Irish literature and music is full of tales of trouble, sorrow and woe, and Allied Irish Banks (NYSE:AIB) is trying hard not to become part of that canon. Allied Irish has been walloped by the same overheated markets and poor underwriting decisions that have hammered many Western banks, and Allied Irish is scrambling to shore up its capital. Although asset sales will help, Allied Irish could be in for a long slog as what the company needs most of all is a healthy operating environment, and that looks to be a ways off.
A Housing Bubble Taken to "11"
Once called the "Celtic tiger", Ireland hit the rocks harder than most other Western economies. Not only were there bubbles in residential and commercial real estate, but the export-driven economy has taken a serious hit from the decline in demand throughout Europe. Allied Irish found itself in a situation where it had become dependent upon wholesale funding to fill the gap between loan demand and deposit supply, and then found its loan book going very bad very quickly. Even though Ireland has set up a government-sponsored "bad bank" to take on bad loans, Allied Irish still saw one-quarter of its loans in some state of concern at the end of its June quarter. AIB reports credit in "watch", "vulnerable" and "impaired" categories, and the 25% refers to the combination of all three. (For more on housing bubbles, check out 5 Steps Of A Bubble.)
Selling the Parts
With no one expecting a quick turnaround in the bank's core business, AIB has turned its efforts to raise capital by selling valuable assets. AIB announced on Friday that it had selected the bid of Spain's Santander (NYSE:STD) over those of France's BNP Paribas and a Polish bank for its 70% stake in Bank Zachodni. AIB will be getting about $3.7 billion from Santander for this sizable piece of Poland's third-largest bank.
Even more interesting could be the disposition of AIB's 22% stake in Buffalo-based M&T Bank (NYSE:MTB). Santander was quite clear earlier this year about wanting to buy this stake and the rest of M&T, but the American bank was not keen to sell. There is ample logic for this deal, and Santander could probably pay up to $100 a share for MTB and still get decent value.( For related reading, check out The Evolution Of Banking.)
If M&T refuses to sell itself entirely, the options for the AIB stake get a bit more interesting. Perhaps a patient company like US Bancorp (NYSE:USB) would be interested, with the idea of maybe "softening up" M&T management's feelings towards a full merger down the line. Likewise, the same could apply for other banks like PNC (NYSE:PNC), though it would be a much larger deal for PNC. Investors should not expect banks like Wells Fargo (NYSE:WFC) or Bank Of America (NYSE:BAC) to jump in, though - their size puts any potential deals under even greater scrutiny and it is unlikely that the government is inclined to create even more "too big to fail" entities.
Of course, none of this is to say that AIB could not sell its M&T stake to another European bank that would be willing to just sit tight as a major investor and not make a play for the whole bank. It would certainly seem that that would be M&T's preference.
The Bottom Line
What should investors take away from the AIB saga? Well, the notion that "growth that seems too good to last" probably will not last is true, but maybe cliché at this point. Unfortunately, AIB looked like a good bank for so long that many investors got lulled into a false sense of security. There were certainly warning signs along the way, and maybe that is the ultimate takeaway: however good a company has been in the past, investors must keep a close eye on current operating conditions. After all, no company is so good that things cannot go wrong.
There is still hope for AIB, but it is going to be a long, hard and uncertain road. At this point, it is certainly not a stock for the faint of heart. (For related reading, see Operational Risk: A Must-Know For Investors.)
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