Government to delay decision on €1.8bn Bank of Ireland shares

The Government and Bank of Ireland will wait until the Central Bank’s balance sheet assessment of domestic banks is completed before making a decision about the redemption of the €1.8bn in preference shares, say analysts.

Michael Noonan, the finance minister, holds €1.8bn of preference shares in Bank of Ireland, which will step up in value by 25% unless they are redeemed before Mar 31.

Bank of Ireland said it was looking at a number of options in terms of refinancing the preference shares.

However, the bank is awaiting the outcome of a European Commission review on what the implications would be for core tier one equity capital if the shares are transferred to private ownership.

Under existing rules, the preference shares are deemed to be core tier one capital until 2017 as long as they are owned by the State. Alternatively, if Bank of Ireland could raise the equity through a rights issue to refinance the €1.8bn, then that would also count as core tier one equity.

“We estimate that [Bank of Ireland’s] 2013 year end fully-loaded Basel III core tier one ratio would increase by 3.7% to 9.0% if the bank raised equity of €1.8bn to replace the preference shares,” said Merrion Stockbroker analyst Ciaran Callaghan in a note.

“Furthermore, we believe there would be existing market appetite to raise this amount at present (equates to 25% of current market capitalisation). BoI shares are currently trading on 1.3x its 2013 trough tangible net asset value.

“This represents a significant valuation premium compared to peers in other distressed economies, especially given BoI’s relatively weaker future projected profitability and likely high cost of equity (we expect it to generate a return on equity of circa 6% in 2015).

“Nevertheless, we believe that many equity investors are prepared to take long-term ‘buy and hold’ positions in the bank, considering it as a geared play on the Irish economic recovery.”

Bank of Ireland rose for a second day in Dublin trading to reach an almost 30-month high after Mr Noonan said the State may sell its preferred shares in its largest lender “sooner rather than later”.

The shares are a legacy of the bank bailout in 2009. The State has a 15.1% stake in Bank of Ireland.