Irish literature and music is full of tales of trouble, sorrow and woe, and Allied Irish Banks (NYSE:AIB) is trying hard not to become part of that canon. Allied Irish has been walloped by the same overheated markets and poor underwriting decisions that have hammered many Western banks, and Allied Irish is scrambling to shore up its capital. Although asset sales will help, Allied Irish could be in for a long slog as what the company needs most of all is a healthy operating environment, and that looks to be a ways off.
A Housing Bubble Taken to "11"
Once called the "Celtic tiger", Ireland hit the rocks harder than most other Western economies. Not only were there bubbles in residential and commercial real estate, but the export-driven economy has taken a serious hit from the decline in demand throughout Europe. Allied Irish found itself in a situation where it had become dependent upon wholesale funding to fill the gap between loan demand and deposit supply, and then found its loan book going very bad very quickly. Even though Ireland has set up a government-sponsored "bad bank" to take on bad loans, Allied Irish still saw one-quarter of its loans in some state of concern at the end of its June quarter. AIB reports credit in "watch", "vulnerable" and "impaired" categories, and the 25% refers to the combination of all three. (For more on housing bubbles, check out 5 Steps Of A Bubble.)
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