Analysts at a key adviser to AIB on its recent return to the main Dublin and London stock markets have said they “remain cautious” on the stock in the near term as the lender faces risks as it seeks to draw a line under its non-performing loans problem over the next two years.
AIB shares fell by 0.5 per cent on Thursday to €4.876, giving the group a market value of €13.2 billion.
Wall Street giant Morgan Stanley, a key corporate broker to AIB and part of a team of securities firms that underwrote the Irish bank’s €3.4 billion initial public offering (IPO) in June, initiated coverage of the stock with the equivalent of a “hold” rating. It was among a number of firms that worked on the deal to publish reports on Thursday as a 30-day “blackout period”, in which they were banned from commentating on the company, expired.
While AIB has slashed its level of non-performing loans by more than 60 per cent in the past four years, some €21.1 billion of loans, or 19 per cent of its portfolio, continue to be troubled. The bank said last week that it would continue to concentrate on restructuring loans. However, it will also have to resort to loan sales and increased repossessions.
“Management is targeting a 5 per cent level by 2019, in line with European norms,” the Morgan Stanley analysts, including Alice Temperley, said in a report. “Restructuring and cured loans will be aided by a better [macroeconomic backdrop], but it is sales that have the ability to really move the dial, which come with risks: faster the pace, the greater the potential capital price.”
‘Excess capital’
Currently, Morgan Stanley sees AIB holding €3.24 billion of “excess capital” by the end of 2019, which could be returned to shareholders over time. The brokerage initiated coverage of the stock with a €5 price target. AIB’s IPO on June 23rd was priced at €4.40.
Davy, which advised the Government on the sale, started coverage of AIB with a “neutral” rating and €5.10 price target. Its analysts expect the bank to accompany a €500 million ordinary dividend payment to shareholders in 2019 by beginning to release surplus capital the same year, with an initial €500 million payout.
As the bank’s ability to expand its net interest margin – the difference between the average pace at which it funds itself and lends on to customers – fades in the coming years, its key challenge is to return to loan growth, according to analysts. Ireland’s banks have shrunk their balance sheets dramatically since the outset of the crisis as they sold loans, including real-estate assets to the National Asset Management Agency, and borrowers repaid debt at a faster pace than taking on new liabilities.
Goldman Sachs, which started coverage of the stock with a “neutral” rating, estimates AIB’s performing loan book will grow 8 per cent from last year until the end of 2019. Its analysts expect the bank to pay out €3 billion in “special dividends” in 2020 and 2021.
JP Morgan, which was also among the IPO underwriting team, gave the stock a “neutral” rating.
However, Investec analysts Owen Callan, Philip O’Sullivan and Ronan Dunphy were more upbeat, initiating with a “buy” rating and €5.27 price target.
“We regard it as a national champion, with an accreting excess capital trajectory and significant income distribution potential,” they said.
Analysts at Goodbody Stockbrokers, AIB’s second corporate broker, were the most positive, giving the stock a “buy” rating and €5.30 price objective.
