BoI steals march on AIB in returning excess capital to shareholders

Joe Brennan: Its big pitch to investors when refloating was €3bn over-capitalisation

Bank of Ireland may have required by far the smallest crisis-era bailout among the Republic's surviving banks – relative to the size of its balance sheet – but it wasn't the favoured plaything of investors betting which Irish bank would be first to start returning excess capital.

Governments of the day were forced to bombproof rival AIB before and during the Troika rescue years with €20.8 billion of rescue funds, to convince markets that the bank with the biggest problem in the system, after Anglo Irish Bank, wouldn't go under.

However, the big pitch to investors when it re-floated on the main Irish stock market in 2017 was that it was over-capitalised to the tune of more than €3 billion – and that this would be returned to shareholders over time.

Bank of Ireland, on the other hand, had scraped by for most of the past decade with a much lower capital cushion than AIB, over and above what has become the norm for European banks.



This was partly down to the fact that the quality of its loan book – despite doubling in size in the last four years of the boom – proved to be much better than its rival when the music stopped.

But minimising Bank of Ireland’s taxpayer rescue bill to €4.7 billion also allowed at least one lender to avoid succumbing to effective nationalisation during the crisis.

That was extremely important at a time when the State itself was trying to convince international markets of its credit-worthiness.

While AIB, in early 2017, became the first Irish bank to return to paying regulator dividends, a year ahead of its rival, few would have predicted that Bank of Ireland would set the pace in terms of returning surplus cash.

On Wednesday, however, Bank of Ireland, led by chief executive Francesca McDonagh, started a €50 million share buyback programme, its first since 2004. (The figure is in addition to a planned €50 million dividend, after a two-year hiatus on such payments during the height of the Covid-19 pandemic.)


The bank has been able to do so because of a massive jump last year in its store of rainy-day reserves – or what’s known as its common equity Tier 1 capital (CET1).

The bank’s CET1 jumped to 16 per cent of its so-called risk-weighted assets in December, from 13.4 per cent a year earlier and 13.8 per cent in 2019. A figure of about 13.5 per cent is seen as a sensible target by analysts these days.

The increase was driven by Bank of Ireland swinging into a €1 billion net profit from a €707 million loss for the previous year, as it freed up almost €200 million of the €1.13 billion of provisions it had set aside in 2020 for expected Covid-related bad loan losses.

It was also aided by what the group called “balance sheet optimisation”. That’s parlance for manoeuvres last year where the bank essentially took out insurance in the market on some loan-loss risks attached to certain loan portfolios, including mortgages.

Of course, the bank’s ability to release loan provisions in the first place was essentially down to the unprecedented moves by central banks and governments, including our own, to shore up the global economy during the worst of the pandemic and avert an international spike in bad loans.


Some of the bank’s excess reserves will be used up to support its planned acquisition of KBC Bank Ireland’s €9 billion of performing loans and stockbroking firm Davy this year. But both deals are set to support earnings growth over the coming years.

Bank of America analyst Alastair Ryan said in a recent report that the Bank of Ireland's €100 million planned spend on share buybacks and dividends, first announced at the unveiling of the bank's 2021 results in February, is only the beginning.

He reckons the bank will return almost €1.3 billion to investors by the end of 2024 – the equivalent of about a fifth of the group’s current market value.

Meanwhile, Minister for Finance Paschal Donohoe confirmed this week that the Government has raised €523 million by reducing its Bank of Ireland stake from 13.9 per cent last summer to about 4.9 per cent currently, by drip-feeding stock on to the market.

This brings to about €6.5 billion the amount received by the State on foot of its €4.7 billion crisis-era bailout.


These are simple “cash in, cash out” figures. Some €2.3 billion of the amount comes from bank guarantee fees and interest from bailout bonds during the crisis, as well as dividends.

The State’s remaining stake is currently worth more than €300 million, as selling continues. McDonagh and analysts reckon the company will return to full private ownership this year.

AIB’s payback, meanwhile, is taking way longer than what was expected five years ago when Donohoe presided over the sale of an initial 28.8 per cent stake in the bank.

The State has so far recovered about €10.2 billion of AIB’s €20.8 billion crisis-era bailout.

While the Minister started to feed some of its remaining stake in to the market in January, that plan alone is only likely to see the stake dip to 68-69 per cent by the middle of the year.

AIB is currently in talks to use some of its surplus capital buy back about €91 million of taxpayers’ shares in the bank, which equates to a further 1.7 per cent, based on the current price at which its stock is changing hands.

Some analysts estimate the bank may have as much as €2 billion of excess capital to return to shareholders over the coming years, net of potential loan provision releases and spending on acquisitions. But the market isn’t giving it much credit for this so far.

The Government’s remaining stake is currently worth about €3.79 billion leaving taxpayers, all told, under water to the tune of €6.8 billion on the amount they committed to keep the bank from going under during the crisis. That’s a lot of ground to make up.