AIB – What nationalisation will mean for shareholders and depositors

Irish Independent
By George Garvey
Friday December 24 2010
Q: Why does AIB need another €3.7bn in fresh capital?
A: In the final, mad years of the boom, AIB was the most aggressive lender to the overheated property market. The taxpayer is now paying the price for this binge of irresponsible lending, with AIB having already taken a bad-debt charge of more than €9bn and transferred almost €20bn of bad loans to NAMA. No one expects the tide of losses at AIB to ebb any time soon.

Under the new, tougher capital adequacy imposed by the Financial Regulator, AIB needed to raise €6.1bn of fresh equity capital by the end of the year and a total of almost €9.8bn of fresh capital.
While AIB had raised more than €4bn from the sale of its Polish and US interests, it was still almost €6bn short. In the current climate, it was apparent that extra capital had to come from the State. With deposits fleeing AIB, time was of the essence.
Q: What percentage of AIB will the State now own?
A: The state shareholding in AIB will immediately rise from the present 18pc to 49.9pc following yesterday’s move by the Finance Minister. It will rise even further to 92.8pc when the sale of AIB’s Polish bank is completed early in the New Year. Then, when the State converts its €3.5bn of AIB preference shares into ordinary voting shares in late February, the state shareholding will climb to more than 96pc — full nationalisation to all intents and purposes.
Q: What does this mean for AIB shareholders?
A: Following the de facto nationalisation of AIB, its shares will be delisted from both the Dublin and London stock
exchanges. However, the shares will continue to be traded on the Irish Stock Exchange’s junior market, the Enterprise Securities Market. This means that existing AIB shareholders will still be able to buy and sell shares.
Unfortunately, with the number of AIB shares set to increase from 1.08 billion at present to more than 23 billion, the existing shareholders will be massively diluted with their total stake in the company shrinking to less than 4pc.
The best existing shareholders can now hope for is that the new management team turns the bank around and that AIB is sold to a foreign bank in a few years.
Q: What does this mean for AIB depositors?
A: As yesterday’s High Court hearing was heard in camera, we don’t know why Brian Lenihan chose to act now. However, we can make an educated guess. The word in financial circles is that the haemorrhage of deposits from AIB, which lost €13bn of deposits in the first 10 months of the year, had accelerated in recent weeks. There was a very real risk of a “run” on AIB. By acting quickly, Mr Lenihan has protected the remaining AIB depositors by ensuring that AIB stays in business.
Q: What does this mean for AIB borrowers?
A: As they seek to repair their shattered balance sheets, all of the Irish banks, and not just AIB, will squeeze their customers hard for every last cent.
Bank of Ireland’s announcement yesterday that it was ending “free” current account banking for most of its customers is a sign of things to come.
Expect AIB to hit its customers with a slew of interest rate increases and higher charges in the New Year.
Q: Will the State ever get back all of the money it has pumped into AIB?
A: After yesterday’s emergency injection of €3.7bn, the State has now pumped a massive €7.2bn into AIB, with the prospect of even more to come in the New Year. By comparison, AIB had a market value of just €432m yesterday.
By taking virtually complete ownership of AIB, the Government has ensured that it is the taxpayer rather than the existing shareholders who will receive the full proceeds when AIB is eventually sold back to the private sector. Unfortunately, barring a totally unexpected economic recovery, AIB is likely to be sold for a fraction of what the Government has spent rescuing what was Ireland’s largest bank.
– George Garvey