1 AIB Mortgage Bank – Asset Covered Securities June 2007 A number of statements we will be making in our presentation and in the accompanying slides will not be based on historical fact,but will be “forward-looking” statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in the forward looking statements. Factors that could cause actual results to differ materially from those in the forward looking statements include, but are not limited to, global, national and regional economic conditions, levels of market interest rates, credit or other risks of lending and investment activities, competitive and regulatory factors and technology change. Any ‘forward-looking’ statements made by or on behalf of the Group speak only as of the date they are made.
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1
AIB Mortgage Bank – Asset Covered Securities
June 2007
A number of statements we will be making in our presentation and in the accompanying slides will not be based on historical fact,but will be “forward-looking” statements within the meaning of the United States Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in the forward looking statements. Factors that could cause actual results to differ materially from those in the forward looking statements include, but are not limited to, global, national and regional economic conditions, levels of market interest rates, credit or other risks of lending and investment activities, competitive and regulatory factors and technology change. Any ‘forward-looking’ statements made by or on behalf of the Group speak only as of the date they are made.
2
Contents
Sections
1. AIB Mortgage Bank, Collateral Pool & Legislative Changes
2. Irish Housing Market
3. Performance of Irish Covered Bonds
4. AIB Group Funding Profile
Appendices
Irish Asset Covered Bond Legislation
AIB Group Overview
Republic of Ireland Economy
3
Section 1: AIB Mortgage Bank, Collateral Pool & Legislative Changes
4
Overview of AIB Mortgage Bank
Registered as a Designated Mortgage Credit Institution (DCI)
License granted by Regulator – Feb 2006
Non-guaranteed, Public Unlimited Company wholly owned by AIB plc
9 Directors, including 3 non-executive directors
Major activities outsourced to AIB (ROI) Division subject to terms of the Service
Level Agreement
Mortgage Assets Total €16bn+
Capital Exceeds 8.5%+ of RWA at €766m
€15bn EMTN programme launched in 2006
3 ACS Bond issues completed, total €5.5bn
5
AIB Group’s position in the Irish Mortgage Market
Total Irish mortgage market drawn balances are estimated at €100bn+
AIB Bank market share 16%+
AIB Bank presence in all major towns and cities via a network of 275 offices
35%+ of the banked public have a primary account relationship with AIB Bank
80%+ of branch sourced mortgages come from existing AIB Bank account
holders
Mortgages are originated by AIB Bank and sold by AIB Mortgage Bank
AIB MB does not book mortgages introduced through intermediaries and only
holds assets comprising residential mortgages
6
Credit Policy
AIB Bank’s marketing is focused on customer relationships – ‘we sell mortgages to customers we know’
Priority measure is ‘ability to repay’ and then ‘asset quality’
For owner occupied residential mortgages the Max Loan amount determined by Debt Service Ratio
(DSR) = the Proportion of Net Income that is prudent to allow for purposes of Mortgage Repayments
Buy to Let mortgages utilise cashflow assessment
DSR is stress tested to allow for increases in interest rates of 2%
Max LTV = 92%
Lenders have no sanctioning Targets/Quotas
Exceptions are approved by Senior Mortgage Lenders
Regular reporting to Regulator
7
Residential Mortgage Historic Data
Loan to Value Ratio*Dec 200
2
Dec 200
3
Dec 200
4
Dec 200
5
Dec 200
6
< 75% 66 67 67 70 66
> 75% < 90%26 25 24 17 21
> 90% 8 8 9 13** 13
Total100% 100% 100% 100% 100%
* % of drawdowns
** Policy raised to 92% 2005
Arrears Profile Dec 200
2
Dec 200
3
Dec 200
4
Dec 200
5
Dec 200
6
% of Total Mortgage Advances 0.8% 0.5% 0.5% 0.4% 0.4%
New Business LTV Percentages
8
Residential Mortgage Portfolio Data
Indexed LTV Ranges of Collateral Pool
Indexed LTV RangeOutstanding
Balance
< 25% 12%
25% - 50% 28%
50% - 75% 41%
75% - 100% 19%
Weighted average Indexed collateral LTV 54.4%
9
Residential Mortgage Portfolio Data
Origination by year Weighted Averaging seasoning of pool = 28.6months Average legal maturity is 20 years Expected average life estimated between 5 to 7 years Total aggregate indexed LTV = 38%
YearOutstanding
BalanceAggregate Indexed
LTV of Year
< 2003 10% -
2003 10% 36%
2004 17% 42%
2005 27% 46%
2006 31% 49%
2007 5% 51%
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Residential Mortgage Portfolio Data
Geographic breakdown of Collateral Pool
RegionOutstanding
Balance
Dublin area 31%
Non-Dublin 69%
Occupancy Breakdown of Collateral Pool
TypeOutstanding
Balance
Own Residence 75%
Buy to Let (residential investment) 23%
Other (holiday home) 2%
Total 100%
11
ACS: AIBMB Collateral Pool
No commercial mortgages, no arrears > 3 months included in pool, minimal interest rate risk
Collateral Pool Criterion
Minimum contractual over-collateralisation 5%
Actual over-collateralisation (excluding cash) 64%
Pool size by PMV €9.029bn
Aggregate Prudent LTV 38%
WA Indexed LTV 54%
Dublin / non-Dublin 31/69
No. of properties 55,756
BTL / Owner Occupier 23/77
Fixed rate 13%
Interest only 24%*
Prudent Market Discount 15%
WA Seasoning c.28 months
* Interest Only loans are primarily < 5 years then revert to annuity
