Government enjoying bank windfalls but losses are still lurking beneath the surface

But despite the welcome flow of funds into the State coffers, what’s really happening is the State is crystallising a loss on its overall investment in the banking sector. If you look beneath the surface it’s easy to see why.

Taking the three surviving banks – AIB, Bank of Ireland and Permanent TSB. According to the latest figures from the Department of Finance, the Government put in a total of €29.4bn between 2009 and 2011. Of that, €20.3bn has come back in cash from asset sales, bond redemptions and fee payments, leaving a €9.1bn gap. 

Yet the value of the stakes the Government owns in those banks is just half that at €4.6bn. In all likelihood, most of that shortfall is not coming back and when the State sells at current valuations, it bakes in that difference.

And that’s before we even get to the elephant in the room: IBRC. The entity formed to absorb Anglo Irish Bank and Irish Nationwide absorbed €34.7bn to cover the massive losses of those two lenders, but so far just €1.57bn has come out in the form of dividends. There is about €3.5bn in remaining assets there, but it’s unlikely they’ll be liquidated at full value.

This week’s €305m placing of AIB stock was the latest mini-windfall produced for the Government from the strategy of gradually drip-feeding its bank shares into the market.

Monday’s after-hours disposal of 5pc of the bank brought the State’s stake in AIB down to 63.5pc, from 71pc in January, and represented a rare opportunistic large transaction in the wake of smaller block trades and the bank’s recent buyback.

Coming just as the National Asset Management Agency (Nama) was completing another €250m surplus transfer to the exchequer, the total of €555m made it a good week for paying back the bailout.

The policy of whittling down the Government’s bank holdings rather than waiting for the right moment in turbulent markets to launch a big-bang public offering has resulted in a steady stream of such cash returns dating back to last summer.

That’s when the National Treasury Management Agency (NTMA) started selling about 1pc of Bank of Ireland per month after holding an unchanged minority stake for years.

Since June 2021, the Government has recouped more than €600m on Bank of Ireland, leaving a small 3pc stake that is expected to be sold in tranches over the next few months ahead of the departure of chief executive Francesca McDonagh in September.

According to the most recent figures from the Department of Finance, there is just €155m to be gained from those remaining trades, but the real prize is the final privatisation of at least one Irish bank 11 years after the Government had to rescue the sector.

The Department of Finance calculates its net position in the banks by adding up all the money it put directly into them and sets that against all the money that has come back out so far.

On that measure Bank of Ireland has been a profitable bit of business for the State, which is nearly €2bn to the good, including about €1.5bn in fees collected on 2008’s bank guarantee scheme.

AIB is less of a success. The State is still more than €5.6bn in the hole, even when the presumptive value of the minister’s majority stake is taken into consideration. In cash terms alone, the Government has recovered just a little more than half of the nearly €21bn it pumped into the lender to save it.

However, the market value of the remaining 63.5pc in State ownership is close to €4bn, so there is big money still on the table.

Indeed, the strong performance of Irish bank shares this year – Bank of Ireland has gained nearly 20pc and AIB is up a more modest 9pc – is working in the Government’s favour, making each new transaction relatively more profitable.

Nonetheless, there is an argument that the NTMA was therefore selling cheaply in 2021 and might have been better off waiting for better pricing to offload the stakes.

But that view ignores the positive impact of the disposal plans themselves, which improve the liquidity of the stocks and attract more institutional investors, thus supporting the price.

So where next?

The State will be out of Bank of Ireland in a few short months and AIB looks like it’s en route to being a majority private bank sometime next year if the NTMA can maintain the pattern of pairing regular block trades with the occasional big placing. That will be a major boost for CEO Colin Hunt, whose first priority has to be making sure the taxpayer gets value for money.

Permanent TSB has thus far been left out and is carried on the Government’s books at a loss on current valuation.

The solution there is likely to involve an IPO at some stage, as NatWest is coming in as a significant minority shareholder as part of PTSB’s deal to acquire mortgage and small business banking assets from Ulster Bank.

The UK bank is taking the stake to retain some upside from the Ulster Bank debacle and will want to monetise its position at some point. An IPO is the obvious mechanism.

What all this adding up of cash returns leaves out, however, is the uncalculated opportunity cost of having put €64bn into the banks in the first place.

More than €45bn of that has come back in one form or another over the years – Nama for instance, will make a surplus of €4.5bn alone – but the austerity required to shoulder the expense caused lasting economic damage that cannot be so neatly quantified.

All the same, it’s effectively a sunk cost. The money that rolls in from future share sales is far more politically tangible.

---