Market reaction to the Government’s €7 billion recapitalisation of the State’s two largest banks AIB and Bank of Ireland has been muted with shares in both lower today. Some brokers have already questioned if the Government’s capital will be sufficient.
At 3.40pm shares in Allied Irish Bank (AIB) were 7.5 % lfell to 99 cent, having earlier fallen by 15 %. Bank of Ireland (BOI) stock was 8 % to 56 cent.
Under the Government’s plan it will pump €3.5 billion into each bank and get warrants giving it an option to buy a 25 % stake in the lenders. Both banks have welcomed the decision.
Kevin McConnell, head of research at Bloxham Stockbrokers, said the capital injection is “good news insofar that there is a sizable capital injection .. “However, without clarity on either an insurance scheme or the creation of a bad bank, there is still uncertainty over the size of the impact of bad debts on capital levels.”
Davy Stockbrokers analyst Scott Rankin said “investors believe that this will not mark the end of Irish Government intervention and believe it is highly likely that the state will proceed with a bad-bank/insurance scheme in order to fully deal with the problem.”
The Government statement indicates that it is going to further investigate “proposals for the management and reduction of risks”. It is unclear if this will involve further recapitalisation of both banks.
Mr. Rankin went on to state that the recapitalisation was welcome and would give comfort to bond investors and liquidity providers alike, ”it may not represent the end of the government’s involvement.”
On the same day as the announcement of the € 7 billion recapitalisation injection, BOI announced a revision of its impairments forecasts on property loans over the next three years from €3.8 billion to €6 billion, citing the worsening economic climate and rising unemployment.
Bank of Ireland also said it will make a fiscal second-half loss, without giving details, as it increases the amount of money set aside to cover bad loans.
Speaking on RTE’s Morning Ireland the Minister for Finance Brian Lenihan said he believes the Government had correctly judged the required capital level for AIB and Bank of Ireland: ”In terms of capital, I believe we got it right”.
The preference shares issued by AIB & BOI as part of the Government’s recapitalisation will pay a fixed 8 % dividend. This is lower than the 12 % the Royal Bank of Scotland Group is paying the British government, when the British Government recapitalised in late 2008.
Mr Lenihan stated that he has discussed “management change” at both banks and that the boards of both lenders will retire before their annual general meetings and go forward for re-election. He said it would be “premature” for him to comment on the possible composition of a new board and that the appointment of chief executives at the lenders was a “matter for the board.”
Mr. Lenihan also stated that:
“I’m quite prepared to discuss schemes for assessing and eliminating risk for the bank, but would involve careful protection for the taxpayer.”
Source: Irish Times – February 12th 2009 – “Muted Market Reaction to €7bn racapitalisation plan: