Allied Irish Banks Plc Chief Executive Officer David Duffy said the lender may start repaying its 21 billion euro ($28.9 billion) government bailout after European Central Bank stress tests this year.
The bank, based in Dublin, is weighing the potential redemption of the state’s 1.6 billion euros of contingent capital notes, should European stress tests and talks with regulators produce favorable outcomes.
“If there was nothing untoward in the stress tests or no new metrics, you would say to yourself at the end of the stress tests this year you have sufficient capital,” Duffy, 52, said in an interview. “Therefore you don’t need the buffer; therefore you can repay the government.”
The state owns 99.8 percent of Allied Irish after a taxpayer bailout of the lender in the wake of the worst real estate crash in Western Europe. Duffy said today the lender will return to profit this year for the first time since 2008, has enough capital to withstand stress tests, and may be ready for a potential stake sale next year.
The CoCo notes, sold to the government in 2011, would convert automatically to equity if the bank’s core Tier 1 capital ratio falls below 8.25 percent. The ratio stood at 14.3 percent in December and 10.5 percent when all incoming Basel III international banking rules are accounted for.
The bank also said the state may convert its 3.5 billion euros of preferred shares to equity this year, bolstering its balance sheet before a return to private ownership. The bank hasn’t paid a dividend on the shares since they were issued in 2009.
Swapping the preference shares for equity would accelerate the company’s preparation for new Basel rules. These instruments are due to be deducted from core Tier 1 capital, a gauge of financial stability, by 2018 under Basel III requirements.
“If you want to get to a sale and an equity process, you want to look at how your Basel III capital stacks up,” Duffy said. “What the market would like to see is some clarity.”
The state may sell a stake in the bank before the nation’s next scheduled election in 2016, Finance Minister Michael Noonan said in January.
“Converting the preference shares will help sort out the bank’s balance sheet before AIB looks to win new investors in coming years,” said Stephen Lyons, an analyst with Davy, Ireland’s largest securities firm.
AIB’s loan impairment charge fell 25 percent to 1.9 billion euros last year, even after including “substantially all” of the central bank’s estimates of how much extra provisions needed to be set aside for soured loans. The bank’s net loss narrowed to 1.6 billion euros from 3.56 billion euros a year earlier, in line with the median estimate of three analysts surveyed by Bloomberg.
AIB’s net interest margin widened to 1.37 percent from 1.22 percent for 2012. The bank and Irish rivals cut deposit rates and raised lending rates last year to revive margins.