AIB (that’s Allied Irish Banks PLC for our foreign friends and not to be confused with Anglo Irish Bank which is just referred to domestically as “Anglo”, meaning “English”) is in the wars at the moment. Just over a week ago it was “stunned” to find out from Ireland’s new-ish Financial Regulator that it needed to raise an additional €3bn in capital by the end of December 2010. And that was after the decision to allow AIB keep €4.5bn of €5-20m NAMA-eligible exposures – God knows what the additional capital requirement would have been if AIB was forced to recognise the true level of losses on what are increasing seen as the most toxic development loans.
And to recap, AIB has a capital raising target of €10.4bn in the next 85 days (Davy Stockbrokers in Dublin are saying that the timeline for completing asset sales might be extended to March 2011) and with only a €2.5bn-capital-contributing sale of its Polish operation, 70.5% of Bank Zachodni WBK (subject to approvals and expected to complete in 2011) under its belt, it seems that the State is going to be on the line for most of the shortfall. AIB has a capital raising “plan” that currently looks like this
(a) Sell its 22.4% share in America’s M&T Banking Corporation for about US $2bn. Hopes of a quick sale were dashed during the week when talks with banking conquistador, Santander, broke down. On Thursday last, the bank announced that it was selling its shares at US $77.50 each valuing the sale at €1.5bn which will contribute €0.9bn to capital, there are suggestions the sale is being underwritten by Morgan Stanley and Citicorp. On Friday, the M&T share price fell to US $76.84 putting in question the demand for the AIB offering. And the euro:US dollar exchange rate hit an 8-month high of US $1.40. Also at this stage AIB can’t in fact sell shares, it can only sell vouchers which will be redeemable for shares if the sale gets shareholder approval. So the sale looks far from certain, and unlikely to be concluded by Christmas and if it is, it’s unlikely to even generate €0.9bn of capital.
(b) Sell its UK operation including the First Trust chain in Northern Ireland (employing 1300 people in 48 branches). When AIB revealed its interim report for 2009 at the start of August 2010, the bank indicated at that date that the sale was expected to complete in September 2010. More recent reports have suggested that the sale has been put back to next year. Unions in the North are opposed to the sale predicting it will lead to loss of jobs and closure of branches. The suggestion is that this sale would raise €1bn. UPDATE 1st November, 2010. Reuters are reporting that the new executive chairman of AIB, former HSBC banking veteran David Hodgkinson has said that the UK sale is now on hold as there has not been any satisfactory bid.
(c) Issue €5.4bn in shares in November 2010 (underwritten by the State). Analysts are already saying the State will pick up 90% of the issue and with an issue price of €0.50 being claimed in Ireland’s Sunday Business Post today, it is hard to see how the State will not end up with 100% of the issue. The AIB share price closed on Friday at €0.40 (off its 5-year low of €0.27 reached in March 2009 but well down from €0.99 at the start of August 2010).
And last week Standard and Poor’s downgraded AIB’s debt by one notch from A- to BBB+, still three notches above junk but just one notch above Anglo. Furthermore S&P’s outlook is negative indicating a future downgrade.
So AIB on Friday last had a market capitalisation of €427m, not far above the €280m 8% annual interest owing on the State’s injection of €3.5bn via preference shares in 2009. If the Financial Regulator’s Prudential Capital Assessment Review (PCAR) means anything then the State will be on the hook for a further €7.9bn injection into AIB in the next 85 days (assuming the €2.5bn-capital-contributing Bank Zachodni deal is approved). The M&T sale will be worth something but it might be well south of €0.9bn and the UK sale is uncertain. And the €5.4bn issue next month is almost certainly going to end up 100% with the State. The State already owns 18.7% of AIB as a result of AIB providing ordinary shares in lieu of interest when the first 8% annual dividend on the €3.5bn injection via preference shares fell due in May 2010. That shareholding was worth just €78m last Friday (representing just a 2.2% annual return on the €3.5bn injection).
So AIB may have €350m of private shareholders today (with the State owning €77m of shares) but without the State ponying up €7.9bn by Christmas or the Financial Regulator abandoning his PCAR, AIB won’t exist as a private entity.
NAMA Wine Lake 
Hi NWL,
I’m a little confused by your comment that “…. without the State ponying up €7.9bn by Christmas or the Financial Regulator abandoning his PCAR, AIB won’t exist as a private entity.”
Surely if the State do pony up the €7.9 billion AIB will cease to exist as a private entity as it will effectively be nationalised? Or am I misinterpreting something?
Obviously, if the State doesn’t come up with the money AIB is insolvent and will cease to exist in any form.
(see bottom for links)
I must admit that it is not the clearest piece of writing and I will amend it. To answer your question with a question – at what point does the State say that things are so bad at AIB that it takes it 100% into State control?
Cast your mind back to January 2009 when Anglo was taken totally into State control. The Minister said “The funding position of the bank has weakened and unacceptable practices that took place within it have caused serious reputational damage to the bank at a time when overall market sentiment towards it was negative. Accordingly the Government believes that the recapitalisation is not now the appropriate and effective means to secure its continued viability. Therefore the Government must move to the final and decisive step of public ownership.”
So what I meant was that the State might decide to pony up recapitalization of AIB to the tune of €7.9bn but still decide not to take AIB into 100% public ownership (the State would own 95%+ of the institution but there would be still be <5% in private ownership). Also the Regulator could relax the PCAR requirements which might mean that AIB didn’t need so much new capital.
