AIB goes from bad to worse, but worst may be yet to come

ANALYSIS:A WRENCHING deterioration in AIB's business is laid bare in a new update from the bank's management, one of the final public statements from outgoing chief executive Eugene Sheehy and retiring chairman Dermot Gleeson.

As with many of AIB’s recent utterances, the latest revisions involve yet another downgrade from an already dire position. The bank that said for months that it didn’t require new capital and that had absolute confidence in its top management has found it impossible to maintain its forecasts in recent times.

Inveterate optimism is no longer a feature of the bank’s public pronoucements. Bad debts are rising rapidly as recession bites, profit margins are falling and corporate deposits have come under pressure. AIB shares are down 91 per cent in 12 months.

Picking up the tab tomorrow will be taxpayers when the bank’s beleaguered shareholders vote at an extraordinary general meeting (egm) on a €3.5 billion recapitalisation package from the State. That’s not all. AIB itself is seeking to raise a further €1.5 billion through asset disposals and debt buybacks.

Mounting pressure on the bank culminated 12 days ago in moves by Mr Sheehy and Mr Gleeson to leave their jobs. They were joined in the departure suite by finance chief John O’Donnell. The condition of the bank as they prepare to leave it is set out in last night’s interim management statement, a document which represents the central strand of the multi-faceted set of circumstances whose outcome in the coming months will determine the bank’s fate. No matter who succeeds Mr Sheehy, the individual in question will be faced with a mammoth task.

Having set an outer limit of a €4 billion bad debt charge in March in a stress scenario – off a base case of roughly €3 billion – AIB now expects its bad debt charge to come in at about €4.3 billion. That’s more than twice the €1.8 billion hit the bank took last year, which itself represented a massive uplift from the €106 million charge taken in 2007.

Needless to say, AIB’s recent forecasts leave a lot to be desired when it comes to confronting the consequences of the acute pressure it is now under. So this may come to be seen as the point at which AIB finally threw the fabled “kitchen sink” into its public projections.

Yet with all indications pointing to a worsening of the economic climate in Ireland, there may be more in store. After all, AIB’s “criticised” loans – those described as being on watch, vulnerable and impaired – rose by no less than €9 billion to €24.3 billion in the first three months of the year.

This must be of concern to the Government, which is supporting the bank to an extraordinary extent, and to shareholders, who face obliteration if the Government has to increase the new capital it is providing to the bank.

After all, Finance Minister Brian Lenihan has made it clear that any additional capital – over the €3.5 billion, that is – will go in by way of ordinary equity. If that happens, the Government will find itself in a big majority position on the share register.

For the moment, however, the message from both bank and Government is that nationalisation is not on the cards. Government sources point to the €3.5 billion and the creation of the National Asset Management Agency (Nama) as the definitive cure for the bank’s ills.

Meanwhile, AIB sources reiterate that the €5 billion coming in through State capital and AIB’s own efforts will be sufficient to see it through the storm. Although the statement itself said AIB’s capital ratio is well in excess of regulatory requirements and will increase post-recapitalisation, the bank said it would be “premature” at this point to estimate the impact of Nama’s establishment on its capital.

Of overriding importance here will be the discount that applies to the price of the assets that Nama takes from the bank.

Too big a discount and further Government capital will be required to buttress the bank’s capital. Too little and AIB runs the risk of forestalling recovery and a return to normal lending levels, which itself will be crucial for the restoration of confidence in the wider economy.