AIB's 'excessive profit-taking' not the worst

It's easy to take pot-shots at AIB's profitability. Many politicians could not resist populist attacks last week when the bank announced 2005 profits of €1.7 billion, even after setting €50 million aside to cover the cost of compensating customers ripped off by the foreign exchange transactions scandal. This is an enormous figure in a country this size – even if half that profit is earned abroad. At face value it implies to some an organisation that is ripping off its customers, overcharging for services and products. And we've learnt enough about AIB's business practices in the past to make everyone deeply cynical about the bank.

Labour leader Pat Rabbitte led the charge, saying this was “excessive profit-taking” in the Irish economy. “Hundreds of thousands of ordinary bank customers are being milked in order to contribute to excessive profits,” he said.

Taoiseach Bertie Ahern replied that banks must be fair to their customers while monitoring their profitability. He noted that “you can go to the bank to cash a cheque and end up being offered a car loan” which tapped into the sense that it may be too easy for many people to borrow money and that they may end up with repayment problems.

Ahern said that competition was usually the best way of helping the consumer but that “I get a sense of satisfaction from seeing AIB or any Irish company where over half its profits . . . were gained on the international market. One of our companies is able to be out there competing in that market.”

So is AIB guilty as charged by its opponents of excessive profiteering, and indeed of reckless lending, and is competition in Irish banking always a good thing? The answers are not as straightforward as some critics would suggest.
AIB's chief executive Eugene Sheehy, appointed only last year, believes that “banks need to make big profits. Big profitable companies are good for society and if they are good corporate citizens and put something back in then everyone can benefit from it.” It's easy to imagine many people scoffing at the corporate citizenship bit, especially after AIB's past role in facilitating widespread DIRT evasion by its customers, but he is on strong ground when he claims AIB needs “to retain profits so we can meet our customer demands for liquidity.”

Sheehy also pointed out that about 45 per cent  of AIB's profits are returned to shareholders by way of dividends. This doesn't just benefit tens of thousands of individual shareholders, but major Irish pension funds who invest on behalf of hundreds of thousands of Irish workers.
AIB is also a big employer, with 8,500 staff in over 260 branches. It added 500 people to the payroll last year, which is in contrast to Bank of Ireland which is trying to cut 2,000 workers, much of it through enforced outsourcing. It has also rewarded staff with generous bonuses for the 2005 performance and is prepared to agree a new wage deal with terms significantly better than those likely to emerge from the national pay talks.

In addition, AIB seems to be more responsible in its mortgage lending than many of its competitors. During last year AIB's loans in Ireland, including mortgages, business lending and personal lending, increased by 28 per cent which is in line with overall credit growth in the economy. However, it grew its mortgage lending by just 24 per cent, compared to a 27 per cent rise in the overall market. It turns out the bank is averse to risky 100 per cent  mortgages, as offered by a number of its competitors, limiting maximum exposure in most cases to a maximum of 92 per cent of the purchase price. This is clearly a more responsible approach whereas 100 per cent  lending by other banks is contributing to the ever inflating property bubble. One of the rewards for AIB has been that its bad debts – loans that have not been repaid – are just 0.15per cent  of all its loans, an extraordinary performance.
On the flip side the bank retains fees where other banks are getting rid of them. However, consumers have the choice of moving their accounts and it is easier now to do so under a new code of practice introduced under regulatory pressure. That AIB has chosen to keep fees notwithstanding suggests it is confident that customers look at the overall service provided.

Competition is also driving profit margins down, year by year. In 2005 the profit margin on the business contracted by 0.2 per cent  and is likely to do so again this year. Compared to many other businesses, the profit margins earned by banks are not enormous. Given the amount of capital required to run a bank, and the returns demanded by investors for their capital, the Irish banks may be doing little more than is really required.

And what do politicians really want of AIB? The widespread provision of free services? Experience suggests that a bank that does that may recoup the lost money in other ways. More permissive lending? Surely enough money is being advanced cheaply to people at present. A softer approach to problem borrowers? The bad debt experience suggests most borrowers can afford their repayments. If the politicians really believe the profits are too high then why not re-introduce the bank levy, scrapped by Minister Brian Cowen at his last budget, at the end of a three-year imposition, as an additional tax on the 12.5 per cent  corporation tax levied?

Seeing things from the point of the banks is never popular. But there are worse rip-offs in Irish business. They're just less obvious.