22 January, 2011

Ireland Bank Mergers & Acquisitions (Allied Irish Banks)

Photo: Two older Northern Irish (British) pound banknotes issued by the former Provincial Bank of Ireland and Allied Irish Banks. The Irish Republic’s currency was the Irish punt between 1938 and 1998, and the Euro since 1999. Northern Ireland, as part of Great Britain, uses the British Pound Sterling.

Allied Irish Banks, plc (AIB Group)

Allied Irish Banks was formed in 1966 through the three-way merger of the Provincial Bank of Ireland, the Royal Bank of Ireland and the Munster and Leinster Bank. All three founding members were established long before Ireland gained independence from Britain in 1922.

The Provincial Bank of Ireland

Of the three, the Provincial Bank of Ireland was the oldest, having been founded in 1825. Despite its Irish focus, the bank was backed by Scottish investors and had its head office in London.  The Provincial Bank pioneered branch banking in Ireland, and forced the incumbent and much larger Bank of Ireland to quickly follow suit to establish offices outside of Dublin. 

Long an innovative bank, the Provincial was also one of the parties that pushed for the creation of a clearing house in Dublin in 1845. The clearing house was a centralized place where bills of exchange and cheques were swapped and cleared and balances settled amongst the banks. In the second half of the 19th century, the Provincial Bank became closely associated with the burgeoning linen industry in Ireland.

Some 31 years after Ireland gained independence from Britain, the Provincial Bank of Ireland finally relocated its head office from London to Dublin in 1953.

The Royal Bank of Ireland

The Royal Bank of Ireland opened for business in 1836 and initially served mostly the wealthy Protestant merchants. The name “Royal” obviously dated from a time when the entire Ireland was a part of the United Kingdom of Great Britain and Ireland. Following the establishment of the Irish Free State in 1922, a civil war broke out between the pro-Anglo Irish Treaty forces and those against it. It was during this divisive and violent time that Royal Bank of Ireland exchanged its own Northern Irish business for Belfast Banking Company's operations in the Irish Free State.

Interestingly, as the Big Four on the Irish Isle today all started long before Ireland became independent, they have always operated in both the north and the south. Hence, Allied Irish Banks and Bank of Ireland, both based in Dublin, also operate in Northern Ireland. Similarly, Ulster Bank and Northern Bank, both based in Belfast, have major operations in the Republic. The Irish may not agree on religions and politics, on money matters the border doesn't seem to affect their choice of bank. It should be pointed out, however, that Ulster Bank is part of The Royal Bank of Scotland Group whereas Northern Bank is now a subsidiary of Denmark's Danske Bank.

The Munster and Leinster Bank

The Munster and Leinster Bank can loosely trace its origins to the establishment of the Munster Bank in 1864 in Cork.  The southern Irish bank expanded quickly and gained a foothold in Dublin in 1870 when it acquired prominent private bank David La Touche & Son. The La Touches were Huguenots (French Protestants) who fled to the Netherlands in the 1680s and migrated to Ireland with Protestant King William of Orange during the Battle of the Boyne.  The La Touche family established a flourishing weaving business in Dublin and branched into the private banking business in 1713.  The family became major backers of founding of the Governor and Company of the Bank of Ireland in 1783.  In 1870, the family sold their Dublin-based private bank David La Touche & Son to Munster Bank.

In 1885, Munster Bank suffered a devastating bank run following allegations that the bank made un-recoverable loans to its directors.  Following Munster Bank's collapse, the government brokered (but financed by private investors) the creation of Munster & Leinster Bank in 1885, taking over the deposits and branch network of the bankrupt Munster Bank. With its extensive branch network in rural Ireland, Munster and Leinster was the average folks’ choice of bank.

Allied Irish Banks

Despite the creation of Allied Irish Banks in 1966, the Royal, the Provincial and the Munster and Leinster continued to operate under their own names for some years. By 1971, they operated more than 280 branches in Ireland and another 46 in Northern Ireland.

In 1977, Allied Irish Banks opened a branch in New York. Six years later, it acquired a 43% stake in American regional bank First Maryland Bancorp, which operated the First National Bank of Maryland. AIB’s stake in First Maryland was raised to 49% in 1988 at which point the Irish bank launched an offer to fully privatize First Maryland.

In 1990, Allied Irish Banks formally adopted the abbreviation AIB, though in legal matters “Allied Irish Banks” remains in use.

