AIB charting difficult course
THE PROSPECT of AIB escaping State ownership appears to be fading. The group’s interim results released yesterday and the accompanying briefing from management revealed that progress on its strategy to raise €7.4 billion – and thus avoid having to take any more money from the State – has been painfully slow. This is not entirely the bank’s fault. Market conditions are far from favourable with the after-effects of the recent euro zone sovereign debt crisis still reverberating. Selling substantial banking assets against such a backdrop is difficult.
It now seems more than likely that the process will drift out into next year, with the bank’s managing director indicating as much yesterday, particularly if market conditions do not improve. This in turn will delay the second part of AIB’s strategy which is to raise money from private investors. It also seems likely that the Government will have to ask Brussels to allow it extend the guarantees it has given over the Irish banks in order to reduce the pressure on AIB. Even so, there is no certainty that the bank, in the end, will not have to turn to the Government to help meet any shortfall, resulting in the State becoming the majority shareholder.
Faced with this scenario, it is not unreasonable to ask whether it might be better to take the bull by the horns and simply nationalise the bank outright rather than allowing it to pursue what some might see as an increasingly drawn-out strategy, with a very low chance of success, that may ultimately produce the same outcome? Indeed, there is a real risk that the bank’s attempts to avoid nationalisation are in effect becoming an impediment to it discharging its primary economic role; the provision of credit in the economy. Given that AIB is the largest bank in the State, this is potentially a threat to the nascent economic recovery.
The acknowledgment by the bank yesterday that mortgage rates will have to rise by half of a percentage point despite no increase in the underlying European Central Bank rate is just one example of how AIB’s need to boost profitability – in order to attract investors and avoid nationalisation – may actually contribute to undermining the recovery.
However, although nationalisation is appealing on several levels, not least the general disenchantment with the banks, such drastic action is probably unwise, possibly illegal and could be equally counterproductive. As we have seen with Anglo Irish Bank, nationalisation is no panacea. The bill run up by AIB during the boom and bust will have to be paid one way or the other. The losses will have to be met and the bank recapitalised before it could be returned to the market by the State at some future point. Outright nationalisation, assuming that Brussels approved it, might offer some more options, but would no doubt create its own problems.
On balance, the correct course of action is to let AIB proceed with its existing strategy. But if some sort of measurable progress has not been made by the autumn, then it may be time to consider more radical options.