Business | Markets
AIG sold almost all it had, but it's not safe yet
Management will be very lucky to get the $30 billion the Pru offered
- Financial Times
- Published: 00:00 August 9, 2010
What on earth is one to make of AIG these days? With the US Treasury owning 78 per cent of the insurer, few investors or analysts look at the stock any more. Such was the scale and awfulness of AIG's demise and subsequent bail-out that most, it seems, would rather put the whole episode behind them.
But it is still right that US taxpayers should try to get all their money back. What chance do they have? On Friday, Robert Benmosche, AIG's president and chief executive, said that in recent weeks the company has sat down with the Federal Reserve to discuss how the insurer will repay the $27 billion (Dh99 billion) it still owes in loans and interest, as well as with the Treasury on how the government might eventually exit its equity positions.
Shrinking
To recap: AIG's plan is to shrink right down to international general insurance (property and casualty) plus domestic life assurance. It may also keep insuring mortgages. Everything else has been sold, closed or is probably up for sale. AIG has agreed to flog Alico to MetLife for $15 billion, and, post the Prudential deal falling apart, is planning to list its jewel of an Asian operation, AIA, in Hong Kong.
Management will be very lucky to get the $30 billion the Pru offered, but who knows?
All in all, repaying the Fed's credit line is easily achievable and the Fed's equity investments in AIA and Alico are attractive ones. Less certain is whether the value of what is left of AIG — CreditSights reckons a mid-case number of $55 billion — exceeds the $49 billion the government has committed in equity capital. A double-dip recession would also raise concerns about $30 billion of taxpayer loans used to buy toxic mortgage securities and derivatives, now held in two special purpose vehicles. For those still interested, AIG is not out of the woods yet.
UK banks' half-year reporting season has a Groundhog Day feel to it. Like its peers earlier in the week Royal Bank of Scotland on Friday reported a sharp fall in bad loan charges that helped offset slowing second-quarter investment banking revenue. Nor was RBS the only bank to report that net new lending in the UK was virtually flat.
For now, conditions are mostly working in favour of Stephen Hester, RBS chief executive, whose job is to create a safer, more valuable bank for shareholders, including taxpayers, who own an 84 per cent stake.
But what of the things Mr Hester can influence? Like Barclays, RBS targets an investment banking contribution of a third of total profits, so reducing risk and swings in profitability; RBS is closer to that target. Although global banking and markets delivered almost half of the core operating profit, the rebound in retail and commercial banking gained momentum in the second quarter. Further, Mr Hester has slashed GBM's balance sheet to less than half its £874 billion pre-crisis size.
No delays
Nor has he delayed in exiting businesses to reduce risk or comply with EU state aid rules, selling 22 non-core businesses and, now, the £1.7 billion sale of a portfolio of branches to Santander. Furthermore, he has kept underlying costs in retail and commercial banking broadly flat. However, although RBS met government targets for business and mortgage lending, it increased net lending only in mortgages.
In spite of progress in de-risking the bank, however, RBS's shares are still the sector laggard, trading at 0.4 times price-to-tangible book value. It does not yet have all the attributes of a low-risk post-crisis bank.
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