AIB described as ‘phoenix rising from the ashes’

Stockbrokers Merrion Capital is convinced there is a resurgence in AIB, with analyst Ciaran Callaghan issuing a note entitled ‘Phoenix rising from the ashes’.

Mr Callaghan’s thesis is that the removal of the contingent convertible notes (CoCo) from AIB’s balance sheet and the paying off of the Nama senior bonds will leave the bank as a prime candidate for investors.

“Given the high (10%) coupon on AIB’s €1.6bn CoCo coupled with the net interest margin (capital contribution) drag, the notes represent an inefficient form of capital in the current environment. Therefore, AIB’s viability and earnings capacity would be significantly enhanced if the group was allowed to retire these instruments over coming months, in our view,” he said.

However, Mr Callaghan said they don’t think that the AIB will make any move to remove the CoCo notes until after the result of the European bank stress tests which are due in November.

Although the analysis states that it would be much cheaper for AIB to fund the €1.6bn of capital represented in the CoCo notes through the debt market, due to uncertainty around the Central Bank’s tax treatment of new instruments.

The success in AIB’s deleveraging means that it is not far ahead of the troika-mandated loan-to-deposit ratio of 120%. The bank currently has a loan-to-deposit ratio of 100%. This means that the bank has an opportunity to reduce the amount it is paying to depositors, saving it money and increasing the bank’s key net interest margin rate.

Bank of Ireland has already taken the initiative to lower its deposit rates, and Mr Callaghan believes that AIB could now do the same.

“With a loan-to-deposit (LDR) ratio of 100% at 2013 year-end, we believe AIB has the capacity to take a market leading position in the Irish market and drive further pricing reductions over coming months,” he said.

This move, coupled with cost reduction, means that the bank can increase its net interest margin resulting in scope for increased returns.