ANALYSIS:The obstacles AIB must overcome in order to remain independent are immense, writes JOHN McMANUS
AIB’S GENERAL manager Colm Doherty trod a difficult line between realism and pessimism yesterday. While he clung to the belief that the bank can avoid majority State ownership, it was clear that the odds against this have lengthened.
The obstacles the bank must circumvent in order to remain independent are immense and progress painfully slow. It needs to find €7.4 billion by the end of the year. First it will raise as much cash as possible from selling assets at home and abroad and then it must plug the remaining gap by raising fresh money from investors. Failing this, it will have to turn to the Government.
Doherty had little by way of news on the asset-disposal front and relied with some justification on the need for confidentiality. But his assertion that the disposal of its UK banking business, its Polish subsidiary and its stake in US regional bank MT will be complete by September looks optimistic.
The only positive news about the auction of its UK and Polish assets is that the process has moved to what he called “stage two”, in which bidders who made indicative offers over an acceptable threshold start due diligence. This implies that someone is interested in paying the sort of price that AIB has in mind for its assets, which is in the region of €4 billion including the MT stake. But converting these offers into binding deals by September is a tall order.
He was equally downbeat about the sale of its interest in MT. Explaining that any sale requires the co-operation of the US bank, he alluded to the need to take into account MT’s own plans – understood to be a reference to talks between MT and Banco Santander. Not surprisingly then Doherty indicated that he may have to seek some sort of extension to the end-of-year deadline set by the regulator and the European Commission for the State’s bank guarantees.
What is increasingly clear is that selling his good assets is probably the least of Doherty’s problem. His real challenge is going to be convincing outside investors to make up the difference between the €7.5 billion target and whatever he gets for this prime assets.
Doherty described the slimmed-down bank he expects to emerge – essentially the group’s operations in the Republic after its land loans are transferred to Nama. Attracting investment will not be easy. As yesterday’s figures made clear, business continues to deteriorate. The number of “criticised loans” in the Irish book increased by 46 per cent in the first half of the year to €16.8 billion or almost one-third of all loans. The most positive note Doherty could sound was that the situation is not getting any worse, but it will be 2013 before credit losses “normalise”.
The bank also desperately needs to improve margins on its performing loans, particularly residential mortgages. Doherty warned that AIB will follow Bank of Ireland and put up mortgage rates by half a percentage point.
Prospective investors in AIB will also have to take a view on the costs and industrial relations implications of job losses to come. Doherty refused to be drawn on the extent or cost of the losses, saying they would be a “2011” event. But, with an eye to fund- raising, he did say that they would bring the bank’s cost-income ratio back under 50 per cent.
Anyone looking at putting money into AIB will have to weigh these and numerous other uncertainties, including the strength of the Irish recovery. If they believe Doherty will deliver the restructuring against a backdrop of a steadily improving economy then the fundraising represents an opportunity to reap the rewards of this by buying shares at a very good price.
It’s a hard sell, but the problems don’t stop there. Hanging over everything is the current state of the equity markets, with confidence in European bank shares badly shaken by the recent sovereign debt crisis. It would be a cruel twist of fate if AIB was to surmount its many obstacles only to find the equity market effectively closed by a further bout of uncertainly. In such an eventuality the bank would have no choice but to postpone its fundraising, Doherty said.
Given the extent of the problems, it not surprising that Doherty wants to see an extension of the Government guarantees of Irish bank loans and deposits, which expire in September and December. Not only would this remove from his to-do list the need to refinancing of €7 billion of AIB debt outside the guarantee, it would also reduce the chances of some sort of systemic funding crisis for Irish banks. Even if he gets what he wants in this regard Doherty faces a very busy couple of months, the outcome of which will determine whether the bank remains an independent entity or is effectively nationalised.
