Canadian bank makes surprise AIB move

Flamed Diving

Canadian bank makes surprise AIB move

ARTHUR BEESLEY, Senior Business Correspondent
Fri, Aug 14, 2009

A major Canadian bank has proposed to take a stake in Allied Irish Banks. The investment would take place only after AIB’s development loans move to Nama, the National Asset Management Agency.

The news boosted shares in AIB which rose over 13 per cent when the market opened before easing back to €2.30 by 9.20am, a gain of 9.5 per cent. Bank of Ireland shares also rose this morning adding 6.6 per cent to €2.20.

The conditional approach to the Government and AIB from the Canadian bank was received about a fortnight ago.
The name of the bank could not be confirmed last night but it is understood to rank among that country’s top five lenders.
The proposal is considered to be serious, although it is unlikely to develop in the immediate term given that it is predicated on the outcome of AIB’s engagement with Nama.

“It’s a much longer-term thing. I don’t think they’re going to be moving quickly until they see the full extent of Nama. They want to take an equity interest. We deem this to be of a lot higher standard than other approaches,” a source said.
The source added that the outcome of Nama’s involvement with other financial institutions and any capital-raising exercise they attempt may be a further consideration for the Canadian bank as it examines a possible AIB investment.
Nama is being established by the Government to take over toxic development loans to developers.

Canada is the only state in the Group of Seven largest industrialised countries not to support its banks with guarantees, recapitalisations or the purchases of toxic assets. Among other factors, this has been attributed to stronger regulation, strict capital requirements, fiscal conservatism and the absence of tax-deductible mortgages.
Only the largest of Canada’s institutions, Royal Bank of Canada (RBC), has incurred a quarterly loss this year, its first since 1993. The other main Canadian lenders are Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, and Canadian Imperial Bank of Commerce.

RBC is known to have examined the Irish banking system in recent times, although any interest it may have in AIB could not be verified last night. Last month, RBC chief executive Gordon Nixon said Irish banks stood out “as an example as having way too much leverage in relation to the size of the institutions”.
The Nama process will significantly derisk AIB. It remains unclear whether the Canadian bank has an interest in taking a majority or strategic minority stake in AIB, which has come under severe pressure on international markets as a result of its large exposure to the beleaguered Irish property market.

On the face of it, however, a fully-developed investment proposal from a large well-capitalised Canadian institution would be welcomed by the Government as it would have the potential to reduce any requirement for further State capital after AIB’s loans move to Nama.
Although the Nama process is designed to stabilise the financial institutions so that they can recommence normal lending practices, the removal of loss- incurring “toxic” loan assets from their balance sheets would make them a more attractive investment proposition to private investors.

Efforts by AIB and Bank of Ireland at the start of this year to raise fresh private capital under the terms of the Government’s original recapitalisation plan were unsuccessful as investors shirked the proposal in the wake of Anglo Irish Bank’s nationalisation.
The existing recapitalisation scheme is designed to incentivise existing investors in the big two banks to provide new capital to them. However, any new capital-raising process would also be open to new investors.

AIB, which declined to comment last night, is in the process of recruiting a successor to outgoing chief executive Eugene Sheehy. Colm Doherty, head of AIB’s profitable capital markets division, is widely held to be the internal favourite for the job. He has been on the AIB board since 2003.

© 2009 irishtimes.com

So, what do people make of this? I reckon it could be a good thing, as Canadian banks have shown themselves to be quite frugal, and it may rid AIB of much of the old guard and their cosy relationships with state and developers.

Thoughts?

Économiste Monétaire

Key term here: 'a stake'. That stake is not defined in % terms. I'm not-so-sanguine about this, it reeks of government spin. That said, the new management team couldn't perform much worse than their predecessors.

Flamed Diving

Économiste Monétaire wrote: »

Key term here: 'a stake'. That stake is not defined in % terms. I'm not-so-sanguine about this, it reeks of government spin. That said, the new management team couldn't perform much worse than their predecessors.

Hmm, wouldn't be bad if it was the government stake, at least we would get €3.5bn back, or more since the share price has risen?

I'm not too fond of the idea of the state clearing the bad debts from the books, leaving a nice, clean bank, and then the shareholders making a mint if Royal Bank of Canada bought AIB.

Économiste Monétaire

Flamed Diving wrote: »

Hmm, wouldn't be bad if it was the government stake, at least we would get €3.5bn back, or more since the share price has risen?

I'm not too fond of the idea of the state clearing the bad debts from the books, leaving a nice, clean bank, and then the shareholders making a mint if Royal Bank of Canada bought AIB.

Well, it would be nice to get a return beyond the capital amount (I think we're getting 8 or 10% a year from our preference share holding) and the warrants on the stock are worth something. I agree with the second point, which is why a lot of analysts want the main banks nationalised—then the NAMA SPV becomes a lot simpler—and re-privatise the banks at a later date.

