AIB to raise €1.5bn in capital

AIB plans to raise a further €1.5 billion to improve its capital base because the Government recapitalisation will be insufficient and is exploring possible asset sales.

AIB plans to raise a further €1.5 billion to improve its capital base because the Government recapitalisation will be insufficient and is exploring possible asset sales.

The bank said "market and public uncertainty about our capital adequacy has persisted despite the proposed addition of €3.5 billion in core tier 1 capital".

Core tier 1 capital is a key measure of the financial strength of a bank.

The Minister for Finance Brian Lenihan welcomed the move saying it would “boost confidence and credibility in AIB’s ability to weather the financial storms we have experienced”.

AIB said due diligence and stress test scenarios conducted in conjunction with the Department of Finance, with assistance from PriceWaterhouseCoopers, suggest "a total amount of €5 billion new core tier 1 capital is appropriate".

"As a consequence, in addition to the proposed €3.5 billion injection by the Government, we aim to increase core tier 1 capital by a further €1.5 billion before the end of 2009."

The bank will look at selling assets to raise the capital and admitted the decision "represents a reappraisal of our previous view in relation to asset disposal".

In a statement AIB said it "acknowledges that the Minister has said that if any further capital injections are required from the State these would be in the form of equity capital”.

The bank goes on to state that it supports the creation of a National Asset Management Agency (Nama).

At 11.45am shares in AIB were trading on the Irish Stock Exchange at 97 cent, a gain of over 12 per cent.

Mr Lenihan said in a statement that he had no intention of nationalising AIB or Bank of Ireland and added that stress tests on the latter did not indicate a need for further capital.

He also welcomed AIB’s support for Nama and said the preparatory work to establish the body was underway. Mr Lenihan said at this stage he had “no reason to anticipate any further problems will emerge”.

In a note to investors Davy's analyst Emer Lang said AIB started the year with core equity of €7.7 billion, or 5.8 per cent, and core tier 1 of €9.9 billion, or 7.4 per cent.

While the Government preference shares will lift the latter to €13.4 billion or 10 per cent this will have no impact on equity, she said.

With the disposal of AIB's 24 per cent stake in M&T possibly raising €660 million Davy's says the selling of its Polish unit Bank Zachodni WBK "should no longer be ruled out". AIB holds a 70 per cent stake in Bank Zachodni.

M&T Bank is due to report first quarter results tomorrow.

"We also assume that boosting equity through debt buybacks at a discount is a distinct possibility," Ms Lang added.

The bank has “significant scope to boost capital via a buyback of its undated hybrid debt, which is currently trading at levels well below par,” NCB Stockbrokers analysts John Cantwell and Ciaran Callaghan wrote in a note to clients. “The bank is also likely to consider disposal of interests in property and joint ventures.”

AIB will hold its agm/egm on May 13th to approve the planned injection of €3.5 billion in capital by the Government.

Professor of economics at University College Dublin Karl Whelan told RTÉ's Morning Ireland programme that the move was one step close to AIB accepting the extent of its difficulties.

Mr Whelan said Irish banks are "moving towards being seriously under capitalised" and said, given the failure of AIB to raise funds privately at the turn of the year, the most likely source of new capital was the State.