Sunday 22 April 2018

Noonan to take €4bn back from AIB but will have to wait for big pay day from IPO

Finance Minister Michael Noonan will have to be aware of a prowling bear market
Finance Minister Michael Noonan will have to be aware of a prowling bear market
Richard Curran

Richard Curran

Timing is everything when it comes to selling. Finance minister Michael Noonan will be painfully aware of that as he watches international stock markets heading south.

Nama has made hay by offloading a lot of assets while the market was buoyant, even though it has sold some assets perhaps a little too early.

Aside from Nama, Noonan still has one big one to go. And that is AIB.

After the last government sunk over €20bn of public money into the bank, AIB is now getting closer to paying a chunk of that money back. AIB has been rebuilding its balance sheet and its business after the devastating collapse of 2008.

It is back making money and reported a €1.2bn profit for the first half of this year, up from €437m in 2014. This surge in profitability came on the back of lower impairment charges, actual loan loss write backs (where it doesn't look like losing as much as previously thought), cutting costs and of course benefitting from the general improvement in the economy.

It has been the only bank to cut standard variable interest rates three times and does look poised to start growing again.

So now might be a good time to sell down the state's stake, right? Wrong. AIB needs to tidy up its balance sheet before it can re-float on the stock market. It has too many shares which have continued to trade in small amounts at inflated prices.

Furthermore, the State is sitting on €1.6bn of contingent capital notes (Cocos), €3.5bn of preference shares as well as its holding in the ordinary shares.

The good news is that AIB is now finally ready to tidy up this balance sheet, buy out the State's Cocos and a sizeable chunk of its preference shares.

The move could see between €3bn and €4bn returned to the State in the coming months, and that is before the Government sells down any of its ordinary AIB shares through an IPO.

The share structure change and the pay out to the state are important to AIB because it cleans things up ahead of a flotation. It is helpful for Michael Noonan because there is an election coming and if anything the flotation of AIB could slip further away than he originally planned.

This isn't AIB's fault but has more to do with the performance of international stock markets. A nervous falling market is not a good time to flog AIB.

Wall Street's Dow Jones index is down over 13pc since mid-July. The FTSE 100 is down 11pc in the same period. The German DAX index is down 14pc.

In fact when you look at Bank of Ireland where the State has already got its investment back, its remaining 15pc shareholding has fallen in value by €200m since July. If concerns about China lead to a protracted stock market bear run, the state will have missed a summer window to exit Bank of Ireland.

With all of this uncertainty, an AIB IPO in 2016 could be more difficult to pull off. Fine Gael looks like heading into a general election campaign, making the case for having "fixed the banks" without getting back a red cent of the €20bn that went into AIB.

So it is more than helpful if the Government can point to a cheque for €3bn to €4bn flowing back to the exchequer without actually selling down any of the ordinary equity in the bank.

Two questions arise. Firstly, what will Noonan do with the money and secondly can AIB afford it at this time?

A big cheque from AIB would bolster the exchequer position ahead of October's budget and once the money makes it to the exchequer coffers in 2016, he could factor it into his overall budget planning.

Noonan is highly unlikely to use it to increase the budget giveaway but it more likely to see the cash as an opportunity to justify the size of the giveaway that is proposed.

The money will probably be used to pay down debt which will make it easier for Noonan to sell the economic logic of the €1.5bn budget to analysts, the EU, credit rating agencies and the likes of the IMF. In other words, he can argue, that we can afford it, when you look at our overall exchequer position.

Can AIB afford it? The bank's financial position has improved considerably and there is little justification for holding on to capital on its balance sheet that it will not need. However, it doesn't have all that cash sitting there and it may have to raise a bond to repay part of it.

That is where the small print of the deal will have to be looked at. Management at AIB have been in the bunker for the best part of six years and clearly the fruits of their labour are beginning to show as the economy improves.

They have been rightly criticised on variable mortgage rates, credit card insurance products, repossessions and dealing with debtors. However, the bank is in a much stronger financial position.

It also has to be borne in mind that some of the tailwind its financial performance is enjoying has come from write-backs on loan losses which is lifting all of the banks right now.

The Minister for Finance has gone to considerable lengths to de-risk the balance sheet of the state. This has meant getting Nama to fast-track the sale of assets to pay back its debts quickly.

Getting back a chunk of money from AIB will be very positive for taxpayers but virtually full State ownership of AIB looks likely to continue for longer than Noonan would have liked. Bear in mind he still has a rather sizeable and tricky Permanent TSB on the State's books.

The arguments suggesting AIB will be able to return all €20bn to the State have always looked too optimistic to me.

It is predicated on gradually selling off the State shareholding in AIB over a number of years.

If a protracted bear market in global share prices does emerge, the State's exposure to Irish banking could still be quite significant a decade after the bank guarantee of 2008.

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