Trade scandal could force AIB to jettison Allfirst

Irish parent company may feel pressure from investors, analysts say

February 21, 2002|By William Patalon III | William Patalon III,SUN STAFF

While Allied Irish Banks PLC continued to insist yesterday that Allfirst Financial Inc. is key to its future, the continuing trading scandal may force the parent company to sell its Baltimore-based affiliate to mollify its investors, industry experts said.

"I've said for a long time that they should have sold this," said Seamus Murphy, a banking analyst for Merrion Stockbrokers in Dublin, Ireland.

Murphy isn't alone in his sentiment.

Scott Rankin, a banking analyst with Davy Stockbrokers in Dublin, said he was heartened by AIB's disclosure yesterday that the foreign exchange losses originally pegged at $750 million were only $691.2 million. But he was troubled that, instead of being confined to a single year, as the bank first maintained, the losses started in 1997 - and continued into this year.

That "certainly doesn't help investor sentiment," Rankin said.

It also makes it more likely that shareholders will put pressure on the company to jettison Allfirst or restructure the U.S. operations in some other fashion, he said.

AIB has alleged that Baltimore currency trader John M. Rusnak ran up the losses, concealing them with phony transactions. Rusnak has not been charged with any crime. The FBI and U.S. attorney's office are investigating the case, as are state and federal banking regulators, along with the Central Bank of Ireland.

AIB is also conducting its own investigation, headed by Eugene Ludwig, a former U.S. comptroller of the currency.

Since the losses were first revealed, AIB leaders have insisted that Allfirst is an important component of the bank's future. Although its core market is in Ireland and the bank's growth rate is higher there than in the United States, the U.S. market has greater upside and AIB wants to be a player here, executives have maintained.

With the depth of Allfirst's problems now emerging, it's not yet clear that AIB will stay committed to the U.S. market.

"On our strategy for Allfirst and for all U.S. [businesses], I think it is fair to say that our focus over the next six to nine months will be to put right the damage that Allfirst has suffered and to rebuild the momentum of the retail and commercial business, which is really the heart of the business at Allfirst," Michael Buckley, AIB's chief executive officer, said yesterday. "Then we will embark upon a revalidation of our whole strategic approach to our U.S. business. Our first priority is to regain the momentum that we had at Allfirst coming into this year."

Yet AIB didn't diminish the potential its U.S. business holds.

"We have a strong franchise in the United States," AIB's chief financial officer, Declan McSweeney, said yesterday in a Bloomberg Television interview. "Allfirst is one of the leading banks in its region. It has a market share of either No. 1, No. 2 or No. 3 in nearly all the counties in which it operates, so it's a strong local bank."

Between Allfirst and a separate AIB business that focuses on the not-for-profit sector, the United States accounts for about a quarter of AIB's business, McSweeney said.

While noting that the losses represented a "serious hit," McSweeney made the same assertion that other AIB officials have made since the trading loss was first announced: It's a one-time problem that will be fixed, allowing the company to return to the task of growing its business.

"This is a very serious hit to the bank, but it's a one-off hit, and we believe that we can quickly restore confidence in the bank," he said.

Other industry experts said they aren't sure if AIB has the luxury of standing pat - even after fixing the internal controls that allowed the loss to occur.

"Obviously, it's no surprise that investment banks are crawling all over each other," hoping to persuade AIB to make some sort of deal, said a Baltimore-area banking executive who requested anonymity. "But the Irish have put them on hold until Ludwig issues his report. It's pretty clear they have two or three alternatives."

The obvious alternative for AIB - and the one pushed for by analysts such as Merrion Stockbrokers' Murphy - is to sell Allfirst, using the proceeds to bolster the remaining parts of its business.

Murphy wanted Allfirst sold even before the trading scandal emerged, citing performance that was "mediocre" in the rapidly consolidating U.S. banking market. And with the problems appearing deeper than first thought, AIB will be "under pressure from some shareholders to take some pretty drastic action," said Davy Stockbrokers' Rankin.

But this may be the worst time to sell Allfirst, experts said, because the currency fiasco has clearly pushed the local bank's market value to a low point. Even if AIB decides Allfirst has to go, it's better to fix the problems, allow some time to pass and wait for the U.S. economy to improve before making the deal, Rankin said.

"Selling is not something you'd want to do now - when it's not fully valued," he said.

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