AIB’s sale of its ‘capital stack’ could be good news for Noonan

AIB went to the Commercial Court yesterday to seek permission to reduce its share capital by €5 billion to create distributable reserves. It was the first small step on the road to returning to private ownership.

At an extraordinary general meeting last month to approve this move, AIB chairman David Hodgkinson (pictured) told shareholders that a "simplified and strengthened capital structure will better enable a return to shareholders as well as helping to meet regulatory requirements".

The proposed capital reorganisation will result in the reallocation of capital redemption reserves and share premium to distributable reserves, subject to the court’s permission.

It's a running joke that AIB is valued on the stock market at €52 billion. This is a quirk of the 523 billion shares in issue that are a legacy of the €20.8 billion recapitalisation it received from the State. With AIB now back in profit and seemingly on the path towards normalisation, its chief executive, David Duffy, has decided the time is right to deal with its so-called "capital stack". Hence this reorganisation.

By tidying up the capital structure, Duffy and the AIB board can begin prepa- rations to attract external investment and begin repaying the State for its bailout.

It first has to negotiate a couple of hurdles. The court petition will be heard in October and, while approval would be expected seeing as the Government and the Central Bank have both given their approval, it is not a slam dunk. We can expect the court to put AIB through its paces before approving the scheme.

AIB also has to negotiate the pan-European stress tests, which will test its balance sheet strength in advance of the Single Supervisory Mechanism taking over regulation of the financial sector in the euro zone at the end of this year.

AIB won't know the results of the stress tests until November. Presuming it clears those hurdles, it can start thinking about a dividend payment to the State, or about returning to private ownership in some form. Duffy has said this is likely in the first half of next year. With a general election due in the first half of 2016, any repayment of funds to the State next year would be helpful to Minister for Finance Michael Noonan as he frames his final budget of the Coalition's term.