But the State might decide that things are so bad (which I think they will) that they take AIB 100% into State control and do what they did with Anglo’s shareholders (see below), ie take their shares and not pay them anything. The State would then convert its €3.5bn preference shares to ordinary shares to make up PCAR capital.
By the way it is interesting to note the different interpretations of the word “nationalize”. On 1st October, 2010, Britian’s Guardian newspaper reported that AIB had been nationalized whereas Dan O’Brien in the Irish Times says that AIB has been “all but nationalized”. Joan Burton said that AIB was being “quasi-nationalised”. Nationalisation of course can be 100% control or majority control according to most definitions (see wiki for a decent general description) which includes “Nationalization has been used to refer to either direct state-ownership and management of an enterprise or to a government acquiring a large controlling share of a nominally private, publicly-listed corporation”. In the past few days I have used the term to mean 100% State control but now accept that it can mean a controlling share and that we have now nationalized AIB.
Impact on ordinary shareholders at Anglo
14. I am an owner of ordinary shares in Anglo. What has happened to my shares?
With effect from 21 January 2009, your shares have been automatically transferred from your ownership to the Minister of Finance’s ownership.
Anglo’s shares have been de-listed from the Irish Stock Exchange and the London Stock Exchange so they cannot now be bought or sold. The Minister for Finance has confirmed that shareholder rights will be respected in the
nationalisation process.
15. Will I receive any compensation?
An Assessor will be appointed by the Minister for Finance to assess whether compensation should be paid to those persons whose shares will be transferred to the Minister for Finance and, if so, to determine the fair and reasonable amount payable as such compensation. At this time, it cannot be said whether you will receive any compensation or, if you are entitled to compensation, how much you will receive. If the Assessor determines that compensation should be payable, a scheme will be established called the ‘Anglo Irish Bank Compensation Scheme’ to effect any compensation payments.
Guardian – http://www.guardian.co.uk/business/2010/sep/30/ireland-banks-bailout-allied-irish
Irish Times (Dan O’Brien) – http://www.irishtimes.com/newspaper/opinion/2010/1001/1224280081427.html?via=mr
Irish Times (Joan Burton) – http://www.irishtimes.com/newspaper/breaking/2010/0930/breaking18.html
Anglo statement by Minister for Finance
http://www.finance.gov.ie/viewdoc.asp?DocID=5627&CatID=1&StartDate=01+January+2009&m=
Wiki (nationalisation) – http://en.wikipedia.org/wiki/Nationalization
The sooner the ECB realise’s it is in the FIAT money system the better. It needs to crank up the the printing presse’s to create inflation.
Print baby Print :lol:
Unlike Anglo and INBS which, after the mess they have created can only damage Ireland’s financial reputation, AIB on the other hand is essential for Ireland’s economy and can not be left lying dormant on the floor like the two mentioned above.
Thus the state has to either buys huge amounts of bonds from AIB to provide cash for the bank to carry on lending (but sensibly now) or nationalize the AIB as was done with Anglo.
The Irish State is aware that it can not “haircut” any type of current bondholders, neither subordinated bond holders, nor senior bondholders, and in addition must re-assure “depositors” (and they have done that ) that they are top on the list of the safety guarantee.
Being part of the EURO zone has both positive and negative aspects for Ireland, the negative aspects are the fact that Ireland can not control its currency during a depression like now, i.e. devalue it’s currency, and lower interests rates in order to help the economy in particular exports and the same problems applies to the other PIIGS countries.
The positive aspect is that being part of the EURO zone means support from the ECB and (by George) Ireland has received huge amounts of cash for both the banks and for the sovereign state itself, in order to survive, this support will no doubt continue since the EURO zone can not afford any member going financially down the swanny.
The entire set of Irish bankers have shown great in maturity
in not realizing the potential property bubble burst that was bound to arise after such mad lending to property developers, greed is one thing, but stupidity is quite an other.
However, Ireland’s financial reputation will survive, despite all the current down gradings, however, Ireland’s politicians must unite in order to achieve that.
I am a private share holder of around 6000 AIB shares. I haven’t wanted to see them over the last year cos they are worth so little. If AIB are moved to a lesser stock exchange will my shares continue to have value and potentially be traded. If the government takes over 100% do they have to but my shares @ around 30 cents each at the moment or do they get my shares for nothing ? It’s all very confusing and hard to understand the process involved if you are a small private shareholder. Can you help ??
Hi Ursula, I suppose that the worst that can happen with your shares would be a repeat of the Anglo nationalisation which saw shareholders in that bank lose 100% of their share value. Your shares on ISEQ and the LSE seem to be worth €1,800 at present and their value could theoretically rise or fall with the transfer onto the Enterprise Securities Market . What will happen to the share price? Who knows, but the government appear keen to keep AIB’s shares traded and seem to want to avoid 100% nationalisation but remember that AIB’s court hearing before Christmas was held in private so I don’t think anything is clear on that bank’s condition at present.
On one hand AIB may suffer further unprovisioned losses on loans, derivatives and may suffer from a continuing deposit flight. On the other hand I noted that the NAMA discount on AIB loans at 54% mentioned by the NAMA CEO at the Committee of Public Accounts hearing on Thursday last for AIB loans thus far absorbed was less than the 60% discount that markets had built in though not all AIB NAMA loans have yet transferred and the smaller loans may push the discount towards or even beyond 60%. Confidence may return to banks and there may not be further unprovisioned losses. So there are theoretically events which could increase or reduce the share price – now you know why President Truman wanted economists with only one hand!
The extent to which the various factors are recognised by the stock market isn’t totally clear.