State forced to take B of I stake

The Government's plan to limit its ownership of the two big banks has suffered a setback after Bank of Ireland said it would give the State shares instead of cash in respect of a dividend payment.

From Monday, the State will own just shy of 16 per cent of Bank of Ireland through the National Pension Reserve Fund. This will automatically dilute the positions of other shareholders in the bank.

The transfer, which will require the bank to issue new ordinary shares, is the result of a European Commission ban on the bank making certain interest payments.

The bank had been due to pay €250 million to the State by this weekend under the terms of the Government’s €7 billion bank recapitalisation scheme. Under this scheme, which has seen the Government invest €3.5 billion in both AIB and Bank of Ireland, the State is entitled to receive annual “coupon” payments of up to €280 million from each bank. The European Commission has, however, placed a “coupon-stopper” on the banks while it considers their restructuring plans. Under Bank of Ireland’s internal regulations, this automatically triggers payment in shares.

It is thought all of the parties involved would have chosen a cash payment over share transfer, but the transfer was welcomed by Minister for Finance Brian Lenihan.

“This ensures that taxpayers are remunerated in a timely fashion for their investment in the bank,” Mr Lenihan said. He assured taxpayers they would be “appropriately remunerated” for any investment in the bank. The State already controls 25 per cent of Bank of Ireland through special “preference” shares, which can be converted into ordinary shares within four years if the State has not been reimbursed for its €3.5 billion investment by then.

It is unclear exactly how the State’s new shareholding will affect Bank of Ireland’s requirements for further cash injections to bolster its reserves.

Analysts at Davy have said the bank will need to raise €2.2 billion by early next year, with most in the market expecting a fundraising initiative over coming months. It is possible the State’s shareholding will increase as a result of this, with a majority stake remaining possible. Bank of Ireland said last night it was “actively exploring a range of options” on its funding position.

The bank stated its intention to pursue the matter as soon as the EU had signed off on its restructuring plan and the impact of the National Asset Management Agency (Nama) had been clarified. It is expected that the European Commission will respond to the banks on their restructuring proposals within the next few weeks. Nama, meanwhile, is on the point of taking on the first batch of bad loans from participating banks.

Labour Party finance spokeswoman Joan Burton said the "grubby episode" in relation to the banking strategy had been "an act of shocking deception by the Government on the people of Ireland".

"It is now over a year since the government put €7 billion of taxpayers’ money into Bank of Ireland and AIB in the form of preference shares. This investment was to carry a yield of 8 per cent or €560 million per annum. This, according to Ministers, was a sound investment and an 8 per cent annual dividend made sound business sense.

"Now that initiative lies in ruins. Once again in the banking crisis an important outcome has turned out totally different from what was promised by Brian Cowen."

Ms Burton said Ministers "must have known the real financial situation of Bank of Ireland and AIB when these preference shares were acquired through the National Pension Reserve Fund" and that the draft Nama business plan "now looks like pure fantasy".