Good options few for Allfirst

Perhaps best course is to do nothing for now, analysts say

March 16, 2002|By William Patalon III and Andrew Ratner | William Patalon III and Andrew Ratner,SUN STAFF

Allfirst Financial Inc. faces many challenges as it tries to recover from the trading scandal that ran up nearly $700 million in losses, but it has few good options, industry experts say.

The bank is too small to go it alone, but lacks the money to make the large acquisition needed to give it extra muscle and expand into new markets.

Selling out isn't a much better alternative, since the trading debacle has diminished Allfirst's worth.

That could force Allfirst to remain independent at a time when its credibility is low and after a stretch where it has delivered consistently mediocre performance.

None of those alternatives are ideal, leaving analysts to wonder which path its parent, Allied Irish Banks PLC, ultimately will choose for Allfirst.

"Prior to this scandal, they had a serious problem in the [United States] anyway in terms of strategy," said Jim Power, chief economist at Friends First, a brokerage in Dublin, Ireland, AIB's hometown. "Now that question has been magnified 10-fold. AIB is an injured animal at the moment."

And so is Allfirst Financial, industry experts say.

Allfirst had problems even before the losses surfaced. Its earnings were flat in 1999 to 2000 - despite a record boom - and some of its business model was flawed, AIB officials conceded this week.

Even so, AIB Chief Executive Officer Michael Buckley said the bank is committed to the U.S. market, and to Allfirst, maintaining there is "serious potential in that franchise."

A key goal is to snap up some small community banks in the Baltimore-Washington region, giving Allfirst a broader reach to stimulate profits. But analysts are increasingly saying that AIB would be better served by selling Allfirst, and using the money to bolster its own business at home.

"We've come around to the view that it's likely Allfirst would be disposed of," said Scott Rankin, a banking analyst with Davy Stockbrokers in Dublin. "We feel this is part of what will happen," in either the near-term or not-too-distant future.

Selling Allfirst outright - or at least making it more competitive through a joint venture with another bank - would ease AIB's credibility problem, since it's not shown itself capable of managing the U.S. business, some analysts said.

Other experts actually believe that AIB should sell itself, reasoning the Dublin company will never overcome this scandal. Both the Royal Bank of Scotland Group PLC and the Bank of Ireland PLC have been mentioned as the most likely purchasers.

But AIB's options seem limited on that front as well. The chief obstacle in Ireland is a regulatory environment that frowns on mergers between big domestic rivals.

Earlier this week, the Irish Times reported that Deputy Prime Minister Mary Harney - responsible for approving major mergers and acquisitions within Ireland - would oppose any combination of AIB and the Bank of Ireland, since they are the country's two largest banks.

So if AIB leaders believe a deal is needed to restore investors' faith, the parent company may have to part with Allfirst. At least there may be willing suitors, according to analysts. The Royal Bank of Scotland may among them.

Like AIB, the Royal Bank of Scotland diversified into the U.S. market seeking growth. But unlike AIB, the Scottish bank is faring well on this side of the Atlantic.

The Royal Bank of Scotland owns the Citizens Financial Group Inc., of Providence, R.I., New England's second-biggest bank, and had deployed it as a springboard into other East Coast markets.

In December, the Scottish bank spent $2.2 billion to buy Mellon Financial Corp.'s 345 retail branches, bringing its tentacles down into the Pittsburgh and Philadelphia regions. The bank is on the prowl for more branches and is looking in Pennsylvania, Delaware and New Jersey for certain, and possibly in Maryland, too.

Fred A. Goodwin, the Royal Bank of Scotland's CEO, recently declined to tell journalists whether his bank was eyeing Allfirst, which has about 260 branches between Pennsylvania, Maryland and Virginia.

Allfirst's market would make it a great fit with the Scottish bank, said Jeff Davis, a mid-cap regional banking analyst for Midwest Research, an institutional equity-research firm based in Cleveland.

"After they picked up Mellon, [Allfirst] would certainly fit," Davis said.

Several U.S. banking companies may be interested in Allfirst, too, analysts said. Chief among them: BB&T Corp. of Winston-Salem, N.C.; Wachovia Corp. of Charlotte, N.C.; and SunTrust Banks Inc. of Atlanta. All three banks are players in Maryland.

But here again, AIB faces challenges.

BB&T wants to boost its Baltimore presence, analysts note. But Allfirst has nearly $18 billion in assets, making it nearly three times larger than the biggest bank BB&T has bought, said James Record, director of banking research for SNL Securities in Charlottesville, Va.

Wachovia may not be a suitable suitor, either, since it's still finding its footing after the September merger between it and First Union Corp.

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