It’s been refreshing that the decision of Finance Minister Michael Noonan to sound the starting pistol to sell a valuable chunk of AIB has sparked some sort of debate about Irish banks.
Rightly or wrongly Minister Noonan has had a bit of a thing about returning AIB to private hands for some time and has decided the best way to get back the almost €21bn taxpayers injected into the lender was through a shares sale. His plans were thwarted last year when bank shares collapsed amid fears about the Italian banks’ loans books and the financial health of European banking giant Deutsche Bank.
The process of selling 25% of AIB in an initial public offering (IPO) will be completed in the next four weeks, if not earlier. That’s because the appetite of investors participating in the many “non-deal roadshows” conducted by AIB and the Government around the world this year has been strong. There is no doubt, as the jargon goes, the bank is more than IPO-ready. It is what its Government owners and its AIB managers have worked towards since the bank turned its first profit over two years ago following the crash. That does not mean the sales process is guaranteed a smooth market ride. Political events could yet cause turbulence for markets.
The debate over how best to use the substantial proceeds of possibly more than €3bn that will flow from the sale is welcome. It needed, however, to have been widened for a long time into a discussion on how banks after the crash could best serve Irish firms and households. As numerous reports from the Central Bank and ECB have shown, Irish SMEs pay some of the highest cost loans in the eurozone and households here pay the highest home loan costs. Even before the crash, the two big banks dominated. The last competition probe into Irish banks took place before the crash, over a decade ago. The rigour of that report can be judged that bank shares here famously climbed on the day its findings were published. The unspoken nature of Irish banking is the troika and the Irish authorities ensured an effective duopoly to ensure the financial system would survive financial disaster.
Much shrunken, AIB, as well as Bank of Ireland, despite its British Post Office tie-up, are focused on the Irish economy. That focus has become a key selling point for the Government and its advisers as they tested the appetite of US funds who have clambered to tap investments in the recovering eurozone by acquiring part of a bank exposed to the fastest-growing European economy.
In AIB, investors will take a bet on the Irish mortgage market and Ireland’s young population, who will need home loans when the country finally sorts out how to build enough of the right mix of houses.
AIB is also “IPO ready” because it has managed in a fast-growing economy to strike deals with its customers and to sell off non-performing loans. The amount of its non-performing loans have fallen from a peak of €28.9bn to €8.6bn at the end of March. There is still a large non-performing loan portfolio on its balance sheet, however. At a time when the latest report from the European Commission recommended action to reduce this bad debt, including debt forgiveness, this creates uncertainty.
It leaves AIB more exposed than other banks with regular levels of NPLs in the event of a downturn or further economic shock such as Brexit. The needs of Irish households and SMEs should not be overlooked.
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