03 Feb Leading bank puts sustainability at the center of everything it does
Colin Hunt, CEO, Allied Irish Bank, describes how the robust institution is supporting customers through crisis and working to secure a world in which future generations can prosper.
As CEO of Ireland’s largest retail, commercial and corporate bank, what’s your analysis of the state of the Irish economy at the moment and of the Irish banking sector. How have Irish banks helped weather the storm of the COVID-19 pandemic and cushioned its impact. What role have they played in supporting the real economy during the crisis?
We are dealing with a crisis that is truly unprecedented both in terms of its underlying causes and the scale of its impact. Large parts of the Irish economy and many other economies are in forced hibernation at the moment, and they’ve been living with severe restrictions for very good health reasons. The actions that have been taken by policymakers in terms of fiscal policy and monetary policy have helped to mitigate the damage to the fabric of the economy. Indeed, banks have had a very significant role to play in that as well. When the crisis first hit us in March 2020 and we started to go into lockdown from mid-month onward, the industry collectively came together and put in place payment breaks that were much needed at a time of great uncertainty and great instability. They were an important relief measure at a time of great worry for a lot of our customers. The industry worked together very well, we managed to deploy those payment breaks at speed and at pace, in a way which supported our customers when they needed us more than ever before.
We obviously have seen a very significant increase in unemployment, which has been driven by the nature and scale of lockdowns, but the economy has been surprisingly resilient. Thanks to a very strong performance by the export sector and the multinational sector, it is looking very likely that the Irish economy will recover quite quickly; depending on the speed of vaccine distribution and the return to “normalized” economic activity, Ireland may not only see a positive growth rate in gross domestic product (GDP) terms for 2020, but could potentially return to once again being among the fastest growing economies in the European Union (EU). That very strong GDP performance is driven very largely by the external sector, by the multinational base and just doesn’t reflect the underlying domestic demand and conditions in the economy, which obviously have been significantly impaired by the lockdown and by the restrictions that are necessary at this moment in time.
Consumers simply haven’t had the opportunity to spend, nor have they had the opportunity to travel and, as a consequence, we’ve seen a surge in terms of deposits on our balance sheet. We’ve seen a surge in terms of savings rates across the economy—the savings ratio stood at 36 percent in the second quarter of the year, which is phenomenal. The increase in savings, the protection of the underlying fabric of the economy, the mitigation mechanisms put in place by very aggressive fiscal and monetary policy actions, the conduct of the banking institutions in supporting our customers—all that has actually collectively created an environment where we can reasonably expect a very strong rebound in activity as the COVID emergency fades.
This March will mark a year that Europe has been in this crisis. What would you say have been the major lessons learned from it and what permanent transformations will shape the Irish business and investment landscape going forward?
COVID has forced 10 years of change into 10 months across the global economy. I believe this has led to a dramatic acceleration of three long-term secular trends. The first trend that has accelerated is the move toward greater use of digital. We were already spending more of our lives online, but this pandemic has led to a quantum leap in terms of online living. Looking at our own customer base, today we have about 40,000 customers who will physically pass the thresholds of our branches around the country on a given day. On the same day, we would also have 1.2 million of our customers engaging with us online. While we haven’t noticed a significant change in customer behavior among the under-40 age group, there’s been a very significant change among the over 65s. We’ve seen a 27-percent increase in digital engagement from our more mature customers over the course of the past months, largely driven by COVID. Digitalization is far more important than it was: we’re going to see an increased customer usage of the digital channels with customers increasingly demanding access to an increased product range online. It has led to a very significant behavioral change in terms of how customers want to engage with organizations like us, for everyday ordinary transactions.
The second accelerated trend is that it has fundamentally altered the way that we work. In the space of days, we moved 80 percent of our colleagues to work from home. We have people who remain on the front line in branches and call centers, but the vast majority of my colleagues are working from home. I believe that when the COVID emergency is over and when the restrictions are behind us, my colleagues will not want to return to the office five days a week as they did before. They want to have a hybrid way of working. I do believe that we will end up in a situation where the vast majority of my colleagues work from home for approximately two days a week. This will lead to greater flexibility in the way we work. The sort of change that we expect post COVID will replicate broadly across the economy.
The third trend is sustainability, which has become increasingly important to businesses, investors, regulators, consumers, customers and employees over the course of the past 30 or 40 years. There was a view at the start of the pandemic that this crisis was so severe, so present and so real, that we had to sideline the sustainability issue to deal with the here and now. That’s absolutely false: the pandemic has exposed the frailty and the fragility of the world in which we operate like nothing ever before. I believe it has actually moved the sustainability issue closer to the top of the agenda, the political agenda, the regulatory agenda, the investor agenda, the customer’s agenda, the business agenda. I think it has seen a marked acceleration in terms of its importance because of COVID. These three trends will shape the operating environment for businesses for decades to come.
AIB is a massive player on the market with over 300 locations and 9,500 employees. Can you give us a brief introduction to the bank and some of its key distinctive features? What sort of historical role has the bank played in Ireland and how does it stand out?
