Allied Irish Bank's last chance to avoid nationalisation

Eugene Sheehy told investors last October that he'd rather die than raise equity. Luckily the Allied Irish Banks boss, who has announced his imminent "retirement", won't have to make good on that pledge.

His forthcoming departure, along with that of finance director John O'Donnell and chairman Dermot Gleeson, is the bank's last chance to prove that it deserves to remain in private hands. One more mishap and finance minister Brian Lenihan will have no choice but to nationalise it.

These departures suggest that Ireland's finance minister, who speaks for 25 percent of AIB's shares, is at last taking a tougher line with the bank. Sheehy et al have stubbornly resisted admitting the scale of their problems.

And AIB is in a very deep hole of their making. Loans to builders more than doubled between 2005 and 2008, on Sheehy's watch, and accounted for more than a third of the Irish loan book in 2008. Even worse, almost a fifth of AIB's property loans were secured against Irish land-banks.

As the credit crunch deepened, the board's reaction to it seemed to part company with reality. They raised AIB's dividend by 10 percent last July only to scrap it altogether four months later. Only last month did the bank finally admit that it will need no less than 5 billion euros of new capital, of which 3.5 billion euros is coming from the Irish taxpayer. Given his prior statements, Sheehy had backed himself into a corner.

His departure clears the way for AIB to raise new money and shift some of its property loans into the National Asset Management Agency, (NAMA), Ireland's bad bank. Davy Stockbrokers expects AIB to move 30 billion of assets.

In view of the discount NAMA is likely to apply, the bank could end up taking a 6 billion euro hit, leaving it with core equity of just 1.7 billion euros or 1.6 percent of risk-weighted assets.

Lenihan has left the door open to private capital to plug the hole, while promising that the state would step in if necessary. If that promise is called, the Irish taxpayer would end up as the majority shareholder in AIB, possibly holding up to 80 percent.

Lenihan is understandably reluctant to take AIB fully into state ownership. The pressures to lend to politically-popular sectors, like farming and, again, home-owners, would be intense. Nor does the Irish state enjoy unlimited access to cash on the wholesale markets.

However, whether he nationalises or not depends on AIB's ability to recruit credible new management and to come up with a believable financial plan for the business. If either of those conditions aren't met, Lenihan's hand will rightly be forced.

-- Margaret Doyle is a Reuters columnist. The opinions expressed are her own --

By Margaret Doyle

LONDON, May 5 (Reuters) -