Monday 22 April 2019

Noonan may have to lower asking price for AIB shares as he weighs up sale options

Feel-good factor at lender hit by uncertainty in the banking sector, writes Dan White

Larry Broderick
Larry Broderick

Dan White

Finance Minister Michael Noonan told the Dail last week that the recent recovery in European bank share prices created a "window of opportunity" for the sale of some of the Government's 99.8pc AIB shareholding with the most likely date being either May or Autumn 2017.

The Euro Stoxx index of European banking shares fell by almost 50pc between mid-2015 and mid-2016 with the Bank of Ireland share price halving to just 18 cent.

However, European and Irish bank shares have since recovered with the Euro Stoxx index up by almost 50pc over the past seven months with the Bank of Ireland share price up by about a third from 18 cent to 24 cent, over the same period.

After years of losses both of the main Irish banks are strongly profitable, with Goodbody analyst Eamonn Hughes forecasting that they will each report profits before provisions and other charges of about €1.1bn when they publish their 2016 results in March.

Mr Hughes estimates that AIB will be in a position to write back up to another €250-300m of loan loss provisions while Bank of Ireland will provide about €180m against bad loans. When other items are taken into account this will leave AIB with post-tax profits of about €1.3bn-€1.4bn (including some exceptional gains like the Visa stake) and Bank of Ireland with about €700m, he reckons.

Investor sentiment will be further improved by the fact that both AIB and Bank of Ireland may resume dividend payments in 2017 for the first time since the crash. Mr Hughes believes that AIB may be able to make a dividend payment to the state from its 2016 earnings. He pencilled in a 20pc dividend payout ratio for Bank of Ireland from its 2017 earnings. A 2016 AIB dividend payout could deliver up to €285m to shareholders while Bank of Ireland shareholders can expect a payout of up to €140m from this year's earnings.

Despite this good news, Irish bank lending is still shrinking with the latest figures showing that Ioans to Irish households fell by a further 2.6pc in the year to November 2016 while loans to non-financial businesses fell by 5.1pc over the same period. Hughes expects overall bank lending to stabilise in 2017 with a slight increase in the total stock of mortgage lending. But loan quality remains poor. AIB still had €11.3bn of impaired loans at mid-2016, a sixth of its total loan book, while Bank of Ireland had €9.9bn of non-performing loans, almost an eighth of the total, at the same date.

Question marks also persist over the commitment of the remaining overseas banks to the Irish market. With Halifax and Danske having already exited the Irish market, Belgian bank KBC is due to make an announcement about the future of its Irish operation on February 9.

Larry Broderick, general secretary of the Financial Services Union which represents many KBC workers, has said that there is "significant concern" among many KBC Ireland staff and has called on the company to clarify its intentions.

There are also doubts about the long-term commitment of RBS, which owns Ulster Bank, to the Irish market. Ulster Bank paid its parent a €1.5bn dividend in November 2016. Another unresolved issue for the banks is tracker mortgages. Trackers, where the interest rate is tied to official ECB rates, accounted for about 40pc, €33bn, of the Irish banks' mortgages at the end of September. With the official ECB rate, against which trackers are priced, currently at just 0.25pc it is extremely difficult for the banks to make a profit on these loans.

Not surprisingly all of the major banks have made strenuous efforts to "encourage" borrowers to give up their trackers.

A bit too strenuous perhaps. The Central Bank revealed before Christmas that 8,200 customers had been wrongly taken off trackers. However, it the eventual figure could be twice that.

The widespread feeling is that will take an industry-wide restitution scheme to sort out this mess.

These uncertainties mean that, even if the Government does succeed in selling down a significant proportion of the state's AIB shareholding, it is unlikely to raise the €3bn that it had been expecting for 25pc of the shares.

Even after the recent share price recovery Bank of Ireland has a market value of just €7.8bn. This would seem to indicate that the best that the Government can expect for 25pc of AIB is about €2bn.

A return to bank profitability, renewed dividend payments, a stabilisation in lending and a resolution of the tracker issue will all help pave the way for an AIB share sale later this year but Noonan may have to lower his asking price to get the deal over the line.

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