Growth is key as Government plans sale of stakes in PTSB and AIB in 2015

The year 2015 is shaping up to be a key one as the Government tries to plot the next stage of its exit from the banking bailout. The sale of significant Government stakes in Permanent TSB (PTSB) and AIB is now provisionally scheduled for next year. This would represent the next phase in the movement of the banking sector back to private ownership.

For this all to work, Irish economic conditions need to remain favourable. Buying a stake in AIB or PTSB is, effectively, taking a bet on the future of the Irish economy. Minister for Finance Michael Noonan needs the positive growth momentum and the favourable trend in house prices seen in recent months to continue if the sales are to be successful.

A plan to sell a significant minority stake in AIB in 2015 has been in place for some time now. First AIB had to pass the European Central Bank stress tests – which it has done, with a significant buffer of spare capital even if economic conditions turn down. Next it needs to outline a year of profitability to the markets when financial results for 2014 are published next March.

After that, the working plan has been to sell down some of the State shareholding, possibly via a sale of some shares on the markets, with the hope that future shares could be sold for higher prices in subsequent years.

Accelerated planning

Government officials will now accelerate their planning on how to get cash back for the State from AIB, Noonan indicated yesterday. Some €20 billion was needed to bail out AIB – yesterday’s tests suggest that this was more than enough. So the numbers are very significant for the State’s finances and for the calculation of how much we will get back from the €64 billion spent rescuing the banks.

AIB might have thought it was next in the queue for sale but the stress tests have changed that. The other key State stake remaining is in PTSB, where the State owns 99.2 per cent, effectively full control. What the stress tests have done is accelerate the pace at which this is likely to be sold. Because PTSB needs capital – €125 million on its management estimates – the obvious way to raise this is for a new investor to put in cash.

To raise this cash, the Government has to start selling down its stake and has said it will do so early next year. Doing so at a time when the bank is still unprofitable and needs capital means it is unclear what price might be available.

On some estimates the bank might be worth €1 billion or more. Investors are likely to want to put in more than the minimum capital requirement. So the State might recoup, say, €300 million or more from the sale of a 30 per cent stake. But PTSB’s capital-raising plan has to first be approved by the new EU regulators and it still awaits clearance from the European Commission on its overall business plan.

Minority stake

So Government Ministers and officials will realise this is far from a done deal – and we will just have to see what offers emerge. A call for State investment to fill any shortfall is still possible and would no doubt cause some political flak. Ideally, as with AIB, the plan would be to sell a minority stake and hope to sell further shares later for a better price.

The vital issue for potential investors in PTSB and AIB is the Irish economic story, as the future of both banks is rooted in growth. Strong growth and rising house prices, as we have seen in the last few months, will help the restructuring of both banks and give investors something to buy into.

The State is unlikely to recoup the €20 billion used to bail out AIB or the €4 billion pumped into the former Irish Life & Permanent. But there is still a lot to play for as these sales are planned, both in cash terms and in influencing the future shape of the Irish banking market.

There was much talk when the Government published Budget 2015 of the reliance on growth continuing to make the numbers add up. The same applies for the sale of the bank stakes. There is a lot riding on the economic trends over the next six months.