AIB profit warning pushes M&T stake sale into focus

By Joe Brennan

November 06 2008

Allied Irish Banks left analysts in little doubt yesterday that its 24pc stake in US lender M&T will be put on the block as the group seeks to build up its capital reserves in the face of soaring bad loan losses.

The group slashed its full year earnings guidance by more than a third to €1.20 a share before the stock market opened, after more than doubling its forecast for bad loan loss provisions to €950m — or 0.75pc of average loans.

An increasing number of souring loans to property developers has forced AIB to also hike its loan loss forecast for 2009 from 0.6pc-0.8pc loans to 0.9pc-1.10pc. This points to a combined charge of over €2.35bn for the two years, assuming the overall loan book remains stable.

However, the country’s largest lender said it had an “action plan” that would save it from going to shareholders to raise fresh equity.

“It’s no surprise that AIB’s credit quality has deteriorated, given the challenging economic environment,” said Sebastian Orsi, an analyst with Merrion Capital. “The bad debt figures are beginning to get up there towards what the market is expecting.”

Analysts estimated the group would save €500m by a decision not to pay a final cash dividend this year. A scrip issue has not been ruled out and a question mark hangs over whether AIB will make a 2009 payout.

AIB also highlighted that asset disposals are on the cards as it seeks to increase its core tier one capital ratio — a key measure of a lender’s balance sheet strength — from 6pc at the end of this year to “at least 7pc over time”. Irish banks will come under pressure to sufficiently address their capital bases before the Government guarantee scheme runs out in two years’ time.

“We cannot announce specific actions in advance. Suffice to say, we have assets and the disposal of assets can bring us up [to a 7pc core ratio],” said John O’Donnell, group finance director. He indicated, on questioning in an analysts’ conference call, that a sale of its M&T stake could release €1.2bn of additional capital.

“The new target of 7pc is obviously low relative to where [UK and European] peers are headed and will disappoint the market. One presumes a disposal of M&T is imminent in order to help AIB to get there,” said Davy analysts.

Chief executive Eugene Sheehy appeared to pour cold water on suggestions the group’s 70pc stake in fast-growing Polish lender Bank Zachodni WBK could be sold.

“In our model, as you’re aware, we’ve four divisions,” he said, referring to the Republic of Ireland, UK, Capital Markets and Poland units, “and we believe the strategy we have in each division is robust. We spent a long time building up our positions in these markets. We’ve invested a lot of money and a lot of time building up these franchises and we don’t see the merit in running them down.”

When asked how a theoretical sale of Bank Zachodni could boost capital, Mr Sheehy told an analyst: “You’re stretching theory a bit too far.”

AIB sees its dependency on wholesale funding dipping this year as deposits grow by a “low teens percentage” — driven by the UK, Capital Markets and Poland — while loans increase about 9pc.

The loan-to-deposit ratio should fall from 157pc last year to 150pc at the end of 2008, and further gain in the medium term.

While AIB’s net interest margin has been squeezed in recent years as loan growth outpaced that of deposits, the group sees the trend is now being reversed.


Published in: on November 6, 2008 at 1:37 pm  Comments Off on AIB profit warning pushes M&T stake sale into focus  
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