Where to now for AIB and BoI?

IT has certainly been an annus horribilis so far for AIB and Bank of Ireland and the question for the dominant forces in Irish banking is where now?

What a horrible year for the executives in charge of the banks, AIB's Michael Buckley and Bank of Ireland's Michael Soden. The question for the both banks is quo vadis?

Despite having to face up to two major setbacks, the key indicators for shareholders in each bank market capitalisation have held up well.

Since the beginning AIB's market capitalisation is up €337m while Bank of Ireland's is up a close 320m.

The first hit was on AIB with the Allfirst debacle which resulted in foreign currency trader Johnny Rusnak hiding losses of $691million. The Rusnak affair came like a bolt out of the blue, and that was the most worrying aspect of the affair. Did more Johnny Rusnaks lie hidden in the deep grass of AIB's back offices waiting to be uncovered? AIB moved fast to sort out problems in Baltimore and before the weekend Rusnak was jailed for seven years and six months for bank fraud. The matter of recovering some, or all, of these losses from the bank's insurers or through legal action will have to be tackled. Banking analyst with stockbrokers Merrion Capital Seamus Murphy is pretty emphatic on the prospect of AIB making the company's insurers pay for the debacle: "Some rumours were circulating that following the guilty plea by John Rusnak AIB could claim insurance cover on the total US$ fraud losses. However, insurance will only cover the claims on the presumption that Rusnak himself benefited from the fraudulent activities, over and above his own salary and bonus scheme. To date this has not been proven and so a successful insurance claim seems unlikely."

The internal regulatory problems exposed by the AIB funded 100 million Ludwig Report means that any cause of action against those who traded with Rusnak could, if successful, have any damages reduced because of what could be perceived as the contributory negligence of the bank in the affair. Over in Bank of Ireland, Mike Soden failed miserably in his attempt to take over Britain's sixth largest bank Abbey National. Abbey's executive chairman Lord Burns won the strategy game hands down and saw off Bank of Ireland with relative ease.

The Rusnak Affair and the failed Abbey National bid have brought AIB and BoI up on the radar screens of international banks in predatory mode.

AIB and BoI can count themselves lucky their respective share prices have held up despite their travails, otherwise they might be deemed to be tasty cheap morsels ripe for the picking by larger predators. There are bigger assets available in Europe with smaller price tags. Deutsche Bank for example with its exposure to the dormant German economy has a market cap of €29 bn. This makes AIB and BoI look very expensive when one considers a fat premium would be expected by the shareholders of both banks if either were to come into play. Irish analysts say at current prices there is little sense in someone taking over either AIB or BoI. They are both too expensive, too well run and offer little scope for savings through synergies. This means AIB and BoI have to chose between squeezing more out of theirustomer bases ormaking acquisitions. Both have been burned in the US and their respective UK operations limp along. AIB's exposure to the Polish market is a long play and the time might be right to try and take on a significant bank operating within the Euro area. Mike Soden proposed a merger of BoI and AIB and was all but laughed out of court. He may not have been all wrong. Perhaps a joint venture to take on Europe, while being separate at home, is the way forwardAfter all, the devil you know...