It is mid-term for AIB and the report card for managing director Colm Doherty is not looking very good. The announcement of the bank's interim results is on Wednesday and there is little sign of progress on asset disposals, capital raising and cost-cutting.
According to market sources, without something concrete on the bank's plans to sell its international businesses, investors – on both the debt and equity sides – could punish AIB further. Doherty has been "about taking action", as he put it, since he announced AIB's capital generation plan at the bank's annual results presentation in early March. But so far this year the bank has been all talk.
Doherty's plan earlier in the year was to exercise all the available "self-help options" – such as asset disposals, balance-sheet management, attracting strategic investment and doing a rights issue – to fend off majority state ownership and save something of value for shareholders.
But so far the bank has not been able to help itself. Apart from an expected imminent sale of its stockbroker, Goodbody's, to Fexco for an estimated €20m-plus and the possible sale of AIB Investment Managers for something approaching €50m, no deal on asset disposals has yet been made.
The Central Bank has told AIB to raise – or have deals in place to raise – €7.4bn in fresh capital by the end of December to absorb expected losses from bad loans and asset transfers to Nama. That is more than twice the amount needed by the seven European banks which failed the recent stress tests carried out by the Committee of European Banking Supervisors last month. AIB has a lot of work to do.
Bank Zachodni (BZWBK), AIB's Polish subsidiary, has held four meetings with potential investors, its chief executive Mateusz Morawiecki said last week. He had no information about the "stage reached in the bank's sale process", however.
AIB is selling its entire 70% stake in Poland's third-biggest bank by market. France's BNP Paribas and PKO Bank Polski, Poland's largest lender, are in talks to buy the stake. Intesa Sanpaolo SpA, Italy's second-biggest lender, is conducting due diligence on BZWBK. Spain's Banco Santander SA is also among bidders for the bank.
AIB is also in the process of selling its minority stake in US regional lender M&T Bank. Doherty resigned his seat on M&T's board in June to clear the way for the disposal. Spanish bank Santander was lined up to merge M&T with its own Sovereign Bank, but talks broke down. It is now believed AIB will get rid of its 22.5% holding through a private placement.
The UK business, which includes Northern Ireland's First Trust Bank, is also on the block, but there has been no news on potential buyers.
CB estimates that AIB could generate €4.3bn from these, leaving a residual equity gap of €3bn, which would be raised in a rights issue most likely underwritten by the government.
Some analysts are concerned that AIB will not achieve the prices it needs on these disposals, even if all the sales get hammered out before the December deadline.
"Santander is looking to renegotiate its deal on the RBS branches it's buying in Britain," said Oliver Gilvarry, head of research at Dolmen Securities. "That's bad news for anyone trying to sell bank assets in this market."
With so much uncertainty hanging over AIB's capital situation, funding remains a challenge. The markets are not fully open for Irish banks yet and market sources are beginning to fret about what will happen once the government guarantee lapses at the end of the year. Pricing is also difficult, with banks' lending margins under severe pressure because of low ECB rates coupled with persistently high costs of funds for Irish banks – either from deposits or on the capital markets.
And with funding remaining a problem, a return to productive lending to help the economy recover still looks some way off. AIB and Bank of Ireland have committed to new SME lending of €6bn each over the next two years, but business owners continue to complain the working capital is scarce. Finance minister Brian Lenihan and enterprise minister Batt O'Keeffe sat down with Doherty and AIB chair Dan O'Connor last week to address the issue. Given that Bank of Ireland didn't have a similar meeting, it would seem AIB is not meeting government expectations of economic support in exchange for last year's €3.5bn emergency recapitalisation.
The one bright spot for AIB so far this year has been its relative success in passing the CEBS stress test. AIB came 74th out of 91 banks. Hardly a ringing endorsement of its financial strength, but not worst in the class either. If Doherty can scrape together that €7.4bn, AIB looks just strong enough to make it on its own.
Yet some unease remains in the market over the manner in which AIB achieved its result, notwithstanding the stricter criteria under which Irish banks were judged.
"AIB passed on the grounds that it will raise the required capital of over €7bn by the end of the year," said John Finn, managing director of Treasury Solutions, a capital markets advisory firm.
"Given that the government will fund any shortfall, doesn't that mean that it passed the stress test because the government won't let it go, rather than because the figures stacked up?"
If the tests are seen as too lenient, the market could turn on AIB regardless of how well Doherty meets the Financial Regulator's expectations on the capital front.
"With only seven of the participating banks failing, the perception of the tests being too lenient may arise," said Ciaran Callaghan, banking analyst with NCB. "Therefore the spotlight could possibly fall on the next tier of banks that managed to scrape a pass, with the market potentially forcing them to raise further equity. This might include the Irish banks."