Commission Decision (EU) 2015/218
of 7 May 2014
on the State aid Nos SA.29786 (ex N 633/09), SA.33296 (11/N), SA.31891 (ex N 553/10), N 241/09, N 160/10 and SA.30995 (ex C 25/10) implemented by Ireland for the restructuring of Allied Irish Banks plc and EBS Building Society
(notified under document C(2014) 2638)
(Only the English text is authentic)
(Text with EEA relevance)
THE EUROPEAN COMMISSION,
Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article 108(2) thereof,
Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,
Whereas:
Allied Irish Banks, plc (‘AIB’) and the EBS Building Society (‘EBS’) have each received State aid individually, which was notified to the Commission in separate procedures. EBS and AIB merged on 1 July 2011 (‘the Bank’), and the Commission assessed the aid granted to the Bank in a separate procedure. Hence there are three State aid procedures relating to AIB, EBS and the merged entity, respectively.
Following this initial capital injection, the Irish authorities submitted an initial restructuring plan for AIB on 13 November 2009, followed by a number of exchanges. On 4 May 2010, the Irish authorities submitted an updated restructuring plan, which again was followed by a number of exchanges between the Commission and Ireland.
The Commission received comments from EBS and two other interested parties.
In July 2011, EBS merged with AIB and became a fully integrated subsidiary of the Bank. As a result, EBS ceased to exist on a standalone basis. Therefore, the Opening Decision, which related to EBS as a standalone entity, became nugatory and the Commission decided not pursue the procedure any further.
In the years preceding the financial crisis, AIB was a diversified financial services group which offered a full range of personal and corporate banking services. In 2008, it had a balance sheet size of EUR 182 billion. It was one of the two largest banks in Ireland and had market shares of about 35 % of personal current accounts, 27 % of mortgages, 46 % of savings and 41 % of SME current accounts.
Prior to that crisis, AIB expanded fast, with a particular focus on new lending to the Irish property market and a strong reliance on wholesale funding. When the global financial crisis broke out, which hit the Irish economy and notably the Irish property market particularly hard, the vulnerability of AIB's business model became evident and the need for State support unavoidable.
In July 2011, AIB was merged with EBS.
In the years preceding the financial crisis, EBS was Ireland's largest building society and the eighth largest financial institution operating in Ireland with total assets of EUR 21,5 billion in 2009. Building societies are mutual organisations which have no shareholders but instead are owned by their members, who are also their clients. Their objective is to collect deposits and provide loans. Profits are used to adapt interest rates to the advantage of the members, or are accumulated as reserves.
EBS offered traditional retail banking products to its members (savings and mortgages) in line with its goal as a building society. It also had a treasury department offering boutique services to corporate clients, professional firms and credit unions. From 2005 onwards, EBS expanded its activities in commercial property lending, building up a substantial loan book in that segment. EBS suffered from the downturn in the Irish economy at large and in particular from the collapse of commercial real estate prices. Access to funding gradually deteriorated and massive impairments on its commercial and mortgage loan books led to a reduction of EBS's capital.
Since 1 July 2011, EBS has been a fully owned subsidiary of AIB. It offers mainly mortgage and deposit services on the Irish market. EBS continues to operate under its own brand name.
Under the terms of the Programme, the participating credit institutions had to prepare recapitalisation plans to comply with the additional capital specified by the PCAR/PLAR and the required amount of capital had to be in place by the end of July 2011.
On 31 March 2011, the Irish Minister for Finance announced the restructuring of the whole Irish banking sector. It was decided to merge AIB and EBS; the thus newly created Bank was to become a pillar bank of the reformed Irish banking landscape.
On 26 May 2011, the Minister, AIB and EBS signed an acquisition agreement providing for the acquisition by AIB of EBS (following its conversion into a private company and receipt of all requisite regulatory approvals). Under the terms of this agreement, EBS is a fully owned subsidiary and benefits from AIB's full support while continuing to operate under the EBS brand. The merger of the two entities involved the demutualisation of EBS and its conversion into a fully licensed bank, followed by the acquisition by AIB of its share capital for a nominal consideration. Following merger control clearance on 27 June 2011, the merger was completed on 1 July 2011.
As of 15 July 2011, 99,8 % of the Bank's share capital is held by the Irish State.
The Bank is positioned as a full-service bank, primarily focused on Ireland and offering a wide range of banking products and services through an extensive distribution network. The Bank has a limited overseas presence in Great Britain. In the latter part of 2012 AIB commenced organising its internal structure to a more customer centric model comprising the following key segments: Domestic Core Bank, AIB UK and Financial Solutions Group (‘FSG’). Reporting on this new segment basis commenced in 2013.
The Financial Solutions Group was established in 2012 to assist SME and personal customers facing difficulties in complying with their loan commitments and to execute the Bank's asset deleveraging plan.
