Financial sector survives crisis through experience

Financial sector survives crisis through experience

 

Colin Hunt, CEO, Allied Irish Banks, describes the effects the COVID-19 pandemic has had on the financial services sector in terms its turn towards digital technologies and drive to promote sustainability

 

What is your assessment of Ireland’s financial services sector?

The industry can essentially be divided into two groups: domestic retail institutions and international institutions. Dublin’s international financial services center was established in 1987 and has since been an increasingly important driver of employment. We have seen strong growth on the international side recently. On the domestic side, there are five primary retail financial institutions. We have had announcements from NatWest Group that it will be closing its Ulster Bank franchise in the country on a graduated basis over the following years. Additionally, we have had a similar announcement from Belgium’s KBC Bank that it will close its operations here. Consequently, we are seeing growth on the international side and a consolidation on the domestic retail side. AIB is Ireland’s largest retail bank with 2.8 million customers. Around 40% of Irish personal banking customers and about 40% of Irish business banking customers have their primary accounts with us. However, this will change as things are slowly consolidated.

From a capital perspective, the Irish banking industry went through an exceedingly difficult period in the previous global financial crisis. Domestically headquartered institutions all required the support of the taxpayers and bailouts to varying degrees. Allied Irish Banks (AIB) was no different. We were bailed out by the state. However, we collectively entered this new crisis in a far greater position of strength because we had reinforced our balance sheets, reduced non-performing exposures and improved our operational efficiencies. In AIB’s case, we were the strongest capital issuers of any bank in Europe. Notwithstanding the immense pressure imposed on our financial system and the healthcare system by COVID-19, we have come through the crisis in a position of strength. While banks were part of the problem in the last global financial crisis, banks are now a large part of the solution.

 

What changes did the COVID-19 pandemic have on AIB’s strategy?

When the COVID-19 pandemic hit, it became obvious we were going to have to reshape our plans to consider three long-term trends: the enhanced importance of sustainability, more agile ways of working and living more of our lives online. In consequence, we launched a refreshed strategy at the start of December 2020 that set out new medium-term targets committing us to reducing our cost base by 10% to $1.6 billion, to having a common equity tier one capital ratio of more than 14% and a sustainable return on tangible equity greater than 8%. We reshaped our operations by refocusing the work of the branch network towards sales advisory and less on transaction support in response to customer behavior patterns. We are digitizing more and more of our processes to allow for faster credit fulfillment and response times. We are reshaping our property footprint by moving to a hybrid working model where people work from home two to three days a week on a permanent basis. We have taken a quantum leap in workforce behavior because of COVID-19.

We also embarked on a series of initiatives to complete our product suite. While we have a fantastic franchise in terms of customer reach in the Irish context, we had an incomplete product suite with clear gaps in savings and investment. We therefore formed a joint venture with Great-West Lifeco  in the pensions and investment market, which is progressing well. We also announced this year that we are acquiring Goodbody Stockbrokers — one of Ireland’s leading stock brokerage firms — giving us a greater reach in terms of capital markets and wealth products. We have also agreed with NatWest Group to acquire the Ulster Bank corporate and commercial loan book. We have driven ten years of change in less than one; it has been remarkable.

We supported our customers during the COVID-19 pandemic in the form of almost 75,000 payment breaks and by continuously supporting our customers. We are here to sit at the heart of our customers’ financial lives as a full-service provider of financial services in the Irish context. As the COVID-19 emergency fades, we will come out strong, vibrant, well positioned and efficient. Our successful reform was done at the same time as meeting demands during a period of great uncertainty and change.

 

How is AIB contributing towards sustainability?

We have put sustainability at the very heart of our strategy. As a pillar bank it is incumbent upon us to do everything within our power to reduce our own consumption of the Earth’s precious resources, encourage our third-party suppliers to adopt similar measures and work with our customers to finance their transition to a lower-carbon future.We are extremely excited about the progress we are making in this direction and are determined to make more progress in sustainable lending.

At the start of this crisis, there was a view that important topics like sustainability would be pushed to the side. However, the opposite has happened. The COVID-19 crisis has exposed how fragile our world is and the need for us to all be deeply conscious of the health of our planet and the environment. The pandemic has moved sustainability to the very center of people’s lives and business agendas. We see this in our engagement with customers, investors and regulators. It is a key differentiator for us since it was at the center of our mission well before the pandemic. We are committed to reaching net-zero carbon emissions by 2030 in our operations and to have 70% of our lending be green and transition based.

As a financial institution we have a big role to play in sustainability, not only as a big business but as a provider of capital. Sustainability is the fastest growing part of our lending book. We have raised two green bonds. We also have $2.06 billion in capital for deployment into green products. Additionally, we have a green mortgage and green personal loan. AIB supports companies in their carbon-neutral transition. We also have electric vehicle products. We have shown that it is possible for businesses to do well financially while doing good for the environment.

