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Canadian banks rumoured to be seeking a minority stake in Allied Irish Banks

TORONTO - Reports that Ireland's second-biggest bank may have attracted a Canadian suitor were greeted with skepticism by some analysts, who questioned whether it would make sense to move into such a mature market.

TORONTO - Reports that Ireland's second-biggest bank may have attracted a Canadian suitor were greeted with skepticism by some analysts, who questioned whether it would make sense to move into such a mature market.

"The reason expansion into European personal and commercial banking has traditionally not been viewed as likely for the Canadian banks was that the banks there are big and the market is mature and concentrated," wrote Robert Sedran of National Bank Financial in a note Friday.

Both CIBC (TSX:CM) and Royal Bank (TSX:RY) were named in reports that pinned them as the interested buyer of a minority stake in Allied Irish Banks, which confirmed it has received interest from an unidentified third party.

But, AIB said the discussions were "preliminary and are not expected to progress in the near term."

"There can be no certainty that these discussions will lead to a proposal to invest in the group or a transaction being concluded."

The two Canadian banks said declined to comment on the reports.

However, the speculation helped AIB's shares gain 8.6 per cent, or 51 cents, to close at US$6.40 in New York, where it trades as an American Depository Receipt, though it has its primary listing in Ireland.

On the Toronto stock exchange, CIBC shares were down 31 cents to C$67.75 while Royal Bank stock gained 65 cents to $51.36.

Edward Jones analyst Craig Fehr said it's not implausible that a Canadian bank might want to make an investment in an Irish institution.

"It's an area where asset values are quite distressed," he said in an interview from St. Louis.

"There's a lot of government involvement in the banking system there, so if you're a bank or an institution outside of Ireland that has excess capital to deploy towards assets that are cheaply priced, this may be a market you would look at."

However, he was more skeptical that CIBC would be the more suitable Canadian bank to make the move.

"They've spent the majority of the last two years retracting themselves back into Canada," he said, noting that CIBC backed out of some capital markets investments to recoup losses from writedowns.

"The idea of them going back out into the international markets... does open up a growth avenue that they've been lacking. But, at the same time, it adds back risks that they've been trying to shed."

AIB reported significant losses in the first half of the year and has been widely expected to sell loans to the local government's National Asset Management Agency, which has been buying up real-estate debt to bolster the country's lenders.

Earlier this month, AIB said it was premature to quantify how much of its loan book could be sold to the government agency.

AIB's property development books include 660 customers who owe the bank 16-billion euros (C$24.73 billion).

Morningstar financial analyst Chris Blumas was skeptical about whether either bank was serious about making the purchase, especially CIBC.

"When I heard CIBC I thought it was silly. It doesn't make a lot of sense," he said.

Blumas suggested the CIBC probably wouldn't get the kind of shareholder support they'd need to do a deal.

"In any acquisition situation that's meaningful, the bank would need the confidence of the market because they'd either have to do the deal with shares or they'd have to raise capital," he said.

"Their financial position isn't that strong, and they're just trying to work through their own issues."

Canadian banks have fared better than many of their counterparts during the economic downturn and subsequent capital markets problems, raising the possibility that they might use the extra cash to boost their presence in other regions.

Scotiabank (TSX:BNS) is known as Canada's most international bank, with operations concentrated Latin America and the Caribbean.

Most Canadian banks have kept out of Ireland, however, because the region already has a well developed banking business, which means its often difficult for outsiders to successfully break in.

Bank of Montreal (TSX:BMO) is one of the exceptions with BMO Ireland, a capital markets business.

 
 
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