This story just seems very convenient given the recent heavy criticism of NAMA's operational framework, e.g. Karl Whelan and Brian Lucey. It kind of reminds me of Warren Buffet's government guaranteed purchase of Goldman Sachs stock back in '08 to shore up confidence.

Flamed Diving

I don't see how this shows a stamp of approval for NAMA, though. It just shows a bank seeing a steal, given that the state are taking on all the risky assets, leaving a clean bank, on the cheap. How is NAMA's performance related to RBC's interest?

Économiste Monétaire

Flamed Diving wrote: »

I don't see how this shows a stamp of approval for NAMA, though. It just shows a bank seeing a steal, given that the state are taking on all the risky assets, leaving a clean bank, on the cheap. How is NAMA's performance related to RBC's interest?

If this does show a stamp of approval from RBC for NAMA, ergo good for the taxpayer or good for RBC? Are these mutually exclusive? I'd hazard a guess at saying: their interest lies in whatever outcome is cheaper to acquire a given stake in AIB (ceteris paribus). A chronically under-capitalised bank doesn't really have a great bargaining position; they could probably pick up a considerable ownership stake on the cheap if there are very few willing investors. If the government outright nationalised the bank, the longer they wait to sell the bank back into private ownership, the price may rise.

Flamed Diving

Économiste Monétaire wrote: »

If this does show a stamp of approval from RBC for NAMA, ergo good for the taxpayer or good for RBC? Are these mutually exclusive? I'd hazard a guess at saying: their interest lies in whatever outcome is cheaper to acquire a given stake in AIB (ceteris paribus). A chronically under-capitalised bank doesn't really have a great bargaining position; they could probably pick up a considerable ownership stake on the cheap if there are very few willing investors. If the government outright nationalised the bank, the longer they wait to sell the bank back into private ownership, the price may rise.

But FF won't nationalise, because their drinking buddies will give out to them.

Simplistic, I know, but drenched in truth. What frustrates me the most about this whole crisis, is how little economists are being listened to. Whelan, Honohan and Lucey are coming up with great ideas/criticisms, and they are simply being ignored.

Économiste Monétaire

Flamed Diving wrote: »

But FF won't nationalise, because their drinking buddies will give out to them.

Simplistic, I know, but drenched in truth. What frustrates me the most about this whole crisis, is how little economists are being listened to. Whelan, Honohan and Lucey are coming up with great ideas/criticisms, and they are simply being ignored.

First principles, Clarice. Simplicity. Read Marcus Aurelius. Of each particular thing, ask: What is it, in itself, what is its nature?

Anonymous1987

Could be a bit of spin to push through NAMA, politicians pointing to a Canadian bank investing in AIB on the condition that NAMA takes care of developers loans makes for a bit of urgency.

I'd be sceptical that a safe Canadian bank would bring "responsibility" to the Irish banking system, not long ago Dublin was the wild west of finance for its weak regulation (probably still is) . More likely a Canadian bank would take advantage of the Irish regulatory system and is hoping to get a bargain deal at that.

Hasschu

I have first hand knowledge of Canadian banks all of it good. First and foremost the Canadian government keeps a tight rein on the banks. Second if a bank fails the government takes it over while it is still operating and the stockholders and bondholders get whatever assets are available after the depositors are taken care of. To say that the Canadian banks get no government assistance is not quite right. Government allowed banks to issue 40 year 5% down mortgages in late 2006. After the American fiasco with MBS in 2007 the Canadian gov't transferred $50 billion worth of those mortgages from the banks to a gov't agency called the Canadian Mortgage and Housing Corporation. That was the deposit so to speak and at any signs of weakness the gov't will come to the rescue. CMHC is also the gov't owned mortgage insurer, you could say it was a case of pay me now or pay me later. House prices in Canada are holding up very well in no small part due to the actions of the Bank of Canada (Central Bank) and the gov't. Canadian banks are conservative by international standards due to regulation and the example set by the gov't, there is no get off scot free when a bank fails. Canadian banks will be hard nosed if they take a stake in an Irish bank it will be a sound investment from day one. Matthew Barret from Tralee was CEO of Bank of Montreal and later CEO of Barclays Bank in the UK, he is now retired and would be a very valuable consultant if the Irish gov't was to consider getting serious. Mark Carney is Governor of the Bank of Canada and has brothers called Sean and Brian, you know where they came from. The Irish have done very well in Canadian banking and there is good reason to believe that Canadian banks would fare well in Ireland.

EastWallGirl

Ehhm Any Canadian bank that operates here will be operating under the non existant Irish law. It does not matter how good they are in Canada.

Canada is not the only one with banking regulation so that is a moot point, so that alone does not make them brilliant.

