Why does no one seem to want to buy all of AIB?

BUSINESS OPINION:A lack of clarity as to the bank's real losses is casting shadows over the prospect of its sale, writes JOHN McMANUS

THE MOOD must be grim down at Bankcentre. As Bank of Ireland inches away from the State’s clutches, AIB’s plans to remain independent are going nowhere fast and it seems destined for dismemberment with majority State ownership for the domestic rump of the business.

It’s not a very appealing prospect for shareholders or management and it’s surprising that we are not hearing more about the bank’s plan B. As far back as last autumn, we were hearing reports that international suitors were eying up AIB. The bank’s management did little to disabuse us of the notion that if it came down to choice between a sale of the bank or State-sponsored death by a thousand cuts, the board’s preference was that the bank would be sold as that was in the best interest of shareholders.

It now looks as though this was little more than sabre-rattling ahead of the going-live of the National Asset Management Agency (Nama) and the Central Bank’s assessment of the banks’ capital needs. The inference seemed to be if Nama went too hard on the haircuts and the regulator asked for too much capital, the board would sell the bank.

You might be tempted to ask a question: what harm if it did? From the State’s perspective, it’s six of one and half a dozen of the other. As things stand, the Government does not plan to put any more cash into AIB and, if anything, would be hoping to get some back. The impact on the exchequer of a sale versus the current dismemberment plan is broadly neutral. If anything, it is a public policy issue. What would be better for the economy – to have the biggest player in retail banking owned by a foreign bank or for the State to own it? Hobson’s choice. But one suspects there is an attraction in foreign ownership, as it makes future problems the responsibility of a foreign regulator and ultimately a foreign government as is the case with Ulster Bank and Bank of Scotland (Ireland). By the same token, a foreign-owned AIB would be kept on a very tight leash.

It’s a dilemma, but for the time being it is moot as nobody appears that interested in AIB.

It must have come as a blow for AIB to learn that Spanish giant Santander was courting MT, the US regional bank in which AIB has a 22.5 per cent stake that it must now sell. The talks with MT appear to have stalled, but Santander is also in the frame for part of AIB’s UK business.

The question is why does Santander seem more interested in picking apart AIB rather than buying it outright? Even if it did not particularly want some of AIB’s other valuable assets – such as its stake in Poland’s Bank Zachodni WBK bank – it would stand to make a turn on these assets by warehousing them until market conditions improve.

It would appear that a lack of clarity about the value of the core Irish franchise seems to be the problem. Before you bought AIB, you would need to have comfort that the bank’s estimates of the losses in its Irish business – and the Central Bank’s estimates of the amount of capital required to meet them – are good.

This requires taking a view on at least two things. The first is how well the bank actually knows its own business; and the second is the general direction of the Irish economy.

There seems to be consensus that the Irish economy is on the mend, as reflected in Bank of Ireland’s ability to have a rights issue (priced to go as it may be). The conclusion then is that AIB’s real problem is worries about the losses in its Irish loan book.

There are a couple of sound reasons for such caution. The haircuts applied by Nama to AIB and Bank of Ireland were not that different, but AIB is transferring almost twice as many loans to Nama. The perception remains that once the two big banks decided to chase Anglo Irish Bank for market share, it was AIB that did it with the most enthusiasm. Reorganisation of credit control in the Irish bank, instigated by Colm Doherty since his appointment as managing director, is tacit confirmation of this.

Given that in a straight sale any black hole in AIB’s domestic loans book would become the problem of its new owner, then it is easy to see why foreign regulators (and governments) would be less than enthusiastic about one of their banks buying AIB.

The current nervousness in the market about the viability of the deflationary economic strategy being adopted by euro-zone peripheral states – including Ireland – can only add to unease.

If AIB is serious about selling itself, it has a couple of choices. One is to wait things out and get a couple more quarters under its belt to underpin its assessment of the Irish business’s losses. And the Central Bank’s decision to give it until December to agree the disposal of its overseas assets makes this possible.

The alternative is to find a third party to guarantee losses on its Irish book over a certain level. The Irish Government is the obvious candidate, but it’s hard to see that one fly.