AIB Sell Stake in Polish Bank

AIB have (finally!) sold their 70% stake in Polish bank Bank Zachodni for €3.1 billion (press release here). The bank reports that the disposal

will generate c. €2.5bn of equivalent equity tier 1 capital towards meeting AIB’s Prudential Capital Assessment Review requirement set by the Irish Financial Regulator.

As I understand it, there are two elements to this €2.5 billion figure.

Page 225 of the bank’s 2009 annual report states

The market value at 31 December 2009 of the shareholding in BZWBK S.A. of €1.5 billion (2008: €1.3 billion) exceeds the carrying amount including goodwill of the investment by €0.09 billion

In other words, the stake in Bank Zachodni was valued at €1.4 billion on AIB’s balance sheet. So AIB has sold this asset for €1.7 billion more than this carrying value, triggering a corresponding increase in the bank’s equity.

In addition, because the Polish bank’s balance sheet was integrated into AIB’s consolidated balance sheet, the disposal allows AIB to deduct €10 billion from its risk-weighted assets (see page 35 of the 2009 annual report). With a target Tier 1 equity ratio of 8%, this implies a reduction of €800 million in the amount of equity the bank is required to have to meet its target (this is the part of the general Honey I Shrunk the Bank survival strategy). Added to the €1.7 billion gain on the sale, you arrive at the €2.5 billion figure.

This is a positive outcome but it’s not too far ahead of expectations as I understood them. For instance, a nice analysis from Barclay’s Capital a few months ago assumed the sale would generate a profit of €1.3 billion, which would put this €400 million ahead of that. The Barcap analysis foresaw the bank converting €3.3 billion of its €3.5 billion in preference shares into common equity, with the state then having €3.3 billion of €5.5 billion in common equity for a 60 percent ownership stake.

Keeping everything else unchanged, the additional €400 million from today’s sale would see the state converting €2.9 billion to common equity, which would still see it having a 53 percent stake (2.9 / 5.5 = 0.53).

Of course, the baseline 60 percent stake of that analysis may have been a bit low (others have been more pessimistic) and there’s lots of other moving parts to this analysis. However, today was a step in the right direction for AIB in its quest for the ultimate prize: 49.999% state ownership.

52 thoughts on “AIB Sell Stake in Polish Bank”

  1. Perfectly well explained, but money still on AIB finishing up being State controlled. Stockmarket seems to have snored through this development.

  2. Santander buys BZW
    Santander buys M&T stake,
    Santander may buy UK stake.
    NPRF will need to convert most of the 3.5bn prefs for a 60% plus stake
    Why not sell the Irish operations to Santander and let the stake take a stake in Santander?

  3. @BWII

    The announcement was made after the close of the market, will be interesting to see the value the market had priced in on Monday.

  4. One assumes that this “Santander” bank which is in a position to toss around large amounts of cash buying other banks’ subsidiaries must be based in a non-Eurozone country that had no property crash and wasn’t affected by Lehman’s, because after all any country faced with such circumstances would be in just in bad a mess as Ireland is because it was all stuff beyond our control and there’s no way it could have a healthy bank.

  5. AIB closed with a value on the Irish Stock Exchange on Friday of €659m compared with €3.6bn for Bank of Ireland and CRH at €9bn.

    This is a bitter experience for AIB, quitting Europe’s biggest emerging market after 15 years.

    Banco Santander has had the financial strength to pick up firesale bargains in the UK and its branch network there is now the 4th biggest. Last year, it acquired AIG’s retail bank in Poland.

    Banco de España and its banking supervisor, put a system for special loan-loss provisions, in place in July 2000, to cope with a sharp increase in credit risk on Spanish banks’ balance sheets following a period of significant credit growth. Moral suasion had proved to be inadequate in inducing banks to become more conservative. Moreover, intense competition among banks had resulted in inadequate loan pricing – – that is, risk premiums were too low. The new system in effect obliged the banks to build up a fund for the rainy day.

    Besides central bank intervention, an intense board-level focus on risk is another reason why Spain’s large banks have so far weathered the credit crunch in better shape than many of their European rivals.

    Banco Santander has been run by the same family since it was founded in 1857 and at its annual meeting of shareholders in the Spanish port of Santander in July, Emilio Botín, the chairman who is 75, said earnings from Brazil will outstrip profit from the bank’s home market for the first time this year. Botín is married to Paloma O’Shea, Marquess of O’Shea and Santander is in the region of Spain where most Irish can trace their origins to.

