THE GOVERNMENT and Allied Irish Banks (AIB) have acknowledged the State’s €3.5 billion investment in the bank will not be enough to protect it against potentially higher losses and have said the bank requires an additional €1.5 billion.
The move follows more severe stress tests conducted on the Government’s behalf ahead of its €3.5 billion investment.
The Government said following “extreme” stress tests, a total of €5 billion would be “appropriate” to strengthen AIB further.
The bank said it planned to raise the €1.5 billion itself by the end of this year and it may have to sell some of its businesses, including Polish bank Bank Zachodni WBK. This marks a reversal by AIB, which said last January it would not sell its 70 per cent stake in the Polish bank.
Minister for Finance Brian Lenihan said “intensive discussions” took place with AIB last weekend due to concerns which arose during the State’s examination of the bank’s books ahead of the Government’s investment. “They [AIB’s management] have agreed that the correct figure to meet their prospective losses at this stage is €5 billion,” he said. The Minister said the Government needed to be very careful of nationalising banks and that it was not going to “rush into this”.
“It’s very much a last option because the key issue for the Irish banks is to raise funds abroad for them, and their presence in the marketplace is very important in order that they do raise funds.”
The Department of Finance said the same stress tests were applied to Bank of Ireland and the bank did not need further capital beyond the €3.5 billion invested.
The announcement shows that the Government felt AIB’s own stress test was not severe enough.
The bank said last month that it could write-off up to €8.5 billion in bad loans over three years to 2010 and still have sufficient capital with €3.5 billion from the State.
Stockbrokers estimated AIB could boost its capital levels by selling its stake in Bank Zachodni and the 24 per cent stake in US bank MT, and by repaying at a discount debt investors who have funded the bank. Analysts view AIB’s move as an attempt to keep the State’s ownership of the bank to a minimum.
AIB said it supported the National Asset Management Agency (Nama), the State’s “bad bank” which will buy loans of up to €90 billion at an as yet undecided discount from the six Irish lenders.
The bank signalled its intention to participate in the Nama plan.
Taoiseach Brian Cowen said it would be several months before Nama could begin its work because legislation underpinning it has yet to be drawn up. He said there was “a very detailed amount of work which now has to take place”.
Meanwhile, AIB employees have rejected proposed changes in pay and pension entitlements. The proposals included a two-year pay freeze, a 5 per cent contribution from staff on a defined benefit pension and changes in the calculation of pension entitlements. The bank employs 11,000 people in the Republic, 4,500 of whom are in the defined benefit scheme.