Inside the world of business

Stress-test boost for bank shares

AIB and Bank of Ireland have been duly rewarded for passing the stress test set by the European Commission, with shares in both banks getting a much-needed fillip yesterday.

It is to be hoped that the results will represent another milestone on the Irish banking sector’s journey back to credibility.

It will take some time for investors to digest the stress test and already many have criticised it as flawed because it did not tackle head on the implications for Europe’s banks of a default by one or more of the weaker euro-zone members. Citi yesterday published its own hybrid list in this regard, which painted a much less rosy picture.

The real proof of the credibility of the tests will be in whether it leads to an improvement in the funding market for Europe’s bank. This is particularly important in the Irish context as any prospect of ending the Government guarantee of the banks is contingent on them being able to raise significant funds outside of the guarantee before the end of the year.

The problem for the Irish banks is that while they passed the test, they were towards the bottom of the class. Despite its flaws, lenders to the banks will still regard the list as the best available ranking of European banks by financial strength. This, in turn, is going to have consequences both for their willingness to lend and the price they will charge.

If tensions rise in the euro zone again – as well they might – the banks towards the bottom of the list will be squeezed.

One option for the Irish banks is to either try and improve their capital positions further and move up the list, which is no easy ask, or else they can hope that some sort of positive feedback from the publication of the list ensures that the current abatement in the crisis of confidence in the euro zone endures – at least until they get through their tricky refinancings in the autumn.

State power companies vie with each other 

One thing that is going to strike Colm McCarthy when the assets review group begin its work is that the State owns three companies, ESB, Bord Gáis and Bord na Móna, that are in the energy business, and a fourth, Coillte, that plans to join them there.

There is competition between them. For example, Bord Gáis is chasing ESB’s domestic customers and the ESB is after Bord Gáis’s industrial clients. However, there is a contradiction between the State’s policy of promoting competition on the one hand and its ownership of a number of power companies on the other.

It would be pretty surprising then if McCarthy and his colleagues, Donal McNally and Prof Alan Matthews, don’t recommend doing something about it.

Eamon Ryan, the minister whose remit covers these companies, has already signalled that he sees no reason to change the status quo, but presumably the group is going to take its own view irrespective of this.

However, it could pay attention to one of his remarks last week, that it should “learn the lessons of the Eircom sale”.

By that he was referring to the fact that the State sold its telephone network when it floated Eircom (then Telecom Éireann) in 1999, a move that resulted in leaving the Republic’s broadband infrastructure trailing the rest of the developed world.

There are parallels in the energy business: the ESB’s national grid and Bord Gáis’s network. These are strategically important assets that ensure electricity and gas – which is used to generate electricity – can flow around the country to where they are needed.

There are already plans to separate the ownership and control of both networks from both companies. In the case of the ESB, they have stalled for industrial relations reasons.

In the case of Bord Gáis, the Government is still finalising its plans.

The assets review group could recommend that the State speed up these plans and place ownership of the networks in new entities under its control.

Spotlight on phone and online betting taxes

As Irish racegoers descended on Ballybrit for the first day of the annual Galway racing festival yesterday, racing- related news of another kind was announced across the Irish sea. William Hill is to move its telephone betting business to Gibraltar with the potential loss of hundreds of jobs at its Sheffield and Leeds call centres.

While the announcement has no direct impact on its business here, it does throw the issue of tax on online and telephone betting into the spotlight. Online and telephone – non-retail – bets placed by Irish punters are not subject to the 1 per cent tax imposed on traditional betting. The Government is planning to introduce legislation to tax bookmakers and internet betting companies through a licensing mechanism.

The issue has sharply divided the country’s bookmakers and the horse- racing industry. Horse Racing Ireland has traditionally benefited from the betting taxes and it needs the cash to plug an ever expanding hole as traditional betting declines.

Bookmakers question why Horse Racing Ireland should be the recipient of online or telephone gambling tax , when only a small percentage of online and telephone betting actually relates to horse racing.

More importantly, the bookies argue that what is on the table in terms of new legislation is anti-competitive and poses a threat to the industry.

Eight out of 10 online gambling companies operating in the Irish market are offshore. Irish bookmakers say that a tax would put them at an unfair advantage and would force them to relocate.

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