Developments in Recent Years
A key element of AIB's pre-crisis market positioning was its involvement in the Irish property sector, which was the fastest growing segment of the Irish economy. From the late 1990s to 2006, the mortgage market in Ireland expanded rapidly as housing prices soared, driven in part by economic and wage growth and a low interest rate environment.
The global financial system began to experience difficulties in mid-2007. This resulted in severe dislocation of international financial markets around the world, unprecedented levels of illiquidity in the global capital markets and significant declines in the values of nearly all asset classes. Governments throughout the world took action to support their financial systems and banks, given the critical role which properly functioning financial systems and banks play in economies.
Global financial market conditions triggered a substantial deterioration in domestic economic conditions and property values. In 2008, as the Irish economy started to decline and as interest rates continued to increase, housing oversupply persisted and mortgage delinquencies increased. Declining residential and commercial property prices also led to a significant slowdown in the construction sector in Ireland. As a result, loan impairments in the Irish construction and property and residential mortgage sectors, to which AIB was heavily exposed, increased substantially. These dynamics began to present funding and liquidity issues for AIB as well as a rapid deterioration in the Group's capital base.
The Irish Government recognised the pressing need to stabilise Irish financial institutions and to create greater certainty for all stakeholders. A number of measures were implemented by the Irish Government in response to the continuing crisis. These measures were taken to enhance the availability of liquidity and improve access to funding for AIB and other systemically important financial institutions in Ireland. The first action was the establishment of the Credit Institutions (Financial Support) ("CIFS") Scheme on 30 September 2008, by which the Minister for Finance guaranteed certain liabilities of covered institutions, including AIB, until 29 September 2010. This was followed by the EUR3.5 billion subscription by the National Pension Reserve Fund Commission ("NPRFC") on 13 May 2009 for the 2009 Preference Shares and 2009 Warrants. Subsequently, the Minister for Finance established the Credit Institutions (Eligible Liabilities Guarantee) ("ELG") Scheme in December 2009 which facilitates participating institutions issuing debt securities and taking deposits during an issuance window and with a maximum maturity of 5 years.
AIB joined the ELG Scheme on 21 January 2010. However,on 26 February 2013, the Minister for Finance announced that the ELG Scheme will end for all new liabilities with effect from midnight on 28 March 2013. After this date, no new liabilities will be guaranteed under this Scheme. In December 2009 the Irish Government established the National Asset Management Agency ("NAMA") which has acquired certain performing and non-performing land and development and associated loans from participating banks, with the aim of freeing up banks’ balance sheets and facilitating the easier flow of credit throughout the Irish economy. AIB has transferred approximately EUR20 billion of assets to NAMA.
The original Prudential Capital Assessment Review ("PCAR") announced by the Central Bank of Ireland ("the Central Bank") on 30 March 2010 imposed a requirement for AIB, among other credit institutions, to strengthen and increase its capital base to help restore confidence in the Irish banking sector. The PCAR assessed the capital requirement of AIB and other Irish credit institutions in the context of expected losses and other financial developments, under both base and stress-case scenarios, over the period from 2010 to 2012.
Following the results of the original PCAR exercise, AIB disposed of its stake in M&T on 4 November 2010, a transaction which generated core tier 1 capital of EUR0.9 billion. AIB announced, on 10 September 2010, the sale of its Polish interests to Banco Santander S.A. for a total cash consideration of EUR3.1 billion. This transaction completed on 1 April 2011 and AIB generated core tier 1 capital of approximately EUR2.3 billion as a result of the disposal. AIB also disposed of Goodbody Holdings Limited; AIB International Financial Services Limited; AIB Jerseytrust Limited; and its 49.99% shareholding in Bulgarian-American Credit Bank ; AIB Asset Management Holdings (Ireland) Limited, including AIB Investment Managers.
On 23 December 2010, a direction order under the Credit Institutions (Stabilisation) Act 2010 with the consent of AIB, directed AIB to issue EUR3.8 billion of new equity capital to the NPRFC. This also resulted in the delisting of AIB's ordinary shares from both the Main Securities Market of the Irish Stock Exchange and from the Official List maintained by the UK Financial Services Authority. AIB's ordinary shares were subsequently admitted, in January 2011, to the Enterprise Securities Market of the Irish Stock Exchange. Furthermore, AIB announced in August 2011 that its American Depository Shares ("ADSs") were delisted and have ceased to be traded on the New York Stock Exchange.
On 24 February 2011, AIB acquired deposits of EUR7 billion and NAMA senior bonds with a nominal value of EUR12 billion from Anglo Irish Bank, pursuant to a transfer order issued by the High Court under the Credit Institutions (Stabilisation) Act 2010. AIB also acquired Anglo Irish Bank Corporation (International) PLC in the Isle of Man, including customer deposits of almost EUR1.6 billion.
On 1 July 2011, as part of the restructuring of the Irish banking system, AIB completed the acquisition of EBS for a nominal cash payment of EUR1.00. EBS had EUR19.2 billion of total assets, approximately EUR16.0 billion of customer loans and EUR10.1 billion of customer deposits at this date. This transaction represented a significant consolidation within the Irish banking sector, resulting in the formation of one of two pillar banks in Ireland.
On 31 March 2011, the Central Bank published its 'Financial Measures Programme Report', which detailed the outcome of PCAR 2011 and Prudential Liquidity Assessment Review ("PLAR") 2011 for certain Irish credit institutions, including AIB and EBS.
On this date, the Central Bank stated that it had set a new capital target for AIB and EBS, ultimately requiring AIB and EBS to generate a total of EUR14.8 billion of additional capital. This additional capital requirement was satisfied through AIB's placing of EUR5.0 billion of new ordinary shares with the NPRFC, capital contributions totalling EUR6.1 billion from the Minister for Finance and the NPRFC, the issue of EUR1.6 billion of contingent capital notes at par to the Minister (which completed on 27 July 2011), and further burden-sharing measures undertaken with the Group's subordinated debt-holders. Following these actions, the State, through the NPRFC, now owns 99.8% of the ordinary shares of AIB.
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