Oireachtas Joint and Select Committees

Thursday, 22 March 2018

Joint Oireachtas Committee on Finance, Public Expenditure and Reform, and Taoiseach

Proposed Sale of Non-Performing Loans to Private Investment Funds (Vulture Funds): Allied Irish Banks

9:30 am

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I welcome Mr. Jim O'Keeffe, head of AIB's financial solutions group, and his colleagues.

I wish to advise the 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 the joint committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to so do, 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 asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or persons or an entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

I invite Mr. O'Keeffe to make his opening statement.

Mr. Jim O'Keeffe:

I thank the Chairman and members of the committee for inviting AIB here today to discuss how AIB is dealing with non-performing loans. We will answer as many of their questions as possible. However, as we have outlined in our responses to the committee's questionnaire, we have not disclosed any information to the market with regard to potential portfolio sales and are constrained in doing so here today. Alongside me are colleagues from AIB’s executive team: Mark Bourke, Tom Kinsella and Hilary Gormley.

I will begin by emphasising that AIB has been and remains acutely aware of the very difficult circumstances frequently associated with distressed debt and the need for a sensitive approach towards customers when coping with financial difficulty. Responding to the clear debt crisis facing our customers, the bank and the economy, we put in place AIB’s financial solutions group in 2012. Today, we continue to have a team of over 1,500 people countrywide in place, guided by the key objective of keeping viable businesses operating, supporting jobs and enabling customers to stay in the family home.

We put in place the most extensive range of solutions for customers in the Irish marketplace and decided at that early stage to commence writing off debt as part of these solutions. Early on, we recognised the need to partner with external organisations to support customers in restructuring loans and enabling them to move on with their personal and business lives. This approach has resulted in impaired loans reduced from €28.9 billion to €6.3 billion at the end of last year; a 57% reduction on mortgage arrears since 2014; 93% of the mortgage customers meeting the terms of the solutions; and 95% of our wider base adhering to the terms of their restructures. AIB’s solutions are appropriately matched to affordability.

Notwithstanding this progress, supporting customers in difficulty remains a key priority for AIB, and while we do see loan sales as part of our overall plan, our key priority remains to restructure customers on a case by case basis. We believe it would be important to look at three key areas to give further insight and context as follows: recognise the need for a sustainable banking sector and our commitments to achieving EU norms for non-performing loan, NPL, levels; the scale of restructuring completed at AIB and how this can provide confidence for our customers that through meaningful engagement sustainable solutions can be found; and how we achieve our plans while continuing to support customers in financial difficulty in reaching solutions with the bank.

Regarding our commitments to achieving EU norms for NPL levels,in addition to the importance of the consumer protection imperative when dealing with distressed customers, the bank must also have regard to the European Central Bank, ECB, priority of reducing its stock of NPLs to the EU norm of approximately 5%, that is, €3 billion to €4 billion in AIB’s case, by the end of 2019 – a fact not exclusive to Irish financial institutions but required of lenders across the eurozone.

Regulatory guidance and targets in technical terms address all non-performing exposures, NPEs, which follow the European Banking Authority definition, a broader concept than impaired loans. This defines non-performing loans based on days past due, that is, greater than 90 days, or where a loan is unlikely to be repaid without full realisation of collateral, regardless of days past due. Hence, AIB’s NPE of €10.2 billion includes the €6.3 billion of impaired loans. The ECB uses the two terms of NPE and NPL interchangeably.

The key issue is that NPLs carry a very high risk weighting and, as a result, require the banks to hold many times more capital for an NPL loan than a performing loan. This capital requirement on an ongoing basis could limit the flow of new lending into the economy and impact the pricing of that credit resulting in much tighter lending restrictions into the future.

As part of the requirement to achieve this normalised level of NPLs, AIB has set out its plans in response to the ECB NPL guidance framework, which required that a defined plan be put in place and implemented in an ambitious timeframe.

On the scale of restructuring completed to date, with the need for customer engagement at the core of our approach, solutions were devised and implemented, mainly on a case-by-case restructuring basis, for personal and business customers in difficulty, and overseen by a robust consumer protection framework.

In addition, AIB has also engaged with a number of external agencies in an overall approach to help address the problem, including the Irish Mortgage Holders Organisation, the Money Advice and Budgeting Service, MABS, StepChange and iCare. We are also working with organisations like the Irish Farmers' Association. Through these advocates, thousands of customers, who were heretofore reluctant to engage with the bank, ultimately achieved a satisfactory resolution of their financial difficulties.

Regarding mortgage debt, the bank has a four-step process to deal with distressed mortgages, known as the mortgage arrears resolution process; this allows bespoke sustainable solutions for each customer in difficulty. The process has been extremely effective, resulting in 93% of sustainable mortgage resolution agreements continuing to meet their terms. It is based on open two-way communication between bank and customer, with the expectation of full disclosure of financial information, assessment to determine the customers’ affordability and resolution to implement the most suitable sustainable solution.

For its part, the bank is prepared to write down debt where there is reduced affordability on the customer’s part.

I now turn to the issue of business debt. The bank’s resolution strategy for dealing with business debt begins with an individual assessment of the levels of sustainable and unsustainable debt involved. Solutions allow the customer to enter into a performance based agreement, typically over a five year period, characterised by the disposal of non-core assets, contribution of unencumbered assets and contribution toward residual debt from available cashflow.

When considering the level of restructuring undertaken to date we must also be fair to the customers who have come forward and restructured. We have clear examples where customers have restructured and taken on the revised debt and are making the affordable payments while other customers or businesses have not engaged and continue to pay very little or, in some cases, nothing. This inconsistency is clearly unfair in view of the sacrifices made by the thousands of customers who have already restructured.

I will now outline our approach to reaching normalised NPL levels and to continuing to support customers. As defined by the ECB, our non-performing exposures, NPEs and non-performing loans, NPLs at the end of 2017 were at €10.2 billion. This represents 16% of AIB's balance sheet and it compares to EU norms of circa 5%. This NPE figure is broadly split into two categories, namely, customers who we have resolved subject to a probationary period or completion of property sales before the loans exit from NPE and customers yet to be resolved.

Fortunately, due to the scale and type of restructuring undertaken by AIB we expect that more than €3 billion will exit NPE status as customers complete this probationary period or conclude property sales. We have a dedicated team working with customers who have restructured to support them in adhering to the terms of their arrangements. The adherence rate is currently running at 95% and is one of the primary reasons AIB does not see any necessity to sell treated or restructured customer loans.

For the customers whose loans are still to be restructured we continue to have a team working on a case-by-case basis to help resolve their financial difficulties. We continue to encourage customers to engage with us as this is by far the most expeditious and preferred approach to resolving these difficulties.

As part of our requirement to meet EU norms of circa 5% by end of 2019 we see a role for loan sales. Our approach has been to focus on the investment loan elements of our portfolio in the first instance, creating time and space for business and family home customers to work with us. With regard to family homes, a key development has been the launch of the enhanced mortgage to rent scheme with our partners iCare. This was the result of a significant project over more than 12 months to put in place a potential alternative to a large scale private dwelling home, PDH, portfolio sale. With the advancement of this solution, a few weeks ago we were able to announce at our financial results for 2017 that our plans to achieve normalised NPL levels does not include the sale of PDH portfolios.

As previously noted loan sales can be one of a number of strategies used to reduce NPLs. We note the Governor of the Central Bank’s recent statements that the Consumer Protection (Regulation of Credit Servicing Firms) Act 2015 ensures that relevant borrowers whose loans are sold are afforded the regulatory protections they had prior to the sale. These include protections provided by the consumer protection code, the code of conduct on mortgage arrears and the SME regulations.

I reiterate to the committee AIB’s absolute commitment to resolving these challenges. Our continued focus is to work with customers on a case-by-case basis and find resolutions suitable to their circumstances. Based on our proven track record to date, we can give confidence to customers to come forward and work with us in a meaningful way to resolve their difficulties. We look forward to contributing to a productive discussion with the Chairman and the committee members.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I thank Mr. O'Keeffe. I call on Deputy Doherty.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Cuirim fáilte roimh na finnéithe ón mbanc chuig an choiste. Baineann an chéad cheist atá agam le Project Redwood. Perhaps Mr. O' Keeffe will give the committee an understanding of what is contained in that project and what stage it is at now.

