Muted market reaction to €7bn recapitalisation plan

 

Market reaction to the Government’s €7 billion recapitalisation of the State’s two largest banks AIB and Bank of Ireland has been muted with shares in both lower this afternoon as some brokers question if the capital will be sufficient.

At 3.40pm shares in AIB were 7.5 per cent lower at 99 cent, having earlier fallen by 15 per cent. Bank of Ireland stock was 8 per cent lower at 56 cent.

Under the Government’s plan it will pump €3.5 billion into each bank and get warrants giving it an option to buy a 25 per cent stake in the lenders. Both banks have welcomed the decision.

Kevin McConnell, head of research at Bloxham Stockbrokers, said the capital injection is “good news insofar that there is a sizable capital injection”/

“However, without clarity on either an insurance scheme or the creation of a bad bank, there is still uncertainty over the size of the impact of bad debts on capital levels.”

Davy analyst Scott Rankin said “investors believe that this will not mark the end of Irish Government intervention and believe it is highly likely that the state will proceed with a bad-bank/insurance scheme in order to fully deal with the problem.”

The Government statement indicates that it is going to further investigate “proposals for the management and reduction of risks”.

And while the recapitalisation was welcome and would give comfort to bond investors and liquidity providers alike, ”it may not represent the end of the government’s involvement,” Mr Rankin said.

Bank of Ireland this morning revised up its impairments forecasts on property loans over the next three years from €3.8 billion to €6 billion, citing the worsening economic climate and rising unemployment.

Bank of Ireland also said it will make a fiscal second-half loss, without giving details, as it increases the amount of money set aside to cover bad loans.

Speaking on RTE’s Morning Irelandthe Minister for Finance Brian Lenihan said he believes the Government had correctly judged the required capital level for AIB and Bank of Ireland: ”In terms of capital, I believe we got it right”.

The preference shares issued by Allied Irish and Bank of Ireland as part of the Government’s recapitalisation will pay a fixed 8 per cent dividend.

That’s lower than the 12 per cent the Royal Bank of Scotland Group is paying the British government, which it tapped for capital last year.

Mr Lenihan said he has discussed “management change” at both banks and that the boards of both lenders will retire before their annual general meetings and go forward for re-election.

He said it would be “premature” for him to comment on the possible composition of a new board and that the appointment of chief executives at the lenders was a “matter for the board.”

“I’m quite prepared to discuss schemes for assessing and eliminating risk for the bank, but would involve careful protection for the taxpayer,” Mr Lenihan said.

Additional reporting Reuters/Bloomberg