Business Irish

Thursday 19 April 2018

Newsmaker: Shrinking violet?

With AIB's crisis deepening, its chairman must abandon his low profile and take control

This week's dreadful half-year results heaped further pressure on AIB and its chairman Dan O'Connor. With AIB now almost certainly destined for state ownership, the time has come for O'Connor to take over the day-to-day running of AIB or quit the bank.

As the second anniversary of the Government's unconditional deposit guarantee approaches, AIB still seems mired in the merde. Nothing -- the deposit guarantee, a €3.5bn state-funded recapitalisation or NAMA -- seems to have succeeded in stabilising the situation at AIB.

This week, AIB published its results for six months to the end of June. Anyone expecting a smidgeon of good news was disappointed. Instead, AIB wrote off a further €2.3bn of bad loans. This brings AIB's total bad debt write-offs over the past two years to more than €9bn.

The markets might have been prepared to tolerate further bad debt write-downs from AIB if the bank had been in a position to signal that the worst was now over. But of course it wasn't. Far from things getting better at AIB, the situation is still deteriorating.

It is now clear that, with the exception of Anglo Irish, AIB has more bad loans on its books than any other Irish bank. As Sean FitzPatrick's cowboy outfit massively increased its market share from the late-Nineties onwards, all of the other Irish banks were forced to respond to the competitive threat posed by Anglo.

The result was that all of the other Irish-owned banks relaxed their lending standards as they tried to prevent Anglo poaching their customers.


However, apart from Anglo and 'me-too' Irish Nationwide, it was AIB which went furthest in throwing normal banking caution to the wind.

The consequences of this collapse in normal banking standards at AIB are now becoming apparent. AIB is transferring €23bn more of bad loans to NAMA.

This compares with just €12bn of Bank of Ireland bad loans that are NAMA-bound. Moreover, the discounts being applied by NAMA to the AIB bad loans -- 43p on the first tranche of loans transferred last April -- are much higher than for the Bank of Ireland bad loans, where NAMA extracted a 35pc discount on the first tranche.

A 43pc discount on the full €23bn of bad loans being transferred to NAMA by AIB would translate into losses of €9.9bn. In practice, the average discount is likely to be even higher as the later tranches will consist of loans to smaller builders and developers, which are likely to be of even lower quality than the loans already off-loaded onto NAMA.

And the losses on loans going to NAMA represent only part of the likely losses at AIB. It had a total loan book (including loans which will be sold to NAMA) of about €130bn at the end of June this year.

Even a 10pc write-down on its remaining loan book would leave AIB facing further loan losses of at least €11bn, to bring the total loan losses to more than €22bn.

In fact, the eventual outcome could be even worse than that. At the end of June, AIB had over €42bn of 'criticised' loans -- those that have already gone bad or that the banks reckons could go bad in the future -- on its books. Less than €15bn of these criticised loans are headed for NAMA.


In other words, up to a quarter of AIB's non-NAMA loans could conceivably eventually go bad. In a worst-case scenario, this would leave AIB looking at further loan losses of €27bn-€28bn.

Even a 50pc write-down on these loans would cost AIB €14bn, bringing its total loan losses to €24bn.

Losses on such a scale would make a nonsense of AIB's plans to raise €7.6bn of fresh capital, through a combination of disposing of its Polish and American operations and selling new shares to private investors, by the end of the year.

If AIB can't meet the deadline for raising fresh capital by the end of the year, which has been imposed by the Financial Regulator, or if, as seems increasingly likely, mounting losses mean that it will have to raise even more capital than was originally demanded by the Regulator, then majority state ownership will be the only option.

Further complicating matters is the poor relationship between AIB and the Government and regulatory authorities. Unlike Bank of Ireland, which is generally reckoned in official circles to have played a relatively straight bat, the feeling is that AIB has not measured up as well as its domestic rival.

Matters weren't helped by last year's long stand-off between the Department of Finance and the AIB board over who should succeed Eugene Sheehy as chief executive.

Although Sheehy announced his intention to 'retire' in April 2009, it was not until November 2009, almost seven months later, that Colm Doherty was installed as managing director.

The long delay was caused by the government's demand that Sheehy's successor not be an AIB insider, hardly unreasonable one would have thought given the mess created by the existing management team.

What was most perplexing about last year's seven-month dispute is that there was a suitably qualified and experienced candidate for the position already sitting on the AIB board, a candidate who, if he had been appointed, would have met with the Government's enthusiastic approval: Dan O'Connor.

The former Woodchester and GE executive was first appointed to the AIB board as a non-executive director in 2007. This happy accident of timing absolves him from any blame for AIB's disastrous lending decisions.

After graduating from UCD with a commerce degree, O'Connor qualified as a chartered accountant with KPMG and joined Craig McKinney's leasing company, Woodchester, in 1987. When Woodchester was taken over by GE Capital, the world's largest non-bank financial services company, in 1997, O'Connor stayed on.

He rose rapidly through the ranks at GE, eventually becoming head of GE Money, GE's European consumer finance division, which recorded profits of more than €1bn during O'Connor's last year in charge.

He quit GE in 2006 and acquired a number of non-executive directorships, joining the board of CRH in 2006 and that of AIB a year later.

When he succeeded Dermot Gleeson as AIB chairman 13 months ago, the appointment was widely welcomed.

Here was someone who had spent almost two decades with one of the world's most respected financial services companies who could root out AIB's introverted corporate culture.

With AIB's existing management discredited in the eyes of its critics, here was the new broom that would sweep it clean. Except that it has hasn't happened like that.

While he was temporarily appointed 'executive' chairman as part of the messy compromise that led to Doherty's appointment, O'Connor has consistently adopted the lowest of low profiles at AIB, not even attending results briefings for journalists and analysts.

While O'Connor's desire to stay out of the limelight is perfectly understandable from a personal point of view, the last thing AIB needs now is a shrinking violet.

With the bank facing the worst crisis in its 44-year existence, it needs a forceful leader who can drive the changes so desperately needed to restore it to health. O'Connor is more than capable of filling that role. But is he willing? If not, then he needs step down in favour of someone who is.

Irish Independent

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