A MAJOR Canadian bank has proposed to take a stake in Allied Irish Banks. The investment would take place only after AIB’s development loans move to Nama, the National Asset Management Agency.
The conditional approach to the Government and AIB from the Canadian bank was received about a fortnight ago.
The name of the bank could not be confirmed last night but it is understood to rank among that country’s top five lenders.
The proposal is considered to be serious, although it is unlikely to develop in the immediate term given that it is predicated on the outcome of AIB’s engagement with Nama.
“It’s a much longer-term thing. I don’t think they’re going to be moving quickly until they see the full extent of Nama. They want to take an equity interest. We deem this to be of a lot higher standard than other approaches,” a source said.
The source added that the outcome of Nama’s involvement with other financial institutions and any capital-raising exercise they attempt may be a further consideration for the Canadian bank as it examines a possible AIB investment.
Nama is being established by the Government to take over toxic development loans to developers.
Canada is the only state in the Group of Seven largest industrialised countries not to support its banks with guarantees, recapitalisations or the purchases of toxic assets. Among other factors, this has been attributed to stronger regulation, strict capital requirements, fiscal conservatism and the absence of tax-deductible mortgages.
Only the largest of Canada’s institutions, Royal Bank of Canada (RBC), has incurred a quarterly loss this year, its first since 1993. The other main Canadian lenders are Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, and Canadian Imperial Bank of Commerce.
RBC is known to have examined the Irish banking system in recent times, although any interest it may have in AIB could not be verified last night. Last month, RBC chief executive Gordon Nixon said Irish banks stood out “as an example as having way too much leverage in relation to the size of the institutions”.
The Nama process will significantly derisk AIB. It remains unclear whether the Canadian bank has an interest in taking a majority or strategic minority stake in AIB, which has come under severe pressure on international markets as a result of its large exposure to the beleaguered Irish property market.
On the face of it, however, a fully-developed investment proposal from a large well-capitalised Canadian institution would be welcomed by the Government as it would have the potential to reduce any requirement for further State capital after AIB’s loans move to Nama.
Although the Nama process is designed to stabilise the financial institutions so that they can recommence normal lending practices, the removal of loss- incurring “toxic” loan assets from their balance sheets would make them a more attractive investment proposition to private investors.
Efforts by AIB and Bank of Ireland at the start of this year to raise fresh private capital under the terms of the Government’s original recapitalisation plan were unsuccessful as investors shirked the proposal in the wake of Anglo Irish Bank’s nationalisation.
The existing recapitalisation scheme is designed to incentivise existing investors in the big two banks to provide new capital to them. However, any new capital-raising process would also be open to new investors.
AIB, which declined to comment last night, is in the process of recruiting a successor to outgoing chief executive Eugene Sheehy. Colm Doherty, head of AIB’s profitable capital markets division, is widely held to be the internal favourite for the job. He has been on the AIB board since 2003.