MARKET REACTION:DESPITE CONFIRMATION that it will require an extra €2.7 billion in capital this year, Bank of Ireland found favour with US investors last night.
Somewhat counterintuitively, the US line of the bank stock enjoyed a bounce of about 19 per cent, bringing its share price to $7.86 (€5.85) on the New York Stock Exchange. Bank of Ireland shares trade in batches of four shares in New York, which equates to €1.46 per share
However AIB, which must raise at least €7.4 billion in extra capital by the end of the year, moved in the opposite direction, tumbling by about 7 per cent to $3.33 (€2.48) for a batch of two shares.
The Irish stock market had closed for trade by the time Minister for Finance Brian Lenihan made his speech on the state of the banking sector yesterday.
Bank of Ireland shares closed up 3.5 per cent in Dublin, at €1.29 in anticipation that it might fare better than expected. AIB however fell to close to €1 ahead of the Minister’s speech, but recovered to close at €1.25, down 9 per cent.
Traders said the initial reaction of US investors would serve as a useful indicator of how the Dublin and London lines of the banking stocks will fare today.
One Irish broker noted yesterday that much of the news filtering through was mainly in line with media predictions. “Six months ago, we would have thought these numbers were very, very bad, but the market was conditioned for it,” he said. Ciaran O’Hagan of Société Générale predicted last night that the bond market will take “some reassurance” from the fact that the Government is taking forceful action. “Holders of bank bonds will on the whole be impressed,” he said.
Bank losses represent a one-off hit, he added. However, he warned that investors in Government bonds will be concerned about the hit to the taxpayer, although he believes that they will give the Government the benefit of the doubt “for now”.
He said investors in Government bonds will be more concerned about the gaping budget deficit. Slashing the chronic over-expenditure and raising taxation is vital, he said. He added that there was nothing to suggest that investors in Irish bonds were worried ahead of yesterday’s banking sector announcements.