Recent transaction(s):
  • In May 1991, AIB purchased TSB Northern Ireland from TSB Bank plc (the former Trustee Savings Bank, see entry under Lloyds Banking Group). Following the purchase, Allied Irish changed the name of its Northern Ireland division to First Trust Bank.
  • In December 1991, AIB acquired York Bank & Trust Company in Pennsylvania. The enlarged First Maryland now had branches in Pennsylvania, Delaware and Washington DC.
  • Between 1995 and 1997, AIB bought 60.1% of Polish bank Wielkoposki Bank Kredytowy.
  • In 1999, AIB bought 80% of another Polish bank Zachodni from the Polish state treasury.
  • Also in 1999, AIB acquired 24.9% of Keppel TatLee Bank of Singapore.
  • In 2001, AIB’s Polish holdings were combined to form Bank Zachodni WBK, the 5th largest bank in Poland, in which AIB had a 70.5% stake.
  • Also in 2001, AIB sold its stake in Singapre's Keppel TatLee Bank to Oversea-Chinese Banking Corp (OCBC).
  • In February 2002, AIB's U.S. unit Alltrust Financial discovered that currency trading losses totalling USD $750-million had been run up by a rogue trader named John Rusnak. Mr. Rusnak apparently hid the losses by falsifying bank records. The resulting scandal caused Allied Irish's share prices to tumble. Later in 2002, AIB decided to merge (sell) its Alltrust Financial unit with Buffalo-based M&T Bank in exchange for a 22.5% stake in M&T, plus USD $865-million in cash. The whole deal put a value of about USD $3.1-billion on Alltrust Financial.
  • In 2007, AIB bought AmCredit for Eur 40-million. AmCredit was a mortgage lending specialist in the Baltic region and operated 13 outlets across Latvia, Lithuania and Estonia.
  • In 2008, AIB bought 49.99% of Bulgaria's Bulgarian-American Credit Bank AD (BACB) for Eur 216-million (USD $318-million). BACB specialized in providing secured financing to small- and medium-sized enterprises. It had four offices and a mobile staff of 130 employees to cover another 15 cities.
  • Following the collapse of the U.S. housing market in 2007, losses from the collateralized debt obligations (CDOs) soared to billions of dollars around the world, and the inter-bank credit market froze during the summer of 2008. As funding sources dried out, some of the world’s largest banks were on the verge of collapse, including Citigroup, Wachovia, Washington Mutual, HBOS (Halifax-Bank of Scotland), Royal Bank of Scotland, Fortis and all three of Iceland’s commercial banks. Ireland’s Allied Irish Banks, Anglo-Irish Bank and Bank of Ireland were no exception and certainly would have gone down without state aid.
  • On 2008-09-30, the Irish government had to offer a sweeping guarantee covering all deposits and loans at six major Irish banks (including AIB) to prevent a panic run on the banks. The unconditional state guarantee would be effective at least until the end of September 2010.
  • In December 2008, the Irish government announced plans to recapitalize the three largest Irish banks for Eur 5.5-billion. The government offered AIB Eur 3.5-billion (USD $4.92-billion, GBP 3.26-billion) in return for perpetual preference shares with an annual yield of 8%. The purchase gave the government a 25% indirect stake of AIB.
  • In mid 2009, the Dublin government announced the creation the National Asset Management Agency (NAMA) to take the bad loans off the books of distressed Irish banks. NAMA planned to buy between Eur 20-billion to 25-billion of AIB’s bad loans at a significant discount. The resulting loan loss would require AIB to raise more capital from the Irish state or private investors.
  • In September 2009, NAMA unveiled plans to pay a number of Irish financial institutions Eur 54-billion (USD $79.5-billion) to unload Eur 77-billion (USD $113.4-billion) of bad loans from their books. The financial institutions would record losses of 30% of the loans. However, as the poor quality of the loans was revealed in 2010, the Irish government significantly lowered the percentage that it offered to take over the bad loans during 2010.
  • In March 2010, the Central Bank of Ireland published its Prudential Capital Assessment Review (PCAR), which required AIB to raise Eur 7.4-billion in addition to the proposed sales of AIB’s bad loans to NAMA, as well as the proposed sales of AIB’s Polish and American operations. The amount of additional fresh capital requirement was further raised to Eur 9.8-billion in November 2010.
  • In April 2010, AIB transferred its first tranche of bad loans to NAMA. AIB received Eur 1.9-billion for loans with a book value of Eur 3.3-billion, representing a “haircut” of 42%.
  • In July 2010, AIB transferred its second tranche of bad loans to NAMA. AIB received Eur 1.4-billion for loans with a book value of Eur 2.73-billion, representing a “haircut” of 49%.
  • In September 2010, AIB sold its 70.4% stake in Poland’s Bank Zachodni WBK S.A. and 50% stake in BZWBK AIB Asset Management to Banco Santander for Eur 3.09-billion (USD $3.97-billion). Bank Zachodni WBK was Poland’s No. 3 bank and had 512 offices. The sale generated Eur 2.5-billion of tier 1 capital for the troubled Irish bank.
  • In October 2010, AIB sold its 22.4% stake in U.S. regional bank M&T Bank Corp. for USD $2.07-billion (Eur 1.5-billion). The sale raised AIB’s tier 1 capital by Eur 900-million.
  • Between 2010-06-30 and 2010-11-16, a total of Eur 13-billion (UD$ 18-billion) of deposit was withdrawn from AIB, mainly due to wary corporate and institutional clients transferring their cash away from the debt-crippled bank.
  • Between November and December 2010, AIB transferred two more bad-loan portfolios to NAMA. AIB received Eur 5.1-billion for loans with a book value of Eur 12.5-billion, representing a “haircut” of 59%.
  • On 2010-12-23, the Irish government injected Eur 3.7-billion (USD $4.85-billion) into AIB to raise its stake from 18.6% to 49.9%. The government also planned to exercise its Eur 3.5-billion of convertible non-voting stock in the bank in early 2011, raising its ownership to 92.8%, effectively nationalizing Ireland’s largest bank. AIB still needed to raise another Eur 6.1-billion by the end of February 2011 to meet its Eur 9.8-billion fresh capital requirement. As part of the restructuring, AIB’s stock listing would move from the Irish Stock Exchange’s main board to the Enterprise Securities Market as of 2011-01-26.
  • In February 2011, Allied Irish Banks (AIB) paid Eur 3.5-billion (USD $4.81-billion) to acquire Eur 8.6-billion (USD $11.78-billion) in deposits and Eur 12.2-billion (USD $16.78-billion) in NAMA bonds held by Anglo Irish Bank. The purchase price basically represented the value differential between the total deposits and the NAMA bonds. In addition, AIB also bought Anglo Irish's Isle of Man unit for Eur 200-million. The government-brokered deposit sale was a major step to wind down the bankrupt Anglo Irish Bank, which lost Eur 12.7-billion in the 15 months ending on 2009-12-31 and another Eur 17.6-billion in fiscal 2010 from non-performing commercial real estate loans.
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