AIB IPO documents warn of ‘political instability’ risks after UK vote

AIB has warned in documents relating to its upcoming stock market flotation that the inconclusive outcome of the UK election last week may give rise to "political instability", which may impact its business.

The bank also highlighted risks associated with Brexit and revealed that the rate at which it has been freeing up provisions previously set aside for bad loans dropped sharply in the first three months of 2017 as the pace at which it is restructuring non-performing loans has slowed in the past year.

The result of the UK election last Thursday “in which the governing Conservative Party failed to achieve a majority, could lead to a deterioration in market and economic conditions in the United Kingdom and Ireland, which could adversely affect AIB’s business, financial conditions, results of operations and prospects,” the bank said in a share sale prospectus published on Monday evening.

The UK accounted for about 12 per cent of AIB’s operating income last year, while the outlook for the Irish economy, to which the bank is the most exposed lender in the Republic, is highly dependent on that of the UK.

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The prospectus said that the State could raise as much as €3.8 billion from the sale of up to a 28.8 per cent stake in AIB to stock market investors by the end of this month as it returns to the main Dublin market and secures a premium listing in London.

The shares are expected to price between €3.90 and €4.90 each.

The State, which seized control of AIB in late 2010 and injected a total of €20.8 billion into the lender during the financial crisis, has since received €6.8 billion from the bank, including the repayment of capital injected into the bank, interest and fees for government guarantees of the banking sector during the downturn.

There had been a view on Friday that the publication of the prospectus, originally scheduled for early this week, could be delayed by a couple of days or even fall into next week as a result of the shock outcome of the UK general election last week, resulting in a hung parliament.

Market fall-out

However, advisors working on Europe’s largest initial public offering (IPO) so far this year concluded that the market fall-out from the shock outcome of the UK vote has been muted enough to press ahead.

AIB’s return to profitability since 2014 has been underpinned as the bank released over €1.1 billion of bad loan provisions as the economy improved and it lost less than expected when restructuring soured debt.

However, the prospectus highlighted that it only released €7 million of such provisions in the first few months of this year, compared to €112 million for the same period in 2016.

“During 2016, AIB began to experience an expected slowdown in restructuring momentum ... and is now primarily dealing with [troubled loan] cases which are of lower monetary value, more complex, more specific, more specific to an individual’s circumstances and more protracted in nature,” the documents said.

“In addition, a larger proportion of the remaining loans being resolved are subject to enforcement and the legal process associated with these takes more time than a consensual process.”

Meanwhile, the prospectus also disclosed that bankers, lawyers and other parties involved in the IPO are set to receive €41 million in fees.

This includes €16 million of costs incurred by the State for investment banks and brokers – including Deutsche Bank, Bank of America Merrill Lynch, Goldman Sachs, and Davy – working on the transaction. AIB has a further €25 million of expenses relating to the deal, understood to include investment banks, lawyers and stock market fees.