AIB and Bank of Ireland add €5.5bn to value since Ulster and KBC first revealed exit plans

The boost for Government-owned banks is bad news for customers as investors believe Ireland faces vastly reduced competition

The Government all but controls Permanent TSB with a stake of 75%, has a huge shareholding of 70% in AIB, and holds a minority shareholding in Bank of Ireland of 14%. Picture: Brian Lawless/PA

The three Government-owned banks — AIB, Bank of Ireland, and Permanent TSB — have between them put on more than €5.5bn in market value since late February when news first broke that major rivals planned to quit banking in the Republic, the Irish Examiner can reveal.

The €5.5bn gain in stock market value is good news for the Government which has major shareholdings in all three banks but is bad news for household and business customers as is the clearest sign yet that global stock market investors believe Ireland faces vastly reduced competition that will benefit the surviving lenders.

The Government all but controls Permanent TSB with a stake of 75%, has a huge shareholding of 70% in AIB, and holds a minority shareholding in Bank of Ireland of 14%. That means the Government owner will benefit when, or if, it sells down its shareholdings to private investors.

Carve-up

All three banks have lined up to participate in the carve-up of the combined €30bn in mortgage and corporate loans that Ulster Bank and KBC plan to shed. 

AIB has an early-stage agreement to acquire €4bn in corporate loans from Ulster while Permanent TSB is in talks, but has yet to sign a formal agreement, to take multi-billions in performing mortgage loans from the NatWest-owned bank.

Bank of Ireland has struck an agreement with the Belgian-owned KBC to take most of the performing mortgage loan book of around €9bn in Ireland. 

There is widespread agreement between analysts, economists, consumer advocates, and business groups that customers will lose out. Stock market investors appear to agree.

Irish bank shares have been among the best performing in Europe this year -- with most of their huge stock market gains notched up in the last three months when the implications of the exit plans of Ulster and KBC became clear.

According to Irish Examiner calculations, AIB has added over €2.25bn in value since the start of March for a valuation on Thursday of €7.45bn. Bank of Ireland has put on €3bn over the same period and smaller rival Permanent TSB has gained around €220m.

Third largest

Ulster Bank is the third-largest lender in the Republic and it said in late February that after a five-month review it planned to close. Its owner NatWest said it could put its capital to better use elsewhere. Ulster offers tough competition for AIB, Bank of Ireland, and Permanent TSB by selling some of the most competitive fixed-rate mortgages in the market. Within weeks, Irish banking suffered a further blow when KBC said in mid-April it too was closing down in the Republic.

With around a share of 12% of the mortgage market, KBC is an important player because it competed directly against AIB, Bank of Ireland, and Permanent TSB. It also eschewed cash-back mortgage loans which have long been damned by brokers and consumer advocates for offering first-time buyers and the least knowledgeable the costliest interest rates.

On mortgages, the big two banks AIB and Bank of Ireland currently have just under 60% of the mortgage market and KBC's 12% share means its exit will mean over 70% of the home loans market will be concentrated in the hands of the already two dominant lenders — even before the carve-up of Ulster Bank is taken into account. 

A research note by Davy published on Thursday predicted that "significant upside remains" in the market valuations of the Irish banks.

"We do not believe that valuations reflect the additional earnings that can arise from the prospective transactions that are currently being negotiated," its analysts said, referring to the acquisition plans of the loan books from Ulster and KBC.