Saturday 16 December 2017

€3bn range in valuations shows pricing AIB shares is more art than science

AIB chief executive Bernard Byrne. The sales pitch from the bank is that it will grow as the economy – particularly housing – recovers
AIB chief executive Bernard Byrne. The sales pitch from the bank is that it will grow as the economy – particularly housing – recovers
Donal O'Donovan

Donal O'Donovan

AIB could have a "credible" valuation anywhere between €11bn and €14bn, according to analysts at Investec yesterday.

At the top of that range the State's sale of a 25pc stake would reap €500m more for taxpayers than the €3bn expected when the deal was being prepared for launch.

A €14bn valuation would suggest AIB is worth almost two Bank of Irelands.

But the gap between €11bn and €14bn is so vast in both real and percentage terms, just weeks before the deal is due to price, that all it really does is highlight the massive difficulty of pricing bank shares.

That matters, because pricing this bank's shares is what big and small investors will have to do before deciding if they're willing to buy the stock.

Banks are complicated businesses - even relatively straightforward ones like AIB. Their main source of income - interest - comes in over decades.

It takes years to know whether today's lending decisions prove sensible, while the risk taken by lenders is taken on from day one.

A bank that appears to be throwing off cash may well simply be digging a hole for itself.

Even if the Irish property crash had only been half as deep, tracker mortgages could still have become a massive and destabilising issue, for example.

It does look like AIB right now is set fair as a straight bet on the Irish property market, overwhelmingly geared-up to lend into the mortgage market.

The sales pitch from the bank is that AIB will grow as the economy, and especially the housing market recovers.

Even if that's right, whether AIB can read the market well enough to ride the wave without being swept away by it, again, remains to be seen.

AIB shares are already so notoriously prone to erratic and irrational swings that there's a name for it - the eejit trade.

Before Michael Noonan fired the starting pistol on the share sale this week, the stock had traded at as much as double the price big investors will ultimately pay for AIB.

Having come through the crash, AIB is now "highly profitable and well capitalised," Investec reckons.

Its certainly true that regulators in Dublin, Frankfurt and London have been crawling all over the bank for almost a decade now. It seem unlikely there are skeletons we don't know about in AIB's closet after all that.

But, that is something individual investors will have to assess for themselves.

A formal prospectus and guidance from the banks running the sale on a price range - based on early soundings with investors - is due around mid June.

That will focus the valuation range and better help potential buyers make up their minds.

By then the final date for the share sale should also be known - with indications its likely to be at the end of June.

A successful flotation at that stage will see at least some of the risks associated with AIB shifted off taxpayers and back onto the financial markets, but with an equal portion of the potential profits to be made by the bank transferred the same way.

Irish Independent

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