Ladies and gentlemen, welcome to AIB Group first quarter trading.
[Foreign Language] Cette réunion est en cours d'enregistrement. Cette réunion est transcrite.
Ladies and gentlemen, welcome to AIB Group PLC Q1 trading update conference call hosted by Colin Hunt, Chief Executive Officer, and Donal Galvin, Chief Financial Officer. Throughout today's recorded presentation, all.
[Foreign Language] Cette réunion est composée.
Listen-only mode. Later, we will conduct a question-and-answer session. You may register for questions at any time by pressing star one on your telephone keypad. Now, I'm handing over to AIB's CEO, who will give you some brief opening remarks, and then we will open for Q&A.
Thank you. Good morning, everybody, and welcome to our trading update call for the first quarter of 2025. Thank you for your time this morning. The business has had a strong opening quarter. Our Q1 performance is ahead of plan, and we are reiterating all our guidance. We are continuing to grow our loan book prudently and to attract new customers, over 500 every single day, to AIB while making significant progress on the implementation of our strategy. Year-on-year, new lending increased by 14%, of which 38% was green.
Net interest income was in line with expectations, while net fees and commissions were up 7%. Costs were 3% up, in line with guidance, delivering a cost-to-income ratio of 43% in the quarter. We remain exceptionally well-capitalized, with the end-March CET1 ratio standing at 16.8%. We are, of course, conscious that the external environment is uncertain. That said, the domestic economy continues to perform solidly, with employment growth running at 2.5% and Modified Domestic Demand growing by 3% in real terms currently. Our own PMIs remain in expansion territory, and this morning, we released our manufacturing PMI with a very robust result. Trade tensions externally have increased and have the potential to be dampening of global growth and put upward pressure on global prices.
While growth domestically is expected to be more modest than experienced in recent years, it will still be comfortably ahead of other economies across the Eurozone and further afield. The Irish economy remains strong, characterized by high employment, 2.8 million people at work, 400,000 more than pre-pandemic, low leverage, high savings ratios, and a robust fiscal position. This management team has been ambitious in our strategy and conservative in our execution, conservative in our underwriting, in our provisioning, and in our guidance. That remains very much our modus operandi, and we are confident that we will meaningfully exceed our RoTE targets for 2025 and comfortably meet it in 2026. I'll stop there for the moment and hand over to you for your questions.
Thank you, sir. As a reminder, to ask a question, please signal by pressing star one. Rahul Sinha , JP Morgan, please go ahead.
Hello. Can you hear me?
Yes, we can.
Great. Thanks for the call. Can I have two, please? First, on the lending performance, it looked relatively weak compared to what we have seen in previous quarters, both on the gross loan side and on the new lending side. It will be interesting to hear what sort of backdrop you think that the bank is operating in and what is sort of driving that number, especially with the guidance reiterated at that 5% loan growth number. Secondly, you talked in the previous quarter around a greater than EUR 3.6 billion number for 2026. I would be interested to hear your thoughts on that number, given where the rate outlook is at the moment, please.
Brilliant. Hi, Donal here. With respect to lending, I would say that all of the business lines are performing well. If we take out some volatile FX movements, all of the growth was actually ahead of our own expectations. Typically, across our main business lines, the first quarter would be slower than the others. We fully expect to reach our lending targets as the year progresses. Very comfortable with that. With respect to NII, obviously, since results, lots of things have changed in the external environment. Most importantly, euro rate expectations have changed. Our guidance for 2025 was greater than EUR 3.6 billion, and that was assuming a year-end ECB deposit rate of 2%. We are comfortable to reiterate our guidance for 2025, and we have assumed in that that the ECB deposit rate would be 1.75%.
Even if rates were to go as low as 1.5%, given they're back-ended, we're very comfortable with 2025's net interest income. Obviously, as we go into 2026, that question becomes a little bit more interesting. What I would say is, I mean, consensus income for 2026 is just over EUR 3.6 billion, and we'd be comfortable with that level if you assumed an ECB deposit rate of around 1.75%. If you have a different view on rates, I think the best thing to do is just look at our sensitivity tables that we would have published. A 25 basis points reduction is EUR 90 million, and so a 50 basis points reduction would be EUR 180 million.
Obviously, the curve is pretty sensitive and volatile at the moment, but overall, guidance for 2025 very firmly confirmed, and 2026, I think, still a bit variable depending on the rate outturn, but that's as much color as I can give at the moment.
