Eugene Sheehy: soon to depart

AIB is facing a tough decision on whether it should sell its majority stake in the highly-profitable Polish bank Bank Zachodni WBK (BZWBK) to raise much-needed capital or hang onto the subsidiary to generate profits for the beleaguered group.

The question has taken on added urgency in the past week as BZWBK comprehensively beat analyst expectations to deliver €64m in profit for the third quarter. The bank also delivered lower-than-expected impairment provisions, in contrast to the rest of the group, which is still haemorrhaging losses.

Yet AIB may ultimately be forced – either by circumstances or the European Commission – to sell its stake in the Polish bank to bolster capital reserves, despite its contribution to the bottom line. According to analyst estimates, the disposal of its 70% stake in the bank would net AIB more than €1.5bn in fresh capital, as BZWBK now has a market capitalisation bigger than its majority owner.

Executives now face the choice between taking this one-time capital boost or banking steadily growing earnings, both of which are crucial to the future health of the institution following the damage done by the property crash and banking crisis.

It is understood BZWBK's future has been addressed in the restructuring plan AIB sent to the European Commission for approval last Friday. While both the Polish unit and AIB's stake in US regional bank M&T have been considered by the bank and analysts as possible sources of capital in a disposal, BZWBK is seen inside AIB as a "golden goose".

Executives are believed to be reluctant to part with the asset as their goal is to return the group to profitability as soon as possible and BZWBK is seen as essential to this. However the sale of AIB's minority share in M&T would bring in about €0.6bn. That would leave AIB needing a much bigger rights issue or more government support in 2010, as it transfers €24bn in bad loans to Nama. The bank may be pushed to shed BZWBK to stave off government ownership or to hedge against the market uncertainty surrounding a prospective cash call.

Another concern for the bank, now that its viability plan is with the commission, is its recent dominance in the domestic mortgage market. AIB has raced to 40% share in new mortgages as rivals exited the market. This could raise EU competition concerns, although the bank is actually fulfilling its commitments under the government's €3.5bn recapitalis- ation programme from February.