Saturday 21 October 2017

The tide has gone out, out, out - and the banks have been left stranded

Brexit has banjaxed the AIB sale in Ireland and worsens Europe's banking crisis

'It isn't just in Ireland and the UK that the implications of Brexit will be felt. Even before the result of the British vote was known, Euro Stoxx had fallen by more than a third over the previous 12 months.' Stock photo: Bloomberg Finance
'It isn't just in Ireland and the UK that the implications of Brexit will be felt. Even before the result of the British vote was known, Euro Stoxx had fallen by more than a third over the previous 12 months.' Stock photo: Bloomberg Finance
Dan White

Dan White

The market response to British voters' decision to leave the EU was swift and brutal, with bank shares being particularly badly hit.

The Euro Stoxx index of European bank shares fell by almost a quarter on the referendum result. The share prices of all the major UK banks were clobbered, with Barclays, whose share price fell by a third, being worst hit. In this country, the Bank of Ireland share price was also down by a third.

This collapse in bank share prices will have major budgetary implications in both countries. Finance Minister Michael Noonan had been hoping to sell a 25pc shareholding in AIB for up to €3bn later this year. This timetable, which had already slipped into the first half of 2017, will now recede even further.

The share price is not a reliable gauge of the 99.8pc state-owned AIB's value. For the record, the current AIB share price of 5.5c implies a market capitalisation of €15bn. A far more accurate indication of AIB's value is the Bank of Ireland market capitalisation of €5.8bn (itself down from €8.8bn before the UK vote for Brexit).

The Strategic Investment Fund, which holds the State's bank shareholdings, valued AIB at €11.7bn and the 14pc Bank of Ireland stake at €1.5bn at the end of March. Even at the time these looked like aggressive valuations. After Brexit they look hopelessly optimistic.

The collapse in bank share prices means that a sale of the State's bank shareholding is now off the agenda for the foreseeable future. With less money now available to grease the political wheels, the date of the next general election has almost certainly been brought forward.

UK chancellor George Osborne had also been hoping to raise some ready cash by selling bank shares. In his autumn statement last November, he outlined plans to sell about a quarter of the UK's 73pc shareholding for £5.8bn and its remaining 9pc shareholding in Lloyds for £2bn this year.

Not now. While no official announcement was made, UK Treasury sources took advantage of the post-Brexit political turmoil to quietly let it be known that the plans for bank share sales had been shelved.

There is also mounting concern about Barclays, which avoided majority UK state ownership following the 2008 financial crisis by raising fresh capital in the Middle East. With its current market value of £23bn being only a third of its book value, it is clear that investors believe Barclays needs a capital injection. Having dodged the bullet of majority state ownership in 2008, will Barclays be so lucky post-Brexit?

It isn't just in Ireland and the UK that the implications of Brexit will be felt. Even before the result of the British vote was known, Euro Stoxx had fallen by more than a third over the previous 12 months.

Following the most recent share price falls, European bank shares have halved in value since June 23, 2015 and now stand at only one-sixth of their April 2007 peak.

The European banking crisis, which has festered since 2008, worsened following the British referendum. Since 2008, the EU and the ECB have done just enough to prevent the crisis from bubbling over, but have failed to tackle the underlying problems.

The Italian banks have been particularly badly hit, having lost more than half their value so far this year. They have an estimated €360bn of bad loans on their balance sheets, 18pc of their total lending.

Following the referendum result, the EU allowed the Italian government to provide up to €150bn of liquidity to the country's banks. However, it is still stalling on plans by the Italian government to inject up to €40bn of fresh capital into the banks. Such foot-dragging doesn't bode well for next October's Italian referendum on constitutional reform. A defeat for the government of prime minister Matteo Renzi would almost certainly bring forward the date of the next general election, which must take place by May 2018.

With opinion polls showing the opposition Five Star Movement - which has promised to hold a referendum of Italy's membership of the euro if it is elected to government - running neck and neck with Mr Renzi's Democratic Party, the omens are not good.

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