Group Chief Executive’s Review We have designed our systems and processes to review each customer on a case‐by‐case basis, taking into account all the information available and provided to us before we offer a specific treatment. Sustainability and affordability are the two key principles which underpin our arrears resolution strategy. However, in the proven absence of sustainability and affordability on the part of the customer, the AMU is left with no other choice but to advise the customer to work with us on a sale or, where the customer does not co‐operate, to initiate legal proceedings. I want to re‐iterate that we do this only in cases where no other alternative options truly exist for the customer or the Group. Non‐Core The Non‐Core businesses consists of the UK and Isle of Man mortgage businesses, the Irish Commercial Real Estate portfolio and another smaller Irish portfolio of specialist residential mortgages. These portfolios remain closed to new business. We continue to manage these portfolios professionally, by outsourcing servicing where appropriate in order to maximise value with the intention of deleveraging as opportunities arise. At the same time, the trade‐off between price and capital availability remain the key consideration for us in availing of any deleveraging opportunity. Group Centre We have strengthened every functional department in the Group Centre. We wanted to ensure that the Group’s Business Units always have access to professional support. As a Management Team we believe that professional, efficient and effective support functions are a key part of our pursuit to becoming a best‐in‐class Irish retail bank in 2014 and beyond. We will continue to invest as required in the right technology and systems, appropriate processes and people to ensure that the Group Centre acts with continued professionalism, driving operational efficiency and influencing commercial outcomes. Restructuring Plan The Group is required to seek approval from the European Commission for the State Aid it has received from the Irish Government. Prior to granting this approval, the Commission requested, as it has for other Irish banks in receipt of State Aid, that the Irish Government submit a Restructuring Plan in respect of the Group. activity and to demonstrate that the initial restructuring proposals were being implemented. We have had a positive engagement with the relevant authorities and expect the plan to be approved in due course. The Group itself has moved on to implementing the plan and on ensuring that each business meets its objectives for our shareholders. Strategic Priorities As we strive to steer the Group towards recovery, our Management Team’s focus is firmly fixed on the following key priorities: Optimising the Net Interest Margin Reducing the Cost Base Optimising the Funding Mix Managing Capital and Impairments Structuring the Group to Maximise Value Optimising the Net Interest Margin In 2013, we have continuously managed to drive down the cost of funds and as a result the net interest margin of 0.82% for the Group showed a modest improvement of 0.10% as compared to 2012. This was a strong achievement against a backdrop of European Central Bank rate reductions totalling 0.50%. In 2014, we will continue to focus on sourcing funds at sustainable rates and lending at rates that provide the optimal balance between risk and reward. Reducing the Cost Base In 2013, we made significant reductions to our payroll costs. We balanced the cost reductions in some parts of the Group with investment in other critical areas such as the AMU. This rebalancing of the cost base ensured all aspects of the Group were appropriately sized for the delivery of their strategic objectives. These changes significantly impacted our employees; in particular, through voluntary redundancy programmes and changes to pension entitlements. However, these changes were necessary to secure a sustainable business model for the Group. In 2014, we will continue to look at opportunities to drive operational efficiencies and lower the Group’s cost to income ratio (Operating Expenses as percentage of Total Income). With the agreement of the Commission and the Department of Finance, we submitted an initial Plan in June 2012 and an update in August 2013. This Plan has been the subject of quarterly reviews to allow the Group both to provide more details on restructuring Page 6
Group Chief Executive’s Review Optimising the Funding Mix In 2013, we strengthened the Group’s funding structure through a combination of continued deposit growth and new capital market transactions, such as the €500m mortgage backed security issuance. Although we continue to avail of collateralised funding from the European Central Bank, this is now at less than half its peak level. In 2014, we will continue to focus on diversifying funding sources to achieve the optimal mix for the Group that is both sustainable and helps improve our net interest margin. Managing Capital and Impairment Provisions Credit losses and their impact on the Group’s capital base continue to be the biggest challenge facing the Group. In 2013, Buy‐To‐Let arrears levels reduced while Home Loan arrears levels showed signs of stabilisation in the second half of the year. In 2014, our priority is to ensure that the AMU continues to work through arrears cases with a view to curing as many loans as possible. This, we hope, will be complemented by further macro‐economic stability and improvement in house prices resulting in normalised impairment levels over time. As noted by the Chairman, the 2013 impairment charge has allowed for the outcome of the CBI balance sheet assessment. In addition, the Group has updated its risk weighted assets calculations. This has resulted in an increase in risk weighted assets on defaulted loans of €3.3bn. Having taken both of these updates fully into account the Group’s Core Tier 1 ratio under the Basel II rules and the incoming Common Equity Tier 1 ratio under Basel III rules were in excess of minimum regulatory requirements. Structuring the Group to Maximise Value Creating distinct business units has brought greater clarity and focus to the Group. Each of the business units now has a clear vision to its role in contributing to the recovery and strengthening of the wider Group. Our structure provides a clear line of sight as to the performance of the component parts of the Group. We will continue to review both our Core and Non‐Core structure on an on‐going basis to ensure that the Group is well placed to take advantage of both investment and deleveraging opportunities as they arise. Financial Performance Headlines Group On an underlying basis, the Group reported an operating loss before exceptional items of €977m in 2013 (2012: €977m). This includes moderate improvements in total income and is offset by a 6% increase in operating expenses and a 4% increase in impairment charges. Total operating income of the Group rose by 28% reflecting a reduction in Eligible Liabilities Guarantee fees of €60m and an improvement in the net interest margin of 0.10%, offset by reductions in net fees and commission income and other operating income. Operating expenses before exceptional items increased by 6% during 2013. This is primarily due to increased investment in the AMU and provision for liabilities offset by significant reductions in staff related costs. Impairment charges were €929m, indicating an increase of 4% compared to 2012, which is driven by increased provisions in the ROI mortgage portfolios. The Group’s Core Tier 1 ratio at 31 December 2013 stood at 13.1% compared to 18% at 31 December 2012. The total capital ratio stood at 14.8% compared to 20.5% at 31 December 2012. Following the implementation of the new Basel III rules on 1 January 2014, on a pro forma CRD IV (transitional basis), the Group’s Common Equity Tier 1 capital ratio would have been 13.4% at the year end. Management will continue to deploy capital in a professional manner always looking for the right balance between adequacy, debt writeoffs (not forgiveness), deleveraging and buffers for stress. The Group’s funding position improved in 2013 as reflected by the growth of €2.9bn in customer deposits which now represent 56% of the Group’s total funding. Although the Group continues to avail of the collateralised funding facilities from the European Central Bank, this has reduced to €6.9bn at year‐end from €10.7bn at 31 December 2012. The Loan to Deposit ratio stood at 150% (31 December 2012: 191%) at year‐end reflecting the growth in customer deposits and reductions in loans and advances. Business Units Permanent tsb reported an operating loss of €153m with a NIM of 1.03% in 2013. This operating loss is primarily driven by an impairment charge of €148m.We will continue to work hard to ensure that permanent tsb returns to profitability in 2014. In 2013, AMU reported a loss of €561m. This is primarily driven by an impairment charge of €496m. We expect this loss to narrow in 2014 and beyond as new defaults reduce and loans are cured. The Non‐Core business reported an operating loss of €283m in 2013. This is mainly as a result of reported impairment charge of €285m of which c.86% relates to the Irish Commercial Real Estate portfolio. Page 7
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