AIB interim management statement – “we’re banjaxed”

Allied Irish Banks PLC (AIB) has this afternoon released an interim management statement which continues to paint a distressing picture for what was Ireland’s largest bank. Highlights

UPDATE: 20th November, 2010. Thanks to the commenters for pointing out that AIB reclassified the UK and Polish deposits at the end of June 2010.  This has clarified the update immediately below. It seems that AIB’s deposits went from €84bn in Dec 2009 to €83bn in June 2010 (including €23bn held in the UK and Poland) to €71bn today. It is unclear from the AIB statement if the €13bn is from all deposits (including the UK and Poland) or just the €59bn non-UK/Poland. If the latter then that means that 22% of deposits have “flown” since June 2010.  If the trend of increased household savings in 2010 was the same as 2009 then this means that withdrawals by corporates and institutions were partly offset by increased deposits by households. UPDATE: It has been pointed out that although household savings might be increasing as measured by the Central Statistics Office, it seems that household deposits fell by 2% in the year to September, 2010. So the deposit flight might consist of a marginal reduction in household deposits and a substantial reduction in corporate/institutional deposits.

UPDATE: 19th November, 2010. Well now I am thoroughly confused – looking at the balance sheet for AIB at June 30th 2010, I see that customer accounts were down €23bn from the end of 2009. If customer accounts are now “only down” by €13bn then that implies that deposits increased by ~€10bn in the four and a half months to 11th November, 2010. And remember this was the period when the guarantee was due to run out and AIB’s credit rating was cut on 8th October, 2010 by S&P. If this interpretation is correct then why didn’t AIB shout it from the rooftops today – if deposits did indeed increase by ~€10bn in the most recent four months then surely that is a positive that should be highlighted?

(a) The bank claims to have lost 16% of its deposits since the start of 2010 (note 43 on page 149 of the 2009 Annual Report shows deposits of €83bn and AIB say that has reduced by €13bn to the end of last week). The bank is dependent on ECB/Central Bank of Ireland funding. Unlike Irish Life and Bank of Ireland, AIB don’t indicate if the deposit flight tailed off after the renewal of the guarantee in September 2010.

(1) The State, via the National Pension Reserve Fund, is now on the line to underwrite €6.6bn of new capital raising at €0.50 per share (current share price €0.45). €2.9bn of the €6.6bn will come from a conversion of preference shares (the State presently owning €3.5bn of 8% yielding preference shares). At current prices, the State will end up owning 93.92% of AIB (CORRECTION: 20th November, 2010. I see that Simon Carswell in today’s Irish Times is putting the State shareholding at 94% so here are the workings  – In May 2010, the State through the NPRF received 198,089,847  shares in lieu of the 8% dividend on preference shares. The State said this amounted to 18.6% of AIB’s shares implying there were 1,065m shares in total. The proposal now is to inject €6.6bn at €0.5 per share ie to receive 13.2bn shares. This will mean that the State owns 13.2bn shares from this forthcoming issue plus 198m from the dividend in lieu payment in May 2010, ie a total of 13.398bn shares out of a total of 14.265bn or 93.92%) And that assumes that the sale of AIB’s Polish operation – 70.5% of Bank Zachodni WBK gets both regulatory and shareholder approval, it’s not clear what the delays are. There is no indication that junior bondholders will be subjected to haircuts so at present, there is a lamentable paying off of junior bondholders at the expense of our pension fund.

(2) There may have been some jiggery pokery with the €10.4bn capital requirement as AIB seems to have only booked a 56% haircut on the €4.4bn of €5-20m loan exposures which the Minister for Finance decided in September should remain with AIB and BoI. The AIB NAMA loans are expected to incur a 60% haircut. Why should the lower value loans which are expected to be more green fields in Athlone have a lower haircut than the €20m+ exposures?

(3) AIB claim their 90+ days of arrears mortgages amounted to 2.6% of their mortgages at the end of September 2010. Interestingly they claim the Central Bank was to release figures showing 6.6% of mortgages were over 90 days in arrears – “the overall market figure for the same arrears category published by the Central Bank of Ireland was c.6.6% at the end of September.”. In fact, just on Wednesday the Central Bank released their Q3 figures which showed 5.1% of mortgages in arrears over 90 days. Did the Central Bank trim their statistics at the last minute? You could easily become paranoid here!

(4) AIB has cut 600 staff in the past year.

(5) The bank has put on hold the sale of its UK operation. Although Northern Ireland property values and business show poor results, the mainland is performing better.

(6) The outlook is uncertain. AIB forecast 2011 GDP in the State at +1.75%. Unemployment will weigh on any recovery. The only positive I took from the statement was that AIB’s mortgage book appears unusually healthy. It’s probably the all-pervasive gloom but I find myself suspecting that even that assessment of the mortgage book is too optimistic.

(7) And for a management statement that relates to a period that ended 45 days ago, no operating profit or net profit quantum though there is a general statement that they’re reducing. Are things that bad?

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