Thursday 19 April 2018

Banks face challenge on fund-raising deadline

Brussels may issue its decision on lenders' restructuring plans as early as next month

Brian Lenihan has said the loss-making banks must resolve their capital issues in the first quarter. Photo: Frank McGrath
Brian Lenihan has said the loss-making banks must resolve their capital issues in the first quarter. Photo: Frank McGrath

Joe Brennan

The country's two top banks are vying for first-mover advantage in a multi-billion euro effort to raise fresh capital from financial markets.

Sources said it is unlikely that Bank of Ireland and Allied Irish Banks will choreograph their rights issues over the coming months -- raising the prospect of both competing in the market for investment at the same time.

Finance Minister Brian Lenihan upped the ante this week when he said the loss-making banks must resolve their capital issues in the first quarter.

But banking sources said it will be "challenging" for both to have necessary clarity on a number of issues, including NAMA discounts, by the end of the first quarter in order to pitch a share sale to the market.

Mr Lenihan estimated last September that Ireland's lenders face an average 30pc discount on €77bn of loans bound for the "bad bank".

However, recent cautious comments from the banks and anecdotal evidence suggest that the average will be deeper.

"We were surprised by the certainty the minister appears to be attaching to the first quarter," said one senior banking source, "but we will be pulling out all the stops."

Trading update

Bank of Ireland is slated to give the market a trading update in mid-February, while Allied Irish Banks is due to unveil its full-year figures on March 3. A source familiar with capital planning at the other institution said Mr Lenihan's comments has "focused minds" and that "you can expect discussions with the minister's people to commence in earnest again very soon".

Government sources believe, however, that another key market concern for investors -- Brussels' decision on their respective restructuring plans -- could largely be hammered out by late February, which is earlier than many observes expect.

The European Commission's say on AIB's and Bank of Ireland's viability plans will be key to any investment case.

Analysts largely believe Brussels will demand AIB sell its 23.5pc stake in US lender M&T and 70.2pc-owned Bank Zachodni. The sale of both stakes could generate up to €2.5bn of capital, but a resultant dramatic retrenchment of AIB's geographical profile back to Ireland may put some international investors off. Banks would also have to provide the market with a degree of confidence on the level of losses coming down the tracks on their mortgage and business books, which, analysts currently believe, will be as deep as their NAMA discounts.

All told, the market believes BoI needs to raise almost €3bn and AIB up to €4.5bn to raise equity tier one capital ratios -- a key measure of the financial stability -- to 8pc by the end of the crisis.

BoI chief executive Richie Boucher has acknowledged that 8pc has become the new figure that will be demanded of the financial markets, versus 4pc before the crisis.

But it is understood that both banks initially only want to hit a ratio of no greater than 6pc through equity raisings within the next few months, before gradually increasing it to 8pc over the next few years.

Merrion Capital analyst Sebastian Orsi estimates AIB would need to raise €2.3bn (or 140pc of its current market value) and BoI €1.1bn (or 64pc of its market value) to leave their equity ratios at 6pc after the NAMA process.

Some market observers believe the State will end up as the sole underwriter of massive share sales -- buying up any stock not taken up by investors.

But rather than pump fresh cash into the banks in the event of rights issue flops, it is understood the Government would offer to convert some of its existing €3.5bn-worth of preference shares in each into ordinary shares.

Market bulls believe a 33pc rally in AIB's share price over the last few days, to €1.61, and a 25pc surge in BoI to €1.69, bodes well as both in preparation for equity raisings.

Irish Independent

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