Table 1 | |
The Bank — Selected Financial Data 2013 | |
31.12.2013 | |
|---|---|
Total assets (EUR) | 118 bn |
Loans and receivables to customers (EUR) | 66 bn |
Operating profit/loss before provisions (EUR) | 0,445 bn |
Customer deposits (EUR) | 66 bn |
Loan to deposit ratio (%) | 100 % |
Risk weighted assets (EUR) | 62 bn |
Core Tier 1 Ratio (%) | 14,3 % |
Total staff (Full Time Equivalent) | 11 431 |
Source: The Bank's restructuring plan, September 2012; AIB 2013 Annual Report. | |
Table 2 | |
The Bank's positioning in SME, personal, mortgage and savings markets | |
(%) | |
Market shares | |
|---|---|
SME main current account | 40 |
Personal main current account | 37 |
Mortgage sector — outstanding balances | 31 |
Savings market (AIB and EBS combined) | 40 |
Source: Complementary submission of March 2014; market shares pertain to December 2013. | |
AIB's need for State aid was the result of the impact of the global financial crisis, combined with AIB's excessive growth, strong reliance on wholesale funding, its exposure to the Irish property market and inadequate risk management.
The deterioration of the Irish property market, the subsequent falls in property prices as well as the slowdown of the Irish economy as of 2008, led to a significant deterioration of AIB's asset quality and considerable impairments of its loan book, which reduced the bank's capital cushion.
To fund its rapid expansion, the bank increased its dependence on wholesale funding from around 35 % in 2004 to 42 % in 2006, while the ratio of the loans to deposits (‘LDR’) increased from 101 % in 2002 to 157 % in 2007.
Similarly, the financial crisis impacted EBS's financial position, in particular as a consequence of the sharp reduction in property values in Ireland. Prior to that crisis, EBS had built up a considerable loan book in the segment of commercial property lending.
EBS had to take large impairments on its commercial and mortgage loan books. EBS's access to funding gradually deteriorated and ultimately reached a complete shutdown. Consequently, due to its vulnerable position, EBS was forced to make demands on the State's support measures. EBS needed funding guarantees, asset transfers to NAMA and capital injections.
Due to the difficulties faced by AIB and EBS, the State had to provide considerable support to AIB and EBS individually, as well as to the Bank (the merged entity).
Moreover, the State granted guarantees on Emergency Liquidity Assistance provided by the Central Bank of Ireland.
The Bank's combined total recapitalisation measures (including preference shares and contingent capital instruments) amount to EUR 20,775 billion. As a result of the different capital injections, the Irish State, through the National Pension Reserve Fund Commission (‘NPRFC’), owns 99,8 % of the ordinary shares of the Bank.
Table 3 | |||
Overview of aid measures granted to AIB, EBS and the Bank (merged entity AIB/EBS) | |||
(amounts approved and actually granted differ in some cases) | |||
Type of measure | Amount(in EUR bn) | Remuneration | |
|---|---|---|---|
Measures in favour of AIB (standalone) | |||
a | Guarantees under the CIFS scheme (amount of guaranteed liabilities) | up to 133 | In accordance with the CIFS scheme |
b | Guarantees under the ELG scheme (amount of guaranteed liabilities) | up to 62,5 | In accordance with the ELG scheme |
c | Asset relief measure — transfers to NAMA | 20,4
(estimated aid amount = 1,6)
33
| n.a. — average discount was approximately 56 % |
d | Recapitalisation in the form of preference shares, May 2009 | 3,5 | 8 % p.a. or ordinary shares in lieu |
e | Recapitalisation in the form of new equity capital, December 2010 | 3,7 | |
f | State guarantee on Emergency Liquidity Assistance (‘ELA’) until Q2 2011 | [5-15]34 | |
Measures in favour of EBS | |||
g | Guarantees under the CIFS scheme (amount of guaranteed liabilities) | up to 14,4 | In accordance with the CIFS scheme |
h | Guarantees under the ELG scheme (amount of guaranteed liabilities) | up to 8,0 | In accordance with the ELG scheme |
i | Asset relief measure — transfers to NAMA | 0,9 (estimated aid amount = 0,1) 33 | n.a. — average discount was approximately 57 % |
j | Recapitalisation in the form of Special Investment Shares (SIS), May and December 2010 | 0,625 | Can be remunerated through the pay-out of a dividend if there are sufficient distributable reserves |
k | Recapitalisation through a direct grant in the form of a promissory note, December 2010 | 0,250 | Not remunerated separately |
l | State guarantee on ELA | [0-5] | |
Measures in favour of the Bank (the merged entity) | |||
m | Recapitalisation in the form of ordinary shares (‘placing’), July 2011 | 5,0 | |
n | Recapitalisation in the form of contingent capital notes, July 2011 | 1,6 | Fixed mandatory interest rate of 10 % p.a. |
o | Recapitalisation in the form of a capital contribution, July 2011 | 6,1 | Nil consideration |
Combined total recapitalisation (d + e + j + k + m + n + o) | 20,775 | ||
Source: Irish authorities and restructuring plans for AIB and EBS and the Bank. | |||
In November 2009, the Irish authorities submitted a first restructuring plan for AIB which set out first proposals on how AIB should return to viability. Ireland submitted an updated version of the plan in May 2010 which, among other things, provided for further disposals (AIB's Polish, UK and US subsidiaries) to meet the new minimum regulatory capital requirements announced by the Financial Regulator under the PCAR in March 2010.
