Contents 4 Chairman’s statement 255 Statement of Directors’ responsibilities in relation to the Accounts 6 Group Chief Executive’s review 256 Independent auditor’s report 8 Corporate Social Responsibility 258 Additional information 12 Financial Review 276 Principal addresses - Business description 278 Index - Financial data - 5 year financial summary - Management report - Capital management - Critical accounting policies - Deposits and short term borrowings - Financial investments available for sale - Financial investments held to maturity - Contractual obligations - Off balance sheet arrangements 59 Risk Management - Risk Factors - Framework - Individual risk types - Supervision and regulation 106 Corporate Governance - The Board & Group Executive Committee - Directors’ Report - Corporate Governance statement - Employees 119 Accounting policies 136 Consolidated income statement 137 Balance sheets 139 Statement of cash flows 141 Statement of recognised income and expense 142 Reconciliations of movements in shareholders’ equity 146 Notes to the accounts 1 Forward-Looking Information This document contains certain forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations and business of the Group and certain of the plans and objectives of the Group. In particular, among other statements, certain statements in the Chairman’s statement, the Group Chief Executive’s review, and the Financial Review and Risk Management sections, with regard to management objectives, trends in results of operations, margins, risk management, competition and the impact of changes in International Financial Reporting Standards are forward-looking in nature.These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements sometimes use words such as ‘aim’,‘anticipate’,‘target’,‘expect’,‘estimate’, ‘intend’,‘plan’,‘goal’,‘believe’, or other words of similar meaning. Examples of forward-looking statements include among others, statements regarding the Group’s future financial position, income growth, loan losses, business strategy, projected costs, capital ratios, estimates of capital expenditures, and plans and objectives for future operations. Because such statements are inherently subject to risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking information. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future.There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by these forward- looking statements.These factors include, but are not limited to, the effects of continued volatility in credit markets, the effects of changes in valuation of credit market exposures, changes in valuation of issued notes, changes in economic conditions globally and in the regions in which the Group conducts its business, changes in fiscal or other policies adopted by various governments and regulatory authorities, the effects of competition in the geographic and business areas in which the Group conducts its operations, the ability to increase market share and control expenses, the effects of changes in taxation or accounting standards and practices, acquisitions, future exchange and interest rates and the success of the Group in managing these events.Any forward-looking statements made by or on behalf of the Group speak only as of the date they are made. AIB cautions that the foregoing list of important factors is not exhaustive. Investors and others should carefully consider the foregoing factors and other uncertainties and events when making an investment decision based on any forward-looking statement. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this Annual Report may not occur.The Group does not undertake to release publicly any revision to these forward-looking statements to reflect events, circumstances or unanticipated events occurring after the date hereof. 2 You will note this year’s Annual Report includes additional information that was not included in our 2007 and earlier reports.This additional information primarily reflects material that is responsive to the disclosure requirements that are applicable to AIB by virtue of the listing of its ordinary shares on the New York Stock Exchange and its reporting obligations under the US Securities Exchange Act of 1934. In an effort to ensure all investors, wherever they are based, are provided with substantially the same information at the the same time, we have decided this year to include all relevant information in one report in line with a practice being adopted by an increasing number of major European and other companies that have United States as well as domestic reporting obligations. 3 Chairman’s Statement The turbulence experienced in the global economy We believe this agreement with the Government and financial markets in the second half of 2008 strikes the right balance between the interests of was without precedent in our lifetimes. Its strength shareholders, the need to provide a fair return to and ferocity took most people by surprise. the Irish taxpayer and the provision of support for the Irish economy.The Government guarantee AIB Group, in common with hundreds of financial scheme was also a vital part of the moves made institutions around the world, was not immune to to increase stability in the Irish financial sector. the effects of a downturn that turned rapidly into a AIB welcomes the Government's stated intention severe recession. to look at ways of extending this scheme I'm acutely conscious that the consequences of beyond 2010. these events have greatly affected our shareholders The significant signs of stress as a result of the and many of our customers and this is a matter of adverse economic conditions at the end of 2008 deep regret to me. generated a bad debt charge of €1.8 billion, Let me try and update you on AIB’s current position. equivalent to 1.37% of average loans. Capital The Government is to examine proposals for the AIB has always prided itself on being a management and reduction of risks connected with well-capitalised bank. In recent months, it became land and property in banks like AIB.This will be clear that the markets were looking for a level of done as a matter of priority and in consultation comfort that was higher than what was previously with the European Central Bank and the relevant regarded as adequate. European Union authorities. On 11 February this year we accepted the Irish Remuneration Government's offer of new capital on the same AIB shares the view of the Government that pay basis as Bank of Ireland. restraint is important in the current economic conditions.The Government has also made it clear This agreement, which has to be approved that significant changes in the remuneration by you, our shareholders, the European Union and structures of banks are needed. the regulators, will see the Government injecting total core Tier 1 capital of €3.5 billion into AIB in In 2008, and again this year, the Group Chief the form of preference shares giving certain rights Executive, the non-executive directors and myself to the Minister for Finance, including the right to voluntarily waived remuneration. For more details, subscribe to purchase 25% of the ordinary share see Note 59 to the Financial Statements. capital of the enlarged equity of the bank. AIB is co-operating with the Covered Institution Assuming completion of the transaction, Remuneration Oversight Committee (CIROC), the effect of this recapitalisation would have been which was appointed by the Minister for Finance. to increase our core Tier 1 capital ratio at the end AIB will consider the CIROC report on the of December 2008 to approximately 8.4%, our remuneration plans of senior executives of the Irish Tier 1 ratio to approximately 10.0% and our total banking institutions. capital ratio to approximately 13.1%. 4 Board changes What we need to do is focus on the fundamentals. There were changes in the composition of the AIB AIB is learning from the events of recent years. Board in 2008 and this year.Adrian Burke and We are working through the issues around Jim O’Leary retired as non-executive directors in our asset quality, focusing on our funding position April 2008 while Bernard Somers resigned from after the strong growth in our deposit base last year the board, also as a non-executive director, in and we are tightly managing our costs. December. Senior Independent Director Mike Sullivan is to retire from the board at the AIB We are determined to ensure AIB remains a AGM 2009. His successor as Senior Independent sustainable, responsible and profitable company. Director is David Pritchard. I wish to thank Adrian, Jim, Bernard and Mike for their valuable The restoration of shareholder value is the goal contribution over the years. of everyone who works at AIB. In January this year, as part of the agreement with the Government, Declan Collier and Dick Spring were appointed to the AIB Board as non-executive directors and I welcome them to the board. Outlook Dermot Gleeson We expect the operating environment to remain Chairman extremely difficult throughout 2009. It will be a time of global uncertainty with the Irish economy in a very challenging phase. A prolonged economic downturn and dislocation of global credit markets will reduce the recoverability and value of AIB’s assets and require an increase in the group’s level of provision for impairment losses. Markets worldwide are experiencing severe tightening in the availability and duration of unsecured liquidity and term funding. If these conditions continue,AIB’s access to traditional sources of liquidity will be further constrained. I realise that AIB’s shareholders will want to know when the steep decline in our share price will be reversed.There is no easy answer to that question.