Oireachtas Joint and Select Committees
Wednesday, 31 October 2012
Joint Oireachtas Committee on Finance, Public Expenditure and Reform
Operations and Functioning of AIB: Discussion
12:50 pm
Ciarán Lynch (Cork South Central, Labour)
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We will now turn to item No. 7 of our overview of the issues facing the economy and the banks. I welcome the following witnesses from AIB: Mr. David Duffy, chief executive; Mr. Bernard Byrne, director of personal, business and corporate banking; Mr. Fergus Murphy, director of products; Mr. Paul Stanley, acting chief financial officer; and Mr. Enda Johnson, head of corporate affairs and strategy.
As we commence proceedings, I wish to remind members, witnesses and those in the public gallery that all mobile telephones must be switched off. This meeting is being broadcast by UPC on channel 207 and if a mobile telephone is switched on it will interfere with the broadcast, sometimes to the extent that the broadcast is seriously disrupted, and those watching cannot follow or hear the questions asked or the answers given.
In beginning the formal aspect of proceedings this evening I wish to advise witnesses that by virtue of section 17(2)(l) of the Defamation Act 2009 witnesses are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence in relation to a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given, and they are asked to respect the parliamentary practice to the effect that where possible they should not criticise, or make charges against any person, persons or entity by name of in such a way as to make him, her or it identifiable.
Finally, members are reminded of the long-standing ruling of the Chair to the effect that members should not comment on, criticise or make charges against a person outside the House or an official by name in such a way as to make him or her identifiable.
I will deal with some matters before I ask Mr. Duffy to commence. I will be taking questions in rungs again. The first rung will be for 15 minutes, the second for ten minutes and the third for approximately six minutes. After that, if time allows, we will move to individual supplementary questions. I have indicated who will be coming in.
I wish to thank Mr. Duffy and his colleagues for appearing before the committee this afternoon. I now call on him to make his opening statement.
Mr. David Duffy:
I wish to thank the Chairman and other members for the opportunity to address the committee. We have distributed, and I hope all members have received, a considerable amount of information in advance of this meeting, so that we will hopefully be in a position to have a focused and productive session. I intend to keep my comments relatively brief, as a consequence. I wanted to make sure that you have received the copies, Chairman.
Ciarán Lynch (Cork South Central, Labour)
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Yes, we have.
Mr. David Duffy:
Before making my opening comments, it is important for us to recognise the support of Irish taxpayers, the Government and our other stakeholders, including the Central Bank. It has been said before that AIB does recognise the historical role it has played in where we have come to today, and the issues we face. We want to remind everybody that we are fully aware of, and do apologise on behalf of AIB for, our contribution to this situation. Notwithstanding that, the team here today is brand new. I will speak more about that shortly.
The efforts which we have to make to change AIB are very broad. The team here today is a brand new one. Our entire leadership team is new to the bank and brings a wide variety of skills to the table. The team is passionate about restoring AIB to a position where we can support the economy, return some value to the shareholder, and at the same time address what is a very important population - those who are in significant distress, whether they are customers in homes or SMEs.
The scale of what we have to do in the bank is fairly dramatic. For the purposes of history, the peak of our head count was 27,000 in 2007. Following the severance programme for the bank today we will be at 12,000. That is still subject to further potential reduction.
Our balance sheet over the period has been reduced by 26%.
There is a material change in the overall structure of the bank. We have changed the leadership team, reduced the workforce, cut pay for the majority of the workforce and reorganised the structure of the bank to be more simplified and focused on customers. We are trying to rebuild the business at the same time as restructuring while addressing customers in financial distress, which requires the build-out of a new bank capability. On top of that we have the overall regulatory regime, which has escalated significantly as it catches up on areas that needed to be enhanced over time. This all has to be done at the same time as motivating staff who have had a difficult time over the past four years, the majority of whom have not had an influence in the difficult decisions that have been made and their consequences. They do pay a price and it is difficult for them to remain motivated. It is also difficult for us to get them motivated to deliver some of the solutions required. These changes, given their scale and complexity, will take time. Everyone would like to solve everything immediately but it does take time.
When I joined the bank ten months ago, there were several concerns about the bank’s culture and the lack of trust between the bank and its key stakeholders, including the Department of Finance and the Central Bank. Our risk processes were very deficient and the customer model was broken. Our ability to help people in financial distress was fairly non-existent. We have introduced several cost-cutting measures. A voluntary severance scheme is under way with 1,700 staff expected to depart by the end of December 2012 and a minimum target of 2,500 by 2014. It is interesting to note that more than 2,500 applied for the scheme. That speaks of the stress and the environment in which many of our staff work. Annual savings in excess of €200 million are expected from this scheme. Pay and benefits have been tackled, with a 15% pay cut at executive levels while there is a pay freeze at more junior levels. All employees who are members of a defined benefit pension scheme will be moved to a defined contribution pension scheme, which is expected to generate €30 million in savings. Several branch closures have taken place, which is a difficult decision. We know it affects customers. However, with our arrangements with An Post we are hoping to mitigate the loss of service in some locations. We have to tackle fees. In our variable expenditure, we estimate that we will have reduced the ongoing burden of professional fees by 60% this year.
We are also looking at how we run the bank. We have a revised strategy based on servicing customers and increasing our effectiveness in lending in the economy - both mortgage lending and lending to small and medium-sized enterprises, SMEs. AIB recognised that the leadership team needed to change, which was part of the culture change in the bank. The entire board and leadership team has been replaced. In the past 12 months AIB has appointed a new chief executive officer, chief risk officer, chief operating officer, head of audit, head of human resources, general counsel and head of corporate affairs. Five new board members have also been appointed. Of the 11 board members, two are public interest directors and the other nine were appointed in 2010 and 2011. Of the 50 significant officers who were in place during the crisis, only two remain and only as non-executives. We have created a financial solutions group, a dedicated unit of more than 2,000 people, to address debt and debt restructuring.
What is the bank doing about lending? We are focusing on mortgages, SMEs and customers in difficulty while at the same time maintaining the bank’s capital and remaining stable for the long-term health of the economy. We have had to revise our processes to make it easier to access credit. AIB is 28% ahead of its September year-to-date lending target of the Government’s target of €3.5 billion. We continue to approve 90% of formal applications for credit. We have tackled the overall big drive for the small business area and shown how we are open for business. We are assisting SMEs and providing education, training and consultancy in moving them from collateral-based lending to cashflow lending. Some SMEs are fearful about the economy and unwilling to take risks. We are helping them understand how they can access credit. In many cases, we have discovered that firms do not want more debt and would prefer equity. There is a combination of issues in the dynamics of the economy which we are trying to address. We have landed several funds to promote debt and equity.
AIB will comfortably exceed its internal target of €1 billion in mortgage approvals for 2012. There has been an improvement in the trend of mortgage lending. However, as the Central Statistics Office pointed out recently, 46% of house purchases have been cash-only. The number of total approvals has increased by 72%, and 47% of all mortgages sanctioned are by AIB. This is quite a material share of the economy. At the same time, however, we have also opened up EBS as a mortgage channel which was not in the market until two months ago. We expect the EBS brand, a historically strong lender, and the AIB brand to be operating in the mortgage market fully in the next month.
AIB is participating in the NAMA 80:20 deferred consideration pilot initiative. We have introduced new initiatives such as the negative equity trade-up mortgage and expanded our distribution arrangements with An Post. Credit approvals have a quick turnaround and there will be a choice of brands with AIB and EBS.
Our endeavours show that we are approving much more than we used to and a much higher volume.
We have had to try to address the overall deposit costs for the bank. As we have explained at other meetings, the cost of funds to AIB is significant and leads to many of our products being loss-making. Many of the mortgages we write, even at current rates, when one takes into account the cost of funding and administering the bank, still remain loss-making. We have seen a big increase in deposits in the first half of the year. We have even seen some unguaranteed corporate deposits come back to the bank, which is a positive trend and a signal of more stability and confidence in the banking system.
The stabilisation and support of customers in difficulty are probably the most complex and significant matters in the endeavours we must undertake. We provided a complex analysis of this in the packs we sent to the committee. In the past year we have had to build the skills set which was not really available in the bank previously and that skills set is for 2,000 staff. We have had to identify existing and new outside resources. We have had to create a separate division of financial solutions group. We have had to train all of these individuals and work with them to help them on issues of how to manage, understand and be empathetic in the restructuring of debt with an individual. We have developed all of the Keane report and MARS arrears products and have had these submitted to and approved by the regulators. We have received full board approval for the entire strategy for addressing absolute debt levels in the marketplace and the use of each of these products. The strategy has been documented and confirmed and communicated to the regulators.
At the same time, we have not been sitting there waiting for that approval. We have been engaged with our customers and in many cases there has been initial forbearance. If we look at principal homes, the private homes category, we have been addressing 33,000 customers in difficulties. Although 85% to 90% of our customers are paying their mortgages, for those in distress for whom there is interest-only forbearance, 70% have been able to return to a normal payment schedule. The balance we must address within more complex scenarios and in that regard, we come across in a significant number of cases somebody who has a home but also an SME, is in a partnership for buy-to-let properties and may have other family relations who, together, have invested in commercial real estate or other properties. We are trying to address the disentangling of all of these components of debt by prioritising the issues of people staying in their homes and the stability of jobs and growth in SMEs. Some 41% of the population of SMEs at which we have been looking are in advanced stages of restructuring. Some 14% have debt restructuring. If one looks at all of the SMEs on which we are working and which are in distress, our objective is to have 100% of them addressed by the second quarter of next year. The speed at which we can move is significantly enhanced by having a trained and capable group of 2,000 staff. We now have the resources and would like to receive all of the committee's questions on this topic, among others, that will allow us, together with the tools we have developed, to address the issue of sustainable debt in all categories of the economy.
I want to bring my comments to a close because we have provided so much information that the guidance I am receiving is that we would like to move to questions as quickly as possible. Let me reiterate the fact that we appreciate the support we have received, for which we are very thankful. We recognise that AIB would not exist today were it not for that support. At the same time, we must deliver a sustainable and profitable bank if we are to be able to lend and return shareholder value at the end of this process and support with capital those in distress. We must be able on a long-term basis to support the growth of the economy. As the economy will eventually return to strong growth, we need to have the ability in skill sets and the capability in terms of capital to support that growth. We now have the right solutions and the right team in place that will allow us to deliver on our promise. At the same time, we appreciate the fact that delivery of many of these initiatives may not be as fast as people would like, but we must be effective in what we do; we must be consistent and fair in how we treat people; and, above all, the solution must work. We have achieved a great deal. We have taken many steps within the bank to change the culture and costs. At the same time, we have taken many steps to rebuild our lending and restructuring capability. Notwithstanding the fact that we have taken all of these steps, we recognise that we have more to do than we have already achieved.
1:05 pm
Ciarán Lynch (Cork South Central, Labour)
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I thank Mr. Duffy. With the committee's permission, I will publish his opening statement. Is that agreed? Agreed.
I will defer my questioning until the end of the first round, but let me put this question to Mr. Duffy before I invite other members to contribute. Does he have a response to Ms Fiona Muldoon's recent comments which were very much directed at his bank and Bank of Ireland, that they were in denial in respect of the mortgage difficulties, that their response to date had been very much one of wait and see, that the issue of forbearance about which Mr. Duffy spoke was one of merely keeping something going on an infinite basis which, in some cases, was making people's situation worse, and that, with the Personal Insolvency Bill coming down the tracks, we should have seen more innovative approaches from both banks?
Mr. David Duffy:
On this point, I respect everything Ms Muldoon and the regulators have had to say. They have a difficult challenge to address in this complex transition in the banking environment.
On the specific concern that AIB was waiting for some solution in the economy, I can tell the committee that that is absolutely not so. The bulk of the senior team and others who are not here have hardly had a weekend day free. We are working around the clock to develop, if one thinks about it, one of the biggest financial services firms in the country to service this debt restructuring. Second, we had to seek approval from the regulators and others for the very products that would be effective in providing the solutions. Third, we have a complex debt restructuring to take care of and balance it with moral hazard, which is not an excuse. When one has 85% to 90% of one's mortgage holders paying their mortgages, rushing out and putting a temporary or quick and expedient solution in place for those in distress would be complex and, ultimately, damaging to the economy and those individuals. At the same time as developing that capability which has been an enormous task, as I stated, we have addressed 33,000 private dwelling house, PDH, customers in stress, 70% of whom have been in a position to make their payments. There is always an element of truth in these statements, but we are working around the clock to develop advanced capabilities. At the same time, we have not ignored the reality and tried to address all of these customers. We are very advanced in the SME sector, too. We have an objective of within six months having complete coverage of all SMEs in distress and solutions on which we will work with them.
On the question of whether we are or have been waiting for something, the answer is, "No, we have not." At the same time, we respect the fact that the regulators would like us to proceed and be more aggressive in our execution and that there are stresses for people who are living on the edge. We are trying to address them. There are no expedient solutions, but we hope to demonstrate in the next 12 months our absolute commitment by what we do, not by what we say.
Michael McGrath (Cork South Central, Fianna Fail)
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I welcome Mr. Duffy and his colleagues from AIB and thank him for all of the information he sent which we have had the opportunity to go through in preparation for the meeting. As I am limited in time, I will move as quickly as I can through the key issues I want to raise.
As Mr. Duffy will be aware, the State has injected €20.7 billion into AIB and the EBS in the past few years. When can we expect to get some of this money back? The Government is involved in negotiations which potentially may involve using the European Stability Mechanism to take equity stakes in the banks that the State has already recapitalised.
As CEO of the bank, does he have any view on that issue? Does he believe it is the right strategic direction for AIB or does he have alternative proposals such as getting the bank to profitability and, ultimately, selling an equity stake by another means?
1:15 pm
Mr. David Duffy:
I will deal with both issues together. It is relatively clear from our perspective. Our priority has been to get the bank back to sustainable profitability for the very purpose, as I have said, of lending in the economy, returning value to the shareholder - the issue raised by the Deputy - and also helping people in distress. The issue of how to do this involves all of the things I mentioned in our preamble and significant changes are required to get there. We have stated our objective is to get to that position by 2014; therefore, that is when we would have profitability. The purpose behind this is to allow us time to begin - we have begun already and are in numerous discussions - talking about foreign or other investors in the bank. Our strategy on the first level is to pursue the bank model we can deliver that we would have confidence would attract investors and to begin conversations with these potential investors where the first conversation is about building trust. Then over two years we would expect to be able to convince them that everything we were doing and delivering would suggest one could trust a management team to execute a model that would deliver sufficient return on investment. That is the path we are pursuing, regardless of anything else that happens. These conversations have been positive and people have been pleased to see us back in the marketplace in discussions around these topics.
With regard to the ESM facility, I really do not have a perspective on whether it will succeed or come to life, or when it will come to life. Certainly, if there is a positive - if it did come to life - the bank would become a bank that had a foreign investor, that was no longer linked with a sovereign risk and that could be attractive to investors. There are a number of possible advantages to cheaper funding. However, the view of the team is that we cannot build a bank strategy around anything we do not control. We need to build a successful bank model based on the environment we can control and deliver a bank that will be profitable in 2014 and have positive discussions with investors along that curve until 2013. If somebody subsequently offered the ESM to us and that was a solution we could apply to the bank, of course, we would be happy to consider it in a positive light.
Michael McGrath (Cork South Central, Fianna Fail)
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I wish to clarify what I interpret Mr. Duffy as saying. Apart from the possibility of the ESM taking a direct stake in AIB sometime in the future, even at this point the bank is engaging with potential investors explaining its strategy for getting back to profitability with a view to them potentially investing in the equity of the bank in a couple of years time or beyond. Is that essentially what he is saying?
Mr. David Duffy:
That is correct. Our objective is to pursue that timeline and conversations now with investors because they will not take a view in the first instance. An investor needs to look at the management team in place, establish in his or her mind whether the people concerned have the capabilities and credibility by their track record to deliver a bank that will give a return that an investor would find attractive. In our minds we see the two year timetable mentioned by the Deputy mentioned as sufficient time to demonstrate a track record of two years or more and be able to offer at least the sight of, if not the actual reality, sufficient returns for investors to make an investment.