The EBS restructuring plan, submitted on 31 May 2010, provided for an internal restructuring of EBS to ensure viability, combined with a quick sale to a third party. According to that plan, EBS would exit from commercial property lending and refocus its activities on retail savings and mortgage business. EBS would reduce its reliance on (short-term) wholesale funding and instead focus on retail deposits.
Business divestments that have generated EUR 3,3 billion of Core Tier 1 Capital:
Sep 10
Sale of Goodbody Stockbrokers
Nov 10
Sale of 23,9 % stake in M&T Corporation
Feb 11
Transfer of Anglo Irish Banks EUR 9 billion deposits to AIB
Apr 11
Sale of 70,36 % stake in Polish BZWBK
Apr 11
Sale of 50,00 % stake in Polish BZWBK Asset Management
May 11
Sale of 49,99 % interest in Bulgarian American Credit Bank
Aug 11
Sale of AIB International Financial Services
Aug 11
Sale of AIB Jersey Trust
Jan 12
AIB announces decision to end joint venture with Aviva Life Holdings Ireland Ltd
Apr 12
AIB announces decision to cease operations in the Isle of Man and Jersey
Apr 12
Sale of business of AIB Baltics
Jun 12
Sale of AIB Investment Managers
Aug 12
Sale of interests in Polish property funds
Asset transfers of EUR 21,3 billion to NAMA,
Asset deleveraging arising from PLAR 2011 of EUR 20,5 billion (complete),
Liability Management Exercises/Debt Buy back carried out in 2009, 2010 and 2011 respectively, contributed EUR 5,4 billion of Core Tier 1 Capital:
Jun 09
Tier 1 Hybrid buy back + EUR 1,1 billion capital contribution
Mar 10
Tier 2 bond buy back + EUR 0,4 billion capital contribution
Jan 11
Tier 2 bond buy back + EUR 1,5 billion capital contribution
Jul 11
Tier 1 and Tier 2 bond buy back + EUR 2,1 billion capital contribution
Jun 10–Feb 11
Series of EBS Tier 1 and 2 bond buy backs + EUR 0,3 billion capital contribution
Branch closures (68 in Ireland, 22 EBS outlet closures, 22 AIB UK branches),
- Early retirement and voluntary severance programme: a reduction of +/– 2 877 FTE37 at 31 December 2013, with further exits planned,
Complete replacement of Board and senior management positions (as compared to the pre-September 2008 profile),
Refocus of business on Ireland, offering corporate and retail banking services.
On 28 September 2012, the Irish authorities submitted a restructuring plan for the Bank covering the period 2012 to 2015. The Irish authorities amended and supplemented that plan repeatedly, and the restructuring period was eventually fixed to comprise the years 2014 to 2017.
The Irish authorities submitted a base scenario, an alternative base scenario based on more prudent assumptions, and an adverse scenario with the aim of demonstrating the Bank's ability to achieve long-term viability.
By the end of the restructuring period, the Bank plans to return to being a solid, profitable and well-funded institution with sound capital ratios and a more traditional business model. The plan sets out a business strategy that positions the Bank as a smaller full-service bank, primarily focused on Ireland, as compared to the internationally diversified financial services group that it used to be in pre-crisis times. The Bank's operating structure is based on three points of focus — the Domestic Core Bank, AIB UK (the UK business comprising business in Great Britain and Northern Ireland), and the Financial Solutions Group, created in 2012.
- (a)
the re-orientation of the Bank into a smaller bank with an improved funding profile, primarily focused on Ireland;
- (b)
improved levels of profitability through NIM enhancement, cost reduction measures and significantly reduced impairment charges;
- (c)
a strong capital buffer.
In the base case, it is assumed that Gross Domestic Product (‘GDP’) in Ireland will grow by 2,2 % in 2014 and accelerate in 2015, 2016 and 2017 to 2,8 %, 3,2 % and 3,2 % respectively. GDP in the United Kingdom is expected to grow by 1,9 % in 2014, 2,1 % in 2015, 2,5 % in 2016 and 2,5 % in 2017.
Employment is expected to improve throughout the restructuring period, with an expected growth rate of 0,8 % in 2014, 1,5 % in 2015, 2 % in 2016 and 2 % in 2017.
Housing and construction are expected to rebound from very depressed activity levels. House prices are forecasted to increase by 3 % in 2014, by 3 % in 2015, by 2,5 % in 2016 and 2,5 % in 2017.
