Allied Irish Banks: Introduction to Financial Services - Essay Example

? Introduction to Financial Services Table of Contents I. Introduction 3 II. Financial Performance 4 III. Strategy 7 IV. Conclusion 8 Works Cited 10 I. Introduction This paper is an examination of the financial performance as well as the business strategy of AIB. AIB Plc, or Allied Irish Banks, along with its different subsidiary organizations is in the business of commercial banking as well as retail banking operating in Ireland. There are in all four different lines of businesses that the company is engaged in, and these are EBS, AIB UK, PBB for Personal and Business Banking, and CICB for Corporate Institutional and Commercial Banking. The latter two correspond to its lines of businesses for individuals and for corporations. The most recent developments in the company’s operations and prospects include the disposal of its Latvian portfolio of mortgages to SwedBank AB, which occurred in February of 2012; the disposal of its AIB International Financial Services Limited and AIB Jerseytrust operations in 2011; the disposal of its stake in Bank Zachodni to Banco Santander SA in April 2011, comprising 70.4 percent of its total stake in that bank; the disposal of its 50 percent stake in BZ WBK AIB Asset Management likewise in April of 2011; and the acquisition of the EBS Building Society in July of 2011 (Google). It is noteworthy that while many of its activities are concentrated in Ireland, it has substantial presence in the UK, and also some presence in the United States, the latter in the form of CICB banking services on offer to corporations in the US, as well as in the UK. Moreover, it has a business segment focused solely on Northern Ireland and Greater Britain, in the form of its AIB UK business segment. This business segment is registered in the UK, and operates under the name of Allied Irish Bank GB. This business segment operates 28 full branches all over the UK, with regular banking services coupled with corporate and international banking (Reuters). Meanwhile, due to Central Bank mandates for the bank to up its capital base, AIB raised € 14.8 billion of new capital through the flotation of new shares (AIB). The series of moves tied to this flotation effectively resulted in the Irish government coming to own all but a tiny fraction of all of the ordinary shares at AIB (AIB): On 31 March 2011, the Central Bank published its 'Financial Measures Programme Report', which detailed the outcome of PCAR 2011 and Prudential Liquidity Assessment Review (“PLAR”) 2011 for certain Irish credit institutions, including AIB and EBS. On this date, the Central Bank stated that it had set a new capital target for AIB and EBS, ultimately requiring AIB and EBS to generate a total of € 14.8 billion of additional capital. This additional capital requirement was satisfied through AIB's placing of € 5.0 billion of new ordinary shares with the NPRFC, capital contributions totalling € 6.1 billion from the Minister for Finance and the NPRFC, the issue of € 1.6 billion of contingent capital notes at par to the Minister (which completed on 27 July 2011), and further burden-sharing measures undertaken with the Group's subordinated debt-holders. Following these actions, the State, through the NPRFC, now owns 99.8% of the ordinary shares of AIB (AIB). II. Financial Performance The company’s ADR is valued at $31.03 billion as of the latest stock market close, with the stock ranging in value from a high of $1.87 and a low of $0.56. The most recent stock price close is at $0.60. Below is a snapshot of the performance of its ADR stock price from September 2011 to the present (Google): Plot source: Google While data on the ADR is recent and short-term, data on the five-year financial performance of the bank is available through to 2009 from 2005, hitting the years from 2007 when the global financial crisis hit, but missing out on the past few years data, including the data relevant to its recent flotation of ordinary shares that transferred ownership of most ordinary shares to the Irish government. Based on that data, total capital went up from € 12.173 billion in 2005 to € 15.921 in 2009, while profits peaked at € 2.147 billion in 2006 before declining through to 2009, when profits sank to minus € 2.457 billion, a tremendous loss compared to historical performance over that five-year period. This is indicative of the kinds of problems that the bank faced in the aftermath of the financial crisis, even as its capital picture reflected some stability in terms of being able to retain and shore up its capital base. As discussed above, the shoring up of its capital by an additional € 14.8 billion through its shares flotation means that the bank has further strengthened its capital position. The transfer of virtually total ownership of all ordinary shares to the government also has implications for the stability of the bank moving forward. It essentially has the backing of the Irish government Treasury from here on, and can be relied on for some fiscal and management prudence, as well to get help in case of future crises (Google; AIB). Meanwhile, an examination of the key financial ratios for the bank yields some insights into the financial condition and performance of the bank that shows some weaknesses. For instance, below are the valuation ratios of the bank. It is noteworthy that it has a very high beta compared to the industry and the sector in general, by a factor of four higher, indicating high volatility for the stock. Moreover, its P/E valuation at the high side is just a sixth of what the industry commands, at just 7.27 compared to 42 for the sector. Its price to sales ratio is high, even as its price to book value is on par with the sector and the industry. These figures reflect an investor community that has come to value the AIB stock at a substantial discount in comparison to the rest of the industry and the sector, reflecting a lack of confidence in the bank’s prospects in general (Reuters (b)):   Company Industry Sector P/E Ratio (TTM) -- 26.53 25.01 P/E High - Last 5 Yrs. 7.27 41.95 133.37 P/E Low - Last 5 Yrs. 3.06 8.41 83.31 Beta 4.12 1.27 1.22 Price to Sales (TTM) 23.89 4.86 5.56 Price to Book (MRQ) 1.84 1.90 1.78 Price to Tangible Book (MRQ) 2.01 2.48 2.87 Price to Cash Flow (TTM) -- 6.39 12.66 Price to Free Cash Flow (TTM) -- 1.72 3.09 % Owned Institutions -- -- -- Table Source: Reuters (b) Looking at the other ratios, its debt to equity ratio is double that of the sector average, and reflects a heavily leveraged financial position, owing debt that is twice the level of the sector in comparison to its equity. Its operating margins are highly negative, and its net margins too are negative, in comparison to the net positive margins of the sector. The management effectiveness ratios, meanwhile, reflects negative returns on equity and negative returns on assets in the near term, and over the past five years, lagging sector and industry average returns, which, though small, are marginally positive (Reuters (b)):   Company Industry Sector Return on Assets (TTM) -4.48 0.76 1.27 Return on Assets - 5 Yr. Avg. -1.68 0.94 1.38 Return on Investment (TTM) -- -0.00 1.14 Return on Investment - 5 Yr. Avg. -- -0.00 1.12 Return on Equity (TTM) -57.11 9.62 8.20 Return on Equity - 5 Yr. Avg. -29.92 11.90 10.23 Table Source: Reuters (b) The picture that emerges from the above assessment of the financial condition and performance of the bank reveals a firm that on the one hand has come to fix its capital base inadequacies and has come to be essentially a bank with common shares ownership concentrated on the Irish government, and on the other a bank with historically respectable financial performance, deteriorating from 2007 onwards on key financial metrics such as profitability, valuation, and returns on equity and returns on assets (Google; AIB; Reuters; Reuters (b)). III. Strategy The bank itself identifies the key pillars of its strategy as it relates to shoring up the bank’s profitability to a sustainable path by 2014, while in the process, and subsequently, likewise helping the Irish economy get back on its feet. On closer inspection these are the key goals of the strategy too, with the strategy itself consisting of several legs, focusing on the customer relationships, shoring up operations, strengthening the leadership, renewing focus on innovation and technology, revisiting the way the bank manages its distribution network, and developing the relationships of the bank with its key stakeholders, among them the government entities such as the Irish Central Bank and the Irish government’s Finance Department (AIB (b)). It is important to note the relationship of the strategy to the recent developments in the ownership of the bank’s common shares. The requirement to increase the capital of banks necessitated what amounted to a capital infusion by the Irish government, in exchange for that ownership structure for the bank’s common shares. This effectively makes the government the single biggest stakeholder in the bank, and by proxy, the Irish people represented through the government buy in. Public interest, therefore, becomes an important consideration in the drafting and execution of the strategy. It is no accident that one of the key legs of that strategy involves the close coordination of the management of the bank with the key government institutions tasked with managing the Irish economy in general, and the banking system. These are the Irish Central Bank and the Department of Finance of Ireland. From here on, viewed one way, the steering of the bank, the crafting of strategy and the execution of that strategy will effectively have substantial inputs from the government. Viewed one way too, that reality means that in large measure the strategy of the bank will have to reflect the overall goals and strategies of the government with regard to managing the economy. This means, for instance, aligning the bank’s loan disbursement policies in line with government’s policies relating to risk levels. This can affect the kinds of loans and activities that the bank can get in. Moreover, from a strategic point of view, achieving sustainable profitability may take equal priority with a host of other pressing national priorities, such as providing liquidity to the market, and providing priority loans to activities that are essential but may not necessarily bring in as large profits as when those funds are channeled somewhere else. In gist, therefore, the strategy of the bank, as the bank itself crafted it, conveys the message of the bank taking on general public interests as an overriding consideration for its key strategic decisions moving forward (Google; AIB; AIB (b); Reuters; Reuters (b)). IV. Conclusion The reality is that from a financial performance and condition point of view, AIB faces challenging prospects in terms of shoring up its investor attractiveness, and shoring up its profits, revenues, and efficiency at managing its assets and equity. It is a bank that has a high level of leverage relative to its assets, and is not profitable. On the other hand, it has adequate capitalization, further improved by the government’s effective infusion of new capital into the bank. This infusion impacts strategy. The key goals of the present strategy are returning the bank to profitability that is characterized by sustainability, as well as aligning the bank’s overall firm goals with the national interests and the goals of the Irish government in general (Google; AIB; AIB (b); Reuters; Reuters (b)). Works Cited AIB. “Development in Recent Years”. AIB.ie. 2012. Web. 15 November 2012. AIB (b). “Strategy”. AIB.ie. 2012. Web. 15 November 2012. Google. “Allied Irish Banks PLC (ADR)”. Google Finance. 2012. Web. 15 November 2012. Reuters. “Profile: Allied Irish Banks PLC (AIBYY.PK)”. Reuters.com. 2012. Web. 15 November 2012. Reuters (b). “Financials: Allied Irish Banks PLC (AIBYY.PK)”. Reuters.com. 2012. Web. 15 November 2012. Read More