State poised to take stakes in two big banks
Submitted by daltonr on Wed, 12/30/2009 - 22:57
27 December 2009 By Cliff Taylor
The government is preparing to take a significant stake in both AIB and Bank of Ireland, by converting some of its preference shares in the banks into ordinary shares.
The move is expected in the new year, as part of a programme to recapitalise the two main banks. The government injected €3.5 billion into each of the banks last year, and will now use these funds to take the significant shareholdings.
Given the extent of the Nama write-downs, the state may end up with a majority stake in the banks, particularly in AIB, which market analysts believe faces a bigger write down than Bank of Ireland.
Based on the current AIB share price, the conversion of more than €1.1 billion-worth of preference shares would lead to a state shareholding in AIB of over 50 per cent.
While the preference shares are counted as Tier 1 capital by the Financial Regulator, the markets will want to see the banks recapitalised with ordinary share capital. However, the state will be foregoing the 8 per cent dividend it was due on the preference shares.
Holding ordinary shares is also riskier, although it could yield a return to the state, if the banks return to financial health in the years ahead. Separately, the state may also be able to sell on the warrants it purchased with the preference shares.
Details on the first of the Nama loans - which relate to big developers - are being transferred now to Nama. The loans will start to be transferred soon, probably by February.
Some market analysts believe the average write-down for AIB will be in excess of the 30 per cent average indicated by the government, increasing its need for new capital.
Analysts say the banks face further write-downs on mortgage and business loans, not covered by Nama. Economist Morgan Kelly warned in a research paper last week that these were likely to ‘‘overwhelm’’ the banks. Market sources say much will depend on the pace at which mortgage losses, in particular, crystallise over the next few years.