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AIB Mortgage Bank Asset Covered Securities April 2010

AIB Mortgage Bank Asset Covered Securities April 2010. A number of statements we will be making in our presentation and in the accompanying slides will not be based on historical fact,

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AIB Mortgage Bank Asset Covered Securities April 2010

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  1. AIB Mortgage Bank Asset Covered Securities April 2010 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. The following commentary is on a continuing operations basis. Any growth percentages (excl. EPS) are shown on an underlying basis, adjusted for the impact of exchange rate movements on the translation of foreign locations’ profit and excluding interest rate hedge volatility.

  2. Agenda • Allied Irish Banks • Key events 2008 – 2010 • Pro-forma Post Nama & Disposals Loan Books • AIB Mortgage Book • Funding • Irish Economy • Asset Covered Securities - Ireland • AIB Mortgage Bank

  3. Allied Irish Banks – key events 2008 - 2010 • 2008 Q 4 announcements • Ratings Aa2 / A+ / AA- • Sept. – Irish Govt announces bank liability guarantee scheme • 2009 H 1 announcements • March 2008 Dividend missed, Board changes, Ch, CEO,CFO • May €3.5b Preference Shares + warrants issued to Gov’t • June € 2.4b Capital buy back creates € 1.1b gain • 2009 H 2 announcements • Aug. Press statement – potential equity investment • Sept. Gov’t proposals for new Guarantee Scheme (ELG) & NAMA proposals, total scheme at c. €84b.of Prop.& Const. loans , AIB €24b • Sept. & Nov. AIB re-enters unguaranteed 3yr & 5yr bond market • Nov. Further Board appointments • Dec. EC ruling requires AIB to defer ‘may pay coupons’ T (i) & Upper T (ii) • Dec. Shareholder EGM votes to accept NAMA participation • 2010 March announcements • €1.8b Lw T(ii) Exchange, generates Core T(i) €445m • Regulator requires AIB to raise equivalent of €7.4bn of capital; targeting a Equity T1 ratio of 7% • First tranche of NAMA loans €3.3b @ 42% discount • Ratings A1 / A-(n) / A-

  4. Pro-forma post NAMA, post disposal Significantly de-risked and recapitalised profile • Reorganisation of credit and risk functions • Targeted equity ratio 7%, core tier one ratio 8% Loan Book • Capital Markets c. €22.4bn • Well spread across sectors and geographies • Emerging signs of stability • Republic of Ireland c. €58.4bn

  5. AIB Bank Republic of Ireland – Total Mortgage Book • Total book €27.1bn, up 6% in 2009 • c. 36% share of all new business written in the Irish market • Borrower profile • Arrears profile remains better than peers • 90+ days 1.96% including impaired loans of €429m • Buy to let arrears more than twice owner occupier level of 1.5% • Bad debt charge €91m in 2009, 35 bps of average mortgages • Unemployment to determine future loss levels AIBMB’s Historical Quarterly Cover Asset Pool Data – provided on web site

  6. Capital Senior Debt CDs & CPs Deposits by banks – unsecured Deposits by banks – secured Customer a/cs ACS Allied Irish Banks – 2009 - Funding % • Solid funding base in still challenging conditions • Customer deposits 51% of funding, up from 49% at June • Loan deposit ratio 146% (123% excluding held for sale assets NAMA), down from 156% at June • 2 successful non Government guaranteed bond issues in H2 • ELG facilitates guaranteed issuance out to 5 years • €48bn in qualifying liquid assets / contingent funding at year end and continuing to increase capacity • NAMA bonds to significantly improve liquidity profile • Balanced funding maturity profile post 2010 • Funding from monetary authorities not material 10% 10% 7% 10% 3% 3% 4% 6% 8% 5% 15% 19% 49% 51%

  7. Irish Economy • Economic Performance in Recent Years • Impact of housing downturn from 2007 • Housing sector remains weak • Mortgage debt in decline • Framework for recovery • Improving economic conditions • Public finances stabilise • Irish Economic Data & Forecasts 2006 -2011 • Stronger Performance from 2012

  8. Irish economy outperformed strongly from 1994 to 2007 Rapid growth in domestic demand took over from traded sector as main driver of growth Big rise in employment from 1994 – 2007 with large inward migration. Period of very low unemployment But, economy entered recession in 2008 for first time since 1982 GDP declined by 3% in 2008 after 14 years of buoyant growth Sharp decline in GDP of some 7% in 2009: further contraction likely in 2010 Housing collapse knocks some 10% directly off GDP in 2007-2010 Deep global recession also impacts on very open Irish economy Very sharp tightening of Irish fiscal policy depressing activity even further Economic Performance