Michael McGrath (Cork South Central, Fianna Fail)
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At this remove is AIB neutral on whether that investment could come from the European Stability Mechanism or whether it could come from stand-alone foreign investors taking stakes in the bank? How would Mr. Duffy feel about AIB being owned and run by the ESM?
Mr. David Duffy:
I do not have a strong view on that issue. I do not know enough about it because it is not something that is clear. What would be the governance structure? What would be the ownership structure and for how long? What conditions would be attached? Until we know all of these elements, it would be hard to have a positive or negative view of it. The most practical measure we have adopted, in recognition of the uncertainty in many areas, is focusing on delivering success within an environment we can control. Then, if there are further benefits to the ESM or some other model, we will, of course, address them at the time, but we do not have a strong view on it at this stage.
Michael McGrath (Cork South Central, Fianna Fail)
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Before I move on to the issue of mortgages, I wish to ask about pensions. Mr. Duffy referred to - it is also outlined in the details AIB sent us - the difficulties the bank is experiencing in respect of the defined benefit pension scheme. It is moving to a defined contribution scheme. Last weekend the Sunday Independent reported on the pensions being paid to former politicians, which are always, rightly, subject to scrutiny. Mention was also made of some of Mr. Duffy's predecessors as head of AIB. According to the newspaper, the former CEO, Mr. Eugene Sheehy, is paid a pension of €529,000 per annum, which would have an overall value of approximately €18.5 million over a lifetime. The former AIB managing director, Mr. Colm Doherty, on reaching his 65th birthday will, apparently, receive a pension of €300,000 per annum. These figures seem obscene, particularly in the context of what has happened to the bank and the amount of money ordinary taxpayers have had to put into it. Has Mr. Duffy, as CEO, explored every possibility of addressing the legacy pension bill AIB is facing for his predecessors, even down to the level of asking people to volunteer to surrender pensions on foot of what has happened in the bank?
Mr. David Duffy:
The issue has two parts, the first of which is the absolute overall pension liability for the bank. We believed on assessment that the absolute pension cost to the bank was unsustainable. With the model we were operating, the benefits employees today are receiving are significantly in excess of what they should be in a market that we would see as sustainable. That is why we addressed pensions overall as per the document the Deputy has before him. We have addressed the issue to materially reduce the cost to the bank and, ultimately, the taxpayer.
The Deputy asked about specifically addressing the pensions of previous individuals. The question was raised with the chairman at our annual general meeting this year and the chairman has committed to evaluating the ability to request a voluntary contribution back from a range of individuals in the history of the bank. He has committed to doing this by the end of the year.
Michael McGrath (Cork South Central, Fianna Fail)
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Has that happened yet?
Michael McGrath (Cork South Central, Fianna Fail)
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How are these particular pensions funded? Does the money come from a separate AIB executive defined benefit pension scheme? Is it separate from the normal scheme AIB is changing from a defined benefit to a defined contribution scheme? Is there a specific executive pension scheme?
Michael McGrath (Cork South Central, Fianna Fail)
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Am I correct in saying that is the same scheme that has benefited from the transfer of the €1.1 billion of loan assets transferred from the bank to the pension scheme in order to meet its funding requirements and future pension liabilities?
Michael McGrath (Cork South Central, Fianna Fail)
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Essentially, money that is owed to the bank by its debtors, instead of being repaid to the bank, is being paid into a pension scheme which will now fund the payment of enormous pensions to Mr. Sheehy, Mr. Doherty and many others. Is that the case?
Mr. David Duffy:
It is the case and unless there is a contractual change in the environment, as CEO, I cannot make any change to these arrangements. However, notwithstanding these arrangements and any arrangement reached in the future, for the broader population of AIB, past and present, many of whom have nothing to do with some of the decisions made in the past, we had to address the issue of pension restructuring. The deficits would have meant pensions would have been wound up and in that case all pensions, including those for long retired pensioners who were in the bank before any of these issues relating to current employees arose, would have been reduced by up to 50% or 60%, which we considered would have been inequitable. Our purpose was not to fund any particular pension but to address the critical mass of the population.
Michael McGrath (Cork South Central, Fianna Fail)
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I wish to move on to the issue of mortgages. In the questionnaire submitted AIB has indicated that even at a 4% standard variable rate for mortgages, variable mortgages are still loss making. In the presentation Mr. Duffy has pointed out that the cost of funding now is 2.79%. I presume he is taking into account ELG costs, bad debt provision, etc. in saying that even at 4%, the bank is still losing money on variable rate mortgages. What would it need to charge in order for them not to lose money?
Mr. Fergus Murphy:
The average cost of funding in AIB and the EBS is approximately 3%.
Until recently, the standard variable rate in AIB was 3%. We have a €41 billion portfolio so there is much processing and organisation around it and it is clearly loss-making. As our CEO stated, we are attempting to bring the bank to viability, sustainability and profitability. In that regard, we must sell products in AIB at a profit going forward, just as any viable bank would. Our mortgage book is loss-making. The cost of running the book is about 60 basis points per annum in terms of the operating cost for the people and processes. The cost of credit going forward will probably be about 50 basis points. If one takes an average funding rate of 3% and adds on that 1.1%, one still sees a book that is break-even or loss-making.
1:25 pm
Michael McGrath (Cork South Central, Fianna Fail)
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The essential issue is that the tracker mortgages are haemorrhaging in terms of losses. The variable-rate mortgages might be marginally loss-making but if one is charging 1.75% on tracker mortgages, the losses there are absolutely enormous. I know the bank denies the claim that variable-rate customers are subsidising tracker mortgages but essentially they are. One would not need to charge as much if the trackers were not so low.
Mr. Fergus Murphy:
I do not agree with that. The tracker and SVR books are not subsidising each other. They sit alongside each other in the balance sheet and are both loss-making. Our SVR, at 4%, is still by far the lowest in the Irish marketplace; that is an important point to make. The tracker book is terminally loss-making. It was a very bad product brought out by Irish and UK banks at a point in time when the world was a very different place. Clearly, AIB and EBS are honouring their commitments, as they must and should, in respect of tracker mortgages. However, we do not look at one book subsidising another.
Michael McGrath (Cork South Central, Fianna Fail)
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With regard to the advanced forbearance options referred to in the presentation, such the split mortgage trade down and mortgage-to-rent, Mr. Murphy said that these have been available on a pilot basis since July 2012 and full roll-out is in train. Am I correct in saying that the bank has actually executed some of these solutions for individual distressed borrowers? They have been piloted. Have all of these types of advanced option been rolled out on a pilot basis?
Mr. David Duffy:
I will make one comment and ask my colleague to comment on some of the cases. Just to be clear, the complicated multiple debts that are linked must be resolved so we are employing all products. We have three approaches. The first is to immediately stabilise and reduce the absolute flow of debt the person must service. The second is to calculate with him or her what is sustainable. The third is to determine the debt that is not sustainable that we would have to restructure. The case in the example we showed the committee is representative of a significant number of our volume. In a number of cases, one finds a husband and wife with a PDH, a SME and three buy-to-lets and a brother- or sister-in-law with further SME debt and other property debt complications. We would bring interest rate forbearance, split equity, debt write-off and all of the elements into those. That is the model we are using so everyone understands how we are approaching it. The great majority of cases are in that mode of complexity. It takes time to resolve them and come to a conclusion but we will end up in all of these situations reaching a level of debt in a calculation at which that debt is not serviceable and we have to write some of that debt off.
Michael McGrath (Cork South Central, Fianna Fail)
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In respect of split mortgages, which Mr. Murphy said the bank was implementing, is the part-capital element of the mortgage accruing interest under the AIB model?
Michael McGrath (Cork South Central, Fianna Fail)
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There is inherent debt forgiveness built into that.
Michael McGrath (Cork South Central, Fianna Fail)
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That is happening?
Dara Murphy (Cork North Central, Fine Gael)
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Like Deputy McGrath, I welcome Mr. Duffy and his colleagues to the meeting. The bank has two clear objectives. The first, as it is one of our pillar banks, is to get back to a point at which we have a functioning banking system. The second is to ensure that some moneys can be recouped by the Exchequer. I will pick up on some questions posed by Deputy McGrath. This morning, we heard from executives from the IBRC who told us that their ambition is for the net cost to the Exchequer of the promissory notes to be in the region of €25 billion as opposed to the predicted figure of €34 billion. AIB has cost the Irish taxpayer in the region of €20 billion. I know the bank is restricted with regard to profit warnings but it has said it hopes to be back in profit in 2014. Could Mr. Duffy give us a target that could be achieved for the Exchequer from a potential sale of AIB or a portion of it and give us some indication of where he sees the bank at this point?
Mr. David Duffy:
We are not able to put a financial target on it. There are so many variables. We must deliver on restructuring, capital and Basel III. We must get our costs down and develop a provable model. We must see what the economy and the European market does, how our revenue profile can build or not build and how quickly we can produce a profitable bank that has an attractive yield. In speaking to investors, not one of them would give us any indication of what likely output there would be in terms of a pricing model in the future. The view is that it is too early in Ireland's case - because we are so linked to the sovereign, which is our shareholder - for them to calculate how they would see us in terms of the value of an investment. We would seek to produce a return for the bank in the 8% to 12% range that we believe is attractive to investors and in discussion they have confirmed that, but beyond that we have not been in a position to create any calculations around the exact value potential.
Dara Murphy (Cork North Central, Fine Gael)
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In respect of the language that Mr. Duffy used about variables and the market changing, perhaps one of the most refreshing parts of this morning was that the IBRC also acknowledged, as we all do, that there is a broad range of variables. However, the IBRC still set a target at which to arrive. It may be worthwhile to look at the model set out by the IBRC in the documents its delegates laid before us as to where it sees itself going. As a State-owned bank, AIB should have that objective rather than a more vague ambition.
My next question concerns SMEs. Mr. Duffy said that 90% of formal applications for credit are being approved. Could he briefly define "formal application"? Certainly, there is anecdotal evidence that many businesses are being refused before they arrive at a formal application. Does Mr. Duffy have a figure for the number of people who are being refused before they get to the formal application stage?
Mr. David Duffy:
I will comment on that question and then ask Mr. Byrne to comment on SMEs. To be open and frank, the informal side of it has been a concern. There was risk aversion in the restructuring of AIB. Certainly in the early period, people were afraid to bring some credits to the table and were risk-averse in that respect. Throughout the past six months, whenever I have met many of the Deputies here and others in Government, I have asked those present to bring to us by name any individual company which has not been able to access credit so we can tackle it. I have given those present my number and e-mail address to this end. On a positive note, I received notification of a significant number of cases over that time and we were able to resolve many of them satisfactorily. We have been trying to specifically address the informal world and have spoken with Deputies and the ISME representative group.
We have met with the ISME executive and every other institution in the financial services world. As simple and as unsophisticated as it is, we gave them our card and stated they can bring anybody to us, from the Taoiseach all the way down through any other institution. Some of those in this room have brought us people who were not able to access credit and we have been able to resolve the matter. We recognise a challenge exists at the informal level and this is one of the initiatives we have been rolling out. As I mentioned earlier, there are also all of the other educational initiatives and travelling throughout the country.
The executive, which numbers an additional four or five people, does not meet at the head office in Bank Centre; it meets only in branches. For our monthly executive meetings we travel to a branch. The two most recent meetings have taken place in Kilkenny and Cork. We meet the staff during the day and spend four or five hours afterwards with small and medium enterprises and individual customers. At the most recent meeting in Cork we met 50 customers over four hours. We do not present; instead, we ask the customers what we can do better. To give a level of comfort, the executive will be on the road for the bulk of the time in direct contact with retail and small and medium enterprise customers throughout the country. We think this is the best way to learn. This is an indication of the attempts we are making to deal with the informal world. I will ask Mr. Byrne to comment specifically on the definition of a formal application.
1:35 pm
Mr. Bernard Byrne:
A formal application is an application in writing using our application form. The benefits of applying in writing are that we are provided with all of the information, and if somebody does not like the decision made he or she is capable of appealing it internally to AIB or to the Credit Review Office. If somebody does not make a formal application there is no process by which he or she can make an appeal. We strongly encourage everyone to make a formal application. To the end of September 25,000 formal applications were made to AIB of which 92% were approved, which is approximately 23,000 applications.
With regard to informal applications, we ran a trial for a period of time. It was a spreadsheet-based approach on a branch by branch basis to try to track how many applications did not proceed from informal to formal inquiry. It was very much a manual process to try to get a sense of the issue referred to by the chief executive. Our sense is that the number could be an extra 10% to 20% so it could mean our approval rate is below 90%. It is an informal process and, as has been indicated, our objective is to try to get to a point where all applications are made formally. We clearly suggest that if everyone with an interest in applying for credit formally applied the application approval rate may fall. We believe this would be all right because it would mean a formal process was in place through which everyone would know what was happening. In every forum where we have the opportunity to do so, we consistently encourage people to make a formal application because it is the only way they can appeal our decision if they believe it is incorrect.
Dara Murphy (Cork North Central, Fine Gael)
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What is the degree to which the bank has restored power to local branch managers? A largely anecdotal view is that during the so-called boom huge pressure was put on individual managers to lend and sell various products which many people now find difficult to repay. There is also a sense that individual managers must kick an issue up the line. To what extent is the bank working on allowing managers, who know their customers best, to be part of deciding on solutions?
Mr. David Duffy:
Deputy Murphy raised several issues which are quite particular with regard to how we are changing the culture of the bank. In the past people were paid for volume of sales and this is one of the easiest ways to damage a bank's health if it is without regard to the creditworthiness or ability to repay of the customer and is a case of piling them high and selling them by volume. This is the wrong motivation for banking.
Banking is very basic. One should know one's customer, and our ability to have people in the branch network who know their customers was severely weakened during the time it was felt people had to move to head office to progress their careers. To answer the Deputy's specific question, we are taking this skill-set back from head office and putting it into the branches. We are returning the SME experience which was severely weakened to the branch network and bolstering it with expertise we must source from outside the bank because much of it had left. We are taking these two steps to return to the basic banking model, which is that people in the field know their customers and make judgments. We are adding to this a level of approval which has been difficult to discuss because in a regulatory environment such as ours which is changing, requests are made to remove individual authorities from the branch network. We have been working on standardisation, simplification and a delegated level of authority which we can review monthly in head office but a stand-alone decision can be made locally with a customer in a branch. It is early days but we imagine in the next six to 12 months there will be a material improvement in terms of knowing the customer, accessing local credit decisions and having the authority to make such a decision without referral to head office.
Dara Murphy (Cork North Central, Fine Gael)
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AIB has merged with EBS, and the mortgage figures in some of the graphs refer to AIB while in other graphs the figures are pooled. Why do different variable rates exist? In one table AIB is referred to as having the lowest standard variable rate, which it does, but the same table does not refer to EBS, which has a higher rate.
It was stated that 43% of people who have distressed mortgages come from the SME or partnership sectors and perhaps have rental properties, and that the bank is examining packaging all of their debt to come up with a solution for them. To what extent is the bank examining loans with other banks which their mortgage customers have? Is the bank taking a multi-institutional approach to difficulties? If people have loans with several banks the burden still exists although I am sure AIB would not wish to have the liability.
In continental Europe, particularly in Germany, people have 50 or 60 year mortgages. Would AIB be interested in such a product? It would allow multi-generational ownership of property. Is this a potential solution to the difficulties people have?
Mr. David Duffy:
Where other banks are involved we take a multi-institutional review. To give a practical example, a person may have unsecured debt with another bank and a mortgage with us. The banks initially came together on this through the Irish Banking Federation but now deal directly with each other on each transaction. In some cases we deal with unsecured debt as a loss and in other cases another bank will, but we will work together to try to solve the cases. We must work on a multi-bank basis to solve the problems.
Mr. Fergus Murphy:
With regard to the main lending rate for mortgages, the EBS rate is 4.33% against the AIB rate of 4%. The market average is approximately 4.35% so EBS is still slightly below the average. EBS is a separate legal entity with separate funding vehicles, securitisation vehicles and wholesale funding. As a smaller organisation historically it paid a little more for its funding than AIB because it was lower rated and smaller.
Since the cost of funding the EBS balance sheet - it is a separate legal entity with a separate balance sheet, board and governance - is a little bit more expensive, it would be appropriate that its pricing would be at par or slightly higher. To build a sustainable model, the EBS moved its pricing to a sustainable level prior to AIB during the crisis.
