New doubts arise over timing for AIB flotation

Just when AIB thought it was safe to go back to the markets, investors took a large bite out of a number of blue-chip financial stocks on Monday, with further nervousness yesterday, potentially wounding the Irish bank's chances of a flotation this year.

Before Christmas, it was a question of when rather than if AIB would float this year. Now it’s all up in the air.

The outgoing Fine Gael and Labour Party Coalition was committed to a flotation this year subject to market conditions. But the polls suggest that they could fall 10 seats short of a majority, which is a large gap to bridge with Independents and/or small parties. So all bets are off.

Labour didn’t help matters this week by announcing that it would increase the annual bank levy to €500 million from €150 million.

As the two big beasts in the banking sector, the major burden would fall on AIB and Bank of Ireland, applying a substantial added drag on their profits and reducing their wriggle room to cut interest rates further.

Separately, Fianna Fáil’s economic strategy document talks about examining the feasibility of EBS being stripped out of AIB and sold as a standalone mortgage bank. It’s a well meaning idea, aimed at stimulating competition in the mortgage market, but it isn’t exactly helpful for AIB’s flotation narrative.

Meanwhile, Sinn Féin has indicated that it would retain AIB in State ownership for a minimum of five years.

Clearly, there could be a lot of horse trading on the issue after the February 26th poll.

But let’s assume that the new government is inclined to proceed with a flotation. The timing of it would be dictated by the markets. From that point of view the current backdrop couldn’t be worse.

Banks around Europe and the US took a battering on Monday. European heavyweight Deutsche Bank closed down 9.5 per cent on concerns that it doesn't have enough cash to pay its debts. It fell again on Tuesday to its lowest price since 1992.

Our own Bank of Ireland finished 10 per cent lower on Monday and was down 6.7 per cent on Tuesday. Permanent TSB closed down by 9.4 per cent on Monday and by 9.8 per cent yesterday.

European stocks tumbled yesterday for a seventh day as the global equity rout sparked by investor worries over the global economic recovery showed no signs of abating.

UK bank Clydesdale got its flotation away earlier this month at £1.80 a share but this was at the lower end of its price range. Its pricing equated to 0.6 times its net asset value, a metric that would be unpalatable in an AIB context. The Irish bank is valued at €11.7 billion by the National Treasury Management Agency. A 0.6 times book valuation would equate to about €7 billion, which in turn would value a 25 per cent stake in AIB at €1.75 billion. It wouldn't be worth getting out of bed for that figure.

Recouping bailout funds

Permanent TSB’s flotation last year was valued at 0.9 times. A similar valuation would net about €2.6 billion for a quarter share of AIB. Again, you’d have to think that the government would be better advised to bide its time as it looks to recoup its €20.8 billion in AIB bailout funds.

The bank made a start on these repayments in December when it handed over a cheque for €1.62 billion relating to its preference shares. It is due to pay €1.76 billion on its CoCos in July and the Government could probably also draw a dividend from the bank.

Given the flux in the market, about the only thing we can say about the timing of AIB’s flotation is that it is unlikely to happen before the autumn, but even that might be an ambitious target.

Regardless, the key is to get the maximum return for taxpayers. If the new government believes in the durability of the Irish economic recovery, then there is no need to rush to sell a stake in AIB.

Twitter: @CiaranHancock1