The overarching objective of the banking strategy I set out in March 2011 was to have a functioning, stable banking system operating in support of the Irish economy and to reduce the cost of the banking bailout to the Irish taxpayer.
Our strategy is working. We now have two strong universal banks, AIB and Bank of Ireland, with Permanent TSB operating as a challenger bank focusing specifically on retail and consumer banking. The relationship between the banks and their customers is improving and the taxpayers’ shareholdings in the banks are now valuable assets.
However, the cost the taxpayer has incurred to secure this has been unprecedented. Maximising the banks’ value and ultimately the return of cash to the taxpayer is a key priority in 2015. Today I have appointed financial advisers to ensure we optimise the return on AIB, where more than €20 billion of taxpayers’ money has been invested.
Between the banking guarantee in 2008 and the bailout in 2010, more than €46 billion of taxpayers’ money was injected into the banks by the Fianna Fáil-led government with the majority – about €34.7 billion – going into Anglo Irish Bank and Irish Nationwide Building Society.
Upon taking office in 2011, and with the situation continuing to deteriorate, I set out this Government’s strategy for the banking system. This was underpinned by an investment in the three viable banks of just less than €18 billion. This brought the cost to the Irish taxpayer to €64.1 billion; €34.7 billion into Anglo Irish Bank/INBS and €29.4 billion into the three viable banks of AIB, Bank of Ireland and Permanent TSB.
Over the past two years we have taken major steps in reducing the overall cost of this bailout. The liquidation of Anglo Irish Bank and the replacement of the promissory note deal in February 2013 reduced the amount of money that the State will have to borrow over the next decade by some €20 billion. In addition, through the sale of investments in Bank of Ireland and the sale of Irish Life, about €5 billion has been returned to the State, in addition to €5.9 billion from interest and fees across all the banks.
The Irish banking system is now in a much stronger position. The preliminary independent valuation of the shareholding, referred to last week by the NTMA, shows that as at December 31st, 2014 our equity and preference shares in AIB were valued at €11.7 billion and our 14 per cent equity interest in Bank of Ireland was valued at €1.4 billion. The State is also holding €1.6 billion of contingent convertible capital notes (CoCos) in AIB and €400 million of CoCos in Permanent TSB; which brings the total current value of the State’s investment in the banks to more than €15 billion.
Permanent TSB is not as far along the road to recovery as the two pillar banks but has a viable business plan. The ECB recently endorsed Permanent TSB’s capital plan and discussions are well advanced with the European Commission regarding its restructuring plan. Preparations for Permanent TSB to raise new capital are well under way and this is expected to be completed before the end of July.
Value for taxpayers
Much of the banking-related work in the Department of Finance this year will focus on AIB. Given the scale of the State’s investment – some €20.8 billion – and the range of options available to recoup value from the bank, officials within my department are working with AIB on reconfiguring the capital structure. Goldman Sachs International has been appointed to provide financial advice.
The focus will be on ensuring that the best decisions are made regarding potential capital restructuring options and sequencing in order to maximise the return of cash to the State from our AIB investments. While this is just the start of the process, it is an essential first step on the road to recovering value for the taxpayer. All options remain on the table and it is too early to specify what steps will be taken next or to put a timeline on decisions.
The approach this Government has taken in dealing with the banks is working, is in the best interests of the Irish taxpayer and will deliver the best results. We have taken the opportunity to recoup taxpayers’ money when the right opportunity arose and have walked away from other potential transactions that simply did not represent good value for the taxpayer. The success in restructuring the banking system is recognised by investors and rating agencies, and the banks are no longer viewed as a risk to the financial stability of the State.
I am confident that, over time, we will at a minimum fully recover the funds this Government invested in AIB, Bank of Ireland and Permanent TSB. If economic and trading conditions continue to improve over the next decade or so, the cash returned to the State combined with the value of any remaining shareholding may exceed the funds invested.
However, we will take our time in assessing all options to ensure the banks are operated in the best interest of the Irish economy and that the return to the taxpayer is maximised.
Michael Noonan is Minister for Finance