AIB shares and irrational exuberance

Is there another dilution of AIB shares in the near future or will the current trading price continue? If I bought now, is another dilution of the share price possible or is that it?

Mr BO’N, Co Down

What’s going on with shares in AIB is an issue I have been hoping to get around to for some time now. The slightly worrying thing – at least from my point of view – is that this is the first letter I have received on the subject. The lack of investor interest on the issue indicates that, despite what has been happening to the share price, few people see cause for concern. They should.

The general view is that Minister for Finance Michael Noonan is going to move imminently to refloat part of the State's share in the bank – dating back to the 2009 bailout during the financial crisis.

The State put €20.8 billion into the bank to keep it afloat. In return, it now holds 99.9 per cent of the equity. Think about that for a moment: all the shares in private hands (and it is almost universally private rather than institutional hands) amount to just 0.1 per cent of the stock of the bank.

So far, AIB has repaid about €6.5 billion of that money. Much of the balance is expected to come from the sale by the State of its shares back into the market. In the short term, the Minister’s stated plan is to sell up to 25 per cent of the Government stake this year – most likely over the next few weeks.

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So where does that leave you? Well, let’s leave the issue of dilution to one side just for the moment.

AIB shares were trading at €9.20 last week. At that level, the bank is seen by investors to be worth €24.97 billion. However, at the end of last year, the bank’s own view of its value was closer to €11.3 billion.

Pre-IPO interest

Yes, valuations have risen a little since then but they haven’t more than doubled. Just one month ago, before the latest flurry of pre-IPO interest, shares in the bank were trading at about €5. And even that was seen as optimistic.

Irrational exuberance from investors over AIB is nothing new, even since the financial crash. Both the bank itself and the Minister for Finance have warned several times in recent years that the shares are overvalued. When you consider that listed companies and their major investors tend to spend most of their time talking up their worth, it gives you some sense of just how out of kilter trading in AIB shares has been.

Yes, the stock market valuation of the bank at that time was an even more eye-watering €78 billion but the Minister’s advice – and that of the bank – is just as relevant now.

AIB shares may or may not be a solid investment in the longer term. And, to answer your direct point, while there is no way of knowing for sure whether there will be any future dilution, with the State looking to sell off its stake, no such exercise is likely in the medium term.

What is certain – at least according to people like Stephen Hall, the banking analyst at stockbroker Cantor Fitzgerald – is that people buying AIB shares at current market rates will be nursing a substantial loss on paper when Noonan does put part of the State’s holding in the bank back into the market.

What is happening just now with AIB is being termed in the market as an “eejit trade”. That’s not meant as a compliment and it is not something any sensible investor wants to be getting involved with.

Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or by email to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice