Enter Goldman Sachs as Irish Tell Banks It’s Payback Time
Finance Minister Michael Noonan, seen here, said today AIB is a “valuable” asset, as he... Read More
For the Irish taxpayers who rescued banks after they sank the economy, it’s payback time.
The government last week hired Goldman Sachs Group Inc. (GS) to advise on how to recoup Allied Irish Banks Plc (ALBK)’s 21 billion-euro ($24 billion) bailout as part of a strategy that could help push Ireland’s debt back below the euro region’s average.
“Banks are turning into a positive story, having been the source of so much concern in recent years,” said Anders Moller Lumholtz, an analyst with Danske Bank A/S (DANSKE) in Copenhagen. “We estimate Ireland will raise 20 billion euros selling bank investments between now and the end of the decade.”
Recovering the aid will be a boost to the government as it heads toward elections within 18 months. Ireland had to rescue its banks after the worst real estate bust in western Europe, injecting about 64 billion euros into the financial system. Irish Finance Minister Michael Noonan said that the departure of AIB Chief Executive Officer David Duffy, announced today, wouldn’t derail the lender’s return to private hands.
“The natural inclination is to think that this announcement may nudge out timelines on any return to the market, though we note the chairman is an ex-bank CEO, the management team has been strengthened in recent years and the strategy and path to profitability is well in train,” Eamonn Hughes, an analyst at Goodbody Stockbrokers in Dublin, said.
In July 2011, months after the government sought a bailout, the yield on 10-year bonds peaked at 14.2 percent, as the nation’s debt level headed towards a peak of 123 percent of gross domestic product.
Worst Over
Since then, the yield has dropped to 1.19 percent. In part, that reflects European Central Bank President Mario Draghi’s pledge to do “whatever it takes” to defend the euro, which sent borrowing costs across the region plunging. It also reflects austerity measures, an improving economy and optimism that the worst is over for the nation’s banks.
Though Moody’s Investors Service opted not to raise the nation’s credit rating last week, a year ago the ratings company restored Ireland to investment grade.
While the taxpayer has essentially lost 35 billion euros used to pay off depositors and bondholders at the bankrupt Anglo Irish Bank Corp., Noonan said last week he’s confident Ireland will recover the 29 billion euros it pumped into the three surviving banks.
Clawing back the money may help Ireland’s debt fall to 74 percent of GDP in 2020, according to Danske Bank.
Permanent TSB Group Holdings Plc, the only Irish lender to fail European stress tests last year, is in the process of raising capital from private investors. Bank of Ireland Plc, the largest lender by assets, has handed about 6 billion euros to the state following a 4.8 billion-euro rescue.
Goldman Appears
“The banks are back in profit,” said Fiona Hayes, an analyst at Cantor Fitzgerald LP in Dublin. “Non-performing loans, while still very high, are falling.”
Now, attention is turning to AIB, with Noonan appointing Goldman Sachs to advise on options for the bank. It was paid 7.7 million euros by the Irish government for banking advice between 2010 and 2013, though the bank is working pro-bono this time, according to the Finance Ministry.
AIB returned to profit in the first half of last year for the first time since 2008 as loan losses fell and lending profitability increased. The bank is also starting to free up money previously set aside for bad loans amid a rebound in home prices and the modification of terms of soured loans.
“I believe now is the right time for a new CEO to lead the bank through the next phase of its recovery and a multi-year process of returning capital to the Irish state,” Duffy said today, as he prepared to leave to take over at Scotland’s Clydesdale Bank, which is owned by National Australia Bank Ltd.
The bank “looks overcapitalized” by about 5 billion euros by 2017, said Stephen Lyons, an analyst at Davy, Ireland’s largest securities firm. “But it may take time for the bank and regulators to be comfortable that this is the case.”
Taxpayer Cash
The government says its AIB investment is worth 13.3 billion euros, through shares, preferred stock and contingent convertible notes, or CoCos. Turning that into cash for the taxpayer will involve a series of steps.
The lender will probably redeem the state’s 1.6 billion euros of CoCos, which pay a 10 percent coupon, by selling lower-cost lower Tier 2 and Additional Tier 1 subordinated debt instruments this year, Lyons said.
In addition, AIB said last year it had begun talks with the government about converting its 3.5 billion euros of preferred shares into equity. AIB may buy back as much as 2 billion euros of those shares, said Hayes at Cantor Fitzgerald, who estimates the bank will post a 1 billion euro profit in 2015.
Finally, the government will start selling down its 99.8 percent stake in the bank, said Lyons. He expects the government to sell at least a 25 percent stake in the bank in the second half, possibly raising as much as 3 billion euros.
Lingering Risks
Yet, risks remain for Ireland and AIB. About a third of its 80 billion euros of gross loans were impaired at the end of June, while its loan book has been shrinking since 2008.
“I’m still very concerned about weak loan growth,” said Hayes. “I really thought the loan book would have stabilized by now, but you’re probably looking at the first half of next year before loans begin to increase again.”
Still, taxpayers will get their money back, said Stephen Kinsella, an economics lecturer at theUniversity of Limerick, as the economy continues to recover.
Ireland’s economy was the fastest-growing in the euro region last year, and is forecast to expand 3.9 percent this year, according to the Finance Ministry.
“Buying AIB is essentially buying the recovery of the Irish macro-economy,” said Kinsella. “I can see why it makes sense to investors hunting for yield in a low inflation, low yield environment.”
To contact the reporter on this story: Joe Brennan in Dublin at jbrennan29@bloomberg.net
To contact the editors responsible for this story: Heather Harris at hharris5@bloomberg.net Dara Doyle, Rodney Jefferson
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