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State may earn €1.5bn from latest bailout but bank profits to suffer

THE State looks set to make as much as €1.5bn by lending money to banks under the latest bailout -- but the tough terms of the loans could dent the banks' profits and make them harder to sell.

Bank of Ireland revealed the terms of the so-called 'contingent convertible' debt instruments last week, when it announced plans to raise some €5.2bn in capital by the end of July.

The Government is injecting some €3bn of the debt instruments into the banks at the end of July -- the money is to be repaid in five years' time or the state can convert the loans into a bigger stake in the banks.

The Irish Independent has learned that the loans for AIB, EBS and Irish Life & Permanent will all be done on the same terms as those outlined by Bank of Ireland last week, implying an interest rate of 10pc.

The rate makes the loans significantly more expensive than the 8pc interest AIB and Bank of Ireland had to pay on the €7bn of preference shares they issued to the State in 2009.

The 10pc is also significantly worse than the rate the banks got when they last went to the market, including BOI's October deal to pay investors 5.8pc for €750m of two-year money.

While the interest from the contingent convertibles will be a welcome boost to the national coffers, the repayment burden could be significant for banks already weighed down by the cost of the government guarantee.

Bank of Ireland, which will get €1bn of "contingent convertible" loans, will pay out €100m in interest a year and €500m over the lifetime of the loans.

Before the terms of the contingent convertibles were announced, stockbrokers Davy were pencilling in pre-provision profits of €758m for BoI -- that figure falls by 13pc after the extra €100m interest payment.

AIB will get €1.4bn in contingent convertibles and pay out €140m a year in interest, while its subsidiary EBS will get €200m and pay €20m a year to the State.


Irish Life & Permanent's contingent convertible contribution comes in at just €400m, implying an interest rate of €40m per annum for the bancassurer.

The interest payments are somewhat circular, since AIB and EBS are effectively state-owned, Irish Life & Permanent will be all but nationalised later in the year and BoI could fall into majority state control.

But the weight of the interest burden could make it harder for the banks to attract outside capital over the five-year period, however, with several analysts already commenting on how Irish bank earnings are being dragged down by the cost of the guarantee scheme.

Meanwhile, an analyst at broker Newedge Group yesterday blamed the contingent convertibles for a collapse in BoI's share price when its capital plans were announced late last week.

"The one Irish financial institution that looked able to emerge from the crash intact and sellable, now looks an utter and complete basket case," Bill Blain said. (Additional reporting Bloomberg)

Irish Independent