A decade on from the financial crisis, Ireland’s government is running out of good reasons to continue owning the majority of the banking sector.
Ireland bailed out three banks in 2011-12 at a collective cost of almost €30bn. The choice then was to pull out the national cheque book or let the country’s banking system collapse and unleash unknown domestic chaos. But the cost of the bailout was so ruinous it forced the country into an EU-IMF rescue programme and triggered years of austerity.
The recent announcement of a gradual sale of the country’s 13.9 per cent stake in Bank of Ireland, Ireland’s second-biggest lender, is an acknowledgment at last by the government of how times have changed. The country’s economy posted some of Europe’s best growth rates in recent years as it emerged from the post-crisis wasteland.
But Dublin will have to take bolder steps if it is to restore normality to a sector that is the backbone of the Irish economy.
As well as its Bank of Ireland holding, the state owns 71 per cent of the country’s biggest bank, AIB, and 75 per cent of the much smaller Permanent TSB. The stakes give the government majority ownership of the domestic banking industry that lends to small businesses, homeowners and car buyers and is used by most for day-to-day banking.
Financiers say that this continued public ownership of domestic banks is dragging the sector down. One argues that the best thing the government could do for AIB’s share price is to sell a few shares. Or lay out a plan to sell a few shares, so that investors could see a path to normality.
“When investors talk about ESG (Environmental, Social and Governance) with AIB, the G is the biggest thing,” the financier says, describing the government’s presence on the share register as problematic for others considering investing. The problem is such investors do not know when the government will dump the stock.
Government ownership also tangles public policy and commercial decision-making. Pearse Doherty, finance spokesman at Ireland’s biggest opposition party, says the government should continue to hold the majority of AIB so that the state can “pursue its strategic interests when key decisions and transactions take place”.
He sees the case for strategic ownership as particularly strong now Ireland is headed for a “duopoly” with the imminent withdrawal of KBC and Ulster Bank, which say they cannot make enough money. Doherty’s stance might be a winner with voters but probably would not be with other AIB shareholders, whose interest is in profits, not national strategic priorities.
Ireland’s reluctance to launch a mass sell-off of its banking assets is more about price though, than Doherty’s concerns. The Bank of Ireland sale is palatable because, by the government’s somewhat creative maths, Ireland will have made a net profit of €2bn on its €4.7bn BoI investment if its remaining shares are sold at their market value on the day the government announced its plans.
Paschal Donohoe, finance minister, understandably will not publicly disclose the minimum share price he has set for banks carrying out the gradual sale of BoI stock over six month. However, you can bet it’s a number that will allow him to beat his chest and claim the investment delivered a net profit.
Even if that net profit was calculated selectively, on a basis that includes the almost €1.5bn in fees BoI has paid for state guarantees, which have no link to the equity investment but which the Department of Finance counts as part of the investments’ return. The department also makes no mention of the cost of servicing the debt Ireland took on so it could bail out its banks, a figure that Ireland’s Comptroller & Auditor General estimated at €2.5bn spread across Ireland’s three surviving banks and the defunct Anglo Irish Bank and Irish Nationwide.
The narrative is trickier for AIB, rescued at a cost of €20.7bn. The government is in the red to the tune of about €6bn, after taking into account proceeds of AIB’s partial float in 2017, other income received from the bank and the residual holding’s value.
That €6bn gap — and the fact that AIB’s shares are trading at around 50 per cent of their 2017 listing price — goes some way to explaining Donohoe’s statement last week that there are no immediate plans to sell AIB stock.
Other arguments against selling now include the idea that offering both banks concurrently could saturate the market and result in lower prices all around. The government might be holding off too because of hopes that the stakes will be worth more later.
“We might be in the early stages of possibly one of the strongest macro economic recoveries ever,” says Jason Napier, head of European banks research at UBS. “It might be early in cyclical terms to be selling.”
The irony is that, in practical terms, how much money Ireland gets is not that significant for the country’s economy. Karl Whelan, economist at University College Dublin, says any money is likely to be used to pay down debt, since EU budget rules make it hard to spend windfalls on things such as health and housing.
What matters more for Ireland’s future is a healthy and normalised banking market, and one where the state is not exposed to the vagaries of banks’ share prices rising or falling.