AIB shares fell 63 cent to €21.57 as the market digested a weekend profit warning from M&T Bank, the US bank in which AIB holds a stake of almost 25 per cent.
Buffalo-based M&T is exposed to turmoil in the sub-prime mortgage market, and announced late on Friday that it had reduced its estimate for first-quarter earnings per share to $1.50-$1.60 (€1.12-€1.20), a significant drop from a recent market consensus of $1.83.
Last year, M&T made an after-tax contribution of €141 million to AIB, which represented 7 per cent of the Irish bank's overall earnings. AIB said yesterday that M&T's profit warning would have no effect on its own earnings guidance for 2007.
The earnings revision was attributed to the "negative effect" of recent difficulties in the US sub-prime mortgages market on the rest of the mortgage marketplace, particularly the "Alt A" sector in which M&T operates.
M&T issues Alt A mortgages, which require limited documentation from borrowers, and then sells these loans on to investors. However, in the first quarter, the bank had to write down the value of its Alt A loan portfolio by $12 million ($7 million after tax), due to a weak auction environment.
M&T is obliged to repurchase Alt A loans from investors if certain criteria are not met, for example if the mortgage holder fails to make timely payments in the first 90 days following the sale. An increase in re-purchase requests observed by M&T in the first quarter is expected to reduce its net income by a further $4 million.
M&T chief executive Robert Wilmers said the bank was changing its sales practices relating to Alt A lending to mitigate future risk. "We do not expect these discreet first-quarter events to have a lingering impact on the fundamentals of M&T's core business model," he added.