12
AIB Mortgage Bank
Summary
AIB Mortgage Bank launched three bond issues in 2006 totalling €5.5bn
Mortgages are originated from the AIB Bank branch network in Ireland
Tight credit policies ensure credit quality
Portfolio data illustrates granularity, low LTVs, geographic diversity
‘Interest only’ loans are primarily granted for periods of less than 5 years
Annuity effect on the portfolio contributes to reducing the LTV
Expected average life is between 5 & 7 years
13
Asset Covered Securities (Amendment) Act 2007
The rationale for the amendments includes
Introduction of Capital Requirements Directive in 2007
Ensuring Irish ACS legislation remains fully CRD compliant ACS legislation requires Irish ACS issuers to be compliant with the CRD at all times resulting in transparency for
investors and a 10% Basel II Risk Weighting
Enhancing investor protection
Completing legislative framework for a 3rd asset type - commercial mortgages
Changes ensure that Irish ACS are CRD compliant in terms of the definition of a Covered
Bond, but the changes do not go as far as the CRD in terms of eligible assets ensuring that
credit quality within the pools is maintained
The three key changes are
Quality of Eligible Assets
Risk Control
Monitoring & Compliance
14
Asset Covered Securities Legislation
The Irish Government has clearly demonstrated commitment to the growth of covered bond issuance in Ireland by updating the ACS legislation
The amended legislation has ensured ACS bonds are CRD compliant
Every effort has been made to provide transparency to investors
The result allows investors to compare the Irish ACS framework with leading covered bond competitors from Germany and France
15
Section 2: Irish Housing Market
16
Period of Adjustment for Housing Market
Adjustment in the housing market underway Rate of price inflation falling Forward looking indicators point to lower supply
Market had been in danger of overheating Level of price rises was becoming unsustainable Output at very high levels
Factors driving adjustment High level of prices Rising interest rates - leading to deteriorating affordability
17
Many Factors Underpinning Strong Housing Demand
Continued strong inward migration
Favourable demographic trends
Untapped demand: low headship rates in Ireland
Continuing demand for second homes
Strong growth of economy and employment
Easier financing: longer term mortgages, interest rates still low in historical context
Fiscal policy: mortgage interest relief for FTB, tax relief on rental income for investors, easing in stamp duty for FTB
18
House Price Inflation is Falling Sharply
National House Price Inflation
-1.2
-0.8
-0.4
0.0
0.4
0.8
1.2
1.6
2.0
Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07
5
6
7
8
9
10
11
12
13
14
15
16
Month-on-Month : LHS Year-on-Year : RHS
% %
Source: permanent tsb
19
But This Should Help Stabilise Deterioration in Housing Affordability
New House Affordability % of disposable income required for mortgage repayments *
In Ireland the activity relating to asset covered securities is primarily governed by the legislation which delegates the operational regulation to the Irish Financial Services Regulatory Authority (IFSRA)
Specialist bank principle - ACS can only be issued by a ‘Designated Credit Institution’ (DCI)
A DCI must be approved by IFSRA be owned by an IFSRA regulated bank be separately capitalised have non-executive Board membership agree to be restricted to activities defined within the ACS legislation
Eligibility for asset classes to be held by a DCI The Act restricts the asset classes, and requires IFSRA to issue a Regulatory Notice
(RN) for each asset class RNs have been issued for 2 asset classes - Public Sector and Residential Mortgages RNs describe the procedures for valuing the collateral
41
Asset Covered Securities Act 2001
Covered Asset Monitor (CAM) is an independent appointment, subject to approval by IFSRA. The CAM is responsible for monitoring the collateral pool
The DCI’s assets are divided between the pledged collateral pool and unpledged assets
The RN valuation methodology governs both pledged and unpledged assets, and requires
all mortgages to be indexed by reference to an IFSRA approved index, IL&P/ESRI Property Index
a Prudent Discount Factor (PDF) is used to discount upward movements of the index whilst all negative movements are taken in full, the result is the Prudent Market Value (PMV)
In the pledged collateral pool any one mortgage loan’s contribution to the collateral pool is limited to 75% of the PMV of the secured property
Loans may have high LTVs but the aggregate LTV of the entire mortgage loan portfolio of the DCI must not exceed 80% of the PMV of the properties
42
Asset Covered Securities Act 2001
The combined effect of The Act and the RN ensures the quality of the residential mortgage collateral cannot be compromised by changes in property market prices; the restrictions extend to controlling both the aggregate collateral holding in the DCI and the actual collateral Pool
The ACS Bondholders are protected at all times, since
The Prudent Market Value of the Pool must be > the ACS principal outstanding
The interest receivable from the Pool must be > the interest payable on the ACS for any 12 month period
The weighted average maturity of the pool must be > the ACS maturity
43
Asset Covered Securities Act 2001
Balance Sheet Interest rate sensitivity is subject to limits
Publication of statutory accounts, including report on collateral performance