    Ana Patricia Botín is the heir-apparent and while it’s unusual to have family control of a firm for so-long, she joined JP Moragn at one stage following a spat with her father.

  6. @Karl Whelan – “today was a step in the right direction for AIB in its quest for the ultimate prize: 49.999% state ownership.”

    In banking terms, is 49.999% state ownership similar to being “a little bit pregnant?”

  7. @Michael Hennigan

    ‘… central bank intervention, an intense board-level focus on risk is another reason why Spain’s large banks have so far weathered the credit crunch in better shape than many of their European rivals.’

    Thanks Michael. On Governance and Bank Corporate Governance, obviously a good bit to note here in comparision to Irish Bank Boards and Irish Financial Governance ………… don’t suppose you know if the Duc de Tetuan is on the Santander Board?_ direct line from 1607 ………. and I might stand a chance of getting some … er … ‘credit flowing’ (-;

    @All

    On AIB, we are in the realm of ‘manageable fiction’ – wish I could say the same about Anglo-Irish …

  8. @Joseph

    .. spose it depends on the nature of whatever ideological pill they are on (-; and which partner is taking said pill, or perhaps some board members have taken to the snip nua pro-cyclical approach … perhaps a bit on gelding as the sovereign stallion continues to reign supreme … til it drops!

  9. Somewhat off topic, but my goodness: the latest Independent article from Brendan Keenan. If this is Keenan in his Voice of Doheny’s mode, then the final culmination is in sight, and the party line will be changing in anticipation. The current story is that private-sector bank defaults are somehow equivalent to sovereign defaults even in the absence of any government guarantee, and therefore are unthinkable. The new line, apparently, promises to be that sovereign default is actually quite thinkable, in fact fairly inevitable; default by any Irish bank, however, remains unthinkable. Thus our banking rescue will have forced the State into restructuring in order to spare the privately-owned banks the same. I have to admit that this has pierced my protective cynicism: I am genuinely shocked.

  10. .
    President Obama is believed to be about to nominate Elizabeth Warren, the Leo Gottlieb Professor of Law at Harvard Law School, to head up the Consumer Financial Protection Bureau.

    It’s interesting to hear Professor Warren’s views on the bailout of the bankers:

  11. Thanks for the link. It’s great to hear her, she talks a lot of sense. The Western banking system had a heart attack in 2008 . There has been no meaningful reform since then. The bankers are behaving as they did prior to the crash. The next heart attack is inevitable.

    It’s sad to see AIB having to sell that Polish bank. It feels like the flight of the earls. Finally they get around to admitting how bad things really are. So much for Brendan Keenan’s estimate of 1% of losses in that famous Prime Time interview.

  12. According to the article, the sale was for about 3B euro but only generated 2.5B in equity capital for AIB. Who got the other .5B?

  13. seafoid

    Banking with fractional reserves is designed to eventually fail in the way it has. It is also called the business cycle. The heart attack is part of the cycle. This is not the first time it has happened it will nopt be the last. Those who expouse it, and they do!, justify it on the basis that those who understand it and particulary those involved, make money at the expense of the stupid. It is one of the means by which the rich, who control most capital and fund banking, ensure their wealth increases. It is a High Tory viewpoint. It is rendered into popular parlance by the rising tide theory and the trickle down theory. The rich gain first as they are closest to the flow of inflationary credit. Later the poorest get involved. Sub-prime mortgages? At that stage, as Joe Kennedy Sr noticed, when the shoeshine boys give stock advice, the fall is imminent. This time, TPTB decided to make it a super depression by moving to reinflate the economy after the dot.com boom and collapse in 1999, like the SE in 1929, by involving the housing market!!!!!

    Madness. The rich can suffer as the poor when revolution occurs…… This may be the approach to 1789, again. The solar minimum may destroy crops again as it did in previous minima. The apparent lack of foreknowledge may also be dissembling, in certain quarters.

