Saturday 17 February 2018

Shane Ross: Small shareholders at AIB should dump the lot

Duffy's Circus: The AIB chief executive saw the bank's bad debt provision slashed by €646m and then stood up and claimed to have made €437m profit
Duffy's Circus: The AIB chief executive saw the bank's bad debt provision slashed by €646m and then stood up and claimed to have made €437m profit

Perhaps you are tempted to buy shares in AIB after its "return to profit" in the first half of 2014? Run a mile. And if you are a holder of AIB shares, however small, sell the lot. Tomorrow, at dawn.

Did AIB's spinners tell you that their little basket case's market value is today greater than the mighty Deutsche Bank's?

Hardly. Instead, the AIB silver tongues filled the pages of the media and our television screens with garbage about AIB "returning to profit".

Brokers like to call the current share price of AIB - at around 9c/10c - an "anomaly". It is not. It is an aberration. There are 90,000 small shareholders out there under the illusion that the price can hardly go lower. It can. And it almost certainly will.

Sadly, there are still some innocent punters piling into AIB shares on the basis that they were once €22. Last week's wild talk of "recovery" will push suckers back into AIB.

At Wednesday's price of 10c, AIB's market value stood at over €50bn. There are 523 billion shares in issue. While 99.8pc are held by the Government, the remaining 0.2pc are traded by small shareholders. The market has become dysfunctional as gullible grannies and granddads spy an apparently cheap opportunity to regain their lost fortunes. In reality, the price is in the stratosphere as the ever-clever professionals dump stock on the ever-hopeful mug punters.

Last week, the NTMA valued the State's AIB ordinary shareholding at only €6.5bn while the market is signalling an incredible price tag of over €50bn. It believes that AIB shares are worth 1.25c each.

Quite a long way from 9c/10c. Indeed, the €50bn figure is doubly astonishing when compared with the far more successful Bank of Ireland, currently commanding a market value of only €9bn.

As usual, unsuspecting small shareholders are about to be ambushed. Yes, at a price of 9c/10c, their shares are seven times overvalued.

Small shareholders have been duped by the titillations of a single digit price tag. They miss the point that there are enough share certificates in issue to complete a paper trail to Mars and back. The shares are virtually worthless.

Many poor sods are buying in bundles of 50 grand, muttering happily about nest eggs for their grandchildren. Many brokers are, shamefully, not expressing opinions on this form of financial suicide.

In the near future there is likely to be a "consolidation" or another similar financial acrobatic for AIB shares.

What does this mean? As Noonan and AIB prepare for privatisation, small shareholders could be given one share in exchange for every six shares held. The price would remain the same. Nothing else will change except that small shareholders will be filleted as they lose five out of every six shares.

Both Michael Noonan and AIB were forced to make an admission in unison on Wednesday. Both their statements accompanying AIB's results coyly referred to the absurdity in the market. The very last item on AIB's three-page litany of hype about its half-year "success" admitted that: "AIB trades on a valuation multiple of circa 6x (excluding preference shares) June 30, 2014 net asset value (NAV). The group continues to note that the median for comparable European banks is circa 1x NAV."

Decoded: a zombie bank is flying high on free market heroin. AIB is trading at six times the value put on its European banking peers

Noonan issued an almost identical statement. Both parties had been shamed into quietly conceding that small punters have been paying way over the top for the shares. The battered mites should brace themselves for a mighty shock in the months to come.

Cold turkey is on the way.

AIB can now cynically claim that the small punters were warned: that it is not AIB's fault that the well-buried warning was drowned in the craven media's welcome for "AIB's rebound", its "return to profit" and general "good news for taxpayers".

AIB's masterly spin on its figures will induce innocent investors to pile their savings into the "recovering" bank, now entering real "profit" for the first time since 2008.

But were Wednesday's figures "real" profit? Or were they just more sleight-of-hand, part of a bigger plot to pass the imminent European bank stress tests and march AIB on towards the holy grail of privatisation?

"Consolidation" - screwing the small shareholders back into the ground by diluting their shareholdings by over 80pc - will be the first part of the tidy-up for privatisation. AIB will weep crocodile tears as they refer victim shareholders back to their weasel words, way back in the July 2014 interim statement?

Crushing the poor minnows is the easy part. AIB has bigger fish to fry. A magic profit figure is essential to impress the privatisation zealots and the bank's stress-test masters. Achieving it can be a mountain to climb.

On Wednesday they climbed that mountain with the stroke of a pen. Not by lending more money. Not by meeting their margin targets. Not by repossessions, asset sales or any other combination of profitable ventures.

No, AIB used the oldest trick in the world to doctor the profits. They simply slashed their provisions for bad debts. Profits automatically rocketed. Thursday's headlines were written.

Wednesday was AIB's "pick a profit" day. AIB managed to declare profits of €437m. The most significant reason was that they had reduced their provisions for bad debts from €738m last year to €92m this year. The manoeuvre, a reduction of €646m, launched AIB comfortably into profit. If they had repeated last year's bad debts figure, they would have made a loss of over €200m.

But that would never have done.

The bloated €437m profit figure had the desired shock effect. Merrion Capital stockbrokers had forecast €230m profits, Goodbody around €100m, while Davy had opted for €66m. All are in the same game and all obviously allowed for AIB's desperate need to manufacture a profit this year in the light of the hurdles to come.

While none of the three brokers would have been surprised that AIB was so generous to itself with its bad debt reduction figure, none had foreseen that AIB would have the brass neck to go for broke and double best market forecasts. The ploy worked a dream. Michael Noonan and AIB chief and PR king David Duffy were peddling an identical agenda.

The stage is set. AIB should survive the stress tests - for now. Privatisation will be attempted in 2015. Duffy will be rewarded for his "heroic achievement" in bringing AIB back into "profit". Noonan will agree that this "exceptional performance" deserves recognition. Bosses at AIB will be given bonuses for exceeding "ambitious" profit targets. They may even be treated to a sudden bout of share options at single digit cent levels. The privatisation will wobble, but a significant stake will be sold - for a song - to a "Wilbur Ross-type" predator. The fire sale will be greeted by Government as a triumph for the taxpayer and for the management.

Much of this "triumph" will be built on the quicksand of reduced bad debt provisions. The taxpayer will be landed with whatever shareholding is left over - a large legacy stake in a zombie bank.

Noonan will use the small proceeds of the sale to win the general election. Duffy will be headhunted by Ulster Bank and given a special consultancy on bad debt provisions and selling snow to Eskimos.

Small shareholders will retire crippled, demanding to know where were the auditors when the bad debt provisions were agreed, bamboozled by the drop of 90pc in the value of their shares.

The stock exchange should suspend AIB shares. In the meantime, sell before it is too late.

Sunday Indo Business

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