Business Irish

Sunday 23 July 2017

Dan White: AIB IPO price under threat from Spanish bailout and UK election result

AIB ceo Bernard Byrne Photo: Bloomberg
AIB ceo Bernard Byrne Photo: Bloomberg
Dan White

Dan White

The Irish Government may have to settle for less than the €3bn it had originally hoped to raise from the AIB IPO following last week's emergency rescue of Spanish bank Popular, the shock UK general election result and the recent weakness of European bank share prices.

With the AIB share application deadline for retail investors only days away, Minister for Finance Michael Noonan could have done without a last-minute spanner in the works.

Unfortunately, that's exactly what he got last Wednesday when the ECB and the Spanish government brokered a shotgun marriage with Santander, the country's largest bank, buying Popular, the country's fourth-largest bank, for just €1. That's €1 for the lot, not €1 per share. With a loan book of almost €100bn, Popular is one-and-a-half times the size of AIB.

Two days later, further clouds appeared on the AIB IPO horizon when Prime Minister Theresa May unexpectedly lost her parliamentary majority in the UK general election.

While the Santander deal saves Popular's depositors, the shareholders have been completely wiped out. With the Popular's share price having traded above 90 cent, valuing the entire bank at almost €3.8bn, as recently as the end of March that's a bitter pill to swallow.

Popular was brought to its knees by €37bn of non-performing real estate loans, over a third of its total loan book. While it had been ailing for many years, with its share price having already fallen by almost 95pc since 2014, what finally did for Popular was a run on its deposits and the ECB's verdict that it was "likely to fail" - a call that would quickly have become a self-fulfilling prophecy.

Instead it was sold to Santander, which will raise €7bn from its shareholders to plug the holes in Popular's balance sheet. While the Popular "rescue" has been widely lauded as a vindication of the eurozone's new resolution mechanism for failing banks, the markets initially hated it, with the Santander share price falling almost 2pc on the announcement of the Popular deal, but the Santander share price has recovered all of these losses and then some.

Santander's purchase of Popular bears an eerie resemblance to Lloyds' 2008 purchase of fellow UK bank HBOS, where a healthy bank was cajoled by government and regulators into buying a distressed bank. Will Santander be infected by the Popular's toxic assets in the same way that Lloyds was following its ill-advised purchase of HBOS?

Popular wasn't the only reminder that many of Europe's banks remain in rag order. On June 1 the EU finally approved a "precautionary" recapitalisation of MPS, Italy's third-largest bank, by the Italian Government. MPS has €26bn of defaulting loans on its balance sheet with last July's European Banking Authority stress test estimating that it had a capital shortfall of €8.8bn.

Although the Italian government approved the MPS recapitalisation last December, the EU has dragged its feet, arguing that the bank's bondholders, and possibly its depositors, should share some of the pain.

This has been fiercely resisted by the Italian government, which has pointed out that most of the MPS bondholders are small savers rather than large institutional investors. Under the Italian government's proposed recapitalisation only the MPS subordinated bonds, ie the very riskiest bonds, will be converted into shares.

With an Italian general election due by May 2018 at the very latest expect this one to run and run. With the price range for the AIB IPO due to be announced within days, the events at Popular and MPS couldn't have been worse-timed for the Department of Finance.

Having already had to postpone the AIB share sale last year, Michael Noonan had been hoping to take advantage of the recent strength in European bank shares to raise €3bn from selling 25pc of AIB shares to investors.

After losing five-sixths of its value between May 2007 and July 2016, the Eurostoxx index of European bank shares jumped by 80pc over the following 10 months. It was this recovery in European bank share prices that prompted Noonan to fire the starting gun on the IPO of AIB, which is headed by ceo Bernard Byrne.

However, after peaking in early May the Eurostoxx index has since turned down again losing 7pc of its value over the past five weeks. Shares in the other major Irish clearing bank, Bank of Ireland, have been among the casualties with the share price falling by 13pc to 22.5 cent over the past month. Has the window of opportunity for an AIB IPO and with it a triumphant swansong for Noonan come and gone?

Probably not. While Banco Popular and MPS demonstrate that many European banks have yet to fully address their problems, the strongly growing Irish economy - the Department of Finance is predicting 2017 GDP growth of 4.3pc - means that there will still be plenty of takers for the AIB shares later this month, the UK general election result not withstanding.

Even so, earlier hopes that the State could raise more than €3bn from an AIB IPO may have to be reined back. The recent weakness in the Bank of Ireland share price definitely points in this direction.

When asked if the Government would be prepared to accept a lower price in order to get the AIB IPO away successfully, a Department of Finance spokesperson would only say: "The Department of Finance will set a price range for the IPO towards mid-June."

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