10bn recapitalisation of Irish Banks announced

[z109]

As a shareholder in AIB, I don't want to see my holding devalued, so I would participate in any fund raising - especially if I know in advance that the fundraising will be fully subscribed.

By fully subscribed, I presume you mean underwritten by the government? In this sense, recapitalisations are pretty much fully subscribed always - someone volunteers to carry the can in the event of no interest. With B&B in the UK recently, the investment banks that underwrote their last offering got slaughtered as nobody bought, so IBs (are there any left?) are unlikely to step in. So it has to be government.

As johnboy points out above, institutional desire to throw good money after bad has been low of late... so the likelihood is that you will have a shareholding in a largely nationalised bank (think AIG) that will be unlikely to see dividends for a good while. Not to teach your grandmother how to suck eggs, but is that really the best place for your capital at the moment?

 

[D.S.]

The Government has already looked at the bank's books front to back via PWCs investigation. Furthermore, under the terms of the state deposit guarantee scheme, the financial regulator now has representatives based on site with all the banks.

The value of the shares is determined by the markets. Government investment will not guarantee a rise in value unless the markets believe that the banking sector is in a sound position. Until more comes to light regarding bad debt charges and concentration risk to the commercial sector - the banking sector could remain quite volatile regardless of Government capital going into the banks..

 

[D.S.]

The private equity firms who have been sniffing about and who have met with the Government could quite easily participate in an injection. You could view this as likely given the fact that the Government are only injecting half of the 20bn required to stabilise the sector..

 

[JohnBoy]

Thanks for the 'simple' explaination. Wouldn't ordinary shareholders who have seen a lot of loses be loath to buy more shares? If the government does this would the share value go up in value. Will the government be looking at the banks books before making this investment? It would be silly to put money into a bank they may in effect be bust surely.

It really depends on their risk appetite and availibility of funds. The average Irish investor seems to me to be quite stubborn. I would not be surprised to see a reasonable degree of retail investor interest in any recapitalisation. I have not seen any response from the Irish Association of Investment Managers yet. They claimed that they had up to €6bn IIRC to inject into the banks.

IF the recapitasliation is successful and IF there is more honesty about loan book writedowns then you might see some interest in the shares of the surviving banks but the UK recapitalisations have been a disaster for those who bought into them. If the same people are running the banks post the recapitalisation then I cannot see this inspiring confidence with international investors (given that the domestic investors will probably be tapped out if they subscribe for new shares).

 

[Bronte]

The Government has already looked at the bank's books front to back via PWCs investigation. Furthermore, under the terms of the state deposit guarantee scheme, the financial regulator now has representatives based on site with all the banks.

..

That's great then the accountants have looked at the books and everything is fine. Would that be the same accountants that have signed off the banks books in the last few years and said everything is rosy when it was not. In relation to regulators, in the US the regulator singed of Madoff's (not sure of spelling) accounts too and it was all a pyramid scheme.

 

[D.S.]

That's great then the accountants have looked at the books and everything is fine. Would that be the same accountants that have signed off the banks books in the last few years and said everything is rosy when it was not. In relation to regulators, in the US the regulator singed of Madoff's (not sure of spelling) accounts too and it was all a pyramid scheme.

Hold on

1) Who else other than the accountants are qualified to examine the books??

2) Are you questioning the impartiality of the audit PWC carried out on behalf of the state?

There are a whole host of things that can be said here. But here are a few:

- the banks were adequately capitalised over the past few years based upon the mark-to-market value of the bank's positions at that time. Part of the problem that banks are experiencing is that they have to write off the positions they have due to the current accounting rules, despite the fact they may have no wish/need to settle these positions in this financial year.

- Irish banks are not the only banks who have a concentrated risk to the property sector and are experiencing a liquidity crisis. This is a global problem brought about by a globally agreed soft-touch regulatory approach.

- Maddoff's deliberately committed fraud and hid/supressed their actions. You can't equate that situation with the situation here in Ireland. There was a) no fraud, b) the risks were voiced by several prominent economists, and c) reports were given to the bank's themselves on their risk profile

- The Government commissioned PWC to undertake the audit of Ireland's financial institutions. If there is anyone to blame if you feel they weren't impartial, it's the Government who should of taken this into account.

Your comments are v generalistic.

The Irish banking sector has made the same mistakes in lending policy as every other bank globally. Does this mean boards should be sacked and we start again? Maybe, but that's up to the shareholders.

What definititely needs to happen is a root/branch examination of 1) capital adequacy and liquidity rules and 2) corresponding lending policies to make sure the same mistakes aren't repeated.

We shouldn't buy into the media garbage we are recieving which is v much one sided and ill-informed.

 

[Padraigb]

...The Irish banking sector has made the same mistakes in lending policy as every other bank globally...

I don't think that is true. The key element in the international crisis was the collapse of the sub-prime market. Do you not remember how Irish commentators smugly pointed out that Irish banks were not very exposed to that?

The reason why they were not exposed emerged quickly. Instead of investing in the dodgy bonds emanating from US sub-prime lenders, the Irish banks had their very own bubble in which to risk their funds.

The sub-prime crisis precipitated a crisis for the Irish banks, but it is quite possible that the crisis would have developed anyway.

 

[Bronte]

Just to be clear I'm not referring to PWC in particular and when I referred to 'same accountants' I meant big accounting professions in general. It hasn't been unknown for accountants (some) to be too close to boards (eg Enron).

 

[D.S.]

I don't think that is true. The key element in the international crisis was the collapse of the sub-prime market. Do you not remember how Irish commentators smugly pointed out that Irish banks were not very exposed to that?

