Next week's egm will revolve around recapitalisation and electing the board – a vote to be influenced by some tarnished pasts, writes SIMON CARSWELL

DESPITE THE impending departures of the three top brass at Allied Irish Banks (AIB), the bank faces one of the biggest days in the 43-year life of the financial institution next Wednesday.

The announcement on April 30th that chief executive Eugene Sheehy, chairman Dermot Gleeson and finance director John O’Donnell would leave AIB over the coming months now turns the focus on whether the Government will support the re-appointment of the rest of the board members.

Despite their decision to step down following mounting pressure, the three directors will also seek re-election next week as they are retiring in the months following the annual meeting.

The bank has said that non-executive director and former US ambassador to Ireland Mike Sullivan will retire at the meeting.

Excluding two directors appointed by the Government under the guarantee (Dick Spring and Declan Collier), the remaining nine have been on the AIB board for between two and six years.

On Wednesday, at AIB’s extraordinary general meeting, shareholders will be asked to approve the Government’s €3.5 billion recapitalisation of the bank which will give the State warrants to buy 25 per cent of AIB in five years.

In the afternoon, at the bank’s annual meeting, the Government can – if the recapitalisation is approved – use its voting power to block the re-election of the nine surviving board members and to appoint two more non-executive directors to represent taxpayers.

Questions will be asked about whether the board should be re-elected given that these non-executive directors were sitting on the board when the bank sharply increased its loan book, particularly to the construction sector.

It is this same sector that is causing AIB so much pain and is responsible for most of the sudden and massive surge in bad loans.

AIB’s loan book increased from €67 billion at the end of 2004 to €129 billion at the end of 2008 – almost doubling in just four years.

Most of this increase came in 2005 and 2006 when AIB’s loan book increased by €53 billion.

Five of the remaining 10 directors were on the board during the years when AIB was aggressively chasing a greater share of the property lending market.

A sixth, Sean O’Driscoll, chief executive of electrical appliance maker Glen Dimplex, joined in September 2006.

The loan book continued to increase through 2007 but not as sharply as before, rising from €120 billion to €128 billion.

The most recent appointee was Stephen Kingon, chairman of Invest Northern Ireland, in September 2007. Another director, David Pritchard, appointed deputy chairman last month, joined the board in June 2007.

Two directors – Dan O’Connor, who will replace Mr Gleeson as chairman, and Anne Maher – joined the board in January 2007.

The only remaining executive director who is not departing, Colm Doherty, head of the bank’s capital markets division, is the only internal frontrunner to replace Mr Sheehy as chief executive, though Government would prefer an external candidate.

While Mr Doherty was among the dissenting voices on the AIB board to express concern about the bank’s over-exposure to property lending in recent years, his division facilitated the substantial growth in the bank’s funding and loan-to-deposits ratio.

AIB is suffering now following the bursting of this credit bubble.

The bank says under its stress scenario it will write off up to €8.4 billion on loans over three years to the end of 2010 and had claimed last March to have enough capital with the taxpayers’ €3.5 billion.

The Government disagreed, arguing it needed €5 billion. The bank has provided loans totalling €21 billion – about 16 per cent of all loans – to developers.

Stockbrokers Davy estimated last week that AIB could end up being 78 per cent State-owned following the purchase of these property loans at a 20 per cent discount by the “bad bank”, the National Asset Management Agency (Nama). However, given AIB’s share price has climbed 60 per cent in the past week, Davy estimated yesterday the Government could end up taking 72 per cent of the bank if it was to be recapitalised to a 6 per cent core tier-one ratio, a gauge of loss-absorption ability.

Either way, the transfer of the bank’s bad loans is likely to lead to a fresh injection of pure equity capital and majority State ownership.

All of the remaining 10 directors were on the board of the bank when the Government guaranteed the bank’s deposits last autumn.

The board approved the almost doubling of bad loan provisions to €1.8 billion for 2008 last February – a sharp revision on the bank’s position four months earlier.

The decision to increase the bank’s half-year dividend payout by 10 per cent last July was also considered bizarre given the demands by investors that capital be hoarded. Scrapping the dividend would have bolstered the bank’s capital by €270 million.

The board will face awkward questions over its defence of Mr Sheehy and his view last October the bank did not need capital. It will also have to answer why the bank admitted on three subsequent occasions it had insufficient capital. AIB’s audit committee, chaired by Dan O’Connor since May 2007, receives reports from the bank’s chief risk officer which would have outlined any credit, market and liquidity risks.

Kieran Crowley, Stephen Kingon, Anne Maher and David Pritchard – all current board members – also sit on this committee, though most were appointed in 2007 at the tail-end of the boom. (Academic economist Jim O’Leary was a member until April 2008.)

All these board members will be the focus of some attention on Wednesday – prior to the re-election ballot – as to whether they asked the right questions about the risks facing the bank.

Despite the expected vocal contributions from the small shareholders in attendance next Wednesday, the real voting power rests with AIB’s institutional investors who hold 77 per cent of the bank’s 883 million shares.

While the future focus will be on whether AIB appoints an internal or external chief executive, the board faces uncomfortable questions on Wednesday about its past performance.