Under-pressure bank must cash in its jewels

ANALYSIS:MINISTER FOR Finance Brian Lenihan got a dig in at AIB late yesterday evening when he said that the bank's reported losses for 2009 showed Nama was forcing the banks "finally to face up to the reality of their bad loans", writes SIMON CARSWELL

“Were it not for Nama, the banks might still be nursing their loans in an attempt to spread their losses over a prolonged period,” said the Minister. “This might benefit their shareholders but it would the choke the prospects of economic recovery.”

Colm Doherty, AIB’s recently appointed managing director, said the bank had “imperilled” itself by lending so heavily to developers.

He said he took no pride in AIB reporting a loss of €2.65 billion for 2009 yesterday, the bank’s first ever annual loss, caused largely by €3.4 billion in losses on €23 billion in loans moving into Nama. This is just the start of his difficulties.

The bank’s core equity ratio – the closely watched barometer of a bank’s strength – stood at 5 per cent at the end of last year. Nama will drive this considerably lower, forcing the bank to find more cash.

Reaching a core equity ratio of 8 per cent – the target set for international banks – by the end of 2012, would allow AIB to raise capital on its own, said Doherty. Bringing the date forward would lead to the State taking a larger stake, he said.

“Banks need to be given time to rebuild their capital base. If you impose an extremely tight deadline, we won’t be able to raise the capital because the worst thing we could do is have a distressed sale of our assets,” he said.

Mr Doherty said the bank had so far taken total losses of €4.2 billion on Nama-bound loans. However, given that AIB is facing a “haircut” of 35 per cent, according to analysts, the Nama-inflicted loss should be €8 billion.

In other words, the bank has taken a “haircut” of just 18 per cent so far and is spreading the losses over 2009 and 2010, crucially leaving any substantial capital injection until this year.

Doherty said the bank did not have to take losses on the loans until they had been transferred.

“We are clear that is going to create a capital gap and we are clear we have to fill that gap.”

Doherty said that he intends to raise capital by selling assets or welcoming a strategic investor before turning to shareholders or the Government again for cash.

Asked whether AIB would lose its attractiveness as a strategic investment if it sold “the jewel in the crown”, Polish lender Bank Zachodni, Doherty said he was not attaching a high probability to an investor coming in but he had to “maintain dialogue”.

“That is why in the first instance we are about self-help,” he said.

The difficulty is that Nama will crystallise losses and trigger a large capital requirement for AIB this year, if the Government “bad bank” plan is set up according to schedule.

This puts Doherty under huge pressure to raise enough capital in the short term.

Doherty must not just generate cash but he must also try to repair AIB by reducing costs (largely by cutting jobs) and returning AIB to profitability by charging more on loans and paying less on deposits, to change the “dysfunctional” retail banking which exists now.

He must plan all this while awaiting some crucial decisions.

The European Commission has yet to rule on the bank’s restructuring plan; Nama has yet to say how much exactly it will pay AIB for the €23 billion in loans; and the Central Bank has yet to set the capital thresholds for banks.

Selling overseas businesses, which are generating profits, would enhance AIB’s value, he said, up to €6 a share. The existing share price of €1.02 “reflects impending nationalisation”, not the underlying value of the bank.

The contradiction for Doherty is that to avoid turning to the State for another bailout, he must sell off some of AIB’s gems for the benefit of the bank overall.