AIB shares sink on bad debt alert ahead of agm

 

THE BOARD of Allied Irish Banks (AIB) stands for re-election before its beleaguered shareholders today amid renewed pressure on its ailing shares, which closed 11 per cent weaker last night on foot of a warning that bad debts will climb to €4.3 billion this year from €1.8 billion in 2008.

AIB shares dropped more than 12 cent to close at €1.02½ and reached 90 cent at one point. The share is down 92 per cent in a year and fell as low as 27 cent in March.

The collapse of the stock, which reached €23.95 when the Irish equity market was at its height in February 2007, has led to a loss of more than €20 billion in the bank’s market capitalisation since then.

The latest forecast from AIB, issued after markets closed on Monday, was followed by a reiteration of the case made by stockbrokers Davy that the State will ultimately take majority position on the bank’s share register after the establishment of the National Asset Management Agency (Nama). “There is not a huge amount in this statement that we did not already know or suspect,” said Davy analyst Scott Rankin.

In advance of today’s annual general meeting (agm) at which shareholders will determine the fate of AIB’s directors, shareholders will meet at an extraordinary general meeting (egm) to sign off on the Government’s €3.5 billion recapitalisation package.

The deal was approved yesterday by the European Commission. Assuming recapitalisation proceeds, Minister for Finance Brian Lenihan will have 25 per cent voting rights in the agm.

Mr Lenihan has given no public indication in respect of his voting intentions. But the imminent departure of AIB chief executive Eugene Sheehy, chairman Dermot Gleeson and finance chief John O’Donnell has fuelled expectation that he will vote for their re-election to the board until their successors take office.

Given the extent of the Government’s support for AIB, he is likely to argue that such a vote would be in the interest of continuity at the very top of the institution. The Government is known to favour the appointment of an external candidate to succeed Mr Sheehy, who for months insisted that he could hold on to his job in the face of rising pressure on the bank.

The bad debt forecast set out in Monday’s interim management statement exceeds the worst case projection declared by the bank in March, when it put an upper limit of €4 billion this year on its bad debt forecast.

That was before the bank conceded last month that it would have to raise up to an additional €1.5 billion through asset sales and debt buybacks, a sum that brings to €5 billion its immediate requirement for capital.

AIB said in the interim statement that it would be premature to estimate the impact on its capital of Nama’s establishment.

In a note yesterday, however, Mr Rankin again made the case that a 20 per cent discount on the transfer of €30 billion AIB property assets to Nama would lead to a requirement for significant additional capital from the Government and a majority State shareholding in the bank.

Such a €6 billion “haircut” would bring the bank’s core tier one capital and core equity ratio below 2 per cent without remedial action, he said.

“Based on our current estimates, Allied Irish Banks will need an equity injection of €1.5 billion on top of the €3.5 billion in preference stock (and €1.5 billion from disposals/buybacks), which will give the Government a share of 64 per cent.

“With €3.2 billion of distributable reserves in the bank (or €5.8 billion in the group), there is a risk that post-Nama the Government pref coupon may need to be paid in shares, which would push ownership up another 10 percentage points based on a full-year outlay.”