The near €3 billion AIB share sale is set to be the biggest in Europe this year and the largest stock market flotation of a State asset since Eircom in 1999. Small investors with minimum €10,000 to invest will be able to buy shares but only if they’re signed up with a stockbroker.
Share prices can go up and down and anyone considering buying AIB shares in the offering should first take some advice from a investment professional. But here are a few things that are worth considering.
Déjà vu all over again?
Remember Eircom? About 500,000 Irish residents paid €3.90 per share as they piled into the Government’s heavily-marketed initial public offering (IPO) of the phone group back in 1999 – raising €6 billion. After an initial jump, the shares slumped by more than a third in a little over a year with hundreds of thousands of small investors having their fingers burned.
More recently, institutional investors who bought into Permanent TSB’s IPO in 2015 ago have had a torrid time. Within a year, the stock had lost two-thirds of its value. It remains more than a 33 per cent off its €4.50 flotation price. Can the Government get the pricing right this time with AIB?
Ireland is the fastest growing economy in Europe
This is a positive for investors. With €54 billion out on loan in Ireland, AIB offers potential investors the clearest bet in the banking sector here to the recovering Irish economy, which the European Commission projects will be the fastest-growing in the euro zone for a third straight year in 2017.
Only 14 per cent of the bank’s loans are in the UK, compared to 40 per cent at Bank of Ireland, leaving it less directly exposed to Brexit.
However, AIB warned in documents published earlier this year for debt investors that the impact of Brexit to Irish trade with the UK, particularly in the agriculture and tourism sectors. It said sterling’s weakness “could have a material adverse effect” on the group.
The reason why taxpayers had to inject €20.8 billion into AIB during the financial crisis was to give it money to absorb losses on bad loans and prevent the bank from collapse. The bank had by far the highest level of soured loans at the height of the crisis – at a massive €29 billion in 2013.
AIB has since managed to slash that number to €8.6 billion as it restructured troubled mortgages and the economy picked up. The level of bad loans remains high by international standards, which is a concern to investors.
The bank has set itself an ambitious goal of cutting bad loans further by €6 billion to €7 billion over the next three years. This would suggest loan sales to vulture funds and house repossessions. This won’t be popular with politicians but should appeal to shareholders.
Irish banks make much higher profits than their euro zone counterparts on new mortgages. Hard-pressed borrowers may have cheered the fact a Fianna Fáil Bill aimed at giving the Central Bank powers to limit standard variable mortgage rates passed through an initial stage in the Dáil in May last year without a vote.
Not so the bankers, who view it as a threat to their profit margins. Shares in Bank of Ireland and Permanent TSB fell at the time.
AIB has cautioned that if the Bill is ultimately passed into law – despite opposition from the European Central Bank – it might ultimately affect its income.
The Minister for Finance Michael Noonan has made it clear that AIB’s management will not be given bonuses or incentive payments as part of the flotation. Bonuses in bailed-out Irish banks were scrapped in 2009 after taxpayers were forced to guarantee the sector to prevent it from collapse – and remain a dirty phrase here almost a decade later.
However, most big investors like to see top executives in companies locked into agreements where much of their pay is based on performance. Glass Lewis, one of the world’s leading advisory firms to large investors in listed companies, said recently that it remains “concerned” that executive pay at Bank of Ireland is comprised solely of fixed salary, with no bonuses or incentives.
The State will continue to own a controlling 75 per cent share in AIB after the flotation.
Some analysts have expressed concern in the past about the pressure the Government has placed on lenders to cut mortgage rates and its influence on bankers’ pay. AIB, after all, has been at the forefront of standard variable rate reductions in recent years.
The Minister for Finance Michael Noonan has acknowledged that Governments don’t make good owners of banks and AIB looks set to be majority State-owned for some time to come.
However, AIB’s chief executive Bernard Byrne has noted that the bank has been able to make decisions “that might have looked politically difficult”, including the layoff of thousands of workers as it cut €365 million of costs since 2012 and rebuilt its profits.