Comments on: Goodwill Hunting at AIB

By: The Irish Economy » Blog Archive » AIB Watch: April 4th Edition

The Irish Economy » Blog Archive » AIB Watch: April 4th Edition — Mon, 05 Apr 2010 07:54:19 +0000

[...] valued at on the balance sheet according to Note 35. So not much gain there. However, as I noted last year, AIB’s accountants tell them that they can write up their goodwill because of this [...]

By: The Irish Economy » Blog Archive » AIB Debt Buyback

The Irish Economy » Blog Archive » AIB Debt Buyback — Fri, 26 Jun 2009 12:00:54 +0000

[...] From the point of view of AIB management, however, this debt buyback is the main step that they could take to boost their core equity capital by €1.5 billion as ordered by the Minister for Finance. So it might not really be that great a deal for AIB shareholders or for the taxpayer, but it lets AIB management live to fight another day. (The rest of the money might be made up by the great AmericanPolish bank Goodwill boondoggle.) [...]

By: John Lee

John Lee — Fri, 24 Apr 2009 17:02:02 +0000

The same old same old. Let’s talk about accounting issues as if they were the same as actually having a banking strategy and the talent to execute it. Does selling M&T and the Polish bank really make sense. Do they add value to this mess or subtract from it. Will they make money in the future or heavens forbid this month? Or are they just stupid mistakes of the past. And even if they are stupid mistakes from the past that’s water under the bridge. What is their future prospect? The real question is simply - How is AIB planning to make money in the future? Is it a viable business? If the answer to those question are no, then the playing with M&T and other accounting junk is beyond pointless. But certainly within the scope of AIB’s management talent.

By: Gregory Connor

Gregory Connor — Tue, 21 Apr 2009 18:46:37 +0000

The AIB move might be criticized on minor points but seems a reasonable move to make. So I think that they should be appluaded for a good decision.

Given stress tests indicate too little AIB equity capital it needs to shrink its balance sheet, increase equity capital, or lower the riskiness of the balance sheet (either or both sides of the balance sheet). Ignoring forex risk the common shares on US-domiciled banks have per annum volatility of 30-40% so if AIB uses a reasonable market valuation this is the per annum volatility-risk attached to this asset — much of it is highly correlated with the risks in the other assets in its portfolio. Replacing this US common share asset with a cash asset (volatility near zero, plus perfect liquidity) is a good idea in the circumstances unless the price received is a distress-sale price. By broadcasting its plan and taking time to complete the transaction it should get a reasonable auction-type price not a hasty distress-sale price.

Once it has cash it can use it to shrink the liability side of the balance sheet and raise % equity capital.

By: Karl Whelan

Karl Whelan — Tue, 21 Apr 2009 17:33:02 +0000

Thanks Owen. I realise now that the original post didn’t make it clear enough that I was only focusing on the effect of the M&T sale (I have edited the post now to reflect that) and as far as I am concerned that is a pure accounting gimmick.

Buying back debt at a discount is a slightly different matter. I agree that we’ll see a lot of this kind of thing over the next year.

However, I think you might be slightly off in your example. I don’t think buying preferred prefs at a discount changes Tier 1 capital at all—at the end of the day there’s still 100 units of Tier 1 capital in your example. It just changes the distribution within Tier 1 towards having more core Tier 1.

I can’t claim to know but I suspect that what they are planning to buy back at a discount are what are listed as “subordinated perpetual loan capital” (692 million as of December) which are junior to perpetual prefs and the only type of debt not covered by the guarantee. Buying this stuff at a discount does not change total regulatory capital but does lead to more Tier 1 and less Tier 2.

However, since this kind of undated subordinated debt wasn’t covered by the state guarantee, that kind of transaction wouldn’t really give the banks any greater cushion in relation to when they would have to call on the guarantee. So I still think that would be a bit gimmicky.

By: Owen C

Owen C — Tue, 21 Apr 2009 14:29:03 +0000

Basically, as i understand it, if they buy back the AIB perpetual paper, which is classified as Tier 1 capital, the situation evolves like this - the paper is still valued at 100 on their books as a liability, but trades in the market at say 30 cents. They go in and tender at 45 cents on an issue. Paper holders receive a 50% profit on the tender vs market price, and the Bank gets to close off the liability at 45 vs book value of 100, creating 55 profit which is then becomes fresh and real capital. Its not a accountancy trick, more an issue of being able to use the distressed market values of bank bonds in your own favour for a change. Obviously if people thought they were going to do this on a huge scale, it would see the bonds bid up, but they’ll likely choose very specific issues to do it on. I’m currently a holder as of today of a very small amount of 2049 AIB paper at 30 cents. It yields c.20% on the discounte purchase price, so even if this doesn’t get tendered for immediately, the risk reward payoff is attractive. Expect this sort of thing to happen with a lot of banks over the next year.