1:45 pm
Dara Murphy (Cork North Central, Fine Gael)
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Might I clarify?
Ciarán Lynch (Cork South Central, Labour)
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Briefly, please.
Dara Murphy (Cork North Central, Fine Gael)
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Surely the purpose of merging the two was to ensure an economy of scale. How is the rationale squared?
Mr. Fergus Murphy:
The economy of scale exists in the middle and the back offices, creating operational efficiencies and synergies. On the funding side, a person enters an EBS or AIB branch. As they are separate brands and legal entities, the cost of funding in the EBS is slightly higher than in AIB. This does not mean that we are not getting synergies from their merger.
Dara Murphy (Cork North Central, Fine Gael)
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What of the-----
Ciarán Lynch (Cork South Central, Labour)
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I am sorry, but I must call Deputy Doherty.
Pearse Doherty (Donegal South West, Sinn Fein)
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I thank the witnesses for their presentation, which was full of facts and figures. I appreciate how comprehensive it was. As I am restricted by time constraints I will begin my questions.
A number of people have mentioned the super pensions being paid by the bank. As these are contractual pensions, the bank's ability is limited. The Parliament has seen this issue previously, when bonuses were being paid to people who believed they were entitled to them despite the fact that their banks were being propped up by taxpayers' money. A super levy was introduced. The bonuses could be paid, but the taxpayer would recoup nearly all of it through a universal social charge levy on persons in institutions being supported by the State. When we discuss the super pensions, we are not referring to employees' ordinary pensions. What would be the impact on AIB if legislation was introduced to impose a similar levy on pensions in excess of a certain limit?
Mr. David Duffy:
I cannot figure out what the impact would be. If legislation entitles the State to reclaim money, it would become a matter between the super pension individuals, as the Deputy defined them, and the litigation. It would probably become a legal issue, but I am unsure as to how it would interplay with the bank. Former employees would be in litigation or in a super levy situation.
Pearse Doherty (Donegal South West, Sinn Fein)
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Would the bank have any concern about such legislation deterring other individuals from being recruited? I assume that members of the bank are no longer entitled to these types of super pension.
Mr. David Duffy:
That is correct. Apart from no longer being defined benefit pensions, but defined contribution pensions, the current pension structure requires a much lower level of contribution. The Deputy's point is valid.
As to the deterrent, it would be another contributing factor to the negative environment in which the banks operate. The greatest background challenge is the operational risk of having a large group of employees in a shrinking bank that is publicly vilified, be it politically or in the press. Their pay and pensions have been cut and their benefits, for example, cars, are gone. Name it and it is gone. If one is in that environment and suddenly something else is done, it will serve to vilify a population, the great majority of which had nothing to do with what happened. It may have a negative impact on that population.
Pearse Doherty (Donegal South West, Sinn Fein)
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I know many of the bank's employees. They would welcome the imposition of such a levy on super pensions, as it would be viewed as equitable, particularly by those who are losing their jobs as a result of the downsizing. People who worked in the bank right up to the middle of the crash and who were a part of the excessive lending have walked away with golden parachutes.
Regarding lending to small and medium-sized enterprises, SMEs, the presentation mentioned that the bank had surpassed the 2011 and 2012 targets. Given the figures released by the Central Bank, this seems to be a question of the interpretation of what we call new lending. I presume that the bank does not view restructuring as new lending.
Mr. David Duffy:
Correct. Of the target surpassed to date, €600 million is specifically new lending. People measure differently. We do not call giving someone a new facility new lending. Besides the €600 million, much of the amount is restructuring. Restructuring is vital to the retention of employment and the stability of SMEs.
Pearse Doherty (Donegal South West, Sinn Fein)
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To what period does the €600 million in new lending refer?
Pearse Doherty (Donegal South West, Sinn Fein)
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New lending in the year to date is €600 million, but the target is €3.5 billion.
Pearse Doherty (Donegal South West, Sinn Fein)
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I have AIB's 2010-11 SME lending plan. The target was €3 billion. The first paragraph reads: "In recognition of this, AIB is already providing considerable lending support to SMEs in both new lending and in the re-scheduling and restructuring of their existing borrowings". It does not state that rescheduling and restructuring form part of new lending. Indeed, they are not a part of new lending. As written, they are separate.
The Central Bank has provided data on new lending for SMEs. The Central Bank states: "Gross new lending is defined in such a way as to exclude renegotiations or restructuring of existing loans". Are we playing with figures? The target of new lending was the additional money being given to SMEs, supposedly some €3 billion last year. All of the banks in the State just about surpassed that figure. AIB's target this year is €3.5 billion. The bank is playing with figures to make it look like its targets are being achieved when that is not the case. If someone's overdraft is restructured into a loan, the business person has not received new money or lending. He or she might be in a better position with a loan, but new money is not being delivered into the economy.
Mr. David Duffy:
I will ask my colleague Mr. Byrne to reply. We are not playing around with numbers and have been consistent with our definitions since the beginning. We have not changed our definitions or our communications on same. I will ask Mr. Byrne to explain what we mean by "new lending" to ensure that everyone is clear on the definitions.
Mr. Bernard Byrne:
This topic has arisen previously. The targets of €3.5 billion and €3 billion for this and last year, respectively, were set as part of the recapitalisation of AIB and the Bank of Ireland. The targets could never have been envisaged as new money into the economy, as a total target of €7 billion this year or €8 billion next year would be in excess of anything the economy could even contemplate having. From a macrostatistic point of view, we could not provide a further €6 billion, €7 billion or €8 billion. Those amounts would never have been sustainable, given the size of the economy.
Pearse Doherty (Donegal South West, Sinn Fein)
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We will be hit by time. The 2010-11 lending plan reads, "AIB is already providing considerable lending support to SMEs", but the key phrase is "in both new lending and in the re-scheduling and restructuring". In its plan, AIB clearly makes a distinction between new lending and restructuring. The bank's target is €3.5 billion in new lending.
Pearse Doherty (Donegal South West, Sinn Fein)
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That is not what the plan states. The idea was that we would try to get money flowing into SMEs. The presentation, while good, puts forward the idea that the target has been surpassed and that €3 billion has flooded into SMEs. However, that is not the case. The majority of the €3 billion is the same money that the SMEs had, merely restructured. I will move on, as we will not agree on this point. We have been playing with figures.
Ciarán Lynch (Cork South Central, Labour)
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Four or five minutes remain.
Pearse Doherty (Donegal South West, Sinn Fein)
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As it has already been mentioned, I do not want to labour the issue of the possibility of the European Stability Mechanism, ESM, taking over shares in AIB. Mr. Duffy told a Deputy at this meeting that the bank was in discussions with potential investors with a view to a return of 8% to 12% on their investment. Is this what he hopes the bank can offer?
Pearse Doherty (Donegal South West, Sinn Fein)
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If he believes that potential investors could make a return of 8% to 12% on their investment, he obviously has an idea of the value of the investment.
If the AIB representatives are of the view that potential investors could have a return of 8% to 12% on their investment, they have a view on the value of the investment. If an investor invests €1 billion, perhaps 10% amounts to a certain figure. If the investment amounts to much more for the bank, the return will be much less. Does the bank have a figure in mind for the value of AIB? I know the bank will not share it with us if it is in negotiation.
1:55 pm
Pearse Doherty (Donegal South West, Sinn Fein)
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With regard to an investment return of 8% to 12%, most of the money that went from the State to the bank, approximately €15 billion, went via the NTMA and the National Pensions Reserve Fund. The National Pensions Reserve Fund has been successful in the past but average returns are approximately 6%. Why would the National Pensions Reserve Fund not hold onto its shares in AIB if the bank could rate guarantee a return of up to 12%?
Pearse Doherty (Donegal South West, Sinn Fein)
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Approximately €1.4 billion of the recapitalisation was contingent capital under PCAR. It is due to be repaid to the State by 2016 on the basis that AIB does not hit the adverse scenario under the stress tests. Are the witnesses confident the contingent capital will be returned to the State according to the figures being worked on now?
Pearse Doherty (Donegal South West, Sinn Fein)
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That is a "Yes" under the assumptions used at the moment.
I take the witnesses back to November 2011, when there was a public spat between the Government and the bank. The Minister of State at the Department of Finance called the position of the bank pathetic and the Minister for Finance said the position was serious. It concerned the ECB reduction of 25 basis points in interest rates, which was not passed on by AIB. The meeting between the Government and bank resulted in the bank facing down the Government but two weeks later it reduced the interest rate by 25 basis points. The bank knew the mortgage book was loss making at that time. The Government faced down the bank and AIB reduced the rate by 25 basis points. Since then, the ECB has reduced the interest rate on two occasions, amounting to 50 basis points, but AIB has not passed on reductions. Instead, it has increased its interest rate by 50 basis points. Is another showdown required between the Minister for Finance, the Minister of State at the Department of Finance and AIB? Why did the bank reduce the rate in November 2011 when it was not of the opinion that it should reduce it and when it knew the mortgage books were loss making?
Ciarán Lynch (Cork South Central, Labour)
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After hearing the final reply to Deputy Pearse Doherty, we will hear from Deputy Arthur Spring.
Mr. David Duffy:
The original decision was taken before my time. I am not even sure if all the parties are here. The question of why we are not doing it now and what will happen in the future is the most pertinent issue. It involves sitting down as a senior group of people and working through, with the Department and with the troika, what is needed to bring a bank back to stability. There are three things – one must be able to price products so that they are not at a loss, lower the cost of funding and significantly reduce the cost to the bank. If we put that together in a strategy to bring us to profitability in 2014 and include our assumptions on our margins, it means we will not be reacting to variables of ECB rates. In that sense, the reason for not making a decision in reaction to the ECB rate cut is that our arms-length commercial strategy to return to profitability, to attract investors and to return money to shareholders has been agreed between all parties.
Pearse Doherty (Donegal South West, Sinn Fein)
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This is my last question. Last year, the bank informed the committee that €600 million had been written off in respect of the mortgage book. What is the figure at this point?
Pearse Doherty (Donegal South West, Sinn Fein)
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I did not ask about the provision. What has actually happened?
Pearse Doherty (Donegal South West, Sinn Fein)
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The committee was informed that, this time last year, some €600 million was written off in respect of the domestic mortgage book. Does the figure of €600 million still apply or has it increased?
Pearse Doherty (Donegal South West, Sinn Fein)
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I refer to a letter from the bank responding to questions at the Oireachtas joint committee, which states that mortgage write-offs to date at AIB have only occurred in exceptional circumstances as, so far in 2011, the bank has written off €6,000,000 predominantly in the first half of the year. I seek an update on the current figure.
Pearse Doherty (Donegal South West, Sinn Fein)
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Sorry, it is €600,000.
Mr. Fergus Murphy:
We will provide an update on that figure. The sum of €600,000 is a tiny amount in the context of the balance sheet and the point I was making is that any write-off will be minuscule or near zero in that context. Let us say that €600,000 on a balance sheet of €95 billion is zero. We are not writing off debt.
Arthur Spring (Kerry North-West Limerick, Labour)
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I welcome the witnesses. My opening comment concerns the sale of the bank. I am the fourth speaker and I welcome the fact that we are talking about the sale of the bank. It is an indication that we are incrementally moving towards the light at the end of the tunnel. How will the bank pitch towards the investors the attraction in purchasing AIB? Reference was made to a return of 10% to 12% on investment. The witnesses talked about profitability, the cost of funds and reducing overheads. Can the witnesses provide a two-minute pitch on what they would do to make AIB attractive to investors? I do not have any spare change.
Mr. David Duffy:
If the Deputy could refer us to someone following the pitch, that would be advantageous. To give the committee the concise and explicit version of what we have just done in Asia, where we met investors at the IMF, and two weeks previously at the Merrill Lynch conference, the world of banking is structurally changing. UBS, with 10,000 people, changed as a result of the regulatory consequences of old banking models. Pay scales, business models are changing with Basle III and everything else is changing. Analysts and those who examine these investments, from Canadian long-only to other short-term venture capital firms, are looking at a yield. The highest value is a simple and transparent bank. The comment has been made to us many times. We will create a model of a bank that is a low-cost provider of a utility type service of payments and cash management, with strong SME capability. It will primarily be a domestic bank, offering the most advanced technology to facilitate consumers banking when they want, how they want and what they want rather than having to come to the bank and queue up. We have the technology. The cost, ease-of-use and ubiquity of the technology for all products should be comparable to the disintermediation threat of PayPal and others coming across the Internet to compete in that space. The cost-income ratio must be in the low 40s whereas banks today are in the high 40s and early to mid 50s. It must be an incredibly efficient, low-cost model. It must offer a simplified range of products. We have a large number of mortgages, whereas it should be a handful of mortgages. What will investors think of a bank with a stable market share, with a transparent and simple to understand balance sheet and products that are simple, a bank that is low-cost, high tech and is competitive in terms of ease of use of facilities with anything that is disintermediated, with a strong capital tier 1 ratio and a stable annuity yield of between 8% and 12%?
If we can present that to investors, what will they think? Investors will think that is very attractive.
2:05 pm
Arthur Spring (Kerry North-West Limerick, Labour)
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Can Mr. Duffy elaborate on the cost of funds and how the bank will pitch that to them?
Arthur Spring (Kerry North-West Limerick, Labour)
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By retail deposits.
Arthur Spring (Kerry North-West Limerick, Labour)
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It is looking at 50 BPS for a margin and at another 60 BPS for administration costs. Is that the model the bank will work off?
Arthur Spring (Kerry North-West Limerick, Labour)
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What about mortgages, for example?
Mr. David Duffy:
It depends on the mortgage, including the duration. As the Deputy will know, the loan to value ratio can vary and the amount of the mortgage can vary, depending on the person. The cost to income ratio is the best way to look at it. If one can create a low cost with sufficient margin that the cost to income ratio is in the low 40s, that allows one to generate that yield and that is what makes it attractive to investors.
Arthur Spring (Kerry North-West Limerick, Labour)
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Therein lies my concern. As we know, the mortgage crisis is escalating. I refer to the bank talking to potential investors who will purchase into a forecasted cashflow that shows profit being made on what I call "negligent lending" - lending over 30 to 40 years, at 100% to 110% LTVs and multiples of earnings that were inappropriate. What I am trying to work out is whether the bank is putting into the cashflows a margin which is shown on these loans, especially the ones given between 2002 and 2008, which will give a return on investment of potentially of 8% and 12% to investors.
I welcome the news the bank is considering investors coming into it but it must solve the problem of cost of funds and of negative equity and what I would consider a solution - a potential moratorium on profit-making on negligent lending. I raised this subject with the Minister for Finance last week and have done so on a number of occasions in regard to the sale of the bank. We have all known for more than over a year that it is going to do this but it is only a topic of debate now. What will the bank do to tell the people that they were lent money in the most negligent format, that it got it wrong and that it will strip it back in any future profits it will make and in any sale which will ensue?
Mr. David Duffy:
In regard to what we are going to say to the customer, we understand and have a lot of sympathy with much of the difficulty people are incurring in their personal lives and the debts they have. That goes from a small single home owner family to more complex people with businesses and buy-to-lets. We have an obligation to understand what debt is sustainable. That is at the heart of the issue - what is an affordable level of debt for those people and not what was the debt. How do we address that with individuals? In our restructuring plan, about which we talked, our intention is to address that with all of those people. SMEs will be 100% tackled by the second quarter of 2013. We are involved with 33,000 homes and are trying to cover that entire spectrum of distress in the same period. Can we get answers for those people in distress and return them to a lifestyle that has affordability as a theme rather than distress? That is the simple message.
Arthur Spring (Kerry North-West Limerick, Labour)
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The very fact the bank is engaging with investors at a time when the number of people with distressed mortgages is rising would suggest to me that it cannot give an investor a true picture unless it is talking about the margins it will implement on mortgages. Will there be some forgiveness in regard to the mortgages of people who were loaned money in the most negligent format?
Mr. David Duffy:
Are we putting a margin around those current lending products? We are putting average assumptions around a portfolio, so we are not modelling current distress into margins for an investor. That is absolutely not the case. We are assuming we can solve our distress issues and rebuild a stable and normal bank and we are offering that as a proposition to investors. It is a very different issue.
