Minister for Finance Michael McGrath’s move to squeeze a bit more out of the domestic banks by more than doubling the industry levy will land AIB with the biggest charge. But it hasn’t damaged the bank’s prospect of continuing to pay down a more important Government bill: its crisis-era bailout.
AIB is set to see its levy jump to almost €100 million next year from an annual charge of €37 million in recent times, according to sources digesting details of the new basis of calculation outlined in the Finance (No. 2) Bill 2023 on Thursday. Bank of Ireland faces a levy of up to €90 million and PTSB, by far the smallest of the three, will end up stumping up about €23 million under the revised method, based off customer deposits that are eligible for the State guarantee.
The combined initial estimates come to a combined €213 million, slightly more than the €200 million that McGrath has targeted from the measure. But the hit is viewed by analysts to be more than manageable — especially weighed against the lead Opposition party Sinn Féin’s alternative budget, which argued for the industry charge to be more than quadrupled, to €400 million.
AIB’s net interest income almost doubled in the first half of this year, compared to a 68% advance by its closest rival
Shares in AIB actually hit a five-year high this week and are now up 46 per cent on where they were changing hands 12 months ago, advancing at almost twice the pace of both Bank of Ireland and PTSB, which rebranded last week from Permanent TSB.
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AIB’s net interest income almost doubled in the first half of this year, compared to a 68 per cent advance by its closest rival — making it the main beneficiary so far from a rising interest rate environment.
The bank’s net profit for the period relative to shareholders’ funds — a key measure of profitability — reached 21.5 per cent during the period, well above its medium-term target of more than 13 per cent and the 18.5 per cent return on tangible equity (RoTE) delivered by Bank of Ireland. It is also seen as having more surplus capital to distribute to shareholders in the coming years.
Meanwhile, trading activity — or liquidity, in markets lingo — in its stock has also picked up gradually as the Government continued a programme of selling down its stake in the bank, with its move below the key 50 per cent level in June putting AIB on the radar of investors that ordinarily eschew State-controlled companies. The sell-down has been on three fronts: dribbling small amounts of shares into the market; placing larger 5 per cent blocks on occasion; and participating in stock buybacks by the bank.
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The holding dipped below 46 per cent on Monday as the Minister continued to drip-feed stock into the market. It stood at 71 per cent in January last year when his predecessor, Paschal Donohoe, decided it was time to get on with exiting the bank.
All told, about €13.1 billion, or 63 per cent, of the aid given to AIB to keep it afloat during the crisis has been recouped, including proceeds from the sale of shares, redemption of bailout bonds, interest, guarantees and dividends.
On Thursday, AIB’s share price pierced — albeit briefly — the key psychological €4.40 price of the bank’s 2017 initial public offering for the first time since late 2018. This will hardly have gone unnoticed by McGrath’s officials, even if the price has since pulled back amid wider global market declines.
The Government last placed a 5 per cent block of stock in June, thanks to the fallout from the blow-up in March of a few US regional lenders, and Silicon Valley Bank, and Credit Suisse in Zurich having less of a lasting effect on sentiment towards the sector than originally feared. The shares were priced at €3.64 each in that deal.
While Irish banks have been behind European peers in passing on rising central bank rates to savers … AIB has forecast that it will have handed over 30% of official rate hikes to depositors by the end of this year
While the average price target that analysts have on AIB shares over the next 12 months is €5.65, about 33 per cent above current levels, according to Bloomberg data, there are reasons to be cautious about the stock reaching those levels.
AIB chief executive Colin Hunt signalled in July that 2023 “will definitely be the peak year” for the bank’s net interest margin. The difference between the average rate at which the bank funds itself and lends on to customers is forecast to tip over the 2.9 per cent mark this year, compared to 1.74 per cent in 2022.
While Irish banks have been behind European peers in passing on rising central bank rates to savers — as they also lagged the wider sector in increasing mortgage rates — AIB has forecast that it will have handed over 30 per cent of official rate hikes to depositors by the end of this year, up from 10 per cent in the first half of this year.
Hunt has also been at pains to out that this year’s RoTE — which will be more than double the 8-10 per cent ratio that is widely seen as a sign of a healthy bank — will be “exceptional”.
With Sinn Féin ahead in opinion polls, Barclays analysts said in a recent report that political uncertainty is likely to hit market sentiment towards Irish banks in the short term
To be sure, the market expects AIB’s net interest income to continue to grow in the coming years (even as margins narrow) as its loan book expands. But this has been an area of persistent disappointment for bank investors over the past decade. Small businesses are largely avoiding taking on fresh credit as they grapple with inflation and uncertainty over the global economy. The housing system, meanwhile, is as dysfunctional as ever — even if banks have managed in the past year to win back mortgage market share previously ceded to non-bank lenders.
Finally, investor focus is likely to increasingly turn next year to the next general election, which must be called by spring 2025. With Sinn Féin ahead in opinion polls, Barclays analysts said in a recent report that political uncertainty is likely to hit market sentiment towards Irish banks in the short term. They estimate that a full implementation of the party’s populist policies on housing, personal wealth and bank taxes and levies could knock as much as 8.5 per cent off the net earnings of the two main banks.
The Minister needs to crack on with further AIB block share sales while he can. The next window may open after the bank issues a trading update on November 1st.
