Government planning part privatisation of AIB

The Government will release a plan for the part privatisation of AIB as well as the restructuring of the €3.5bn of preference shares and €1.6bn of contingent convertible bonds soon after the release of its 2014 results next March, according to market sources.

The Government has pumped nearly €21bn into the 99.8% State-owned bank. It also holds €3.5bn in preference shares and €1.6bn in contingent convertible bond notes.

One source said the most likely outcome is that the contingent convertible notes will be refinanced through a combination of alternative tier one debt and subordinated debt. The Government is likely to hold on to half of the preference shares and convert the other half into common equity, the source added. A minority stake in the bank of between 25% and 49% will then be floated on the Irish Stock Exchange.

The latest trading update shows the bank continues to improve its operating performance. The net interest margin, a key indicator of profitability, was 1.64% for the first six months of the year, a rise of four basis points on the previous quarter. This was driven by lower funding costs and asset repricing, according to Ciaran Callaghan, an analyst at Merrion Stockbroker.

The bank’s core tier one equity capital increased to 16.5%. AIB passed the ECB comprehensive assessment of the banking system last month. New lending was up roughly 40% year on year.

“Underlying net loan volumes continue to contract, but remained broadly stable on a headline basis since the half-year at €64.7bn, while drawdowns increased by 40% to €4bn,” Mr Callaghan added.

Total impaired loans reduced from roughly €26bn at June 30 to €24.3bn at the end of September, with impaired loan balances stable or lower in all sectors. Impaired loans have now reduced by about 16% since December 2013.

“The reduction in impaired loans is predominantly driven by increased restructuring activity and the pace of migration to newly impaired loans declined as economic conditions improved. Specific provision to impaired loans coverage reduced marginally to circa 53% at the end of September 2014, reflecting the improving economic environment and write-offs on restructured loans,” the bank said. It said it will meet the €350m cost reduction target.

“With capital build and profitability stronger than anticipated in the third quarter, AIB’s financial progress continues to defy expectations, leaving it very well placed to approach capital markets in the near term,” Mr Callaghan said, adding that the strong trading performance “is further evidence of the geared nature of AIB’s balance sheet to the recovery Irish economy, and bodes well for the repayment of State aid”.