In regard to the distress in mortgages today, we are looking at all debt, and not just mortgages on their own, and at the sustainability of that debt. We are being explicit about the difference. There will not be debt forgiveness. Maybe this is semantics for some people but it is a hugely important issue. There will be debt restructuring where there is compromise on both sides at the end of a process of discussion. As I said, there are three parts to this. We will immediate try to stabilise. The reality is we are all human beings and people are lying awake at night in distress. We will stabilise the situation to prevent that from becoming another problem. We will identify what is a sustainable amount of debt. Both parties, following discussion, will decide the amount of debt that is affordable. We will deal with and address the rest of that debt and, in most cases, do some structural write off. Those are the challenges we face and the actions we will take.
Arthur Spring (Kerry North-West Limerick, Labour)
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In essence, that means rather than a debt write down, there will be a margin moratorium for people. That is one way to look at it. I would like to ask Mr. Murphy about cost of funds. He expressed an interest in trying to sell the bank with a view to potentially different elements of funding for the bank coming about - wholesale deposits, etc. What could happen if we sell the bank and how low should interest and cost of funds go?
Mr. Fergus Murphy:
We do not know who that investor might be at this stage, so much would depend on the investor, the investor's individual ratings, etc. In regard to what Mr. Duffy said earlier, we are looking to build a bank that can stand up in its own right based on what we can control right now. Whatever comes around the corner in terms of ESM, investors or whatever is just that.
At the moment, the funding costs to the bank are about 3%. They are unsustainably high given that there is an ECB rate of 0.75%. We have brought deposit rates down by about 1% during the course of this year, so we are on a glide path to bring those deposit levels, which will be the lifeblood of the new core bank, down to levels where they should be. As the Deputy knows, they have been artificially high.
With all the stakeholders, we will also look at removing the eligible liabilities guarantee at a point in time that is appropriate for the system. There is a significant cost to the bank on an annual basis for the eligible liabilities guarantee. It is about 43 basis points off the net interest margin of the bank on an annual basis. If we want to bring a viable and sustainable bank to an investor going forward, we will have to have a net interest margin of 1.5 plus. Taking 43 basis points off that before one starts is a difficult thing to do. Our net interest margin at the moment is in the mid 80s after the ELG cost. We are planning to bring deposit pricing down and to look at removing the ELG at the right time. Then one starts to get the liability side of one's balance sheet in shape.
Arthur Spring (Kerry North-West Limerick, Labour)
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Will that kick into the mortgages and the cost of mortgages, especially the variables?
Mr. Fergus Murphy:
On the asset side of the balance sheet, we have to make sure that in future, because this was not the case in the past, we charge an appropriate price for any product, say a mortgage product, and that we cover our cost of operation and our cost of credit going forward and a margin for profitability. The fact that deposit pricing comes down does not necessarily mean the asset margins come down.
Arthur Spring (Kerry North-West Limerick, Labour)
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If the ECB rate stays where it is at the moment, can Mr. Murphy see the cost of mortgages in this country decreasing in the short to medium term?
Arthur Spring (Kerry North-West Limerick, Labour)
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What about in the medium to long term?
Arthur Spring (Kerry North-West Limerick, Labour)
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That will be very disappointing for many people. I urge the witnesses, when selling the bank, to look at putting a moratorium on margin-making on the most vulnerable mortgages.
There have been more than 40 bank closures and I will not be parochial and talk about Kerry.
Arthur Spring (Kerry North-West Limerick, Labour)
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AIB might be what people consider to be the bank of the moment but to me it should be PIB - popped up Irish bank. The level of damage that has been done to the brand in rural areas, where it has closed branches, is incredible. It has not told people why it has had to do this. As someone with some banking experience, if one looks at some of those bank branches as stand-alone entities, they would be profitable.
None of them provided moneys for apartment blocks in Ballsbridge, contracts for difference or anything else like that. They were involved in agricultural loans, simple things like car finance and some mortgages. Can the witnesses explain to the people of Ireland why AIB closed those banks? Will they do anything to redress the imbalance that exists in rural Ireland now? The bank was the fulcrum of society. Shops, petrol stations and small retailers will feel the effects of this move. I would like to hear the witnesses' socioeconomic analysis of what this is all about.
2:15 pm
Mr. Bernard Byrne:
We recognise that this was a very difficult decision for us to reach. It was an essential decision from an economic point of view. It reflected the demographic changes that have taken place at many of these locations over a long period of time. Perhaps more important, it reflected the fact that the way people bank now is very different from the way they banked 20, 30, 40 or 50 years ago, when many of the branches in question were opened.
Arthur Spring (Kerry North-West Limerick, Labour)
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Some of them were opened 150 years ago.
Mr. Bernard Byrne:
Almost 90% of all transactions take place away from the branch. Clearly, that was not the case when those branches were set up. Notwithstanding any anecdotal evidence one might hear, the volume of activity that goes through those branches is tiny by comparison with what it was when they were originally set up. The specific locations we chose had the lowest levels of activity and served areas that could be served in other ways. The committee may be aware that we have four mobile banks which are serving most of the locations that have been disenfranchised as a result of this measure. We also have an arrangement in place with An Post to ensure anyone can carry out lodgments, which was a key issue for people with cheque lodgments. At each location where we have closed a branch, An Post has been enabled to accept cheque lodgments in post offices. It was already able to take cash lodgments and provide cash services. The new facilitation, which involves cheque lodgments, was launched at the exact same point in time. In many locations that have lost a branch, two or three locations in the surrounding region have been enabled from a post office point of view. Clearly, there has been a change in how the service is being offered. We know that is difficult. It was simply not possible for us to continue to provide this social service in the context of the imperative to become viable. We had to do something to address the cost base. We believe we have enabled people to continue to avail of banking services through our on-line and remote offerings, through what is happening in An Post and through the mobile banks I have mentioned. That is a quick attempt at an answer at this point.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I thank the witnesses for their presentation. I am still trying to work my way through this substantial amount of information. Our view is that we need write-downs because forbearance, restructuring and the various models the bank is developing or has put in place are not enough to deal with the issue of mortgage arrears. The witnesses have made it clear that write-downs are not on the agenda. Can they justify that position? The figures we have been given, which show that the bank is getting an additional 1,400 requests for forbearance each month, indicate that the mortgage crisis is getting worse. More and more people are encountering trouble and asking for help. Although many people are already in trouble and the crisis is getting worse, we are continuing to approach this problem on a piecemeal basis rather than looking for a radical solution that could take this albatross from around people's necks, get them out of trouble and boost the economy. We all know that the level of mortgage distress is operating as a huge macroeconomic dampener on the economy. Can the witnesses tell me why it is better to take a piecemeal individual approach, involving restructuring and forbearance, than to adopt our approach of writing down to current market value the unsustainable debt that was incurred during the period of the property boom caused by developers and banks? If our approach was pursued, how much would it cost? On the basis of the bank's figures - we have been told that the volume of negative equity is approximately €6.8 billion and that €1.9 billion of that is currently impaired - I estimate that the additional cost of writing down the negative equity would be approximately €5 billion. Is it not the case that the bank has been recapitalised to do that? The Irish banks are probably among the most recapitalised institutions in Europe. Why can this not just be done? It would help distressed mortgage holders and the economy at the same time. If we string it out, it will act as a continuous burden on people in an unsustainable situation and damage the prospects for economic recovery.
Mr. David Duffy:
The Deputy has asked a number of questions. I will make an initial comment before I ask my colleague, Mr. Murphy, to do likewise. I should mention, in order to be balanced, that we are looking at the totality of unsustainable debt, including mortgages, SMEs, buy-to-lets, commercial real estate and unsecured debt. All of those elements, taken together, comprise the debt burden that society has. It is not just one asset class. In the context of our addressing of the totality of the debt, we are figuring out how to reduce the burden, what is sustainable in the eyes of our customers and feasible in terms of repayment over a continuum, and what is unsustainable in the manner suggested by the Deputy. We will then consider whether that can be addressed by writing some of the debt off. It has been suggested that we are not looking at any write-downs, but in fact we are. We are doing so in the context of all the asset classes of debt, rather than just one. I ask Mr. Murphy to comment on the specific issue of the cost of the alternative approach the Deputy is advocating.
Mr. Fergus Murphy:
The most important thing we are trying to do is move away from the concept of negative equity and towards the concept of affordability. Much of what we are doing is being done with the intention of driving it in that way. The Deputy correctly mentioned that the negative equity on AIB's mortgage book is €6.8 billion. Under the prudential capital assessment review, we have provisions of €2.8 billion in place for that book. We have also made provision for other asset classes and books, etc. It would be irresponsible of AIB, as a Government-owned bank that has been recapitalised by the taxpayer, to approach the mortgage arrears and default problem that is being experienced by the bank and the country by writing off all negative equity overnight. It is not a solution for the country. As Mr. Duffy and I have already said, we need to get people into restructured loans that they can afford, if at all possible. Between 69% and 70% of our 33,700 customers who are in forbearance are affording the new restructured loans we have put them into. This approach is working, in the main. It is obvious that there are problems with between 25% and 30% of the customers in question. That is why the banks have been initiating advanced forbearance under the supervision of the Central Bank over the past year. We are trying to restructure these customers' loans in a deeper way to see whether we can get them onto a sustainable path again. That is the approach. It relates to affordability rather than to negative equity.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I reject the argument that by coming to an arrangement with people that enables them to just about manage, AIB is somehow offering a solution to the damage to the economy that is being caused by the fact that so many people are in mortgage distress. I understand the logic of AIB's point of view, but I do not understand its rationale from the point of view of the economy as a whole. Even if an arrangement is reached that allows people to just about manage, as long as they are continuing to pay off the inflated mortgages that resulted from the property madness, they will be limping along for many years to come and therefore will not be able to contribute substantially to the restoration of economic demand.
I do not accept that is the case. Furthermore, I put it to AIB that given it is getting more requests for forbearance - 1,400 extra requests - the situation continues to worsen and deteriorate. It is obvious we need more radical solutions. AIB asserted in its response that this is not the answer for the economy. I cannot see what evidence it as for that assertion, given there is no evidence the current approach being pursued is getting us out of the crisis with anything like the urgency we need, both for the householders involved and the wider economy, where demand continues to be strangled by this debt burden.
2:25 pm
Mr. Fergus Murphy:
Unemployment has stabilised, house prices have stabilised and the monthly increase in defaults in the banks has been reducing month on month for nine months. We are beginning to see an inflection point in the economy, where, hopefully, the worst has passed and the economy continues to stabilise.
We will contact 1,500 customers per month in the coming months to restructure their mortgages in a deep restructuring called advanced forbearance, using products like split mortgages, where we try to put the customer into a sustainable cash flow pattern on mortgage part A and warehouse, at zero interest to the customer, the second part of the loan, for the foreseeable future. In this process we will link in with the customers on a regular basis to see how they are getting on. Where people are unemployed currently, hopefully they will be employed in the future so that where one person of a couple was working, there will be two. People will receive salary increases or promotion and the economy will grow. This is a medium term solution we need to work through as there is no short term solution that will make the problem disappear overnight.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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We will agree to disagree. Obviously, this is also a Government policy matter, but it is also Government policy to allow AIB the freedom to make these decisions. I believe AIB is making the wrong decisions, because unless we get radical debt write-down, we will continue to bump along the bottom. I believe AIB is failing to grasp the significant influence it has on whether we will have the recovery AIB hopes will arrive magically. AIB is part of the solution or the problem in the context of producing the recovery.
To what extent is AIB policy in this regard connected to the fact that its objective is to resell the bank and make it attractive to private investors? I see this as part of the problem and see these two issues as connected. In so far as AIB has responded - not sufficiently in my opinion - to some public pressure in terms of how it operates and its willingness to pass on ECB interest reductions, that has to do with the fact AIB is now in public ownership and more subject to public pressure. However, in the opinion of many, AIB is not responding fast enough or significantly enough to that public pressure and this has to do with the fact AIB is trying to make itself attractive to private investors. Is that a reasonable assumption?
Ciarán Lynch (Cork South Central, Labour)
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That should be the Deputy's final question.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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I have one final short question.
Ciarán Lynch (Cork South Central, Labour)
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The Deputy should put it now, because I will not get back to him.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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My final question concerns the land and development and investment property loans of AIB, which are a significant part of its loan portfolio and impaired loans. In fact, they comprise a larger portion of the impaired loans than residential property loans. What is going on with regard to these loans? Tell us more about them and what is happening with them. Do these loans relate to commercial and residential property that is sitting around empty? Many people feel we could be doing something useful with this property, such as helping encourage small and medium enterprises or housing homeless people.
Mr. David Duffy:
There are two questions there. I will respond on the first and then Mr. Stanley will respond on the issue of commercial property.
We were not capitalised for negative equity, but we may end up disagreeing on that. With regard to what the capital is for, it is for multiple purposes. I would not characterise needing to create private investors in the bank to return taxpayers' money as a sole purpose. We are in a position where we must have capital at a minimum level for regulatory purposes. On top of that, we must have capital for restructuring when we do write-offs, because what happens is capital is destroyed then. We must also have capital for growth.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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The bank was provisioned for the first of those, was it not?
Mr. David Duffy:
We do not know if it is sufficient provision yet. It will take years to understand whether the provision is adequate. We are looking at having to continue to provide this year, on top of provisioning, and we anticipate the need for more provisions over the next few years. We need to be able provide for write-offs and growth capital and need to meet our regulatory hurdles and provide for Basel III. These four issues are an enormous influence on our capital base.
Mr. Stanley will now respond on the issue of the property portfolio.
Mr. Paul Stanley:
The Deputy asked about land and development. There is €7 billion in that portfolio and some €5.7 billion of that is in impaired loans, which is indicative of the quality and locations of those properties. Some 71% of those impaired loans are provided against. A large part of that portfolio comprised elements that were to go to NAMA, but a threshold level of €20 million was introduced so they remained on the bank's balance sheet. The quality of the portfolio is reflected in the figures. With regard to alternative uses to which these properties could be put, I do not have a view I could convey to the committee on that.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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That is investment property.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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My question asked what was happening with that portfolio, in particular the investment properties.
Ciarán Lynch (Cork South Central, Labour)
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The Deputy's question should be specific. Then we will move on.
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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What is happening with the investment property?
Richard Boyd Barrett (Dún Laoghaire, People Before Profit Alliance)
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By whom?
Ciarán Lynch (Cork South Central, Labour)
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Before I bring in Deputy Twomey, I would like to put some questions and recap on or our position. It is interesting to listen to the discourse here and to hear the different terms used. This morning, Mr. Alan Dukes was very averse to the use of the term "product" when we were discussing these matters, so I find it interesting that AIB is talking about "product" ranges this afternoon. Perhaps this is just a presentation issue. Whether products or options, one of the issues at both business and individual level is that many people invested in property and now find themselves ruined as a result.
With regard to the issue of split mortgages, is the bank considering a model involving joint asset ownership so that this facility will not just be available for householders or homeowners, but will also provide an opportunity for businesses? Is that a model or project the bank may consider?
Mr. Fergus Murphy:
I presume the Chairman is talking about personal customers. It is not exactly like a split mortgage. We look at the total debt of the customer and try to take a holistic view of all of the debt. The property often comprises an owner occupier primary domestic dwelling, an SME, buy-to-let properties, tax loans, car loans etc. We look at bundling all of that together and prioritising how we manage it, with a view to bringing the customer again into a repayment plan that works for the customer. Therefore, we break their loans into three, an A a B and a C part. The C part is a stretched target that may not be doable for the customer.
Through time, depending on the performance of the other loans, we look at the possibility of compromising on that. Therefore, we are trying to segregate our book in the way suggested.
2:35 pm
Ciarán Lynch (Cork South Central, Labour)
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Mr. Duffy mentioned earlier that with the roll-out of product or options, there are issues with regard to the Central Bank and the Financial Regulator. What issues are arising currently with regard to the credit guarantee scheme? What sort of structural engagement does AIB need with the Central Bank and the Financial Regulator to ensure this rolls out smoothly?
Mr. David Duffy:
We are engaged in discussion with the Central Bank, giving it our opinions and views on how best to approach this. We have also engaged with the Department of Finance on the same issues and all parties have discussed them with the IBF. There is a consensus that with the improvement in the sovereign area and the stability in retail deposits, it would be a realistic option for the banks to no longer have access to the eligible liabilities guarantee, ELG.