The Irish government is still not talking about better banking regulation.

It seem from the news reports that the Canadian bank want to know all about NAMA, so basically it wants to know about guaranteed money for assets that are not worth it - wouldn't we all.

Someone has tipped them off.

Anonymous1987

EastWallGirl wrote: »

Ehhm Any Canadian bank that operates here will be operating under the non existant Irish law. It does not matter how good they are in Canada.

Canada is not the only one with banking regulation so that is a moot point, so that alone does not make them brilliant.

The Irish government is still not talking about better banking regulation.

It seem from the news reports that the Canadian bank want to know all about NAMA, so basically it wants to know about guaranteed money for assets that are not worth it - wouldn't we all.

Someone has tipped them off.

Thats what I think anyway

Hasschu

The Canadian banks have been dealing with the American banks for over a century and are well versed in how to do due diligence. The Canadians are already operating in Ireland but not as deposit taking institutions they are well versed in how the Irish bankers and gov't operates. They will drive a hard bargain but at least you will finish up with a bank you can trust. Any shenanigans out of the gov't and they will pull out as they did in Argentina when the gov't froze deposits. Depositors were paid outside of Argentina. The mutual back scratchers, one hand washes the other will find no traction with the Canadians.

Flamed Diving

Hasschu wrote: »

The Canadian banks have been dealing with the American banks for over a century and are well versed in how to do due diligence. The Canadians are already operating in Ireland but not as deposit taking institutions they are well versed in how the Irish bankers and gov't operates. They will drive a hard bargain but at least you will finish up with a bank you can trust. Any shenanigans out of the gov't and they will pull out as they did in Argentina when the gov't froze deposits. Depositors were paid outside of Argentina. The mutual back scratchers, one hand washes the other will find no traction with the Canadians.

If the above is even half true, I welcome them with open arms.

Anonymous1987

Canadian Bankers and Irish bankers are driven by the same thing its the regulatory environment that makes the difference, I refer you to assumption no. 1 of economics: everyone is greedy



And that is coming from someone form the Gordon Gecko school of thinking.

Flamed Diving

Anonymous1987 wrote: »

Canadian Bankers and Irish bankers are driven by the same thing its the regulatory environment that makes the difference, I refer you to assumption no. 1 of economics: everyone is greedy



And that is coming from someone form the Gordon Gecko school of thinking.

Assumption 1: People act out of self interest.

Self interest =/= myopic selfishness

But that's besides the point. They appear to run different business models. Do you really think they would come in and repeat AIB's blunders?*










*Given the moral hazard issues that this governments handling of AIB... maybe.

Anonymous1987

Flamed Diving wrote: »

Assumption 1: People act out of self interest.

Self interest =/= myopic selfishness

More accurately put.

Flamed Diving wrote: »

They appear to run different business models. Do you really think they would come in and repeat AIB's blunders?*
*Given the moral hazard issues that this governments handling of AIB... maybe.

Whats to stop them? I question their motives for investing in the Irish market given its reputation and also in practice its lax regulation but I would welcome outside investment in the banks to deal with the closely nit finance community in Dublin. What I'm really getting at is the regulatory deficit in Dublin.

Hasschu

There are countries in the world that have bought into the concept of a "Social Contract" as outlined by Jean-Jacques Rousseau. Civil society as in we are all in this together so we might as well help each other. Naked greed and self interest works in the short term until it becomes obvious, then it is game over for the institution or persons who are engaging in nonproductive tactics. Fairness and reasonableness is what survives in the medium to long term. Is our gov't being fair and reasonable when it proposes that we will socialize the losses and privatize the gains. To take the E/W German example from 1989 when the E German banks collapsed. W Germany propped up the E German banks on a one E Mark is equeal to one W Mark basis. But this is the genius of the W Germans they also deposited one W Mark for each E Mark in every depositors account in East Germany. That is what the Social Contract is all about. Here in Ireland it is long past time we had a hard look at ourselves and our gov't. Twenty years of prosperity and the social divide is wider than it ever was. Everyone for himself and the devil take the hindmost with the exception of the politically well connected. I believe Hannah Arendt dealt with these issues in some depth or at least she bemoaned the fact that economists missed the biggest upheavals in history. For example the French Revolution was not good for the economy.

Hasschu

Link to article in Canada's version of the Independent.

http://www.theglobeandmail.com/globe-investor/cibc-comes-out-of-hibernation-eyeing-stake-in-irish-bank/article1251930/

Notice that McCaughey is the CEO of CIBC.

EastWallGirl

That article does not show CIBC in a good light...

damnyanks

CIBC investment arm put their depositers / retail customers up the creek without a paddle. So many times they've structured products with 0% risk. They sell the retail guys a crap product and sell all the risk on the market.

dodgy crowd if you are bakning with them.