Allied Irish Banks is facing the possibility of "virtual nationalisation" by year end, the US investment bank JP Morgan has told its clients.
Responding to AIB's results for the first six months, the Wall Street giant said even after selling off its overseas assets, AIB was facing a €3.5bn to €4bn capital shortfall, with the Government standing in the gap as "the lender of last resort".
The US bank said AIB was suffering from margin pressure and a deterioration in asset quality that was not showing signs of stabilisation yet. These problems will reduce visibility on AIB's future profits in a "post-NAMA world", said the bank's analysts.
AIB managing director Colm Doherty has said he does not expect the State to emerge as a majority shareholder in the bank, once a rights issue and/or institutional placing are done later this year.
Despite Mr Doherty's comments, Green Party spokesman Dan Boyle said yesterday that he believed the Government would probably end up with a majority stake in Allied.
"At this stage it looks likely the State will have a larger equity in Allied Irish by the end of the year," Mr Boyle told RTE. "It probably will mean a majority holding from the State."
But clouding the prospects are the prices AIB will get for its overseas assets and uncertainty over its future pre-provision profits. Firm signs of recovery in the Irish economy will also be needed to convince investors.
AIB is trying to raise €7.4bn in total, the largest amount of capital ever raised by an Irish bank.
Assessing what happens after the asset sales are completed, JP Morgan said the proceeds of the sales may not be enough to ward off nationalisation.
"That [a sale] leaves the bank with a €3.5bn to €4bn capital shortfall to fill, with the Government standing as the lender of last resort, and a scenario of virtual nationalisation still appearing as a possibility,'' its analysts wrote.
"Overall, in our view, weak results by AIB, with margin pressures and asset quality deterioration not showing signs of stabilisation yet, will reduce visibility on the bank's profitability in a post-NAMA world. In addition, prospects are still largely dependent on the capital relief AIB extracts from the planned disposals of Poland, M&T, and the UK."
The overseas asset sales should boost AIB's core Tier 1 capital by €2.5bn, said the bank, and also reduce the scale of its risk-weighted assets.
The investment bank noted that the number of criticised loans (loans needing additional monitoring) now stood at €42.2bn, up from €38.2bn in the second half of 2009. It also highlighted problems in the non-NAMA loan book.
"Quality deterioration does not seem to be abating yet, even in the loans that will not be transferred to NAMA," it said.
The government is likely to convert some preference shares into ordinary equity as part of a transaction later this year, Mr Doherty said.