Monday 18 December 2017

AIB and BoI have to increase mortgage rates, warns UBS

Joe Brennan

SWISS investment-banking giant UBS has warned that Irish banks need to start hiking mortgage rates to return to profitability.

It says they also need to bring in outside investment. UBS is the latest of a raft of international brokers – including Morgan Stanley, BarCap and Keefe Bruyette & Woods – to have taken another look at Irish banks in recent weeks.

The renewed interest comes as speculation mounts that Allied Irish Banks and Bank of Ireland will hit the markets over the coming months, raising billions of euro to shore up their capital bases, as the banks face up to the NAMA ‘discounts’ and spiralling loan losses on their remaining portfolios.

UBS says the Government will have to convert its entire €3.5bn of preference shares in both AIB and BoI into equity. This means the State will no longer be entitled to the 8pc – or €280m – annual dividend due on the preference shares.

It also expects that any additional raising of equity on the markets will dilute current shareholders in AIB to around 24pc and in BoI to about 22pc.

However, many other brokers believe that the Government would use its preference shares to ‘underwrite’ multibillion- euro ‘rights-issue’ share sales by both banks.

The State would guarantee to buy whatever shares were not taken up by investors – by converting its preference shares into ordinary stock.

UBS has also factored in AIB divesting of its stakes in US bank M&T and Polish unit Bank Zachodni WBK (BZWBK).

It said: “AIB needs the Irish mortgage book to reprice and the European Commission or the Government to drive domestic consolidation".

“It also needs to divest itself of M&T and BZWBK and for the Government to convert its subordinated debt into equity.”

It added that the bank needs the economy and property market to bottom out and to go to shareholders for equity.

Turning to BoI, UBS said: “Irish mortgage pricing remains a fundamental problem.”

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