Banking crisis delays AIB’s return to majority private hands – and decision on pay

Some of Wall Street’s leading investment firms, desperately seeking to make sense of the biggest banking emergency since 2008, were treated to a flashback to the last crisis as senior AIB executives landed in New York this week to peddle the bank’s attractions.

AIB may have received the biggest bailout – totalling €20.8 billion, lest we forget – given to any Irish bank to survive the crash. But in chief executive Colin Hunt’s briefcase was the bank’s best set of investor slides in years as he led a roadshow following its recent annual results.

It showed AIB’s loan book is finally starting to grow again, having contracted by more than half since the crash – even if last year’s 5 per cent increase was driven by transfers of initial batches of the loans being acquired from Ulster Bank.

A series of European Central Bank (ECB) interest rates since last July means it is now targeting profit returns that would have been unimaginable even a few years ago, when central banks were flooding markets with cheap money to fight persistently low inflation globally.

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AIB had also cut its non-performing loans from a peak of €31 billion in 2013 to €2.2 billion by the end of last year. Crucially, it has not – so far – seen an increase in problem loans in the current cost-of-living crisis.

[ Q&A: Should we be worried as Credit Suisse brings banking crisis to Europe? ]

After more than doubling in value over the preceding 12 months, shares in AIB hit a four-year high of €4.27 – not far off its 2017 initial public offering (IPO) price of €4.40 – when the results were unveiled on March 8th.

And having sold two large 5 per cent blocks of shares last year – at prices of €2.28 and €2.96 respectively – there was a clear expectation in the market that a successful roadshow would prompt the Government to press the button within weeks on the sale of another 5 per cent, pushing its stake below the key psychological 50 per cent level.

That was before Silicon Valley Bank (SVB), the California-based banker to start-ups and venture capitalists collapsed, exposing how aggressive central bank rate hikes can blast holes in the balance sheets of banks that took on too much risk.

Catastrophically, at a time when better-run banks were upping insurance against rising rates ... SVB allowed virtually all its rate hedges to expire last year

In an effort to make money out of excess customer deposits in the era of lower-for-longer rates, SVB had invested tens of billions of dollars in long-term bonds. Unlike the toxic US sub-prime mortgage-backed bonds that triggered the 2008 crash, most of the SVB money was invested in extremely low-risk US government debt.

However, the bank made a $1.8 billion (€1.7 billion) loss when it went to sell a $21 billion bond portfolio last week to fund customer deposit withdrawals. This was due to the average market interest rate, or yield, on the portfolio being less than half the prevailing 3.9 per cent rate on 10-year US government bonds. Bond values move in the opposite direction to bond yields.

Catastrophically, at a time when better-run banks were upping insurance against rising rates – through so-called financial hedging contracts – SVB allowed virtually all its rate hedges to expire last year. A subsequent failed plan to sell shares to plug the capital gap and an all-out run by companies on deposits resulted in the biggest US banking collapse since the financial crisis.

Silicon Valley Bank: what is the cost of the collapse?

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US banks were sitting on $620 billion of paper losses from securities that had dropped in value by the end of last year, according to figures from the Federal Deposit Insurance Corporation, the body that seizes failed banks in that country. That’s to say nothing about potential nasties lurking in financial derivatives books.

Smaller, regional US banks with balance sheets below $250 billion – such as SVB – are now subject to the global standards on capital, cash management and resolution that apply to all EU and UK lenders.

It’s not a market for the Government to be selling a block of stock in AIB, whose shares are now languishing almost 15 per cent below their recent peak

Late on Thursday, a group of major US banks were forced to provide a $30 billion lifeline to San Francisco-based lender First Republic Bank, which was on the brink as concerns about unrealised losses in its bond portfolio saw it bleed deposits.

Turmoil across banking stocks also brought fresh focus to the unique basket case on this side of the Atlantic that is Credit Suisse, which is in the middle of a major restructuring programme following a series of scandals in recent years.

Irish banks, subject to the St Patrick’s Day share price massacre 15 years ago, six months before they nearly collapsed, may be bystanders this time round – with among the highest ratios of capital and ready cash in Europe. They are now bit-players in the commercial property lending market and have been writing mortgages for the past eight years under rules that are among the strictest in the EU.

Unlike many smaller US banks now in focus, Irish banks did not participate in the so-called carry trade of using cheap excess deposits to buy higher-yielding bonds. Instead, they stored excess cash with the ECB. While they did incur losses when negative central bank rates prevailed, the €67 billion of surplus cash that the three surviving Irish lenders had on their balance sheets as of December is now hugely profitable.

As the ECB pressed ahead on Thursday with a half-point rate hike – moving its deposit rate to 3 per cent – its president, Christine Lagarde, refused to be drawn on future increases. A number of economists have revised down where they think ECB rates will peak – from 4 per cent only a week ago to about 3.5 per cent.

[ Will the US banking crisis reach Irish shores? ]

A lowering of rate expectations has a bigger effect on market sentiment towards Irish banks, with their higher reliance on interest income than your average European bank. The risk of policy error by central banks triggering a deep recession is heightened with the financial sector in turmoil.

It’s not a market for the Government to be selling a block of stock in AIB, whose shares are now languishing almost 15 per cent below their recent peak.

Still, it puts off a likely decision on lifting a €500,000 executive pay cap once the holding drops below 50 per cent – at a time of some unease at the recent move by Bank of Ireland, where salary limits were lifted in December, to boost future pay of top executives by 50 per cent through fixed share awards.