A Bank That Keeps Winning Big

09/21/2010 1:00 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The fire sale goes on at Allied Irish Banks (NYSE: AIB). On September 14, the company announced that it would sell its holdings in two Polish banks to Spain’s Banco Santander (NYSE: STD).

The deal will raise $3.2 billion for Allied Irish. Bank regulators have told Allied Irish, Ireland’s second-largest bank, to raise $9.5 billion in capital by the end of the year to avoid the government’s becoming the majority owner of the bank.

The government already controls almost 20% of the bank after putting up almost $10 billion in taxpayer money to rescue Allied Irish and the Bank of Ireland.

For Banco Santander, buying Allied Irish’s 70% stake in Bank Zachodni, and its 50% stake in BZ WBK AIB Asset Management, continues the Spanish bank’s drive to build a diversified global bank. And it gives the bank a position in Poland, the only European economy not to dip into negative growth territory during the global financial crisis.

On September 13, the head of Poland’s central bank said that gross domestic product growth could reach 4% in 2010, and on September 14, the European Commission tagged Poland and Germany as the two countries with the best growth prospects in the European Union in the second half of 2010.

Banco Santander will offer to buy the rest of the two Polish companies from shareholders after the deal with Allied Irish closes in 2011.

This won’t be the last part of Allied Irish to go on the block. The company is looking to sell a business bank in England and a consumer branch network in Northern Ireland, and its 22% stake in M&T Bank (NYSE: MTB) in the United States. Banco Santander has been rumored as a buyer for M&T as well.

Santander has enough capital to buy Allied Irish’s Polish assets without needing to raise more capital. The deal will bring the Spanish bank’s “tier one” capital down to a little over 8%. (Tier-one capital is a critical measure of a bank’s financial strength, including mostly common stock and retained earnings—Editor.)

That’s enough to easily meet the new Basel III requirement of a 7% capital ratio. (Basel III comprises the latest proposals on bank regulation made by the Basel Committee on Banking Supervision—Editor.)  Buying M&T, however, would probably require Banco Santander to go to the financial markets to raise capital.

Banco Santander is a member of my Dividend Income portfolio. And I think it is one of the beneficiaries of the need for some banks to raise capital to meet the new requirements of Basel III. (For more on those rules, see this post.)

Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio.

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