AIB appears unscathed after recent scandal

Investors fail to be put off by the ongoing saga and customers seem happy enough to stay with the State's largest bank, writes Siobhán Creaton, Finance Correspondent.

AIB has ended a difficult week on a positive note. Business is booming, the bank's share price is at a two-year high and it has told investors they can expect a more than 10 per cent rise in profits this year. AIB group chief executive Mr Michael Buckley and his senior management team will be happy enough and so will their investors.

The fact that the Republic's biggest bank got a public rap on the knuckles from the Irish Financial Services Regulatory Authority (IFSRA) for "deliberately hiding" the fact that it had overcharged thousands of customers more than €30 million for almost eight years has barely registered a ripple within the investment community.

Indeed, in some quarters, the amount of media attention paid to this scandal and to the disclosure that some of the bank's most senior former executives used offshore accounts to evade tax and were the beneficiaries of inappropriate deal at the bank's investment arm was being viewed as bordering on hysteria.

In a note to investors, AIB's stockbroking firm, Goodbody, said the media had a "field day" with the material and stated that IFSRA's findings against the bank were nothing more than had been expected.

The only potential downside for the bank from an investors' perspective, Goodbody warned, was the possible increase in regulatory costs to AIB if the bank or any of its peers transgressed in this way again. "It would give the regulators ample opportunity to step-up the pace of regulation in the industry, which could not be a positive point obviously for the cost line," it stated.

"More importantly, AIB has a pre-close statement where we expect the tone to be positive," it continued.

Davy Stockbrokers referred to the AIB "saga", saying IFSRA's report contained no real incremental news for investors and would not affect the bank's share price.

AIB had indicated that the investigations, which it paid for, together with the refunding of the monies involved to customers who were overcharged would cost no more than €50 million.

The bank is sticking by this figure, which is pretty small beer for one of Europe's most profitable financial institutions, a bank that will bring in profits of more than €1 billion this year.

Davy states that the only outstanding issue now is the possibility that any of the individuals within the bank facing disciplinary proceedings turns out to be among AIB's most senior ranks.

Up to 10 senior executives at the bank are believed to be facing disciplinary proceedings arising out of the findings of these investigations. Neither the bank nor IFSRA will name them or identify the level of seniority involved while the process is continuing.

Mr Buckley has said that he had no knowledge of the cover-up and that a crucial memo, prepared in 2002 - which identified and estimated the cost of the bank's overcharging and recommended notifying the regulator - was never circulated to his senior management team.

"It doesn't show the management in a good light but the market isn't bothered by what's happened. It is seen as more of a public relations issue rather than an investor relations matter," according to one market source.

"If one of the senior management were to lose their job though, the market would take notice," he added.

Another market source suggested that AIB's notoriety in terms of previous scandals, including its role in facilitating DIRT evasion in the 1990s and the loss of $691 million (€520 million) in 2002 by rogue trader Mr John Rusnak at its former US bank Allfirst, fuelled the furore.

There is some sympathy for the bank's position in relation to the foreign exchange overcharging. AIB was found to have charged a rate of commission on certain foreign exchange transactions that was double the rate approved by the regulatory authorities. AIB says this was due to an error.

This week IFSRA chief executive, Dr Liam O'Reilly, pointed out that it would have been "pretty cheap" for the bank to have corrected this error early on and could not understand why the bank had deliberately concealed the facts.

In the months after a whistleblower alerted IFSRA to the problem and subsequently tipped off RTÉ as well, individuals at AIB began to correct the error covertly and by April of this year the bank was charging the proper commission.

The cautious regulator went so far as to speculate what the bank's next move might have been. "These matters are open to the interpretation that AIB then intended to notify the regulator subsequently of a proposed increase and to do this without ever drawing attention to the previous breach, which had persisted for almost eight years," according to IFSRA.

Dr O'Reilly went on to warn that it would not tolerate such practices within the financial services industry and said that future offenders would suffer significant financial costs and "the inevitable public reputational damage that will follow".

This episode had been expensive for AIB and its brand has certainly been bruised by the many headlines and critical reports in the past few months but this appears to have made little impact on its domestic business.

Indeed, its trading statement says it has extended its "prime position" in retail and commercial banking in Ireland and has gained a bigger share of the market across a range of products sold to Irish consumers.

If investors lost little sleep over recent events, AIB's customers have also remained loyal.

"While people bitch and moan about banks all of the time, they rarely get up off their backsides and move their accounts or even shop around for a better service," one analyst remarked. "Everybody hates banks. They are complex businesses. Overcharging can happen, but customer tend to stay put."

Efforts to enhance competition among Irish financial institutions, primarily by making it easier for consumers to switch their accounts, may result in greater customer reaction to such issues in future.

For now, however, investors will keep an eye out for news of the disciplinary proceedings in AIB but will mainly look forward to the bank unveiling a bumper set of figures in February.