S&P cautious on outlook for AIB

Standard & Poor's has affirmed its credit ratings for Allied Irish Banks, but has warned about AIB's expansion into Poland and Singapore, markets that the ratings agency believes carry more risk than the bank's established markets in Ireland and the US, writes Brendan McGrath.

While reaffirming its current ratings, S&P has slapped an "outlook negative" tag on AIB. "The outlook reflects AIB's weakened asset quality and capitalisation ratios following its likely acquisition of Bank Zachodni.

"Failure to improve these ratios would be a negative ratings factor," the S&P report states. However, it accepts that AIB's management is committed to restoring capitalisation ratios quickly through earnings retention.

The outlook also reflects AIB's potential expansion in the Far East, which S&P considers a risky market. "Should AIB take its option (or even part of it) to acquire a 25 per cent stake in Keppel TatLee Bank, the minority shareholding acquired could also be a negative ratings factor," warns S&P.

AIB is spending £443 million (€563 million) and is negotiating the right to buy a 25 per cent stake in Keppel TatLee, which could ultimately cost AIB as much as £661 million (€839 million).

The reaffirmed ratings are based on AIB's leading position in its core Irish market and the diversity of earnings provided by its Allfirst subsidiary in the US. S&P believes that AIB faces no serious threat to its dominant position in Ireland despite an increase in competition. It warns that AIB remains vulnerable to a slowdown in the Irish economy "although its growing geographical diversity makes it less exposed than its peers".