Banks sold corporate souls during the boom

By Brian O’Mahony

Saturday, March 06, 2010

FROM an Irish perspective the European Central Bank’s decision to leave borrowing rates at their historic low level of 1% following its monthly meeting in Frankfurt would be good news in normal circumstances.

But our circumstances are far from normal. The bad debt write-downs of over €5 billion in bad property and related loans for 2009 earlier in the week provided a further stark reminder about the extent to which Irish banks sold their corporate souls to the property market during the boom.

It’s interesting too how the blame game has started doing the rounds. Sean FizPatrick and Anglo Irish Bank are being blamed for the debacle.

It was Anglo, the other banks have been suggesting, that led the frenetic rush to lend to the sector and it seems AIB and Bank of Ireland felt they had to follow Anglo or lose out on significant profits, not to mention the bonuses and massive salary rises that followed during the property driven boom.

At this crisis driven time in the economy the wrong kind of signals are being sent out when British owned and operated banks are taking a hostile view of this economy. ACC’s action against Fleming Construction is a case in point.

It was also responsible for bringing property developer Liam Carroll to its knees for a sum of €130m out of a total amount owed of over €1bn, while other lenders were prepared to give the group additional time to try and resolve its problems.

Given that background it could be argued that the future prospects of AIB staying an independent entity look slim.

If the Irish businesses they funded cannot get support from overseas banks, like ACC, because it obviously views this economy as a basket case, then AIB may have great difficulty staying out of the clutches of the state.

Earlier in the week AIB chief executive Colm Doherty got a good response from the markets when he said he would make every effort to achieve recapitalisation of the bank through private means.

The shares rose sharply as investors took the view that the country’s largest bank would survive. They put their faith in Doherty and bought the bank’s stock.

But the current view of Ireland by outsiders is extremely negative and Irish banks and the state are having to pay above the odds for what they borrow due to the perceived higher risk in lending to Ireland and Irish companies.

That being so, it is not at all clear that the bank will get the funding it needs to recapitalise itself in the months ahead.

That’s one side of the equation that has to be resolved by the bank. The other is the proposed sale of some of its best assets in both Poland and the US.

Clearly, it is a bad time to sell off the most profitable parts of the business when its core retail operation, which announced over €4bn in bad debts for last year, is struggling to survive.

Doherty said several key parties have emerged who want to invest in his bank, but it was not clear who they are or what kind of deals they were prepared to put in place.

Only time will tell and those getting excited about the recent share price rise will do well to remember that AIB’s shares peaked at over €24 a share before the bubble burst.

Following its loss disclosures earlier in the week Finance Minister Brian Lenihan made it clear the state will step into the breach, if it has to, to provide the bank with the capital it needs to survive.

That was an assurance by the minister to the outside world that the state will, if it has to, step in again to protect the bank.

To outsiders that was hardly a vote of confidence in the distressed bank and the €4bn required to bring it back into shape could be hard to raise.

This story appeared in the printed version of the Irish Examiner Saturday, March 06, 2010