Thank you. We will now move to our next question. Christopher Cant, Autonomous, please go ahead.
Good morning. Thanks.
Good morning, Chris. We are not hearing you, Chris.
Sorry. The joys of too many mute buttons. Good morning. Thanks for taking my questions. Hopefully, you can hear me now. I just wanted to follow up on NII and prod you a little bit on the outlook into 2026. Thanks for the sort of updated thinking given the shift in the rate environment. How should we think about deposit costs as rates come down? When I look at system data, the pass-through to sight deposits was de minimis in Ireland. The increase in average deposit costs was essentially driven by terming out. When I look at the front book and back book pricing, it feels like that's already starting to roll over in terms of the cost of term deposits. How should we be thinking about how low that might realistically go in the sort of lower rates environments you're now thinking about?
If we're at 1.75 in 2026, is it just a case of assuming that the term deposit rates come down to more or less that sort of level? Thank you.
Yeah, look, a couple of things. First of all, we would start off with the quantum of liabilities, what we saw in the first quarter. On the face of it, it looks flat enough. Our ROI deposit book is up slightly, U.K. book down slightly. We are pretty comfortable with what we are seeing there. I think we previously said that liabilities quantum would grow by at least 2%, possibly a little bit more. As a starting point, I would just get comfortable with that. Overall, what we are seeing on the betas is very consistent with what we had talked about at the year-end. I think for Q1, the deposit beta was 18%, and the movements that we are seeing into term have slowed down. We actually announced yesterday some rate cuts in our term deposit rate, the one- and two-year rate.
Obviously, as rates change, we keep all of our asset and liability pricing under review.
We'll now move to our next question from Alvaro Serrano from Morgan Stanley. Please go ahead.
Thanks. You've touched on the key guidance, so thanks for that. I'm just wondering on volume growth, following up from the first question, are you seeing, in terms of the new production in corporates in particular, any sort of delayed sort of loan growth decisions or investment decisions as a result of tariffs? Second, can you remind us where you stand in provision overlays, where they are as of Q1? Thanks.
Okay. I'll let Donal deal with your second question, but on the first one, we certainly have seen nothing to date in relation to reduced corporate demand on foot of the increased trade tensions. As Donal said earlier, the performance of the business in the first quarter was actually ahead of our expectations. We're actually ahead of plan in the first quarter, and we're seeing no impact at the moment from those increased trade tensions. We continue to monitor our early warning indicators very, very closely. These are very elaborate suites of early warning indicators, which are designed to highlight any signs of emerging stress in the loan book, and they remain exceptionally stable in the first four months of the year.
Yeah. Hi, Donal here. Just with respect to provisioning and ECLs, I'll answer that in two ways. At the year-end, we would have had post-model adjustments in place of just over EUR 300 million. What will happen, or certainly how we will approach provisioning for the half year, is twofold. Firstly, we're kind of in the middle of rerunning our macro scenarios. Similar to everyone else, this is a challenging exercise given the range of potential outcomes. Once we settle on those, we'll have a conversation with our board around the weightings that we would apply. At that stage, I'd like to think that we'll be able to capture all of the range of outcomes from whatever geo tariff effects we imagine. As a worst-case downside, I'd probably just draw you to our sensitivity tables.
I don't imagine that any of our severe scenarios would be any worse. If you weighted everything in ECLs, that would be a maximum impact of EUR 600 million. I don't think we're anywhere near that just yet, but that's just to give you an idea of the process. More importantly, what I would say for Q1 is that business performance was strong, asset quality remains very strong because the main drivers, such as employment, GDP, asset prices, held up very, very well. We are conscious to the changing external environment. We will ensure that we are pretty comprehensive and forward-looking in our approach to provisioning, but we would believe we are very well provided for with cover and PMAs. More importantly, whatever the environment is, we will continue to run business with our customers throughout the cycle.
Grace Dargan. Barclays, please. Please go ahead.
Hi, morning. Thank you very much for taking my questions. I just wanted to ask around your commentary on the directed buyback in today's AGM. I note the comments in the RNS. Are you saying that even if approval is given today, that firstly, you may not go ahead with the directive with the Irish government given the price? Secondly, if it does get rejected at today's AGM, what do you see as the kind of key options for you going forward in terms of the EUR 1.2 billion that has effectively already got regulatory approval? Thank you.
