Stocks
by Zviad Maisuradze on May 25, 2020

Shares of AIB Group (A5G) Fall by 3% on Expected Loan Losses

As Euronext 100 stocks opened for trading on Monday, the shares of Allied Irish Banks (A5G) dropped by 3%. The stock previously closed at €0.974, however, at the moment it is trading at €0.946. The move came as investors are becoming more concerned about the possibility of the Bank suffering from heavy losses on its loan portfolio.

Just several days ago the AIB management has already announced the decision to set aside €210 million to cover costs, caused by customer defaults on their liabilities. Many financial analysts forecast that the Irish economy might contract by as much as 8% during the quarter. Obviously, the sheer scale of the economic downturn will most likely make the servicing of debts incredibly difficult for some consumers.

AIB represents one of the four largest commercial banks in Ireland. According to the official reports, in 2019, the company has an annual revenue of €2,695 million. As the numbers suggest, 77% of this sum was composed of net interest income, while the rest 23% represented fees and other sources of income.

At the same time, the pre-tax profit reached €499 million, with the net interest margin (NIM) at 2.37%. This is actually significantly higher than some other major European Banks, with NIM close to 1.5%. The company did pay an 8 euro cents per share dividend back in 2019, however, it is highly unlikely that the company can do the same in 2020.

AIB Shock Price Performance

The recent decline of the AIB share price was not just a one-off single event. Actually, It is a part of a larger downtrend.

                                                                                                                                                                                               source: cnbc.com

As we can see from the chart above, a year ago, the shares were trading at €3.50 and remained mostly flat until late July 2019. Subsequently, it did experience some decline in the following months, but it did manage to regain most of the lost ground by the end of the year.

Unlike many other blue-chip stocks that started their decline in the middle of February, AIB share entered downtrend in January 2020. Just in a matter of 3 months, the stock fell below €1.00 mark. After that, the shares prices mostly stabilized around this level. However, the fact remains that the stock lost approximately 2/3 of its value during recent months and so far has not recovered from those losses.

The most recent quarterly results did not much help the share price either. According to the report, the net interest income, which makes up more than 3/4 of bank revenues, fell by 5%. At the same time, the net interest margin has also dropped to 2.19%. One can argue, that those results were still much better than that of some other major banks.

However, it might be helpful to keep in mind, that so far we have seen only the first-quarter result, which includes January, February, and March. April 2020 was in sense a high watermark of restrictions and lockdowns imposed as a response to COVID-19 pandemic. Consequently, the 2nd Quarter report can be even worse than the first, as more customers default on their loan obligations. As a result, investors are cautious about purchasing banking stocks and the recovery of AIB share price might take some time.

By Zviad Maisuradze

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