BoI under pressure from EU to sell UK business bank and mortgages
BANK of Ireland is coming under pressure from the EU to sell its UK business bank and mortgage book, as talks on the group's state-aid restructuring plan enter the final stage.
People familiar with the negotiations said yesterday that the bank's joint venture with the British Post Office, an important source of group deposits, was not in the mix.
"It is highly unlikely the Post Office relationship would be considered as a state-aid remedy," said one well-placed source.
The Irish Independent reported yesterday that Brussels had indicated it wanted Bank of Ireland to agree to sell some of its UK operations in order to get the green light for its restructuring plan, which was first filed with the European Commission last September.
However, it was not clear at the time which assets had attracted the attention of the Commission's case officers working on BoI's viability plan.
The discussions are not expected to be completed by the time BoI unveils its results and Finance Minister Brian Lenihan delivers his keenly eyed statement on the future of the banking sector next week.
Observers expect that the bank will be given up to three years in which to execute any asset disposals, in line with sanctions imposed on other bailed-out financial institutions across the EU over the past year-and-a-half.
The EU verdict will be the last major milestone BoI's chief executive Richie Boucher must pass before launching a massive equity-raising. He is believed to be planning to set out next month to raise at least €2.5bn in a three-pronged transaction.
It is expected to comprise a 'rights issue' share sale, subordinated debt-for-equity swap, and conversion of some of the State's investment in the group into ordinary shares. The State currently holds €3.5bn of preference shares in the group.
Both BoI's debt and equity investors are likely to be relieved that Brussels is not demanding the group exit its Post Office venture, which is the source of €8bn -- or 9pc -- of its total deposits.
Goodbody Stockbrokers analyst Eamonn Hughes said that a sale of BoI's stake in the Post Office partnership "would just exacerbate the funding stresses, not alleviate them".
A key element of the EU restructuring procedure is to ensure that a viable business emerges from the process.
Mr Hughes suggested that the bank could release about €500m of capital by selling its UK broker-sourced mortgage book, which stopped take new business last year.
But he said that a bank selling a mortgage portfolio in that market would be unlikely to achieve full net-asset value -- would could see the uplift drop back to €300m-€400m.
Analysts also indicated that BoI would be hitting a "buyers' market" if it were to dispose of its UK business banking unit in the near term.
Davy analyst Emer Lang highlighted that Allied Irish Banks was likely to sell its UK business banking operation, in addition to its 23pc stake in US lender M&T.
"In AIB's case, the key issue is whether the Commission looks for a sale of Poland," she said, referring to the group's 70.2pc stake in Bank Zachodni.