Yeah. Thanks very much indeed, Grace. We have regulatory approval for that. We got it back in before we released our full year numbers for 2024. That regulatory approval has a validity of a year. Now, today, we're going to AGM. As you know, we have that motion before our shareholders for their approval. Assuming we get that approval, we don't know yet. We'll know later on this afternoon. Assuming we get that approval, it'll then be up to the board to decide if proceeding with the transaction is in the best interests of the company. I think it is fair to say that we are eager to transact. The government is eager to transact, and it will be up to the board to make that decision on the basis of the best interests of the company.
In the event we get that approval at AGM today, it has a validity and a lifespan that extends to the close of business on Thursday of next week, so on the 8th of May. We have a bit of time on our hands, and let's wait and see what happens over the course of the next number of days. As of today, first order of business is getting that approval through the AGM, and then we will be having, hopefully, a discussion at board in relation to proceeding or not in the best interests of the company.
Diarmaid Sheridan from Davy. Please go ahead.
Hey, good morning. Can you hear me okay?
Yes.
Good morning. Too, if I can, please, maybe just tangentially related to the last question on capital returns. Obviously, you've got a very high level of capital sitting on your balance sheet now. I mean, is it reasonable to expect that you might start to move to interim kind of distributions and kind of normalize that piece and look to manage your capital on kind of a more frequent basis, just given the level of capital you have and the capital you're generating? First question. Then just secondly, on costs, obviously, up and in line with expectations. Just wondering if you have any kind of more detail that you could provide to us around how you get back down to kind of guidance for 2026 of around that EUR 2 billion mark. That would be great. Thank you.
Okay. Diarmaid, thanks for your questions. Just in relation to dividends and interim distributions, you are quite correct. We are in an exceptionally strong capital position. I've said on a number of occasions that we have a strong preference to see a normalized pattern of distributions in a normalized bank. That is a discussion we have not had at board as of yet, and I'm not going to preempt that discussion. It is a discussion that will be taking place in the context of the first half results. I'm not going to pre-announce anything today. It would be entirely inappropriate of me to do it, and I would be running ahead of the discussion that we will be having with the board. I want to make it clear that we want to see a normalized pattern of distributions in a normalized financial institution.
Yeah. Hi, Diarmaid. With respect to the costs, obviously, we've a number of medium-term targets. RoTE of 15% really is the main one, and we'll meaningfully exceed that in 2025. We'll certainly look to do the same in 2026. Our CET1 ratio, 14% or greater than 14%, is obviously equally a North Star for us and helps define our return ambitions. Lastly, obviously, underpinned by our costs and our cost target of less than EUR 2 billion in 2026. Organizationally, we're very focused on this. You see year-on-year that the overall headcount has flatlined and is beginning to come down. We have a number of different initiatives that we are executing, not just to reach a 2026 target, but more around, I would say, ongoing perpetual operational efficiency management.
We're very focused on reaching and exceeding all of our targets, one of which is the EUR 2 billion cost target in 2026.
The next question is from Chris Hallam from Goldman Sachs. Please go ahead.
Yeah. Morning, everybody, and thanks for taking my questions. Two, please. Again, on capital, you'd previously flagged 120 basis point tailwind from Basel IV. Capital generation continues to be strong. In addition to that, is there anything else to call out? Just in terms of capital, the CET1 ratio you've given today looks particularly strong. My second question then is a little bit sort of post-quarter end, but on deposit trends, are you seeing anything changing in terms of deposit trends by customer type? Obviously, you've given some color on the mix shift, but post-quarter end, have you seen any sort of, let's say, liquidity builds from customers, for example? Obviously, customer deposit growth was about 5% in the first quarter. I think earlier in the call, you mentioned 2% liability growth for the full year. Does that feel increasingly cautious as an assumption?
What sort of NII sensitivity should we expect to build in from higher deposit balances? Thank you.
Yeah. The savings backdrop is very, very strong in Ireland. We have traditionally had a very, very high savings ratio. I think pre-pandemic it was running about 10%. It is currently running at about 15% in terms of the savings ratio. You are seeing that that is obviously an important balance for our business. We have seen a significant moderation of pace in terms of the migration from demand deposits into term deposits. That has been a continuing feature through the opening months of 2025, and that continued to be the case through the months of April. The flow is probably running at the moment something of the order of a third of what it was if you go back 12 months ago.
