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AIB Group (UK) p.l.c.Annual Financial ReportFor the year ended 31 December 2016Company number: NI018800

Within this document any reference made to “AIB UK”, “The Bank” or “The Company” will relate to AIB Group (UK)p.l.c., whilst any reference to “AIB UK Group” will relate to AIB Group (UK) p.l.c. and its subsidiaries. Reference madeto “AIB plc” or “the Parent” will relate to Allied Irish Banks, p.l.c. whilst reference to “the Parent Group” will relate toAllied Irish Banks, p.l.c. and its subsidiary undertakings, which includes AIB Group (UK) p.l.c.

ContentsPageBusiness review2016 Performance highlights 01Chairman’s statement02Strategic report 04Risk managementPrincipal risks and uncertainties 15Framework 16Principal risks 22Governance and oversightDirectors and other information37Report of the Directors 38Financial statementsDirectors’ responsibility statement 48Independent auditors’ report 49Consolidated and parent company financial statements51Notes to the financial statements57General informationGlossary of termsAIB Group (UK) p.l.c. Annual Financial Report 2016133

2016 Performance HighlightsOperating performanceProfit before tax*Net interest margin*Total operating income* 170m 49m2.12% 18bps 263m 9mIncreased profit before taxenhanced by one off nonrecurringexceptional items of 23m. Themain driver of this was profit onsale of VISA Europe shares.Reduced net interest margin asmargins compress due to BoEbase rate reductions coupled withhigher average interest earningadvances balances.Operating income remains flatdespite falling interest rates.Operating expenses*Credit provisionProfit after tax 116m 8m 1m 4m 66m 145mCost reductions in line withexpectation driven by disciplinedcost management. Cost/incomeratio of 44%, down 5% on 2015.Continued progress on debtrestructuring, coupled with lownew impairments.Impacted by tax charge of 104m(2015: 200m) owing to changes intax legislation with consequencesfor recognition of the deferred taxasset.Balance Sheet / CapitalCapital adequacy ratio1New lendingCustomer deposits17.0% 50bps 1.5bn 0.4bn 8.7bn 0.4bnCapital position remains strong.Measured growth in key segmentsreflecting continued support toCorporates and SMEs in the UK.Customer balances remain stablewith marginal growth in currentaccounts.Impaired loansLeverage ratioLoan deposit ratio 0.4bn 0.1bn8.7% 10bps74% 3%20% reduction reflecting supportfor customers in difficulty throughsustainable restructuring solutionsfor customers.Leverage ratio remains in excess ofregulatory requirements.The decreased loan deposit ratioreflects higher customer accountsand stable net loans.1Common Equity Tier 1 (fully loaded)Provision coverage ratio remains ata robust level of 50% (2015 49%).*These numbers are used by management for internal reporting purposes and represent a non–statutory view.1AIB Group (UK) p.l.c. Annual Financial Report 2016

Business ReviewChairman’sStatementPeter SprattChairmanMy first year as Chairman of the Board has seenchanges both within the Bank, in terms of organisationalstructure, and within the economy, as reaction to theUK vote to leave the European Union impacted onmarkets, albeit not to the extent initially expected.Throughout this period, I am pleased to report thatAIB UK Group has performed well and has producedan improved financial performance for the year, whilemaintaining a strong customer focus.Business environmentThe results of the referendum, where the UK voted infavour of an exit from the European Union, impactedinitially on the financial markets which resulted in theBank of England Monetary Policy Committee introducinga number of easing measures, including a cut in base rateby 25 basis points to 0.25% in August. Since then theUK economy, whilst growth has slowed, has performedbetter than was originally expected. However, whilegrowth is expected to be weaker in the medium term,the recent depreciation in the value of sterling isforecast to result in an increase in inflation over the nexttwo years.AIB Group (UK) p.l.c. Annual Financial Report 2016Financial performance and businessstrategyAIB UK Group recorded a financial profit beforetaxation of 170m for the year. This included a oneoff gain of 21m from the sale of Visa Europe shares,resulting in an overall improvement of 49m on theprofit before taxation in 2015 of 121m.New business lending for the year at 1.5bn was downon 2015’s new lending however the quality of the loanbook improved with a reduction in non-performingloans.From an operating model perspective, in 2016 wecontinued to provide specialist industry and sectoralexpertise to our business banking and corporate sectorcustomers. We also serviced our customers in FirstTrust Bank offering a full banking service in branch,online and through mobile channels.A new organisational structure was announced in Aprilresulting in a number of consequential changes to themanagement team during the rest of the year as thebusiness transitioned towards the new structure. Weare now ready, with a refreshed management team, totake the business forward in 2017. In particular, it isrecognised by management and the Board that there2

