Royal Bank Of Scotland May Bid For Wounded AIB

by Jason Gorringe, Tax-News.com, London

27 February 2002

AIB shares, which fell as low as Euros11.35 after the revelations of a US$691m loss by US subsidiary Allfirst two weeks ago, traded strongly for a second day on Dublin and London markets as speculation mounted that Royal Bank of Scotland (RBS) is putting together a merger/takeover proposal for the bank. After a see-saw day, the shares closed up 60 cents at Euros13.

At yesterday's closing price, AIB is valued at just under Euros12 billion while RBS - one of the biggest banks in Europe since it took over Natwest - is worth around Euros80 billion at yesterday's closing price on the London market. RBS has expanded aggressively in recent years under the direction of chief executive Mr Fred Goodwin, and many analysts believe that while there might be regulatory issues to be overcome with AIB, the Scottish bank is more likely to be attracted to a deal with AIB rather than a bid for a mainland European bank.

Banking sources believe that RBS is more likely to be interested in buying Allfirst on its own. Its Maryland territory fits well with RBS's existing US interests, Citizens in New England and the recently purchased retail side of Mellon Financial in Pennsylvania. RBS has been steadily extending its interests on the US eastern seaboard.

AIB itself said that it had received no direct or indirect approaches from RBS. "All of these rumours are coming out of London but it's hard to see RBS or anybody else making any move on AIB before the Allfirst situation is clarified," said one Dublin market source. In a research note yesterday, Irish stockbroker Davy's analyst Scott Rankin warned that while there was logic in a link-up from RBS's perspective, a problem would arise in the combined entity's market share in the SME market - particularly current accounts - on both sides of the Irish border. Davy estimates that AIB and the RBS-owned Ulster Bank have a combined market share of close on 50%.

Among multiple investigations going on into events at Allfirst, the key one from a market perspective is probably the report being prepared by Eugene Ludwig, the US banker appointed by the board to investigate the alleged fraud.

Chairman Lochlann Quinn says that no disciplinary action will be taken by AIB before that report is received, but in an interview over the weekend pointed to AIB's strong share price as an indication that there was no fundamental crisis of confidence: "Our share price doesn't indicate investors have lost confidence. They're probably buying the story that this is a one-off. They're probably waiting for Ludwig to see what that might say. But I think they recognise out there that it's a good bank, with a good franchise, which makes real money. And, you know, the share price is higher now than it was in October and November."

Mr Quinn says the bank reacted promptly in giving the markets some indication of the damage done, and limiting the fall-out. He is also anxious to clarify some confusion over Mr Ludwig's remit. It is not his job, says Mr Quinn, to "name names" but will make recommendations in terms of controls and procedures. The task of allocating blame will be for the board, which will prepare a summary of Mr Ludwig's report for the outside world.

Although he won't name names himself at this point, Mr Quinn makes it clear that his support for chief executive Mr Michael Buckley is conditional on the executive being cleared by the bank's internal inquiry.

Meanwhile Citibank has confirmed that it is to investigate allegations that Mr John Rusnak, the currency trader accused of defrauding AIB, colluded with one of its own currency dealers. The move is in response to a report that investigators looking into the alleged fraud at AIB's Allfirst subsidiary in Baltimore have found emails on a computer used by Mr Rusnak showing he received help from an apparent Citibank accomplice.

Citibank said: 'We've been co-operating with AIB and their auditors in their efforts to account for their transactions between Allfirst and Citibank. Allfirst has not raised with us any evidence or allegation of collusion. 'Obviously, any such allegation would be taken very seriously.'

Citibank, which is a subsidiary of Citigroup, declined to comment further on its relationship with Mr Rusnak. However, traders say it provided him with so-called prime brokerage facilities. These included such services as settlement and clearing for trades and trade execution. It is also believed Citibank was one of the counterparts to whom Mr Rusnak sold so-called deep-in-the-money options.

These options, which AIB says he never disclosed, allowed him secretly to raise large amounts of cash to cover losses he incurred in spot and forward foreign exchange markets.

Recommended