Yeah. That is what I mean, the flow from demand into term. Yeah. I would just add, with respect to our core franchise in Ireland, it is mainly within the SME kind of mid-sized corporate sector. We do not bank the big US or international FDI firms, so that is, and we do not compete for liabilities in that NBFI space. We will not and would not expect to see any volatility from that perspective. You asked a question there around capital generation. Q1, very strong performance-wise. Overall, obviously, we had a benefit from Basel IV. I talked about previously over on 120 basis points. We had profitability over on 80 basis points. We made a dividend deduction of around 50 basis points, and we had some other items which had a benefit of around 20 basis points, which is mainly the deferred tax asset.
At the year-end, I would kind of talk about some potential headwinds coming from modeling and model outputs and IRB outputs and stuff like that. We do not have any line of sight on any changes there. We do have a model which is up for approval at the moment, which is for our Climate Capital project finance portfolio. We are awaiting the outcome of that from the regulator. I would not have anything to say on that side, positively or negatively. Hopefully, for the half year, we will be able to have a little bit more color there. Obviously, overall capital position, capital outturn for Q1, exceptionally strong.
The next question is from Denis McGoldrick with Goodbody. Please go ahead.
Morning, Colin and Donal. Thank you for taking my questions. Just two, please, if I may. One is just on deposits again. Maybe if you could just elaborate a little bit more on your expectations for deposit growth for the full year in the context of them being obviously in line quarter-on-quarter. I guess linked to that, maybe how that informs your thinking on the structural hedge and the quantum of that, or if your thinking has changed in any way on how the structural hedge goes from here. Thank you.
Yeah. Good question. Overall, I mean, just to reiterate around deposit flow is very much in line with expectations. Let's be honest, some of this is going to depend on the environment that we're coming into in the second half of the year. If there is any nervousness on individual or business side, we're inevitably going to see an increase in unit holding liabilities. To date, for Q1, haven't seen anything that we weren't expecting. With respect to the structural hedge overall, obviously, I would have talked previously about the additional quantum we executed in January. Very comfortable with the overall size. We keep this under review. I mean, if the liability mix and the balance sheet mix changes, then we react to that. If we do see any changes, we certainly would have the capacity to increase that hedge.
That is something that we are just currently under review at the moment. I would not take it for granted that we will necessarily do anything. As you can imagine, we keep a watching brief at all times.
Thank you. We will now take our next question from Borja Ramirez from Citigroup. Please go ahead.
Hello. Good morning. Thank you very much for taking my question. Good morning. Thank you very much for taking my questions. I have two. Firstly, if you could kindly remind me what was mentioned on there was a question on NII 2026. Sorry, I didn't fully understand. I think linked to this, I would like to ask what is your NII benefit from the yield curve steepening? Because not only do you have the structural hedge, you also are possibly the European bank with the highest amount of cash in the balance sheet. I think it was 27% by year-end. That can be reinvested into a fixed income portfolio. Lastly, you also have a sizable fixed rate mortgage loan book that can be repriced at higher rates.
I would like to ask what could be the NII benefit in the future years from the steepening of the yield curve? Thank you.
Hi, Borja. Donal here. Yeah. What I've said for 2026 is if we look at consensus NII, which is just over EUR 3.6 billion, if the ECB deposit rate was 1.75%, we'd be comfortable enough with that. If you imagine that interest rates are going to be any different, the sensitivities that we would have disclosed at year-end, which I would say still hold, would indicate a 25 basis point reduction would have an impact of EUR 90 million. I'd say for now, that's as clear as I can be. The yield curve steepening debate is unfortunately one which seems to be flattening away in front of our very eyes. Look, rates are volatile overall at the moment. A couple of weeks ago, obviously, rates were four- or five-year rates were 60 basis points higher.
You could see a real effect there where they are today. I don't see too much benefit, to be perfectly frank. Overall, as you correctly say, we have a lot of excess cash sitting with the central bank. What we have witnessed is a widening of spreads in credit markets, particularly sovereigns, particularly SSAs. We do see on a go-forward basis that we will see those widened level remains, especially with the expanded plans coming out of Germany. We will be looking to increase our fixed income portfolio. It's not a momentary opportunity. We think that spreads are structurally going to remain wider in the Eurozone. We look to add between EUR 3 billion and EUR 5 billion in the coming 12-18 months, really in the SSA space, maybe in the sovereign space. We will keep that position under review.
Look, rates remain volatile, and we keep all options on the table, but would be able to take advantage of either steeper curves or wider rates.
I think that's it for the moment. Donal and I have an AGM to attend now. We've got some very important proposals before the AGM. We look forward to engaging with our shareholders later this morning and to catching up with you all over the coming weeks. Thank you very much indeed. Good morning.
Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.