A bank-friendly deal that offers more shelter for stormy years ahead

ANALYSIS:SOME 83 days after the State guaranteed €440 billion in deposits and debts at the Irish banks, the Government has injected €5.5 billion into AIB, Bank of Ireland and Anglo Irish Bank with the possibility of investing up to another €1 billion each in AIB and Bank of Ireland in the issuing of new shares.

All told, the State's investment in the three big banks could reach €7.5 billion.

Minister for Finance Brian Lenihan says the State's investment in Anglo is the "last step short of nationalisation" and believes the cash injections for the State's two big banks, AIB and Bank of Ireland, will be sufficient to meet "the challenges facing them" over the coming years.

"Were we to go the nationalisation route [at Anglo] I think we would be affirming that we have no confidence in the capacity of the bank to survive," said Mr Lenihan.

The deal bears shareholders' interests in mind at AIB and Bank of Ireland. The State is taking preference shares in both banks, which means it will be paid ahead of ordinary shareholders, but existing investors will not initially be affected by any dilution in the value of their interests.

The cost to the banks is 8 per cent in the case of AIB and Bank of Ireland, and 10 per cent for Anglo, which reflects the higher risk associated with Anglo and the interest the State is taking in that bank. This is lower than the 12 per cent the UK has charged banks in its recapitalisation programme.

This amounts to €160 million a year for AIB and Bank of Ireland, and €150 million for Anglo. If the banks can't pay this, the Government has the power to take ordinary shares in the banks instead.

The aim of the deal is to encourage the banks to buy out the State's interest within five years. "It can buy back at face value for the first five years or 125 per cent if it went beyond that," said Mr Lenihan. So the State could earn €2.3 billion over the five years in return for the initial investment of €5.5 billion.

Given that the €18.7 billion National Pension Reserve Fund has lost substantial money this year due to falling stock markets, the annual returns of 10 per cent and 8 per cent aren't too bad.

AIB has deviated from the line it has consistently (and emphatically) stood by in recent months by informing the stock exchange today that it has "indicated our interest in seeking up to a further €1 billion from our shareholders".

The bank says its capital ratios are good but that it is "mindful though of the growing market expectation for banks everywhere to have higher capital levels". In other words, the bank thinks it has enough capital, but the market wants more and it is reluctantly agreeing.

Bank of Ireland has signalled that it will hold a rights issue offering new shares that will be underwritten by the State. The rights issues will give existing shareholders an opportunity to buy into the shares again and give them the potential to benefit from any potential upside in the stocks.

Analyst Scott Rankin at Davy stockbrokers said the recapitalisation deal "looks like a very bank-friendly deal", while Sebastian Orsi, analyst at Merrion Capital, described it as "relatively shareholder friendly".

The fresh capital from the State will undoubtedly offer more shelter for the stormy years ahead.