Table 4 | ||||||
The Bank's financial results and financial projections under the base scenario | ||||||
Key financial indicators | 2012Actual | 2013Actual | 2014Plan | 2015Plan | 2016Plan | 2017Plan |
|---|---|---|---|---|---|---|
— Capital and Risk Weighted Assets (‘RWAs’) | ||||||
— Core Tier 1 (‘CT1’) ratio or Common Equity Tier 1 (‘CET1’) ratio (%) | 15,2 % | 14,3 % | [10-20 %] | [10-20 %] | [10-20 %] | [10-20 %] |
— Capital buffer (EUR m) vs. 8 % CT1/CET1 | 5 133 | 3 934 | [0-5 000] | [5 000-10 000] | [5 000-10 000] | [5 000-10 000] |
— RWAs (EUR m) | 71 417 | 62 395 | [55 000-65 000] | [55 000-65 000] | [55 000-65 000] | [55 000-65 000] |
— Profitability | ||||||
— NIM — excluding ELG (%) | 1,22 % | 1,37 % | [1,5-2,25 %] | [1,5-2,25 %] | [1,5-2,25 %] | [1,5-2,25 %] |
— Cost income ratio | 123 % | 77 % | [60-70 %] | [50-60 %] | [45-55 %] | [45-55 %] |
— Profit after tax (EUR m) | (3 557) | (1 597) | [0-750] | [0-750] | [250-1 250] | [250-1 250] |
— Return on equity (‘ROE’)39
| – 37,0 % | – 21,5 % | [0,5-10 %] | [0,5-10 %] | [5-15 %] | [5-15 %] |
— Funding | ||||||
— LDR | 115 % | 100 % | [95-120 %] | [95-120 %] | [95-120 %] | [95-120 %] |
— ECB reliance (% of total liabilities40) | 20 % | 12 % | [10-20 %] | [< 10 %] | [< 10 %] | [< 10 %] |
— Others | ||||||
— Gross loans and advances to customers (EUR m) | 89 872 | 82 851 | [70 000-80 000] | [65 000-75 000] | [65 000-75 000] | [65 000-75 000] |
— Total Assets (EUR m) | 122 501 | 117 734 | [100 000-150 000] | [100 000-150 000] | [100 000-150 000] | [100 000-150 000] |
— FTE (number) | 13 429 | 11 431 | [10 000-15 000] | [8 000-13 000] | [8 000-13 000] | [8 000-13 000] |
Source: The Bank's restructuring plan and complementary submission of 10 January 2014, AIB 2013 annual report. | ||||||
The Bank is progressively regaining access to the wholesale market. In January and September 2013, the Bank issued two Mortgage Bank bonds of EUR 500 million each. In October 2013, the Bank issued a credit card securitisation for EUR 500 million, which was the first ever of its kind issued by an Irish bank. In November 2013, the Bank managed to place EUR 500 million of 3 year debt fully unsecured. This was the Bank's first unguaranteed debt transaction since 2009. In March 2014 the Bank issued a EUR 500 million 7 year secured Asset Covered Securities bond. This is the longest dated benchmark public Asset Covered Securities bond by AIB since 2007.
Table 5 | ||||
The Bank's liquidity ratios | ||||
(%) | ||||
Liquidity ratios | 2014Plan | 2015Plan | 2016Plan | 2017Plan |
|---|---|---|---|---|
LCR | [75-150] | [75-170] | [75-170] | [75-170] |
Minimum LCR included in Regulation (EU) No 575/2013 | 60 | 70 | 80 | |
Net Stable Funding Ratio | [70-120] | [70-120] | [70-120] | [70-120] |
Source: the Bank's restructuring plan. | ||||
The Bank projects to return to profitability in 2014, with a forecast profit after taxation of EUR [0-750] million, which will reach EUR [250-1 250] million in 2017. The return on equity (‘ROE’) is expected to be [0,5-10 %] in 2014 and [5-15 %] in 2017. This will be achieved in the following way.
Table 6 | |||||
The Bank's forecasted evolution of average yields on assets and liabilities | |||||
(%) | |||||
Average yield | 2013Actual | 2014Plan | 2015Plan | 2016Plan | 2017Plan |
|---|---|---|---|---|---|
Average yield — New lending | [3-7] | [3-7] | [3-7] | [3-7] | [3-7] |
Average yield — Back-book loans | [2-5] | [2-5] | [2-5] | [2-5] | [2-5] |
Average yield — Total loans | 2,74 | [2-6] | [2-6] | [2-6] | [2-6] |
Average yield — Deposits (including current accounts) | – 1,54 | [– 0,5 to – 2,5] | [– 0,5 to – 2,5] | [– 0,5 to – 2,5] | [– 0,5 to – 2,5] |
Source: The Bank's restructuring plan and complementary submission of 20 March 2014. | |||||
Second, the discontinuation of the ELG scheme as per 28 March 2013 will bring an improvement in the NIM after ELG costs since the guarantee fees paid to the State will be reduced. They amounted to EUR 0,4 billion in 2012 and are forecasted to be only EUR 8 million in 2017.
Third, with a view to reaching sustainable pre-provision operating profits, the Bank plans a further reduction of its operating costs from EUR 1,8 billion in 2012 to EUR [1,0-1,5] billion in 2015 and to EUR [1,0-1,5] billion in 2017. The two key initiatives underpinning this projected reduction are the Retirement and Voluntary Severance Scheme and the pay and benefits review announced in 2012. In this respect, the Bank projects a reduction of its staff of respectively [20-40] % by 2015 and of [20-40] % by 2017 as compared to 2012 levels, leading to a total decrease of [2 000 to 5 000] staff.
