The end of government ownership of the Bank of Ireland was so well announced and predictable that when it arrived yesterday it drew little attention.
All signals pointed to an exit from the last 3 piece holdings in September following a successfully executed drip elimination plan that started in June 2021.
It’s a legacy of which the late Bank of Ireland boss Francesca McDonagh and Treasury Secretary Paschal Donohoe can be rightly proud.
Given that the government took over stakes in the banks in the direst of circumstances in 2011, the financial benefits of a sale are now significant. Bank of Ireland’s return on assets was 6.7 billion euros versus an original bailout of 4.7 billion euros, of which 841 million euros came in the last 15 months.
In fact, the remaining majority stakes in AIB and Permanent TSB are likely to generate significant income streams of their own for years to come. In the right conditions, it could even promise some big capital payouts for the taxpayer.
Things are exceptionally converging for the domestic Irish banking sector. Here are some key factors that will determine how well things will go from here.
The National Treasury Management Agency (NTMA) had the advantage of selling Bank of Ireland shares in a rising market, boosting the state’s cash returns from recent share sales.
Bank of Ireland shares sold in the final phase of the trading plan went at an average price of €6.17 per share, according to the Treasury. That was an increase from an average of €5.64 in phase two and €4.96 in phase one.
Some of that lift came from a generally bullish market over the past year
Some of that lift came from a broadly rising market over the past year as investors positioned themselves for a post-Covid economic recovery.
But in 2022, as shares fell on inflation concerns and the fallout from the Russian war in Ukraine, both Bank of Ireland and AIB outperformed their European peers and the broader market.
Investor interest in the historically weak ‘third force’ of Irish banking is also likely to increase with the return of PTSB to the Iseq 20 index of Ireland’s largest stocks this week.
Strong share prices mean sales opportunities. That should help the NTMA find their spots for opportunistic disposals of shares of AIB, which is also in the midst of a drip-feed sales schedule.
Irish bank stocks plummeted when the European Central Bank hiked interest rates by three-quarters of a point earlier this month.
Why? Because they are extremely sensitive to movements in the underlying cost of money.
AIB, for example, can expect to add more than €300 million in interest income for every 1 percent increase in base rates — a 19 percent increase based on 2021 results.
With all banks expected to pass on at least some of the recent rate hikes to adjustable rate borrowers (tracker customers have already taken the hit), money will flow.
As ECB deposit rates rise in tandem with credit prices, the deadweight on bank deposits will also disappear, removing a key drag on Irish banks’ profitability.
This “widening of operational maws,” as a new Davy report calls it, means an overall increase in revenue for the banks, which will flow back to shareholders — the state — in the form of dividends and divestitures.
According to Davy, this will mean returns of over 10 percent for all banks by 2025. Something that hasn’t happened since 2007.
The departure of Ulster Bank and KBC Bank Ireland from the domestic banking scene is not good for customers, but it is changing the profitability profile of remaining competitors: Bank of Ireland, AIB and Permanent TSB.
PTSB is likely to benefit the most as it acquires €7.6 billion in small business banking assets from Ulster Bank
PTSB is expected to benefit the most as it is 7.6 billion AIB duopoly.
As part of the deal, Ulster Bank owner NatWest will take a minority stake in PTSB, diluting the state’s position from 71.2 percent to 63.5 percent. But it will be a smaller stake in a much more valuable — and sellable — company.
AIB and Bank of Ireland have also fattened up on the leftovers from Ulster and KBC, adding income-generating assets that will immediately contribute to the bottom line.
It has become something of a cliché in recent years that Irish banks are well capitalised, but management’s oft-repeated truism is true.
As the legacy of non-performing loans diminishes, these robust capital buffers are less necessary for loss absorption. That means they can be released in share buybacks that would return even more money to the taxpayer.
Certainly there is a high level of uncertainty in the economic environment which could negatively affect the outlook for Irish banks, but the current convergence of encouraging conditions points to a continuation of a gradual exit process that has just returned Bank of Ireland to full private ownership.
https://www.independent.ie/business/bank-of-ireland-exit-from-state-ownership-is-just-the-start-of-an-era-of-returns-from-bailed-out-banks-42013503.html The Bank of Ireland’s exit from state ownership is just the beginning of an era of returns from bailed out banks