Mr. Jim O'Keeffe:

As mentioned in the questionnaire and in my opening address, we have not shared any information on any particular potential portfolio sales at this point in time. I do not intend getting in to any discussion of portfolio sales today.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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The purpose of this committee meeting is to deal with these issues so, without commercial breaching confidentiality or sensitivities, we have to discuss these issues as broadly as we can.

The loan sale is reported to be valued at €3.75 billion. Is that correct?

Mr. Jim O'Keeffe:

Again, for the reasons I explained to the Deputy, we are not just using commercial sensitivity as some smoke screen to getting in to a discussion on it. The Deputy will be aware that the NPE part of the banking industry, especially for high NPL banks such as AIB, is of key interest to the market in general terms. It is, therefore, very much a commercially sensitive item.

With regard to any portfolio sale, as it journeys through and as work is done on those potential portfolio sales, they will change and they will change significantly as they go through the process. To actually start to communicate in the early stage in the process would be premature because one is not sure how it will conclude in the final stages. These are the two parts to the reason we are not getting in to particular portfolio sales.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Okay. How come AIB cannot say that but Permanent TSB can tell us that Project Glas is this, that and the other and while it is not saying how much it is going to be sold for it can indicate the book value of the loan sale? It is very clear from media reports, which are going unchallenged, that someone - I presume from AIB - is briefing the media that there is a loan sale, that it is called Project Redwood, it has a book value of €3.75 billion and that it has three bidders at the final stage. All that information is there. I am sure the part about the bidders cannot be told to the committee but I presume we can talk about the make-up of the portfolio that is being scrutinised by vulture funds currently

Mr. Jim O'Keeffe:

I cannot comment on where Permanent TSB is at with its items. AIB has been focused on the plan it has set out to deal with this issue between now and the end of 2019. It is not about avoiding commentary on particular items. Our track record has been that when we took on the plan we knew that PDH loans were going to be a huge challenge for everybody in it. At that point we set out to undertake the project with iCare, which probably ran for well over 12 months. We did not announce anything about the project until we concluded and knew the project was actually going happen and to work. We have since implemented the project and as we have begun to see what is coming through the project has allowed us to get to the position where we believe we can work through a considerable amount of the PDH portfolio. When we were ready with that we announced at our results recently that we were now in a position to say that PDH loans would not form part of the portfolio. I convey this to the committee, not that it answers the Deputy's other question, but to explain that our position and strategy around this. We have a very clear plan as to how we are working through this and when we have the evidence at completion we will then communicate this. To be fair, the journey for us has led us to the position where we have been able to give comfort to our family home customers that we are going to work with them over that period.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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It is appropriate to acknowledge that in relation to this sale. Let us deal with some aspects. Does Project Redwood exist?

Mr. Jim O'Keeffe:

I have no doubt that the Deputy is going to come back to this in a number of different ways, and I will have to come back with the same point; we have not disclosed anything around potential portfolio sales. As I have said, and to comment further on what we see in the plan between now and the end of 2019, I have absolutely outlined it and we have confirmed more widely that we see a role for portfolio sales. The strategy is to focus on the investment-type loans or assets in the portfolio.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I want to get back to the issue. I thought that was a start off, easy question. I thought we would start with the easy ones. Is it the position of the bank today to not inform the committee that there is a loan sale, and will the bank not confirm if the beginning of a loan sale is under way? When the committee asks the witnesses about information that is repeatedly in the media that a loan sale that is valued is under way, will the witnesses not confirm that there is even a loan sale under way and that bidders have been looking at it? Are the witnesses not going to confirm anything in relation to that?

Mr. Jim O'Keeffe:

We will not confirm anything about it but, as I said, we have set out a strategy, we are making progress on that strategy, I think we are already seeing the fruits of it and we are happy to discuss that.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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At what stage will we, as members of the finance committee, be able to be informed? Will it be after the so-called loan sale is completed? I find this a wee bit bizarre. As I said, I thought this was straightforward, that there is a loan sale, agents are appointed and advisers are appointed. AIB has had the due diligence done and has taken it down from the long list to the short list. I expected that that was there but that the witnesses would confirm that to us today.

Mr. Jim O'Keeffe:

As we go through with any potential loan sale, we will take that through the appropriate governance with our board, etc., and at that point we will share further.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Mr. O'Keeffe says that PDHs, family homes, will not be contained in a future loan sale or, indeed, the loan sale we all believe is under way at this point. Will buy-to-let properties be part of it? Will family farms be part of it?

Mr. Jim O'Keeffe:

As I said, the focus is on investment loans outside of family homes. Buy-to-lets will be part of that, as will commercial real estate, land and development and property and construction. That is the primary focus of the potential loan sales as we go through the process. On the question of farms, we have worked very well on the solutions we have put in place for farmers and we are doing that very actively as we go forward. Our solutions as to how we can put in place a solution for customers on the farming side is quite unique in the market in respect of the way we operate. However, we have some farming loans, or farming connections, which have a much bigger overhang of investment debt than the farming connection itself. They are cross-secured against the farm and vice versa. Those loans, if we do not have them restructured, could form part of a potential sale as we go forward.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I wish to ask Mr. O'Keeffe briefly about mortgage-to-rent. I know AIB is partnering with iCare. How is that going? It is probably still in its infancy. Has AIB agreed a number of cases that would be suitable for mortgage-to-rent with the new organisation? If so, can Mr. O'Keeffe tell us how many AIB has agreed so far?

Mr. Jim O'Keeffe:

Yes. There are a number of strands to this. We are pleased at this point about it, and I think our partners are as well. iCare itself has just under 300 confirmed cases that we believe it will follow through on and complete. To put this in context, when we launched this with iCare last September, the industry over the previous five years had completed 250 in total. If we move those through the pipeline, and I am confident we will, it will work well. From our perspective, the other piece, which we had hoped for and we are seeing coming through, is that in January we wrote to more than 3,000 of our customers who are in the legal process to signal to them that this solution was available. Obviously, engagement has been a challenge with that group. We have received more than 1,100 responses in this regard. As Deputy Doherty knows, we complete the standard financial statement. We have completed more than 300 of those at this stage. They are either suitable for mortgage-to-rent or they may be suitable for some other solution. In the round we are pleased at this stage, but-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I questioned representatives of Permanent TSB earlier about its split mortgages and they informed us that under the current guidelines all their split mortgages are deemed as non-performing. Mr. O'Keeffe, under questioning from me on the previous occasion he appeared before the committee, suggested or stated that AIB's split mortgages can be deemed as performing under the current guidelines. AIB repeats this in the answer to question No. 24 of the questionnaire: "Subject to new repayment terms being fully met during a probationary period (typically 1 year), AIB Split loans are eligible to return to performing status under EBA non-performing definitions." Can Mr. O'Keeffe clarify this? Regarding the 3,190 split loans that have been restructured until the end of the year, are they or can they be deemed as non-performing? If so, can Mr. O'Keeffe perhaps speak to the committee about how the bank has achieved a position whereby they may be not classed as non-performing?

Mr. Jim O'Keeffe:

I confirm that what we discussed previously is accurate and that our split mortgage solution for customers, which more than 3,000 customers have taken up, means they will all be eligible to exit non-performing status at the end of the period. Clearly, there is-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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What is the end of the period?

Mr. Jim O'Keeffe:

Typically, it will be a year. There is a probationary period. I say "typically" not because we have some-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I just wanted to confirm whether the period was the 25-year mortgage.

Mr. Jim O'Keeffe:

Sorry. Some will obviously run into perhaps a month's arrears or something and then we have to restart the clock, etc. That is the position, and we have already seen quite a quantum of those exit non-performing, NP, status.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Has that been made crystal clear to AIB by the regulator? Is Mr. O'Keeffe 100% sure that all AIB's split mortgages and the way in which it has structured them are deemed or can be deemed as performing once they go through that probationary period? We heard from Permanent TSB, and this is not about pitching one bank against the other, and I do not want to do so, but not one of Permanent TSB's affected loans is being deemed or can be deemed as performing. It tells us it has been writing to the regulator since 2017 and has got no response. Is AIB crystal clear this is the case?