AIB was formed from the merger of three Irish banks in 1966. We are a retail, commercial and corporate bank. While most of our activities today are in Ireland, we had a very outward orientation in the past and were very active in the international marketplace. We had a Polish bank for a period; we had an American regional bank for a period; we had corporate operations stretching across much of the world, from Australia, through Europe, into the U.S. and Canada. As an institution, we made some really bad decisions coming into the last global financial crisis, which ultimately ended up in us being rescued by the state. Consequently, we had to focus on our core markets. We disposed of our international businesses, with the exception of our business in Britain. AIB as an institution required a bailout from the government of more than €20 billion. That bailout casts an ongoing shadow on the institution.
We have 2.8 million customers today. Our stated purpose is to back our customers to achieve their dreams and ambitions. We are in the premier league in fintech. We have the best Irish banking mobile app. The number of our customers that are active on that continues to grow. This functionality continues to improve and, today, the vast majority of our personal loans are completed online. We’ve got capacity to do mortgage lending online. Almost 90 percent of all personal deposit accounts over the last year were opened online. We have been very heavily focused on improving our digital capacity in recent years, which is what customers want.
Roughly 40 percent of Irish individuals and businesses have their primary bank account with us. AIB has an extraordinary franchise. Our task is to deliver a complete suite of competitive products to them in the way that they want. AIB has a very clear strength in mortgages, in credit cards, current accounts and deposit accounts, but there are a few gaps such as in life, pensions and wealth management. I am very much focused on plugging those gaps, so that we can deliver on our purpose and on our strategic ambition, which is to be at the heart of our customers’ lives. I want us to have a complete product range for our customers both personal and business, and to deliver those products in a way that our customers want now.
One of the effects of the COVID-19 crisis has been the clear acceleration of digitalization. How has the digital push materialized at AIB and what can you tell us about the bank’s digital agenda?
We invested about €1.4 billion between 2015 to 2016 chiefly on upgrading our IT systems and our digital capacity. This doesn’t mean that we are not committed to having a physical presence around the country. We have seen an accelerated shift away from physical locations toward digital locations for everyday banking transactions—but it doesn’t mean we’re not committed to our network. We’re going to see an evolution of what happens in the branch—away from everyday transactions and more toward sales, advice, and more complex transactions. I’m very committed to our network, I think it’s really important, it’s a shop window for the organization in the towns and cities of Ireland. It also highlights the fact that we are embedded in our communities, by having a physical presence there, and by having our team living in those communities and contributing to community and business life.
Today, we have among the strongest capital liquidity positions of any bank in Europe, our CET1 ratio was about 16 percent at the end of the third quarter of 2020. We entered the last crisis in a position of capital and liquidity stress, but we entered this crisis in a position of capital and liquidity resilience. That’s a fundamentally different environment. When we emerged from the last global financial crisis, the bank had lost control of the group’s strategic agenda. Thanks to the robust capital and liquidity position we have built over the last decade, we will emerge from this crisis in a fundamentally different position to the way we exited the last.
After 47 years, the U.K. has formally parted from the EU. Ireland, as its closest neighbor, will undoubtedly feel the effects of this transition brought about by Brexit. There are 95,000 Irish businesses trading with the U.K., for example. How will Brexit be felt in the banking and financial sector, and to what extend do you feel that it could also be a window of opportunity for Ireland in the longer run?
Brexit is a cause of great regret politically and economically. There was a very understandable relief when the European Commission and the U.K. government came to an agreement on Christmas Eve at last, because the alternative of a no-deal Brexit was really much worse. We shouldn’t lose sight of the fact that while the deal that has been struck is welcome, it is thin. We don’t have tariffs, but there is obvious friction in terms of trade between Britain and the EU. That is even before Britain fully applies the customs regulations that have been made necessary by its decision to leave the EU. I suspect that the friction that’s there will remain a feature for a foreseeable future. I think this is the first trade deal in history that has led to reduced access to a market rather than increased access to a market, so it is unique and, ultimately, it will impair the economic vibrancy of the British economy. That’s a cause for regret. Britain remains an important trading partner for Ireland, not least for indigenously owned industries, in particular in food manufacturing.
At AIB, we will continue to work with our customers to support them through this period of change and uncertainty. Economically, it is going to have a negative impact on Britain and on our own economic vibrancy as well because of the sectoral impact. It’s not as bad as it could have been, but it is undoubtedly leading to less smooth trade relationships. I believe that this friction that we see is here to stay for the foreseeable future.
Looking at the broader implications for the Irish economy: Ireland is now uniquely positioned as a location for international organizations seeking free and seamless access to the European single market. I suspect that our share of global foreign direct investment flows will increase as a consequence of Britain’s departure. I suspect that we will see increased activity in Irish financial services. Financial services are a very important part of the British economy and there were preemptive moves on the part of some large players in the City of London to protect their businesses by increasing their presence within the EU pre-Brexit. The agreement that was signed in December is silent on the topic of services, and I believe that we’re unlikely to see a deal on services in the foreseeable future, given how long it took us to arrive at a deal on trade. I think this may well be a multi-year endeavor. So I suspect that the anticipation wave we saw in the run up to Britain’s departure from the EU will be followed by a realization wave now on the part of certain institutions, so I do think you will see more banking activity leaving the city and moving within the EU. The key beneficiaries will be the ones that have already benefited: Frankfurt, Paris, Luxembourg, Amsterdam and Dublin.
