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AIB: Q1 Loss On Lower Revenues and Higher Provisions; More Provisions to Come

Allied Irish Banks, p.l.c . (AIB or the Bank) announced in its trading update that it has reported a small loss in Q1 2020 largely as a result of higher loan loss provisions due to an update of credit models incorporating a macro-economic scenario that does not fully incorporate the impact of the COVID-19 shutdown on the economy. As a result, we expect the impact of COVID-19 macro scenario to be incorporated in the Bank's credit models in coming quarters.

Loan loss provisions in Q1 were significantly higher Year-on Year (YoY) at EUR 210 million, of which EUR 106 million related to the update of credit models to reflect the change in the macroeconomic scenario. The Bank reported an annualised cost of risk of 136 bps.

Current macroeconomic assumptions incorporated in credit models of a slow GDP growth of 1.3% and unemployment of 6% in 2020. Under AIB's COVID-19 base scenario, however, the Irish economy is expected to suffer a GDP contraction of 7.5% in 2020 and unemployment is seen increasing to 13.5%..

Given the wide difference in the macroeconomic assumptions in the two scenarios we expect the Bank to continue to report higher loan loss provisions related to the update of COVID-19 impact on credit models in Q2. At the same time, we expect provisioning levels to be affected in coming quarters as asset quality deterioration will translate into increasing stage 2 and stage 3 loans, negatively affecting provisions.