Table 7 | |
Alternative Base Scenario: main changes in the assumptions as compared to the base scenario | |
Variable | Alternative base scenario (change as compared to the base scenario) |
|---|---|
RWAs | Includes the results of the BSA and ignores, for prudency reasons, the impact of the planned deployment of both new and updated IRB models, still needed to be approved by the CBI58. As a result of those two changes, RWAs have increased by EUR [3-8] billion, EUR [3-8] billion, EUR [3-8] billion and EUR [3-8] billion, as compared to the base scenario for the years 2014, 2015, 2016 and 2017 respectively. |
Provisions for loan impairment | Includes the results of the BSA exercise fully. The BSA exercise identified an additional provisioning need of EUR 1,1 billion, of which only EUR […] billion were reflected under the base scenario. This means that the provisions are EUR […] billion higher under the alternative base scenario than in the base scenario in 2013, and reflects a more linear decrease towards pre-crisis level. This implied an additional provision charge of EUR [500-1 000] million in 2014, EUR [500-1 000] million in 2015, EUR [0-500] million in 2016 and [0-500] million in 2017 as compared to the base scenario. |
New lending | Considers that new lending for the Commercial, Corporate and SME's portfolio for each forecasted year is limited to the forecasted GDP growth. This implies that the cumulated new production over the restructuring period is EUR [2-4] billion less than in the base scenario. (The new lending assumptions impacts RWAs by EUR [0-3] billion, EUR [0-3] billion, EUR [0-3] billion and EUR [0-3] billion for the years 2014, 2015, 2016 and 2017 respectively). |
Funding mix | Includes a higher proportion (by 2 % to 3 %) of long term funding until 2016 as compared to the base scenario. |
Cost of funds | Considers that the evolution of the cost of deposits for retail fix term accounts, SME and Corporate deposits follows more closely the evolution of the projected ECB base rate, as compared to the base scenario. |
Source: The Bank's restructuring plan and complementary submission of 11 February and 27 March 2014. | |
According to those more prudent assumptions, the Bank will not return to profitability before 2016, with a forecasted profit after tax of EUR [0-750] million, which will reach EUR [250-1 250] million in 2017. ROE is expected to be [0,5-10] % in 2016 and [5-15] % in 2017.
Table 8 | ||||
The Bank's financial projections under the alternative base scenario | ||||
Key financial indicators | 2014Plan | 2015Plan | 2016Plan | 2017Plan |
|---|---|---|---|---|
— Capital and RWAs | ||||
— CT1 ratio or CET1 ratio (%) | [10-20 %] | [10-20 %] | [10-20 %] | [10-20 %] |
— Capital buffer (EUR m) vs. 8 % CT1/CET1 | [2 000-6 000] | [2 000-6 000] | [2 000-6 000] | [2 000-6 000] |
— Capital buffer (EUR m) vs. 8 % CT1/CET1 including the conversion of CoCos | [3 000-8 000] | [3 000-8 000] | [3 000-8 000] | [3 000-8 000] |
— RWAs (EUR m) | [55 000-65 000] | [55 000-65 000] | [55 000-65 000] | [50 000-60 000] |
— Profitability | ||||
— NIM — excluding ELG costs (%) | [1,5-2,25 %] | [1,5-2,25 %] | [1,5-2,25 %] | [1,5-2,25 %] |
— Cost income ratio | [60-70 %] | [60-70 %] | [50-60 %] | [45-55 %] |
— Profit after tax (EUR m) | [EUR -ve 0-750] | [EUR -ve 0-750] | [0-750] | [250-1 250] |
— ROE | [Not meaningful] | [Not meaningful] | [0,5-10 %] | [5-15 %] |
— Funding | ||||
— LDR | [95-120 %] | [95-120 %] | [95-120 %] | [95-120 %] |
— Others | ||||
— Gross loans and advances to customers (EUR m) | [70 000-80 000] | [65 000-75 000] | [65 000-75 000] | [65 000-75 000] |
— Total Assets (EUR m) | [100 000-150 000] | [100 000-150 000] | [100 000-150 000] | [100 000-150 000] |
Source: The Bank restructuring plan and complementary submission of 11 February and 27 March 2014. | ||||
In the adverse case submitted by the Bank, GDP in Ireland is expected to grow by 1 % in 2014, 1,5 % in 2015, 2,2 % in 2016 and 2,2 % in 2017. The employment growth is delayed until 2015, when it is expected to grow by 0,5 %, 1 % in 2016 and 1 % in 2017. House prices are forecasted to increase by 1,2 % in 2014, and by 1,7 % in 2015 by 1,9 % in 2016 and by 1,9 % in 2017. GDP in the UK is expected to increase by 0,8 % in 2014, by 1 % in 2015, by 1,5 % in 2016 and by 1,5 % in 2017.
The adverse case is based on more severe macroeconomic assumptions as compared to both the base scenario and the alternative base scenario. Nevertheless, the alternative base scenario leads to lower profitability and a lower capital buffer as compared to the adverse scenario because the assumptions underpinning the Bank's financial projections regarding the evolution of its business are more severe in the alternative base case than in the adverse scenario.
