Mr. Bernard Byrne:

I thank the Chairman and members of the Joint Committee on Finance, Public Expenditure and Reform, and Taoiseach for inviting AIB to meet with it today. The committee's letter of invitation refers to tracker mortgages and other issues and we will endeavour to cover as many aspects of our business as possible. Alongside me today are members of my executive team, Mr. Jim O’Keeffe and Mr. Tom Kinsella.

This year marks a decade on from the global financial crash and it is difficult to capture the scale of change wrought across the banking sector by those events. As a completely restructured bank, we now operate in a dramatically different regulatory environment with the Central Bank of Ireland and the European Central Bank focusing in great detail on all aspects of our activity through a customer, conduct, prudential and policy lens. Within that tight regulatory framework and very detailed supervision we must maintain a well capitalised, strong and profitable institution, providing professional and efficient service to our 2.2 million customers in the fastest growing economy in Europe.

Positively, we are well capitalised and our banking activities are generating the returns required to keep the business sustainable and capable of supporting the growing Irish economy while rewarding those who provide the risk capital, both equity and debt, that are required to deliver a robust and resilient bank. This is as it should be, but the changes in the regulatory and supervisory regimes that govern how we operate have brought many changes, some with impact outside of the pure banking sector. First, at an institutional level, we and others in the industry are still working through the impact of the evolving regulatory requirements. While the level of new regulation being introduced is tapering off, the implementation phase will run for some time and will permanently require significant resources from regulators and the institutions. Second, there is a clear harmonisation of approach being adapted by supervisors across Europe. With over 120 banking groups to monitor across the EU this is understandable. The increase in capital levels generally and the standardisation of approach regarding how much capital individual activities such as mortgages and SMEs require is still developing and, on average, also increasing.

The ECB has set measures in stone to ensure the Irish taxpayer is not exposed to bank losses again should there be a further crisis. To avoid taxpayers meeting the cost of potential future bank failures, the new rules under the bank recovery and resolution directive mean banks meet a minimum requirement of own funds and eligible liabilities for "bail in". It means sparing the taxpayer future bailouts. Again this is beneficial and desirable but comes at a cost.

Risk management and controls underpin all our banking activities as we aim to provide competitive funding to homes, businesses, farms and communities across the country. The balance we must strike is to manage the bank well and efficiently, deal with the legacy issues, safeguard our customers' financial interests and support the economy. Securing a turnaround in AIB's financial performance has been achieved. Following the Government sale of 29% of its shareholding, the bank has returned €10.5 billion to the State in capital, fees, dividends, coupons and levies. The remaining shareholding of 71% of the largest bank in the country, with an estimated market cap of €13.46 billion, positions the Government to recoup its investment. While our finances are now robust and Ireland’s financial system is much safer, we should bear in mind that serious issues and challenges remain. Regulatory requirements, including conservative capital buffers, carry cost implications for banks and, ultimately, customers. It is also legally and culturally difficult for a bank in Ireland to realise its security over loans, a fact that leaves investors wary and regulators concerned about the capital required to support such activities. Other external issues such as high degrees of market turbulence in Europe, changing international tax arrangements, increased protectionism in traditional trading and, of course, a possible hard Brexit, all carry further inherent risks to the economy and, by implication, to the banking industry.

Remaining technologically advanced is critical to our position as a market-leading bank. We must be digitally enabled and provide services that meet the ways in which our customers seek to interact with us on a daily basis. In this rapidly advancing environment, we now see circa 1.5 million daily customer interactions, of which more than 1.1 million are via digital channels. We continue to innovate in this space, based on customer feedback and advances in the wider banking network in Ireland with over 270 branches between AIB and EBS, 20 business centres and a partnership with An Post which sees banking facilities available at some 1,100 An Post locations.

Stable income and well-controlled costs are now embedded features of our business model and we are continuing to resolve legacy issues. To the fore has been the tracker mortgage issue about which we have spoken at length to this committee. We are well progressed and are in the final stages of the CBI tracker mortgage examination but ultimately the CBI is the arbiter in deciding when the matter is complete. From AIB's perspective, all impacted customers across more than 30 individual groupings have been identified, contacted and restored to their correct interest rates and paid redress and compensation. The final group of outstanding cases, who are EBS customers identified as impacted in quarter 2 2018, will have their rates rectified by the end of this month and be compensated by the end of September. We will also remain ready to address any other cases should they emerge.

On the tracker issue, we regret that AIB customers endured financial loss and emotional distress where the bank failed its contractual obligations or its requirement to provide proper levels of transparency and information. When the problem came to light, AIB acted swiftly and in good faith to launch a major programme of work involving approximately 500 people deployed to implement fair settlements as quickly as possible. The complexity and scale involved in the examination and rectification meant it took more time than I would have liked and involved difficult judgement calls on the way to finalisation. Some of these were finely balanced. We will continue to commit the resources necessary to conclude this in line with the CBI's framework. How the tracker product was designed, administered and ultimately withdrawn may well continue to be the subject of discussion and investigation. My responsibility is to make sure that we had in place a programme to identify all the affected customers and deliver fair and proper treatment and to express a sincere apology on behalf of the bank to those impacted.

