Investors snapped up Allied Irish Banks and Bank of Ireland on Thursday amid expectations the lenders will avoid having to ask the state for more capital to purge their balance sheets of risky loans. Ireland's top two lenders have been investment pariahs over the past year amid fears their crippling exposure to a brutal local property crash would force Dublin to bail them out with majority shareholdings or nationalisation.
Finance Minister Brian Lenihan on Wednesday gave long-awaited details of his plan to take risky property loans with a nominal value of 77 billion euros off the banking sector's books and into a so-called "bad bank" or National Asset Management Agency (NAMA).
By laying out the amount of loans to be transferred and the ballpark discount of 30 percent he will demand, Lenihan ended a year of uncertainty and cleared the way for investors, both institutional and retail, to start snapping up the cheapest banking stocks in Europe.
"With NAMA, investors can be assured that the losses will be fixed at 30 percent," said Raul Sinha, analyst with Nomura. "That gives them some certainty about the earnings from the banks and that removes some of the discount valuation." At 1050 GMT, AIB was up 21 percent and Bank of Ireland was trading 9 percent stronger. Both stocks had earlier hit near 12-month highs.
"People are looking at the two banks, notwithstanding the fact that they have to raise significant amounts of capital over the next couple of years, as being cleaned up, better entities which have traditionally been highly profitable in the past," said one Dublin-based trader. "People are taking a valuation call. They want to get in now and if there are rights issues, they'll be able to take advantage of the discount."
Ireland will spend 54 billion euros ($80 billion), or nearly a third of its Gross Domestic Product, buying up assets that have crippled what was once Europe's fastest-growing economy. Lenihan's plan is meant to restore the flow of credit and pull Ireland out of the industrialised world's worst recession, but it will require Allied Irish Banks and possibly Bank of Ireland to raise more capital.
After Lenihan's speech, AIB said it was confident it could raise funds internally to meet the writedowns from the transfer of 24 billion euros worth of loans to NAMA - scotching previous expectations that it may end up with a majority state stake. The country's second-largest bank, which believes the discount it will have to pay will be less than 30 percent, said it could tap equity shareholders, strategic investors and asset sales to raise 2 billion euros over the next year and a half.
Analysts said AIB was highly likely to sell its stake in US bank M&T, raising around 500 million euros, but the bank is expected to try and hold on to its Polish business. Analysts expect that it will pay a discount of around 23 percent because of its greater exposure to the UK, where property falls have not been as steep.
Analysts at Davy's do not think Bank of Ireland will need to raise much, if any, additional capital for NAMA but expect it to hold a rights issue in the next few months to meet an end-of-year deadline to reduce the government's 25 percent stake in the bank to 15 percent. Dublin has a 25 percent stake in both banks via preference shares it received in return for an investment of 3.5 billion euros in each group.