Could AIB prove surplus funds are more than a mirage?

They were innocent times three years ago, when the government sold a 29 per cent stake in AIB.

Brokers pitching the deal to stock market investors at the time highlighted that AIB, which needed a €21 billion bailout during the financial crisis, had €3 billion of excess capital on its books – ready to be returned to investors within a few short years.

By the end of 2019, analysts’ expectations of the surplus had come back sharply, as banks’ income were being dented by the effect of ultra-low central bank and market interest rates, slow loan book growth amid uncertainty over Brexit and the Irish housing market, and ever-rising capital requirements being set by regulators.

While AIB chief executive Colin Hunt said in February he was planning to seek approval from regulators later this year to start releasing some of the excess funds (most likely by way of special dividends), the Covid-19 crisis soon put paid to those notions.

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AIB and Bank of Ireland shocked overseas analysts early last month by reporting much higher levels of bad loan provisions than expected – and relative to European peers – for the first half of this year.

This was largely the result of loan impairment forecasting models being based on past experience (with Irish banks having one of the biggest bad loans shocks globally following the financial crash). It also reflected the fact that Irish banks, having drip-fed the bad news during the last crisis, seem keen to do a kitchen sink job this time round.

Either way, it effectively killed off expectations in the market that there would be any surplus cash in AIB to return to shareholders.

However, UBS analyst Jason Napier has taken a contrarian view, highlighting in a new report that the notion of excess capital in AIB may be more than a mirage.

Upgrading his stand on the stock to an outright “buy”, Napier said AIB, whose shares have fallen by two-thirds so far this year, making it and Bank of Ireland among the worst-performing European bank stocks, may have €1.1 billion to hand out to investors after the Covid-19 crisis.

Still, it’d be a brave investor to bank on it.