The Bank's operating income in the adverse case is forecasted to increase from EUR [1-3] billion in 2014 to EUR [1-3] billion in 2017. Operating profit before provisions is projected to increase from EUR [0-1] billion in 2014 to EUR [0,75-1,75] billion in 2017. In the adverse case, the Bank is expected to return to profitability in [2014-2016], with a profit before tax of EUR [0-750] million.
The cost income ratio is forecasted to improve from [60-70] % in 2014 to [45-55] % in 2017.
In the adverse case, the Bank's CET1 ratios are forecasted to be at [10-20] % in 2014, [10-20] % in 2015, [10-20] % in 2016 and [10-20] % in 2017. This would mean a capital buffer of EUR [3-8] billion in 2014, EUR [3-8] billion in 2015, EUR [3-8] billion in 2016 and EUR [3-8] billion in 2017, considering a minimum regulatory capital requirement of 8 %.
Prior to the end of the restructuring period, the Bank will start to repay the State aid via the payment of dividends or other means, provided that it has at least 1-4 % surplus capital above the regulatory minimum CET1 ratio (on a Basel III fully implemented basis) as set by the CBI on 31 December 2016. The repaid amount will equal the surplus above the regulatory minimum CET1 ratio plus 1-4 %.
To facilitate this repayment, the Bank will not take any steps that would lead to a capital outflow prior to […] unless […].
The Bank retains the options to partially or fully convert the NPRFC Preference Shares at par up to 13 May 2014 and thereafter at 125 % of the subscription price, in advance of, or as part of an exit (or partial exit) event which arises for the State involving the private sector.
restructuring of the mortgages and SME loan portfolios
meeting quantitative restructuring targets for restructuring/proposing sustainable solutions,
the optimal restructuring option will be based on Net Present Value maximisation,
new lending to […] is limited to […] in […] and […]. New lending may exceed the limits provided the aggregate closing gross loan balance does not exceed […] at the end of […] and […] at the end of […], respectively,
the repayment of the State aid (through dividends if the capital ratio of the bank exceeds the minimum regulatory capital requirement plus 1-4 %, as of 2016),
the contingent capital notes (CoCos, EUR 1,6 billion) will not be redeemed before the results of the AQR/ST become known,
a cost reduction of EUR [200-600] million by 2015 as compared to 2012, and a cost income ratio of [45-65] % or [50-70] %, respectively, if GDP growth is below 2 %,
the limitation of exposure to Irish Sovereign bonds to EUR [10-20] billion,
behavioural commitments on limiting acquisitions, marketing and advertising and sponsorship in Ireland, dividend ban, coupon ban on existing instruments,
measures to enhance competition in the Irish banking market (‘market opening measures’, comprising a services package and a customer mobility package),
the appointment of a monitoring trustee to watch over the respect of those commitments.
Ireland has undertaken to ensure that the restructuring plan submitted on 28 September 2012, as supplemented, is implemented in full, including the commitments set out in detail in the Annex.
- (i)
the restructuring plan was apt to restore EBS's long-term viability;
- (ii)
the aid was limited to the minimum necessary;
- (iii)
sufficient measures limiting distortions of competition existed.
The Commission noted that the financial forecasting in the restructuring plan was inconsistent and lacked sufficient information on the macroeconomic assumptions under the adverse case scenario. In addition, the Commission doubted the assumptions underlying the calculations of EBS as to the evolution of mortgage lending in Ireland in the medium-term. The Commission also sought additional clarification as to the assumptions of EBS as regards the corporate deposit market. The Commission took the view that the EBS restructuring plan underestimated the level of impairment of mortgage loans for the specified period, and lacked a thorough analysis with regard to impairments on commercial loan book in run-off. Finally, the Commission expressed doubts concerning the calculation of EBS's cost income ratio and the cost of wholesale funding in the medium-term.
Regarding the limitation of aid to the minimum, the Commission observed that it had insufficient information to conclude whether that requirement would be fulfilled, given the discrepancy between the objective of the recapitalisation and the forecasts of the restructuring plan which set out that EBS would largely exceed the minimum regulatory capital requirement.
Finally, the Commission expressed doubts whether the measures to limit distortions of competition set out in the plan were sufficient. Specifically, the Commission criticised that the proposed balance sheet reduction was far less substantial than the Commission would normally have expected from a bank having received such a high amount of aid, both in absolute terms and in terms of risk weighted assets.
The Commission received comments from EBS, who provided additional elements to support the restructuring plan. In addition, two interested parties submitted comments which largely confirmed the Commission's doubts as to the adequacy of the proposed measures to address distortions of competition and burden sharing. Ireland did not provide any comments.
