Three years after a banking crash forced Dublin into a humiliating international bailout, Bank of Ireland said on Wednesday it had raised €580m as part of a transaction to “fully reimburse” the state for the emergency funds it received.
Dublin said the fundraising, and a separate announcement by Ireland’s bad bank Nama that it has redeemed €7.5bn of the debt issued to buy toxic property loans from banks, was evidence its financial sector was stabilising as it exits its international bailout.
“The Irish banking system is recovering, international investors are returning and this has positive implications across the banking system,” said Michael Noonan, Ireland’s finance minister.
Analysts are more cautious, with Deutsche Bank recently warning in a report that Ireland was not “out of the danger zone” and a lot depended on Irish banks and the economy’s capacity to absorb the housing debt overhang.
In September 2008 Dublin made a disastrous decision to offer a blanket guarantee to its banks, tying the solvency of the state to the health of Ireland’s financial and property sectors. When the crisis gathered pace the government was forced to inject €64bn into its main lenders, eventually forcing the country into an EU and International Monetary Fund bailout.
This month Ireland will make a “clean exit” from its bailout following a decision not to apply for a precautionary credit line from its international lenders.
Bank of Ireland, which was the only Irish lender to escape state control during the crash, on Wednesday raised €580m in a share placing to new and existing investors as part of a wider transaction to redeem €1.8bn preference shares held by the state. The shares were placed at a price of 26 cents each and represented 7.74 per cent of the bank’s stock before the placing.
The remaining €1.3bn in preference shares were sold to private investors, earning a small profit for the state.
“In total, since 2009, the bank will have received €4.8bn cash from the state and returned €5.9bn cash to the state for the state’s explicit support,” said Bank of Ireland.
By repaying the government’s preference shares, Bank of Ireland avoids paying an automatic step-up in value of these shares by 25 per cent on March 31. It also enables the bank to resume paying dividends depending on its future profitability. As a penalty for receiving state aid, the bank was restricted from paying dividends while the preference shares remained in state hands.
Analysts say Dublin could sell on its remaining 14 per cent stake in Bank of Ireland quickly.
“There is high probability they will sell the stake within six or 12 months to reduce debt or even provide some stimulus to the economy,” says Ciaran Callaghan, Dublin-based Merrion Stockbrokers. “The state already has a high exposure to bank and property assets.”
Allied Irish Banks, Ireland second-biggest bank by assets, and Permanent TSB are both state controlled following government rescues that cost taxpayers almost €25bn. They face challenges linked to a mortgage crisis and high levels of bad loans.
Bank of Ireland is the strongest of the three main banks. However, it also faces challenges linked to bad loans and was told by Central Bank of Ireland this week it should sharply revise down its capital adequacy ratios following a sector-wide health check. The lender is challenging the regulator’s findings.
Nama, which was created as a special purpose vehicle that could borrow money without adding to Ireland’s national debt, initially paid €31.8bn in government backed bonds to banks to buy toxic property loans, originally valued at €71.2bn.
Nama said on Wednesday it had redeemed €7.5bn bonds, a key target in Dublin’s bailout programme. This represents about a quarter of Nama’s original bonds issued and guaranteed by the state when the agency bought the loans from the banks in 2009-2010.