  9. Impact of housing downturn on economy • Housing became a very large sector of economy - over 14% of GDP in 2005/06 • Sharp fall in house building activity knocks around 10% off GDP: some 2% in 2010 • Housing completions fell to 26,000 in 2009 from 88,000 in 2006. • Housing investment to fall further to close to 3% of GDP in 2010/11 (an 80% contraction) • Big drop in house prices of 45-50% • 50% fall in construction employment • Significant negative knock-on effects on household spending and confidence • Big hit on government finances via a sharp decline in property taxes and rising cost of unemployment benefit • Banking system hit by rising bad debts in property sector, curtailing credit, with banks requiring State support

  10. Housing sector remains weak • Housing output to fall further to 10,000 units in 2010 and 8,000 in 2011 from 26,000 in 2009 and almost 90,000 at peak • Very low level of new construction activity. Commencements have declined to a seasonally adjusted annualised rate of only 6,000 • Once-off builds account for over 70% of starts. Multi-unit developments running at a seasonally adjusted annualised rate of just 1,500 units • Migration flows have turned negative. Outflow of -50,000 estimate in year to April 2010 v 2006/07 inflows of 70,000 per annum • Outward migration depressing demand but population growth still supportive. • Forecast demand for 20,000 – 25,000 units per annum over 2010-2012; longer term demand of 35,000-40,000 • Very low levels of new supply will help erode excess stock • Prices continue to adjust lower but recent indications are that pace of decline is slowing

  11. Mortgage debt in decline • Strong increase in personal sector indebtedness to 2007 – largely mortgage related (85% of household debt) • Residential mortgage indebtedness grew from under €25bn at end 1999 to €123bn at end 2007 • Rate of growth in mortgage debt outstanding has turned negative • 28,333 mortgages (3.6% of total) more than 3 months in arrears in Q4 2009 • Still extremely low level of repossessions – especially from main stream lenders • Repayment affordability at best level since 1995 but set to deteriorate • Wage cuts and tax increases impacting on disposable income • Mortgage rates are on the rise as lenders increase margins

  12. Framework being put in place for economic recovery • Rebalancing of the economy • Much lower exposure to construction • BoP moving towards balance with increased focus on exports • Recovery in household savings with private debt levels falling • Fiscal consolidation • Corrective fiscal measures of 7.5% of GDP in 2009-2010 • Budget deficit stabilised • Further but more modest corrective fiscal measures in store post 2010 • Resolving banking crisis • Transfer of P & C loans to NAMA in 2010 • Recapitalisation of banking system – Gov injects substantial funds • Improving the flow of liquidity • Improving competitiveness • Engineering a real devaluation • Wages and prices in marked decline. House prices and rents fall sharply • International recovery now underway • FDI into Ireland rose in 2009 (UNctad) and world trade now recovering

  13. Economy now stabilising • Manufacturing PMI hit 53.0 in March, its highest level since Sept 2007 • Services PMI at 49.6 in March, the best level since January 2008 • Retail sales have bottomed out • Car sales surge on scrappage scheme • Home sales pick up and rents stabilising • Consumer confidence on the rise • Industrial production held up reasonably well in 2009 and rose strongly in Jan 2010 • Strong pick up in service exports in H2 ‘09 • BoP deficit halved in 2009 • Rate of increase in Live Register has moderated markedly since mid-2009 • Decline in monthly redundancy numbers evident since mid-2009

  14. Key indicators improving

  15. Improving economic conditions this year • Exports to pick up on improving global trade - BoP deficit to be largely eliminated • Household savings have risen to a high level and could support spending • Easing in the pace of job losses given downturn in construction well advanced • Unemployment to level off as redundancies ease and emigration rises • Rising consumer & business confidence • Further decline in consumer prices • Irish HICP rate to remain well below UK & eurozone levels • Sharply falling unit wage costs (-8% in 2009/10) helping competitiveness • Housing market begins to stabilise as new supply falls to very low levels • Stabilisation of budget deficit

  16. Irish bond spreads narrow as public finances stabilise • Tough government decisions stabilise the budget deficit – big spending cuts and tax hikes • Deficit of 11.7% of GDP in 2010, falling to 3% by 2014 as economy recovers • Ireland still has one of lowest debt ratios in EU: 51% at end 2009 - allowing for cash balances • Authorities running large cash balances: €27 billion at end Q1- compares to €18.7bn budget deficit target for 2010 • Over €10bn of the €20bn 2010 government bond funding programme done in Q1 • Very little gov. debt maturing until late 2011 • Low public debt gives the State the capacity to support the banking sector • €7 billion recapitalisation of AIB/BOI in 2009 came from National Pension Reserve Fund • NAMA taking property loans off banks • Sovereign Irish CDS and government bond spreads have narrowed sharply in past year

