Carville move may signal divestment advance

The appointment of Des Carville as head of the Department of Finance’s shareholder management unit could see an acceleration of the Government divestment of its stake in the pillar banks, according to Merrion Stockbroker analyst Ciaran Callaghan.

Mr Callaghan noted comments made by the secretary general of the Department of Finance, John Moran, that the position was being filled “at a key moment as we make decisions about the State’s ongoing share-holding in the banks”.

“Aside from the €1.8bn Government Preference Shares that are expected to be refinanced over coming months, the State also has a 15.1% equity stake in Bank of Ireland currently valued at roughly €1.2bn. Given the recent appreciation in the bank’s share price, which has increased by 170% year-to-date and currently trading on 1.4x 2013 tangible net asset value, we believe that the State may be considering its option to monetise its residual equity stake,” he said.

“In relation to AIB, we also believe that the State currently has the ability to successfully place the majority of its €1.6bn contingent capital instruments. We note that the pricing of BoI’s equivalent contingent capital — same trigger levels of 8.25% and maturity in July 2016 — have improved in recent months.

“We believe that there would be significant market appetite for such a transaction over the coming months, as investors strive to obtain exposure to the recovering Irish economy.”

However, a Department of Finance spokesperson said the appointment of Mr Carville had been an urgent priority of the department because of the importance of the SMU in managing the Government’s interests in the banking system.

Previous head of this unit was Michael Torpey, who resigned earlier this year to join Bank of Ireland.

Bank of Ireland is on course to be the first of the three pillar banks to exit State ownership and make a return to outright profitability. However, the banking sector is still struggling with mostly loss-making tracker mortgages. The latest cut in ECB interest rate will put more pressure on the banks.

“We estimate that Thursday’s ECB rate cut of 25bps will reduce the banks’ aggregate operating profit by roughly €150m per annum (AIB €63m, BoI €56m, ptsb €32m). This incremental hit to revenue is primarily driven by the banks’ low yielding Irish tracker mortgages (AIB €17bn, BoI €17bn, ptsb €15bn) which re-price in line with the ECB refi rate.

“The lower interest rate environment will also adversely impact average deposit spreads and the returns generated from the investment of bank capital, with these items partially offset by reduced funding costs,” said Mr Callaghan. “Given the existing pressures to rebuild margin levels and to return to profitability, we do not expect the Irish banks to pass on the latest ECB rate reductions to standard variable rate mortgage holders.

“Indeed management may now be considering further asset re-pricing of standard variable rate portfolios to compensate for theincreased tracker drag.”


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