Mr. Jim O'Keeffe:

We are crystal clear because, as the Deputy can imagine, the scrutiny and the required regulatory oversight on this is very robust. We are absolutely clear that that is the position.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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From my understanding of both split mortgage models that are used in the two State-owned institutions, AIB also charged no interest rate on the warehoused portion. Is that correct?

Mr. Jim O'Keeffe:

That is correct.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Permanent TSB raised this as one of the reasons it may not be able to be deemed as a performing loan, but AIB's split mortgage does not trip into the classification.

Mr. Jim O'Keeffe:

It does not.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Regarding the ratio of the split that AIB has undertaken, have many of the warehoused portions exceeded the 50% mark?

Mr. Jim O'Keeffe:

No.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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They are all under the 50% mark.

Mr. Jim O'Keeffe:

Sorry-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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The warehoused proportion would be 50% or less.

Mr. Jim O'Keeffe:

Yes, 50% or less.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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However, the majority of Permanent TSB's would be in excess of 50%, and-----

Mr. Jim O'Keeffe:

I am not aware of Permanent TSB's position on the matter, and from what I hear-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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AIB's position on the duration is perhaps key in all this because obviously the EBA rule is that one cannot use underlying collateral to pay off a mortgage and AIB's scenario is that for the warehoused portion there is not a trigger at the age of 65 or 67. Is it a lifetime issue?

Mr. Jim O'Keeffe:

As part of this we will also write down some of the debt to make it a sustainable solution at that point. We have reviews that go on during it and we also have some trigger points in terms of incentives for the borrower to repay at particular points during it. All that contributes to how the rules assess it.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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When AIB designed this split mortgage, was it with an eye on the EBA rules? Did AIB get guidance on the potential pitfalls in the design of it?

Mr. Jim O'Keeffe:

Yes. At the time it was very much a question of aligning to the nature of our proposition or our solution and how that then worked with the appropriate accounting rules. However, obviously, different banks could have different solutions, so I certainly do not want to point to anyone else not adhering to rules, etc., but based on our proposition we were able to get to the point. However-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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If I were an AIB customer and I had a split mortgage, would I have two separate, independent contracts, contract A and contract B, on the same loan?

Mr. Jim O'Keeffe:

Yes. The documentation comes in that format, but I cannot say to the Deputy that that-----

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Mr. O'Keeffe cannot say it is significant.

Mr. Jim O'Keeffe:

-----is a key trigger to the item.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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I have another question. In AIB's annual accounts there is reference to a share bonus scheme which is going to be introduced for senior personnel within the bank. I was scratching my head trying to figure out how this would work. There was not a huge amount of detail on it. How can that work given that there is a 45% USC charge on any bonuses paid to personnel in banks which have been bailed out by the State? That provision exists in Irish tax law and it means that any bonus paid to either the CEO or any senior official would be subject to an effective tax rate of approximately 89%. Is the intention in respect of the share bonus scheme that personnel would pocket the 10% or 11% or is the bank hoping that we as legislators will remove that provision from the Irish tax code?

Mr. Mark Bourke:

Perhaps I will take this question. The context of this is essentially that, over a period of three or four years, the bank is normalising. By that I mean normalising in terms of operations and the non-performing exposures about which we are talking today. The bank is normalising to the degree that it will be profitable and able to return all of the Government's investment. As part of that conversation and as part of the initial public offering, IPO - and this was in the prospectus - the board which determines the remuneration policy for the management and the entire staff wishes to progress towards some form of normalisation of remuneration. This is part of a long discussion. The first element of this is simply putting in place a policy which would allow the bank to potentially put in place a scheme. As we have been normalising, the European Banking Authority has set out, over a number of years, a set of remuneration policy guidelines to which all banks would adhere. What the bank has started to do is to assemble a first step towards a potential remuneration scheme for senior management which would be compliant with the guidelines. This is merely a first step in that. It is not a comment on taxes or the laws of the land. They remain in place. Any award under any proposed scheme would be quite a number of years down the road, as the Deputy will have seen from the financial report.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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With respect, I found the statement quite arrogant. There is only one way that deferred bonus scheme can work. It must operate under the excessive remuneration charge, which was introduced in 2011 and was an additional 45% tax on bonuses for bankers in banks which received State money. There is no Cinderella clause. It will continue in Irish tax law indefinitely unless the Irish Parliament wishes to remove it. Announcing a deferred bonus scheme which could only provide any real benefit to senior executives if this provision was gone was quite arrogant. I think the bank has overstepped the mark. Despite whatever cosy little arrangement it has with the Minister of Finance, the bank may know that he is in a minority. I am not sure if other parties have involved themselves in this arrangement but the Irish Parliament has a tax system that would see the benefit of any deferred scheme limited to 10% of every €1 received as a bonus. Some 90% of it would have to be paid back to the Exchequer. Is that what the witnesses are planning to do because-----

Mr. Mark Bourke:

In respect of the first comment, precisely the reverse is the case. There is no arrogance in our contention at all. First, as the Deputy says, this provision is the law of land and, second, the Minister or the Department would have a say in the implementation of any scheme. The tax implications are in place until otherwise determined. There is absolutely no arrogance in this statement whatsoever.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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However, I presume AIB wants to go ahead with the bonus scheme which it has announced and under this scheme the bonuses will be taxed at a rate in the region of 90%. Is that what the bank wants?

Mr. Mark Bourke:

That is not what I said.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Okay, well the bank has announced a deferred bonus scheme----

Mr. Mark Bourke:

It is the case currently that there is a tax in respect of the scheme.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Does Mr. Bourke want the Parliament to change the tax structure on bonuses?

Mr. Mark Bourke:

We are merely on a journey of normalisation. That relates to the entire bank. Following the IPO, an alignment of management remuneration and delivery of the bank's strategy is appropriate. This is the start of a conversation in that regard. It is no more than that.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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Will the bank go ahead with the bonus scheme if we refuse to remove that provision from the Irish tax code? Let us call a spade a spade. We are all grown-ups, we know how this works. There is no way that the bank is introducing a deferred bonus scheme for senior executives which only provides 10% of the reward being provided for. The bank has done this with either an understanding or with a touch of arrogance which will force the Irish Parliament to remove this provision because we are returning to normality. Otherwise, Mr. Bourke can tell me that the bank will go ahead with this regardless of the position of Parliament.

Mr. Mark Bourke:

I would go back to the point which I made which is that this is the start of a conversation. It is about putting in place the ability to put in place a share scheme. The Minister would have a say both as an investor and under the framework agreement. Under the law there is also the super tax in respect of bonuses. These are all issues which have to be determined by the Government. It is the Oireachtas's province. We are merely doing as I stated. This is not in any way an arrogant response nor is there any agreement with the Minister or any cosy arrangement.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I welcome our witnesses. I find Mr. O'Keeffe's unwillingness to give any information whatsoever about Project Redwood quite disturbing. Project Redwood has been covered quite extensively in the media. While Permanent TSB has opened up, to an extent, in terms of the content of its Project Glas and has subjected itself to detailed scrutiny, which is appropriate, AIB is refusing to make any public comment whatsoever. I have read various articles - which seem to be very well informed wherever the leaks are coming from - which talk about the first round cut-off being conducted in January. Informed sources says the deal will be completed by June. I acknowledge and welcome the fact that no private dwelling home or family home mortgages are included in this portfolio but, if the reports are correct, we are talking about a portfolio of €3.7 billion or so. That is the equivalent of Project Glas and yet AIB is providing no information whatsoever. It is not even confirming that Project Redwood exists. That is a remarkable attitude for the bank to adopt.

Mr. Jim O'Keeffe:

First of all, that is the position we are adopting. However, I genuinely put that in the context of the wider plan which we have. We set out a number of streams in the document. We continue to restructure with customers at a very strong pace. We continue to put almost 1,000 solutions in place a month. We have communicated. We have given great consideration to the nature of our plan and to putting in place the mortgage-to-rent scheme in order to make space to work with our family home customers over that period. The proof point from our perspective is that, when we have done what we have said we were going to do, we will bring it forward and we will put it into place. These are stepping stones in this regard and are very important. We have to meet the targets that are set out and we have taken a very considered approach to allow us to do that and to create the space for us to get to that point. That is my contention.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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It remains the case that the bank is giving no information whatsoever and yet I can read reports from reputable media organisations which tell us that Goldman Sachs is the frontrunner and that Oaktree, Apollo and Deutsche Bank are among the firms assessing the portfolio. I can read that, as part of the sale, there is a condition that the owner must be a regulated entity or own a regulated entity. Despite all this, Mr. O'Keeffe is coming before the national Parliament and giving zero information. Yes, the portfolio does not include any family home mortgages, but I presume it includes farm loans.