  17. Irish data & forecasts (2006-2011) Source: CSO, AIB ERU Forecasts

  18. Stronger performance from 2012 Ireland Population Age Estimates • Open economy will continue to benefit from globalisation, FDI • Large price and wage falls are helping economy to regain competitiveness • Exports to benefit from global recovery • Ireland has youngest population in EU • Housing output will need to rise from extremely low 2010/11 levels • Public infrastructure still at active stage of development • Scope for rebound in depressed consumer spending and business investment • Return to positive GDP from 2011 • ESRI says Irish growth rates of 5.5% likely in medium term • AIB sees growth in 4-5% range from 2012 Source: CSO AIB ERU Medium Term Growth Forecasts

  19. Asset Covered Securities - Ireland • Overview of legal framework

  20. Overview of ACS Framework - 1 • Irish covered bonds, known as Asset Covered Securities or ACS, are issued under a legal framework, the ACS Act 2001, amended in 2007.   • Asset Covered Securities can only be issued by a specialist bank – “Designated Mortgage Credit Institution” (DMCI) • The Financial Regulator licenses DMCI’s only if the applicant - • is owned by a regulated bank • is a separately capitalised standalone bank • has non-executive board membership • provides a detailed account of the business • appoints a Cover Asset Monitor • Cover Asset Monitor (CAM) • Appointed with the approval of the Financial Regulator. • Monitors on-going compliance with the ACS Acts. • Pre-approve all additions/removals to and from the pool. • Reports to the Financial Regulator. • Regulatory Notices under the ACS Acts are issued by the Financial Regulator – provide detailed rules

  21. Overview of ACS Framework - 2 • Over-collateralisation: • ACS Act stipulates 3% minimum, Prospectus commitment is 5% • Loans valued at lower of loan balance and 75% of indexed property valuation (Prudent Market Value) • Substitution asset (cash) limited to 15% of bonds in issue • ALM rules restrict miss-matching: • Duration – weighted average duration of Assets must exceed duration of Securities • Interest – due from mortgage assets must exceed payments on bonds over any given 12 month period • Interest rate risk – NPV changes from 1% shifts in the yield curve must not exceed 10% of DMCI’s total own funds • Currency – Securities and Assets in Euro only, thus no FX risk • ACS bonds awarded RWA @ 10% (CRD and UCITS compliant) • Government Agency, NTMA, will perform role of Manager in event of parent’s insolvency • Irish issuers group – ACS Ireland – website - http://www.ibf.ie/acsireland.asp

  22. AlB Mortgage Bank • Description • Position in the Irish Mortgage Market • Distribution & Sanction • Mortgage Pool / Eligibility • Collateral Usage & Over-Collateralisation • Property Valuations • Pool Arrears • Ratings

  23. AlB Mortgage Bank - Description • Bank License & Designated Mortgage Credit Institution (DMCI) status under ACS granted by Regulator – Feb ‘06 • Public Unlimited Company, wholly owned by AIB plc*. Shareholders investment €920m, of which Tier (i) €620m Tier (ii) €300m • AIBMB’s assets - €21bn residential mortgage loans originated by AIB (ROI) – no commercial property mortgages or other business undertaken • Subject to prudential supervision by Financial Regulator as a bank and as a DMCI • Group Head of Finance chairs Board, supported by 8 Directors, including 3 non-executive directors • Origination and Servicing of loans outsourced to AIB (ROI) Division, via Outsourcing & Agency agreement * In the event of failure, AIB plc is legally required to make good any deficit of AIBMB

  24. AlB Mortgage Bank - Position in the Irish Mortgage Market • The Irish market is dominated by amortising floating rate loans, Ireland has had very limited supply of ‘sub-prime’ style products, where AIBMB /AIB does not participate • Total Irish mortgage market drawn balances as at December 2009 were €147bn • AIB’s drawn balances represents an 18.45%* market share with primary focus on AIB’s customers • AIB has a presence in all major towns and cities via a network of 271 offices: • 36% of the banked public have a primary account relationship with AIB • 80%+ of Mortgage Bank book is sourced from existing AIB account holders * Includes broker originated loans not included in AIB Mortgage Bank

  25. AlB Mortgage Bank – Origination, Sanction, Services • Mortgage origination through AIB’s extensive branch network with no sanctioning authority • Credit sanctioning undertaken centrally by dedicated team, with no sales targets or incentives • Mortgage processing and servicing undertaken by separate dedicated Home Mortgage Operations team (135 staff) • Impaired loans are passed to separate collection team under the Chief Credit Officer • Priority drivers to loan approval and grading • Repayment capacity is stressed, it is the key component, includes consideration of other financial commitments • Income determination and confirmation via third party documents • Verification & sustainability of income is assessed • Determination of source of customer’s equity input - savings record, gifts from family, other assets held • Review Customer’s Credit History (Internal & External) - Internal Credit Grading - Behaviour Score - Account Performance - External Credit Bureau - Track Record - Connected Accounts • Debt Service Ratio & LTV calculation made • All outside policy decisions are referred to senior lenders and reported to main Board on monthly basis • Once drawn, a loan is subjected to an automatic monthly credit grading process.

