A decade and a half ago, as the first financial crisis gripped Ireland, shocked and outraged Bank of Ireland shareholders assembled at Dublin’s Savoy cinema for a decisive general meeting. This marked the inception of the country’s first bank bailout, the effects of which are still felt today. In the subsequent couple of years, the bank would receive a substantial €4.7 billion injection from taxpayers.
Yet, a year and a half past the government selling its remaining shares, the Bank of Ireland had managed to reimburse €6.7 billion, including receipts from bailout bonds, preferred stock, interest, dividends and guarantee fees post crash. To make up for the overall €29.5 billion bailout expenditure for the three surviving banks, the remainder, a hefty €2 billion, may be necessary. Regrettably, the government is still struggling with the amount invested in rescuing Allied Irish Banks (AIB) and Permanent TSB (PTSB).
These figures, however, strictly provide a look at funds received and funds paid. They do not account for the interest paid on borrowed money, the potential gains of investing public funds elsewhere instead of struggling banks, or how inflation has impacted the value of money over time.
When it comes to AIB, the €20.8 billion rescue package still stands as the largest for any Irish bank that has managed to survive. As the bank announced a record €2.06 billion profit this week, it also declared plans to give back €1.7 billion of spare cash to shareholders. Of this, €1.3 billion will be returned to the government through a €1 billion share buyback and nearly €300 million in dividends on the remaining 39.98% stake. This implies that once the dividends are paid, the government will have recovered €14.1 billion from the bank.
There’s still a stake worth €4.64 billion, signifying a paper deficit of €2.06 billion for the State at present.
The surviving trio of banks recorded a cumulative increase in net interest income of 65% to €8.14 billion in the previous year. This significant increase was primarily due to them subdividing the loans of exiting entities Ulster Bank and KBC Bank Ireland and capitalising on rate increases from the European Central Bank (ECB). These developments increased the income from surplus deposits, despite the reluctance of these banks to transfer the full official rate increases to savers and mortgage customers.
Nonetheless, they have projected a collective 5% drop in net interest income this year. Both Bank of Ireland and AIB have assumed that the ECB will reduce its deposit rate to 2.75% by the end of 2024, a decrease of 1.25 percentage points, as inflation continues its downward trend. This reduction is greater than the four quarter-point reductions currently anticipated in short-term debt markets.
Several other factors are influencing the situation, including mortgage holders moving to higher rates after fixed-rate periods expire, and a trend towards moving funds from on-demand accounts to higher-yielding savings products.
The ability of AIB to generate surplus capital remains a significant driver of its share price, according to Davy analyst Diarmaid Sheridan, who suggests it could have about €5 billion to disperse on dividends and buyback over the coming three years. Barclays analyst Grace Dargan identified future distributions as crucial to AIB’s investment case.
Finance Minister Michael McGrath is presumably looking forward to continued share sales as investors increasingly recognise the capital returns story. It is feasible that he could reduce the state’s stake to about 20% by the end of the year, putting pressure on him to remove the imposed executive pay cap at the bank.
Since the beginning of the year, AIB’s shares have increased by 14%, surpassing its 2017 initial public offering (IPO) price of €4.40 for the first time since late 2018.
The UK government has recouped €2.8 billion from PTBS’s total debt of €4 billion. The sale of the bank’s former sister company, Irish Life, to Great-West Lifeco in Canada was responsible for almost half of this recovery. Currently, the taxpayers’ stake value equates to €444 million, creating a paper deficit of €756 million.
The windfall from the Bank of Ireland has marginally reduced the total deficit for the three banks to just above €800 million at present. Unfortunately, the value of PTSB’s share has been dwindling over the last year, decreasing by 47%. The acquisition of €6.25 billion in mortgage and small business loans from Ulster Bank in recent years has noticeably increased its loan book by 50%.
However, the main worry about PTSB lies in the mortgage writing costs – its key sector of business. The high risk-weighted assets (RWA) density, resulting from the last cycle when 28% of its mortgages were non-performing, implies that for every €100 mortgage issued, the bank has to retain expensive capital due to a risk weighting over 40%. The risk weight for new mortgages from Bank of Ireland and AIB is elements within the twenties percentile.
PTSB’s market share has dropped to 15% during the last three months from 23% in the first half of the year due to an uneven playing field, coupled with the temporary market withdrawal of nonbank lenders. Eamonn Crowley, the chief executive of PTSB, and his team are in the process of restructuring its internal loan risk model with the help of advisors. They hope to see some sort of a break from regulators come next year-end.
It is encouraging to note that stringent Central Bank lending rules have been in place for the past nine years, during which 70% of the bank’s mortgages have been issued. Banks have also managed to weather the storm of the pandemic and the cost-of-living crisis thus far without an increase in defaults. However, at present, investors seem reluctant to put their faith in PTSB.
The result of the RWA assessment will greatly impact the bank’s capacity to rival its larger competitors and fulfill its bailout repayment.
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