Ciarán Lynch (Cork South Central, Labour)
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Moving on to specific operational matters, I submitted a parliamentary question recently relating to the rent-to-buy programme and the response was interesting. It stated that more than 60 cases were currently being processed under the mortgage to rent scheme, that one case had been fully concluded and a further eight were expected to conclude shortly. Anecdotal information I have got is that it is the sub-prime lenders who are engaging better with this scheme rather than the pillar banks. From what I know, the only one of these cases that has gone over the line and converted from mortgage to rent has been with a sub-prime lender.
This brings me to Ms Muldoon's comments earlier this evening accusing the banks of being in denial. If this is the case, it means the sub-prime lenders are not in denial, but are dealing with the reality of the market, but that the pillar banks are resisting and still have difficulty with regard to the real value of residential property. How many cases involving moving from mortgage to rent is AIB considering currently and how many of these does it expect to conclude over the coming period?
Mr. Fergus Murphy:
I cannot say how many will do over time. We will discover that as the economy and process unfold. The mortgage to rent product is one we are making available. However, it is a slow demand product, because of the number of restrictions and criteria that must be met before it is an eligible product to sell to the customer.
Ciarán Lynch (Cork South Central, Labour)
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One of the criteria is that the bank must realise the real value of the property. It seems to be the case that the sub-prime lenders know the real value of the property, but it is the accusation that AIB does not. Has AIB completed one mortgage to rent model yet?
Ciarán Lynch (Cork South Central, Labour)
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But not one has been completed.
Ciarán Lynch (Cork South Central, Labour)
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Does AIB expect to get any of those over the line?
Ciarán Lynch (Cork South Central, Labour)
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Will AIB inform the committee by the end of the year as to how many of these it has completed and how many it has examined? We do not need to know the details of the households involved, but I am anxious to know how AIB is engaging on this incentive.
The final question before we move on relates to the issue of credit and debt transactions. In how many businesses in the country does AIB provide a facility for customers to use a credit card machine?
Ciarán Lynch (Cork South Central, Labour)
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No, I am talking about debit card transaction, for example, if I buy a pair of shoes this afternoon in Grafton Street or in McCurtain Street in Cork. How many of those transaction points are there in the country?
Michael McGrath (Cork South Central, Fianna Fail)
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They are laser points.
Ciarán Lynch (Cork South Central, Labour)
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Laser or debit points. How many are there?
Ciarán Lynch (Cork South Central, Labour)
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Would it be 2,000 or 3,000?
Ciarán Lynch (Cork South Central, Labour)
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I understand that in the past AIB rented these debit points to their customers.
Ciarán Lynch (Cork South Central, Labour)
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Of what?
Ciarán Lynch (Cork South Central, Labour)
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Is it AIB merchant services?
Ciarán Lynch (Cork South Central, Labour)
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Am I correct in my understanding that up to recently businesses operating such debit points with AIB merchant banking rented the machine on a monthly basis?
Ciarán Lynch (Cork South Central, Labour)
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I understand that recently the contract of every business that had dealings with AIB merchant banking has been changed and businesses have now moved from a rental to a lease model. Is that correct? Some 40,000 businesses or more have been flipped over to a lease model - a lease being a determined agreed period. Is that correct?
Ciarán Lynch (Cork South Central, Labour)
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The witness should answer the question as it is asked.
Ciarán Lynch (Cork South Central, Labour)
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In Mr. Byrne's estimation there are 40,000 or 50,000 of these debit points. Up to recently, these were rented on a monthly or weekly basis. Therefore, if a business decided not to use them any more, they walked away from them. However, from what I understand, AIB market banking has now engaged with a German company, First Data Global Leasing, and all of these machines are now on a two to three year lease to AIB customers. Is that correct? The accusation in the retail sector is that a scam is being played on them and that is the issue I would like to deal with this afternoon. There is a strong accusation being made that by sleight of hand many retailers who had machines last week and who signed the paper for them, thinking they were just conducting the normal transaction, found they were no longer in a rental agreement that could be cancelled easily but had moved into a two or three year lease agreement. In the event of their business closing, they find they are locked into a three year lease agreement on the machine. The business could go to the wall, but the company owner would still have to pay for the use of the machine. Can we have some more information on that?
Ciarán Lynch (Cork South Central, Labour)
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Nonetheless, AIB is a partner.
Ciarán Lynch (Cork South Central, Labour)
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I would like to emphasise for AIB that businesses are struggling on a week-to-week basis and in terms of cash flow are counting the lodgment they make to this on a week to week basis. If they had to close in the morning, they would have an exposure of several thousand euro for these machines for another two or three years, even though no longer trading. This indicates a poor level of practice on the part of AIB. Many of these businesses did not realise that when they converted to First Data Global Leasing, they were entering a contract of a long-term leasing arrangement. Up to then, they were engaged in a month-to-month rental with AIB merchant banking.
Ciarán Lynch (Cork South Central, Labour)
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I would be very grateful if AIB could provide the committee with a full briefing on that.
Ciarán Lynch (Cork South Central, Labour)
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Very good. I now call on Deputy Twomey.
Liam Twomey (Wexford, Fine Gael)
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It has been interesting listening to the contributions made today and to hear that the AIB team is holding board meetings at branches throughout the country and actively seeking face-to-face meetings with customers. This is all very positive and it is good to hear staff in both loan and asset management are being retrained. These initiatives and others mentioned here this afternoon give the impression AIB is actually rebuilding the bank, almost from the ground up. Clearly, some huge problems were discovered when this team took over at AIB. If it is the situation that significant internal restructuring is being undertaken and that the team must go right to the ground level to do that, is it not a bit premature to talk about getting investors, particularly if there are structural problems and problems with loan management to be dealt with.
One of the issues discussed here, tracker mortgages, which amount to approximately €20 billion, make up a sizeable proportion of the existing loans. These will be loss makers for a number of years, not to mention the buy to let loans, which are significant loss makers. Also, there is €5.7 billion of impaired speculative loans, mainly land. Almost €5 billion of that amount could be written off as there has been discounting of up to 90% on that type of loan. That is another €5 billion loss, before we even start drilling down into the issue of arrears.
The bank is facing huge problems, yet the delegates are talking about seeking to attract investors, almost like they are preparing for a sale. I wonder whether that is a little premature.
The delegates spoke about building sustainable profits and balancing competing interests. On the one hand there is the shareholder interest, which is our interest because the taxpayer is heavily involved. On the other hand, however, is the debt restructuring issue and the need for some type of solution for small and medium-sized businesses and householders in serious arrears. The delegates spoke a great deal about restructuring, but the question that arises in this regard is why there is such resistance to debt forgiveness. Is it because the bank is of the view that there is no capacity within the system at this time to engage in a process of examining customers' debts, assets and income with a view possibly to writing off at least a portion of their debt? Or is it simply the case that there is a general policy of opposition to debt forgiveness in any form across all the banks? Going from what we heard from the IBRC delegates this morning and on previous occasions from representatives of other banks, one might conclude that the latter is the case and that there is a collective strong resistance to any write-off of debt. It is one of the issues that is constantly raised with public representatives.
The other major issue we are hearing about is the difficulty of obtaining loans. In fact, what we are hearing outside these Houses does not correspond to what the delegates are saying in this meeting today. Every time I speak to people at events, particularly business events, I hear very detailed stories about how they were refused a loan. There is a need to clarify what is happening in this regard.
I conclude by voicing my appreciation to Mr. Duffy for making himself and his team so accessible to us. That is a very positive development and it allows us to redirect queries to them with ease.
2:45 pm
Ciarán Lynch (Cork South Central, Labour)
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Before Mr. Duffy responds, I ask Deputy Arthur Spring to take the Chair for a short period. Is that agreed? Agreed.
Mr. David Duffy:
Deputy Twomey's first question was whether, given the scale of what we have to achieve, it is premature to talk about attracting investors. To be explicit on this point, there will be no investors really soon. What we are saying is that investors look at the evolution of a bank, and some might wish to come in earlier in that evolution where they see the price of entry being cheaper and the potential for profiting as things improve. Other investors might choose to become involved at a later stage. We are not targeting investors for a price but rather for trust and confidence. Our view is that it is never too early to start building trust and credibility with all classes of investors. We do not have to accept anybody's offer at any time. It is not a matter of rushing to sell; it is about the Government making the decision on price and us preparing the ground as well and as thoroughly as we can in anticipation of investors of all types possibly engaging in a debate. It is a question of balance. We are seeking to build the credibility necessary to create that option and it is then at our discretion, collectively with the Government, as to when the choice is taken to exercise that option. That is the nature of what we are trying to do. We recognise fully the many challenges we are facing in this regard. However, many investors are not put off by the severity of the challenges facing the world of banking. In fact, many are of the view that Ireland as an economy and the bank as a link to the sovereign are among the first to emerge out of the chaos of recent years. That possibly makes us an attractive investment prospect and we will do whatever we can do to encourage people to think about us in that way. Timing and price, however, are a Government issue and we will not seek to influence that.
On the question of whether there is a reluctance to consider debt forgiveness, it is important, first, to ensure that we are all talking about the same thing when we have this discussion. In particular, it is important to recognise the difference between debt forgiveness and debt restructuring, which includes write-offs. The phrase "debt forgiveness" suggests to us the notion that debt can somehow be magically waived. However, the moral hazard and the absolute inequity of those types of decisions places one on very dangerous territory given the reality that lots of people are paying their debts. The question would immediately arise as to why one person's obligations should be waived simply because he or she made a bad decision which another person, who is not receiving any benefit, did not. When we say that debt forgiveness is not a policy we are supportive of, that is the reason. Blanket forgiveness without regard to the moral hazard and inequity of unbalanced dealings with different people in different situations is not a solution that works. What we are saying is that we are working on the principle of affordability, as Mr. Murphy mentioned. We seek to address, on an individual basis, what is sustainable debt and what people can afford within the mix. In such circumstances, the bank does look at write-offs of debt. That is the approach we are taking rather than simply blanket forgiveness.
The third issue the Deputy raised related to the difficulty in securing loans. There is an evolution going on here and our primary obligation in this is education. We have to get out in the marketplace, which is why we are doing what we are doing. For example, we are saying to members of the committee that if a person approaches them with a problem, they should pass the details on and we will try to assist. We have engaged with local radio, arranged meetings in town halls and so on in an effort to get our message out. It is a matter of putting feet on the ground throughout the country in order to identify where problems are arising. In recent months I have seen thousands of SME owners, including 30 CEOs in one go. I have seen SME owners in large groupings and I have seen individual customers. On each occasion I put some very simple questions to those sitting in front of me. When I asked, for instance, who in the room wanted more debt, no hands were raised. On the other hand, when I asked who was seeking restructuring or equity, a lot of hands went up. The reality is that there are pockets of the economy that are doing very well, including the agri sector and others, where there is a requirement for more debt. We must, however, be very careful and responsible about pushing more debt onto those who are already too heavily indebted and who should instead be offered other solutions. We are seeing a low-demand domestic economy. In our view, there is a need for equity, as well as restructuring, in that low-demand economy to balance out the absolute burden of debt.
Would Deputy Twomey like my colleague, Mr. Byrne, to expand on this last issue or does he wish to ask another question?
Liam Twomey (Wexford, Fine Gael)
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I thank Mr. Duffy for his response. I was struck by the observation earlier that, in the bank's view, the economy is stabilising and we are at a turning point. Will the delegates comment on how they arrived at that view?
Mr. Paul Stanley:
We are trying to be positive. We arrived at that view by looking, for example, at the unemployment data and the recent figures on housing. We have seen the monthly increase in arrears on our mortgage book slowing down month on month for nine months. We took on board the fact that consumer demand for next year is slightly better than this year. Retail sales, consumer confidence indicators and so on are other factors we have considered. All of these are gently pointing to a stabilisation of the economy.
Arthur Spring (Kerry North-West Limerick, Labour)
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Does Mr. Byrne wish to comment?
Mr. Bernard Byrne:
Deputy Twomey referred to the issue of fundamentally reshaping and restructuring the bank. Twelve months ago we would have said that we had three priorities, namely, deposits, mortgages and SMEs, and we have spent a lot of time reforming and reshaping those processes. We have been very successful on the deposit side. As Mr. Murphy outlined, we have been very successful in reforming and reshaping the mortgage process so that people feel confident that they can submit an application and get a response. We are doing a lot of work at this time on the SME issue. It is a much trickier matter which requires a whole ecosystem in which people have the confidence that they can approach the bank and have a reasonable chance of getting the right answer from it. We are doing our piece in this regard through initiatives such as SME seminars. In conjunction with ActionCOACH, we have initiated a scheme whereby SME owners who attend out seminars can be allocated a third-party coach who will go into their business for one day to assist them. We are providing the funding for that for 3,000 businesses. It is all about seeking to instil confidence that it is okay to make an application for a business loan.
Arthur Spring (Kerry North-West Limerick, Labour)
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Thank you, Mr. Byrne. I now call Deputy Joe Higgins.
Joe Higgins (Dublin West, Socialist Party)
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What is the annual wage for the top three executives in Allied Irish Banks?
2:55 pm
Mr. David Duffy:
I will have to do a little bit of thinking and revert to Deputy Higgins with the exact numbers. In my own case, as a top executive I came in on the cap. I took a decision with the senior executives to make a proposal to the board to reduce our pay by 15%, which we did, and that has been implemented. All of those executives have lost all benefits associated with it and pensions have also been cut and discounted severely. As we mentioned earlier, the defined benefit plan closed and instead, there are lower levels of contribution on a defined contributions plan. We have been implementing cuts not only at our level but throughout all levels of the organisation. There have been cuts of 10% at lower levels and, as we got to the lowest levels of the organisation, we felt it was inappropriate to impose cuts and instigated pay freezes. Within the context of the overall expense of the organisation, which is the broader issue with which we concern ourselves, we have looked at tackling the absolute cost of people. We have been able to reduce the number of people in receipt of more than €100,000 by 40%, and where there were a certain number receiving more than €200,000, we have taken that down by 60%. While we still have plenty of work to do, we think it is appropriate to rebalance the cost equation in the bank and consequently, we started with the executive. Even though I came in on the salary cap and others came in on less than the cap, we all accepted, on foot of our own proposal, a 15% cut in our compensation. We then thought the entire bank needed to take some pain, which we did, after which we thought that the absolute number of people on higher salary levels needed to be reduced materially, and it has been. I am not saying our work is complete but we recognise that level of adjustment is the first phase of adjustment that is required in the bank.
Joe Higgins (Dublin West, Socialist Party)
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Is the salary cap approximately €500,000?
Joe Higgins (Dublin West, Socialist Party)
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Consequently, the top three salaries must be close to €500,000.
Joe Higgins (Dublin West, Socialist Party)
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Members received similar information in this morning's session. However, such salaries are gigantic when one considers the €20 billion in taxpayers' funds and the crucifying austerity that is being implemented as a result of bailing out these banks and the speculators who lent to them, which is affecting the poorest and the lowest-income people in our society. How is it morally justified that the bank can continue to pay such huge levels of salary?
Mr. David Duffy:
I came here for the cap. That is what the market was, as set by the Government, and I accepted that. Moreover, my first reaction, when considering the severity of the situation, was to volunteer to cut the salaries of myself and the other senior executives by 15% for starters. That is what we did, and on top of that we addressed benefits and other issues of potential pensions etc. From the perspective of what people get in the organisation and in the community and what skills one gets for that, I was willing to take it at that level and was willing to take those cuts and show leadership in that respect.
Joe Higgins (Dublin West, Socialist Party)
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With regard to lending to small and medium enterprises, I wish to approach this from a different angle. I gather, from reading the international financial press in recent months - that is, the Financial Times, The Wall Street Journal and so on - that essentially, as far as investment is concerned, capitalism in the eurozone is in a state of paralysis. The figures that were given indicated the percentage of investment to gross domestic product is at a 60-year low within the eurozone, with a figure of €2 trillion in uninvested profits by big business sitting in banks and financial institutions. I have seen a figure for Ireland, which I cannot source precisely, of perhaps €32 billion of uninvested profits within a short period. Does AIB find substantial corporate funds resting in its accounts that are not going into productive use - that is, towards investment, job creation and so on - considering that the number of unemployed within the European Union is 25 million? Can the witnesses see this phenomenon here at a local level?
