Sale of AIB's overseas assets to weaken bank -- ratings firm
AIB's strength as a franchise will be "weakened" by plans to sell its overseas businesses and the bank will find it very challenging to raise the €7.4bn of fresh capital it needs, according to the chief ratings agency in Canada, DBRS.
The Toronto-based agency said the Polish, UK and US interests of the bank provided 29pc of underlying earnings for the bank and selling these assets would diminish the AIB franchise. "DBRS sees AIB's overall franchise strength as weakened, on a going forward basis, owed to planned business disposals," said the agency in a new report.
The report recognises the key strength of the bank's Irish operations and says that it has produced reasonable pre-provision Irish profits, despite the downturn.
"Although domestically AIB's franchise remains intact, the future of its non-Irish franchise is at risk," states the agency.
"While DBRS recognises the capital benefits and potential gains to be realised through the disposal of these businesses, DBRS views these actions as diminishing the overall strength of the franchise, given the revenue diversification gained through these operations."
The agency recognises the benefits of NAMA removing distressed loans from the bank's balance sheet, but warns that the non-NAMA loans carry an "elevated credit risk".
"Managing the impact of credit costs on the non-NAMA portfolio remains a key challenge for the near term," said the agency. But the key difficulty is that "ongoing" profits will be hit by the sale of the overseas units.
The bank is undertaking the largest ever capital raising attempt by an Irish bank or Irish company and DBRS reflects upon this difficulty in the note.
"DBRS believes that AIB may be challenged to raise such capital at competitive terms in the private market.
"As such, the group may need to rely on the Irish Government to provide some form of backstop, which may result in increased government ownership," said the agency.
Liquidity at the bank on the other hand remains strong. "AIB's strong deposit franchise provides 51pc of overall funding. Moreover DBRS sees NAMA as improving liquidity as the bonds received in consideration are central bank pledgeable,'' it added.
The agency acknowledges that funding has become more diverse at AIB and reliance on short-term wholesale funding has been slashed.
"Further strengthening of wholesale funding and additional diversification from government guaranteed issuance would be viewed favourably by DBRS,'' said the agency.