AIB now has less than six months to raise €7.4bn in new equity to meet the new minimum capital standards laid down by the Financial Regulator after its prudential capital assessment review (PCAR) in late March. The bank's managing director, Colm Doherty has been "about taking action", as he put it, since he announced AIB's capital-generating plan at the bank's annual results presentation just a few weeks earlier, but now the clock is ticking loudly.
Doherty said at the time that the bank needed to raise about €4bn – an estimate that proved highly optimistic – and could get it using "self-help options" such as asset disposals, balance sheet management, strategic investment and, finally, a rights issue. He said a rights issue would be considered only once all other options were exhausted.
The big options in the capital plan, now under way, involve selling the bank's prize assets, chief among them a 70.5% stake in Bank Zachodni, a leading Polish bank and AIB's so-called "jewel in the crown". It is believed at least seven companies are bidding for the stake, including state-controlled PKO Bank Polski, the preferred bidder of Polish finance minister Jacek Rostowski. Others reportedly include Russia's Sberbank, France's BNP Paribas and Italy's Intesa.
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 last month 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, which may be excluded from the sale, is also on the block, but there has been no news on potential buyers.
Even if all goes perfectly with these sales, though, AIB still has a mountain to climb to raise the full €7.4bn. Analysts estimate whittling the bank down to its core Irish franchise could net up to €4bn, or only a little more than halfway to the target of €7.4bn.
"AIB is selling assets into a nervous market," one fund manager said. "It looks like it will get agreement to sell M&T and Poland now but it is selling in a depressed market. We don't know what is happening in the UK."
Selling the family jewels will only get AIB so far. The problem is that, after the disposal of these businesses, AIB will still be in a major capital hole but will have a weaker investment case. That will make it harder to raise money from a rights issue, leaving the taxpayer to pick up the slack.
Bank of Ireland's successful €1.7bn rights issue, which closed last month, was the biggest in Irish corporate history. AIB's would be about twice that size. Bank of Ireland had 95% take-up of the rights, but is generally regarded among market sources as the stronger franchise.
Again, time is not on AIB's side. A rights issue would ideally be announced when the bank publishes interim results in August. But sales of its assets are likely to still be under way at that time. AIB has imposed a July deadline for considering bids on BZ WBK, but the M&T transaction could keep rolling on, to say nothing of the UK business.
Until those loose ends are tied up, a lot of uncertainty will still hang over the bank. Although the European Commission has ordered AIB to sell those assets, timing and price will be crucial to both the level of capital the bank will need to raise in a rights issue and the share price at which it will be issued. Furthermore, if progress on sales is too slow, the likelihood of majority state ownership – and massive dilution of shareholder value – will loom into focus. Worse, some commentators think that by selling the best parts of the business under pressure from the regulator and the Department of Finance, which wants to minimise the cost to the state of further recapitalisations, AIB will undermine its ability to generate profits and capital in the future.
"Bank of Ireland got their rights issue away at the ideal time, just before the Greek crisis really hit," said one fund manager. "[AIB's] won't happen until September to October and I can't see it happening without the government underwriting it."
AIB's failure to close deals to dispose of its major international businesses has caused some unease in financial markets and among Irish banks, according to market sources. Sources said the lack of a deal announcement is beginning to affect the funding environment for other banks.
"Bank of Ireland must be getting worried about AIB now that they haven't closed a deal yet," said an institutional investor. "It's a big question mark that affects Bank of Ireland. You can't separate one from the other."
The lack of conclusion over AIB's disposals, the bank's capital and the ultimate level of state ownership is creating a "lingering uncertainty" over the whole sector which is affecting funding access and threatening to undo the benefits of Bank of Ireland's successful rights issue, the source said.
AIB, like its peers in Ireland and Europe, is still very weak. The bank's credit and bond spreads moved wider last week, signalling investors are concerned it will not be able to meet its all its debts. This fear is obviously shared by finance minister Brian Lenihan, who got approval to extend the Eligible Liabilities Guarantee to the end of the year, to coincide with the regulator's capital deadline. AIB shares are at year-lows, as well.
Given these circumstances, it is not hard to imagine the state having to convert most of the remaining €3.5bn in preference shares to fill the capital hole should a rights issue fall short or prove impossible before the end of the year. The government already took about 18% of the bank in lieu of a coupon payment on those shares in May. At current depressed share prices, a large-scale conversion would surely result in the state as the majority owner, as it is in Anglo Irish Bank, Irish Nationwide and EBS.
That would be a catastrophe for Doherty, who has staked his first year at the helm on standing the bank on its own feet by means of capital self-help. With time running out, AIB may not be able to complete its rehabilitation before deadline.
Republic of Ireland
Central and Eastern Europe
Disposal value of BZWBK: up to €2.5bn
Market capitalisation: €10bn
Disposal value: up to €1.4bn