Banks to pay €470m in dividends for bailout

THE Government bit the bullet last night pledging €5.5 billion in capital to three of the country’s leading banks.

It has also promised to underwrite a further €1bn in each of the two main banks if they decide to raise funds on the stock market.

The support comes at a significant cost to the three banks who will pay a combined €470 million in dividends each year to the Government over the duration.

The banks can redeem the shares within five years at the share issue price, or at a cost of 125% of the issue price after five years.

Under the terms announced by Finance Minister Brian Lenihan last night, Anglo Irish will get a capital boost of €1.5bn from the state for which it will be charged a dividend of 10% per annum.

The state has taken 75% of the voting rights in Anglo Irish, which gives the Government control of the bank without fully nationalising it.

Bank of Ireland and AIB will pay a lower dividend of 8% and cede 25% voting rights to the state, allowing it control over the raising of further capital by the two banks, as well as the appointment of directors, and will entitle it to nominate 25% of the directors on each of the two boards.

The dividends are much lower than what British banks are being charged.

Barclays is paying 14% for funding secured from wealthy Middle Eastern sources, while Royal Bank of Scotland, HBOS and Lloyds are paying an annual dividend of 12% to the Government.

Mr Lenihan said the cost of the dividend was pitched at 8% for big banks to ensure they would have enough money to lend more support to Irish business than they have been doing over the past year.

The Government said following publication of the rescue plan “the provision of credit is the most immediate and pressing issue for business and for the Government”.

It has set down a number of conditions:

* The banks must up their lending to small and medium firms by at least 10% in 2009 to companies that are “viable”;

* They will lend on the basis of a new code of practice to be developed by the Financial Regulator;

* They will also be expected to boost mortgage lending to first-time buyers next year by 30% and to assist those in arrears with their mortgages.

The Government also stressed the banks would be expected to make every effort “to ensure that repossession [of homes] is truly an option of last resort”.

Reaction to the refinancing package was mixed.

Brian Lucey, professor of economics at Trinity College Dublin, said the Government would end up forking out the €2bn it had pledged in underwriting in the case of new rights issues by the banks.

The Irish Association of Investment Managers said it welcomed this positive step forward in the recapitalisation of the banks.