Negative interest rates weigh on margins at Ireland's AIB

DUBLIN, Nov 5 (Reuters) - Allied Irish Banks expects its net interest margin, a key metric showing the profitability of its lending, to fall marginally below 2.40% for 2019 as a result of the enduring negative interest rate environment for European banks.

One of Ireland’s two dominant lenders, AIB reported a net interest margin (NIM) of 2.42% for the nine months to the end of September, down from 2.46% three months earlier and a rate of 2.51% a year ago.

European Central Bank policy of charging banks for hoarding cash, introduced five years ago to encourage them to lend more to bolster a flagging economy, has exacerbated problems for lenders and manifested in a 11 basis point hit on AIB’s NIM in the third quarter to 2.32%.

The bank’s medium term strategy, which will be refreshed early next year, had targeted maintaining a NIM above 2.40%.

“As we have moved through 2019, the operating environment for European banks has become more challenging, but despite this the group continues to perform well to deliver a solid underlying operational performance,” AIB said in a trading update.

AIB also expects its fully loaded tier one capital ratio, a measure of financial strength, to fall to around 16% at the end of 2019 from the 16.5% reported on Tuesday and the 17.3% mark at the end of June.

That was still well above its medium-term target of 13% as the bank seeks regulatory approval to begin returning excess capital to shareholders next year, a key selling point of its 3.4 billion euro 2017 initial public offering (IPO).

New lending so far this year at the 71% state-owned bank was in line with the same period in 2018 as its share of the Irish mortgage market inched up to 32%. Non-performing loan exposures as a percentage of its loan book fell below 6%.

Chief executive Colin Hunt said last month that AIB planned to cut its number of staff to below 9,000 by the end of 2022 from 10,000 now to keep a lid on rising costs, and the bank said on Tuesday it expected to finish the year with fewer than 9,500 employees. (Reporting by Padraic Halpin; Editing by Muralikumar Anantharaman)