Mr. David Duffy:

I will make a few comments and try to keep them as brief as possible to allow time for what I know will be an extensive discussion. I thank the committee for the opportunity to spend time here because I know that the matters tabled for discussion are material, significant and, in some cases, traumatic.

I remind the committee of AIB's role as we have articulated it, and we have outlined it in our note. The primary role is the support of the Irish economy through lending in mortgages and in the world of small and medium enterprises, SMEs, but obviously, given the circumstances, another key activity has to be engaging in the restructuring of mortgage arrears and SMEs. Behind all of that we have to have a mind to returning AIB to sustainable profitability as, ultimately, that leads to a return of funds to the taxpayer. Last but by no means least, we have to make sure that we provide excellent service to the customer, whether in distress or in growth orientation.

With regard to the specific performance, we have published our results so I do not intend to go through those in great detail. As a headline we have returned to pre-provision operating profit and there is a general improvement in all elements of the business. With that in mind we have restructured our balance sheet. We have a very deep cost-cutting programme, and we have seen a steady demand for lending, some of which we will go through today.

We are particularly focused on investing in the technology side of a banking model. Our overall post-provision loss has been reduced by 40%, our customer accounts have increased by €1.2 billion for the year and we have added more than 90,000 customers during the year thus far. Our bad debt provisions, that being a forecast of what we think the liabilities will be in the future for arrears and other matters, fell by 53% and our cost programme has led to a reduction of 14%. Our headcount has reduced from slightly more than 15,000 to 12,700 and continues to decline. Our loan-to-deposit ratio and all the other metrics that are highly important to the troika have equally declined and we have largely finished with the deleveraging of €20.5 billion of non-core assets. At the same time, we have a core tier 1 ratio of 15.1%, which is material to both now and the future of Basel III calculations. We have reduced our ECB funding by another 20% in the six months to June 2013.

Lending has been a primary focus for a huge portion of the bank. If one looks at the last two years, we have lent €14 billion between 2011 and 2012. This will be the acid test as to whether AIB is delivering into our primary activity, which is supporting the growth of the economy. Against this background, we have lent €3 billion in the first six months of 2013. We have seen an increase in the number of SMEs borrowing but a smaller number - in terms of quantum - of amount borrowed. This signifies some health a little bit, in that there are more people looking to grow but they are borrowing against cash flows and more sensible amounts that businesses can afford perhaps, rather than against collateral, be it property or otherwise.

AIB has a lot of activity around the sectors and is very focused on conducting national surveys, which members will have seen regarding agriculture, among others. The key is to get a national understanding, rather than a small survey understanding, by region of what are the key drivers and to tailor our offerings towards that. We have the largest pipeline of lending we have seen in several years and a lot of discussion is ongoing with SMEs at present. AIB has approved €2.2 billion in lending just to SME and corporate customers thus far this year. AIB's market share in mortgages has been a key focus for the bank and it has moved from 28% to 46% over the past year. If one looks at drawdowns, which are a reflection of the actual spend of mortgages, AIB has 40% of the entire market.

I will turn to the issue of arrears, which I acknowledge will give rise to an extensive discussion. Our strategy remains precisely what it has been before, which is to keep people in their homes and to prioritise mortgage debt. We are acutely aware - and are not just saying this but in practice - of the circumstance of how difficult this is from a human and social perspective. We have exceeded our targets set by the Central Bank and will go into some detail on this, as I believe we will be required to do. We have a wide range of the resolution options, so all the regulatory-approved options are being offered by the bank. The engagement with our customers has increased by 30% in the first half of this year. Moreover, AIB has made 12,500 offers of solutions in addition to our active day-to-day management, which I will discuss, and 4,400 permanent solutions have been implemented. I remind the joint committee that the regulatory targets are for offers and not for resolution. There is an important discussion in this regard, as while the resolution in some simple cases is very straightforward and can be done in a month or two, in other cases with multi-debt connections, it can last six to 12 months as we work through pieces. Consequently, for the avoidance of doubt as I speak to the numbers, when the regulatory targets are published they are about making offers of sustainable solutions. I wish to avoid confusion in this regard. While we also will speak to solutions already executed, that is to be clear. We have dedicated a significant amount of resources and this has not changed. In fact, it has been increased. While it is a time-consuming process, we have endeavoured to be as aggressive as we can in terms of getting to satisfactory solutions for the customers and will give the joint committee some details of that.

