2nd UPDATE: AIB Needs EUR1.5 Billion Cap On Top Of Earlier EUR3.5 Billion

Allied Irish Banks PLC (AIB) said Monday it needs an additional EUR1.5 billion in fresh capital on top of EUR3.5 billion the government promised to inject two months ago, aiming to raise the extra funds through asset sales by the end of this year.

The bank said market worries about its capital strength had persisted since February, when the state cash was offered and that government-sponsored stress tests showed it needed more funds than previously thought.

AIB said: "Following discussions with the minister for finance and reflecting his desire to ensure that systemically important banks would remain adequately capitalized, even in stressed scenarios, we have decided to take further action to strengthen our capital position."

An AIB spokesman said it was too early to say which assets the bank may sell, though an analyst noted that it has a 24% stake in M&T Bank (MTB) in the U.S. and about 70% in Poland's Bank Zachodni (BZW.WA).

AIB's Bank Zachodni stake currently has a market value of around EUR884 million. The Polish bank declined to comment on speculation that AIB may sell it.

The bank's decision to boost capital by selling assets marks a turnaround from its earlier stance and follows a government decision that any further capital injections from the state would be in the form of equity capital.

The analyst estimated that raising EUR1.5 billion through new equity at AIB's current share price would result in a 65% dilution for existing shareholders.

The announcement lifted AIB shares in London and Dublin. At 1000 GMT, in London they were up 4 pence, or 4%, at 95 pence, outperforming the Stoxx Europe 600 banks index, which was down 2.5%. In Dublin, the shares were up nearly 14%. They have fallen by around 44% since the start of 2009 and are down almost 93% in the last year.

Last month, AIB said 2008 net profit fell 61% due the Irish property market crash and a surge in impairment charges and said the operating environment remains "extremely difficult."

For the year, net profit dipped to EUR767 million from EUR1.95 billion in 2007. There was a significant deterioration in asset quality, most notably in property, the bank said at the time.

AIB said Monday it will take part in the government's planned National Asset Management Agency (NAMA), the details of which are still being thrashed out.

In February the Irish government announced a long-awaited bank recapitalization of AIB and Bank of Ireland PLC (IRE), investing EUR3.5 billion worth of Core Tier 1 capital in each.

Under the terms of the plan, the government will get preference shares with a fixed dividend of 8%, payable in cash or ordinary shares in lieu. These preference shares can be repurchased at par up to the fifth anniversary of the issue and at 125% of face value thereafter.

The minister can appoint 25% of the directors to both banks and also gets 25% of total ordinary voting rights in respect of change of control and board appointments, according to the details of the plan.

Company Web site: http://www.aib.com

-By Digby Larner, Dow Jones Newswires; [phone]; [e-mail]

(Malgorzata Halaba in Warsaw and Kimberly Vlach contributed to this item.)