Saturday 15 December 2018

Government may be inspired by UK sale of RBS shares

The UK sold more RBS shares last week. With AIB shares strong, should the Government sell some of its 71pc stake?

If Minister for Finance Paschal Donohoe decides to sell AIB shares it could yield a significant windfall, but there are risks with selling off bank shares too quickly. Photo: Bloomberg
If Minister for Finance Paschal Donohoe decides to sell AIB shares it could yield a significant windfall, but there are risks with selling off bank shares too quickly. Photo: Bloomberg

UK Government Investments, the body which holds the British government's shareholdings in the UK banks rescued following the 2008 financial crash, raised £2.5bn, last Tuesday. The funds came from the sale of a further 7.7pc of RBS, which owns Ulster Bank in this country, at 271p per share.

Following that sale, the British government still has a 62.4pc shareholding in RBS, worth about £20bn (€22.8bn). With the British government having sold its remaining Lloyds shares in May 2017, RBS is now the only UK bank in which the British government has a major shareholding.

Last week's RBS share sale was the first in a series of planned sales over the next five years, which were first announced by the British Chancellor of the Exchequer Philip Hammond last November. If the sales go ahead as planned, the British government's stake in RBS will fall by about two-thirds, to around 24pc-25pc.

However, unlike Lloyds, where the British government eventually recouped virtually all of the £20bn it sank into the bank almost a decade ago, the government is still seriously under water at RBS. It cost the UK taxpayer a total of £45.5bn (€52bn) to rescue RBS from bankruptcy - with the British government's effective RBS stake peaking at more than 84pc.

Even after allowing for £4.6bn raised from the 2015 and 2018 share sales and the value of the remaining shareholding, the British government is still down £21bn (€24bn), about 46pc, on its RBS "investment".

The UK wasn't the only country whose government had to bail out the banks in 2008. On this side of the water the Irish Government spent a gross €64bn keeping our lenders in business after the Celtic Tiger property bubble burst. While more than half of this money, €34bn, went to Anglo Irish and Irish Nationwide and is gone forever, the Government still harbours hopes of recouping most of the remaining €30bn that went to AIB, Bank of Ireland and Permanent TSB.

The Government raised €3.4bn from the sale of 28.8pc of AIB 12 months ago. This brought its total return from AIB to €10.2bn, and its remaining 71pc stake has a market value of €9.6bn. Based on those numbers, the Government is within spitting distance of recouping all of the more than €20bn it put into AIB.

Meanwhile, the Government's total return from Bank of Ireland is now more than €6bn, against €4.8bn originally invested, while the 14pc of the bank it still owns is worth €1.1bn. In April 2015 the Government raised almost €100m from a PTSB share sale and was repaid €400m of capital while still retaining a 75pc stake then worth €1.5bn.

Add it all up and it appears that the Government is well on track to recovering most, if not all, of the €30bn it injected into the three surviving Irish banks.

Unfortunately, there may be less to these figures than meets the eye. Included are payments by the banks to the Government under the emergency liabilities guarantee (ELG), aka the deposit guarantee, as well as dividends. Including ELG payments in the total is a bit like a homeowner seeking to have the premium payments on his or her mortgage protection policy count against the amount outstanding on the mortgage.

Strip out these ELG payments and AIB's total return to the Government falls to something like €7bn while that from Bank of Ireland drops to a little over €4bn.

At least AIB and Bank of Ireland are well on the way to recovery. Both have resumed dividend payments to their shareholders and look set to increase their net loan books in 2018, the first such increase in more than a decade.

Unfortunately, the same can't be said for PTSB. It is still mired deep in non-performing loans, which make up 26pc of its total loan book. It has been ordered to sell off a big chunk of these problem loans by the ECB and is trying to sell €3.7bn of its non-performing loans.

With its share price down by almost 60pc since the 2015 share sale, the value of the Government's remaining shareholding has fallen from €1.5bn to less than €600m. Any attempt by the Government to offload a further significant proportion of its PTSB shareholding would almost certainly trigger a fresh fall in the share price.

By the end of last week, AIB shares were trading at just under €5, up almost 14pc on the €4.40 IPO price. Bank of Ireland shares have also performed well, up 15pc over the past year.

This compares to a 14pc fall in the average value of European bank share prices as measured by the Euro Stoxx banking shares index. Unfortunately, there are at least some signs that the best may be over for Irish bank shares with both AIB and Bank of Ireland shares down about 13pc-14pc since January.

So with bank shares everywhere on the slide is this as good as its gets for AIB and Bank of Ireland and should the Irish Government seek to follow the example of its UK counterpart and offload some more of its bank shares? Is it time for the Government to take more money off the table?

"My sense is no," says Professor Thomas Conlon, of the UCD Business School. "When you are talking about the financial markets you are looking at extreme volatility. In 2015/16 European bank shares fell by 50pc. They then recovered by over 60pc. There will be points where you will get very low prices.

"There is a need to dispose of the bank shares at some point as the Irish Government is not a natural long-term holder. It should gradually sell off the shares in tranches. Hopefully, by doing this they will achieve an average price that reflects the shares' inherent value."

Banking analysts reckon the Government should follow the example of the British and announce a timetable for the disposal of most or all of its AIB shareholding. The near-universal view among analysts is that PTSB's ongoing problems rule out any share sale in the short to medium term while a sale of the Government's remaining 14pc Bank of Ireland shareholding is unlikely until the AIB shareholding drops under 50pc.

So will Paschal Donohoe press the button on a further sale of AIB shares? A sale of even 10pc of AIB would yield more than €1.3bn for the Exchequer - just the sort of money that would come in handy when framing what is likely to be a pre-election budget. Conlon cautions against the Government selling off bank shares too quickly.

"It has to be done over a long period," he says. "For the best price you have to take the longer view."

Sunday Indo Business

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