I mentioned earlier the requirement to ensure that Irish taxpayers are protected in the event of a future economic downturn. This brings me to another legacy issue of critical importance to the bank's strength and viability, namely, non-performing exposures. Dealing with non-performing exposures is, I realise, a contentious matter. On occasion it has been simplistically and incorrectly described as AIB selling off its customers' debts with little care for the consequences. It is very important that we set the logic behind the sale of non-performing loans. AIB has consistently pursued a strategy of working with customers to achieve positive outcomes to their financial difficulties on a case-by-case basis. Using a suite of different solutions, we have achieved over 90,000 customer solutions including 40,000 private dwelling houses. AIB continues to provide solutions for an average of 1,000 loans per month. Recognising that many customers simply cannot repay all their loans or have inadequate security, the bank has also written off very significant amounts of bad debt to right-size loans to a sustainable level. As a result of these actions, the bank’s non-performing exposures fell from approximately €31 billion in 2013 to approximately €9.2 billion at the end of quarter 1 of this year, with continued momentum since then. We are still faced with a portion of impaired loans that remain high. For example, the portfolio that was sold by AIB last month was characterised by levels of deep long term arrears. Approximately 90% of accounts were more than two years in arrears and about 70% were over five years in arrears, reflecting a lack of any meaningful engagement and, or, debt sustainability.

Like every bank across the eurozone, AIB is required to create and hold provisions against bad or doubtful debt; the deeper the arrears, the higher the bank buffers required. Our regulators in Europe are very concerned at the persistent level of non-performing exposures in Irish banks. The end of 2019 is a very important target date for Irish banks to reduce NPL levels to European norms of approximately 5%. AIB's NPL level is currently running at 14%. In reality, all customers who meet their loan repayments are adversely impacted upon by those who do not repay. The Central Bank of Ireland has observed that a functioning secured lending market has to give meaning to security. If that security is undermined, the costs to all other borrowers are impacted. Defaulting customers, and indeed the history of defaults, mean that we as a bank must hold additional capital but this inevitable additional cost is borne across all our customer base for many years. We are determined to push on with the case-by-case resolution process and continue to have 1,500 people working with customers in difficulty across the country. Our clear preference has always been to provide solutions on this individual basis to right-size customer debt to sustainable levels. We must be realistic, however. While we have made great strides, we still have much to do.

The progress that has been made to date in achieving a normalised banking system has been at times overshadowed by these issues but normalisation is happening, particularly against the backdrop of the improving Irish economy. Growth in new lending is continuing and last year alone AIB approved €14.4 billion in loans, with actual customer drawdowns at €9.4 billion, up from €8.4 billion on the previous year. Mortgage lending rose by 17%, business lending rose by 15% and personal lending was up 16%. Leading indicators of activity remain strong, which points to continued good economic growth here. The favourable external environment is supporting exports, with domestic spending underpinned by continuing low interest rates, unemployment falling below 6% and rising household incomes, as well as the ongoing rebound in construction activity. This should result in a further rise in new lending activity this year.

While GDP growth is forecast at 4.5% overall in 2018 and unemployment is predicted to drop below 6%, we remain alert to the challenges and risks that lie ahead. The uncertainty regarding Brexit, the slowdown in UK economic activity and the strength of the euro against sterling obviously present potential headwinds. While many of our customers have been diversifying their export base quite significantly in recent years, the impact of a downturn in the UK would almost certainly impact their performance. We have 21 Brexit advisers across the bank who specifically help customers to work out alternative plans to mitigate exposure to Brexit-related risks. However, given the openness of our economy, a deterioration of global economic conditions and adverse geopolitical developments, particularly in Europe and the US, would have a negative impact here. Some emerging markets have come under pressure this year while there is concern at recent moves towards more protectionist trade policies.

The lack of housing supply in the major urban areas is clearly one of the main infrastructural difficulties facing the country from a social and economic viewpoint. In helping to play our part in alleviating the current crisis, we have ramped up activity in the bank's development lending sector and we are the primary bank to many of the country's largest development groups. We have expanded our lending teams significantly over the last two years and established a group to support mid-sized development companies. Our focus is not just providing real estate finance, although this is critical, it is also on increasingly on facilitating social and affordable housing. We have already supported a very successful affordable housing scheme in Ballymun, with a view to funding more such projects. We also provide long-term funding to a number of approved housing bodies, with the launch of a €100 million social housing development fund. AIB also launched an enhanced mortgage-to-rent scheme in conjunction with iCare Housing and the Irish Mortgage Holders Organisation and has offered a significant number of vacant residential properties to the Housing Agency for consideration.

As I mentioned at the start, banking today operates to a different model to that which predated the financial crisis. The consequences of banks' financial strategies must now be matched by responsibility for the social impact of their actions. Regulation has been brought to a new level involving intense supervision and resulted in a strengthening of our financial foundations. From my perspective, however, the really crucial element of a sustainable AIB is continuing to evolve our culture while rebuilding and maintaining high levels of trust and confidence among members of the public. I know there is still much to do in this regard. Ultimately, the quality of AIB's service to its customers and communities will determine its long term sustainability. Our responsibilities extend to those customers, to Government, to our regulators, to shareholders and to the economy generally and we will continue to work to ensure our stewardship remains solid and deserving of that confidence. I thank the committee and look forward to any questions.