Saturday 20 January 2018

Noonan should look before he leaps on AIB sale

NEW DAWN: We can't flog our biggest bank without planning what the country needs
NEW DAWN: We can't flog our biggest bank without planning what the country needs
Richard Curran

Richard Curran

The Government needs to seriously think about what kind of banking sector the country needs before jumping into a sale of AIB.

Just because the bank is heading towards a point where a chunk of it could be sold, doesn't mean it should automatically happen in a vacuum.

The decision by the Finance Minister Michael Noonan to appoint a panel of advisers on the sale of a stake in the bank is not surprising. Before now, nobody would have wanted to invest in a bank that still had massive bad debts and was losing money.

Now that AIB has dealt with some of its challenges and looks set to report a reasonable profit for 2014, there is likely to be some level of interest in acquiring a 25pc or 30pc stake in the bank.

But how and when the State's 99pc shareholding in AIB is sold isn't just about getting back the most money as soon as possible. It could actually shape the banking sector in Ireland into the future.

The Government could seek to sell a strategic stake of around 25pc to 30pc to private investors, similar to what was done with Bank of Ireland.

If it went down this road, AIB would be no better off than it is today, and the investors would try to maximise their profit in the short term - as happened with Bank of Ireland.

The Government could float a chunk of the bank on the stock market and let small and large investors buy up shares. This would return around €3.5bn or more to the taxpayer, but would the bank or the customers it serves be better off in any way?

If the Government sold off the entire bank in one go, it might get close to the €11bn at which it is valued, but who would buy it? Private investors could asset strip it, savage costs and try to make a big two to three-year financial return.

Selling off the lot to a big international bank would be good for AIB but would not see the taxpayer get the best price possible.

So, something that might be a good outcome for the bank and banking in Ireland, might not be the best for taxpayers when it comes to getting their money back.

This is the conundrum Michael Noonan now faces.

There aren't even obvious guarantees that a big international bank would buy AIB, unless it got it at a fire-sale price. Both British and European banks have been roasted in the Irish market and won't be a in a hurry back, unless it is in smaller niche online offerings. Buying a big corporate beast with lots of branches and strong trade unions in a small economy just might not appeal to them.

One of the best selling points for AIB is the lack of competition in the Irish market. Many players have left.

The big two of Bank of Ireland and AIB hold around 75pc to 80pc of the banking market. Rivals may nibble away but as things stand, that overall figure is unlikely to change by more than a few percentage points.

Fianna Fail has questioned whether now is the best time to start selling off chunks of AIB. The party, despite giving us the €64bn bailout, has raised legitimate concerns about competition. However, introducing measures that would try to improve competition in the sector might reduce the potential value of AIB.

New investors in AIB will want assurances from the State. If it is best for a big bank to buy AIB, then what international bank would buy 30pc of it and feel comfortable having the State own the rest?

A foreign bank would want clarity around how the majority shareholder would act, when it would sell and what might its attitude be to dividends and market competition.

The best way for Noonan to deal with this conundrum is not to start with a strategy for exiting AIB, but with a strategy for the banking sector. After all, he still owns €1.5bn worth of Bank of Ireland, all of Permanent TSB and 99pc of AIB.

Why not develop a picture of what Irish consumers, businesses and the economy need most from the banking sector, now and into the future. This process would throw up issues like the lack of competition and issues around access to finance.

He should decide where AIB, a state-owned bank which we have bought and paid for, best fits into that. I don't believe AIB can thrive over the long term in state ownership. It should be privatised. But how and when are the tricky questions.

The State doesn't stand a real chance of getting back all of the €20.6bn it put into AIB. Wouldn't it be the worst of all scenarios that after paying out €64bn to save the banking industry, we didn't even end up with a banking sector that was best for the country?

We can't start flogging off the biggest bank in the country without a clear plan about what the country needs from its banking sector.

Sunday Indo Business

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