In July 2011, EBS merged with AIB and became a fully integrated subsidiary of the Bank. As a result, EBS ceased to exist on a standalone basis. Therefore, the Opening Decision, which related to EBS as a standalone entity, became nugatory and the Commission decided not pursue the procedure any further. Moreover, since the comments submitted by EBS and the two interested parties relate to measures to address distortions of competition and burden sharing under a restructuring plan submitted for EBS which will no longer be implemented, those comments are not relevant as regards the restructuring plan submitted for the Bank (AIB and EBS merged), so that there is no reason for the Commission to examine them in the present decision. Instead, in Section 5.2 of this Decision the Commission examines the compatibility of the aid measures originally granted in favour of EBS, along with the measures originally granted in favour of AIB and those granted in favour of the Bank, in light of the restructuring plan submitted for the Bank, including the viability of the Bank, the limitation of the aid to the minimum, and the appropriateness of the measures to limit distortions of competition.
Ireland accepts that the measures constitute State aid and is of the view that the measures are compatible with the internal market on the basis of Article 107(3)(b) of the Treaty as they are necessary to remedy a serious disturbance in the Irish economy.
As described in Section 2.7 of this Decision, Ireland has given a series of commitments, which are set out in detail in the Annex.
The Commission must first assess whether the measures granted to the beneficiaries constitute State aid within the meaning of Article 107(1) of the Treaty. According to that provision, State aid is any aid granted by a Member State or through State resources in any form whatsoever which distorts, or threatens to distort, competition by favouring certain undertakings, in so far as it affects trade between Member States.
The qualification of a measure as State aid requires the following conditions to be met: (i) the measure must be financed through State resources; (ii) it must grant an advantage upon its recipient; (iii) that advantage must be selective; and (iv) the measure must distort or threaten to distort competition and have the potential to affect trade between Member States. Those conditions being cumulative, they must all be present before a measure is characterised as State aid.
In addition, the Commission considers that the redemption of the 2009 Preference Shares (before or after the step up) and the subsequent reinjection of the same amount in the form of ordinary shares do not constitute new aid. The Commission has already approved that measure in the Decisions in cases N 241/09 and SA.32891 (N 553/10).
Article 107(3)(b) of the Treaty sets out that State aid can be regarded as compatible with the internal market where it is granted to ‘remedy a serious disturbance in the economy of a Member State’.
All measures identified as State aid have been provided in the context of the restructuring of the Bank (the merged entity). The Restructuring Communication sets out the rules applicable to the granting of restructuring aid to financial institutions in the current crisis. According to the Restructuring Communication, to be compatible with the internal market under Article 107(3)(b) of the Treaty, the restructuring of a financial institution in the context of the current financial crisis has to (i) lead to the restoration of the viability of the bank, (ii) include sufficient own contribution by the beneficiary (burden-sharing) and ensure that the aid is limited to the minimum necessary and (iii) contain sufficient measures limiting the distortion of competition.
For its compatibility assessment, the Commission has based itself on the alternative base scenario proposed by the Bank, which relies on more prudent assumptions than the base scenario.
As the Commission has indicated in the Restructuring Communication, the Member State needs to provide a comprehensive restructuring plan which shows how the long-term viability of the entity will be restored without State aid within a reasonable period of time and within a maximum of 5 years. According to point 13 of the Restructuring Communication, long-term viability is achieved when a bank is able to compete in the marketplace for capital on its own merits in compliance with the relevant regulatory requirements. For a bank to do so, it must be able to cover all its costs and provide an appropriate return on equity, taking into account the risk profile of the bank. Point 14 of the Restructuring Communication stipulates that long-term viability requires that any State aid received is either redeemed over time or is remunerated according to normal market conditions, thereby ensuring that any form of additional State aid is terminated.
The Irish authorities have submitted a restructuring plan which sets out the Bank's strategy to return to viability without further State aid by focusing on (i) the re-orientation of the Bank into a smaller institution, focused on Ireland, with an improved funding profile; (ii) improved levels of profitability through NIM enhancement, cost reductions measures and gradually reduced impairment charges; and (iii) maintaining a strong capital buffer.
The Bank is also strengthening its return to a more conservative traditional banking model where it will substantially fund its loan portfolio through customer deposits with a projected LDR below [95-120] % at the end of the restructuring period under the alternative base scenario. That target is the result of the ambitious and well-achieved deleveraging plan and relatively prudent assumptions regarding the evolution of the volume of deposits. The Commission notes positively that the Bank projects not to be overly dependent on wholesale funding and institutional funding sources, such as ECB funding, according to the alternative base scenario.
With regard to the return to profitability, the plan sets out an appropriate mix of planned actions. New lending will be granted at higher interest rates. In addition, the pricing of (back-book) loans and deposits will be improved where possible. These measures, together with the discontinuation of the ELG scheme guarantee fees, will enable the Bank to progressively drive the recovery of its NIM.
Under the alternative base scenario, the Bank will not return to profitability before 2016. Notwithstanding the impact of impairment charges, the Bank's profitability is structurally weak due to a large legacy portfolio of low-yielding assets (tracker mortgages and NAMA bonds). As a result, the ROE will remain low until the end of the restructuring period, reaching only [5-15] % in 2017. The Commission considers nevertheless that the Bank is on the right path to reach more competing ROE levels/profitability in the future, as the new lending with higher margins and the re-priced (back-book) loans will progressively compensate the drag on profitability stemming from those low-yielding legacy assets. Therefore, profitability is expected to gradually improve.
