International rating agency Standard & Poor's has downgraded its rating for AIB to reflect the fall-out from the $691 million (€784.5 million) fraud at its US subsidiary Allfirst. The agency has stated that while the outlook for the bank remains stable, it will take some time for it to recover from the damage done to its reputation.

Standard & Poor's had placed the bank on credit watch - effectively on alert for a possible change of credit status - in the immediate aftermath of the fraud. This has now been removed with the rating agency concluding that the outlook for AIB is stable but that its overall rating, reflecting its financial strength, should be downgraded.

The "public perception of weaknesses in risk management" is cited as the primary reason for the downgrade with Standard & Poor's stating that this impacts on the bank's ability to raise money in the capital markets and to implement its long-term growth strategy for Allfirst.

Standard & Poor's director Mr Walter Pompliano said the lower rating also factored in the considerable risk attached to AIB's Polish operations and weaker global economic conditions.

The agency notes AIB's leading position in the Irish economy and its good performance track record despite the massive losses. "AIB's financial profile remains sound despite the $691 million losses incurred at its US subsidiary, Allfirst, which stemmed from the breakdown in internal risk procedures surrounding Allfirst's proprietary foreign exchange trading," Standard & Poor's said.

The weaknesses which facilitated the fraud at Allfirst were identified during an investigation carried out by Mr Eugene Ludwig on AIB's behalf.

Standard & Poor's said Mr Ludwig's conclusions that weaknesses in the controls systems at Allfirst's treasury division, and broader failures to detect the fraud which was perpetrated over a five-year period, had negative implications for AIB's reputation and franchise.

It believes that AIB will continue to support Allfirst and that any further fall-out from its treasury losses will not have a material impact on AIB or Allfirst.

"AIB is taking significant steps to ensure the integrity of its risk management procedures and practices and its overall strategy, including its commitment to its US division, remains broadly unchanged. Standard & Poor's believes that the timeframe for AIB to recover from the damage to its reputation might take some time."

All of the bank's businesses will be affected by weaker global economic conditions but the agency expects AIB to manage this slowdown in a controlled manner.

AIB's share price closed up 19 cents at €14.04 on the Irish Stock Exchange yesterday.