THE LOSSES announced yesterday by AIB, the country’s biggest bank, serve to highlight the perilous state of the banking sector and its dependence on the State coming to its rescue. One figure stands out from the interim results which cover trading in the first half of the year. A quarter of the bank’s loans are now classed as distressed in one way or another. The figure was nearer one in 10 six months ago.
It is a shocking statistic and one that calls into question AIB’s future as an independent entity. Under the State-funded bank rescue plan, AIB will have to sell its land and property loans at a loss to the yet to be established National Asset Management Agency (Nama). Yesterday, the bank’s management – led by outgoing chief executive Eugene Sheehy – said they simply did not know what the consequences of absorbing these losses might be for the bank. The only certainty is that, under the Government plan, the taxpayer will support the banks, investing more money if necessary. If the losses are sufficiently big, the Government could end up owning more than 50 per cent of AIB.
Yesterday’s jump of 8 per cent in AIB’s share price seems counter-intuitive when the prospect of State control looms so large. Investors however are choosing to focus on signals from the Government that it will do all that it can to avoid taking equity stakes in the banks.
The Government’s overriding concern is minimising exchequer borrowing in the coming years. Minimal investment in the banks is part of this strategy. Part and parcel of this approach, in turn, is facilitating the banks to build up profits and to attract new investors. Hence the Government’s tacit approval of mortgage rate increases last week by Permanent TSB and the absence of any mention of a proposed bank levy in the Nama legislation also published last week. Any such levy – which was promised by the Minister for Finance and is aimed as ensuring Nama does not lose money – would discourage prospective investors in Irish banks.
The critical issue now, and one alluded to by AIB yesterday, is the price at which the loans will be transferred to Nama. Again, a bias towards the banks seems likely.
The Government’s strategy of minimising investment in the banks is expedient – as evidenced by yesterday’s exchequer returns indicating the still sickly state of the State finances. It will also have long-term benefits in respect of the spiralling national debt.
However, in the short term it represents poor value for the public. No tangible benefits have flowed from the State’s rescue of the banking sector. Reform has been mostly cosmetic and credit is not flowing within the economy. Interest rate cuts have not all been passed on and some rates are going up. And although there has been a painfully slow changing of the guard at the highest level within the sector, the senior management which oversaw the reckless lending remains pretty much intact across the banks.
If the Government wants public support for its policy it must ensure the taxpayer gets something back in the short term for the assistance being given to the banks.