It includes small business loans for manufacturers, retailers, exporters, yet AIB is not confirming anything. Presumably it includes buy-to-let mortgages, many of those properties being tenanted, so they are people's homes. I ask the bank to reflect on its unwillingness to share any information whatever. It appears as though this process has been under way for six months or more at this point. We have given the bank the opportunity to engage, to provide information and answer reasonable and legitimate questions. AIB is a State-owned bank, as is Permanent TSB. The contrast in the approach and openness on PTSB's part, albeit reluctant, and the lack of openness on the part of AIB is stark. We will have to follow up on this issue politically because there is no engagement coming from AIB.

Mr. Mark Bourke:

Perhaps the best way for us to talk about this is in terms of the plan to which we are committed. We start today having reduced our total non-performing loans of €29 billion to €6.3 billion over a period of four years. Some 95% of that has been done through more than 70,000 individual restructurings. We have a plan which by the end of 2019 will get us down from the current level of €6.3 billion impaired loans to between €3 billion and €4 billion. There is also a number of post-restructured loans which includes €4 billion, which we have said we will not sell and that over time they will come out of their probationary period and will then be classed as re-performing loans. Our task is to get from that €10.1 billion total down to between €3 billion and €4 billion. The majority of that will be done through individual restructurings. We have also said that we need all the tools in our armoury to get to the point where we have a normalised balance sheet. That has implications for our ability to price and to continue to lend. It is important that we have the option because, largely, it is where people have not engaged with us and have consistently refused to engage that we would look at over the two-year period of potential loan sales. We have said that in doing so, the bank will not have private dwelling homes, PDHs, as part of that. We have sufficient momentum in arriving at our target not to consider doing sales of private dwelling homes. It is correct that we are not making any comment about an alleged sale of non-performing exposures now because if one looks at this process, during the period until we finalise, there are huge changes in the numbers, largely because we continue to restructure the individuals. We are not at the point where we have an announceable transaction or one which we would put into the public domain.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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It seems to me that it is at a very advanced stage. It is not an alleged portfolio sale. Reputable journalists who seem very well informed have been writing about Project Redwood for months. Mr. Bourke has just characterised the sale as being those who have largely not engaged, who have consistently not engaged. I cannot probe that or question Mr. Bourke on that because he is not providing any information. I do not know what level of impairment these loans are subject to, or what level of engagement there has been with borrowers. I can read articles telling me that this portfolio sale will be closed by June. This is a €3.7 billion portfolio sale that sounds as though it is quite advanced and the bank is not prepared to answer any question about it. That is not good enough.

Mr. Mark Bourke:

Although there is a lot of information in the press, and a huge dispersion of potential numbers, any portfolio sale that we might consider changes over time. Where we have undertaken a portfolio sale in the past, we started at one level of about €500 million and the final portfolio sale was about €200 million. The reason for that was that we managed to get individual restructurings concluded and engagement from clients who were originally part of what was finally a portfolio sale. The fact that detail appears to be very precise in the media is not something that should lead the Deputy to conclude as he has.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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They are getting the information from somewhere and AIB has not contradicted anything that has been reported by the media.

Mr. Mark Bourke:

We have a policy of "no comment" until we get to a point where we have something that is concluded or at an advanced stage.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Can Mr. Bourke confirm if the claim that there is a condition in the sale that the other party must be regulated is true?

Mr. Mark Bourke:

Our general approach to any portfolio sales would be of that nature.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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What is the state of knowledge of the Minister as the principal shareholder of AIB in respect of Project Redwood?

Mr. Jim O'Keeffe:

As part of AIB's normal communications with the Department under the relationship framework, we share information on an ongoing basis. We would clearly have shared our wider plan of our approach to achieving the non-performing loan reductions to the stated targets at the end of 2019. As we said in our note, as part of that we also shared where there may be potential loan sales captured in that.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The Chairman might need to change the channel on the monitor here so that we might see a vote coming up in the Dáil.

Is the Minister aware of any specific plans for portfolio sales by AIB?

Mr. Jim O'Keeffe:

As part of the framework and in relation to the planning, we keep the Department and the Minister up to date on how those potential portfolio sales are progressing.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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So I take it that the Department and the Minister are fully up to date.

On the numbers, the non-performing exposures are €10.2 billion which includes €6.3 billion of impaired loans. Did Mr. Bourke say that it is the €6.3 billion figure that has to get to the €3 billion to €4 billion level?

Mr. Mark Bourke:

Yes.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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So the impaired loans must be reduced to the order of €3 billion to €4 billion?

Mr. Mark Bourke:

I will expand on that. There is €6.3 billion of impaired loans. We have another €3.9 billion which is post-restructured debt. That post-restructured debt is generally performing and going through the probationary period about which we spoke. Within a year, they would generally graduate out to performing debt. We believe the vast majority of that will not reimpair and therefore it becomes performing debt. That leaves us with a task to restructure and to graduate to performing the remaining €6.3 billion. We have to get the total number of non-performing exposures down from €10 billion to between €3 billion and €4 billion. The actual restructurings that must take place are in the impaired population.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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We are distracted here as I think that we must adjourn.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Deputy McGrath and I will have to leave for a vote. We will leave the witnesses in the capable hands of the Senators until we return. They are a gentler breed.

Mr. Mark Bourke:

We are entirely at the committee's disposal.

Senator Gerry Horkan took the Chair.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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I apologise but voting is a big part of what we do here. I call on Senator Kieran O'Donnell.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Before looking at the substantive issue, how many people in AIB are included in the proposed share bonus scheme?

Mr. Mark Bourke:

It is a policy which would allow a scheme to be put in place so we are one step away from such a scheme. We have evaluated between 80 and 100 critical roles among senior management which would be potential beneficiaries of a scheme such as this.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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My understanding of the scheme is that effectively, those involved get shares as bonuses. In what way does the scheme actually work?

Mr. Mark Bourke:

This takes us back to the European Banking Agency, EBA, guidelines that have been developed in recent years. There are three or four key elements. One is that there is a significant period of deferral. It would be a number of years before any grant was made. Any grant that was to be put in place would also be by way of shares in the bank rather than cash. Moreover, there are provisions for clawback of those if the results of the bank in the intervening period went down.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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The shares one would get would be determined by the performance of the bank. The shares would only be granted in years to come. My understanding is that there would be a stipulation that it would not arise until the taxpayers' money had been repaid. Is that correct?

Mr. Mark Bourke:

Yes, that is part of it. The performance of the bank is tied to the repayment to the State or, essentially, the value accruing to the State between the cash received and the value of the shareholding that it still maintains.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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The tax would not crystallise until such a time as the shares come into being. How would the tax situation work?

Mr. Mark Bourke:

If we put one of these in place today and there was a five-year deferral, there is essentially no vesting and no benefit passes to anybody until five years' time.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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In five years' time-----

Mr. Mark Bourke:

That is the point in general.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Is it a capital gain or an income gain?

Mr. Mark Bourke:

Usually any sort of scheme in this area would be primarily income tax rather than capital.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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What is the total number of people working in AIB at the moment?

Mr. Mark Bourke:

There are 10,000 odd, about 9,900.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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How is AIB justifying the fact that it has, say, up to 10,000 ordinary people working in the bank yet it is giving bonus schemes of up to 100% of salaries per annum, roughly, which could arise between now and, for argument's sake, five years' time? How does AIB justify that, considering that the taxpayer still has €21 billion invested in AIB that could be used for a lot of other purposes in terms of running the country, services and so forth?

Mr. Mark Bourke:

The issue of variable pay to the entirety of the staff is a concern and is an area where there is considerable work done by our remuneration committee. The delivery of the investment back to the State and having a management and a staff that can deliver on the strategy and be employed and retained over time is all about alignment of the interests and ensuring that the State does get back its investment.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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The ordinary person looking in will say that top bankers are very well paid as it is. If the taxpayer had not come through and put what is now nearly €21 billion into AIB, AIB would not have survived.