Mr. David Duffy:
I will make a comment before handing over to Mr. Fergus Murphy, who deals with our deposit book. I am not seeing a trend of a large build-up of cash deposits. I am seeing, within the Irish dimension, a very active and aggressively growing foreign direct investment universe. Consequently, when people talk about investment levels, we are seeing a very strong investment in Ireland in technology and other sectors, which we support. However, with regard to actual deposits on the books that are being used, I am unsure whether Mr. Murphy has seen anything.
Mr. Fergus Murphy:
No, not in AIB. We are rehabilitating our deposit book and are beginning to get deposits back. In the year to date, we are doing well in respect of our deposit gathering. As for large corporate deposits, we prefer retail deposits, but we have some large Irish corporate deposits. Globally, however, I note that corporates are doing very well. The balance sheets of large corporates around the world are very strong and globally, they have a lot of cash. They have had strong strategies, good mergers and acquisitions activities and good markets for many years. It is ironic that while banks globally are struggling hugely, many large corporates, which may be what are being referred to in the Financial Times and The Wall Street Journal, are in very strong positions with their balance sheets.
Joe Higgins (Dublin West, Socialist Party)
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They must be going elsewhere, then, to deposit the uninvested cash. As for foreign direct investment, it is fine and obviously is an important part of the economy, but it is the domestic economy here that is getting hammered. This is the reason lending to small and medium-sized enterprises is so important.
To move on quickly, a return to profitability by 2014 has been raised with Mr. Duffy. Why the obsession with the re-privatisation of Allied Irish Banks? If AIB returns to a position in which it is carrying out its business in a socially responsible way and then makes a profit as well, why not keep the bank in public ownership? Why hand it back to the types of entity that wrecked it in the first place?
Mr. David Duffy:
I was not planning to hand it back to anyone to wreck and it is not my decision to hand it back to anybody. My objective and strategy, as agreed with the Government and the troika, is to return it to stability for the purpose of lending in the economy, generating enough capital to support restructuring and, ultimately, being a high-performance bank or, at a minimum, a well-performing bank that would therefore be attractive to investors. This decision therefore is for others to make. Our primary purpose is to build a bank that returns shareholder value based on investments and to make it attractive enough for that and to lend into the economy, as well as to provide capital for restructuring. If we simply continue with our current model of selling products at prices that are loss-making, that will be another huge burden for the taxpayer when we actually do not survive.
Joe Higgins (Dublin West, Socialist Party)
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It is a Government policy anyway. For my last question, I will return to the matter of mortgages for owner-occupiers, not buy-to-let investors or speculators or all the rest of it. Mr. Duffy has set his face quite categorically against what he calls debt forgiveness. What will be his approach to the provisions of the Personal Insolvency Bill when it is enacted?
Second, in his earlier response, Mr. Duffy stated he would not magically wave away negative equity. I put it to Mr. Duffy and to Mr. Murphy that this is a moral issue, in that there was a young generation of Irish workers who, during the bubble, were blackmailed due to the grip financial speculators and developers had on the housing market. If such people wanted a home for a family or whatever, they had no option but to go for the extortionate prices, the 40-year mortgages and all the rest of it. That generation is now stranded, and I put it to the witnesses that there is a moral issue in this regard. While it pertains to society and not simply to the bank, as an important player therein, does the bank not have a moral responsibility to try to unwind this injustice that was done? I put it to the witnesses that there would be huge merit in having an across-the-board scheme of reducing the crazy prices for which homes were bought down to the current value and calibrating the monthly payments downwards accordingly.
That would relieve enormous stress and it would also perhaps release some billions of euro into the domestic economy to try to revive it. So why does Mr. Duffy not entertain that idea more seriously by discussing it and putting it on the agenda?
3:05 pm
Arthur Spring (Kerry North-West Limerick, Labour)
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I do not mean to put Deputy Higgins under pressure and, coming from the generation to which he has referred, I could not agree with him more but we are under a little bit of time pressure so I will ask Mr. Duffy to respond.
Mr. Fergus Murphy:
As citizens we can all empathise and sympathise with what happened to a generation of people buying homes during the Celtic tiger period. I am sorry to repeat myself, but the most important thing is affordability rather than negative equity. We will have a range of supports and products that will help people who want to trade up or down. We are rolling out those products and services. However, as regards the earlier answer, we cannot enable an overnight solution to this problem. Mortgages are a long-term product and there will be a medium-term work-out through this crisis.
Mr. David Duffy:
I will make one final comment on that. We have to be very careful in all of our solutions that we look to the entire population in this country. Solutions which are designed to forgive debt and erase problems for just one section represent very inequitable treatment of the rest of the population. In our case, 85% to 90% of our people are repaying mortgages. It is the residual population that we are trying to address and even of those, 70% on interest rate repayments are paying their mortgages back. I am sure some of us have been in negative equity, which does not mean mortgage distress. At the end of the day, as a bank we are not capitalised to try to solve negative equity on a macro basis.
Joe Higgins (Dublin West, Socialist Party)
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What about the Personal Insolvency Bill?
Arthur Spring (Kerry North-West Limerick, Labour)
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If I could interject, I think the negative equity situation has bigger ramifications than living with the long-term implications of disposable income being usurped. It is also a stressful situation for people with families in two-bedroom apartments. There is a human dimension to this. Unfortunately, bankers deal in numbers the whole time and they might not have as much interaction with the stress that we have seen as politicians. It is something that we are trying to convey to Mr. Duffy today.
As regards the next three speakers, Deputy O'Donnell has agreed to swap time with Deputy Mathews, and then Senator Coglan will contribute.
Kieran O'Donnell (Limerick City, Fine Gael)
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I thank Deputy Mathews for his grace in allowing me to go ahead of him. I appreciate that. I welcome Mr. Duffy and his colleagues. I wish to raise two points. If I am correct, he said that of the €3.5 billion, to date, €600 million of that was new lending. Is that up to the end of September?
Kieran O'Donnell (Limerick City, Fine Gael)
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Time is limited. I remember when the banks were recapitalised and I was there for all of it. How much has the Irish taxpayer put into AIB at the moment? That is a point that has not arisen today. What is that figure?
Kieran O'Donnell (Limerick City, Fine Gael)
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The sum of €20 billion is just slightly less than the Department of Social Protection's budget, and is about two thirds of our annual tax take. The money was given to AIB on the proviso that it would bring about lending in the real economy. I have spent the greater part of my adult life working with SMEs, but AIB is not lending to SMEs. I have as many of them coming to me now as I had in practice. The reason AIB is not lending to SMEs is that while there is new lending, a lot of restructuring is converting overdrafts to term loans. The SMEs are not able to function in business because effectively they do not have an adequate supply of working capital.
My view was that AIB had a part to play. The bank has to restructure but I thought that we were all in this together and that it was not a case of AIB seeking to repair its balance sheet. The mortgage sector and restructuring have been referred to but I am talking specifically about the real economy. I am talking about SMEs that may employ two or three people. They are unable to expand, as they have been explaining to me. AIB was a very aggressive bank over the years and that was shown up particularly in the DIRT inquiry. The bank has ridden very much to the forefront. I would like to see AIB riding to the forefront in SME lending. Mr. Duffy has made points but the figures do not reflect what we are getting from punters on the ground. The Acting Chairman referred to the fact that we are dealing with local businesses.
If someone's overdraft is restructured into a term loan with no overdraft facility, it is like to asking them to drive with the handbrake on. The car cannot function. The SME sector is vital to this economy. AIB has €20 billion of taxpayers' money on loan, so there should be some reciprocity. AIB appears to be very risk adverse, which I understand given the necessity to repair the bank's balance sheet. However, can Mr. Duffy explain why only a quarter of the €3.5 billion annually is going to new lending?
Kieran O'Donnell (Limerick City, Fine Gael)
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I do not see the point in being here if we do not have a robust debate. Mr. Duffy has a job to do and he has come in here, but equally the figures do not lie.
Mr. David Duffy:
We are very happy to have a robust debate; it is entirely fair to do so. Every week I am somewhere in this country and there is a robust debate - perhaps not even a debate but a lecture. That is part of learning how to do this better and we accept that. There is a range of initiatives in our documents about trying to do it better. We are now moving into local radio and local TV.
Deputy Kieran O'Donnell: I know all that but my time is so limited. Will Mr. Duffy deal with the €600 million as a proportion of €3.5 billion and explain why that is so low?
Mr. David Duffy:
Let us do that. The first comment I will make - and then Mr. Byrne will follow - is that there is a demand equation. It is constantly said to us that we are not lending, but if we do not lend the bank will be bankrupted again. Let us be explicit. SMEs are a core part of our business, so unless we are lending there is no point in us being here. We will not be here. I do not understand this equation half the time because we are constantly asking the question ourselves in the field and are told that those concerned do not want more debt, they want restructuring.
As regards the Deputy's specific question, that is one of the concerns I have. Is everybody saying they want something but not applying, or are we not encouraging them enough? We all need to get better at that to make it work. I am making the offer absolutely and have done for six months now. One meets a person, whatever their name is, and all I need is a telephone number and we will get in touch.
Kieran O'Donnell (Limerick City, Fine Gael)
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That is fine and I appreciate that.
Kieran O'Donnell (Limerick City, Fine Gael)
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Will Mr. Duffy explain why the figure is so low?
Kieran O'Donnell (Limerick City, Fine Gael)
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Is Mr. Duffy saying that if there was a demand for new lending of €3.5 billion AIB would be lending it?
Kieran O'Donnell (Limerick City, Fine Gael)
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There is probably a historic element about that.
Peter Mathews (Dublin South, Fine Gael)
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Too much.
Mr. Bernard Byrne:
Too much debt. Viable SMEs are trying to pay down debt. That is one of the issues they all have. They invested during the 2000s. If one thinks of an SME in 2007 or 2008, its business plan projection assumed the economy would probably have grown by 25% at this stage, yet it is now 25% smaller. Therefore the installed capital base around the country, in whatever form it is - hotels, restaurants, pubs, bars-----
Kieran O'Donnell (Limerick City, Fine Gael)
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With due respect, Mr. Byrne, I do not want to interject but my time is limited. A lot of the lending AIB did to the SME sector during the so-called Celtic tiger period was asset-backed.
Kieran O'Donnell (Limerick City, Fine Gael)
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What skill set does AIB have? Mr. Duffy is talking about going back to the branch network.
I saw business proposals sent to AIB which I thought were reasonable but which were turned down.
AIB is closing eight of its 18 branches in Limerick, the highest percentage of any branch network outside County Donegal. This year in County Donegal there is only one branch closing, while in Limerick there are five. The Munster & Leinster Bank, the forerunner of AIB, was very strong in Limerick. In Cork there are only seven branches closing, or 18% of the network, while in Dublin the figure is 11% and in Galway, 13%. Why is the figure in Limerick so high at 44%? After this exercise there will be no AIB branch in east Limerick.
3:15 pm
Mr. Bernard Byrne:
The average small and medium-sized enterprise, SME, loan we have is €22,000, a low level. In order to reach the Government’s €3.5 billion lending target for SMEs at such an average one needs 170,000 loans, or the entire SME sector taking out a brand new loan, which is simply not viable. We know we need to get better in approving business loans. SMEs should appeal a decision to refuse credit and put it in writing. That is the only way we and the Credit Review Office can examine it.
Mr. Duffy spoke about the unit established to deal with distressed customers. We are going through an upskilling process in this regard.
Kieran O'Donnell (Limerick City, Fine Gael)
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Why is the level of branch closures so high in Limerick?
Mr. Bernard Byrne:
There was no geographical bias, negatively or positively. We had a set of selection criteria based on volume of business and area connection to the nearest branch. I did not realise the effect this had had in Limerick, but there was no way the process was driven by a particular regional or geographical bias.
Peter Mathews (Dublin South, Fine Gael)
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I thank the delegation for its presentation. We have heard much about pockets of the forest, but I want to look at the overview of it. The balance sheet of any business tells us an awful lot if we ask the right questions. In December 2007 Bank Zachodni-WBK, BZ-WBK, was consolidated into the balance sheet but not EBS. After the then Minister for Finance, the late Brian Lenihan, announced the NAMA model, I examined the balance sheets of the six banks. I noted that staff levels at AIB were 25,000, but 10,000 of them were in BZ-WBK. The average salary in the AIB Group was €10,000 less than that in the Bank of Ireland Group. This can be explained by the fact that average salaries in the Polish bank are low compared to those of home and English-based employees. The capital injection was €20.7 billion and the aim is to get the bank to sustainable profitability and develop a model to attract investors to rehabilitate the bank. AIB offers one of the lowest standard variable rates, SVR, at 4%, in the market. The sensible level would be 5% to 6% when one factors in the costs of operating a long-term mortgage book and risks.
There are bits missing from the balance sheet provided by AIB. Shareholders’ funds are listed at €13 billion, while customer deposits come to €64 billion. That gives a subtotal of €77 billion. The balance sheet states the bank’s total assets come to €130 billion. What do the European Central Bank, ECB, and other interbank advances come to? The balance sheet lists other assets at €50 billion. What are these assets? It must be remembered that loans for buy-to-let properties or land speculation may be worse than we think. Perhaps mortgages will suffer another tsunami. This means the €80 billion net needs further provision. Perhaps we should start doing surgery rather than with provision. It is time to recalibrate loans through debt restructuring rather than debt forgiveness. Independent News and Media, for example, has had to restructure its debt and it did not leave creditors hanging. We need creditor buy-in in the banking system, which must be done by the Central Bank and the ECB. We do not necessarily have to wait for the European Stability Mechanism, ESM, to be set up, with its banking supervision function. We need a creditor to step into the shoes of the bond investors in AIB in the same way that was done with Anglo Irish Bank.
There is still much confusion about the €25 billion estimate for the loans embedded in Anglo Irish Bank. Irish Bank Resolution Corporation’s loan losses are reduced by the drip feed of income from the promissory note which comes to €18 billion in interest. That is a liquid asset being injected into the bank’s balance sheet at intervals to pay off the emergency liquidity assistance, ELA, provided. The ELA was the originating cause because it was needed to redeem the bond investors in full to save the euro. If one adds the income of €18 billion plus the embedded losses of €25 billion, it comes to a loss of €43 billion. Depending on how much interest comes into the IBRC by way of the promissory note, it adds to the estimated losses of €25 billion.
I am concerned about investors in the buy-to-let market not those who came in on the last wave but those who genuinely built up investment property portfolios and managed them in a professional way, letting them to answer a demand for accommodation in city markets. The interest on their carrying loans in their portfolios is now being restricted by the Department of Finance in terms of its allowability as an expense to be deducted from rental income for income tax assessment purposes. That is another timebomb because that interest restriction is actually growing. It should be reversed if we want to save that category of investor. It is not a question of a free lunch but one of survival. I urge the bank to raise the matter in its pre-budget submission to the Government. I asked representatives from the IBRC to do the same this morning.
When it comes to restructuring loans, whether they are mortgages-----
3:25 pm
Ciarán Lynch (Cork South Central, Labour)
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Let me make a brief interjection. The Deputy will have to allow the delegates to reply, but I do not want him to run out of time. I can call him again later, but he must allow the delegates time to respond.
Peter Mathews (Dublin South, Fine Gael)
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I think the delegates will be able to say, "Yes, we have taken all of these points on board and will reflect on them."
Ciarán Lynch (Cork South Central, Labour)
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If one goes to confession, the priest will nod, but that does not necessarily mean he agrees with one's sins. If the delegates are nodding at the Deputy, it does not necessarily mean they are agreeing with him.
Paul Coghlan (Fine Gael)
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He might not get the forgiveness he is looking for.
Ciarán Lynch (Cork South Central, Labour)
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In this case, debt forgiveness.
Peter Mathews (Dublin South, Fine Gael)
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This is very serious because we are talking about millions of euro.
Ciarán Lynch (Cork South Central, Labour)
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Please, Deputy; I am making a ruling. The Deputy can speak for the time allocated. We will then move on to the next committee member or he can allow the delegates to respond to him now.