  14. Allan Harris
    A balance sheet is exactly what it says. It is a hsitory of what the company has done, in figures. It bought an invest ment years ago for a certain sum. That sum is recorded in the books and does not vary. There may be revaluation reserves, goodwill and so forth that do vary to reflect a desire to be contemporary, but it is merely the cost. The sale was for 3.1 or so, going on figures in this blog. The profit was 1.7bn. The equity capital thing may become transparent if you think it through.

    Basically, a useful asset that would have increased even more in value has had to be sold off to pay off foolish debts. A tragedy that is possibly someone elses opportunity. Danger and opportunity =Crisis in many “Chinese” figurative languages.

  15. Cearbhall O’Dalaigh
    As you know there has been amazing opposition from the money mob to her appointment. Given that the horse has not merely bolted, it is now burger meat, it is really just a sideshow, possibly to shore up the weakest POTUS in living memory. But a small victory that may save some of the dogged.

    Reckless lending has been banned in many states in the USA. But GWB sought to override the protection to consumers and was hoist by Spitzer who was Piked in return. It is defined as lending too much, to the ill-informed, for inadequate security.

    Ireland has been a spectacular victim of reckless lending by the bondholders who funded Irish banks since 2001. They do not therefore deserve to be repaid!

  16. @ Allan

    perhaps if you read the original post above properly you’d understand how 2.5bn in equity capital was created. It seems like you just didn’t read it at all.

  17. Didn’t know where to write this as it concerns Anglo but i have one quick question. Anglo is going to be split in 2 with the funding bank taking over deposits. However if this funding bank is not allowed lend or even take in new deposits what will fund the interest on these deposits?? Is the tax payer left holding the can for this as well?

    Its funny how Anglo and INBS can be wound down (closed) when it suits them and the tax payers have put in the money to save the bondholders but until that happend they were of systemic importance!

  18. @ De Roiste

    That is a very good question. It seems interest will be paid on the funding banks assets- NAMA bonds which carry a coupon of around 1% currently and a bond issued by the bad bank to the funding bank yielding ???? %. With this income the funding bank will pay its depositors. Hopefully the deposit rate will be low.

    The NAMA bonds are definitely guaranteed by the state. The guarantee of the bad bank bond is unknown. However, this does not matter much as the deposits in the funding bank will have to have a guarantee.

    It does not suit the govt to close down the toxic banks. This is embarassing for the govt given that the two institutions were the banking wing of FF. It is being done on the orders of Brussles.

  19. Isn’t the proposed sale subject to shareholder approval. Is it a foregone conclusion that the deal, which by some is being seen as a desperate fire sale, will get shareholder support?

  20. @ Jagdip

    (a) i dont think its a firesale given the price they actually got for it (high end of expectations)
    (b) given that a non-sale, and so a non-raising of capital, will result in shareholders being wiped out by a quasi-nationalisation, then yes, i think shareholder approval is a foregone approval!

  21. @Eoin

    I have read that the consideration is some €500m more than was expected. I have also read that the 70% share of the bank was worth €4bn two years ago. And whilst banks in many states have suffered – look at our own for an extreme, plainly others like Santander are prospering.

    A non-sale may just result in the State buying another €3.1bn of preference shares which would be redeemed if a better price were achieved. The upper estimate of the cost of Anglo has gone from €25bn to €28.5bn in less than a week so what’s another €3.1bn?

  22. @ Jagdip

    Santander are prospering on a relative scale – their stock is still down around 45% from the 2008 high. Most banks have taken large hits to their valuation as a result of both the financial crisis and the lower forecast growth in the coming years. As such, AIB’s Polish arm being valued 25% lower than the high isn’t a particularly bad performance, and is to be expected.

    Although i have been one of the main arguers of not nationalising AIB if at all possible, even my patience would be gone if the shareholders of AIB decided not to sell off their quite clearly non-core assets. There will be no more preference shares, and AIB shareholders know this. I’d attach a maximum of 1% probability that their shareholders do not proceed with the sale.

  23. Eoin Dha Ainim
    Err…”non-core assets”…. ? Hows the most profitable, best strategically placed, asset “non-core”?

  24. @ donnelly and bond

    The original post says the ‘market value’ of the Polish stock was 1.5B. If the carrying value, basis, or cost was 1.4B and the selling price was 3.1B, then the profit was 1.7B. However, the capital addition to AIB is not 1.7B but, according to Whelan, 2.5B (due, apparently, to some very creative accounting.) This supposedly is the ‘Honey, I shrunk the bank’ theory. It’s more like ‘Honey, the bank just suddenly grew by 800M. Lets sell our stock and get some now before the Irish taxpayers see what is happening’ theory.

