AIB's £840 million acquisition in the US will make it one of the 50 largest banks in the US. But, more importantly, the bank is achieving the scale needed to boost its presence in a few key markets in Maryland and Pennsylvania.
The bank has been trying for some time to find a suitable significant acquisition in the markets close to its existing First Maryland base. Its latest acquisition will now leave it well placed in a market where size is becoming a competitive issue as banks consolidate.
FMB has made a number of acquisitions of branches and non-branch banking businesses such as fund management operations in recent years. But AIB's chief executive, Mr Tom Mulcahy, has made no secret of his aim to achieve a significant expansion in the bank's US operations.
The Dauphin acquisition which is expected to be completed in the third quarter of the year is, by any measure, a significant move. AIB, through its US subsidiary First Maryland Bancorp, is paying $1.36 billion (£840 million) for Dauphin Deposit Corporation. The price is well within the market range in an economy where bank assets have become increasingly expensive.
The $1.36 billion price is 2.36 times the value of Dauphin's net assets and 19.1 times its 1996 earnings.
Dnuphin shares were suspended at $33 yesterday. Brokers expected the bank to fetch a price of between $40 to $45 per share. At $43 per share the price is a 30 per cent premium to the suspension price but it is within the range of expectations. At 2.36 times book value it is at the lower end of recent bank acquisitions in the US where book values have ranged from 2.3 to 2.9 times earnings.
At 19.1 times earnings the price compares with price earnings multiples ranging between 13.5 and 21.1 in recent large bank sales in the US. Dauphin reported profits of $71 million after tax in 1996.
AIB expects to boost profits through a restructuring to achieve cost savings of $48 million per annum within two years of completion of the acquisition. As a result, AIB expects the acquisition to be neutral for earnings per share in 1997 - before the once off restructuring costs of $60 million. It is expected to produce a "moderate" return in 1998 and a "significant" return in 1999 and beyond.
The deal is to be funded through a mixture of cash and shares with a maximum of 49 per cent to be paid in cash. AIB wants to achieve a 70-30 per cent share cash split.
On that basis AIB plans to issue 142 million new shares in the form of American Depositary Receipts (US shares each equivalent to six ordinary AIB shares) to Dauphin shareholders. But AIB plans to buy back 50 million shares later to reduce its surplus capital.
Based on this 70-30 split, on completion AIB's Tier 1 capital adequacy ratio - a key measure of its financial strength - will fall to 7.3 per cent from a current level of 8.1 per cent, while its total capital ratio will rise from 10.5 to 10.8 per cent. When the share buy-back is completed, the Tier 1 ratio will be 6.2 per cent and the total capital ratio 9.8 per cent. The deal is structured to ensure that the bank's capital ratios remain at strong levels throughout the process.
The acquisition is a good strategic fit for AIB. Dauphin is a good sized profitable bank - it reported a return on assets of 1.26 per cent in 1996 and a return on equity of 13.04 per cent. It has a consistent record of strong earnings and asset quality is good.
It is located in an adjoining market to FMB, giving opportunities for synergies, and cost savings. The acquisition will catapult AIB onto the number one position in south central Pennsylvania, a market where household income is about 4 per cent above the national average.
AIB already earns considerable profits in the US. Results issued yesterday showed that FMB reported record earnings of $132.2 million last year, a 10.1 per cent increase on 1995. Fourth quarter" earnings were $365 million, a 14.4 per cent rise on the same period last year.
On completion just over one third of AIB group assets will be in the US market where the bank has been very successful since it bought 43 per cent of FMB in 1983. The Irish group took over the bank in 1989 at a total cost of $520 million.
In 1991, FMB paid $130 million for York Bank Pennsylvania. Between 1994, and 1995 it spent over $2 million to acquire a number of deposit books in the region.
In 1995, it bought Zirkin Cutler Investments an asset management operation based in the District of Columbia for $15.2 million. Last year it spent $83.5
million to buy 1st Washington Bancorp. In all, AIB has so far spent over $750 million on acquisitions in Maryland and adjoining markets.
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