AIB can meet the challenge

The consequences of the NAMA and allied announcements yesterday included a slight fall in the share price of AIB today, amid very heavy trading, and a sharp rise in the price of BOI. The market seems to think that the State will end up owning more of AIB- probably a majority most people say -than of BOI

I don’t see it, really. Instead, I think AIB have plenty of options and, although the challenge set for them by NAMA and the Regulator is certainly a big one, I think they can do it and end up the year with a market value in the multi-billions, compared to c. a single billion today.
I don’t have the exact figures with me, so all figures given below are approximations, from memory

AIB need to absorb c. €10 bn. of NAMA losses and then end up the year with an additional €7 bn. in equity. So, that’s their target, €17 bn., say. To reach that, they will deploy their starting (end 2009) equity of €6 bn. and their provisions of €4 bn. (for NAMA). That approximately takes care of NAMA (but we may come back to NAMA because I believe it shouldn’t really cost the full €10 bn.)

So, to raise another €7 bn., what are their options? Well..
* Sell UK business….c 1 bn.
* Sell US business….c 2 bn.
* Sell Poland business…c.3
Hey, that’s €6 bn…………..We’re almost over the line already..Another big heave from the back row should do it..
* Make profits of ….c. €2 bn. for the year (a decline on 2009 core profits)…less another say c. €1 bn. of provisions (against non-NAMA loans, for which there are already provisions of € 1 + bn., not mentioned above)..so, say …c. €1 bn. more.
That’s it…That’s the €17 bn. target achieved. Without inviting the State in
But, I wonder…is there any way we could, sort of, Keep that Polish business, so as to not sell off the major profit-jewel…?

Well, there are still some other options:
* First of all, there’s NAMA…..That €10 bn. haircut above is really a bit rich, so to speak…It’ll probably be a couple of billion lower at the end of the day…Some NAMA-directed loans may disappear in the sell off of the UK business…Others are performing still, for goodness’ sake…At year end, approx. 35% of NAMA bound loans were still performing…Surely they couldn’t be sold off at a discount of 43%??…if they were to be rated at 100% (and here we’ll ignore consideration of the tiny interest rate the NAMA boys propose to pay and the discount rates, etc).. then it means that the Regulator and Mr. Honohan assume that the balance of AIB’s NAMA stuff will be discounted at c. 65%??..Come on…That’s not realistic…If your loans are going to lose that much you’d nearly be better off holding on to them, taking a tax deduction going forward and keeping the option of a future upside. This puts them in a class worse than Anglo’s (where the tax deduction option is irrelevant to their shareholders) So, I propose that, in the final event, there may be a saving from the budgeted €10 bn. loss on NAMA, probably at least €2 bn.

* Then, there’s the timing factor. Not all losses on NAMA loans need to be financed from 2010 earnings and reserves. Some big part may not transfer over until the first quarter of 2011…enabling their accounting treatment to be postponed for a year and permitting the deployment of 2011 profits.

* Then timing comes in again in another sense…The accounting rules under which banks are obliged to take a full hit to P/L account on foreseen losses in the year in which they can first be foreseen, are both unfair to bank shareholders and bad for the economy, and about to be changed. It’s pretty certain that the IASB will bring in a new rule on the treatment of impaired assets, allowing the foreseen impairment to be written off over the remaining years of the loan, basically. That will certainly help AB and BOI in 2011, maybe in 2010. (I suppose it will be too late to re-calculate and re-state 2009 earnings, but I’m not certain about that)

* Then there are equity sales to interested parties..Briefly…1/ a “Strategic” investor; 2/ A rights issue to existing shareholders ; and 3/ Conversion, by AIB’s agreement, of some of the preference shares. In these transactions, the exercise price will be critical. Currently, the shares are trading at a core p/e–price x core earnings per share- of about 0.50, or , say, about 20-30 times less than the p/es of comparable Eurozone banks (who also lost considerable amounts and received considerable “state aid”). If AIB can demonstrate in a few months time that it is on its way to restructuring in the manner foreseen, including liquidation of most of its illiquid assets, and reduced it’s funding cost, then it will become very attractive to certain buyers, especially considering its deposit base and such factors. It should conceivably be able to raise new capital at a share price in excess of €5 euros. Shareholders may even be inclined to provide €3.5 bn. to pay off the preference shares, – well, who knows??- if the State would collaborate in handing back the warrants. (Some commentators who complain that the preference share deal is bad for the State and only a “bail out”, will now probably be very reluctant to see it unwound!)

The prospects of meeting their recently imposed targets, keeping out the State as shareholders and even perhaps hanging onto Poland, are not bad at all. IMHO.

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