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Michael McGrath faces AIB shares dilemma as he looks to senior role in Brussels

Timing of sale of bank’s next tranche sensitive in terms of executive pay cap and looming election

Minister for Finance Michael McGrath: Reducing the Government stake in AIB – which stands at just under 31 per cent – below 30 per cent would leave him having to make a call on whether to lift a €500,000 executive pay cap. Photograph: Alan Betson

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Joe Brennan
Sat Jun 22 2024 - 05:00

Minister for Finance Michael McGrath was prepared when reporters sidled up to him on Wednesday as he left a National Asset Management Agency (Nama) briefing and asked if he had been tapped on the shoulder yet for a certain big job.

“I have no interest in becoming the next… leader of the Green Party,” he guffawed, as he darted towards the exit.

Rumours of McGrath’s interest in becoming the Republic’s next European commissioner have been circulating since last autumn. He is now odds-on favourite in political circles to be picked, with the Irish nominee expected to be announced as soon as next week – as the Government seeks to put its best foot forward to clinch a senior portfolio in Brussels.

The last week in June, however, has also been when the minister for finance of the day has moved in recent years to sell a 5 per cent block of shares in AIB, just before the bank enters what is known as a closed period between the end of its financial first half and the reporting of results in early August.

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The problem is, selling a 5 per cent chunk of shares in AIB now would push the State’s shareholding below 30 per cent.

Reducing the Government stake – which currently stands at just under 31 per cent – below 30 per cent would leave McGrath having to make a call on whether to lift a €500,000 executive pay cap at the bank.

There is never a right time for a minister to be seen to be bumping up bankers’ pay. But now is particularly awkward for McGrath

The 30 per cent threshold is a key psychological one. After all, if a shareholder breaches the 30 per cent level in an Irish public company, giving them what is deemed a controlling interest, it faces having to make a bid for the rest of the company.

Top executives at AIB had good reason to hope that McGrath would lift the pay cap when the State’s stake fell below the key 50 per cent level with a stock placing last June.

His predecessor Paschal Donohoe’s decision in late 2022 to remove salary restrictions at Bank of Ireland – after the State sold its remaining shares in that bank – was accompanied by a commitment that the same would happen at AIB and PTSB once taxpayers’ holdings in each fell to an “appropriate level”.

Department of Finance officials working on a banking review in 2022 made it clear in drafts of the report that they saw that moment arriving when the State was no longer a majority shareholder in either of the banks. However, this never made the final version.

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McGrath – a notoriously cautious politician – kicked the issue to touch last summer. It has only delayed a decision on a thorny issue that will ultimately have to be taken.

There is never a right time for a minister to be seen to be bumping up bankers’ pay. But now is particularly awkward, as McGrath seeks to avoid controversy with his hat in the ring for the Brussels gig and his Cabinet colleagues eyeing a general election.

A 5 per cent share placing would bring the stock to within a whisker of 25 per cent, another pressure point.

The State has recovered about €15.1 billion of AIB’s €20.8 billion crisis-era rescue bill. Its remaining holding is currently worth about €3.6 billion

But avoiding a block placing at this stage would be a cynical decision, given where AIB’s shares are trading and the momentum that has been built up in the past two years reducing the stake from 71 per cent through a three-pronged approach of drip-feeding of shares on to the market, twice-yearly block trades and selling back shares to the bank.

[ State’s AIB stake falls below 31% as drip-feeding of shares continues ]

Shares in AIB are currently trading at close to the €5 mark, up more than one-third from the price at which the Government last sold a 5 per cent tranche of shares in November – and more than double the €2.28 a share it achieved for its first block placing two years ago.

The State has recovered about €15.1 billion of AIB’s €20.8 billion crisis-era rescue bill. Its remaining holding is currently worth about €3.6 billion – leaving taxpayers about €2.1 billion under water.

Investor sentiment towards Irish banks – whose earnings are much more sensitive to interest rates than your typical European bank – has been underpinned this year as expectations of the pace at which the European Central Bank (ECB) will cut official borrowing costs have been reined in.

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At the start of the year, financial markets had factored in 1.5 percentage points of rate reductions. While the ECB moved earlier this month to lower official rates by a quarter of a point – bringing its deposit rate down to 3.75 per cent – economists reckon only two more cuts are in store for the remainder of the year.

Shares in AIB are up almost 29 per cent so far in 2024 (even as European bank stocks wobbled on Friday).

There are any number of risks to sentiment – not least investors taking a more cautious view on AIB’s earnings outlook and the scale of excess capital the bank will return to shareholders in the coming years.

Jordan Bartlam, an analyst with Italian investment bank Mediobanca, recently cut his forecasts for AIB. He sees AIB’s underlying pretax profits, which soared 130 per cent last year to a record €2.56 billion, falling gradually by more than 30 per cent by 2026, some 9 per cent below the consensus market view.

Best for McGrath to crack on with share sales.

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