Irish Bank Awaits IPO Greenlight Seven Years After Near Death

  • Lender seen announcing profit, first dividend since crisis
  • Mortgages a boon for bank that beat only Paschi in stress test

Allied Irish Banks Plc helped tip Ireland into financial collapse in 2010. Now the lender may finally be ready for a meaningful return to the stock market, after nearly seven years of state ownership.

Ireland’s second-largest bank may announce its first dividend in nearly a decade, alongside a pretax profit of about 1.6 billion euros ($1.7 billion), when it publishes its 2016 earnings March 2, Davy analyst Stephen Lyons said in a report this month. That’s setting the stage for the government to sell as much a quarter of its 99.9% holding in AIB by June in what would be one of London’s biggest initial public offerings this year.

A share sale could take place less than a year after the bank recorded the second-worst results in European stress tests, trailing only Banca Monte dei Paschi di Siena SpA of Italy, which now faces nationalization. Despite that ranking, AIB’s shrinking pile of bad construction loans and focus on mortgages are making its capital trends strong enough to consider an IPO. Selling a 25 percent stake could raise as much as 3 billion euros, according to Owen Callan, an analyst at Investec Plc in Dublin.

“AIB’s balance sheet is a lot more normalized, and it is a materially lower risk business” than it had been, said Stephen Hall, an analyst at Cantor Fitzgerald in Dublin.

The bank is ready for an IPO, an AIB spokeswoman said.

Shrinking Impairments

The government, which pumped 20.8 billion euros into the lender during the financial crisis, had a valuation of 11.3 billion euros for the bank on its books at the end of 2016 and has been discussing an IPO for about two years. While a tiny rump of stock trades on the Dublin market and has been flat for months, it’s not considered indicative of the bank’s underlying health or prospects. Finance Minister Michael Noonan has indicated the state’s intention to sell a quarter of the bank as early as May, saying last month that the Irish banking industry is now profitable.

AIB cut its level of impaired loans to less than 17 percent in the first half of 2016 from 34 percent in 2013, when property and construction were the source of nearly half the impairments. Since then, the bank has written off some loans while taking in cash from debtors selling off assets.

That’s allowing it to stave off capital questions raised by the July stress test and invest in its main revenue stream -- mortgage lending, where it has about a third of the market and has been cutting rates. The amount of new mortgages climbed 16 percent last year.

Despite AIB’s progress on capital, the ratio of non-performing loans remains “elevated,” Davy said. “Sustained reduction will be a requirement to make a return to dividend payments and unlock excess capital.”

Stress Test

In the EBA stress test’s adverse scenario, only Monte Paschi and AIB had common equity Tier 1 ratios that fell below 4.5 percent, the legal minimum for all banks. Since then, Monte Paschi buckled under the weight of bad debts after a plan to find new investors failed, while AIB has been the beneficiary of an Irish economy in stark contrast to that of Italy, which has barely grown since the European debt crisis struck. Unlike the Italian property market, Irish home prices have gained nearly 50 percent since 2013, and the country may see an influx of high-paying financial jobs as banks move staff from London after Brexit.

Read more: Monte Paschi’s results and bailout plan

While the stress test wasn’t a pass/fail exercise like previous industry examinations, AIB said the test overstated the bank’s potential capital concerns. Since the stress test, AIB can point to steady progress. The Irish lender had a fully-loaded CET1 ratio of 13.7 percent as of Sept. 30, up from 13 percent at the end of 2015. Davy’s Lyons estimates the ratio may have hit 14.6 percent at last year’s end.

If the bank meets that estimate, it would have posted the biggest gain for 2016 among all major euro-region banks that have reported results, according to data from Bloomberg Intelligence.

One possible roadblock to an April IPO: political instability. With Irish prime minister Enda Kenny expected to step down in the coming weeks, a change of government may delay a sale past summer.

Still, strong earnings would help the government drum up interest in a share sale at a time when demand for global bank stocks has finally recovered. AIB will be ready when the government decides to act, Chief Executive Officer Bernard Byrne has said.

The Stoxx 600 Banks Index has climbed almost 50 percent since hitting a low shortly after the U.K. vote to leave the European Union, extending gains after the election of U.S. President Donald Trump in November, who has vowed to roll back some bank regulations.

The stress test “won’t be a headwind to stop the IPO at this stage,” said Cantor Fitzgerald’s Hall.

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