As speculation of an imminent announcement on the long-awaited return of AIB to the main stock markets in Dublin and London went into overdrive last weekend, Michael Noonan sought to buy himself some wriggle room.
"The decision hasn't been made yet, but will have to be made in the next 10 days," he told RTÉ on Monday, adding that his officials were watching the markets very closely, particularly "events that could put us off track, like the election in the UK".
The following morning, however, he informed Cabinet colleagues that the timeframe had narrowed and that a final call would be made within 48 hours. Following a flurry of phone calls and advice from investment bankers, led by Deutsche Bank, Bank of America Merrill Lynch and Davy, Noonan decided that afternoon to press the button on the bank's initial public offering (IPO).
London-based advisers working on the deal urged that the intention-to-float announcement be made through the stock exchange the following morning, as is normal practice. However, domestic political considerations dictated that Irish taxpayers, who had spent €20.8 billion bailing out the bank, deserved to know first – at 9pm on Tuesday.
Newsrooms were put on notice an hour and a half in advance and put under strict embargo. That embargo was broken by the Financial Times at about 8.15pm. All bets were off.
“It was very chaotic at the time,” said a source involved in the planning, “but after many false dawns, at least the IPO is finally underway.”
Dubbed Project Viking, based on the image of a boat on AIB’s logo, the move to float an initial 25 per cent stake in AIB is likely to be the last major decision by Noonan before he steps down this month as a new taoiseach takes over.
A successful deal would book-end Noonan’s time in office. He had taken over in March 2011, weeks before a round of stress tests, ordered by the Republic’s international bailout masters at the time, exposed multibillion euro holes in the balance sheets of the State’s lenders as their bad loans soared.
The taxpayer bill for rescuing AIB would hit €20.8 billion by that July – second in size only to €29.3 billion that was pumped into Anglo Irish Bank before it was put into liquidation.
"The banking situation was catastrophic when I arrived in Ireland," said Stefan Gerlach, a Swedish-born economist who joined the Central Bank as deputy governor in 2011 and stayed four years. "But I must say I have been very impressed by the way things have recovered."
Noonan is right to take the opportunity now to start out on the road of returning AIB to private hands, according to Gerlach, who is currently chief economist at Swiss private bank BSI.
“The history of publicly-owned banks is not a happy one and should in my mind be limited to emergencies,” he said.
The pitch is simple: AIB, which racked up about €25.5 billion of losses between 2009 and 2013, has been profitable since 2014; it's the most geared lender to the Irish economy, which the European Commission predicts will register the fastest growth rate in the euro zone in 2017 for the third straight year.
Chief executive Bernard Byrne will also spend the coming weeks – before the IPO prices in late June – demonstrating to investors how the bank has slashed its level of bad loans from a 2013 peak of €29 billion to €8.6 billion and plans to largely resolve the problem by the end of the decade.
The bank has also shaved €365 million in costs in the past five years – including through layoffs of thousands of staff – and convinced more customers to carry out transactions online.
"I think the timing for the IPO is quite good," said Christopher Wheeler, an analyst with US brokerage Atlantic Equities in London. "Markets are back again, having been dead in the water this time last year."
Investor appetite for banking stocks, in particular, has been helped in the past six months by an unlikely alliance of the European Central Bank's Mario Draghi and Donald Trump.
The ECB president has clearly indicated that he has no plans to ease off on his €2.3 trillion quantitative easing programme to reboot euro-zone inflation and growth. Meanwhile, banking stocks globally are up sharply since Trump’s election in November in the hope that the US president’s policies will boost economic growth and accelerate rate hikes in the world’s largest economy, which bodes well for bank profitability.
While the rally has lost some of its steam in recent months amid concerns about Trump’s ability to push through his administration’s policies, banking stocks in the euro zone are currently up 65 per cent from their lows of last July.
Still, the sale is not without risks. Financial markets were rattled briefly on Wednesday, with sterling dropping against the euro and the dollar, as an analysis by pollsters YouGov suggested UK prime minister Theresa May's Conservative Party could fail to win a majority in next week's election. May has been banking on the election increasing her hold on parliament and giving her a strong hand in negotiating divorce terms with the European Union.
The Brexit talks with the EU are set to begin within weeks of the vote. While only 14 per cent of AIB's loan book is in the UK, compared to 40 per cent at Bank of Ireland, the State-controlled lender is proportionally more exposed to any fallout from Brexit on the Irish economy.
