Thursday 5 December 2019

Richard Pym - Steering 
AIB in 
infested waters

Last week, with relatively little fanfare, English-born cricket fan Richard Pym was revealed as AIB's new chairman. But who is Pym? And what does the crystal ball have in store for him over the next two likely tumultuous years?

Richard Pym
Richard Pym

OUR second largest lender is far from the most scandalised bank that Richard Pym has turned his hand to over the course of a long career.

His most high-profile gig until now was at Britain's Co-operative Bank, where he took over as chairman in June 2013 in the wake of disgraced ex-chairman Paul Flowers. Flowers was the media doyen and ordained Methodist minister who fell spectacularly from grace after he was filmed buying cocaine and methamphetamines in his car in 2010. He was later accused of covering up child sex abuse scandals and hiring rent boys. Flowers resigned in 2013 after a £1.5bn (€1.9bn) black hole was discovered in the bank's finances.

Pym is a veteran banker with plenty of experience turning around troubled institutions. Other previous roles include the chairmanship of UK Asset Resolution, the combined nasty parts of Northern Rock and bad bank Bradford & Bingley, as well as the chair of Swedish lender Nordax Finans AB and the chief executive spot at Alliance & Leicester, which is now owned by Santander.

Interestingly, he started his career in fashion retail, working with Sir Stuart Rose at Burton Group in the 1980s before switching to banks.

It's hard to trump the troubles of the Co-op Bank, but AIB could be Pym's biggest challenge yet. 99.9pc state owned, with a share price languishing at 9c, a huge book of impaired loans and European Central Bank stress tests looming before the end of the year, its management still have a sizeable mountain to climb.

Here's the low-down on what Pym's main priorities will be over the next two years as he helps to convert the country's second biggest lender into something resembling a private bank.

1. Profitability

First on the list is continuing to improve the bank's profitability, having only just lurched into the black earlier this year. One of the most important drivers here is the resolution of impaired loans, which seven years after the financial crisis first emerged are still a major drag on both profitability and the bank's capital ratios. Chief among these impaired loans are mortgages in arrears - about €11bn in total - but nothing will happen quickly.

"The resolution of mortgages in arrears will take some time, because of the sheer volumes involved," said Diarmaid Sheridan, Davy stockbrokers' newest banking analyst. "The bank is making progress, but it is a slow process.

"Mortgages in long-term arrears are the real problem; the majority of resolutions so far have concerned mortgages in arrears under 90 days. Engaging and agreeing solutions with borrowers in longer-term arrears is the key challenge."

There's also a sizeable book of small business and corporate loans in arrears. CEO David Duffy told the Oireachtas finance committee in April that small business arrears were "in monetary terms... by far the larger proportion of AIB's troubled loan book".

"In theory, resolving these should happen quicker; the volumes are smaller," said Sheridan. "But there are complicating factors such as cross-connections, where there are borrowings related to both trading businesses and properties. Individually, these loans are also larger. We expect the resolution of these loans to really ramp up in the second half of this year, and gather pace from there."

2. Consolidating its share price

Next in the firing line is the bank's rather ridiculous share price, which at the time of writing stands at 9c. Its shares traded at €23 at their peak in 2006. Penny stocks are regarded as too volatile by investors, as a movement of just one cent can result in a serious percentage fall in the value of an investment. Several sources have indicated that the bank will consolidate its share capital to tackle this, reducing the number of shares on issue to make individual shares more valuable.

But this will not be easy. Rounding up shares may mean that small shareholders, Average Joes and Joannas, lose out.

It will happen, said one source who didn't want to be named, but it will be tricky.

"It's a political issue. It could really cause a lot of upset to older shareholders who don't understand the process or who have seen the value of their investment wiped out already. It will be a difficult one for the government to handle."

3. Reducing government stake

The State owns 99.9pc of the institution following its massive €21bn injection of taxpayer's money in the bank bailout. In the past year the Department of Finance has repeatedly indicated its intention to reduce this, as it has done with BoI, without giving a time frame.

Its primary goal, it is understood, is to return AIB to the main market of the Irish Stock Exchange rather than the smaller Enterprise Securities Market on which it is currently listed - which means selling off about 25pc of the Government's holding.

"This will take a long time to ensure value is returned to the exchequer, because the holding is so big and the State is not in a rush to do it all," said Sheridan.

"We think they'll issue subordinated debt in advance to get the market's attention and get people thinking about AIB. Bank of Ireland did this earlier this year and of course AIB should benefit from second-mover advantage."

The State also holds preference shares in the bank, which are not regarded as common equity Tier 1 (good capital) for the purposes of European Central Bank stress tests. It will probably try to convert this into common stock too.

The other alternative, suggested by one well-informed source, is to seek outside investment to dilute the Government's stake.

To do this, the bank would line up a smattering of heavy-hitter investors, much like Bank of Ireland did in 2011 when it handed over 35pc to a consortium of US investors including Wilbur Ross in return for €1.1bn.

Having recently sold off his entire stake in Bank of Ireland, rumours abound that Ross could be ready to pour capital into AIB if this chance emerges - though he would not be drawn on the matter when queried by this newspaper.

Sheridan also plays down the likelihood of this, saying: "We don't think they need fresh capital."

4. Stress tests

There is also the small issue of stress tests, the stringent assessment of the eurozone's 128 biggest banks and their ability to withstand future crises scheduled for later this year.

The stress tests are a key part of AIB becoming directly regulated by the European Central Bank, replacing our own Central Bank, which is happening to Bank of Ireland, Permanent TSB and Ulster Bank as well. 
But most analysts play down the risk that stress tests will unearth unknown dangers in AIB and spook investors.

"They are somewhat of an unknown," said Sheridan. "But we see Ireland's banks as better prepared than many others because they have already passed stringent Troika-mandated reviews under the bailout programme."

5. Sort out the salary issue

The salary cap on senior bank staff seems to rankle AIB's top people more than it does any other bank.

Permanent TSB chief Jeremy Masding might have described banking as "a calling" rather than a money game at the release of his bank's last set of results, but one suspects that it's a sentiment few other bankers share.

All of the bailed-out banks are still subject to a €500,000 cap on maximum salary put in place by Finance Minister Michael Noonan in 2011, as well as a ban on bonuses. AIB was the first one to broach the issue of removing the cap earlier this year, despite the fact that it had not yet returned to profitability at that point.

Led by outgoing chairman David Hodgkinson, a senior team reportedly argued that they were struggling to attract and retain talent when unable to pay the same as non-bailed out competitors. Noonan was having none of it and essentially told the bank that if executives were unhappy with pay, they knew where the door was.

But AIB is unlikely to stay quiet for long, particularly as it is only contracts signed after 2011 that are subject to the cap. Whether Pym can navigate this sticky issue without triggering a public relations meltdown, as his predecessor did, remains to be seen.

6. Get back into property lending

With no sign that Dublin's housing shortage and spiralling property prices will cool, there is serious money to be made in property once again.

AIB's big sister, Bank of Ireland, has dived back in head first, completing a rake of major property deals in the last 12 months including the financing of student accommodation at the old Montrose Hotel near UCD and part-financing Kennedy Wilson's purchase of a major stake in the 200-year-old Shelbourne Hotel.

The water is warm; it's time for AIB to dip its toes back into property too, or it risks missing the wave completely.

Sunday Indo Business

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