AIB is quite remarkable in its commitment toward climate action. In late 2019, the bank became a founding signatory of the United Nations (UN) Environment Programme Finance Initiative Principles for Responsible Banking. AIB has set a deadline for achieving net-zero carbon emissions in its own operations by 2030 and wants green lending to account for 70 percent of new customer lending by 2030. It has also invested in wind energy projects, launched a €5-billion climate action fund and created a green mortgage. Can you tell us more about these initiatives and how AIB is paving the way for a low-carbon economy?
Climate change is the challenge of our generation. This is a genuinely existential threat, the science and the data are indisputable. If left unchecked, this has the potential to do irreversible and massive damage to the world in which we live and to our societies. Our children and our grandchildren will never forgive us if we fail to address the challenge of our generation, which is to stop and reverse this terrifying global phenomenon. No one country, no one business, no one individual can do this—it has to be a collective effort. This is not an attempt to gain market share, profile or profits; it is a move by us to do our part, both as a business and by supporting our customers.
We are a substantial business in our own right, so we have an obligation ourselves to reduce our own carbon footprint. We want to work with our customers, but we also want to encourage others to come on the journey with us. We do recognize that we have a role to play, but everybody else has a role to play, and so we were very enthusiastic about working with others. That’s why we were a founding signatory of the UN declaration for environment program and the only Irish Bank to be a founding signatory. We’ve introduced green mortgages and we have further green products in development. We raised a €1-billion green bond in 2020—the first and only Irish bank to do so to date. In the face of a pandemic, it is quite challenging to grow your lending book. The fastest growing part of our lending book in 2018, 2019 and, 2020 was our sustainable lending book, in terms of energy, climate action and infrastructure. Today, it’s the only part of our lending book that hasn’t required any COVID-19 modifications. It’s given us an opportunity to lend in a way that is very resilient from a credit perspective.
We’re also engaged with our third-party suppliers, the entirety of our third-party supplier network. We have changed our supplier code or procurement code to introduce sustainability as a key measure. Not only are we reducing our own carbon footprint, but we also expect those people that work with us to do the same. We are very ambitious in the space and we want to work with people who share our ambition. We expect that those people that we’ve got commercial relationships with will share our ambition and take deliberate action to reduce their own carbon footprints. We have a net-zero commitment to reach carbon neutrality by 2030. We have targets in relation to our loan book growth and so on, but there’s more to be done. We have a strap line in all our communications, where we pledge to do more. There’s no question of us resting on our laurels, if anything, we’re going to increase the pace at which we advance on the sustainability front, with more and more products, more ambitious carbon reduction and more ambitious deployment of capital. We will do more.
We really want to play a leading role as a driver of the sustainability agenda, not only in the Irish context but internationally, because this is the existential challenge of our generation. As a people, all over the planet we have a choice: are we going to be selfish about the future, or are we going to be generous? If we choose to be generous, it means that we all have a role to play in securing a sustainable climate and a livable planet for our children and our grandchildren.
When you took over the bank as CEO two years ago, you emphasized your strong commitment to sustainability. You said: “We are focused on ensuring AIB is leading the Irish financial market in climate change action by creating a virtuous green circle, where sustainable lending practices attract the capital that supports further lending for the benefit not only of our customers and the wider economy, but also the fragile planet that sustains us all.” Overall, what are some of your biggest achievements over the last two years?
It is a huge privilege to lead this organization, it is so important to the wellbeing of the economy and society in Ireland. Its a massive honor. I’m very ambitious for this institution, I’m very ambitious for our customers. I think we have an opportunity ahead of us to significantly improve our product range, and put the bank in a position to be able to deliver on that strategic ambition, to support our customers and be at the center of their financial lives. I might not have envisaged that a global pandemic would occur while I’m leading the organization, but that’s the hand that I and everyone else have been dealt. I have to say that the organization responded to the COVID challenge in an extraordinarily agile and responsive way, changing our products, changing our policies and procedures, moving to work from home. Like so many other businesses, we did it in a very short period of time and, 12 months on, we remain remarkably resilient, and are there for our customers and for our colleagues.
What I look back at with the greatest pride, is putting the sustainability agenda at the very center of everything that we do. I was building on the work done by my predecessors, but that is the thing that I’m probably the most proud of. I think that is the feature that will be most impactful long after I’m gone.
What is your final message for the readers of Newsweek?
Hold on and prepare for the better days that lie ahead. The world is enduring a major trauma, with countless lives lost and damaged across the globe, and economies brought to their knees. But collectively we must recover, assist each other and commit to ensuring the better times ahead are sustainable. If all of us, as individuals, as businesses, as governments and as society, take action now, we can ensure that the world we hand over to our children and our grandchildren is one that they can prosper in. We owe it to the next generation, and to the one following, that we do everything within our power for a sustainable future, for their sustainable future, to become a reality.