Any partial sale of the AIB equity stake should correct the existing valuation anomaly (current market cap of €73bn versus €9.5bn of BoI) which appears to have been driven artificially high due to the low free float (State own 99.8% of the equity) coupled with primarily speculative investments from a combination of high frequency day traders and retail investors. While there appears to be an insatiable demand for (high yielding) Irish assets in the current environment, we think that a solution to AIB’s DTA issue may be required before the State seeks to unwind its complete equity position. In addition, we believe that the State will be required to convert its €3.5bn Government Preference Shares to equity at some stage over coming years in order to enhance AIB’s viability and to remove future dilution risk (AIB has never paid a cash dividend on these instruments since received in 2009, with the Board electing to pay stock coupons of €280m each year in order to preserve its capital position). In terms of a potential value for the bank, (and post possible c. €1bn AQR related provisioning increases) we expect AIB’s shareholders equity to trough at c. €9bn at 2013 year-end (equates to 1.8c per share on a Tangible Net Asset Value basis and assumes €3.5bn Preference Shares converted to equity) with AIB then expected to return to profitability. <p>
Assuming the State sold its AIB stake at the same price as the BoI disposal in 2011 (c. 0.5x Tangible Net Asset Value) over coming months, it would receive c. €4.5bn which compares to its total €21bn cash outlay. Rather than crystallising a loss of this magnitude, we suspect that the Government will choose to wait for values to recover further before completely re-privatising the bank. In this regard, a strategy of selling down the AIB position over a number of years in more buoyant market conditions and when the bank’s franchise is stronger and generating healthy profits is likely to gain more political traction in our view. Though we note that State approval for the re-introduction of incentive schemes for employees may have to be forthcoming in the meantime, in order to keep AIB competitive in the banking market. As a result of government imposed pay constraints, AIB faces significant operational issues and the potential loss of key staff over coming years as peers reactive bonus schemes. <p>
Finally, we take some comfort from the Minister’s comments that the Irish banks are unlikely to require any material capital post the stress test exercise. This should provide AIB with a window of opportunity to move ahead with a sale of the State’s €1.6bn Contingent Capital notes following the release of its results in early March (same maturity as BoI’s €1.0bn CoCos in July 2016 and 8.25% CT1 trigger).
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