  25. @Eoin Bond/Lucey,

    BZW was/is very much at the core of AIB’s portfolio. the Bank looks like the farmer who went in heavy on some Cheltenham hotpot but who now has to sell the pedigree dairy herd. That said at least he got a good price.

    @AH,
    cool the conspiracy theory, Karl is correct. The transaction generate a capital gain over and above book value of around 1.7bn. It also takes about 10billion of risk weighted assets of the balance sheet. This reduces AIB’s capital requiremnts by 800m or so. So that is where the 2.5bn capital relief figure comes from.
    Only around 5billion to go, with maybe 1.5bn to come from the sale of M&T to Santander. There is however likely to be a loss from selling the UK to guess who..Santander. AIB will sell anything that is not nailed down.

  26. @ Brian Lucey

    i mean non-core in the new reality of it being “an Irish bank, primarily owned by Irish people, lending to Irish people/businesses”. Lots of banks are being forced to sell good assets in order to simplify themselves and raise capital.

    @ Allan

    eh, not entirely sure what point you’re trying to make, but the transaction is relatively straight forward from a capital point of view – as they will no longer need to put capital up against the loans in Poland, they can relocate this to go against capital requirements in the rest of the now smaller balance sheet. The 7.4bn IFSRA requirement was made on the basis of their balance sheet before the Polish sale, and in fairness to AIB, they only talk about the capital being “generated” as part of the IFRA requirements, so they’re not trying to suggest they made something out of nothing.

  27. The AIB fund raising is supposed to be completed by December but the Santanser deal is sheduled to complete in 2011. Will this cause further problems.

  28. @ podubhlain

    i dont think it’ll cause a problem, because although the transaction will “complete in 2011”, once the EGM is held and the sale agreed by shareholders, i imagine it will become a binding contract for both parties, so they would have to include the effect of the transaction on their year end account for all purposes, not just the capital raising. I doubt the regulator will have any issues with the actual proceeds of the transaction not arriving until a few months later.

  29. Eoin

    Usually, the contract is booked once the material conditions are fulfilled, so agree: no problem.

    What of the report of EU intervention into the guarantee? OT of course!

  30. AIB up 10% at the open btw (though most banks are in somewhat positive territory after the Basel III announcement)

  31. entirely off the point but I notice the Independent today
    http://www.independent.ie/business/irish/bidders-battle-for-nationwide-as-400-jobs-hang-in-the-balance-2335244.html
    “TWO bidders are interested in snapping up the savings arm of embattled Irish Nationwide, the Irish Independent has learned.”

    “However, the Irish Independent has learned there is significant commercial interest in acquiring the €4bn deposit book of Irish Nationwide amongst the bidders for EBS.

    That field of bidders is led by Irish Life & Permanent and a consortium including international investment group Cardinal Capital. Sources close to Irish Life & Permanent (IL&P) last night confirmed the bancassurer would be interested in buying the Irish Nationwide deposit book even if its bid for EBS fails”

    “Sources close to the Cardinal consortium said it would “absolutely” be interested in buying the Irish Nationwide deposit book if it is successful in buying EBS. The relatively small size of Irish Nationwide’s deposit wing means Cardinal would only be interested in buying it if it can attach it to something “chunky” like EBS. ”

    Good job that thats impossible, eh? someone needs to tell Cardinal Capital. I mean, you cant sell a deposit book, so you cant buy it. Nope, impossible. A rare deposit selling moment from hypersucessful capitalists. Shame on them.

  32. @ Brian

    any idea on how much they’ll pay for it? Using the same metrics that you put on the Anglo deposit book, we should be able to get close to 3bn in hard cash for it eh? Oh dear…

  33. Brian,

    the point was that you could not sell Anglo’s deposit book for 20bn as suggested by you on the Radio and in that article. Two reason
    *not much good getting rid of your depos if you still retain your loans.
    *deposit franchises only have a value if the rates paid are below market & depos are sticky.
    Anglo was neither

    You are flogging a dead horse Professor, your Anglo 20bn call was rubbish. I ould still grade that proposal as an F.

