AIB stake in M&T ‘undervalued’

AIB’s investment in M&T, the American bank in which it has a 22.5% stake, is significantly undervalued by the market and not reflected in the AIB share price, according to Davy Stockbrokers.

AIB’s stake in the bank is valued at approximately $2 billion

(1.6 billion) and accounts for almost one-sixth of AIB’s total market capitalisation.

M&T became relevant to Irish investors in 2002 when it announced plans to take over Allfirst, AIB’s troubled American subsidiary - at the centre of the $750 million trading loss caused by rogue foreign exchange trader John Rusnak.

AIB received shares in the enlarged M&T, as well as almost $900 million in cash, in return for giving up control of Allfirst in early 2003. AIB continues to have board representation in the enlarged group and has said it remains committed to its strategic partnership with M&T.

The New York-based bank, one of the 20 largest US banks, reports its fourth quarter results on Monday. Davy predicted profits before tax and exceptional items would be in the region of $256 million, a 12% rise year-on-year and 2.2% ahead of the previous quarter.

“It’s probably one of the best-managed banks in America. It has a tremendous track record,” said Davy analyst Scott Rankin.

Mr Rankin said M&T had been impressive in building market share and that it was strong in corporate lending, particularly in the American SME sector. He added that the market had so far failed to give AIB full credit for the value of its M&T stake and there was potential for the AIB share price to grow in the medium term.

According to Mr Rankin, AIB’s core operations are now valued at a multiple of 9.7 times earnings, when the market value of the M&T stake is stripped out.

This compares with a multiple of 16 times earnings paid by Royal Bank of Scotland for mortgage lender First Active as part of its 887 million acquisition, which took effect earlier this week.

M&T has almost 700 branches in the states of New York, Pennsylvania, Maryland, Virginia and West Virginia and in the city of Washington, DC. It was founded more than 140 years ago and has over $50 billion in assets.

Davy expected the bank’s fourth quarter income and bad debt figures to remain constant and said the forecast increase in profitability would come from cost reductions.

M&T integrated Allfirst’s operating systems into the enlarged entity during the third quarter of 2003, bringing significant benefits to the company's fourth quarter figures, Davy said.

M&T traded at almost $97 yesterday. The stock grew by over 22% in dollar terms during 2003, but was ahead by just 2% in euro terms as a result of the dollar’s collapse against the euro.