Allfirst's fate will hinge on profitability

Experts say Irish parent will let bottom line decide

`Don't want excuses anymore'

Decision on quitting U.S. to be made this year

May 31, 2002|By Bill Atkinson | Bill Atkinson,SUN STAFF

The most important question facing Allied Irish Banks PLC executives in deciding whether to keep or sell Allfirst Financial Inc. isn't assessing whether the name has been damaged beyond repair, but whether the bank is worth the investment, industry experts said.

"The bottom-line issue is return on capital," said Jeffrey R. Springer, a retired Baltimore banker and executive-in-residence specializing in banking at the University of Baltimore.

"You are going to make a decision if the capital you are allocating to Allfirst will provide you with the optimum return or whether there are better alternative investments available."

Jim Eckenrode, group director of consumer banking research at TowerGroup Inc., a research and advisory company in Needham, Mass., called return on investment key to Allied Irish's decision.

"You are the primary shareholder in some respects. What you are looking for is profitability," he said.

Allied Irish, based in Dublin, Ireland, has been forced to confront the issue of Allfirst's future since the Baltimore bank revealed in February that it had lost $691.2 million in one of the worst banking scandals in history.

Allied Irish officials blame the losses on John M. Rusnak, an Allfirst currency trader who was fired along with six co-workers and supervisors who failed to detect the losses over a five-year period.

Rusnak, who lives in Mount Washington, is cooperating in an FBI investigation. He has not been charged with a crime but has been accused of falsifying documents to hide trading losses that were so big they cut Allied Irish's profits in half last year.

Allied Irish officials said this week after the company's annual meeting that they will decide by year's end whether to withdraw from the U.S. market. Allied has also suspended plans to acquire other institutions in and around the mid-Atlantic region.

"If you have a sore tooth, you take it out, but the pain doesn't go away right away," Gary Kennedy, Allied Irish's group financial director, told The Sun on Wednesday. "You have to see if there's infection underneath."

Whether Allfirst has problems that are beyond repair is unclear, but the crucial question is whether Allied Irish officials believe the subsidiary can recover and generate a return that is worth their time and investment, experts said.

Allied Irish has owned Allfirst since 1989, and it has had good and bad years. But executives were disappointed with Allfirst's performance from 1998 to 2000, when the economy boomed and the bank's assets, deposits and loans remained stagnant.

Last year, Allfirst's profitability picked up. The bank would have made $200.5 million, 12.2 percent more than in the prior year, if not for the trading losses. As a result of the scandal, Allfirst lost $36.8 million last year.

It made $37.8 million in the first quarter but would have made $55.4 million in the quarter, 4 percent more than in the prior year, had it not been for charges related to the fraud. Allied officials said this week that Allfirst has shown resiliency.

David Odlum, a bank analyst at NCB Stockbrokers in Dublin, said that "from a shareholders' point of view, they [Allied Irish] should sell it ... to realize value."

In a report released yesterday, Odlum and John Kelly, also an NCB analyst, wrote: "In the past five years, Allfirst's loan book and deposit book has been practically static. ... Poor management has also been a feature.

"It would be difficult to expect shareholders to be comfortable about AIB staying in the USA given its recent track record there, unless they have absolutely no other choice."

Odlum said in an interview that Allied Irish executives face many questions. "Why would they grow it now when the economy has slowed down considerably?" he said. "We can't see where it is going to come from. People just want to see the bottom line improving. They want to see quality earnings. They don't want excuses anymore."

Besides profitability, other factors that Allied executives are likely to consider is whether Allfirst has the management and directors to move the bank forward, experts said.

In April, Allied Irish named one of its executives, Eugene C. Sheehy, chairman of Allfirst, replacing Frank P. Bramble, who retired April 30.

"Someone needs to come in now and do a quick assessment of how good are we," said Louis C. Burnett, managing partner of Secura Burnett Co., a financial services consultant in San Francisco.

"The question ... is how good do we want to be and can that management team be deployed. It is not a seriously technical analysis;, it is more practically developing a point of view about what you think is possible."

Springer said Allied Irish executives probably will consider whether the company has the resources to run the bank more closely than it has in the past.

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