AIB wants to be a leading global champion for sustainability. We are not doing this to own the space, but rather we are doing it to encourage others to come with us on the journey. The drive for sustainability is the greatest challenge faced by this generation. We are running out of time in terms of the speed at which we address the terrifying phenomenon that is climate change. We have the ambition, drive and capital to be a leading player. However, we will not manage to achieve our objectives on this front unless we work collectively. There needs to be a huge international coordinated effort to arrest and reverse global warming. It is incumbent upon us to address this challenge as we cannot leave it to the next generation to deal with it as it will be too late.

 

How important is Ireland’s ties to the U.S. in terms of foreign direct investment and economic support?

We have deep and long standing cultural, social, political and economic links with the United States that stretch over centuries. The U.S. is an especially important source of foreign direct investment in Ireland. Additionally, it is an important destination for foreign direct investment out of Ireland; we frequently lose sight of this last feature of our relationship. Coming out of the global financial crisis, multinational companies had a huge role to play in getting Ireland back on its feet and propelling the economy forward.

Ireland is an attractive place for U.S. investment into Europe for several reasons. The headline grabber is our corporation tax rate, but there is far more than that at work here. We are now unique in being an English-speaking member of the European Union. If companies want open and untrammeled access into the European single market, Ireland is a good place to consider. We have also built several significant industrial clusters thanks to multinational investment in areas such as pharmaceuticals, medical devices, aviation leasing and digital technologies. Our version of Silicon Valley is called Silicon Docks in Dublin, which is home to many international digital companies. The sector has been an important economic driver and an important support when the country emerged from the last global crisis. Ireland is keenly focused on maintaining our attraction as a destination for U.S. investment into Europe. At AIB we have been physically on the ground in the United States since the 1970s through our office in New York.

 

How has Brexit affected Ireland’s economy?

It is regrettable that Britain left the European Union, but that decision is made, and we now seek to minimize its negative implications. The decision has introduced friction in terms of trade across the Irish Sea. We have seen quite a significant increase in trade between Northern Ireland and the Republic of Ireland. Trade between us and Britain was largely reduced due to British exports into Ireland. We experienced a bit of supply chain difficulties at the beginning of Brexit, but without a major negative impact. Overall, our customers have fared well. Businesses most worried about Brexit such as transport logistics have actually done very well due to the COVID-19 pandemic. However, the Brexit decision will ultimately lead to increased costs in terms of time and price.

Given that Brexit came at us for five years, businesses were running an array of scenarios and outcomes early, including a hard Brexit. Had it happened, there would have been a large emphasis on diversifying export markets beyond our traditional reliance on Britain. For a large part of Irish indigenous small and medium-sized businesses, this would have had an impact in terms of employment. Ireland’s development strategy would have been affected. Even without a hard Brexit, we have seen diversification of our trade reliance on Britain as a consequence of the break.

AIB has a presence throughout the island of Ireland as well as in Britain. Our best interests would have been served if Britain had remained an EU member. The only positive economic implication is that it has enhanced Dublin’s position as a leading financial services center in Europe. We are only at the early stages of seeing the true benefit of it. In terms of industrial clusters, once you build a critical mass in terms of skills — be these direct, employee or professional services and support skills — you tend to become ever more magnetic in terms of your ability to attract investment. We have seen the scale and breadth of financial services in Dublin increase because of Brexit. In the medium term, this will undoubtedly be a positive for the sector.

 

How has AIB integrated new digital technologies into its operations and services?

We invested heavily in digital architecture. We have had a significant shift away from physical in-branch banking towards digital banking. On an average day just fewer than 40,000 of our customers physically visit one of our branches, but we have around 1.5 million interactions using digital technology, with some days as high as 2 million. The COVID-19 pandemic has led parts of our customer base to adopt digital technology when they had not in the past.

We have been very responsive in our evolving customer preferences. We are Ireland’s first bank to offer online openings for current accounts. Almost 90% of all personal deposit accounts were opened online in 2020. We have a digital personal credit loan. A total of 71% of all completed applications were done through digital channels. We have seen a 28% increase in 2020 in the number of people who are over 65 engaging with our mobile banking app, with a significant increase in the number of interactions. Customers who are active on our mobile technology are now connecting with us about 36 times a month on average. We are far more present in their lives than we would have been through our traditional channels. Cash usage is in parallel falling, while digital wallet transactions are up about 140% in terms of value in 2020 on a year-by-year basis.

We have seen a huge wave of increased activity in fintechs across the banking industry globally. This has encouraged incumbents to be ever more innovative and invest heavily in their digital agendas. These smaller entities propel competition, innovation and improvement in customer services, not just in banking, but across all parts of economic and social life. Before the pandemic we acquired a business called Payzone, which is Ireland’s leading payment services provider. It covers transport, parking, utility bills, tolls and card payments. We are now positioned as having Ireland’s number one banking app. To a large extent this is in response to the competitive pressure brought forward by smaller fintechs.

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