Post-bailout Ireland turns focus to banking hangover

Wed Dec 4, 2013 4:03am EST

* Getting value from AIB major govt strategy in 2014-source

* BOI investor Fairfax won't invest in other Irish banks

* Workers would welcome privatisation of state-owned banks

* Investment bankers say AIB, permanent TSB tough sell

* EU stress tests pose further risks to state-owned banks

By Padraic Halpin and Laura Noonan

DUBLIN/LONDON, Dec 4 (Reuters) - With liberation from Ireland's three-year bailout getting closer by the day, the banks which drove the country into the arms of the EU and IMF are once again taking centre stage as Dublin tries to turn 11 billion euros ($15 billion) of its banking assets into hard cash.

That mission got off to a promising start on Wednesday with the announcement of the sale of 1.8 billion euros of the state's Bank of Ireland (BoI) preference shares.

The sale leaves Dublin with a small profit and a good news story to placate weary taxpayers who have paid dearly for the banking crash. But the state faces an uphill battle to get a similarly good return from the other banking assets it reluctantly acquired during the financial crisis.

Ireland pumped more than 28 billion euros into Bank of Ireland, permanent tsb (PTSB) and Allied Irish Banks (AIB), and more still into banks that have since failed in a series of bailouts that began in 2009.

The banking crash tipped the country into an economic crisis that resulted in harsh austerity measures which are still being felt the length and breadth of the country.

With government debt set to peak at 124 percent of gross domestic product (GDP) this year and signs of economic recovery still tentative, cashing in on its bank holdings could provide a buffer as Ireland begins to fund itself without bailout cash next year.

Several bank workers and union representatives said they too would welcome new ownership and a move away from the "hands on" approach they feel exerted by the state.

But despite Wednesday's success and signs of stabilisation in the sector, the task of off-loading the government's 99.8 percent stakes in Allied Irish Banks and PTSB leaves a banking hangover that could drag on for years and make Dublin's quest to be the standout success among the euro zone's bailed-out nations more challenging.

"The bottom line is that these banks (AIB and PTSB) are not really viable banks any more to our mind, and so (there) will simply be a gradual asset liquidation," said one investor who said his firm would still not invest in either lender.

A Deutsche Bank report last month noted AIB and Bank of Ireland had some of the lowest capital ratios in Europe when measured under new Basel III rules, implying a need for new capital to be raised, while official data show more than 18 percent of Ireland's home loans in arrears - one of the highest rates in Europe.

Fairfax Financial boss Prem Watsa, who owns about 10 percent of BoI and helped forge a group of North American investors that kept the bank out of state hands in 2011, is positive on Ireland but would not put money into AIB or PTSB.

"We're very much focused on Bank of Ireland," Watsa said in a telephone interview. "We're on the board, we like (BoI chief) Richie Boucher, we think the bank is in an outstanding position as the (only) bank not owned by the government."

FURTHER RISKS

Irish banks passed a Central Bank balance sheet assessment on Monday, but European banking stress test next year will expose Ireland to further risks, since if the state is still the main owner of AIB and PTSB it will likely be the only port of call if either needs to raise more capital.

Larger European banks like Germany's Commerzbank and the UK's RBS, looking to replace state shareholders with private ones, threaten to direct investors' attention elsewhere, as could banks embarking on stress-test driven capital hikes, which accountants PwC last week said could top 180 billion euros.

Dublin knows it will not get all its cash back from the banking stakes, but a senior government official told Reuters getting value from them was a major priority for 2014.

Two London-based investment bankers involved in earlier deals said the government's most likely move would be to follow the BoI preference share sale with the sale of its equity stake of between 14 and 15 percent stake in the bank.

"The government is likely to look for an opportunity to sell out of BoI in 2014, but with uncertainties still hanging over the capital requirements, they will have to wait for greater clarity to provide the market opportunity," said John Conroy, chief executive of Dublin-based Merrion Capital, which has previously advised bidders for Irish banking assets.

Selling out of Bank of Ireland would raise about 1.2 billion euros at current prices, leaving the state with an overall profit on the bank's 4.7 billion euros bailout, which will have repaid more than 4.2 billion euros once the preference share deal is done.

"I think in time the government of Ireland will have no problem selling its shares if it so desires ... this bank has gone through difficult times, but the pre-provision profitability is still excellent," said Watsa.

BoI made pre-provision profits of 380 million euros in the first half of 2013.

AIB, whose 21 billion euro bailout was Ireland's second largest after the 30 billion for recently-liquidated Anglo Irish Bank, is next in the government's sights, bankers and official sources say.

The government is still working on a placing of 1.6 billion euros of cocos or contingent convertible bonds in AIB - debt instruments that can convert to equity in times of distress - which had been expected in the Spring, following a successful placing of 1 billion euros of state-owned cocos in BoI.

A share sale could be the next step, though questioned in a radio interview last week the bank's chief executive David Duffy would only say he wanted to achieve at least a partial sale of the bank over the next few years.

AIB says the timing of any share sale is an issue for the state, while a second government source said the bank could be in a position to talk to investors in seven or eight months.

It would have to show robust results first, but when the criteria of the EU stress tests are known that could make it easier to put a valuation on the bank. After that, some private investment could come next year, the source added.

MORE EVIDENCE

The two London investment bankers said a sale was unlikely to happen until after 2014 as potential investors will first want more evidence of the cleaned-up bank's earning power.

Permanent TSB, whose 20 billion euros of loss-making "tracker" mortgages make up two thirds of its loan book, is lower down the priority list, official sources said. Ireland has made several failed attempts to get Europe's bailout fund to help fund the tracker book and efforts are continuing.

"We are stepping up our engagement with the investment community ... and we anticipate increased engagement over 2014," a spokesman for PTSB said.

Fairfax's Watsa said the state went out of its way to attract investors when his firm bought into BoI and could play a major role in finding investors to the other banks.

"The big plus is the sentiment has changed now in Ireland. The economy is growing, house prices have bottomed out ... The provisioning that you might have thought six months ago, a year ago, will be less so," Watsa said.

"I don't know how long it will take, but it will be possible for the other banks to be privatized also at some time."

That time can't come soon enough for some workers at the state banks, who hope Ireland's bailout liberation is swiftly followed by their liberation from the Department of Finance.

Larry Broderick, head of the IBOA bank workers trade union, said the state had a hands-on approach and that BoI showed that fresh ownership can allow more flexibility.

Employees at Ireland's state-owned firms have traditionally feared privatisation, but some workers who have joined state-owned banks in recent years see room for change in work practices they described as "civil-service like".

One veteran EBS union representative, who along with colleagues was used to coming to work on their birthday to find a box of chocolates and a card stamped by the chief executive waiting on their desks, says work practices have changed.

"It's take it or leave it, you're told you're lucky to have a job, that (you wouldn't have) ... if it wasn't for the government bailing you out," said the worker at EBS, which became part of AIB in 2011.

"It's not the government that bailed us out, it's the taxpayer. I'm a taxpayer too." ($1 = 0.7345 euros) (Editing by Alexander Smith and David Holmes)