Bank shares plunge despite ‘positives’

BANK of Ireland and AIB both saw their shares plunge yesterday despite analysts saying there are a number of positives from having the Government as a stakeholder.

Bank of Ireland shares closed down almost 6% to €1.11 while AIB also fell 6.3% to €1.01.

Merrion Stockbrokers said although the increased state ownership in Bank of Ireland can be seen as negative there are also a number of positive outcomes.

The Government took a 16% stake in Bank of Ireland on Monday through the National Pensions Reserve Fund (NPRF).

Merrion said the Government as a new major shareholder with a strong vested interest in a successful rights issue should support recapitalisation.

As recapitalisation occurs, recognition of the franchise value of BoI should drive attractive near term returns, said analyst Sebastian Orsi.

Merrion said by increasing the market capitalisation of the bank the share issue will reduce underwriting risk for a potential rights issue.

“The creation of a major common shareholder increases the alignment of the Government’s interest with private shareholders. We believe the NPRF will support a potential rights issue, if only to ensure a successful outcome,” said Mr Orsi.

He said considerable risks remain to be addressed, in particular NAMA discounts and EC restructuring requirements.

“However, we remain of the view that the franchise value of BoI is attractive after including recapitalisation requirements,” he said.

Based on forecasts for normalised earnings, which still offer material leverage through margin expansion and cost reductions over time, Merrion sees share price appreciation potential of 60% on a two-year view to compensate investors for the risk.

“Recapitalisation of the bank, which we expect to occur through Q2 of this year, should act as a catalyst for the share price,” Mr Orsi added.

Meanwhile, Fitch Ratings warned that the September 2010 expiry of Irish Government guarantees for certain obligations of Irish banks may have a negative impact on certain bonds issued by the banks here.

The agency warned that the expiry would have a ratings impact on some structured finance (SF) transactions and covered bond programmes and no further actions are put in place.

However, Fitch has received feedback from covered bond issuers that they plan to take mitigating action prior to the expiry of the guarantee and expects similar action to be taken for SF transactions.


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