Statement of bad debt liability may help alleviate crisis

THOSE highly critical of the banking mess argued there would be no resolution to the credit crisis until each of the banks fully came clean on their bad debt levels.

AIB, one of the country’s leading banks, if that is not a misnomer in the current climate, attempted to do that yesterday in its interim management statement.

The estimated bad debt hit of €950 million is substantially worse than market estimates but the revised estimate suggests AIB has stepped up to the plate by trying to tell it as it is.

Having taken the hit, AIB might have expected some boost to its shares, but instead they plunged 17% in early trading as investors ran for cover.

But as the day wore on much of that loss was recovered and the shares were down just over 3%, suggesting some investors saw the bank’s action as a step in the right direction in trying to assuage doubts about future debts.

With the shares trading at just over €4 a share yesterday that implied a price earnings ratio (PE) of just over three times which contrasts sharply with a PE of 12 times in more normal circumstances. That disconnect between the earnings figure and the current worth of the bank’s shares is a reminder still that investors remain sceptical about what is round the corner.

The other issue needing resolution is the capital issue of AIB and the rest of the Irish banks. AIB is well off the accepted norm of a 10% tier 1 ratio emerging in the wake of the global banking crisis.

By the end of 2008 it is hoping to be at 6%, but Davy Stockbrokers suggests the bank will get it higher by selling its M&T associate in the US within months.

It seems the bank is insisting it will not crawl to the markets to raise money through a rights issue and thereby inflict further damage on the holdings of existing shareholders. The bank seems intent on avoiding that if at all possible, despite the speculation that most of them will be forced to raise money or have the Government take direct stakes in it, as has happened banks in Britain and elsewhere.

Recently AIB’s chief executive Eugene Sheehy said “we’d rather die than raise equity”. And the interim management statement backs that stance.

It said: “Our capital position is good and expected to remain resilient in all plausible scenarios through the downturn in the credit cycle.

“Looking to the end of 2009, we expect to have significant levels of retained profits in both years, reflecting a robust operating profit performance and notwithstanding a material increase as guided for bad debt charges.”

By cutting out a final dividend it will save €500m and it can repeat that next year if the need arises or just cut dividends across the year which would enhance the capital base. AIB’s plan, it said yesterday, is to achieve a core tier 1 ratio of at least 7% over time and to be at 6% at the end of 2008 which target assumes that a final cash dividend will not be paid.

However, when it stops the huffing and puffing AIB will, if it is serious, want to resolve the capital issue without delay and Davy Stockbrokers says it will sell M&T at the first opportunity to show it is committed to getting the bank in line with best international practices at this stage.

The tone of AIB’s statement is a far remove from market speculation that suggests at least one of the country’s leading banks has already been canvassing the rich Arab states for badly needed funds in recent weeks to help them to avoid going to the markets to fundraise.

If the banks fail to resolve the crisis on their own however, then the government will be forced to inject capital into banks, analysts have said.