Take a glass of water and a panadol. You’re a banker now just like the rest of us taxpayers, so AIB’s 2008 results is compulsory reading as is getting a grip on the arcane language of banking accounts. Forget the headlines about a fall in pre-tax profits of 60% to a cool billion which is to be used to replenish its capital base -the trend in dodgy loans is the key. Remember, the bigger the hole, the greater your taxes will be over the years ahead and the bigger the Government cutbacks once the National Pensions Reserve Fund is drained of cash to shore up banks.  So what’s the AIB story?

AIB  point to an improvement in its costs as a percentage of income from its efficiency drives and that its crucial Tier 1 capital is up largely thanks to our €3,500 million loot from 5.8% to 8.4%. At first glance it seems Minister Brian Linehan has done the trick on the cheap and the patient will be back on his feet in jig time but unfortunately the lethal dose is in the estimate of dodgy loans.

What proportion will become losses,  over the next few years will depend on how deep and long the recession will be, especially in the property market which account for 60% of so-called impaired or non-performing loans and which is up nearly threefold since 2007. These have gone from a little over a billion to nearly three billion in just one year jumping from 0.8% of the huge €130,000 million loan book to 2.3%. Remember the impaired loans are the stuff you’ll  never see again, the bad debt write offs and the 2008 figure represents 85% of the cash we’re to lob into AIB. In essence our cash is already gone to pay for losses. You can take that panadol now.

But the impaired loan figure is just for last year. What’s the trend, how much more will we have to put into AIB to avoid it shrinking so much that it sinks the economy? Here you need a crystal ball and a strong stomach. AIB’s own estimate of “criticised loans” the stuff that needs extra management time, has jumped to a whopping €15,465million, that’s an increase of 2.3 times the 2007 figure.

But AIB has a special intensive care ward for really ropey loans called grades 11 to 13. This is the stuff one step from the mortuary and right now that’s reading just under six billion in potential imminent losses. Markets, perhaps expecting worse and no doubt relieved that the hard facts are finally coming out marked up AIB’s shares a few cent to the price of some chocolate but nothing fancy - just one of those tiny Dairy Milk bars.

For us taxpayers the message is pretty clear;

• The scale of at dodgy loans across the banks is likely to be about one eighth of their loan book.
• How much will translate into losses will depend on the depth of the recession
• Despite the capital injection AIB will shrink.
• The credit squeeze will continue lock out all higher risk borrowers including businesses
• Full nationalisation looks unavoidable if the banks can’t raise more capital themselves