AIB estimates it has lost almost €870m as a result of fraud. Siobhan Creaton looks at how AIB plans to deal with this loss and its future plans for Allfirst
AIB has said the activities it is attributing to Mr John Rusnak will wipe out about 60 per cent of its profits in 2001. It estimates it has lost $750 million (€864 million) as a result of the fraud, which will have to be found from the €1.4 billion pre-tax profits it will report on February 20th.
After tax, the deficit will show up in its accounts as a €596 million loss, or 60 per cent of the after-tax profits of €997 million for 2001.
By any standard, this is a serious hit but, if contained at this level, it does not pose any solvency issues for AIB. The immediate concern for shareholders is whether further losses will be uncovered as the investigation progresses.
Chief executive Mr Michael Buckley has said no customer funds have been affected and the fraud will have no consequences for its customers. "It's a heavy blow but one from which we will recover," he said.
Briefing the media, the bank said it was "very comfortable" that $750 million is the total cost of this fraud. Speaking to stockbroking analysts, however, the bank seemed to waver - indicating that the $750 million may not represent "100 per cent" of the eventual loss.
AIB has various forms of insurance which it will be investigating to determine whether some of its losses may be covered. It is too early to say whether such a claim would be valid. Analysts suggest much will depend on whether the fraud was perpetrated for personal gain or whether other parties benefited.
Mr Buckley has said there were indications that the fraud involved "internal and external collusion" between individuals. He suggested it was likely that much of the $750 million may have ended up with other brokerages and financial institutions, and not necessarily with Mr Rusnak.
A spokesman for AIB said it was "possible" that its losses might be covered by insurance. "Allfirst had insurance. It is not clear at this point what is covered and whether this will be covered. We won't know until the entire nature of the issue has been thrashed out."
AIB is a well-capitalised bank, with €6.8 billion in reserves to support its ongoing business. The trading losses as they stand are equivalent to about 10 per cent of its total capital base and, in the longer term, mean that the bank has far less capital on which it can earn a return for shareholders into the future.
Key solvency requirements are set for banks to ensure they have sufficient funds to meet all monies deposited by their customer base. This measure, which is known as a bank's Tier 1 capital, is adversely affected by these events but not to a degree that would cause concern.
AIB's Tier 1 ratio has been reduced by 0.8 of a percentage point, dropping from 7.2 per cent to 6.4 per cent. This is comfortably above the minimum 4 per cent set down as an international standard. Most banks try to maintain that ratio at more than 6 per cent, leaving AIB still operating well within the comfort zone.
The reduction in Allfirst's Tier 1 capital is more dramatic. It slips from 10.5 per cent to 7.2 per cent, while its total capital reduces from 13.3 per cent to 10 per cent.
The Central Bank of Ireland, which polices the banking sector, said it was in "close" dialogue with AIB and was satisfied about the solvency of the bank. It is also liaising with the US Federal Reserve.
As embarrassing as the fraud is for the bank, its impact is expected to have a relatively small impact on profits in 2002. Mr Scott Rankin, banking analyst at Davy Stockbrokers, said this year's profits would be affected by the reduced income it can generate from a smaller capital base. The bank will almost certainly have to reassess the type of risk associated with aspects of its business in the light of what has happened. This would also limit profitability.
The fiasco has also prompted fresh calls from some fund managers for AIB to sell Allfirst. AIB has been defending its continuing investment in its US franchise for some time and only last month showed further commitment to it by adding one of Canada's largest fundraising consultancies, the Ketchum Canada group.
Allfirst is a small regional player operating in a depressed economy which prompts concerns about the level of bad debts and raises questions about its long-term potential to deliver profits for shareholders. Yesterday, Mr Buckley again ruled out any immediate moves to sell the bank.
The biggest issue facing the bank now is to restore confidence in its structures to reassure shareholders and customers that this scale of fraud is not prevalent in other parts of the group.
Mr Buckley said he only learned of the extent of the problems Mr Rusnak had caused for the bank on Monday night, but that investigations had been ongoing for several weeks beforehand.
This suggests the reporting structures between AIB and its international subsidiaries will have to be closely scrutinised.
Mr Buckley, it seems, was only told about the problem when it was clear the losses were in the hundreds of millions.
