Should new AIB shareholders now take the money and run?
With the bank's shares set to trade unconditionally from Tuesday, it's decision time for investors who bought into the IPO
Trading in AIB shares will go unconditional on the Dublin and London stock markets this Tuesday in one of Europe's biggest bank flotations since the 2008 financial crisis. The flotation follows the Government's decision to trigger the sale of 25pc of its majority stake in the bank. This partial initial public offering (IPO) marks the first stage of the Government's plans to return AIB to private ownership.
Last Wednesday was the deadline for private investors to order their shares if they wanted to participate in the IPO. Demand for the shares was high. By mid-June, advisers on the flotation said they had already received enough orders to sell more than 25pc of the bank. The big question for the ordinary investors who took part in the IPO now is whether they should sell their shares quickly - or not. The question for those who weren't in a position to buy AIB shares under the IPO, or who didn't get to buy as many shares as they wished, is whether it is worth buying AIB shares once they are admitted to Dublin and London stock markets this week.
Investors who snapped up AIB shares as part of the IPO should keep a firm eye on the bank's share price. Such investors should be ready to sell their shares quickly if the AIB share price takes a big jump, according to Peter Brown, co-founder of Baggot Investment Partners.
"The chances of making any money on IPO shares is a lottery," said Brown, who has over 35 years' experience in financial markets. "If the AIB share price goes up after the flotation, take your profit and run. IPOs are fairground affairs. If you can buy shares under an IPO and make a profit, that's great - but you need to be prepared to make a loss too. IPOs tend to be hyped and they're never much of a winner for small investors. The value of shares [available under an IPO] often falls from the initial price because IPO's are so hyped."
The final price for AIB shares under the IPO was set at €4.40 last Friday.
The massive swings in AIB's share price in the run-up to the June flotation shows just how easy it could be to lose money on those shares.
"AIB's share price has been a rollercoaster for the last couple of months, going up by over 75pc to €9.50 in May and back down to €5.60 by June 13," said Nick Charalambous, managing director of financial advisers Alpha Wealth. "Whether you make money on the shares or not really depends on when you get on and get off - and getting the timing right is notoriously difficult. On average, IPOs lose money within three years."
Conditional trading of AIB shares started last Friday - so brokers have already been able to trade the shares on behalf of the clients who ordered them since then. It is on Tuesday when unconditional trading (that is, when AIB shares can be bought and sold on the open market) is expected to begin. Although it's almost 20 years since the Eircom IPO of 1999, many Irish people who bought Eircom shares at the time still have a sour taste in their mouths. It was largely those who sold their shares quickly after the flotation who made money on them. Most ordinary investors lost money - because they held onto their shares for some time. The experience of investors in the AIB IPO could of course be very different to those who bought Eircom shares in 1999, but the lesson of that Eircom IPO should still be heeded.
In for the long haul?
Like any share, it is impossible to know if AIB's share price will improve or decline over time. It may be worth holding onto AIB shares for a few years before you sell them if you believe AIB will perform strongly in the future and be a good long-term investment.
There are some who believe that as one of the largest banks in Ireland, AIB is a good investment. As the bank has 2.3 million customers, it has major shares in the mortgage, current account, credit card and business account markets.
In an investment thesis published by Merrion Private earlier this month, the stockbroker (one of the brokers selling AIB shares under the IPO) said that after some years of "significant restructuring", AIB "is now focused on sustainable profit growth". "We are very comfortable that AIB is well positioned to grow," said Merrion Private. "The economic backdrop for future lending growth is very attractive. Ireland is one of the strongest growing economies in Europe with the number of people in employment back to record levels."
Some investment experts however aren't as upbeat. "I'm not a fan of AIB, or any other small retail bank, as a long-term share," said Brown.
One reason he is not keen on AIB shares is that he expects interest rates to remain low for some time and banks often find themselves under pressure when rates are low. "Traditionally, small retail banks like AIB and Bank of Ireland have made a lot of money on deposit and current accounts but this isn't the case anymore - and deposit and current accounts are now costing the banks money," said Brown. "Small retail banks have to increase their loan rates to compensate for the cost of deposit and current accounts - and this makes the banks vulnerable to those who can undercut them and offer cheaper loans."
Banks tend to do well when interest rates rise or are high. However, European interest rates have been at record lows since January 2009. There has been speculation that the European Central Bank (ECB) could start to raise interest rates next year though this is uncertain and so far, rates have remained untouched. At its meeting earlier this month, the ECB indicated that it expects interest rates to remain at "their present levels for an extended period of time".
Many small investors couldn't take part in this month's AIB IPO because they didn't have the minimum €10,000 required to buy shares in the bank. Once AIB's shares can trade with no conditions on the Irish and London Stock Exchanges this week, it will be possible for small investors to buy shares in the bank without investing €10,000. Should you be a small investor interested in AIB shares, it may be worth holding off for a few months before buying. "You may be able to get AIB shares much cheaper between three and four months after the IPO," said Brown.
It's impossible to know how shares will perform in the future - but waiting for a while after the IPO before you buy AIB shares could reduce your chances of losing money on them. Charalambous believes AIB was overvalued in the share price set in this month's flotation. Should he be correct, the share price may have far to fall.
Whether you're a small or large investor, should you be considering buying AIB shares at this stage, remember it is always dangerous to pour all of your money into one investment, whether that be a particular share, a property, and so on. So should you have a lump sum to invest, it would be unwise to pour it all into AIB shares. You could lose much, if not all, of your money should those shares take a turn for the worse. Diversifying your investments - that is, spreading your money across various types of investments - is the best approach as it reduces your risk of making losses. "Shares are the riskiest investment you can make," said Charalambous. "For an investor interested in buying Irish shares, I would prefer diversification across a few Irish stocks including AIB's main rival (Bank of Ireland), Ryanair and CRH. You are buying into the Irish recovery with AIB shares - as AIB will do well if the Irish economy does."
Sadly, no-one has a crystal ball for the Irish economy or AIB shares - so tread carefully.
Sunday Indo Business