State already ‘in the money’ as it planned BoI sale, records show

The State was already "in the money" as it planned a sale of its Bank of Ireland stake, the Department of Finance has said.

Minister for Finance Paschal Donohoe announced in June the Government would be selling off its 13.9 per cent stake in the bank through a prearranged trading plan.

Records released under freedom-of-information legislation reveal the plan first began to gather steam in March when a banking road map said bank stocks had recovered from a “torrid 2019/2020”.

An internal presentation said sale of Bank of Ireland stock would allow the department to signal the “privatisation programme is back on”.

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It said the exchequer was currently down €5 billion on its €29 billion investment in the banking sector and that shares would need to double in value from that date to close that gap with full recovery unrealistic in the short term.

However, the presentation said the State was already “in the money” when it came to its investment in the bank and after all fees had been included.

The department needed to “re-break” the perception of close links between the State and the banking sector, it said.

“Privation process has stalled/reversed since AIB IPO [initial public offering] in 2017 and the Ulster [Bank] exit [from the Irish market] compounds this,” said one slide.

It said there was a perception State shareholdings were driving the behaviour of banks when it came to capital allocation and other areas.

The presentation said a full exit – or a pathway to a full exit – from Bank of Ireland would be the clearest signal they could give that State banking policy remains unchanged.

It added: “[The department] believes a trading plan on Bank of Ireland . . . achieves this aim, while helping to maximise proceeds and reduce post-transaction look-back risk.”

It said the hope was that the banking sector was at the start of a trading cycle that “should be more up than down”.

However, one slide warned: “Holding bank equity is risky and there is always the possibility that trends could pan out worse than expected.”

Sale risks

The presentation also cautioned of other potential sale risks including that investors in Irish banks had been badly burned.

It said the State’s investment in AIB was seven times greater than that in Bank of Ireland and that “this [AIB] is where our returns will be made”.

One slide said: “Any perception that regulatory pressure is starting to ease will provide a boost.”

A trading plan would avoid the need to try to time the market with large trades, steer clear of volume price discounts and eliminate the need to go through “political gateways” each time shares were sold, it said.

On the downside, it meant no ‘big bang’ sale announcement and would require some monitoring, including the suspension of trading in any possible “big market correction”.

Alternatives included a major sell-off of the Bank of Ireland stake in one or two transactions. However, a volume discount on a trade like that could cost up to €30 million, the presentation said.

Holding on to the State’s stake in the bank and reaping further income from dividends was also mooted but was seen as contrary to Government policy and carrying its own risks.