  34. Eh, lad. I think the point here is that a significant amount of commentary from you and others seemed (cant be arsed to check in detail frankly, have theses to grade) to poopooh the very idea of selling deposits. The value of them…thats a market call. The concept, now thats something different.

    Much more important is the FT once again suggesting horrific things like, oh, burning bondholders.

  35. @ Brian

    actually thats incorrect – what you suggested was not a “market value” on how much consideration we’d get for the rights to the deposit book, but the actual market value OF the deposit book. You confirmed this by stating that the 21bn we could get for it would represent a “discount” of the 28bn nominal of it. Your words (cos i can be arsed to check…):

    “Anglo can be wound up cheaply — here’s how. Sell the €28bn deposit book. This is a regular event in banking, and even if it has to take a discount of 25pc that would yield €21bn.”

  36. BL

    Correction-burning non guaranteed bondholders. “Explicit state guarantees must be honoured”. I think you disagree with that. If I recall, you favour resiling from the guarantee on Anglo guaranteed paper.

    What I think the FT advocates is pulling the guarantee, triggering an inability to refinance, resulting in nationalisation of the system and then resolution. Any shortfall goes on the public balance sheet. Life would be interesting.

    However, the ECB/EU will not allow this under the current rules of the game.

  37. On a more constructive note … the weekend’s papers were full of speculation (presumably at AIB management’s prompting) of a rights issue in the next couple of months. Seems a tad optimistic to me. Do people reckon this could really happen and could it get the bank out of majority state control?

  38. Just for the sake of theoretical argument:

    – If AIB can’t sell the UK or American assets for more then they are currently valued on its balance sheet, then there is no real increase in overall equity? (bar that accruing from the corresponding reduction in the € amount of risk-weight assets of course).

  39. @ KW

    Post all the disposals AIB will still need at least 3.5bn of equity, possibly more if it takes a hit on a sale of the UK biz (to Santander!!!). Whether it is able to structure a rights issue along the lines of BOI depends on where markets are & its ability to convince shareholders about the the remaining loan losses.

    The equity market backdrop is more favourable than it was given the streess tests and B3 announcements. The bond market is febrile still. Bottom line, the state will convert most if not all its prefs at the very least and assume a majority ownership position at the very least.

  40. @Karl,

    Like the debt market, it seems that the bank-capital market is going to be very crowded in the near future. Deutschebanks €9bn+ cash call is just going to be the start of things, and if basle III ends up being anything like what was announced at the weekend, there will be lots more to come.

    So, in what is increasingly likely to be a very crowded market place, I wouldn’t hold much hope for AIB getting a cash call away, at any price.

    Nice to see that they are talking about it though, good for the optics.. 🙂

  41. Lorcan

    I thought the whole point of the stress test & B3 was to aviod mass recap of the European and Japanese banking system by kicking the now famous can do the road and hoping that a steep yield curve and a resurgent economy do the heavy lifting.

    I do not think there will be much capital raising apart from the Greeks, Germans and the Regional Spanish & ITalians. Estimates seem to centre on 20-30bn. M&A could cause more.

  42. @tull
    How do feel about the Swiss…
    http://www.zerohedge.com/article/ubs-and-credit-suisse-join-deutsche-capital-raising-nzz-am-sontag-sees-two-banks-needing-chf
    “In Basel, central bankers and regulators now lay down stricter rules for the international financial world. This has significant consequences for the Swiss banks. UBS and Credit Suisse have to create more than 20 billion francs in capital to meet the new requirements, say experts familiar with the dossier.”

    I’m not sure how raising core equity from 2% to 4.5% plus a buffer of 2.5% doesn’t leave most banks, even ones that were well capitalised by previous benchmarks, looking for equity cash? Saying it is going to be brought in over the next ten years is pointless – competitive pressures will mean that banks will front-load this.

  43. Hogan,

    Most banks will be above the 6.5% level by the time the clock start ticking.
    The Swiss guys are well above double figures %. Your Swiss Banks are safe. ZeroHedge has an axe to grind.

  44. Hogan,

    ZH quotes the article as saying the Swiss would raise capital but para 2 of the article implies the opposite-they would get there through internal capital generation. UBS now has a fortress balance sheet & has de-risked follwoing its near death experience. CS is also well capitalised.

    Methinks ZH is short the Swiss giants and is getting killed.

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