In respect of strategic default, there has been a lot of talk about it and what is meant by it. We talked about our portfolio and raised this issue. It is never going to be popular but I wish to provide some substance to the commentary we made. If one considers our portfolio, 80% of it is paying normal amounts on the full mortgage. Consequently, one is talking about the 20% that is not doing so. It is of that 20% that we think that up to 20% or more could be making decisions not to prioritise the mortgage payment. In other words, in that context, one is really talking about 4% of the book, that is, 20% of those who are in arrears.

As to where we have come up with those numbers, if one considers the overall portfolio, I will provide members with some examples. Under the mortgage arrears resolution process, MARP, programme, everyone is required to submit a standard financial statement which goes through all of the income and expenditures of a person when he or she submits it. Within the past year, 25% of those indicate that the customer is able to afford their mortgage. Therefore, one in four of the customers who have provided a statement back to us shows that from their net disposable income - here I want to be clear that we define net disposable income as the income after reasonable living standards, which in our case are defined as 20% above the ISI guidelines, that is, one takes the reasonable living standards that have been published, adds 20% and then judges affordability - they were still able to afford their mortgage. I can go into that in more detail. That is a case where it seems to us, where one has the reasonable living standards nationally defined plus 20% and one is not making one's mortgage payment, that is a decision one has consciously made.

One in four of our buy to lets have paid zero in six months. If one looks at that population who have paid zero, they have net disposable income calculations but it is based on an income that was allocated in rent through that property. Therefore, an individual borrowed from us for an investment property or a buy to let, and he or she has a tenant who is paying rent, and for the vast majority that is the case, and in those circumstances, the landlord is making zero payments and diverting the rent. For us, that is a conscious decision not to pay or prioritise one's mortgage payment.

The last item to mention is that in excess of 2,000 customers, in all of the discussions we have had with them, have evidenced deposits which are significantly in excess of their arrears. We look at it and say that where a person has cash on deposit - non-current accounts in the financial system - and it is in excess of the arrears, we view that as a conscious decision not to pay or prioritise one's mortgage payment. I hope we will have more discussion on that.

What we are really saying is we are not trying to interpret. We are not speculating or extrapolating. We are saying clearly that if the customer tells us, based on the reasonable living standards plus 20%, that he or she can still pay and afford his or her mortgage, we believe that if the customer has not, he or she has made a conscious decision not to. If one has diverted rental income against the borrowings for that property and one is paying zero, that is a conscious decision, and if one has cash deposits in excess of one's arrears, one has also made a conscious decision. We are not trying to be clever. We are not trying to incite any discussion. We are trying to be clear that there are a significant number of people in these arrears situations who may have chosen. There may be human dimensions to that psychology; we are not arguing that. As we look at the portfolio, they have made a decision not to prioritise their mortgage payment. As such, we view that as a decision made consciously and, therefore, a strategic default.

While the debate on arrears is mostly about mortgages, we have spent a vast amount of time on SMEs. There is not enough debate in that area. SMEs are a significant driver of the re-basing of this economy and, ultimately, its growth. We are prioritising SME arrears and have been doing so for 18 months or longer. At the end of June 2013, close to 90% of SME arrears customers were engaged with the bank and have either a short-term or a longer-term solution in place. Usually, the short-term solution is put in place to allow a re-basing of their cashflows and to reduce stress while we spend the next period negotiating a longer-term solution with them.

In summary, we believe we are focused on the issue of arrears resolution. We are meeting and exceeding our targets. The statistic we will discuss in more detail is that we should have made 20% of offers in the second quarter and we have offered 27%. We will discuss this in more details presently. We also are lending. We are the dominant player in mortgages and the largest lender in SMEs, and I expect the trends to grow and the momentum to continue in 2013 and 2014.

I thank the committee for providing us the opportunity to explain this. There is much discussion about these topics and a transparent and detailed discussion will help us try to communicate better and will, it is to be hoped, address many of the thoughts and concerns of the committee.

Only if we are engaged in a discussion that is transparent can there be a mutual understanding that is beneficial to everybody. We recognise and acknowledge our critical role in economic recovery, which is why we are driving as hard on lending as we are on arrears. As a new team, we are bringing the bank back from a pretty low position and hope it will be understood we are making as much progress as we reasonably can and contributing to resolving the issues of arrears and lending in the economy, as we should be. Obviously, we still recognise that the debt owed to the State by AIB cannot be overestimated. The longer we go on with resolution, the easier it is to forget, but as a team, we do not forget and are reminded daily by the position in which the bank still finds itself as it tries to recover its profitability. I want to impress on everybody that our team is determined that we will resolve the issue of lending in support of the economy and arrears and, in particular, manage to deliver a profitable and sustainable institution that will be able to start returning taxpayer funds invested in the bailout. In our minds, no other outcome is permissible.