Chairman’s statementis a need for cultural change within AIB UK Group toenable the Company to deliver fully on its strategygoing forward. A ‘One UK’ transformation programmewas developed in 2016 with cultural change, and waysof working, as key elements of this programme. Theseare going to be areas of particular focus for the Boardand the Company in 2017 and, I believe, will be key toenabling success.Customers and staffIn line with our core brand values, we continue toput our customers first and aim to provide them withservices that meet their needs, through our personalrelationship banking and digital channels. It was a greatachievement for our GB business to receive the BusinessMoneyfacts ‘Best Service from a Business Bank’ awardfor a third consecutive year in 2016, and I would like tothank our loyal and valued customers for their continuedsupport in this area.Treating our customers fairly is also a key element of thecustomer experience we provide to all our customers,but most importantly to our vulnerable customersand those in financial difficulty. We registered with theAlzheimer’s Society in 2016 as ‘Working to becomeDementia friendly’ and carried out a successful pilotin one of our branches to train staff in this area. Thisis anfundraising events for this and numerous othercharities during the year.As I mentioned earlier, our culture is an ongoing areafor development that the Board and I are focusedon so that our staff feel appropriately empowered,governance remains appropriately tight, and we are allfully engaged in working in a manner that looks after ourcustomers’ interests. Considerable success has alreadybeen achieved in improving staff engagement and inembedding our brand values, and I look forward to thefurther successes in these and other areas. We have alsosigned The Women in Finance Charter, as we remaincommitted to broadening our diversity in all areas andlevels in the business.Board of DirectorsDuring the year there were a number of changes to thecomposition of the Board.David Pritchard retired as Chairman of the Board inFebruary 2016 and Stephen Kingon retired in October2016. Both had completed nine years of service asdirectors and I would like to thank them for theirconsiderable and valuable contribution to AIB UKGroup.Ger O’Keeffe left in July 2016, after over twelve yearswith the Bank, and Hugh O’Donnell, having completeda five year secondment to AIB UK Group as FinanceDirector, decided to leave AIB plc in December 2016.Both Ger and Hugh led their respective teams throughperiods of significant change and the Board and Iare grateful for their contributions over the years.Additionally, I would like to acknowledge and thankTiana Peck for her hard work and dedication to AIB UKGroup. Tiana left in June 2016 after being with the Bankfor 21 years, including 19 years as Company Secretary.OutlookWith the new organisational structure in place and a‘One UK’ transformation programme launched, I lookforward to 2017 being a successful year for the UKbusiness despite the uncertainties ahead for the UKeconomy with the impending exit from the EuropeanUnion. In short, I believe AIB UK Group is currently wellpositioned to meet our customer’s needs, for growth inour chosen markets, and to deliver enhancements to ourbusiness model to ensure sustainability into the future.P SprattChairman28 February 2017I would like to thank all our management and staff fortheir commitment and energy over the last year as wellas our colleagues in our parent company who provideongoing support.3AIB Group (UK) p.l.c. Annual Financial Report 2016

Business ReviewStrategicReportBrendan O’ConnorManaging DirectorPage1. Purpose of the Strategic Report52. Business strategy2.1 Business proposition52.1.1 Allied Irish Bank (GB)52.1.2 First Trust Bank52.1.3 UK Financial Solutions Group52.1.4 Core brand values and strategic pillars62.2 Customers and people2.2.1 Our customers62.2.2 Digital enablement62.2.3 People72.3 Financial performance72.4 Capital management and liquidity2.4.1 Capital management112.4.2 Liquidity122.5 Principal risks and uncertainties3. UK Economic factors12124. Regulatory and other evolving issues4.1 Increased regulation and supervision134.2 Recovery and resolution planning134.3 IRB and IFRS 9134.4 Senior managers and certification regime134.5 Regulatory change horizon134.6 Conclusion13AIB Group (UK) p.l.c. Annual Financial Report 20164