Sunday 17 December 2017

Banks now in a scary state

Nick Webb

Nick Webb

IT'S going to make Nightmare on Elm Street look like an episode of the Tweenies. Banking is about to get bloodier than ever.

AIB, once the State's largest bank and now the size of a small orange, is set to give the market a hint about its financial position next Wednesday morning.

AIB boss Eugene Sheehy certainly has a taste for drama. This is the man who thought that AIB was such good value 18 months ago that he blew his year's salary on shares. Those shares traded at over €18. Last week AIB shares touched €3.20.

This is the man who increased AIB's interim dividend by 10 per cent despite clear signs that banks' desperately needed to hang onto cash as the financial system went brown.

AIB would "rather die" than raise equity, according to Sheehy. Booyah! It's fighting talk but he'll look like a bit of a berk if he's wrong.

Ireland is one of the few major developed countries not to have seen the State plough money into recapitalising the banks. The UK, US, Germany, France, Belgium and Holland have all done it. Merrion figures that AIB needs €2bn, with Anglo €2.1bn and BoI €2.6bn. Either Sheehy has been hiding his brilliant escape plan very effectively or he's going to be very, very wrong.

Last week, National Irish Bank spooked the market. It did something that must have made the other Irish bankers collectively wet themselves. NIB fessed up. It said that its bad loans were pretty bad. The rate of loans going bad was miles higher than the other banks had let on.

NIB isn't flash. It's not run by geezers in sheepskin jackets. They never call you squire. They are Danish after all. NIB's loan book is fairly conservative. Almost Lutheran. Martin rather than Lex. It doesn't bode well for the other banks.

The Regulator has unleashed PwC to comb through the bank's books and find out about all the bad property loans. These are the guys who missed John Rusnak's US$691m trading whoopsie and the recent €21m Greencore fraud. They'll be eager to avoid the hat-trick.

This could see some scary indicators coming out on Wednesday from AIB. Goodbody forecasts that AIB may have up to €4.5bn worth of iffy loans by the end of 2010. In that case, it's sayonara profits and maybe a big hello government shareholdings.

But AIB has another option. And it's one that is being strongly considered. It can sell off its 24 per cent stake in the US bank M&T. That will raise about €2bn. It should have done it ages ago. The bank's Polish operations are also on the block. The dividend will also be a thing of the past. Having sold all these assets at a knock-down price, AIB could escape tapping up the Government. Almost.

Bank of Ireland doesn't have anything like the wriggle room. It has almost none. It can sell its life business, which is decent enough. There's also a bit of hedge fund stuff in the States. The BIAM asset management division is a dog, having lost billions in mandates. Nobody will touch it with an asbestos-covered barge pole. There's also a medium-sized British mortgage business. But you'd need Hulk-sized stones to even think of buying that.

This means that unless it can get Banco Santander to buy it lock, stock and barrel, Bank of Ireland is probably going to be owned by you and me. God knows where Anglo, Irish Life & Permanent and others will get the cash. Anglo has hired Morgan Stanley to hit rich Gulf states for cash. Barclays has just raised €9bn from Qatar and Abu Dhabi. Despite what they think about themselves, Anglo isn't even on the radar there.

IL&P will almost certainly be bought or merged and broken up, with its insurance business the juiciest plum.

The taxpayer is in the frame big time. It's the "last option" says the Government. But it's almost certain. This is more worrying than hearing Pat Kenny is working on a new line in Jonathan Ross jokes.

Bank of Scotland and Halifax boss Mark Duffy is right. The State bank guarantee is bad for competition. We'll all get screwed by banks in the scheme. Rotten value mortgages, hard-to-get business loans, zero seed capital for risky start-ups. But it'll be even worse if the State is a shareholder.

Shane Ross is on holidays

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