AIB, Bank of Ireland shares rise as tax relief assured
Minister rules out restricting bank’ ability to use past losses to pay no corporate tax over long term
Bank of Ireland and AIB had fallen by more than 11 per cent since the beginning of March.
Shares in AIB and Bank of Ireland rose on Wednesday as investors welcomed the Minster for Finance Paschal Donohoe’s pledge to retain lenders’ ability to use accumulated losses during the financial crisis to pay no corporate taxes over the long term.
Analysts at Davy used the assurance to upgrade their rating on AIB’s shares to ‘outperform’ - the equivalent of a ‘buy’ recommendation - from ‘neutral’, while it added Bank of Ireland to its ‘conviction list’ of stock picks.
Shares in AIB rose 2.1 per cent to €4.80 and Bank of Ireland gained up to 3.4 per cent to €7.10 on Wednesday.
Bank of Ireland and AIB had fallen by more than 11 per cent since the beginning of March, underperforming the wider European banking sector, partly as a result of concern over their so-called deferred tax assets (DTAs). The Sunday Business Post reported more than two weeks ago that the Oireachtas Public Accounts Committee planned to recommend that a “sunset clause” should be introduced into law, which would limit bailed-out banks’ use of DTAs to pay no corporation tax to a 10-year period.
However, Mr Donohoe said on Tuesday in the Dail that he does not intend to change how tax losses for Irish banks are taxed, as such a move would hurt the Government’s ability to maximise its return on bank investments.
AIB, which is 71 per cent State-owned, has €2.6 billion of DTAs on its balance sheet and Goodbody Stockbrokers has estimated that it would have take 17 years for the group to use up these assets. Bank of Ireland has €1.2 billion of DTAs at the end of December and Permanent TSB (PTSB), some €350 million.
The State owns 14 per cent of Bank of Ireland and 75 per cent of PTSB.
“Any change in DTA policy would likely have material implications for the banks, though we were sceptical that any change would materialise and noted that previous proposals for DTA amendments were removed given the ramifications for our wider corporate tax policy,” said Goodbody Stockbrokers analysts Eamonn Hughes and Cian Harty in a note to clients on Wednesday.
Davy’s AIB upgrade was also influenced by the bank’s ability to cut its level of non-performing loans (NPLs) ratio by 28 per cent last year 16 per cent of loans.
The bank has a €3.75 billion portfolio, including property investment loans and buy-to-let mortgages, on the market as it seeks to accelerate its reduction of NPLs to the European Union average of 5 per cent. Unlike PTSB, which also has a portfolio up for sale, AIB has ruled out selling distressed home loans.