Mr. Mark Bourke:

Absolutely true.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Yet here we are giving bonuses to top management to get a return for the money that we as the ordinary taxpayers have put into AIB. It is based around profitability and the return of capital. The ordinary person is going to look back and ask whether anything has changed. People are going to question that. Mr. Bourke does not particularly wish to speak about Redwood but we have many SMEs, in particular farmers, petrified about what is going to happen when their loans are sold on. It seems a very strange move by AIB in the current environment. It reeks of elitism to the ordinary person and it is very hard to explain. It might be different, were AIB a private bank with no State involvement, but it is virtually 100% owned by the State. I am trying to reconcile it and to understand why. Why did the remuneration committee and the board of AIB take this step, which they must have known would meet with a public backlash?

Mr. Mark Bourke:

If I may take that question in a couple of pieces, I think talking about the private bank is appropriate. One of the elements of a successful initial public offering, IPO, which was in our prospectus at the time, was actually a commitment by the remuneration committee to look at the remuneration area for the critical management elements of the bank. That was part of a normal IPO process and private investors in general look for an alignment of interest. I absolutely agree that in general, people view bankers as being well paid and there is no question about that. In respect of loans and the operation of the bank, I go back to my initial comments to the effect that this is all related to the normalisation of the bank, which would be the reduction of those non-performing loans, NPLs, and the ability to deliver a profitable bank that can actually lend.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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While that is fine, I note AIB has 10,000 staff. Is it looking to increase the wages for the ordinary staff? Are there bonuses in place for ordinary staff?

Mr. Mark Bourke:

We have looked at the bands and believe that, again, variable pay for our staff would be appropriate as we normalise the bank.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Mr. Bourke is telling me about getting profitability and whatever. I am asking why the remuneration committee made such a move, knowing there would be enormous public backlash. It is because some members of top management had threatened to leave? What is the reason? I am finding it difficult to understand. Why was it necessary to put bonuses in place which effectively only crystallise when the State has got its money back and will probably crystallise at a time when AIB is private? I am not certain what the tax implications are or whether the current provisions would even apply in terms of the very high rate on bonuses. Again, the public looking in is asking what is going on and why this is happening. It is not that long ago that AIB along with Bank of Ireland went in to meet the then Minister for Finance, saying they had major problems. That is less than ten years ago. I still need to know why.

Mr. Mark Bourke:

I can only return to the answer, which is around normalisation. This is the board's view.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Normalisation for providing big bonuses to bankers?

Mr. Mark Bourke:

The board's view is that it needs to be able to attract and retain the appropriate quality of staff to execute on the plan of the business. The plan of the business, and it is a prime concern and priority, is to repay the State.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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I understand that. However, I just had a quick look at the figures. Mr. Bourke made two references to figures which I will tie in. He said impaired loans have been reduced from €28.9 billion to €6.3 billion. I am assuming AIB has a rate of non-performing loans of about 9% or 10%. Is that roughly correct?

Mr. Mark Bourke:

Of impaired loans, yes.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Mr. Bourke said that under AIB's commitment to achieving new norms, it wants to bring the figure down to circa 5%, or €3 billion to €4 billion. That tells me that AIB is looking to sell somewhere between €2.3 billion and €3.3 billion of loans through this proposal.

We can argue the toss and AIB is saying they are different. The figure of €3.75 billion is the figure reported in the media. In one breath, top bankers are getting bonuses but side by side with that, the bank is selling on farm loans and small and medium-sized enterprise, SME, loans. Those affected are extremely wary. The sale means that they are going into an unknown. It is hard to reconcile how the bank can justify bonuses when it could potentially be throwing some of these family businesses, farmers and SMEs - some of whom have been there for years - to the wolves.

Mr. Jim O'Keeffe:

I will respond to Senator O'Donnell's views in respect of the portfolio of sales and how that would impact the customers he has referred to. It is really important for us – we cannot emphasise it often enough because this discussion slips into potential portfolio sales all the time - since 2014-----

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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With due respect, Mr. O'Keeffe speaks about getting down to the average EU norm of 5%. One does not have to be a rocket scientist to realise that the bank is lining up some portfolio sales.

Mr. Jim O'Keeffe:

I accept that point in terms of the potential sales and we called that out. However, in terms of our ongoing restructuring activity we brought the SME figure down from approximately €3.8 billion in 2014 to €800 million now. That has all been through restructuring.

In the opening section we mentioned that as we look at potential portfolio sales, our focus is around the investment classes that I mentioned earlier. They can often be an overhang on the businesses to which Senator O'Donnell has referred. There are instances of farming businesses and businesses that have taken on investment debt that completely overhangs the business. It is not the predominant issue for farming and SMEs.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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It is there nevertheless.

Mr. Jim O'Keeffe:

It is there. We are saying that in those instances, because of the way lending was set up and because of cross-collateralisation, the loans could be in scope as part of potential sales.

It is similar to the commentary on principal dwelling houses. What we are saying is that we are trying to create space, while still achieving the targets that we have to create, in order that we can work with farmers, businesses and family homes. Therefore, it is critical for us to get the message across. We have put structures in place. The restructuring that we put in place with farmers was really bespoke in terms of how we went about it, how we assessed the affordability, how we assessed the farm and how we look at sustainability. It would be all too easy – as committee members know – to simply look at the asset. However, we also look at what is a sustainable farm based on the market rent etc. We have resolved a significant proportion of farms. It is critical for us to have an element that has the potential to be included in portfolio sales. Today, we can work with customers to restructure these.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Let us suppose the bank has an SME that did not get into investment properties or whatever. Let us suppose the core business is under pressure but there is no property side to the business or the business did not take on debt. Are such businesses excluded from any portfolio sale?

Mr. Jim O'Keeffe:

I do not want to use phraseology but we have worked hard to be able to give commitments around family homes as we work to get to EU norms.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Can Mr. O'Keeffe give a commitment on family homes before the committee today?

Mr. Jim O'Keeffe:

The reason I mention that repeatedly is because of the scale of it. In our portfolio today, the figure is €2.4 billion of the impaired loans.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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A total of €2.4 billion of the €6.3 billion comprises family homes. Is that correct?

Mr. Jim O'Keeffe:

Exactly. Committee members can imagine that as we are setting out our plan to try to navigate the various elements to protect family homes, it is clear that is a significant portion. We expect to resolve this through the solutions we discussed earlier. At the same time, as we move through the potential portfolio sales, we are focused on those investment classes and the overhang of investment on those businesses as described by Senator O'Donnell.

I cannot rule out that as we go through the process we would not have to look at SMEs or farming but they are not our primary or initial focus. Our initial focus, as I have described, is looking at investment asset classes with significant overhang on the businesses we have described.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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This is the point I am getting at. Does the bank expect that if it goes for any portfolio sale, it will get to the 5% norm?

Mr. Jim O'Keeffe:

The key item for us in getting to that is ongoing restructuring. The difficulty for us now is that as we get to this point, engagement becomes more of an issue. Mr. Bourke has described this earlier. We have seen this in the past when we started looking at a particular portfolio of buy-to-let loans. By the time we got it transacted, it was significantly down from where we were because of the scale of restructuring that had happened in between.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Is it fair to say that if €2.4 billion of the €6.3 billion figure is made up of family homes, and they will not form part of any portfolio sale, then the likelihood is that the balance is a little under €4 billion? I have calculated €6.3 billion less €2.4 billion. Are my figures correct? Is that the correct analysis?

Mr. Jim O'Keeffe:

Yes.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Will the €3.9 billion remaining form part of a portfolio sale?

Mr. Jim O'Keeffe:

No, sorry. That is not correct and we have to be absolutely categorical about it. The key point is that we have targeted a significant volume of that reduction through restructuring.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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We need to distil it in figures. We have €6.3 billion in non-performing loans at the moment. At total of €2.4 billion is made up of home loans.

Mr. Jim O'Keeffe:

That is correct.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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The remaining balance is €3.9 billion.

Mr. Jim O'Keeffe:

Let us focus on that €3.9 billion.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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That is what I want to focus on.

Mr. Jim O'Keeffe:

Of that €3.9 billion, we expect a significant portion to be done through business-as-usual restructuring with the 1,500 people that we have in place today.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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How much of that debt does Mr. O'Keeffe expect to be restructured?

