Bank of Ireland sale will inevitably reignite vexatious issue of banker bonuses

Market Beat: Market sentiment towards remaining Irish banks has picked up

 

As the Government made moves this week to finally get the ball rolling on exiting at least one the State’s bailed-out banks, UK taxpayers face the prospect of getting involved in another.

Minister for Finance Paschal Donohoe’s announcement on Wednesday that he has hired Citigroup to drip-feed some of the State’s 13.9 per cent stake in Bank of Ireland into the market over the next six months came as something of a surprise, sending the stock down more than 5 per cent at one stage that day.

It’s not as if European banks are in vogue with investors at the moment, amid concerns about the effect of lower-for-longer interest rates on lending margins, muted loan demand and the general economic outlook.

Irish banks have long stood out as a particularly weak spot, forced to hold what are viewed to be above-the-odds levels of expensive capital as a legacy of the financial crisis.

While Bank of Ireland’s shares have soared more than 200 per cent from their Covid-19 lows early last year, the bank is trading at about half its book value, or estimated net value of its assets.

But if the Government is to start somewhere, Bank of Ireland is probably the best place. After all, it is alone among the State’s banks in repaying its bailout, having returned €5.9 billion in cash, following a €4.7 billion rescue between 2009 and 2011. Donohoe has refused to give the minimum price he will accept for Bank of Ireland shares in the market, but the remaining stake is valued at about €680 million.

Market sentiment towards the remaining Irish banks has picked up in recent months

AIB, on the other hand, has returned only €10.8 billion of its €20.8 billion bailout. Adding in the market value of the State’s remaining 71 per cent stake in the bank and there continues to be a €5.71 billion shortfall. Similarly, taxpayers remain underwater to the tune of €1.77 billion on their investment in Permanent TSB (PTSB).

The high capital demands of Irish banks, dragging on investors’ returns, drove announcements by overseas-owned Ulster Bank and KBC Bank Ireland in recent months of plans to quit the market. This will leave the once-overbanked country with just three mainstream banks.

Many lay the blame with the Central Bank, which is now among the most hawkish regulators in Europe, having been scarred by its own failings during the credit and property bubble.

Indeed, a London-based analyst took senior Central Bank figures to task on a conference call with number crunchers last week for the high levels of capital banks have to hold even as it enforces, among other things, the strictest mortgage lending rules across the euro zone.

Apparent carelessness

Paraphrasing Oscar Wilde, according to sources, the analyst said that losing one bank may be regarded as a misfortune; but to lose two looks like carelessness.

Still, market sentiment towards the remaining Irish banks has picked up in recent months as Bank of Ireland, AIB and Permanent TSB line up to buy up most of the loan books being left behind by Ulster Bank and KBC. The prospect of Bank of Ireland buying all of KBC’s €9 billion of performing loans, mainly mortgages, and AIB acquiring €4 billion of corporate and other business loans from Ulster Bank should go some way towards helping both on their way to more acceptable profit returns.

PTSB, meanwhile, has a shot at proving its long-term viability as it continues talks with NatWest over its Ulster Bank assets. The 75 per cent State-owned bank is understood to be interested in about €9 billion of Ulster Bank’s €20 billion loan book, including non-tracker mortgages and small-business and consumer loans, as well as deposits and part of the UK-owned bank’s branch network.

Analysts estimate PTSB would need to raise more than €500 million of additional equity to support such a deal, not far off the bank’s own current market value of about €570 million.

‘Badwill’ deal

The Government and minority shareholders appear to be open to supporting a cash call. Indeed, the Minister could recycle money from the Bank of Ireland share sale. Capital could also be raised from PTSB buying Ulster Bank assets at a discount to their fair value, giving rise to a “badwill” accounting manoeuvre that, despite what it sounds like, is actually a good thing for an acquirer.

The Irish Times reported on Friday that there are also discussions about NatWest taking a minority stake in PTSB – perhaps in the region of 10-20 per cent – as part consideration for Ulster Bank assets.

This would further reduce the amount of money that PTSB would need to raise and allow NatWest, which remains almost 55 per cent owned by Boris Johnson’s government, to benefit from the potential future upside on assets being sold at a discount. But it would also inevitably lead to an overhang of stock in the hands of a group that ultimately wants out.

There are legitimate reasons for stock-based variable pay

Bank of Ireland’s shares, meanwhile, could become a plaything over the coming months for market speculators trying to work out the minimum price Donohoe is willing to accept for the stock.

As much as half of the 13.9 per cent stake could be sold by the year end, according to market sources.

Bank of Ireland chief executive Francesca McDonagh heralded the share sale announcement as an important moment in “normalising” the relationship between the State and Bank of Ireland.

This has become the bank’s go-to word when pressing to be excused from the Government’s ban on bankers’ bonuses, with its chairman, Patrick Kennedy, most recently using the annual report to call on it to be “permitted to develop a more normalised remuneration approach”.

There are legitimate reasons for stock-based variable pay, not least the fact that most major stock market investors see it as a way of aligning interests of company executives and shareholders.

With Donohoe expected to publish within weeks the outline of planned laws to make it easier to fine financial executives for wrongdoing under their watch, there is an argument for carrot motivation alongside the stick.

But will he go there?

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