What it means
AIB is one of the pillar banks of the Irish financial system, serving personal customers, small businesses and large corporates. Alongside its Irish operations it has maintained a presence in the United Kingdom, trading under its own brand in Northern Ireland and in Britain.
Its recent history is a case study in banking crises. The bank was severely damaged by the collapse of Irish property lending at the end of the 2000s, was recapitalised by the Irish state, and spent the following years shrinking its balance sheet, repairing its capital and gradually returning to private hands.
For a business customer the practical questions are ordinary ones. What a bank charges for lending, what it pays on deposits, how quickly it reaches credit decisions and how deep its payments and treasury capability runs all matter far more to a finance team than the brand on the door.
Bank financial statements read differently from those of a normal trading company. Interest income and interest expense replace revenue and cost of sales as the headline numbers, and the key profitability measure is net interest margin, which is net interest income divided by average interest earning assets.
The other figures worth looking at are capital and loan quality. A capital ratio shows how much loss the bank could absorb before depositors are at risk, while non performing loan levels and provisions show how much trouble is already sitting inside the loan book.
The lesson for a non finance reader is about counterparty risk. The health of the bank holding your deposits and your undrawn facilities is part of your own risk picture, which is why sensible treasury policies set a limit per bank and spread balances across more than one.
In practice
Real-world examples.
Example
An Irish food business compares a EUR 2,000,000 term loan quote from its existing bank with one from a competitor. The pricing difference of 0.4% a year is EUR 8,000, which the owner weighs against the speed and flexibility of the relationship he already has.
Example
A company with EUR 6,000,000 of cash splits it across three banks with a limit of EUR 2,500,000 each. The policy costs a little yield but means no single bank failure could freeze the whole balance.
Example
An equity analyst reviewing a bank's results focuses on net interest margin, loan growth and the provision charge rather than headline profit. A margin falling from 2.00% to 1.80% on a large balance sheet matters more than a one off gain lower down the statement.
Formula
Calculation
Net interest income = Interest income - Interest expense
Net interest margin = (Net interest income / Average interest earning assets) x 100
Suppose a bank reports interest income of EUR 2,000,000,000 and interest expense of EUR 400,000,000 for the year. Net interest income is EUR 2,000,000,000 - EUR 400,000,000 = EUR 1,600,000,000. Average interest earning assets across the year were EUR 80,000,000,000. Net interest margin is EUR 1,600,000,000 / EUR 80,000,000,000 = 0.02, which is 2.00%. If deposit costs then rose by EUR 160,000,000 with no change in lending income, net interest income would fall to EUR 1,440,000,000 and the margin to 1.80%, a reminder of how sensitive bank profits are to funding costs. These figures are illustrative rather than reported results.Case study
Seen in the real world.
This is an illustrative, fictional example. Clonmara Foods, an invented Irish producer, held all of its cash and all of its borrowing facilities with a single bank because the relationship manager had supported the business for a decade. The treasurer saw no reason to complicate a working arrangement.
When the bank restructured its commercial lending team, the overdraft renewal that had always taken a fortnight took eleven weeks. With a EUR 900,000 payment due to growers, the company had no second banking relationship to fall back on and borrowed from a non bank lender at a much higher rate.
In the illustrative story the company later wrote a treasury policy requiring at least two banking relationships and a committed facility at each. The point is not that any one bank is unreliable, but that concentration is a risk even when the service has been excellent.
Watch out
Common mistakes.
- Assuming AIB always means Allied Irish Banks, when the same initials are used by other organisations and occasionally by unrelated bodies.
- Reading a bank's interest income as though it were comparable to a trading company's revenue.
- Keeping all company cash and all facilities with one bank because the relationship is good, which ignores counterparty concentration.
Questions
People also ask.
Is AIB state owned?
The Irish state took a controlling stake after the financial crisis and has been reducing that holding over time, so the ownership split depends on when you look.
What is the difference between AIB and the central bank of Ireland?
AIB is a commercial bank serving customers, while the central bank supervises banks and carries out central banking functions within the euro system.
Why do bank results focus on net interest margin?
Because the core business is borrowing at one rate and lending at a higher one, so the gap between the two, scaled by the size of the loan book, drives most of the profit.
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