Mr. Jim O'Keeffe:

I will talk to what I believe, based on what we are seeing. Let us take a hypothetical scenario. If we get full engagement on the question, we are willing to work with customers right through. Our preferred outcome is to get to the end of 2019 to work through restructuring.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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The period envisaged runs to the end of 2019. Is it possible that there will be no portfolio sale on that basis?

Mr. Jim O'Keeffe:

I said to Senator O'Donnell that I was using a scenario in that regard which is possible if we got the type of scale I spoke of, but that is the challenge for us. I must be honest with the committee: it would be disingenuous of me to say anything else. Based on where we see engagement at the moment, I do not see that scale of engagement coming to allow us to work that through.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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A figure of €3.75 billion is being reported in newspapers. Is that is wide of the mark?

Mr. Jim O'Keeffe:

I know we are going to come back to this item again and again. As Mr. Bourke mentioned earlier, as we discuss the topic, committee members hopefully can begin to appreciate why we do not disclose information in respect of potential portfolio sales.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Mr. O'Keeffe made reference to 2019. Can I take it from what he said that he expects no formal portfolio sale prior to the end of 2019?

Mr. Jim O'Keeffe:

No. At the moment it would be incorrect to take that away. We are looking at portfolios whereby we can see levels of engagement, especially in that investment class. We are seeing that our ability to try to engage and find solutions is not going to get resolved.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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How long will that process take?

Mr. Jim O'Keeffe:

That is an ongoing process.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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At the end of the day, we are here as public representatives. The State effectively owns AIB. We have to ask these questions. In one breath Mr. O'Keeffe is telling me that €3.9 billion may be what we are looking at. The bank has given a commitment, which is welcome, that the €2.4 billion made up of home mortgages will not be included.

There is a balance remaining of €3.9 billion. AIB said it is willing to work on restructuring these SME and farm loans. We are hearing reports in the media about a Project Redwood. We have farmers and SMEs coming to us who are apprehensive about what will happen to their loans because they saw how Ulster Bank sold a similar loan book. Many of them have been dealing with AIB for up to eight or nine years. They are physically and mentally wrecked by this, trying to keep family farms and SMEs together. I accept they may have made investments which, in hindsight, they should not have. However, AIB did give them the money at the time.

We were told by Mr. Jeremy Masding from Permanent TSB that the sale of loans is a six-stage process. The information in the media did not find its way in there just by accident. It is pretty deliberate, speaking about coming down to two or three funds. There is conditioning going on somewhere. AIB owes the committee, the public and the holders of these loans, hard-pressed as many of them are, an answer. Will Mr. O'Keeffe give the committee an indication as to what process AIB will adopt to get to a point when it will work with mortgage holders? Will it do debt forgiveness for SME loans? What is the timescale?

Deputy John McGuinness resumed the Chair.

Mr. Jim O'Keeffe:

I have described as best I could the focus we have in terms of that investment, asset classes and the overhang regarding it. When we talk about debt forgiveness, other organisations talk about it as something they have come across for the first time. We have been doing debt forgiveness and write-down right through the piece. For example, take a farm with a significant overhang of investment debt. I understand the context and I will not argue with the Senator as to how the people involved arrived at that situation. It is not our position to be judge and jury on it. We would take a significant discount or write-down, if appropriate. That is the key message we need to get out there.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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We are here to talk about portfolio sales to vulture funds. We need to get some indication as to when AIB will make a decision around this area. We accept at face value that the bank said it will work with the holders of loans. Is it imminent? Is it by the end of 2018 or by the end of 2019? There are mixed messages coming out. Side-by-side with these messages, there is a report saying AIB is looking to put bonuses in place for 80 or 100 of top management. The public will deem it to be elitism and a return to previous times, which they had thought had gone. We need to be given some indication as to when AIB will make a decision on the sale of portfolios.

Mr. Jim O'Keeffe:

I cannot confirm today about the potential portfolio sales. I have outlined on several occasions that they are under consideration. As we get to points whereby we make decisions around those, we will make full disclosures on them.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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That is not good enough. That is too late. We had Permanent TSB before the committee. While we may not have been happy with what we were being told, it was fairly open about this matter. Today, we quoted the example of split mortgages being included as performing loans. We cannot be taken as fools. We are reading stuff in the newspapers but the bank is telling us to see no evil, hear no evil or speak no evil and that there is no smoking gun. However, the first time we will hear about it is when the deal has gone through. If Mr. O'Keeffe was in our shoes, would he think it was good enough that he was stonewalled, particularly when the taxpayer has €21 billion invested in the bank?

Mr. Jim O'Keeffe:

As the Government and the Oireachtas saved AIB in the past through that investment, we have put a structure in place. We have thought long and hard about the solutions we have put in place to protect customers, not just in the short term but into the long term. We have taken a considered approach to our plan. The Oireachtas on numerous occasions has asked us to be cautious about how we deal with family homes in this late stage of the process. I am not asking for applause but we have spent considerable time on this and put a considered solution in place for mortgage-to-rent. That has brought us to a point whereby we can deal in an appropriate fashion with family homes.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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Does Mr. O'Keeffe believe the bonuses the bank is putting forward for top management are justifiable?

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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We dealt with that.

Photo of Kieran O'DonnellKieran O'Donnell (Fine Gael)
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No, we did not.

Mr. Jim O'Keeffe:

I think Mr. Bourke has given a response on the framework being discussed at the moment. I will not go any further.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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I welcome Mr. O'Keeffe and his management staff. I take it from his report that no family homes will be sold in portfolios.

Mr. Jim O'Keeffe:

That is correct.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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That does not mean there will not be repossessions of family homes. Is it the case that the bank could go to the courts to seek repossessions? Is that the way the family home will be treated?

Mr. Jim O'Keeffe:

It is possible there will be family home repossessions. However, as I have outlined, one of the biggest challenges with family homes has been where there has been no affordability. Stakeholders recognise that this was going to be the challenge. Where there is affordability and income is evident, we have over ten different solutions available to work with customers. We talked about it earlier in terms of the split loans to work that piece. Where there is no affordability for any of those solutions, potentially one goes down the route of voluntary surrender of the home or repossession, if there is no co-operation.

That is why the enhanced mortgage-to-rent project was critical. All stakeholders agreed that we needed to put a solution in place that would look at that vulnerable group of customers who had no affordability, especially considering the social housing challenges which we all recognise. The alternative, as we have discussed, is that customers, having recognised the problem with affordability, would be moved into the mortgage-to-rent scheme. That is a potential solution for us regarding repossessions. The Senator will see from our numbers and from the market - the Central Bank Governor alluded to it in his own commentary - that the scale of repossessions is small. Very often, the possessions we are getting are part of handbacks as opposed to repossessions through the courts.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Permanent TSB has a policy of voluntary surrender and debt write-off. Is AIB on the same plain on voluntary surrender and debt write-off both for buy-to-lets and for the family home?

Mr. Jim O'Keeffe:

As I said, we have had a policy of writing off residual debt if required. We have spoken much about the regulation around reaching NPL levels, etc. There is also a significant focus by the Central Bank on consistency. We have to look at the affordability in those cases. That is why I cannot give the Senator an absolute. There could be a situation whereby there is affordability. If we just write off that debt, then one customer could be actually disadvantaged versus another. It is our policy to look at debt write-off as a solution as part of voluntary surrenders.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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That is the case in all voluntary surrenders.

According to the AIB opening statement, the ECB published guidance for banks on NPLs in March 2017. The policy started 12 months ago. When does the final day come? I am sure the policy has stated that banks have a certain period of time to have a plan in place. When does D-day arrive at which AIB has to have everything sold or have these plans in place with loan portfolios sold or whatever? How many years has AIB been given or how does it work?

Mr. Jim O'Keeffe:

When the guidance was issued in March 2017, it had already been issued in draft format the previous September. The high NPL banks were asked to start putting plans in place under that draft guidance at that point to be ready for sending in those plans at some stage early in 2017 when the final version would arrive. That plan had to be ambitious in terms of achieving the NPL levels. Therefore we set out a plan that would get us to the normalised levels by the end of 2019. However, in that plan the various initiatives that we have talked about, the ongoing restructuring and the sustainment of the team of 1,500 across the country in FSG were all included to ensure that it was not just about one particular aspect of the plan. A huge aspect of the plan is about continuing to do the restructuring and to achieve that piece.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Is that the beginning of 2019 or the end of 2019?