In the Event of Default
National Treasury Management Agency (Govt. Agency) appointed
Pool exempt from bankruptcy proceedings
Bond holders prioritised
44
Asset Covered Securities (Amendment) Act 2007
The rationale for the amendments includes
Introduction of Capital Requirements Directive in 2007
Ensuring Irish ACS legislation remains fully CRD compliant ACS legislation requires Irish ACS issuers to be compliant with the CRD at all times resulting in transparency for
investors and a 10% Basel II Risk Weighting
Enhancing investor protection
Completing legislative framework for a 3rd asset type - commercial mortgages
Changes ensure that Irish ACS are CRD compliant in terms of the definition of a Covered
Bond, but the changes do not go as far as the CRD in terms of eligible assets ensuring that
credit quality within the pools is maintained
The three key changes are
Quality of Eligible Assets
Risk Control
Monitoring & Compliance
45
Asset Covered Securities (Amendment) Act 2007
Quality of Eligible Assets
Responds to investors and rating agencies desire to maintain high quality and well diversified Cover Pools. The changes have taken some of the CRD opportunities to enhance diversification but have maintained a focus on the eligibility of the highest quality credits
Residential Mortgages Securitised mortgage collateral becomes eligible for the pool, enhancing the credit quality and
most importantly the liquidity of the mortgage assets in the pool To facilitate diversification, mortgages from highly rated countries outside the EU are now eligible
(USA, Canada, Switzerland, Japan, New Zealand, Australia)
Commercial Mortgages Are now eligible provided a separate covered pool is established
Public Sector The 15% restriction on assets from the United States, Canada, Switzerland and Japan has been
removed In addition, New Zealand and Australia have become eligible countries (both AAA at S&P). Other
non-Aaa non-EU countries are not eligible Development Banks have now become eligible (only the EIB was eligible before)
46
Asset Covered Securities (Amendment) Act 2007
Risk Control
Legislative Over-collateralisation
Currently, all Irish ACS issuers are contracted with the rating agencies to 5% over-
collateralisation
Now obligation to maintain 3% over-collateralisation by law for mortgage and public
sector pools
New mandatory 10% over-collateralisation for commercial mortgage ACS required by
law
The Regulator will continue to issue Regulatory Notices which govern the collateral
pool valuation procedures
Collateral pools will continue to be valued by reporting to CAM’s on a weekly or
monthly basis
47
Asset Covered Securities (Amendment) Act 2007
Risk Control
Pool Hedge Collateral The amendment introduces a separate register of pool hedge collateral which will
clarify the rights of hedge counterparties making it easier for issuers to enter into ISDA and CSA agreements for the direct benefit of the cover pool and bond holders
The amendments will ensure the transparent management of pool hedge collateral Facilitates effective use of derivatives to manage interest rate and currency
exposures allowing issuers to improve the matching in the pool for the benefit of bondholders
Changes in the duration gap calculation Test has now been simplified to ensure transparency Will assess the weighted average time to maturity of the assets and liabilities in the
pool
Reduction in the volume of substitute assets Compliant with the CRD, the volume of substitute assets under these amendments
will go from 20% of pool assets to 15% of ACS issued
48
Asset Covered Securities (Amendment) Act 2007
Monitoring & Compliance
The ACS legislation is at the forefront of the market with regard to its monitoring and compliance
The weekly or monthly reporting (depending on the issuer) of the Cover Pools and DCI information and the real-time monitoring of that data by the Covered Asset Monitor mean that the ACS market retains the strongest oversight – hence very few amendments have been made here
The adjustments are limited to:
Ensuring the CAM has responsibility for monitoring the legislative over-
collateralisation requirement as well as the existing contractual over-collateralisation
requirements
Ensuring the CAM’s obligations to monitor ACS issuers now captures any
Commercial Mortgage issuers that enter the market
The role of the NTMA as the servicer of last resort has not been amended in the
legislation remaining a cornerstone of the ACS framework
49
Asset Covered Securities Legislation
Summary
The Irish Government has clearly demonstrated commitment to the growth of covered bond issuance in Ireland by updating the ACS legislation
The amended legislation has ensured ACS bonds are CRD compliant
Every effort has been made to provide transparency to investors
The result allows investors to compare the Irish ACS framework with leading covered bond competitors from Germany and France
50
Appendix: AIB Group Overview
51
Allied Irish Banks p.l.c.
Ireland’s largest quoted company & financial institution by
capitalisation € 19.5 billion (Apr ‘07) 15.2 % of Irish Stock Market Index
12th/43 DJ € Stoxx Bank Index
25rd/52 FTSE Eurotop Bank Index
Year End Dec-05 Dec-06
Total Assets € 133bn € 158bnGroup Pre-Tax Profit € 1,433m € 2,298mTier 1 Ratio 7.20% 8.20%Total Capital Ratio 11.10% 10.70%
52
Clear no. 1 Irish banking franchise operating in a high growth economy
Providing the full range of retail and commercial banking services