Oireachtas Committee on Agriculture, Food and the Marine
Tuesday, November 24th 2015
Opening Statement by Allied Irish Banks, p.l.c. – Mr. Ken Burke
Chairman and Members of the Committee, thank you for giving AIB the time to provide the Oireachtas – and the Irish public – with an update on the bank’s continued support for the dairy sector during this cyclical downturn period. My name is Ken Burke and I have been Head of Business Banking with AIB for the past three years. With me today are:
· Dr. Anne Finnegan – Head of Agri Sector
· Margaret Brennan – Head of Sectors
Can I refer you to AIB’s presentation that was submitted to the Clerk in advance.
When we were before you in February last, I outlined how important the farming sector is to AIB and the nature of the very long term association that AIB has maintained with the Irish agri-food sector.
I welcome this opportunity to update you on the performance of the sector and AIB’s specific program of support for farming customers since that time. The demand for credit from farmers, and in particular dairy farmers, has remained strong throughout much of 2015. However, in recent months we have seen some slackening in demand which we had expected as tax bills fall due, farmers postpone non-essential investment in preparation for a leaner income year in 2016 and as farmers await grant approval under TAMS II.
We adopted a conservative outlook to 2015 dairy farm cash flow performance, using an annual average milk price of 26 cent / litre (inclusive of VAT) for 2015 when budgeting for either new lending or working capital support. While milk price has declined significantly from the high level of 2014, it is now likely that based on CSO figures the price will average over 29 cent / litre (inclusive of VAT) for 2015.
An up to date analysis of AIB’s dairy farmer customer base again indicates that the sector remains well positioned with strong cash balances, available overdraft limits and overall strong historic credit performance relative to other AIB SME sectors. I would draw your attention to Slide 3 of the slide deck that was pre-circulated which clearly illustrates this trend. We welcome the decisions to phase Superlevy bills over three years and to pay a significant advance on Direct Payments, both of which resulted from Government and Department of Agriculture, Food and the Marine intervention and will serve to alleviate cash flow pressure. We have been working to support those farmers with high tax bills to spread this cost over the year through the use of our PromptPay facility. We anticipate that, in the main, working capital pressure will not manifest on dairy farms until quarter 1 2016.
Our prudence in lending to this sector gives us a level of comfort that whatever income pressure materialises for our customers, in the main it will be short-term in nature. Our lending to dairy farmers is on the basis of a long term through the cycle budget price of 30 cent / litre (inclusive of VAT). Our focus in Agri-Food and all SME sectors is on cash flow lending. We recognise that Irish dairy farmers are much less indebted than some of their European or Southern Hemisphere counterparts. We also recognise that structural differences exist between farming in these regions and the nature of lending varies greatly with a greater propensity for intergenerational debt and long term interest only facilities. We believe that Ireland’s comparatively lower level of indebtedness in this sector does confer some advantage when prices are low, however, Irish farmers still experience financial pressure, perhaps just not as severe or indeed as quickly as farmers elsewhere. For AIB, the low level of gearing in Ireland versus other countries does not necessarily determine the capacity of the sector to take on debt. Rather, we seek satisfaction on the strength of the underlying cash flow at individual farm level.
As such, the AIB message for a number of years has been to encourage farmers to focus on being ‘Better Before Bigger’, investment in expansion should only be undertaken in a very planned manner when existing efficiencies have been maximised. And as I mentioned when we were here before, AIB has been espousing this in our national roadshows over the past year which were attended by in excess of 3,500 farmers. Since we were last with you we have been proactively engaging with farm stakeholder groups on this theme including the following events:
· Irish Grassland Association Dairy Summer Tour attended by 500 dairy farmers;
· Macra na Feirme Young Farmer Forum attended by 100 farmers;
· Dairy Discussion Group Meetings;
· Participation in National Dairy Forum Chaired by the Minister for Agriculture, Food and the Marine;
· Agricultural Science Association Dairy Study Tour to Northern Ireland, sponsored by AIB;
· AIB / Teagasc Best Farm Business Plan awards for agricultural college students;
· Participation in IFA dairy expansion seminars;
· Participation in Teagasc Get Financially Fit seminars.
In 2014 we doubled our team of specialist Agri Advisors. These regionally based Advisors undertake detailed farm financial analysis of all substantial farm lending cases and examine the technical management and efficiency of the farm. This team are not necessarily motivated by sales or lending targets but rather to ensure that the lending proposal is underpinned by a sustainable cash flow which will cover farm costs, adequate living expenses and can service capital and interest repayments. Their time is not spent in recruiting either new to AIB farming customers or new lending opportunities but rather on supporting the analysis of lending applications and supporting and training our frontline staff. We believe that this component of our model is key to the long term sustainability of our lending to the sector.
Last Spring, the general expectation was for a market recovery in the first half of 2016, however, current market signals suggest that this downturn could extend into the second half of 2016, and recovery may not materialise until after the peak months of Irish production in 2016.
We are in no doubt that many farmers will require short-term working capital support during this trough period. AIB is committed to playing its part in supporting farming customers through this market cycle. Indeed as we outlined when we were with you in February, we have significant experience of supporting the pig sector through various income cycles and the more recent cycles in the dairy sector both in 2009 and 2012. Over the past number of months our Relationship Managers have been engaging with those farming customers who might need our support in the near term encouraging them to make early contact with the bank. The type and magnitude of support needed will be best informed by the development of cash flow projections for 2016 and we are encouraging all dairy farmers to undertake a cash flow plan for the year.
As detailed when we addressed you in February last, our support package for dairy farmers during this income downturn includes the following; review of current monthly repayment commitments, short term increase to working capital facilities, short term loan facilities and where appropriate an interest-only period on existing borrowings with no repricing of existing facilities. We are utilising our existing core lending products to support the sector at this time, including our Farmer Credit Line (4.075% variable)[1] which has the lowest cost of any working capital product in the farmer market and is extremely competitive relative to the cost of merchant credit. We also have in place a €200 million AIB / Strategic Banking Corporation fund which includes term finance for continued farm investment at an Interest Rate of 4.5% variable. All of our customer facing and credit teams have been briefed on the current market situation and AIB’s available support measures. At this juncture we have not seen a material increase in requests for support but as I have already said we anticipate increased engagement in quarter 1 2016.
We are very conscious of the significant medium to long term opportunity for the Irish dairy sector and the Irish Economy. We are also aware of the heightened short-term volatility that must be managed particularly in the next 6-12 months. As the leading bank to the dairy sector we recognise the key role that we play in supporting the sustainable development of the sector and indeed supporting it through the fullness of the cycle.
In summary, on behalf of the bank, I want to again express thanks to you for inviting us here today. We very much appreciate the opportunity to discuss with you what is one of our most important SME sectors.
Thank you and we look forward to your questions.
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[1] Correct as at 23/11/2015