Tuesday 20 February 2018

AIB to tap bond markets for up to €5bn under tough rules to protect savers

AIB chief executive Bernard Byrne
AIB chief executive Bernard Byrne

Gretchen Friemann

AIB will tap bond markets for up to €5bn to comply with new legislation aimed at shielding savers from another banking crisis, according to the lender's prospectus.

The document warns that "meeting these requirements may cause AIB to incur higher-than-expected wholesale funding" and necessitates an overhaul of its corporate structure.

The tougher rules, which have been flagged for some time, mean the bank must hold an emergency general meeting in the autumn, a few months after its shares resume normal trading on the London and Dublin stock exchanges following a €2.6bn to €3.3bn initial public offering.

While the reorganisation is largely technical it will require the publication of another prospectus and is likely to entail millions in fees to bankers, lawyers and accountants.

Bank of Ireland refashioned its corporate structure in April and paid advisers €10.5m.

However, prospective investors in AIB's float are more likely to be interested in the potential impact the wholesale funding will leave on the bank's net interest margin, a key profit marker for the lender.

The Government's bail out of the banks along with relatively slow rates of credit growth have obviated any need for the Irish banks to tap wholesale funding markets in a significant manner.

But the incoming European MREL standard obliges lenders to issue billions in loss absorbing debt, issued from a holding company that is at a remove from an operating company that controls the deposits of ordinary savers.

Effectively it marginally subordinates senior bond holders to depositers.

Yet as this is a new debt structure, and given the Irish banks have been absent from the market in a meaningful way for some time, it is unclear how debt investors will react.

For that reason, Bank of Ireland is expected to be the first out of the blocks with its issuance setting a benchmark for AIB and Permanent TSB.

As the Central Bank has yet to clarify exactly how much special debt the banks must hold and by when, the timing of the bond sales remain unclear.

Analysts calculate that Bank of Ireland will have to issue €4bn-€6bn, with the lower end of that target hit in 2019.

AIB may need to issue €3bn of bonds by the same period, while PTSB, which had its holding co structure in place years ago, is likely to require close to €2bn.

According to one source, Bank of Ireland will be the first to tap markets as it's perceived as the strongest among the banks with a lower level of non-performing loans.

While AIB's credit rating is now investment grade, alongside Ulster Bank and Bank of Ireland, management have guided the market to expect a yield of about 1.5pc over the SWAP rate.

But it is the level of excess capital that may weigh on the bank's NIM and potentially chip into its valuation.

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