Monday 10 December 2018

Ireland Inc should sell AIB while the going is still good

Volatile financial markets remind us that we should be bailing out, writes Liam Collins

'Allied Irish Banks is, by a long shot, Ireland’s biggest bank. It has had a chequered career that continues to this day.' Stock image
'Allied Irish Banks is, by a long shot, Ireland’s biggest bank. It has had a chequered career that continues to this day.' Stock image
Liam Collins

Liam Collins

The sudden volatility in the financial markets tumbling all last week on Wall Street should be a warning to Paschal Donohoe and the Government that the time has probably arrived for the State to get serious about cashing in its chips and bailing out of Allied Irish Banks.

In mid-January at the plutocrat-fest in Davos, Switzerland, the billionaire investor George Soros predicted that the stock market rally would soon end. Now Soros, like all financial gurus, often gets things wrong - but his contention wasn't if it would happen, it was just a question of when? It didn't take long for this prediction to become a harsh reality for investors.

While Europe bounced back, jitters in America's financial capital Wall Street continued throughout the week. In the White House, Donald Trump was left scratching his well-coiffured head. He lamented the fact that in the normal course of events stocks rise on good news. "Today, when good news is reported, the stock market goes down. Big mistake," he tweeted in his inimitable style.

But that is the essence of the market. Watching price fluctuations you often see an established company report healthy profits, only for its shares to fall. Meanwhile, a tech company comes along with massive losses and its stock price soars.

So let us first of all forget about the niceties or otherwise of rescuing Allied Irish Banks with €21bn in taxpayers' money at the height of the financial crisis. What's done is done and it's time to move on.

In the end the taxpayer will get most of that money back through the sale of the 99.9pc of the bank that went into State ownership and through substantial dividends that AIB has paid back since it returned to profitability.

But two things have become clear in recent months.

The first is that the market may be facing into an uncertain future and the Government does not need to gamble with taxpayer money. Let's leave that to people who can afford (or possibly not) to lose their money - like the unfortunate bank shareholders who were cleaned out in the financial collapse of 2009 and didn't get an iota of sympathy then, or since.

More importantly, the State has no business running commercial banks. It doesn't know how to do it properly and politicians are always prone to interfere in decisions in order to court public approval, even if the decision is wrong. This is an especially dangerous strategy in the financial world.

Nobody is saying politicians are actively interfering in running AIB - but let's face it, a lot of ideological warriors would love it if they did.

Allied Irish Banks is, by a long shot, Ireland's biggest bank. It has had a chequered career that continues to this day. But how many times have we heard commentators lament its behaviour on the basis that AIB "is the bank that was bailed out by the taxpayer"?

Excluding the tracker mortgages, which is a scandal, profitable business sometimes have to take tough decisions. They cannot do so with politicians looking over their shoulders trying to protect sectional interests. All the indications are that the Government should think seriously about getting out of AIB and getting out soon, for commercial as well as political reasons.

The sale of 28.8pc of AIB in June of 2017 (at €4.40 a share) was written into the current Programme for Government which does not allow for a further share sale before the end of this year.

In a note last December, Davy analysts Stephen Lyons and Diarmaid Sheridan advised: "We believe it should be revisited as there is a political risk in inaction. Market conditions are favourable at present and investors remain engaged in the AIB story."

They added that there was a risk "that the Government could miss out on the window for a prime selling opportunity". After the fall in the financial markets that note also looks prophetic.

So why is the Department of Finance and Public Expenditure still clinging to 71pc of the bank when it could at least start to offload the remaining shares for an estimated €9bn?

Surely the Programme for Government could be re-written without much difficulty, now that Leo Varadkar has taken over as Taoiseach.

While putting the entire stake on the market in one go is unlikely, selling another large tranche as soon as possible seems advisable - and would send a clear signal that the Government was getting out of AIB in the short-term, rather than the long-term.

It would also be a good message for major investors, who don't like being minority players in State companies.

The final argument is that both the Government and the taxpayer could do with the cash injection. Think of the ways the money could be used and not just frittered away on sticking-plaster solutions for the health service or some other funding crisis, like pay restoration for civil servants.

A serious programme of social housing, properly structured, could bring in a steady income stream for the Exchequer for decades to come.

There are other worthy causes where long-term investment in broadband and a strategy to rescue rural Ireland could be prove a durable and profitable investment for the State.

It's time for innovative thinking, not for leaving billions of euro tied up in bank shares when others with deeper pockets are more than willing to take the risk on them.

The Government insists that financial institutions tell prospective investors that "the value of investments goes up as well as down" - so let's get out of AIB while the going is good.

Sunday Independent

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