AIB to sell off its overseas subsidiaries

[Brendan Burgess]

The Minister announced today that AIB is to sell off its British, American and Polish subsidiaries by the end of the year.

Allied Irish Bank is in a position to raise capital through the sale of overseas assets. As the first step in meeting its capital needs the bank will immediately commence the process of sale of assets in the US, Poland and in Great Britain. The sale of these assets will be completed this year, subject to regulatory clearances.



The disposal proceeds will provide significant capital but it will not be sufficient to address the full requirement.

On Friday 19 March, Brian Lucey had a piece in the Irish Times entitled [broken link removed]

I submitted a response to the Irish Times but they didn't publish it. I submitted a shortened version for the letters page, but they did not publish it either.

It is a really important issue so I think it's worth teasing out.

Here is a summary of Lucey's arguments

Only in Ireland would banks seek to sell profitable foreign assets to shore up their continuing domestic losses.

This probability [of increased banking charges] is increased by a Gadarene rush towards a policy whereby the main banks sell off profit-making, usually overseas, operations using the funds thereby generated to avoid State involvement in recapitalisation. In most rational business environments, organisations sell the unprofitable parts of the business and invest the funds in further expanding their profitable and growing areas – but Ireland, as we know, is different.

Selling the external, profitable parts of the banks may give a short-term boost to share values by reducing the dilution inherent in the State recapitalisation, but it is folly in the long term.

Apart from the consequent loss of value that ensues from the disposal of these assets, we will be left with banks that are weaker than now, being concentrated entirely in and on Ireland rather than being inherently multinational and thus possessed of inbuilt diversification. They will be less attractive to anyone – investor, customer or State. But at least the management and boards will remain entrenched . . .

 

[Brendan Burgess]

And my reply
Professor Brian Lucy suggests (Comment 19 March) that Irish banks will be made weaker by disposing of their, mostly foreign, subsidiaries. If we follow this to its logical conclusion, then we could solve the problem of Anglo Irish Bank by funding it to acquire profitable overseas subsidiaries. Thus Anglo would be “diversifying the risk and would be more attractive to investor, customer and State”.

The tax payer is recapitalizing the banks to preserve the Irish banking system and to get credit flowing again within Ireland. The banks will allocate their capital to wherever they can make the best return. My guess is that over the coming years, it will be more profitable to make loans to British, American and Polish customers than to Irish customers. It makes no sense for the Irish taxpayer, who is already overborrowed to be extending further credit outside Ireland, when we need it so badly here.

The banks will face great challenges in the Irish market for some time to come. The mortgage market is dysfunctional. They have a large number of non-performing property loans which are too small for NAMA. They are under public and political pressure to lend to small businesses which are still struggling in a difficulty economic environment. The way to address these challenges is to isolate them and to focus the energies of the board and executives on dealing with them. They do not need to be distracted by their overseas operations.

Professor Lucey assumes that these overseas subsidiaries will be automatically profitable and will fund the Irish parents. These overseas subsidiaries could well face their own problems and require further attention and capital.

The future for the Irish economy and the Irish banks is very uncertain. If the economy does not recover, and if the bad debts persist in the banks, we may have to face the prospect of dramatic reorganisation which could involve merging AIB and Bank of Ireland or perhaps closing down one or both of them. If this becomes necessary, smaller, simpler banks will be easier to deal with.

And what about Professor Lucey’s diversification argument? If there is some advantage to diversification, the shareholders can make their own diversification decisions. An investor with an exposure to the Irish banking market would get better diversification by investing outside the banking sector.

Bank of Ireland could achieve instant diversification by selling off its home lending subsidiary ICS Building Society. This would not only be good diversification, but it would also increase the competition in the Irish home loans market.

Would AIB really be more attractive to investors if it retains its overseas subsidiaries? It seems to me that the overseas subsidiaries would be far more attractive without the uncertain baggage of the Irish banking business.

A sensible foreign investor which acquires the combined group would probably close down its loss making subsidiaries. It would not be concerned with the banks’ systemic importance to the Irish economy. Even if they were not to close down the Irish operations, they would not invest further capital in them as the return on any such capital is likely to be higher in Britain, America or Poland.

And what about the banks’ Irish subsidiaries such as New Ireland and Goodbody Stockbrokers? It’s not in their interests to be owned by a parent which is starved of capital. This may well hurt these companies’ ability to grow and develop in the Irish market.

From the government’s point of view, if it wants the diversification of owning foreign banks, it can buy the subsidiaries from their parents. The government can choose to invest in them or dispose of them using normal investment criteria. They will probably conclude that an overborrowed Irish government should not be investing in foreign banks.

Professor Lucey argues that the banks are considering selling off their subsidiaries to reduce the need for new capital from the State, thus avoiding 100% State ownership. But even if the government nationalises the two big banks and recapitalizes them, it would still make sense to dispose of the non-core subsidiaries.

The Irish taxpayer is overexposed and overindebted to the banking system generally. We need to reduce that exposure while not damaging the prospects of economic recovery. The way to achieve that is to sell off the foreign subsidiaries.