Cantillon: State’s retreat from banks not so smooth

A weekend report said the flotation of the nationalised Allied Irish Banks has been put back until after the election, but a spokesman for Michael Noonan insists there’s no settlement yet. “The timeline is as previously outlined by the Minister. If the decision is made to go for an initial public offering that will happen later this year or early next year,” he said.

In question is a plan to sell off a 25 per cent stake in AIB, which has financial and political attractions. However, the political dimension of a part-privatisation might be seen to be a crucial consideration. Of the surviving banks, AIB is only institution from which the Government has not yet sold down some of its shares. An IPO, therefore, would signal that the State’s retreat from the sector was under way in earnest.

Still, this is far from straightforward. Noonan may have had no choice politically but to put pressure on the banks to cut mortgage rates, yielding interest reductions from lenders such as AIB. But this has not gone down well in financial markets, where they don’t like “political inference” in bank profitability.

In this scenario, the read-through to AIB from a dismissive HSBC note last month on Bank of Ireland is clear. HSBC put “reduce” guidance on BofI stock, saying earnings per share could decline by up to a mid-single digit if it cut mortgage rates. This was before BofI cut fixed but not variable rates.

Merrion Street said such concerns have not been relayed to it vis-à-vis Permanent TSB. "Following the sale of 25 per cent of PTSB we haven't received correspondence from any of the investors on this matter," said Noonan's spokesman.

But this is less about correspondence and more about price. Whenever AIB roadshows take place, the relevant test of investor sentiment will the price at which shares might sell. The immutable link between mortgage rates and profits will certainly feature in the deliberations.