Thursday, September 16, 2010

Economics 16/9/10: One sick pup lifts one ear

Funny thing the market is, at least if you are an Irish banker.

The rationale for AIB selling its profitable divisions to plug the holes in its collapsed domestic business (notice, more detailed analysis of exactly the same fundamentals argument was supplied by Prof Brian Lucey back in March in his article in the Irish Times - see here). The logic of this AIB's perverse move was:
  • sell the stakes in M&T and BZWBK to provide capital to write down bad loans on homegrown turf;
  • put the bank assets squarely into the geography where it has proven time and again to be incompetent in lending (aka Ireland);
  • reinforce the incompetence of the management of the bank by showing to the rest of the world that over the last 10 years, AIB could manage to make money only in those divisions/investments where it had no managerial say (I mean, really, folks - AIB's competent managers - who need to be paid wages comparable to other bankers around the world, cause, you know they are being actively headhunted by global banking syndicates for their ability to turn funding into bad loans - had nothing to do with only two profitable sides of the bank: M&T and BZWBK)
Ex post the sale of BZWBK, the AIB therefore anticipated markets to rush to their rescue. This clearly is not what's on the minds of the markets. S&P last night held its A-/A-2 credit rating on AIB and the negative outlook, implying a new downgrade might be in the works. Oh, how dare they?

AIB needs not €7.4bn (the minimum regulatory requirement capital top up), but more like €10bn to plug the hole in bad loans. It has managed to under-report (thanks to an accounting rule) losses in H1. The bank is now being stripped of the very few assets it has that actually make sense, leaving it with the legacy of its own actions and choices that is purely toxic. The markets don't buy the management 'plan' (what plan?) nor do they by the management team itself. The only thing that separates AIB from heading the Anglo route is the willingness of the Government to throw taxpayers guarantees and cash at the bank to rescue its shareholders and bondholders. How long will that last is an academic point at this moment in time. The real point is - AIB simply has so far shown no capacity to produce viable banking business short of buying into foreign-run assets.
Post a Comment