By: Conor

Conor — Tue, 21 Apr 2009 10:09:42 +0000

Karl,
I read in the aftermath of the Citigroup results last week that $2.5bn of their $1.6bn profit was profit from the proceeds of debt repurchase at a discount. This was using a new accounting policy from 2007 that allows unrealised gains to be recognised in the p&l of the banks. Conversely, if the debt regains value, the bank must recognise this as a charge to the p&l.
I was greatly disturbed by this development coupled with the revised mark to market accounting policies adopted recently. It seems that accounting wizardry is back in fashion (did it ever go away even since Enron).
Yesterday, AIB made some remarks about debt repurchase. Should I be worried that AIB are going to try to pull the wool over the eyes of the government with some new fancy policies to paper over the cracks?
Finally, AIB have not had pay cuts and the 7 over performing departments have been awarded bonuses (not yet been paid - but no word that they will not be paid) when are these guys going to pay?

By: The Irish Economy » Blog Archive » AIB Re-Cap Announcements

The Irish Economy » Blog Archive » AIB Re-Cap Announcements — Tue, 21 Apr 2009 09:49:41 +0000

[...] The Irish Economy « Goodwill Hunting at AIB [...]

By: Pat Donnelly

Pat Donnelly — Tue, 21 Apr 2009 07:12:50 +0000

Selling assets at the bottom of the market…..hmmmm? Or isit?
Why sell? A revaluation of the goodwill provisions an all acquisitions is justifiable in certain circumstances. But the impetus if it is the stress test, suggests trouble for which it appears the only remedy is cash…..
Banks exist only because they have a licence from the Minister. S/He is advised by the CB. Nationalizing banks merely removes the veil that exists between the licensee and the licensor. But it also entails direct control and responsibility. What has been found that does not require nationilization but requires a firesale? Was NAMA not supposed to deal with bad assets? When operating, and I still think it won’t get off the ground, there will be no need to sell any good asset.
Perhaps all the banks will be asked to dispose of all such assets? Perhaps waiting will reduce the value of them even more?
This is a good sign then, given that nearly every bank that took on growth also over expanded over the last two decades. There is going to be an even greater reduction of capital in all of those banks. Disposing of them now means not competing for capital through the need to fund NAMA and represents a logical clearing of the decks and suggests some thought behind the process.

@ Frank Galton
Confusion always exists where lies are being spun…
Stress tests mean anything the CB wants. With NAMA, it should be the answer to the problem, with whatever secret stress tests enabling a measure both of value and of identification of dubious assets. Or do they mean that their cash flow is so poor that default is possible within months? Note how all the US banks are profitable, yet still need Tarp funds….. accountants are sometimes painting and decorating experts. Or very adept at applying lipstick on pigs!

By: Derek Brawn

Derek Brawn — Mon, 20 Apr 2009 23:27:10 +0000

The asset disposal will be well below Book. According to a senior executive in AIB North America, they had a buyer at $1 billion at the start of the year - due diligence was completed - but the transaction did not proceed.

By: Mark Dowling

Mark Dowling — Mon, 20 Apr 2009 21:49:30 +0000

So M&T is to be sold - but to whom? Maybe NAMA should be buying assets with a possible upside - or at least offering to buy them to create a floor price. Anybody willing to speculate on the future market value of that 22%? Canadian banks are bargain hunting and won’t be shy about bargaining a lot harder with AIB than NAMA will for half built houses.

By: LorcanRK

LorcanRK — Mon, 20 Apr 2009 21:34:14 +0000

Credit Suisse had this note out this morning:

“The two obvious assets which could be disposed of in our view are the stake in M&T and BZ WBK. The market value of both of these assets amounts to €2.2bn with minimal book capital gain on disposal due to carrying value being broadly in line with market value of the assets. However, this is equivalent to €800m (75bps) of equity tier 1 impact after taking into account RWA reduction from sale of BZ WBK and goodwill writeback on sale of M&T. We think that M&T would contribute about 45bps and BZ WBK about 30bps. We therefore find it difficult to see that asset sales alone can generate this extra capital. We see the possibility of raising further equity tier 1 from tier 1 and tier 2 debt repurchase, of which they have €6.6bn in total. For illustration purposes only, we estimate a buyback of €800m at an average price of 50% of par value and 50% take-up would generate an extra €200m of capital to top up proceeds from asset disposals.”

This leaves a €500m hole to fill, presumably by the taxpayer, meaning the government will have around a 30% stake in the equity of AIB. This is before the NAMA unwinds the rest of the mess.

Must have another look at BOIs balance sheet, wonder what’s not nailed down there..

By: Frank Galton

Frank Galton — Mon, 20 Apr 2009 21:21:59 +0000

Perhaps you can help with another bit of confusion.

AIB says that it and the government agree that it needs 5 billion euro. This number comes from the stress tests.

But then there’s NAMA still to come, which presumably reflects the fact that AIB will need to dump more loans into NAMA down the road.

So why didn’t the stress tests already capture this need for additional assistance?