Allied Irish Banks’ initial public offering is as large as it is political.
Ireland plans to sell 25 percent of the nationalized bank in a dual Dublin-London stock listing. The question is whether the Irish government can persuade investors to pay more than book value for a bank that is still a work in progress.
Allied Irish is an almost pure play on the Irish economy, one of the fastest-growing in the eurozone. Only 14 percent of its loans were in Britain by the end of 2016, compared with 40 percent at its domestic peer, Bank of Ireland. It also has a leading 36 percent market share in Irish mortgages, which are a growth business. And crucially, it is the first domestic Irish lender to resume paying a dividend since the financial crisis.
Dublin’s weak coalition government is nowhere near getting back the 20.8 billion euros in taxpayer money it pumped into Allied Irish from 2009 onward. Even so, selling that first slice for anything less than book value is likely to be politically unpalatable. Yet Bank of Ireland currently trades at 84 percent of its estimated book value for the next 12 months, according to Thomson Reuters Eikon. On a similar multiple, the government would raise 2.4 billion euros.
Expect Allied Irish’s owners to suggest comparisons further afield, then — like Lloyds Banking Group of Britain, which trades at 1.1 times book value. It is a reasonable analogy. Allied Irish had a core equity capital ratio of 16 percent by the end of March, higher than Bank of Ireland’s 12 percent. Its costs as a percentage of income are 52 percent, not far from Lloyds’ enviable 47 percent. And, like the formerly government-owned British bank, excess capital means room for future dividends.
The big difference is that Lloyds has already cleaned up its act, whereas Allied Irish Banks’ legacy of reckless lending still lingers on its balance sheet. Around 14 percent of its loans are nonperforming — roughly three times the European average and well above Lloyds’ 1.8 percent. Besides which, what happens to Ireland’s economy after Brexit is anyone’s guess.
Allied Irish may price at book value, but Dublin should think that more than generous.
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