Still, Byrne said he’s not worried about market vagaries.
“Our issue really is to focus on the things we can manage and control,” Byrne said on a call with reporters during the week. “I never really get too worried about the commentary about markets.”
Speaking subsequently to The Irish Times, Byrne said that, while the timing of subsequent share sales remains a matter for the finance minister of the day, it's "conceivable from a markets and liquidity perspective" that AIB could be out of majority state control within "three to five years".
However, both Noonan and Byrne have previously said that it could take up to a decade for the Government to fully extricate itself from the bank.
Formed in 1966 from the merger of three banks – Provincial Bank of Ireland, the Royal Bank of Ireland and Munster & Leinster Bank – AIB first floated on the stock market the following year. Its independence would end 44 years later as the then government seized control of the company two days before Christmas in 2010, on foot of a court order to prevent it from collapse as bad loans soared and customers pulled billions of euros of deposits.
AIB, Ireland’s most valuable bank at the peak of the market in 2007, has had more than its fair share of controversy and scandals in the decades leading up to the crisis.
In 1985, the then government was forced to take over AIB's Insurance Corporation of Ireland subsidiary and bail out the bank after the insurer started incurring large losses on high-risk insurance policies.
In 2000, AIB reached a €90 million settlement with the Revenue Commissioners in relation to evasion of Deposit Interest Retention Tax. Two years’ later it emerged that a rogue currency trader at the bank’s Allfirst unit in the US, John Rusnak, had racked up a $691 million trading loss.
In 2004, it was revealed that the bank had been overcharging customers on foreign exchange transactions for up to a decade, and two years' later, four former AIB executives reached a €206,000 tax settlement as a result of their involvement in an offshore investment company, called Faldor.
The bank remained profitable throughout. But it was beginning to store up problems for the future.
In 1998, property and construction accounted for as little as 12 per cent of the bank's loan book. However, in 2004, AIB, then under chief executive Michael Buckley, set up a "win-back team" to work out why it was losing business to the likes of Anglo Irish Bank. The bank subsequently ramped up lending, bankrolling big developers from Liam Carroll to Ray Grehan, whose property empires imploded during the crisis.
By the time the music stopped and global financial markets went into meltdown in 2008, almost 36 per cent of AIB’s Irish loan book was out to the construction/development industry, with a further 29 per cent comprising of residential mortgages.
Buckley, who stepped down as chief executive in 2005, would tell the Oireachtas banking inquiry two years ago that when he was retiring he had "no premonition, let alone any evidence, that a liquidity and credit crisis was building internationally... and that AIB would be so vulnerable to it and ultimately would only survive through taxpayer support".
His successor, Eugene Sheehy, who quit in 2009 as AIB received an initial €3.5 billion bailout, told the same inquiry that he drew "no comfort from the extraneous factors that contributed to the crisis" and that the damage caused by his role in what happened occupied his thoughts "on a daily basis".
But now it’s payback time.
The Government has recovered €3.3 billion of capital from AIB over the past 18 months, plus a €280 million dividend handed over this year – its first such payout since 2008. When guarantee fees and interest payments are included, AIB has returned €6.8 billion to date.
Investment bankers working on the deal estimate AIB could be worth between €11 billion and €13 billion, according to sources. At the mid-point, the sale of a 25 per cent stake could raise €3 billion. A further 3 per cent in AIB could be sold immediately after the IPO if investment bankers exercise a right to buy and place additional shares – or what is known as a “greenshoe” allotment – if demand for the stock is particularly high.
"It looks like there will be good demand for the shares on the back of the strong recovery in AIB's performance in recent years, including its return to profitability, a significant improvement in asset quality and higher capital ratios," Simon Adamson, an analyst with debt research firm CreditSights, said in a note to clients during the week.
The aim is for the State to drip-feed further stock onto the market for up to a decade to fully recover AIB’s bailout. Analysts warn that it is important that the Government isn’t too greedy in its initial pricing, particularly as a portion of the shares will be marketed to small, or retail investors.
Investors who bought into another bailed-out bank, Permanent TSB, when it was floated two years ago – at a top-of-the-range €4.50 a share, even though the lender was loss-making – are currently sitting on large losses. PTSB shares had declined by two-thirds within a year of the deal. They are currently more than a third off their IPO price.
“Trying to squeeze everything out in the first tranche is not a good move,” said Wheeler. “You want investors coming back to the table the next time. When you have a lot more shares left to sell, you always want to leave something on the table.”