Debt investors more optimistic about Irish banks than the stock market

The Central Bank highlighted in its biannual Financial Stability Review, published this week, how Irish banks had higher levels of capital heading into the Covid-19 crisis than most European countries – putting them in a better position to absorb shock losses as defaults increase.

However, shares in the State’s lenders have been among the worst hit in the sector so far this year as investors mull the impact of the pandemic on the economy.

While the Iseq Financial Index has rallied by almost a third from its March lows, it remains 55 per cent down so far this year, leaving the banking stocks trading at about 20 per cent of the level at which their assets are valued, or what is known as book value.

It’s just as well that the banks don’t have an immediate need for fresh equity – because they’d struggle to raise it.

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“Low valuations imply banks may find it difficult to raise capital through market issuance in the future, forcing them to de-lever [reduce assets] instead to maintain capital ratios,” the bank said.

However, the bond markets have been telling a different story in recent times. AIB managed to sell €625 million of the riskiest form of bank debt on Tuesday, having secured orders from international investors for eight times the amount that was on offer.

These notes, known as Additional Tier 1 (AT1) bonds, are first in line, after equity, to take a hit should a bank run into financial trouble.

It follows on from Bank of Ireland raising a similar amount a month ago as it reopened a segment of the market for European banks that had been closed for the previous two months.

“The demand from credit markets for Irish bank AT1 paper is a strong vote of confidence from the debt market for the resilience of Irish bank balance sheets in the face of Covid-19,” Goodbody Stockbrokers analysts said in a note to clients on Thursday.

Equity investors, meanwhile, need more convincing.