Fraud leaves AIB open to takeover

Revelations about a $750 million (€859 million) fraud at AIB has brought the bank a few steps closer to being swallowed up by a major international bank but an early hostile bid is unlikely.

There is a degree of acceptance that the two main Irish banks will eventually be subsumed within a British or European financial group as consolidation gathers pace. AIB and Bank of Ireland are profitable institutions and have been eyed up by many potential suitors over the years. Analysts now believe the red light flashing over AIB has reduced the time it can remain as an independent Irish-based bank but no-one will be rushing forward with a bid until the scale of the eventual losses is known.

"The chance of a takeover happening are considerably higher now than a couple of weeks ago. There had been an expectation that the Irish banks would not remain independent over the next few years. This just makes it more likely to happen sooner rather than later," said Mr Scott Rankin, banking analyst at Davy Stockbrokers.

A bid is most likely to come from one of the major UK banks, with Royal Bank of Scotland, the parent of Ulster Bank, seen as the front-runner. Royal Bank acquired Ulster Bank as part of its takeover of the National Westminster Bank. The merger of those operations has progressed at a much faster-than-expected pace and could give the bank the appetite for another acquisition.

The slide in the AIB share price this week presents an opportunity for the likes of Royal Bank to get their hands on a bank, which has been a top performer for investors, at a relatively cheap price. AIB shares are trading at a discount of up to 20 per cent to other banking stocks. The shares closed at €12.15 with Commerzbank Securities suggesting a serious bid would have to come in at €14 at least.

The shares have found some support, with buyers snapping them up in the past couple of days amid talk of a takeover. Commerzbank analyst, Mr Piers Brown, has cautioned that much of this speculation is premature. "Nothing is likely in the short term. The bank is not distressed and it is unlikely that the investment community will suddenly abandon it," he said, adding that the bank would need to confirm that $750 million was the total loss incurred as a result of the fraud at its US subsidiary in Maryland.

There has been some suggestion that AIB might merge with Bank of Ireland but this is deemed to be the most unlikely scenario. "AIB and Bank of Ireland will never get together. They would be too big to operate in this market," Mr Rankin said. He also suggested the Irish banks would end up in the hands of a major UK institution. Royal Bank is a particularly good fit with AIB, with operations North and South of the Border as well as the Citizens financial group, which is the second-largest bank in the New England region of the US.

AIB has always played down its vulnerability to a takeover on the basis of its strong management team and high performance. Mr Rankin said that defence "has now been shot full of holes".

A takeover would almost certainly have to be done with the co-operation of AIB's board and management rather than as a hostile bid. The bank's management is currently pre-occupied with limiting the damage to the bank's reputation and balance sheet and restoring investor confidence. But the issue of a takeover bid may move up the bank's agenda in the months ahead.