Friday 23 March 2018

Sorting out the AIB mess

A tough-minded outsider drafted in for 12 months, he could be just the man to root out the bank's cowboy corporate culture

DAVID Hodgkinson has certainly had a baptism of fire at AIB. With the sale of the bank's UK operations having fallen through, and investors openly questioning its ability to repay its subordinated bonds, the new man at Bankcentre has it all to do.

Just when it seemed as if things couldn't get any worse at AIB, they do. On Monday it was forced to reveal that the proposed sale of its UK operations, including First Trust Bank in Northern Ireland, had been "challenging". In other words, it couldn't find a buyer at an acceptable price.

As a result of the failure to offload its British businesses the State's shareholding in AIB is now set to rise to 95pc, up from the 90pc which most analysts had previously been predicting.

The timing of the announcement was excruciatingly embarrassing for Hodgkinson. Having been appointed executive chairman of AIB just five days previously, he was addressing AIB shareholders at the shareholders' meeting convened to approve the sale of the bank's American and Polish businesses, which were flogged off in a desperate -- but ultimately unsuccessful -- effort to avoid majority state ownership.

As if this wasn't bad enough, a day later the price of AIB's subordinated bonds took a hammering as investors worried that the bank's need for ever-larger amounts of fresh capital would result in subordinated bondholders taking a haircut, ie that AIB would not repay them their money in full.

Humiliating fall

For what had, until recently, been Ireland's largest bank, it has been a humiliating fall from grace. With de facto nationalisation set to result in the extinction of the existing AIB shareholders as their stakes are diluted to virtually nothing, the AIB share price ended the week at just 27 cent, down almost 99pc from its March 2007 peak of over €22.

The events surrounding Hodgkinson's appointment were in stark contrast to last year's AIB farce, which followed Eugene Sheehy's announcement of his intention to resign as chief executive.

Despite telling the world in April 2009 that he was quitting as boss, a stand-off between the Government and the AIB board over who should succeed him meant that he was still in situ seven months later.

That impasse was only broken when the Government backed down and agreed to the appointment of insider Colm Doherty as managing director.

Lenihan was in no mood for a repeat of such nonsense. His hand was greatly strengthened by the announcement at the end of September that AIB needed €10.4bn of fresh capital, €3bn more than had previously been estimated, to plug the hole in its balance sheet.

This increased need for capital made majority state ownership inevitable and triggered the departure of Doherty and AIB chairman Dan O'Connor.

With Lenihan now holding the whip hand there was no question of the job going to an insider. The minister made it clear that he wanted Hodgkinson to get the job and he duly got it, just four weeks to the day after Doherty and O'Connor announced that they were leaving the bank.

On October 27, AIB announced that Hodgkinson had been appointed "executive chairman" of AIB. The former HSBC chief operating officer will stay with AIB for about 12 months, during which time he will oversee the appointment of a new (outsider) chief executive and non-executive chairman.

Banking crisis

The longer the banking crisis has dragged on, the clearer it has become that AIB's difficulties go much deeper than the merely financial. At its core AIB's problem is a deeply flawed corporate culture.

Ever since the State first had to rescue AIB in 1985, when problems at its ICI insurance subsidiary threatened to pull the rest of the bank down with it, it has been apparent that not alone were excessive risk-taking and corner-cutting tolerated by AIB, they were positively encouraged.

Subsequent events over the following quarter of a century merely reinforced this suspicion. In the 1990s it emerged that AIB had knowingly encouraged tens of thousands of its customers to open bogus non-resident accounts and thus evade DIRT.

In 2002 AIB's own rogue trader John Rusnak cost it $691m (€491.6m). Two years later the Faldor scam, where senior a AIB executive used an offshore company to evade tax and received sweetheart deals from the bank's fund management arm at the expense of other customers, came to light.

With such a buccaneering style it should have come as no surprise that when an aggressive upstart, Anglo Irish Bank, began eating into its market share during the Irish property boom in the noughties, AIB threw caution to the wind.

Indeed by 2006 and 2007, when even Anglo was getting worried that the property market might be over-heating, the word on the street was that AIB was bankrolling the projects that Anglo was rejecting.

This meant that when the credit crunch struck in August 2007 AIB -- with its balance sheet bursting with late-cycle loans to builders and property developers -- was extremely vulnerable to any downturn.

For more than a year it tried to brazen it out, denying that there was any problem. Even after the Government was forced to unconditionally guarantee the deposits of the Irish-owned banks at the end of September 2008, AIB remained in deep denial.

It is only now, with virtually full nationalisation just weeks away, that the full extent of its predicament seems to be dawning on AIB.

Even as he scouts for a new chief executive, a large part of Hodgkinson's job at AIB will rooting out its cowboy corporate culture.

The events of the past two years have demonstrated that banking is not like other businesses. When you are entrusted with hundreds of billions of other people's money and occupy a central position in the economy, extremely high standards aren't just desirable, they are absolutely essential.

Hodgkinson certainly comes well equipped to begin the reform process that AIB so desperately needs. He joined HSBC, now the world's sixth largest bank, straight from school in 1969.

Although it became a major player in the UK banking market when it acquired the Midland Bank in 1990, HSBC was historically a colonial bank headquartered in Hong Kong which did most of its business in the Far East and the Middle East.

Until he was appointed chief operating officer in 2006, Hodgkinson had spent most of his HSBC career in Hong Kong, the Philippines and Saudi Arabia.

As chief operating officer he effectively served as number two to HSBC chief executive Michael Geoghegan. He retired from HSBC after almost 40 years with the bank, at the end of 2008.

His departure from HSBC was not entirely without controversy. In November 2008, in a statement that infuriated the then British Prime Minister Gordon Brown, he warned that lower official interest wouldn't necessarily be passed on to borrowers.

The fact that Hodgkinson made the statement while travelling as part of an official British delegation to the Middle East, did nothing to lessen Brown's anger. Brian Lenihan had better be warned -- Hodgkinson is no pushover.

Which is no bad thing. The appointment of a tough-minded outsider such as Hodgkinson, who comes to the job with no historical baggage, is a vital first stage in the reform and rehabilitation of AIB. If he succeeds Irish taxpayers, who will shortly own almost all of AIB, won't begrudge him a cent of his €500,000 annual salary.

Irish Independent

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