AIB still waiting for IPO trigger

The European Commission's latest post-bailout surveillance report of Ireland, published on Monday, confirmed what many had thought – namely that volatile market conditions would push back the planned sale of a 25 per cent stake in AIB into the second half of next year.

An IPO of shares had been “tentatively” scheduled for the first half of 2017 but a combination of uncertainty over Brexit and the fact that financial stocks have been out of favour with markets this year for a variety of reasons has more or less ruled out a new listing in the first half of next year.

While it’s not the end of the world for the Government, neither is it particularly helpful for the bank, whose management team feel the time is right to re-enter the private sector, especially given the multiple challenges posed in this digital age.

It remains to be seen if the IPO will happen at all in 2017. The performance of stock markets will obviously play a large role in the decision but so too will the stability of our minority Government.

An election at some point in the next 12 months cannot be ruled out and would torpedo any prospect of an IPO of shares.

Bank ‘fixed’

At a lunch hosted by the Leinster Society of Chartered Accountants earlier this month, AIB chief executive Bernard Byrne said the bank was "fixed" and ready for an IPO whenever the Government wanted to press the button. AIB was now in "good shape" and "robust", he added.

But this has been the narrative for a couple of years now and there comes a point where you can’t keep talking about an IPO without it actually happening.

This was illustrated in my interview in April with Mr Byrne's predecessor, David Duffy, who left the bank last year for a role with Clydesdale in the UK.

“The work that we had to do to create a viable IPO-able AIB was enormous,” he said. “It could have happened in ’15 but it didn’t. It could happen in ’16 but that depends on the elections. It could happen in ’17 but there could be more elections; so who knows when exactly?”

When indeed. And, if it does come to market next year, would you buy shares in AIB?

That’s really a question for institutional investors as there is likely to be little or no offering to retail buyers. Besides, most Irish people probably wouldn’t touch AIB shares with a barge pole having seen their investments wiped out following the crash and having had to bail the bank out to the tune of €20.8 billion.

The case for buying AIB shares is that the bank is now back on a sustainable profitable trajectory. In 2015, it made a pre-tax profit of €1.9 billion, roughly half of which was from its underlying business with the balance from writebacks of provisions.

It has also trimmed an impressive €450 million from its cost base since the crash while lending is growing again, it has extinguished the costly share instruments that were part of its bailout package, and it is once again generating capital.

The Government has signalled its intention to announce a package of measures in the budget that would stimulate house building and support first-time buyers, moves that should be supportive to mortgage lending and attractive to its investment case.

As a bank mostly focused on the Irish market, AIB looks like a good proxy right now for the Irish economy, which is one of the best performing in Europe at present.

Flip side

On the flip side, it had impaired loan balances of €13 billion at the end of 2015, its net interest margin is still a bit shy of where it would like it to be, and Brexit has created uncertainty for both the British and Irish economies. About 14 per cent of AIB’s loan book is in the UK.

The recent European Banking Authority stress tests also highlighted AIB's vulnerability in the event of another major crash, with the Irish bank ranking second last among those surveyed with a core equity tier 1 ratio of just 4.3 per cent in the adverse scenario.

“Irish banks’ recovery is fragile and could be severely impacted by a deterioration in the economy,” is how the Commission put the stress test results into context. Irish banks are also under political pressure to further reduce their mortgage rates, which only serves to reduce their profits.

In the finish, it will all come down to price. Nama stands accused of having sold its Project Eagle portfolio too cheaply, something that will now involve two public inquiries.

So we should probably expect Michael Noonan, or perhaps his successor, to appoint an army of advisers to check and double check the pricing of AIB shares in advance of any IPO.

The last thing we need is another commission of investigation.

Twitter: @CiaranHancock1