Consolidation hopes to be hit by AIB stance

09 November 2008  By David Clerkin, Markets Correspondent

Significant doubts have been raised over the government’s plans to use the new €440 billion guarantee framework as a mechanism to encourage consolidation in the banking sector after AIB ruled out acquiring other Irish banks and building societies in the coming months.

Eugene Sheehy, chief executive of AIB, said last week that the bank would instead concentrate on ensuring it managed its existing businesses appropriately through the current market turmoil.

He said AIB was unlikely to engage in any merger and acquisition (M&A) activity in the current climate and that most banks would focus on ‘‘managing their own challenges’’, instead of seeking partners.

‘‘I think there is going to be very little [M&A] activity, really, during this level of problems and uncertainty," Sheehy told analysts last week, following the publication of a downbeat trading statement.

‘‘I think businesses are going to be very risk-averse. Certainly, we are focused on the actions we need to take to steer this business over the next couple of years, to make sure we do everything right.

‘‘From conversations that we have had with other banks, we think that, by and large, most management teams are focused on managing their own challenges, and I don’t see much M&A likelihood in the near term."

Brian Lenihan, the Minister for Finance, was granted wide-ranging powers in the legislation underpinning the guarantee to approve bank mergers if they were in the interest of preserving stability in the banking sector, even at the expense of competition-related concerns.

Banking sources had expected Lenihan to use his new powers to ensure that the Irish banking sector emerged in a stronger position when the government guarantee scheme came to an end.

The scheme is scheduled to be wound up in September 2010.

AIB had been viewed as the most likely driver of consolidation, and the bank is believed to have been sounded out by the government and Financial Regulator to establish its appetite for acquiring smaller institutions.

Sheehy’s comments, however, suggested AIB was currently unwilling to take on the loan books of other institutions, as they would expose AIB’s shareholders to unnecessary risks.