Peter Mathews (Dublin South, Fine Gael)
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Perhaps the Chairman finds it hard to understand big picture financial engineering, but this is important because if it works, the bank can pass on the value of all the write-downs and the cost of creditor capitalisation to customers.
Ciarán Lynch (Cork South Central, Labour)
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That is the Deputy's view, but-----
Peter Mathews (Dublin South, Fine Gael)
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It is not my view; it is a fact.
Ciarán Lynch (Cork South Central, Labour)
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We have delegates before us who may have an opinion on the matter and may actually agree with the Deputy. I ask him to facilitate them by allowing them to respond.
Peter Mathews (Dublin South, Fine Gael)
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I will make one final point on restructuring and loan rehabilitation on the books of AIB, the IBRC and NAMA. AIB is doing a lot of work for NAMA and I am wondering if there are conflicts or competition issues. Are staff leaving AIB to join the staff of potential buyers and investors of AIB's or NAMA's portfolio of loans? AIB staff know what the provisions on the different loan cases are, which is important competitive information that could be useful to some of the investment funds coming into Ireland. All of these issues are important.
Mr. David Duffy:
I thank the Chairman and Deputy Peter Mathews who has made very valid observations, some of which we discussed. On the issue of NAMA conflicts, we take great care in that area, but the degree to which we can control it is limited. We cannot dictate where someone goes to work, but we have not come across a problem to date. It would be fair to say most people leaving banking want to take a break from it. However, we will keep that point in mind and make sure there is a minimum ethical standard, which is critical to the future functioning of the bank. We cannot tolerate any unethical behaviour or anything that might lead to the perception of such.
Regarding the Deputy's central theme on processing versus execution, we have built the capacity and have the technology and the provisions to do precisely that, namely, to restructure the absolute debt level in the organisation. The rest of the issues on the balance sheet and the observations, with the exception of those made regarding the IBRC, on which I cannot comment, are noted and will be taken into consideration. The same applies to the Deputy's point on the buy-to-let market.
Peter Mathews (Dublin South, Fine Gael)
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I asked about the other assets of €50 billion on the balance sheet and the €53 billion in creditor funding.
Mr. Paul Stanley:
I will talk about the data to June, which is the information in the public arena. Nothing has changed hugely since. The principal element in terms of assets is the available-for-sale portfolio, principally made up of bonds, which is worth approximately €13 billion. We also have NAMA bonds worth approximately €20 billion. The other assets, in terms of balance sheet assets, would be offset by other liabilities. A large amount of them will be accounting-----
Peter Mathews (Dublin South, Fine Gael)
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Is it the case that the NAMA bonds pay as little as 0.6%?
Peter Mathews (Dublin South, Fine Gael)
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It is almost like a frozen lump of asset.
Peter Mathews (Dublin South, Fine Gael)
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Yes, but AIB has received ECB advances.
Peter Mathews (Dublin South, Fine Gael)
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I would be using this in my discussion on the issue of creditor buy-in, albeit retrospective, and legacy buy-in. The ECB stuffed us.
Ciarán Lynch (Cork South Central, Labour)
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Does the Deputy have supplementary questions?
Peter Mathews (Dublin South, Fine Gael)
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No; that will do for the moment.
Paul Coghlan (Fine Gael)
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I welcome Mr. Duffy and his colleagues and thank them for their honest and open approach in trying to rebuild the business which has been tarnished as well as damaged. I wish to corroborate what was said in that it is open to any of us to get in touch with AIB. I did so and I am grateful because a case in south Kerry was solved to my satisfaction.
I accept what was said about staff. I have dealt with AIB for a long time and know many of its staff. I appreciate its difficulties in motivating them because morale is low. However, I salute what Mr. Duffy and his team are trying to achieve. Approximately 2,500 staff will leave, 1,700 of whom will have gone by the end of the year. However, the bank is also taking on people, particularly new graduates.
Mr. Duffy has said the bank is ahead in lending, but that seems to be in conflict with what we heard from Deputy Kieran O'Donnell. I ask Mr. Duffy to clarify the point. What does he mean by saying AIB is ahead in lending? If I understood what was said correctly, 41% of SME loans have been or are being restructured. Does this mean that 59% have yet to be restructured?
If the bank is hiring new staff, one assumes they will need training. I gather some of the new staff might be graduates and perhaps the bank might allow them to deal with the restructuring because the most important area on which the bank should focus is new lending. I appreciate that we do not want to have more bad debts and that many people are reluctant to take on more debt, but there are genuine cases in which credit is needed. It is very important that the right staff deal with such cases. Coupled with this, I welcome what was said about the meetings in branches in Kilkenny and Cork. There seems to be a slight drift of control of lending away from head office towards branches. Is there a new authorisation or credit limit in operation or due to be put into operation for branch managers who know what the situation is locally? That would be welcomed if it was so.
I ask Mr. Duffy to answer my questions on lending and the hiring of staff. Staff are employed on an agency basis for NAMA. How many AIB staff are working full-time for NAMA, dealing with receivers and so forth? What level of remuneration is the bank receiving from NAMA for such work?
I loved what Mr. Duffy said about being back in profit by 2014. We all hope that will be the case.
Mr. Duffy dealt with the issue of a sale to foreign investors and I totally accept his answer. He also spoke about the economy. I ask him to give us his prediction as to when he expects us to return to growth. We are all very interested in his answer.
I wish Mr. Duffy and AIB the very best. We have a vested interest in AIB becoming profitable as soon as possible for the sake of the taxpayer, but we hope it will happen without people being screwed, if I may put it like that.
Mr. David Duffy:
I thank the Senator for his comments. He raised a range of issues, the first of which concerned lending. The main point is that bank branches need to have more autonomy and a greater ability to approve credit decisions. They also need enhanced skill sets and capacity to be able to service their customers. In response to the Senator's question, that is our objective.
Mr. David Duffy:
We are trying to transfer staff from head office back into bank branches. We have made the statement internally that in the future nobody is going to build a career in head office in AIB.
That is the tone and style of what we are trying to do in that respect. Mr. Byrne will comment on the 41% figure.
3:35 pm
Mr. Bernard Byrne:
The 41% appears in two places. The Mazars survey stated they had a decline in turnover of 41%. Let us consider our credit position. Some 41% of our SMEs are in the impaired category while 39% are in the satisfactory category and we do not expect them to impair. Then the category in the middle is the watching vulnerable category. While 41% have been worked through, we are carefully monitoring and minding this category because these businesses are weak at the moment.
Paul Coghlan (Fine Gael)
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Is AIB ahead on the lending?
Paul Coghlan (Fine Gael)
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Is some of it restructuring?
Paul Coghlan (Fine Gael)
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When will the restructuring process be complete?
Mr. Bernard Byrne:
In many cases of restructuring a company might have a three year or five year term loan that expires. We give that company a new term loan, that is, a new loan in terms of restructuring or a re-facilitation of that loan. The restructuring activity is a separate financial solutions group activity and during the coming 12 or 24 months we expect to see significant progress made in terms of the restructuring of the SMEs in difficulty.
Mr. David Duffy:
I wish to be clear in support of Mr. Byrne's comments. We will have fully engaged with and decided on a future strategy within six months in the case of all SMEs in difficulty. At issue is the complexity of taking two years to achieve an end result. We have engaged initially to stabilise but then we must develop a strategy together relating to buy-to-let, SMEs, the house, the in-laws and whatever other variations of transactions with which there is a good deal of connected debt. Sometimes working this out, agreeing it and executing it takes several years. To deal with them in a simple way in our minds we prioritise people staying within their homes and the associated multi-debt connection and we prioritise growth and stability in SMEs. These are the two informed principles behind what we are trying to achieve. We are trying to increase our lending but we must do debt restructuring sensibly to allow those companies to grow again.
Mr. Enda Johnson:
There have been several conversations back and forth today on the new lending versus the overall lending targets. At no point in recent years has AIB changed the definition of what it considers to be the lending target agreed with the Government as part of the recapitalisation. That was agreed and has been agreed and continues to be agreed with the Credit Review Office and the Department of Finance. We do not see this as something new. We have always included new lending, re-financing and restructuring in the figures reported as part of our lending targets.
Mr. David Duffy:
We serviced the assets we transferred to NAMA. There are approximately 300 people in the organisation in our financial solutions group dedicated to the servicing of the NAMA assets. Those are the exact numbers and there is between ten and 12 basis points as a fee. That is the structure and the answer to that question.
A prediction was sought on the economy. Mr. Fergus Murphy has done an outstanding job on that so far. We see more pain to come in the domestic economy for a period. This is the natural by-product of people de-leveraging their consumer spending and this follows through to the domestic SMEs. This is why we are so focused on supporting those SMEs and restructuring those debts. We are seeing positive signs in the agri-economy, where there is strong growth. There is strong growth in the foreign direct investment universe including the employment aspect. The average unemployment rates are beginning to stabilise and we are seeing pockets of positivity in the domestic real estate market. Some of this is related to particular types of housing which have limited supply but some of it is linked to people believing that we are at or close to a bottom in terms of the housing market as well. These are our observations at this stage.
Ciarán Lynch (Cork South Central, Labour)
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Senator Byrne is next and then I will take some supplementary questions from Deputies Murphy, Mathews and Spring.
Thomas Byrne (Fianna Fail)
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I tried to follow proceedings on the monitor when I was not here because I was involved in a different matter today. I apologise if my questions have been asked already and if they have been the delegation can close me down. Will AIB comment on the mis-selling of payment protection policies and the associated Central Bank investigation? How many AIB customers were involved and what is the total cost to the bank?
The Chairman raised the issue of payment processing services. It seems that as we are entering a cashless society many small businesses will be put severely at risk because the costs of having the machines is prohibitive in the first place. Generally my barber or the dry cleaners cannot take a Laser card. Unless a business is a high volume cash shop such as a newsagent or grocery it will not be able to take them. The local farm shop will not take them. Swipe cards are being introduced with a value of under €15. Businesses that depend on such transactions will be at a severe disadvantage because they do not have the machines. It would be a help to small businesses if the costs were reduced. I realise this is not only a matter for AIB. There are various companies involved in this area and I understand AIB is involved in a joint venture, but it seems to be a major issue and it will get worse for these businesses as the take-up of these swipe cards becomes more widespread.
The standard financial statement for mortgages comes from the Central Bank requirement. It seems to be the most extensive means test conducted by anyone in this country. It is more extensive that the medical card or social welfare means test. A social welfare means test does not take account of expenditure, only one's income. The medical card uses three or four items of expenditure as a way of reducing one's income for the purposes of getting a medical card but the standard financial statement goes into remarkable detail in respect of expenditure going out. It seems to be a burden on the banks and it give the banks a bad name because people have no wish to be dealing with the banks, especially when someone has a bad experience and it gets out. The process could be dramatically simplified. We could have standard levels of income or percentages of income to correspond to a mortgage. A mortgage could be no more than 30% or 35% of one's gross or net income, whatever way it works out. Does AIB foresee any difficulty with that or does it wish to see this changed? Is this a burden on the bank? It is humiliating for people to have to list their expenditure to banks in ways not required by the State.
The advanced forbearance options referred to include split mortgages, trading down, voluntary losses and mortgage-to-rent. However, I do not see shared equity solutions, although a split mortgage may be a type of arrangement.
Was the Ms Justice Dunne judgment discussed earlier?
Ciarán Lynch (Cork South Central, Labour)
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It was.
Thomas Byrne (Fianna Fail)
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Has AIB been in discussions with the Department of Finance in this regard? Has AIB lobbied the Department of Justice and Equality to make changes to the law in this area? Has the Department of Justice and Equality indicated that it is prepared to make any changes in respect of that judgment?
Mr. David Duffy:
I will take the questions in reverse order and share them among the team. Mr. Fergus Murphy will speak on payment protection and the mortgage standard financial statement and Mr. Byrne will comment on the machines. Senator Byrne asked about the judgment of Ms Justice Dunne. We have been trying to analyse it in terms of its impact on subsequent case law. It represents a limitation on how we can proceed in some cases. We have raised it with the Department of Finance as one of the challenges at our normal shareholder meetings. It is a limitation in terms of some of the actions we might be forced to take but cannot execute properly. I imagine that will follow its natural course within the Departments.
Thomas Byrne (Fianna Fail)
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Have the Departments given any indication of whether they are prepared to agree with AIB or whether they see this as necessary?
Mr. David Duffy:
It was not a matter of agreement or disagreement. What the case law states and the impacts of it was a matter of record. It was more a question of whether they understand the impact. We did not discuss whether they would discuss a particular thing to fix it. Mr. Murphy will discuss payment protection insurance, mortgage and the standard financial statement.
3:45 pm
Mr. Fergus Murphy:
The Central Bank conducted a review of payment protection insurance last year and has asked all institutions to conduct their own review in this regard. EBS and AIB sell payment protection insurance in three main areas, namely, alongside mortgages, personal credit and credit cards. Since the inception of the consumer protection code in August 2007, some 160,000 customers have bought a PPI product from us. PPI has acquired a bad name in the United Kingdom in the past five or six years, where penetration rates were as high as 95% in some products. In other words, if one took out a mortgage, there was a 95% chance one would also purchase payment protection from the same provider. In Ireland, on the other hand, penetration rates have never been more than approximately 25%. Therefore, we believe this issue is on a different scale in this country compared with what happened in the United Kingdom.
Our review of PPI is ongoing and will continue until the end of 2013. There is no need for customers to do anything in this regard - all of them will be contacted by 7 December this year. One in five of our customers has made a PPI claim against his or her contract in the past five years, and four out of five of those claims have been upheld and paid out. In other words, it is a product that has been of real value to customers. As I said, we believe the situation here is quite different from that in the United Kingdom. We are doing all we can to assist customers in this regard and will have contacted all of them by 7 December.
In regard to the standard financial statement, I agree with the Senator that it is very comprehensive. We follow the format prescribed by the Central Bank, which includes a huge amount of detail in regard to expenditure. In fairness to the customer and to the bank, it is very important that we understand where the former is at in regard to affordability. We must ensure he or she has sufficient income to have a reasonable standard of living thereafter. The SFS, burdensome as it can be, does clarify the situation very strongly. Although it might be possible to have a slimmed down version, it is important that we can clearly see the nature of the expenditure for a particular individual or family.
Thomas Byrne (Fianna Fail)
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When a person becomes unemployed, he or she applies to the Department of Social Protection for jobseeker's allowance or jobseeker's benefit, to the Health Service Executive for a medical card and, if he or she has a mortgage, to the bank to discuss repayment options. It is notable that such persons are obliged to provide much more information to the bank than to the Department or the HSE. I accept that this information retrieval is mandated by the Central Bank, but it seems to me to be superfluous. Would it not be better from the bank's point of view, in terms of administration, time and staff resources, simply to assume a certain level of expenditure? What I am suggesting here is that housing costs should not exceed a fixed portion of income. Would the banks prefer not to have to deal with the level of detail required in the standard financial statement? Would it be possible to operate a fair system with a more broad-based approach? If certain criteria were in place whereby housing costs could only account for a designated portion of income, much of the detail that is currently required could be bypassed and the whole process would work much more quickly. In addition, it would be less humiliating for the person in difficulty and would be in line with the type of information that is required by the Department of Social Protection and the HSE.
Mr. Fergus Murphy:
There is a lot in what the Senator is suggesting. We are currently operating in accordance with what is prescribed by the Central Bank. In time, as we proceed with administering 1,500 cases per month in the next six months, we will get better at processing the SFS and customers will get better at filling it out. We have hundreds of staff throughout our network who are trained to evaluate and challenge SFSs and ensure they are properly completed. We are getting better at helping customers to complete the statement.
Thomas Byrne (Fianna Fail)
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What does Mr. Murphy mean by "challenging" the SFS? If a customer has a Sky movies subscription, for example, will the bank instruct him or her to downgrade to the standard Sky package or switch to Saorview? Does it come down to that level of detail when the bank engages with customers?
Thomas Byrne (Fianna Fail)
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Does the bank have criteria from the Central Bank as to how "necessary" expenditure is assessed?
Thomas Byrne (Fianna Fail)
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In other words, the bank is operating according to its own view of what a person should be spending on a monthly basis.
