Thursday 21 September 2017

State's bank shares shed €6bn in less than two years

AIB’s Richard Pym says the bank is close to being able to pay a ‘prudent dividend’ to the State. Photo: Independent.ie
AIB’s Richard Pym says the bank is close to being able to pay a ‘prudent dividend’ to the State. Photo: Independent.ie
Richard Curran

Richard Curran

Michael Noonan's budget boost for first-time buyers has been described as a real bonus for developers eager to get a higher price for new builds. But it also came as a genuine lift for Irish banks who are eyeing the mortgage market as a source of real growth.

In recent years the likes of AIB and Permanent TSB just haven't had enough customers who qualified for mortgages under Central Bank rules. Cash buyers have been half the market and relatively low levels of new house builds have restricted their otherwise profitable mortgage businesses.

So news that they will have lots more qualifying mortgage customers, thanks to the taxpayer, lifted PTSB's share price by 6pc.

At PTSB around 85pc of its loans are mortgages and the figure is 50pc at AIB. There is no doubt the new 'Help to Buy' scheme should increase mortgage activity. But the NTMA, which holds the State's shares in the Irish banks, won't be raising its valuations any time soon.

European bank stocks, led by the struggling Deutsche Bank, are still badly out of favour with investors. Bank valuations are incredibly low relative to their book values.

Shares in Bank of Ireland are trading around 17c giving it a market capitalisation of €5.5bn. Its balance sheet equity at the end of June was €8.6bn.

A similar valuation metric applied to AIB would drag its valuation down to around €8.6bn, which is below the €9bn placed on the bank by the NTMA earlier this year.

Bear in mind the State valued its 99pc holding in AIB at €13.3bn at the end of 2014. This was brought down to €11.7bn at the end of 2015 and just €9bn in June of this year. A fall to €8.6bn would mark a fall in value of the bank for the State of around €4.7bn in just two years.

With European bank stock woes likely to continue, the NTMA may be rounding its €9bn figure down further come Christmas time and year end.

The State's 15pc shareholding in Bank of Ireland has halved in value this year and is €412m less than it was in January. It is €800m less than it was in December 2015. Its 75pc stake in PTSB has shed €375m this year, and is down €750m since December 2015, while the AIB valuation drop for this year is a more speculative €3bn.

Just as well the fiscal space expanded and Noonan found more money down the back of the sofa in time for the budget. It meant he didn't have to start flogging bank shares at these prices to fund old age pension increases.

Despite the progress AIB has made in cleaning up its balance sheet, the IPO is looking further and further away.

It recently announced 150 voluntary redundancies but with no branch closures or major productivity changes. As long as it is State-owned branches won't close and redundancies will be kept to a minimum

This might not be doing the bank any favours in the long run.

AIB has returned around €3.3bn to the State so far and has also paid substantial sums in levies and to cover the State bank guarantee.

AIB chairman Richard Pym said last month AIB was close to being able to pay a "prudent dividend" to the State and its legacy problems have been largely solved.

Dividends may be on the horizon but the IPO is disappearing over it.

Consumers feel the first chill winds of Brexit

It wasn't supposed to be like this. But then again, everything about the Brexit referendum defies logic. Everyone expected sterling to fall against the euro after the referendum and it did. Then it fell further when British Prime Minister Theresa May outlined her priorities in negotiations in recent weeks.

Simple economics suggests that when sterling falls against the euro, it is bad for Irish exporters to the UK who get paid in sterling. However, on the up side it is good for consumers buying goods sourced in the UK. Our buying power is increased and that is why lots of Southerners are heading across the border to buy everything from secondhand cars to washing powder.

It is supposed to be bad for UK consumers whose buying power is diminished in relation to goods sourced from the euro area.

So, there is nothing surprising about "Marmite gate" and the fact that Unilever wanted to increase the price it charges Tesco and other British multiples for its goods.

But then Unilever sought a price increase from Supervalu, selling goods in euros in Ireland. Our grocery bills should be going down, not up.

However, the integration of supply chains and cross border bulk purchasing means that Unilever is getting less euros for goods sold in sterling, so it wants a general price increase wherever it thinks it can get it.

After all, it has performance targets to meet and bonuses to be paid.

The Tesco/Unilever stand-off has been sorted but with neither side revealing the precise details of the outcome. Unfortunately, this may be just the beginning. It is also the first time that British consumers are facing into higher prices, which are inevitable.

A cheaper sterling is good for British exporters but should drive up inflation at home as consumers have to pay more for imported goods.

Consumers in Ireland have already taken to buying more goods online from British websites. In some cases, the vendor doesn't appear to be passing on the exchange rate benefit in full to Irish customers.

It looks like some of them are charging sterling prices for some and "Paddy prices" for others. But it depends on what currency they use to pay the guy who is delivering the product to your door in Ireland. If he is paid in euro, then it costs the British retailer more to send it here.

That is a higher cost. Throw in a bit of price gouging on top and you aren't getting the full sterling benefit.

Hard core committed Brexiteers in Britain believe sterling was overvalued to begin with, and its near 20pc fall is a minor over-correction. Higher prices (inflation) will eventually drive it back up to its natural level.

There is a simple textbook logic to that. But it fails to take account of the damage that at least two years of uncertainty around Brexit talks will do to the wider UK economy.

Brexit is already costing jobs in Ireland. Take the mushroom industry, where another two farms closed down this week. But this is the first time it is hitting consumers on both sides of the Irish Sea. And it is only just getting started.

Willie Walsh makes most of Irish potential

IAG chief executive Willie Walsh has joined Michael O'Leary in seeking some kind of independent review on the economic cost/benefit of the proposed new runway at Dublin Airport.

They want to see an independent assessment of the price and have questioned the need for a full 3.2km runway the Dublin Airport Authority (DAA) is proposing.

The DAA argues that the additional length is about future-proofing the runway well into the time ahead.

Walsh's IAG has a big stake in the game when it comes to Irish airports, having bought Aer Lingus, and he has big plans to use Irish airports as hubs.

British Airways hasn't wasted any time using the benefit of US Immigration pre-clearance at the likes of Dublin and Shannon Airports. BA operates 32-seater business class only flights from London City Airport to New York. The relatively small aircraft needs to re-fuel at Shannon Airport, where the 32 luxury passengers avail of custom and immigration pre-clearance.

They can then land at one of New York's airports through the domestic flights channel and avoid big queues and long delays. City of London bankers often want to fly to New York at short notice, so BA can charge them full whack.

A ticket for this week will cost you around £7,000 return. Don't worry though, you will get something a little better than a cheese toastie.

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