AIB shareholders' equity to be all but wiped out
The purchasing of troubled loans from Irish banks will see Allied Irish lose more than 80% of its book equity
The transfer of this first tranche of loans, totaling EUR 16 billion in book value, will be completed by early April. In all, EUR 81 billion of loans are expected to be transferred by the end of February 2011 at the latest. As we expected, the discounts varied considerably across banks. At Allied Irish, which has a large portfolio of development loans, the average discount was 43%, while at Bank of Ireland, a relatively more conservative lender, the average discount was 35%. At the nationalised Anglo Irish Bank, the discount was a full 50%. Overall, the average 47% discount applied to the first tranche surprised us. We had expected the discount to be larger than the 30% originally announced, as Ireland's economy has continued to deteriorate, but not 50% larger.
While it's not entirely fair to apply the discount on the first tranche to the total loans to be transferred, as the discount on each loan will be decided individually, we see it as the best estimate available. Using this data point, and giving the banks credit for their existing loss provisions for these loans, we calculate that NAMA will wipe out 83% of Allied Irish's book equity and 54% of Bank of Ireland's.
Allied Irish subsequently published its plan to boost capital levels. While the plan is largely in line with our expectations, we anticipate leaving the stock unrated for now, as it is not yet clear how big of a discount the bank will have to take on subsequent tranches, or how successful the bank will be at raising capital.
Under the agreed-to terms, Allied Irish will raise EUR 7.8 billion of new equity (compared to the EUR 7.0 billion of book equity reported at year end) by the end of 2010. The bank plans to do so, in part, by selling its untraded UK corporate business, its 22.7% stake in M&T Bank (worth about EUR 1.6 billion at today's prices), and its 70.4% stake in Poland's Bank Zachodni WBK, worth about EUR 2.6 billion by our calculations. While the actual sales could bring in more or less than these estimates, Allied Irish remains likely to need additional equity before the end of the year. We expect the bank to try to raise funds from private investors, perhaps through a rights issue, but note that the Irish government has explicitly said it will step in to buy shares if necessary. At best, Allied Irish' existing shareholders will end the year with significantly diluted stakes in a smaller, less profitable business. At worst, if the bank's mortgage book deteriorates more than anticipated, the bank could find itself looking at an even greater capital shortfall.
Erin Davis is a Morningstar equity analyst.