  26. AlB Mortgage Bank – Mortgage Pool (i) Selection of assets for inclusion in the Cover Asset Pool • Committed to maintaining a high quality Cover Asset Pool • Selection depends on the eligibility of assets • Ineligible assets include: - Loans which are in arrears for more than 1 month* or loans which are impaired (self-commitment) - Properties under construction (legal requirement) - Loans which have an unindexed LTV > 100% (self-commitment) * The legal requirement in relation to arrears is that loans in arrears > 90 days are not permitted to be added to the Cover Asset Pool. • Current total arrears (all 0-30 days) in pool at March 2010 is 0.9%. • Historical Quarterly Data Sheets, Mar 08 to Mar 10, provided on website- http://www.aib.ie/servlet/ContentServer?pagename=AIB_Investor_Relations/Miscellaneous/ir_article_printer&c=AIB_Article&cid=1256219261409&channel=IRHP

  27. AlB Mortgage Bank - Collateral Usage at end March 2010 • Usage of Mortgage Assets as collateral Cover Asset Pool €16.2bn Central Bank Mortgage Backed Promissory Note Pool €1.9bn Total collateral in use €18.1bn Other loans €2.8bn Total mortgage assets €20.9bn • Bonds Issued Benchmarks (2) €2.7bn Registered Private €0.1bn Internal Contingent Liquidity €11.2bn* * available to repo with market or with ECB Total Bonds Issued €14.0bn • Covered Bond Over-Collateralisation Nominal Balances Under ACS Act Mortgage Loans €16.2bn €14.0bn Substitution Asset (Cash) €3.3bn €2.1bn Total Cover Pool €19.5bn €16.1bn Bonds in Issue €14.0bn €14.0bn Over – Collateralisation 39% 15%

  28. AIB Mortgage Bank – Property Valuations • Property Valuations are: • Indexed to date on the quarterly publication of the ESRI/PTSB index • Index shows peak (Feb’07) to trough (Dec ’09) fall of 29.1% for non-Dublin and 35% for Dublin • Index is now at similar level to March 2003 • Index considered to understate both the rise in valuations to 2007 and the subsequent fall • ACS Act provides protection for bond holders against falling property valuations • The Prudent Market Value (PMV) rule reduces the loan amount recognised as collateral for loans with LTV over 75% • The PMV of a loan is the lower of the loan amount and 75% of the indexed valuation of the property • The PMV of the loan is used in assessing ACS Act over-collateralisation requirements

  29. AlB Mortgage Bank - Pool Arrears Arrears Profile > 30 days

  30. AlB Mortgage Bank – Ratings Moody’s Covered Bonds Rating - AAA • Over-Collateralisation – necessary to maintain current rating = 13.5% (1). – Actual = 24% at March 2010 (1). • Rating Criteria largely unchanged • Allied Irish Banks, p.l.c. long term rating A1, short term rating P-1 S&P Covered Bonds Rating – AAA Credit Watch Negative • Over-Collateralisation – necessary to maintain current rating = (under review) – Actual = 39% (2). at March 2010 • New Rating Criteria introduced 16th December 2009 • Remedial action (re counterparties- substitution asset (cash) and interest rate swaps) being taken following downgrade of Allied Irish Banks, p.l.c. to long term A- and short term A-2 • Credit watch negative rating to be resolved for all S&P programmes by 16th June Fitch Covered Bonds Rating - AAA • Over-Collateralisation – necessary to maintain current rating = 27.9% (2). – Actual 39% (2) at March 2010 • Rating Criteria largely unchanged • Allied Irish Banks, p.l.c. long term rating A-, short term rating F1 (1)Based on Prudent Market Value of Mortgage loans (2)Based on Ledger Balance of Mortgage loans

  31. AIB Global Treasury - 00-353-164-17803 Bond Issue Desk Sean.a.cremen@aib.ie Duncan.k.farquhar@aib.ie Peter.l.walsh@aib.ie Treasury Economics - 00-353-164-17176 Oliver.n.mangan@aib.ie Website http://www.aib.ie/servlet/ContentServer?pagename=AIB_Investor_Relations/IR_Homepage&channel=IRHP

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