Shareholder's fears of nationalisation may become reality before year is out
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Eileen McGee, a small AIB shareholder whose investments in Anglo Irish Bank and Waterford Wedgwood have already backfired, went to the bank's annual general meeting yesterday with one main question.
Reflecting the biggest fear of shareholders, who have already seen AIB's share price collapse more than 96pc from its peak, and dividends scrapped for the foreseeable future, she said: "I'm hoping against hope that the bank will not be nationalised."
Despite calls from some economists and the Labour Party, the Government has repeatedly said that it does not wish to nationalise the two main banks. Outgoing chairman Dermot Gleeson also stressed yesterday the group would fight such a move tooth and nail.
Even though the State's injection of €3.5bn of fresh cash into AIB yesterday will only entitle it to a 25pc stake in the bank after five years, it's difficult to see either of the two banks surviving to the end of this year without being majority owned by taxpayers.
Downturn
AIB's board has been left red-faced on a number of occasions over the past year as it repeatedly hikes the forecast of what it expects to lose from bad loans in the downturn.
The rapid pace of deterioration of AIB's lot prompted Finance Minister Brian Lenihan recently to insist the bank agree to raise an additional €1.5bn to bolster its reserves.
The sale of its 24pc stake in US bank M&T is now back on the cards and, for the first time, the bank is considering flogging its 70.2pc-owned Polish unit, Bank Zachodni WBK.
But even all this fails to take into account the elephant in the room: the National Asset Management Agency (NAMA). This agency, a 'bad bank' in everything but name, is destined to take over up to €90bn of risky property loans troubling the banks' balance sheets.
Why should we care about the banks' mistakes? The simple answer is that it is hampering their ability to raise funds in the global markets to provide credit to an already cash-starved economy.
But the Government, rightly, has no intention of buying the loans at the value at which they were set in years of the property bubble. The banks must firstly take a massive writedown on the loans before the D-Day transfer to NAMA.
Analysts at Davy expect AIB to account for €30bn of the loans being taken over by NAMA and that the bank will have to take a €6bn hit beforehand. Market observers believe it will have to go out cap-in-hand again for extra funds to repair the damage this will unleash on its reserves.
With the share price in the doldrums, the Government is, realistically speaking, the only investor in town.
Most observers believe it is a racing certainty that the Government will end up with a majority stake after the NAMA transfer. The same is likely to be the case for Bank of Ireland.
But if the Government is going to end up with 60pc to 80pc of the two main banks, why not go the whole hog?
AIB's outgoing chairman chose yesterday to quote Sir John Gieve, former deputy governor of the Bank of England, when offering his view that nationalisation must be avoided at all costs. "Nationalisation has been tried in many countries and its record is poor."
At a time when the Government is finding it hard to convince international investors in its bonds that it is not overstretched by the €440bn guarantee scheme, taking the banks onto the State's balance sheet creates a much bigger problem.
- Joe Brennan