The reason why they were not exposed emerged quickly. Instead of investing in the dodgy bonds emanating from US sub-prime lenders, the Irish banks had their very own bubble in which to risk their funds.

The sub-prime crisis precipitated a crisis for the Irish banks, but it is quite possible that the crisis would have developed anyway.

There's no doubt that Irish banks have relied heavily on loans to the property sector for profits over the last few years - Irish banks relaxed lending standards to both the residential and commerical sectors and relied on the originate-to-distribute model of banking to fund growth. However - this doesn't differ hugely in any way from the rest of the banking world? The only difference you point out is class of debt - Subprime debt - but it was still to the property sector.

I agree that Irish banks are exposed to excessive commercial debt in the Irish property market as opposed to many other banks who were exposed to toxic subprime debt originating in the states. But the mistakes were fundamentally the same. Relaxed lending standards and an over-reliance on the loan book to fuel growth without appropriate hedging strategies.

 

[Humdinger]

Presumably the €10bn from the reserve fund is currently invested ... do the government need to sell some of these assets to generate the €10bn?

Does'nt sound like a good time to sell assets if this is the case ... are they just locking in decreases/losses on investments made?

 

[Duke of Marmalade]

As an AIB s/holder the really interesting thing will be any preference share issues, if the Boss is right and we have first refusal. Let's say these are with a dividend of 10% and maybe an option to convert into ordinary shares at some future date at say €3 then I for one will take my quota.

(I am only using AIB as an example, hope this is not in breach of the AAM code.)

 

[Duke of Marmalade]

Presumably the €10bn from the reserve fund is currently invested ... do the government need to sell some of these assets to generate the €10bn?

Does'nt sound like a good time to sell assets if this is the case ... are they just locking in decreases/losses on investments made?

That's a humdinger of a point, I presume the NPRF is mostly in foreign equities.

 

[webtax]

Presumably the €10bn from the reserve fund is currently invested ... do the government need to sell some of these assets to generate the €10bn?

Does'nt sound like a good time to sell assets if this is the case ... are they just locking in decreases/losses on investments made?

The vast majority of the fund is invested abroad so as not to distort the Irish market (all changing now!). I read somewhere that the fund has declined over 20% in the last year, but that is a sunk cost so locking it in doesn't really come into the equation. What matters now is how we protect our own economic interest and minimise the damage to it over the next few years. The total banking sector is currently capitalised at €3bn and while there are some heavy losses to be incurred in the next while I cannot imagine the banking system being really that worthless. Investing the fund here would give the government a strategic role in bank policy, 10% interest p.a. plus a share in the upside when the banks recover.

I would rather see this happening than leaving the fund invested in a foreign economy in which we have no stake, hoping that someday we recover our losses.

 

[GSheehy]

Perhaps I am reading this incorrectly but I don't think that the Government is committing €10bn from the NPRF.

Is it not the case that they will pick up the tab, up to €10bn, after existing shareholders and private investor have committed their dough.

 

[JohnBoy]

As an AIB s/holder the really interesting thing will be any preference share issues, if the Boss is right and we have first refusal. Let's say these are with a dividend of 10% and maybe an option to convert into ordinary shares at some future date at say €3 then I for one will take my quota.

(I am only using AIB as an example, hope this is not in breach of the AAM code.)

The cost of this new capital for the banks cannot be too penal otherwise the money will not flow from the banks to the rest of the economy. What type of lending can the banks engage in if their capital costs them 10%.

 

[z109]

As an AIB s/holder the really interesting thing will be any preference share issues, if the Boss is right and we have first refusal. Let's say these are with a dividend of 10% and maybe an option to convert into ordinary shares at some future date at say €3 then I for one will take my quota.

Do you currently hold preferred shares? If not, then should you acquire any through a recapitalisation that would dilute the other preferred shareholders, so the likelihood is that you will only be offerred the type of equity or equity-like instruments (whatever they are) that you currently have! Any excess (i.e. quota that is not taken up) will be offerred to Private Equity and/or investment banks and then the government will soak it up. Presumably Private Equity will have first dibs on selling on their debt in the open market and the government will be locked in for a time period before they can sell their equity on.

 

[Duke of Marmalade]

Yog, that kinda makes sense and is at variance with the Boss' interpretation. The last thing we ordinary shareholders want then, is juicy preference shares which we can't apply for. Now I see why AIB shares fell today.

 

[z109]

Yog, that kinda makes sense and is at variance with the Boss' interpretation. The last thing we ordinary shareholders want then, is juicy preference shares which we can't apply for. Now I see why AIB shares fell today.

'xactly - I want some of those juicy preference shares too - who wouldn't? 8 or 10% essentially government guaranteed with a warrant for common equity should the price recover and no downside if it doesn't? You would have to be mad or think that the state will go bankrupt before it can make good on it's guarantees to not buy them

 

[Duke of Marmalade]

'xactly - I want some of those juicy preference shares too - who wouldn't? 8 or 10% essentially government guaranteed with a warrant for common equity should the price recover and no downside if it doesn't? You would have to be mad or think that the state will go bankrupt before it can make good on it's guarantees to not buy them

Yog, I have been talking to a few folk. General feel is that the Boss is right - ordinary shareholders will be given first refusal. I know that technically speaking this is not legally necessary and not the approach followed by the UK, but the government statement does seem to offer this safeguard, I hope so.

 

[z109]

Yog, I have been talking to a few folk. General feel is that the Boss is right - ordinary shareholders will be given first refusal. I know that technically speaking this is not legally necessary and not the approach followed by the UK, but the government statement does seem to offer this safeguard, I hope so.

Fair enough - it would finally be some good news for shareholders.