Markets: Market sources believe that AIB's latest troubles could leave it vulnerable to takeover

Shares in AIB and Bank of Ireland recovered yesterday despite the continued negative publicity for both banks over the weekend.

Bank of Ireland's share price closed 3.6 per cent higher at €10.05, reversing most of Friday's losses despite the shock resignation of the bank's chief executive , Mr Mike Soden, on Saturday.

Meanwhile, AIB's share price added 2.3 per cent as it recouped some of Friday's 3.5 per cent drop as the low valuations currently attributed to both banks protected them somewhat from the negative newsflow.

However, analysts noted that the absence of US and British fund managers from the market due to bank holidays in both countries meant that the full reaction to the latest developments would not be evident until today.

"I wouldn't read a lot into how the share prices are reacting just yet," said one analyst.

In Dublin, Irish investors said the two bank stories were very different. While most regarded the resignation of Mr Soden as a one-off event and one that could be dealt with quickly, they felt that AIB faces a much more difficult time in resolving the issues it faces.

"The fact is that the market wasn't overly impressed with Mike Soden, particularly in his first year in charge," one fund manager said.

"Investors are probably not too upset to see him go and there is a very good tier of management underneath him."

Another noted that the transition to a new chief executive, expected to come from within the bank's ranks, should be effortless, after which the market would get back to focusing on fundamentals.

The worry about AIB, however, is that the fundamentals of the business are precisely what will be overlooked as the bank strives to come to terms with recent revelations about the Faldor scheme and other tax irregularities.

"The concern investors have is that the issue will take up a huge amount of management time and direct focus away from operational issues," said Mr Joe Dwyer, fund manager with Montgomery Oppenheim. "There is also the risk of customer attrition due to this."

Institutional investors also believe that AIB faces a succession issue as the credibility of its senior management has been seriously dented by the recent revelations.

"The actual substance of what has been going on is very serious. It was a wilful breaking of the rules and, even if it happened in the past, it is still very serious," said one former AIB fund manager who described the ethos within the bank "as a very macho, buccaneering-type culture".

Many in the market do not expect AIB chief executive Mr Michael Buckley to finish his term at the bank, while some believe he will be gone before the end of the year.

"It's hard to envisage him seeing out his full term. He has 18 months to run but it's hard to see him lasting that long," the fund manager added.

But the bank's chairman, Mr Dermot Gleeson, faces a difficult balancing act, market sources believe.

On one hand, there is a general view that the bank needs to hire an external candidate as its next chief executive but such a process takes time.

On the other hand, there is a concern that if a management void emerges at the top, the bank could attract unwanted bid interest.

Market sources said yesterday there was no tangible takeover speculation regarding either bank but if AIB's share price remains in the doldrums, it could yet prove vulnerable to takeover approaches from a number of British institutions.