Fraud sparks speculation of possible takeover

The unprecedented fraud at Allied Irish Banks' Allfirst subsidiary in Baltimore resulted in more than €2 billion (£1.57 billion) being wiped off the stock market value of the bank.

It has also led to increased speculation that AIB's weakened financial position and the loss of confidence in the bank's senior management could trigger a takeover bid for the Irish bank from one of the big British clearing banks. Dealers said there was heavy buying of the shares at the lower levels in London yesterday, although they added there is no indication the buying came from a single source.

"This is the first chink we have seen in AIB's armour and it would make perfect sense for the likes of Royal Bank of Scotland, Barclays or Lloyds TSB to make a move for AIB. The time is ripe for banking consolidation and this could be the trigger," said one dealer.

Other dealers agreed with this view, but one added the name of National Australia Bank - owners of National Irish Bank and Northern Bank - to the list of likely interested parties. At the close yesterday, AIB's stock market value was just more than €10 billion.

From the opening in both Dublin and London, there was what one dealer described as "panic selling" by both domestic and overseas investors.

There was also clear evidence of short-selling by index funds - where they sell AIB shares they do not yet own but buy after the shares have fallen.

This "turn and burn" activity accounted for a large proportion of the 51.5 million AIB shares that traded in Dublin and London. This is about 15 times the normal daily turnover in AIB shares and dealers said that they expect heavy trading to continue over the next few days.

From the overnight price of €13.62, AIB fell as low as €10.50 in early trading in Dublin before bargain-hunters brought the share back to close at €11.35, down €2.27 on the day. In London, the pattern was very much the same, and almost 31 million shares traded compared to the 20 million traded in Dublin.

The €2 billion wiped off AIB's stock market value is more than double the actual €864 million charge that the bank is taking in its 2001 financial year.

While some analysts said that the reaction in the market had been overdone, others felt that the market has called the situation correctly and that the writedown in AIB's value is a valid reflection of the loss of confidence in the bank's board and senior management.

The developments at Allfirst has also had repercussions for AIB on debt markets, with ratings agency Standard & Poor's publicly warning that it may downgrade its rating on AIB's short-term debt. Technically, S&P has put AIB's short-term debt on "credit watch with negative implications".

Another ratings agency, Fitch has, however, affirmed its ratings on AIB debt, although it said: "The scale of the loss and the time taken to discover it raise issues of management oversight, risk management systems and controls.

"Fitch Ratings will be reviewing these matters with AIB in the near future. Much more remains to be found out about how the suspected fraud was perpetrated, but it appears it was sophisticated and likely to have involved other parties."

The extraordinary developments at AIB had repercussions across the markets, with financial shares in Dublin and London weakening. The scale of the suspected fraud at AIB stunned international markets and triggered general concerns abour risk management controls at other banks with overseas operations.

The sudden drop in the share prices of both AIB and Elan has, however, catapulted Bank of Ireland into the number one position on the Irish stock market, ahead of AIB, CRH and Elan.