Ciarán Lynch (Cork South Central, Labour)
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To clarify, Senator Thomas Byrne is, as I understand it, proposing that a social welfare assessment is the type of assessment the bank should be using. Social welfare benefit is determined within a specific monetary limit. In other words, where one qualifies for a full supplementary welfare allowance or disability allowance, there is a cap on the benefit received. Nowhere in the assessment for a medical card, disability allowance or jobseeker's allowance is there any calculation for any debt the applicant might have.
Thomas Byrne (Fianna Fail)
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There is provision to include that information when filling out the medical card application form.
Ciarán Lynch (Cork South Central, Labour)
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No, there is not.
Thomas Byrne (Fianna Fail)
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In some social welfare assessments, there are questions regarding mortgage payments and rental property. If one has an investment property, that will be taken into account.
Ciarán Lynch (Cork South Central, Labour)
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The medical card application form includes a calculation as to whether one has mortgage repayments, rent payments or repayments in respect of a home improvement loan. In respect of the main disability allowance or jobseeker's allowance, however, there is no calculation of debt whatsoever.
Thomas Byrne (Fianna Fail)
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There is if the applicant has a mortgage on an investment property.
Ciarán Lynch (Cork South Central, Labour)
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My point is that there is a ceiling on the amount of benefit an applicant can receive. One could have a debt of €10 billion but there is a maximum on how much one will receive.
Thomas Byrne (Fianna Fail)
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I am seeking the officials' views on the level of detail required in the SFS and whether it goes down to such matters as television subscriptions. All types of discretionary spending, including school costs, are included in the process. My point is that this level of information is not required as part of the means tests conducted by the Department of Social Protection or the HSE. It is utterly humiliating to have to provide that level of detail. I am suggesting - it is for the Central Bank to introduce such a change, but it would be implemented by the banks - that a standard proportion of income be designated for housing costs such that where a customer goes beyond that, it can be concluded that the mortgage is unaffordable and there is no need for the bank to delve into any of the other information. People should be able to spend the remainder of their money as they wish. Given the difficulty in which these customers find themselves, the reality is that it will be spent on what is necessary rather than what is discretionary, however the bank chooses to define the latter or is mandated by the Central Bank to define as such.
Ciarán Lynch (Cork South Central, Labour)
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The Senator has made his point well. We will now move on to supplementary questions, beginning with Deputy Dara Murphy.
Dara Murphy (Cork North Central, Fine Gael)
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I thank the delegates for the time and attention they have given to this meeting and the candid nature of their answers. Is AIB outsourcing any of its debt collection function to agencies in respect of leasing loans, credit card debt or anything else, or is it retaining all debt collection activities in house? My second question relates to the lower interest rate the bank is charging new business customers as compared with existing customers. I appreciate that this is an industry practice rather than being specific to AIB, but in the current climate it is very difficult for business owners to shop around. If they have a good relationship with their bank, most business owners will stick with it. Yet they are seeing new business customers being given a lower interest rate. Will the delegates comment on that?
What is the delegates' view on the concept of 50-year mortgages, similar to products available on the Continent, and how they might work in an Irish context, particularly for people who have very large debt or substantial negative equity? Finally, a suggestion currently being floated-----
Ciarán Lynch (Cork South Central, Labour)
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The Deputy is supposed to be being putting a brief supplementary question, not starting the whole day again.
Dara Murphy (Cork North Central, Fine Gael)
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The delegates can be as brief as they like in their response.
Ciarán Lynch (Cork South Central, Labour)
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The Deputy must also be brief.
Dara Murphy (Cork North Central, Fine Gael)
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This is my fourth and final question. I have been here since 2 p.m.
Ciarán Lynch (Cork South Central, Labour)
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I have been here since 10 a.m. and will be back here at 10.30 tomorrow morning.
Dara Murphy (Cork North Central, Fine Gael)
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Instead of wasting our time on verbal tennis, I will put my final question. In terms of stimulating spending in the economy, one of the suggestions that has been put forward is an increase in deposit interest retention tax. How might that affect the bank's capacity to secure deposits into the economy?
3:55 pm
Mr. David Duffy:
We will run through them quickly. We are not outsourcing the collection of debt, but we are bringing in outsource companies to provide us with expertise and advice which we need. As we do not have enough trained personnel, we have brought in resources to the organisation which have experience of this. Those to whom I refer have experience and help to train our personnel and work with us.
I will ask Mr. Murphy to comment on the issue of 50-year mortgages and Mr. Byrne to speak about lower interest rates for SMEs. I will then come back in on the issue of DIRT.
Mr. Fergus Murphy:
We have looked at 50-year mortgages in the context of the position in Japan and other countries. We would prefer each generation to be in a position to pay back its debt, rather than burdening the next generation with that debt. Most of the structures we are seeking to put in place are trying to talk to this, namely, trying to make that debt affordable for the customer within his or her generation. However, 35 and 40-year mortgages are now available. The tenure of mortgages has increased during the past decade. We are already moving towards long-term mortgages, given that 35 and 40-year mortgages are available.
In terms of DIRT being increased, the liability-deposit side of Irish banks has stabilised and, thankfully, deposits are beginning to come back onshore. Previously, they were offshore. We are also winning against onshore rivals. AIB is up approximately €3 billion to date in deposit gathering. However, we are at an early stage of stabilising that marketplace. Again, the ELG discussion is going to take place soon, we hope and expect, with a view to termination of that issue. It is not for us to decide on tax matters, but, in general, there will be enough happening in that space in the coming period. We wish for that market to remain stabilised rather than potentially being destabilised by something new being introduced which would act as a disincentive for people to deposit money within Irish banks.
Mr. David Duffy:
On a point of clarification, the outsourcing resources for us are internal, but we have used recovery firms. It has been pointed out to me that it is to this to which the Deputy's question may possibly relate. We have used recovery firms occasionally to collect debts. Therefore, the answer is "Yes". I wanted to clarify the position and correct my error.
Mr. Bernard Byrne:
On the rate, this is one of the classic questions where, regardless of the answer we give, there will be a problem. We do have a discounted rate for new business which we see as appropriate, given the challenges new businesses face. We have a package for new businesses which includes free banking for a period and a start-up rate of 4.4%. That rate is also available to a series of other interests and applies to the agri-sector and the job creation fund. The overdraft rate on standard loans is higher - it is closer to 7.8% - and depending on the negotiations that would take place in respect of a standard business, it could be somewhere between 4% and 6%, depending on the type of business involved.
Dara Murphy (Cork North Central, Fine Gael)
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I thank our guests.
Peter Mathews (Dublin South, Fine Gael)
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I wish to raise three matters. In order that there will be no misunderstanding, when I refer to restructuring of AIB's client loans - mortgage loans, buy-to-let loans and SME loans - I mean including a write-down in order that the loans will be recalibrated to reflect what the current, reasonable and maintainable profits of the borrower can bear. Otherwise, our guests will only be fooling themselves and playing at "shadow banking". That is not on. If standard variable rates increase from 4% to 6%, that is a 50% increase. If people are under stress and strain at a figure of 4%, their levels will rise again by 50% if there is an increase to 6%. This only adds to the argument of ensuring the recalibration or restructuring, including a write-down, is done sooner rather than later.
I echo what other members have stated, namely, that people are under enormous stress. It is not just in the context of doing the arithmetic and dealing with the numbers. Those to whom I refer are literally crying, shivering, nervous wrecks when we meet them at our offices. It is very distressing to have to deal with this matter. I ask our guests to please meet their clients. I am glad they have indicated they are going out across the country to do just this. They should keep up what they are doing in this regard.
My final point is that I had experience of loan portfolio work-outs for a five or six year period in the 1980s. I have, therefore, been on the battlefield, which is why I am of the view that it is important to clean up the position and not leave loans to fester or park 50% of them in no man's land. If the latter is done, we will have a sword of Damocles hanging over us in four, five or six years time, which is wrong. It is, therefore, very important to clean up as one goes. I thank our guests and appreciate them giving of their time.
Arthur Spring (Kerry North-West Limerick, Labour)
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I refer again to the type of lending taking place. Much of the anecdotal information indicates that car finance packages are being advanced. I am concerned about the domestic rather than the international economy. In the context of recovery we should focus on a number of particularly vital areas, namely, exports, tourism, energy, agribusiness and microenterprise. AIB's submission to the committee states the fund for agribusiness is €250 million, that 625 applications have been sanctioned to date and that only €47 million in funding has been disbursed. Mr. Duffy has suggested the agri-sector offers a great deal of potential and is going to grow. I would like the lending that is going to take place to focus on indigenous businesses and those which are focused on exports and which can assist us, rather than on other areas. I have no intention of criticising the car sector - I am aware that many are employed in it - but with every car we buy, we are helping the Japanese and the Germans far more than we are helping ourselves. Is AIB's thinking on this matter along the lines to which I refer? What emphasis is it placing on driving the economy towards recovery?
Mr. Bernard Byrne:
The Deputy will find that much of the car finance on offer is actually supplied by the original equipment manufacturer, OEM. In other words, Volkswagen and BMW will offer their own deals which are aimed at shifting their merchandise. Less of that finance is probably directly on offer from the banks.
As the agri-sector has actually grown, we have more credit outstanding to that sector than was the case at the beginning of the year. There are not many sectors in which that is the position. Our exposure to the sector is €1.9 billion at this stage. The fund to which the Deputy refers is a new one. We have a series of funds. We find that if one has a fund and one has something in the shop window, it is easier for people to say "I'll get a bit of that" and "I understand what the agri-fund is". We have many specialists in the regions who are supporting the six advisers who do nothing other than concentrate on the agri-sector. We are very positive in that regard.
In respect of the new sectors to which the Deputy referred - clean tech, energy and medical - we have put a start-up team in place. This comprises ten people whose sole focus is to concentrate on these emerging sectors. We know we need to know more about these industries, particularly as they are different from those industries to which the banks have traditionally lent. We are moving up the curve in terms of the knowledge-base. Much of this is simple. Providing the first item of advice and credit for a small start-up is very different from dealing with traditional manufacturing business. We accept the point and are pursuing a series of initiatives to try to help them move forward.
Peter Mathews (Dublin South, Fine Gael)
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Do the staff in the NAMA divisions know the price at which individual loans were sold to NAMA?
Mr. Bernard Byrne:
The NAMA process was very public in the context of how the final tranches were transferred.
Peter Mathews (Dublin South, Fine Gael)
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Yes, but do the staff involved know the prices of the individual loans?
Peter Mathews (Dublin South, Fine Gael)
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Would such information relate to the gross amount of loans and the net purchase price?
Ciarán Lynch (Cork South Central, Labour)
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On Mr. Murphy's response to Deputy Dara Murphy's question in respect of mortgages with 40-year schedules, are we talking about new or existing mortgages that have been rescheduled?
Ciarán Lynch (Cork South Central, Labour)
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I am surprised to hear that, particularly in the context of new mortgages. In 2009 the Central Bank gave a very clear opinion that it was very much opposed to mortgages with terms of more than 25 years. In the long term advancing such mortgages would give rise to another property bubble because by scheduling over a 35-year period, all one would be doing was facilitating an additional value being placed on properties.
I return to a matter I raised with the Irish Bank Resolution Corporation this morning. In the context of the residential sector, property values are now approaching normalisation. The properties to which I refer are not undervalued; they have reached their real value. If, therefore, one applies lending criteria to a couple, namely, three and a half to four times the principal earner's income plus the secondary earner's income, surely it should be possible for people to repay mortgages over 20 or 25 years.
Thirty-five-year mortgages are as crazy as 100% mortgages.
4:05 pm
Ciarán Lynch (Cork South Central, Labour)
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New property is not at Celtic tiger bubble prices. It is now affordable and should be repayable over 25 or 30 years.
Ciarán Lynch (Cork South Central, Labour)
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It is not me who is saying this; the Central Bank is saying it. Why is AIB doing it?
Ciarán Lynch (Cork South Central, Labour)
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The Central Bank is not talking about retirement dates. It is talking about schedules of 25 years to 30 years. If people take out mortgages in their early 20s, they should have them repaid by the time they are in their 50s, at which time they have another big bill coming down the road, namely, the cost of third level education for their children. If one is in a 35-year mortgage, one is not even halfway through it at the stage when bills for third-level education arise. There is a life cycle to the type of financing people have in adulthood.
Dara Murphy (Cork North Central, Fine Gael)
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To clarify, my question was about people in mortgage distress, not new mortgages.
Ciarán Lynch (Cork South Central, Labour)
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The reason I have picked up on the point is that new mortgages seem to be still in that bracket. I wished to clarify those two points. I am concerned that people seeking new mortgages in AIB are being offered 35-year mortgages.
Ciarán Lynch (Cork South Central, Labour)
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The Central Bank would not be impressed. It was most emphatic about the matter in 2009.
Ciarán Lynch (Cork South Central, Labour)
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A final point relates to mortgage protection and mortgage insurance. What monitoring is available to ensure people are maintaining such insurance for new mortgages?
Ciarán Lynch (Cork South Central, Labour)
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Yes, life assurance.
Ciarán Lynch (Cork South Central, Labour)
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How many of the bank’s customers with non-distressed mortgages have income protection?
Ciarán Lynch (Cork South Central, Labour)
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Okay. It is mandatory to protect mortgage repayments in the Canadian and Dutch models of mortgage lending practice. As a result, neither Canada nor the Netherlands suffered a property bubble. Products were designed by companies such as Genworth to protect 30% of the equity. Because the governments of those countries introduced such a mandatory ruling, they had positive outcomes. From our perspective, it would have meant that one was protected for the first two years of repayments following default. Does Mr. Murphy have a view on the benefit of examining protection of the mortgage itself, not in the event of the person's dying but in the event of his or her losing a job or becoming disabled for a temporary period?
Peter Mathews (Dublin South, Fine Gael)
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Banks have PPI, payment protection insurance.
Ciarán Lynch (Cork South Central, Labour)
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If PPI were mandatory, as is the case in Canada and the Netherlands - albeit under two different models - would it bring down the cost of the mortgage because of the reduction in the risk factor due to the insurance loading that is placed on top of the mortgage?
Mr. Fergus Murphy:
EBS has been taking out mortgage indemnity insurance for the past ten or 15 years, but it no longer does it on its own book. It is often difficult for the bank to claim in cases of mortgage indemnity. In general, taking out insurance would be of marginal benefit to the customer. The main factor in the Canadian market which assisted it through the crisis was the limiting of loan-to-value ratios.
Ciarán Lynch (Cork South Central, Labour)
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The insurance companies ensured there would be a limit on loan-to-value ratios because they insure the amount of borrowing provided by the bank, which results in a triangulation in terms of monitoring.
Peter Mathews (Dublin South, Fine Gael)
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On mortgage protection, if a premium fails to be paid by the borrower, is it an obligation for the bank or financial institution to pay it to keep the policy alive?
Peter Mathews (Dublin South, Fine Gael)
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Normally a mortgage protection policy is assigned to the bank, or it is in the joint names of the borrower and the bank, so that if the borrower fails to pay the premium the policy will lapse. Therefore, the insurance company notifies the bank that the premium has not been paid and normally the bank should step in to do so. Is it legally obliged to step in to keep premiums going?
Peter Mathews (Dublin South, Fine Gael)
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Yes - mortgage protection.
Peter Mathews (Dublin South, Fine Gael)
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I am talking about mortgage protection life cover.
Ciarán Lynch (Cork South Central, Labour)
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It is coming up to 5.25 p.m., and we are due to finish at 5.30 p.m. I would be grateful if we could finish five minutes early. I have been sitting here since 10 o'clock this morning and my legs are getting a little stiff. I thank Mr. Duffy and his team for attending this afternoon. I believe it is his first time before the Joint Committee on Finance, Public Expenditure and Reform. I am new to the committee so I was not sure about that detail. I am grateful for the positive engagement with the committee this afternoon. I wish Mr. Duffy and his team well in their objective of getting AIB back to a sustainable position, independent of the Government, in the future. This is one of a series of meetings we will have in the coming years. I very much appreciate the frankness with which the witnesses dealt with questions and the detailed information they furnished in response to the questionnaire we sent. There is much reading in it for members. On behalf of all committee members I thank Mr. Duffy and his team for their engagement this afternoon and wish them well in their endeavours to return the bank to a sustainable position eventually.