State gains €825m on AIB and BOI stock options

THE STATE’S rescue of Bank of Ireland and Allied Irish Banks has resulted in an €825 million win for the taxpayer as a result of the state holding options on a 25% stake in each of the banks.

Bloxham stockbrokers’ Kevin McConnell said: “There is already an €825m benefit to taxpayers from recovery in the market value of Allied Irish Bank and Bank of Ireland.

“This is apart from the benefit of the annual 8% yield from the €7 billion injection into the two main banks, which adds a further €560m to the return per annum.”

Mr McConnell said the Irish economy is suffering from a starvation of liquidity.

“According to the Bank of International Settlements, international cross border lending is collapsing. Ireland represents the biggest private credit exposure in the euro-zone for the major British banks, according to the Bank of England. Foreign owned banks in Ireland, which contribute 1/3 of the total Irish lending book, are operating at loan/deposit levels far in excess of optimum levels.

“There will be an inevitable pull down of lending in the Irish economy from foreign participants as a group as they seek to redress this imbalance. The Irish economy is urgently in need of the liquidity event which the National Assets Management Agency (NAMA) creates by pushing €60bn-€65bn into the Irish banking channel,” he said.

And he believes the NAMA “discount” is widely misunderstood.

“We estimate that a 23% discount in the gross lending book destined for NAMA equates to a 42% peak to trough fall in property prices... The threat to the taxpayer of NAMA overpaying for assets is overlooking the reduction in valuation already built into the cost of acquisition and the potential future levy on the banks if a profitable recovery is not achieved,” he said.

Mr McConnell considers that full nationalisation on the main Irish banks is the most risky option:

“The size of the Irish banking sector loan book to GDP is far greater than in previous well referenced banking crises (Finland, Sweden, Japan). Therefore the potential cost of a nationalisation of the Irish banks is far greater to Ireland’s debt raising ability than in previous cases.

“Rather than the pension, life and investment community, which act as equity/debt holders of the two main Irish banks, being seen as avoiding “moral hazard” in a non-nationalisation scenario, they are acting as a buffer against the recognition on the national balance sheet of these further banking liabilities.”

He also argues that NAMA can reduce potential capital demands on the taxpayer.

“By removing €85bn-€90bn of a lending book from the Irish bank balance sheet, with the coinciding reduction in risk weighted assets (RWA), potentially up to €6bn-€7bn in capital demands for the Irish guaranteed banking sector is averted, reducing the burden on the taxpayer for that amount. This is a key under recognised feature of the NAMA plan,” he said.