Speculation over future of Anglo as shares fall again

Bank recapitalisation:SPECULATION WAS growing about Anglo Irish Bank's future yesterday as the Government's proposal to inject €1.5 billion into the ailing lender failed to arrest the fall in its share price.

Investors responded positively to the news that the State is to inject €2 billion each into Bank of Ireland and AIB as part of a recapitalisation plan that could be worth up to €7.5 billion.

Anglo is to receive €1.5 billion and the State will get 75 per cent control in return, but its shares continued to plunge yesterday, losing a further 14.3 per cent to close at 30 cent. They were down more than 26 per cent at one point in mid-afternoon trade.

The bank traded at a high of €11.15 over the past 12 months. On the basis of last night's closing price, it has lost more than 97 per cent of its value in that time.

Share dealers in Dublin yesterday remarked that investors "didn't want to know about Anglo". They said the markets now believed it could end up as a State-controlled vehicle for the worst of the bad debts held by Irish banks.

Bank of Ireland gained almost 32 per cent to close at 89 cent. AIB was up almost 27 per cent at one point yesterday, but ended the day up 1.2 per cent at €1.67.

Traders said investors remained cautious about the two main Irish banks, as there was a possibility they would issue new shares to raise more cash themselves. If they do this, both institutions are likely to offer the new stock at a discount to its market price.

The Government has pledged to underwrite a rights issue of up to €1 billion by both banks. This means that if investors do not buy new shares issued by either bank, the State would step in and take up the offer.

Ratings agency Moody's, which measures the banks' ability to repay debts and meet liabilities, said that despite the Government move, it would continue to review the three institutions' credit ratings with a view to downgrading them. It began its review last month.

Yesterday, Moody's senior analyst Ross Abercromby said the agency believed falling property and asset values could still hit the banks' profits and capital, which in turn determined how much they could lend to customers.

If organisations such as Moody's downgrade the Irish banks' ratings, wholesale lenders would regard them as a higher risk than they are currently, and would increase the interest charged to them. The banks would then pass this cost on to borrowers.

Minister for Finance Brian Lenihan said yesterday the €470 million a year that the State expected from its investment in the banks would be a "good return" for the National Pensions Reserve Fund, which is providing the cash.

Banking analysts yesterday broadly welcomed the package.

John Cantwell and Ciarán Callaghan of NCB Stockbrokers said the deal was particularly attractive from the point of view of ordinary stockholders, as the State was taking preference shares in each bank. Davy Research analysts Scott Rankin, Emer Lang, Niamh Hore and Stephen Lyons said the Government pledge to underwrite any share issue should "put a floor under the banks and get us into the new year".

Ibec director general Turlough O'Sullivan said it was crucial banks continued lending money to businesses. "The recapitalisation of the bank will ensure that further emphasis is placed on growing lending to small and medium-sized enterprises," he said. "I welcome the assurance that the banks will provide at least an additional 10 per cent capacity for lending to viable small to medium enterprises in 2009."