Mr. Jim O'Keeffe:

It is the end of 2019.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Therefore the bank has basically two years to clean up the books, whether that entails loan portfolio sales or whatever.

Mr. Jim O'Keeffe:

Yes. We need to look back. We have been on this journey already. On the restructuring part of this, etc., we have a reasonable track record in delivering.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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A number of solicitors and auctioneers have contacted me about trying to get loan facilities in order to close the sale of properties. They say it is nearly impossible with all the regulation and red tape. Does the bank find that is the case? There are so many obstacles in place. They need proof of funds and articles of association if a company is buying the property. The red tape is very frustrating. It takes so long to close a sale that it is having a huge impact on their businesses in terms of manpower, cost and the length of time to get sales over the line.

Mr. Jim O'Keeffe:

The reality for us is that for varying reasons regulation and legislation have been introduced to ensure the process adheres to certain standards. There is no doubt that that adherence can bring with it a burden of managing it through. We have been working with that over a period of time because we have no other choice. I cannot talk to the specific instances the Senator has mentioned. I would be happy to engage with somebody if he wishes me to look at the challenges they are facing.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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Could Mr. O'Keeffe make recommendations to the committee that we could bring to the Minister for Finance or the Central Bank as to how it might streamline things for auctioneers, banks and legal people? The whole system is quite cumbersome at the moment.

Mr. Jim O'Keeffe:

I do not have any specific items in mind as I sit here today. I will certainly take away the feedback and might engage with some of the entities the Senator mentioned because we obviously engage with many of them to see what feedback they have.

Photo of Paddy BurkePaddy Burke (Fine Gael)
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There are also new regulations on debt investors. Would that have an effect on the price the bank might get for loan sale?

Mr. Jim O'Keeffe:

In terms of the potential purchasers of-----

Mr. Jim O'Keeffe:

When the Senator says there are new requirements-----

Photo of Paddy BurkePaddy Burke (Fine Gael)
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I am sure there are restrictions and new guidelines put on them as to how they will operate the loan sales - the loans that they buy and how they will operate them and adhere to the original contracts or whatever. It will have an impact on how they deal with the loans they have from an interest rate point of view, whether they can increase them or whether they can get vacant possession and all of that. Will those regulations have an impact on the price that AIB might get for the loans?

Mr. Jim O'Keeffe:

I cannot comment on behalf of the funds. I assume that they factor the existing regulatory and legislative framework and any potential changes into their costing. I could not comment beyond that. I do not have anything to share on the scale of that and whether it is minimal. However, I presume that is how they would do it.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Has the SSM given a direct instruction to AIB that it must bring its NPLs in line with European norms by the end of next year?

Mr. Jim O'Keeffe:

The ECB in its guidance notes sets out very clearly what the plan must include. There is a lot more to the plan regarding having an appropriate structure, etc., in place and the various elements of that. As part of that, the requirement is that the plan is ambitious. Obviously through various discussions and engagements, as we put our plan together we got an understanding of what an ambitious plan might entail. Once the plan was submitted the regulator opines as to whether the plan is ambitious enough and the likelihood of it taking place. We submitted that plan and the regulator confirmed that it met its ambition requirement to achieve normalised NPL levels.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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It is as a result of direct engagement between the regulator and the bank.

Before the vote, Mr. O'Keeffe said that €6.3 billion of impaired loans need to be reduced to €3 billion to €4 billion. Is that correct?

Mr. Jim O'Keeffe:

By the time we get to the end of 2019 we envisage that the €6.3 billion will have to have reduced. Some of that may have converted to NPE at that point because we will be working it through. Some of that may have converted and it is just walking through the probationary period at that point in time.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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The opening statement indicated that the bank expects over €3 billion will exit NPE status as customers complete the probationary period or conclude property sales. Does the €6.3 billion take account of that? Is the €6.3 billion after the €3 billion has moved out?

Mr. Jim O'Keeffe:

Exactly. As we look at it today, we have assets in the probationary period and we have assets that need collateral sales and they make up just over €3 billion of that group.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Therefore the €6.3 billion needs to be reduced by a further €2 billion to €3 billion to bring the bank to the European norm of 5% or so.

Mr. Jim O'Keeffe:

It is 5%.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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I return to Project Redwood. I am sure Mr. O'Keeffe reads all these press articles. On 23 February the Irish Independenthad an article which stated:

AIB has selected three distressed debt funds for the final round of bidding on its sale of soured commercial and residential loans, once worth €3.7 bn.

The Irish Independent understands Lone Star, Cerberus and Goldman Sachs outmuscled private equity rivals such as Apollo and Oaktree to clinch a position in the last phase of the race, which was launched last year and is referred to as Project Redwood.

No traditional banks made the cut, underscoring the lack of interest in these assets from this corner of the market.

AIB [...] is understood to have imposed tough sale conditions, with the successful bidder required to own a regulated lending entity in the State.

That is a pretty informed person, unless they made it up.

Mr. Jim O'Keeffe:

As we have journeyed through the discussion I hope the one thing we have conveyed to the Deputy is that, based on the work we are doing, the change in any potential portfolio sale can be significant as we go through it and we would voice that as a really critical part of why we have called out the commercial sensitivity of what we are about.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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How are those bits of information coming into the public domain?

Mr. Jim O'Keeffe:

It is like all bits of information to be fair, I think we all face some challenges in relation to that. I do not know where various entities take their feed from or what particular version of information they are working off.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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It is very detailed and it is very specific in relation to Project Redwood. Again, as a final point I reiterate how unsatisfactory it is that there is no accountability or transparency whatsoever. We cannot question, challenge or probe the composition of Project Redwood or to what extent, for example, there are customers - small business owners or buy-to-let investors - who have engaged, who have perhaps restructured and perhaps are honouring the terms of that restructure. The bank has characterised the sale as largely concerning those who have not engaged but we cannot challenge that because we do not have any information whatsoever and it would appear that if the sale proceeds along the current course, the first those people will hear about it is when they will get a letter informing them that essentially the deal is done and their loan has been sold. There are people out there running businesses, be it a farm or indigenous small manufacturing firm, and for months their loans have been gone through by funds and assessed through high level and detailed due diligence and the reports in the media are that the process will be done by June. The bank comes before the Oireachtas committee as a State-owned bank - 71% owned by taxpayers - and it gives zero information. I do not think that is good enough.

Photo of Pearse DohertyPearse Doherty (Donegal, Sinn Fein)
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To add to everything that Deputy McGrath has said, I think the committee has to reflect on the attitude that AIB has brought to this committee today in terms of denying the undeniable. Deputy McGrath is correct in what he said about news clippings. RTÉ has reported this. The Wall Street Journalhas reported this. Each step along the way of the story has been reported internationally since last November. While we will reflect on the position that we as a committee should take, I urge the bank - its CEO and its board - to consider the approach it has taken to the committee. The bank is accountable to the committee. It should come before the committee and answer questions. I think it is wrong, but I accept that we are not going to get answers today. AIB must rectify the situation immediately. I do not think this is something we as a committee should let go.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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We are coming to the end of our time, unfortunately, as we have to leave the room at 2 p.m. I reflect the same view that has been expressed right around this table. Part of our frustration with PTSB was its reluctance to give us information when it was in the public domain, and simply to confirm or deny what we are reading. I understand that paper never refused ink but, as Deputy McGrath outlined, there is a string of reports right across media outlets in relation to this project. The agenda of today's meeting was to discuss the sale of loans and it is clearly laid out in terms of the business of the meeting today. I join with Deputies McGrath and Doherty in saying there is a need for AIB to reflect on it and perhaps to come back to us with some sort of detail on the project itself. Those loans that are tied to a business or some sort of enterprise of one kind or another will not know anything about it, so we have to either tell them that the articles are untrue or that they are true and that they involve the following types of properties, within the loose definition of commercial confidentiality. We all understand that but we also understand the task that we have to undertake. Deputies Doherty and McGrath are correct. We will reflect on what the witnesses have said, or not said, today. I think AIB should do likewise. In the interests of providing calm and direction in terms of the marketplace, while protection of confidentiality and commercial sensitivity are important, I think we need information. That is what has come out of the meeting today.

