AIB making sturdy progress in direction of beneficial IPO

Ciarán Hancock: Bank to meet institutions in bid to promote €750m Tier 2 capital issuance

AIB is also planning to issue about €500m in additional Tier 1 capital, probably by the year end. Photograph: The Irish Times

AIB is also planning to issue about €500m in additional Tier 1 capital, probably by the year end. Photograph: The Irish Times

 

The way things are shaping up, tomorrow could prove to be an important milestone in the history of AIB’s reprivatisation.

Today, three investor relations teams from AIB will meet institutions to promote its €750 million Tier 2 capital issuance. Two of the roadshows will take place in London and the other in Frankfurt.

Unless something unexpected happens, the bank is expected to price the issue tomorrow, with market-watchers forecasting a coupon of between 4 and 4.25 per cent. This is seen as a good level to encourage activity in secondary markets. This will be the first step in its capital reorganisation first announced 12 days ago, which in itself is a key component on the long road to repaying taxpayers their bailout funds.

The aim of the capital reorganisation is to tidy up AIB’s books in advance of an IPO next year. To simplify the investment story for institutions, it will take the €3.5 billion in preference shares off the pitch, probably by the year end; deal with the contingent capital notes (CoCos) in July of next year; eliminate the €250 million EBS promissory note most people had forgotten about; and slim down the number of shares in issue to a more, ahem, manageable 2.7 billion shares on a one-for-250 basis. The latter piece of the jigsaw will be bad news for retail investors but AIB’s stock has been grossly overvalued for ages.

AIB is also planning to issue about €500 million in additional Tier 1 capital, probably by the year end. This will be a trickier exercise than the Tier 2 issuance but there’s likely to be crossover of investors.

Coincidentally, Minister for Finance Michael Noonan met with international investors yesterday. They also met domestic banks and the National Asset Management Agency on a whistle-stop tour of Dublin to check the pulse of the Irish economy and financial sector.

I hear the message from the Minister was that if he is reinstated after the general election, an IPO of AIB is possible in May or June. A lot will depend on the state of the markets at that time. Any wobbles and the offering will probably be pushed back to September or October.

To all intents and purposes, AIB is ready to go. Its chief executive, Bernard Byrne, only appointed earlier this year, has done the rounds of 20-30 global investors to introduce himself and tell the bank’s story.

Financial advice

There were a number of positives to its third-quarter trading update, published yesterday. Its capital levels continue to be “comfortably above regulatory minimum requirements”.

Its net interest margin ticked up to 1.94 per cent, in spite of two interest rate cuts, while the lid has been kept on costs. New lending of €6.2 billion was 53 per cent up on a year earlier and it reported increased volumes of lending in its businesses in Britain and Northern Ireland.

There are headwinds. There’s every chance regulators could again ratchet up the capital requirements, while constraints in housing supply and the Central Bank’s new macro prudential lending rules are “expected to impact future growth rates in the mortgage market”.

AIB also has a large book of provisions to work through, which could be both a positive and negative, and while the number of accounts in mortgage arrears is reducing, it’s a legacy that will weigh.

The question most want answered is when will we get our €20.8 billion back?

Some years down the road is the answer. David Duffy, towards the end of his time as chief executive, said 10 years when pressed by the Oireachtas finance committee.

In a note to clients yesterday, John Cronin, an equities analyst with Investec, suggested some €6.2 billion could be handed back by the middle of next year.

This comprises €1.6 billion for the CoCos, a net €1.64 billion from dealing with the preference shares and the EBS promissory note, and €2.9 billion based on 25 per cent of AIB’s stock being floated on the stock market. The shares are currently valued by the Government at €11.7 billion.

That would be a good start and the Minister is probably right to feel “confident that the State will ultimately recover the full value . . . in the years ahead”.

Twitter: @CiaranHancock1