AIB shares surge to €15

SHARES in AIB touched the €15 mark for the first time in two years yesterday, bringing the bank within striking distance of a market capitalisation of €13 billion.

But shareholders were warned not to become too complacent, as Davy Stockbrokers said the group’s exit from its American investment was “only a matter of time” and the slide in the value of the dollar would hurt overall group profits.

Davy said AIB’s 22.5% stake in American regional bank M&T was worth only slightly more in euro terms than it had been two years ago, even though M&T’s share price had risen 44% in the intervening period. The dollar had collapsed by 36% against the euro over the same timeframe.

But AIB shareholders were fortunate to escape the full effects of the slide, according to Davy, thanks to the bank’s decision to reduce its exposure to America in recent years. AIB did this by taking some of its payment in cash when it sold its troubled Allfirst subsidiary, the home of the Rusnak rogue trading fiasco that cost AIB $690 million, to M&T, as well as beefing up its businesses elsewhere. Earnings from America accounted for 13% of AIB’s pre-tax profits in the first half of 2004, but this figure was as high as 30% in the late 1990s.

Davy said it was likely AIB’s hand would soon be forced in respect of its US interests, as M&T was expected to make an acquisition in the near future and would need to seek fresh funding at that stage. AIB would then need to decide whether to sell up or inject more of its own money into M&T to prevent its stake being diluted below 22.5%.

M&T, which has branches in New York, Pennsylvania and other states in the northeastern corner of the US, has a reputation for making significant acquisitions at 18-month intervals, but two years have elapsed since its last big deal, the takeover of Allfirst.

A sale of the M&T stake would generate a profit of more than €500m, the bulk of which would be used to fund a share buyback programme. This would be expected to provide a further boost to the AIB share price. The bank would also benefit from a recent change to Irish tax law that would exempt it from a €100m Capital Gains Tax bill on the sale.