ANALYSIS:The AIB that will emerge from the banking crisis will be roughly half the size of that of the boom years

THE ONCE-mighty Allied Irish Banks may be the “second pillar” in the Government’s proposed reconstructed banking sector but it will be surrounded by State struts and scaffolding for some time to come.

The bank’s announcement yesterday that it would cut more than 2,000 jobs – confirming speculation that had been circulating for about a year – overshadowed the jaw-dropping losses at the bank.

AIB made a loss before tax of €12 billion in 2010 (or €10.4 billion after tax) compared with €2.7 billion the previous year. This is a record in the bank’s 45-year chequered history, though the scale of this banking crisis has meant we have long run out of superlatives to describe the ever-deepening holes at the banks over the past 2½ years.

David Hodgkinson, AIB’s executive chairman – the bank’s third boss in as many years – insisted that “the worst was over for AIB” and that the recovery was “under way and clearly signposted”. The bank hoped to return to profitability by 2012, he said.

Let’s hope he’s right. The Government has pumped €7.2 billion into what was once Ireland’s largest bank and, following last month’s apocalyptic stress tests by the Central Bank, AIB must raise a further €13.3 billion, pushing the bill to the State to €20.5 billion.

This isn’t far off the cost of Ireland’s worst bank, Anglo Irish Bank, which has €29.3 billion of taxpayers’ funds committed by the Government. And that bank insists that it could still repay €3.5 billion to the taxpayer once it is run down after 10 years.

It’s incredible to recall that the previous government and AIB’s former management team believed back in December 2008 that €2 billion would be enough State cash to prop up the bank. Hodgkinson said the “vast bulk” of the further cash to be injected into the almost fully nationalised AIB in this fifth bailout would be repaid to the State as AIB slims down over the next three years and sheds €20 billion in loans. “It is not lost money,” he said.

AIB will emerge from this restructuring of the bank and the reshaping of the wider banking sector a shadow of its former self. The bank will roughly halve in size.

The losses to investors has been far greater. Some €18 billion has been wiped off the value of the investments of shareholders and subordinated bondholders in AIB.

By 2013, the bank will employ about 12,000 people, mostly in Ireland, compared with 25,800 when it was at its biggest three years ago. This includes the 2,000 jobs to be shed, mostly in Ireland, over two years on a phased and, in the first instance, voluntary basis.

None of the job losses will be at EBS building society, which is to be merged with AIB as part of the creation of this “second pillar” in the restructured banking sector.

Hodgkinson said EBS, which employs 650 staff across its head office and 100 branches with 400,000 customers, will be maintained as a standalone business for the time being.

AIB will be left with between €80 billion and €90 billion in loans after the shrinking of the bank, compared with a balance sheet of €180 billion at its peak.

The bank has 270 branches in the Republic of Ireland (out of about 760 across the six Irish banks). AIB said that it will look at possible closures in the cities.

For a country that was over-banked, the radical reduction in the size of the banks now required to repair the sector was always going to affect AIB the most. The bank got hooked on the property drug. Anglo made massive returns from builders in the early years of the 2003-2007 real estate boom and AIB took fright, setting up a special team to poach developers back. AIB, however, had a wider involvement in the property sector, lending heavily on both sides – to developers building the properties and customers buying them.

“There was almost a kind of collective madness, everyone went crazy and for a very long time,” said the avuncular Hodgkinson.

Formerly chief operating officer at UK financial giant HSBC, he said he had seen five property crashes during his career working in the Middle and Far East. But AIB has been a whole new experience for this career banker since he joined last October.

“I have never worked with quite as many problems as AIB had, particularly in the property sense,” he said.

Losses on AIB loans have topped €20 billion over three years. The extent of the bank’s problems is reflected in the fact that the bank is cutting the largest number of jobs in a single announcement.

Some 3,200 jobs have been cut across other banks since 2009, but none as big as 2,000.

There have been 1,000 at Ulster Bank, 750 at Bank of Ireland, 350 at Permanent TSB, 150 at National Irish Bank, 750 at Bank of Scotland (Ireland) and 200 at Irish Nationwide. This doesn’t take into account the large number of bank staff who have left in the ordinary course of business and who were not replaced. A further 4,000 jobs are estimated to be at risk across the Irish banks as they reduce in size.

Bank of Ireland, which publishes its 2010 results tomorrow, has no plans to announce further job losses. The challenge for that bank is whether it can raise the additional €5.2 billion capital bill set - following last month’s Central Bank stress tests - and avoid outright Government control.

Hodgkinson’s comments yesterday were long on rhetoric around the plans for change at AIB but short on the detail of those changes. The bank will focus on Irish customers at home and Irish ex-pat customers abroad through the UK business, which will be retained, as it splits into a core domestic business and non-core to be run down.

The lack of detail around where exactly the jobs will go angered union representatives, particularly given that this announcement had been anticipated since last year.

“It has heightened uncertainty for staff because they don’t know how they are going to be affected,” said Larry Broderick, general secretary of the bankers’ union, the Irish Bank Officials Association.

One area where Hodgkinson could provide certainty was that the bill to the taxpayer for AIB would not rise above €20 billion.

Simon Carswell is Finance Correspondent