Finally, the Commission notes positively that the Bank is a well-capitalised institution which has a comfortable capital buffer up until the end of the restructuring period. Under the alternative base scenario, the Bank will maintain a capital buffer of EUR [2-6] billion in 2017 with a minimum regulatory capital requirement of 8 % (and EUR [3-8] billion with a 5,5 % threshold), which would enable the Bank to absorb further losses if the economic recovery of Ireland is lower than forecasted. Furthermore, the Bank has EUR 1,6 billion of CoCos available to strengthen its capital base if needed. In this respect, Ireland has given the commitment that the Bank will not redeem the CoCos until the results of the AQR/ST have been made public.
Accordingly, the restructuring plan convincingly sets out the right strategy for the Bank's return to long-term viability. The combination of the actions described above appears apt to ensure the Bank's future viability without further State support.
However, the Bank's return to profitability might be protracted until the end of the restructuring period due to the Bank's low-yielding legacy assets. Therefore, the Bank's ROE, under the alternative base case scenario, remains at a comparatively low level, even at the end of the restructuring period, but shows a moderate upward trend.
Taking into account the above elements, the Commission concludes overall that the restructuring plan of the Bank convincingly sets out the path to restoring its long-term viability.
Section 3 of the Restructuring Communication indicates that an appropriate contribution by the beneficiary is necessary to limit the aid to a minimum and to address distortions of competition and moral hazard. To that end, it provides that (i) the amount of aid should be limited and (ii) a significant own contribution is necessary.
The Restructuring Communication further provides that, to keep the aid limited to the minimum, the bank should first use its own resources to finance the restructuring. The costs associated with the restructuring should not only be borne by the State but also by those who invested in the bank. That objective is achieved in particular by absorbing losses with available capital.
Quasi full burden sharing has been achieved from the former owners of AIB. Shareholders have been wiped out and the State currently owns 99,8 % of the Bank. The Commission therefore considers that the amount of burden-sharing from the former owners is significant and adequate.
With regard to subordinated debt holders, a series of Liability Management Exercises/Debt Buy Backs were carried out between 2009 and 2011, which have contributed EUR 5,4 billion of Core Tier 1 capital (buy back of Tier 1 and Tier 2 instruments). Currently, only a marginal amount of subordinated debt remains in the Bank (i.e. around EUR 34 million at 31 December 2012) […].Therefore, subordinated creditors have adequately contributed to bearing the restructuring costs.
Considering the above, the Commission concludes that the Bank's restructuring plan provides for appropriate own contribution and burden-sharing.
Section 4 of the Restructuring Communication requires that the restructuring plan contains measures limiting distortions of competition. Such measures should address the distortions on the markets where the beneficiary operates after restructuring. In the present case it needs to be ensured that potential new entrants can easily enter the concentrated Irish banking market to boost competition.
The Service Package aims at reducing the cost of entry or the cost of expansion of a competitor. In particular, the beneficiary of the Service Package will receive support for several back-up functions (such as clearing, treatment of paper transactions) at incremental cost by the Bank (costs directly incurred by the provision of that service), and may then decide to invest in its own infrastructure only at a later stage when its customer base is large enough to absorb fixed costs. That beneficiary will also access the Bank's ATM network at incremental cost, immediately offering a national coverage to its customers.
The Customer Mobility Package will reduce the costs of customer acquisition for its beneficiaries. The beneficiaries will contact the Bank's customers, via the Bank, and will present them with alternative products for their current accounts, personal credit card products, business current accounts, business credit cards, mortgages and SME and corporate loans. Although it is difficult to predict how many customers of the Bank will decide to switch their banking products to the beneficiaries of the measure, this customer approach is more targeted and less costly than general advertising measures.
The measures described above provide a framework to stimulate new entry on the Irish banking market and hence limit the distortions of competition caused by the aid granted to the Bank.
Finally, Section 5 of the Restructuring Communication requires that detailed regular reports are made available to the Commission so that it can verify that the restructuring plan is being implemented properly.
A monitoring trustee will be appointed who will provide regular reports to the Commission on the implementation of the restructuring plan by the Bank and the respect of the commitments given.
Taking into account the commitments, the far-reaching restructuring measures already implemented by the Bank and in light of the appropriateness of the own contribution and burden-sharing as set out above, the Commission considers that there are sufficient safeguards to limit potential distortions of competition despite the high amount of aid granted to AIB and EBS before and after their merger.
The measures ‘a’ to ‘o’ listed in Table 3 are considered to be restructuring aid within the meaning of Article 107(1) of the Treaty. In view of the commitments made by Ireland, the Commission concludes that the restructuring plan for the Bank is in line with the Restructuring Communication, the restructuring aid is limited to the minimum necessary and competition distortions are sufficiently addressed. The restructuring aid is thus compatible with the internal market pursuant to Article 107(3)(b) of the Treaty. Accordingly, the Commission,
HAS ADOPTED THIS DECISION: