AIB'S SHARE price rose 1.4 per cent after the State's largest bank reassured investors that raising equity capital would be "a last resort", despite indicating full-year earnings this year would fall almost 42 per cent.
The share price plunged 17 per cent initially after the bank issued a severe profit warning before finishing the day up at €4.30.
Earnings per share (EPS) this year will decline to about 120 cent from 205.9 cent last year, the bank said, and below the 185-190 cent forecast three months ago, due to higher bad debts and funding costs, and an estimated cost of the State's bank guarantee. AIB says it will pay €30 million in the first quarter due to the guarantee.
The bank said it did not experience "any material outflow of funds" prior to the guarantee.
The bank said in an interim management statement that there had been a "significant deterioration" in the economy since its half-year results in July and that the international crisis had also worsened.
AIB chief executive Eugene Sheehy said the bank was "not looking for any cover from these macro factors" and was "regretfully tackling the issues head-on".
Analyst Sebastian Orsi at Merrion Capital said investors had expected the bank to report yesterday's outlook. "Management is also comforting them on the risk of dilution of their shareholding."
AIB finance director John O'Donnell said the bank had "several" options available to increase its capital ratios, including "revising the level of cash dividend payments and disposal of assets".
The bank could sell its 24 per cent stake in US bank MT, which may raise €1.2 billion in capital, or its 70 per cent stake in its Polish business, Bank Zachodni WBKSA.
The bank has scrapped its final cash dividend to raise capital ratios, saving an estimated €500 million, though it has not ruled out a scrip issue, where dividends are taken in shares instead of cash.
A decision on the bank's 2009 dividend will be made next year.
Mr O'Donnell said the bank had an "action plan" to raise its core tier-one capital ratio - a key buffer to absorb losses - to "at least 7 per cent over time" from about 6 per cent at the end of this year.
Banks have come under pressure to raise their capital ratios to match levels of more than 8 per cent at the UK banks which have received state capital injections.
Mr O'Donnell said the bank's capital was well in excess of regulatory requirements and didn't agree that "one size fits all" on capital ratios. The bank said there was "no indication whatsoever" that the Financial Regulator would raise capital requirements.
"The new target of 7 per cent is obviously low relative to where peers are heading and will disappoint the market," said stockbrokers Davy in a research note.
"One presumes a disposal of MT is imminent in order to help AIB to get there."
The bank said its bad debt charge had risen primarily due to losses on its €10.7 billion Irish residential development loan book. Of €950 million in bad debts forecast this year, €700 million will be incurred in the Republic. Almost €400 million of the bad debts, or about 0.3 per cent of average loans, are losses the bank has been unable to identify but which are likely to be reported.
