Mr. Ken Burke:

I thank the Chairman and members of the joint committee for giving AIB the time to provide the Oireachtas and the public with an update on the bank’s continued support for the dairy sector during this cyclical downturn period. I have been head of business banking with AIB for the past three years. With me are Dr. Anne Finnegan, head of agri-sector, and Ms Margaret Brennan, head of sectors. I refer members to AIB’s presentation which was submitted to the clerk in advance.

When we were before members in February, I outlined how important the farming sector was to AIB and the nature of the very long-term association AIB had maintained with the agrifood sector. I welcome the opportunity to update the committee on the performance of the sector and AIB’s specific programme of support for farming customers since that time. The demand for credit from farmers, in particular dairy farmers, has remained strong throughout much of 2015. However, in recent months we have seen some slackening in demand which we had expected as tax bills fall due, farmers postpone non-essential investment in preparation for a leaner income year in 2016 and they await grant approval under the targeted agricultural modernisation scheme, TAMS II.

We adopted a conservative outlook to 2015 dairy farm cash flow performance, using an annual average milk price of 26 cent per litre, inclusive of value added tax, VAT, for 2015 when budgeting for either new lending or working capital support. While the milk price has declined significantly from the high level reached in 2014, it is now likely that, based on Central Statistics Office, CSO, figures, the price will average over 29 cent per litre, inclusive of VAT, in 2015.

An up-to-date analysis of AIB’s dairy farmer customer base again indicates that the sector remains well positioned, with strong cash balances, available overdraft limits and overall strong historical credit performance relative to other AIB small and medium enterprise, SME, sectors. We welcome the decisions to phase superlevy bills over three years and to pay a significant advance on direct payments, both of which resulted from Government and Department of Agriculture, Food and the Marine intervention and will serve to alleviate cash flow pressure. We have been working to support those farmers with high tax bills to spread the cost over the year through the use of our PromptPay facility. We anticipate that, in the main, working capital pressure will not manifest on dairy farms until quarter 1 of 2016.

Our prudence in lending to this sector gives us a level of comfort that whatever income pressure materialises for our customers, in the main, it will be short term in nature. Our lending to dairy farmers is on the basis of a long-term, through the cycle budget price of 30 cent per litre, inclusive of VAT. Our focus in the agrifood and all SME sectors is on cash flow lending. We recognise that Irish dairy farmers are much less indebted than some of their European or southern hemisphere counterparts. We also recognise that there are structural differences in farming in these regions and that the nature of lending varies greatly, with a greater propensity for intergenerational debt and long-term interest-only facilities. We believe Ireland’s comparatively lower level of indebtedness in the sector does confer some advantage when prices are low. However, Irish farmers still experience financial pressure, perhaps just not as severely or as quickly as farmers elsewhere. For AIB, the low level of gearing in Ireland versus that in other countries does not necessarily determine the capacity of the sector to take on debt. Rather, we seek satisfaction on the strength of the underlying cash flow at individual farm level. As such, AIB's message for several years has been to encourage farmers to focus on being better before bigger, that investment in expansion should only be undertaken in a very planned manner when existing efficiencies have been maximised. As I mentioned when we were here before, AIB has been espousing this message in national roadshows in the past year which were attended by in excess of 3,500 farmers. Since we were last with the committee, we have been proactively engaging with farm stakeholder groups on this theme, including the following events: the Irish Grassland Association dairy summer tour which was attended by 500 dairy farmers; the Macra na Feirme Young Farmer Forum which was attended by 100 farmers; dairy discussion group meetings; participation in a national dairy forum chaired by the Minister for Agriculture, Food and the Marine; the Agricultural Science Association dairy study tour to Northern Ireland which was sponsored by AIB; the AIB-Teagasc Best Farm Business Plan awards for agricultural college students; participation in Irish Farmers Association, IFA, dairy expansion seminars; participation in Teagasc Get Financially Fit seminars.

In 2014 we doubled our team of specialist agri-advisers. These regionally based advisers undertake a detailed farm financial analysis of all substantial farm lending cases and examine the technical management and efficiency of the farm. The team is not necessarily motivated by sales or lending targets but rather by ensuring the lending proposal is underpinned by a sustainable cash flow which will cover farm costs, adequate living expenses and service capital and interest repayments. Their time is not spent in recruiting either new AIB farming customers or seeking new lending opportunities but rather in supporting the analysis of lending applications and supporting and training our front-line staff. We believe this component of our model is key to the long-term sustainability of our lending to the sector.

Last spring the general expectation was there would be market recovery in the first half of 2016; however, current market signals suggest the downturn could extend into the second half of 2016 and that recovery may not materialise until after the peak months of Irish production in 2016. We are in no doubt that many farmers will require short-term working capital support during this trough period. AIB is committed to playing its part in supporting farming customers through this market cycle. As we outlined when we were with the committee in February, we have significant experience of supporting the pig sector through various income cycles and the more recent cycles in the dairy sector in 2009 and 2012. In the past few months our relationship managers have been engaging with those farming customers who might need our support in the near term, encouraging them to make early contact with the bank. The type and magnitude of support needed will best be informed by the development of cash flow projections for 2016. We are encouraging all dairy farmers to undertake a cash flow plan for the year.

As detailed when we addressed the committee last February, our support package for dairy farmers during this income downturn includes the following: a review of current monthly repayment commitments; a short-term increase in working capital facilities; short-term loan facilities and, where appropriate, an interest-only period on existing borrowings, with no repricing of existing facilities. We are utilising our existing core lending products to support the sector at this time, including our farmer credit line which has a variable rate of 4.075%, which is the lowest cost of any working capital product in the farmer market and extremely competitive relative to the cost of merchant credit. We also have in place a €200 million AIB-Strategic Banking Corporation fund which includes term finance for continued farm investment at a variable interest rate of 4.5%. All of our customer facing and credit teams have been briefed on the current market situation and AIB's available support measures. At this juncture, we have not seen a material increase in the number of requests for support, but, as I have said, we anticipate increased engagement in quarter one of 2016.

We are very conscious of the significant medium to long-term opportunity for the dairy sector and the economy. We are also aware of the heightened short-term volatility that must be managed, particularly in the next six to 12 months. As the leading bank to the dairy sector, we recognise the key role that we play in supporting the sustainable development of the sector and supporting it through the full cycle.

In summary, on behalf of the bank, I, again, express our thanks to committee for inviting us. We very much appreciate the opportunity to discuss with members what is one of our most important small and medium enterprise sectors. We look forward to answering members' questions.