The bank responded to a questionnaire from 13 June 2017 and said in April of that year it would enter into a binding contractual agreement to sell approximately €200 million of funds. Mr. Bourke alluded to that earlier. I am sure that in the context of that type of information and what we received earlier from PTSB, the same could be done with AIB. Let us as two parties to this reflect on the meeting today. I would love to go into matters more deeply but, unfortunately, time does not permit.

The other area I wish to ask about relates to a response the bank has given that no homes are affected but the concern is that businesses are involved. The bank has been working with iCare and the Irish Mortgage Holders Organisation and perhaps others, but we are aware of those I outlined. A lot of the information the bank has given and the work it has undertaken seems to be positive in terms of how it is progressing all of those things and it is proactive in terms of finding solutions, it is using charities and other organisation outside of the bank to deal with the home loans issue. I asked PTSB earlier whether it would consider reaching out now beyond that and improving the iCare product or option and exploring new and imaginative ways of dealing with that cohort of customers that still exists on the bank's books in order to keep them in their own home, to give them a sustainable solution in the context of where they are at with the bank and to provide them with some alternative.

Mr. Jim O'Keeffe:

I will respond to that point and then Mr. Bourke will come in on the wider point. I hope we have proven that we are very open to looking at different solutions. I know that the iCare management team has certain thoughts around progressing beyond the current enhanced mortgage-to-rent scheme we are looking at. We are very open to engaging with iCare in looking at that, because it is incumbent on us all, and I would hope that if there are solutions for the loans that we would undertake them. We have already shown that there is a willingness to provide discounts and write-offs of residual debt through the iCare programme so we could also see if there is a phase 2 that we would be willing to consider it and take it into account.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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Could the witnesses respond to the point about reflecting on what the members have said here today and the frustration that they have expressed?

Mr. Mark Bourke:

I will say a number of things. First, I apologise for any frustration that members feel because we did not in any way intend to create frustration. We did come here to talk about our approach to our plan to reduce non-performing exposures, NPEs, and that predominantly it is still about individual restructuring and that remains the case. I will come back to that in a moment.

The other point is that we have made, despite any press statements or otherwise, no public statement on any particular portfolio sales. There may be a lot of potentially precise information, or rather information that looks precise, but we have not made any statement. Our reason for that kind of approach is that until we are at an advanced position, the potential sale changes massively in terms of its shape. What we did come to do was to say we continue to look for engagement from individuals where we can restructure. We have restructured 95% of the €29 billion we have restructured through individual restructurings, and we continue to seek to do that. It is the lack of engagement that thwarts us from doing every single client and individually restructuring them.

We have written off €13 billion of debt in the four-year period so I apologise for any frustrations felt. We have no public statement despite all the various statements that have been made in the press. We will reflect on the committee's frustration and attempt to respond but we did want to respond in the context of our overall plan, which we must achieve.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I am not going to get any information out of the witnesses today. That is clear. We have asked them to reflect on it. We understand that things change as the bank moves along. I am just asking the witnesses to understand that at present I am sure there are lots of businesses and farmers all over the country, some of which have met here, that are drawing attention to their plight. I ask the witnesses to understand that. The bank has not issued any public statement. That may be the difficulty because now everyone is in a sweat over what is happening to their loan, what is going on and we are being contacted. We are trying to deal with this in a calm manner. We are asking the bank to be as constructive as it has been with the other issues that are before us and perhaps come back to us. The witnesses used the word "ambition". Could the bank use its ambition to resolve some of those difficulties within that basket of loans and use its ambition in terms of iCare and others to resolve some of the individual issues?

There is a banking union. Members of the Dáil and the Seanad are trying to find solutions to all sorts of problems, as are the witnesses. There are differences of opinion between one bank and another as to how to deal with businesses but all of the problems are central. The problems right across the board are all similar. With all the brains that are in, or left in, the banks, is there is no way that the union could not devise some way of dealing with these loans without putting them out to vulture funds? Could it encourage some mechanism by which a charity, housing authority or other organisation could be involved or where even something relative to business loans could be taken into some sort of holding area where all of the banks would have the same strategy and approach and deal with the matter in as human a way as possible?

Mr. Mark Bourke:

Mr. O'Keeffe will provide some specifics on this. Members can see that going from €28 billion in 2013 down to €6.3 billion happened because we have engagement from our customers and have worked with them. We would work with every single customer to get an individual restructuring. It is generally lack of engagement that essentially prevents us sorting out every single customer. That is what we would like to do. That is where we come at it. The evidence is clear from what we have achieved to date and even at the rate at which we-----

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I accept that. I am saying that within the context of how the bank works with other banks - I know they all protect their own patch, in some way, this issue, which is an issue for the State and the people we represent - this issue would in some way be discussed in an attempt to arrive at an overall position where the banks that have a common problem in all of these areas would find some way forward in terms of a solution. Alternatively, the bank may very well come back here and say it needs particular pieces of legislation or something needs to be changed. The problem will not resolve itself. If the bank went through the sales of businesses or properties and people are turfed out or deprived of their livelihood, they will come back to us and they will be a cost to the State anyway. We have had all these hearings and have had a lot of stonewalling from the banks. AIB has given us much more information than most and is proactive. Its numbers tell their own story but now we have got down to the nitty gritty, there is a need to resolve this once and for all. AIB has an input to make into it. It should not just leave it to somebody else. It should encourage the other banks to do likewise and encourage us to make the changes that are necessary but it should not sell them to the vulture funds.

Mr. Jim O'Keeffe:

In terms of the industry and how we have progressed, the enhanced mortgage-to-rent is a good example. It is something we pioneered that is, thankfully, being taken up by others in the marketplace, which is very positive. As I said earlier, we are certainly open to engaging and looking at other solutions. If we can do that through the banking industry or the BPFI, we will certainly do so. Let us take that away and look at it.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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I had written down a few points before the concluding remarks of Deputies McGrath and Doherty. We are clearly not getting the kind of information we want. The witnesses are apologising for that frustration but we are not getting what we hope and want to get. Commissioner Dombrovskis appeared before us a couple of months ago and told us that banks could sort out their problems. The vulture funds do not have to be the answer to the problems. The banks can do their write offs. The witnesses are saying it is because of lack of engagement. It surprises me that AIB has let these people sit with this situation with no engagement for as long as the witnesses say it has happened.

I will not get caught up in the issue of bonuses. We know nearly 1,000 people in AIB are on nearly €100,000 a year. I am not sure if they are all going to qualify for the bonuses. The witnesses might clarify that at some point in time. Are the witnesses really telling us that the only people AIB is trying to get rid of in terms of vulture funds are people with whom it has had no engagement? Is that what the witnesses are actually saying?

Mr. Jim O'Keeffe:

What we saying in terms of the potential portfolio sales is that these are all long-dated arrears where the engagement, if it existed at all, has not been meaningful.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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That is all the more reason to provide us with the information.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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The data.

Photo of Gerry HorkanGerry Horkan (Fianna Fail)
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For the bank to defend itself.

Mr. Jim O'Keeffe:

I will leave it to the Chairman to decide who makes the closing remark on this. The one message we do need to convey is that the best solution for all customers is for AIB to put in place a solution for them. With 1,500 people across the country, this is our ongoing acknowledgement that we did get €20.1 billion from the taxpayer. I know the committee is being contacted about cases and I know that some of them filter through but it is really important that the committee asks people to engage with us. If that engagement is not correct or appropriate, let us discuss that point but the message has to be there that regardless of what information we get to, people understand that they can engage with us to put restructuring in place. If it is appropriate, that will involve significant debt write-down, particularly where there is overhang of investment debt, but two people need to be in that discussion.

Photo of Michael McGrathMichael McGrath (Cork South Central, Fianna Fail)
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Are the witnesses giving a commitment to review the bank's position on not divulging information concerning Project Redwood and a commitment to come back to the committee with a considered response?

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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We will ask them to do that.

Mr. Mark Bourke:

We will certainly take that away.

Photo of John McGuinnessJohn McGuinness (Carlow-Kilkenny, Fianna Fail)
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I thank the witnesses for attending.

The joint committee adjourned at 2.10 p.m. until 2.00 p.m. on Tuesday, 27 March 2018.