AIB may pay €4bn to the State ahead of October budget

AIB completed a full audit of its accounts in June, a move it was not obliged to take and which has increased speculation that it will start its financial restructuring this year.

Market sources believe AIB is now in a position to return €3-€4 billion to the exchequer well before a planned stockmarket float, and possibly before budget day in October.

It would do this by repaying €1.6 billion in contingent convertible notes (Cocos) to the State and also repaying some of the €3.5 billion in preference shares also invested during the bailout of the bank.

It now looks highly unlikely the Government will move to sell down its ordinary shares in AIB this year via a planned offering of about 25 per cent of the bank on the stockmarket.

IPO

However, AIB’s improving financial position means it could return a significant amount to the exchequer well before the IPO – likely in mid-2016 – and even possibly in advance of October’s budget.

The timing of the move will be decided by Minister for Finance Michael Noonan, but with a full audit completed and talks advanced with the new banking regulator in Frankfurt, he has the option of starting the return of cash before the budget, or certainly before the end of the year.

AIB is now strongly profitable, reporting pretax profits of €1.1 billion last year, and with a strong performance expected this year, allowing it to build back up its capital levels.

Meaningful return

A senior stockmarket source said that the bank’s capital position is understood to be strong enough to enable a meaningful return of money to the State – up to €4 billion before the planned IPO.

If the money was repaid before the budget – or could be booked in to the 2016 exchequer revenues – it would improve the State’s financial position on budget day.

However as a once-off revenue it is likely to go largely to pay down debt, rather than giving room for more budgetary largesse.

AIB has been discussing its financial restructuring with the new regulatory arm of the European Central Bank, the Single Supervisory Mechanism (SSM) and the Department of Finance. These talks are likely to conclude shortly.

Mark Bourke, its chief financial officer, said that “you can easily see a €3 billion number in the near term being returned to the State”.

At that stage, he spoke of the Cocos investment being redeemed when they mature next July, but the likelihood now is that this will happen earlier.

AIB will also be discussing whether some of the €3.5 billion in preference shares need to be converted to equity to boost its capital levels – and how much of these can be paid back to the State.

Ordinary shares

The bank is also likely to restructure its ordinary share base, which will sharply lower the nominal value of shares held by private investors, even though the very small free float means the shares were never saleable at these high valuations.

Despite having warned private investors, this could be a sensitive issue for Mr Noonan. AIB may also raise new capital through a bond issue as part of the move.