Government should sell AIB as soon as practical – HAYES
Government should commit to selling 50% of AIB by 2019
Fine Gael Dublin MEP and former Minister of State at the Department of Finance, Brian Hayes MEP, speaking at a Fine Gael meeting said that the government should sell AIB as soon as practical but should commit to selling at least 50% of the state’s holding in the bank by 2019. When it comes to the final decision to sell AIB, the application of 5 key tests should be used as part of the decision.
“We all know the price of the government going into the banking sector in such an aggressive way. It must never be allowed to happen again. The country paid far too high a price for saving the banks. There was no simple solution to the financial mess that ensued. What’s important now is to recover as much as possible of the investment and the future sale of AIB is critical in this regard. The total state investment in AIB was €21 billion and by July close to €6.5 billion will have been recovered from AIB.
“The new government should sell AIB as soon as it is practical. In my view it’s not in Ireland’s long-term interest to have large state holdings in the banking sector. It doesn’t help competition in the sector. It discourages new entrants from coming into the banking market, offering new products and competing with the pillar banks for business. If ever we need new entrants it’s now.
“The government should make a firm commitment that the state’s holding in AIB should be no more than 50% by the start of 2019. It is important for the government to get out of the banking business because it often leaves the government entangled in the sometimes competing interests of corporate profit and customer protection.
“State ownership of the banking sector is simply a stop-gap measure. The key issue for the Minister for Finance is to maximise the taxpayers’ return by getting back as much of the costs of capitalisation. Another concern is obviously to see the banks functioning properly again – being an agent for growth in the economy and serving the people and business that operate within our economy.
“The disposal of the state’s shareholding in Irish banks is now very much a live political and financial decision for the new government. The sale of AIB is central to the debate. This decision is very much Michael Noonan’s call. His handling of the partial sale of Bank of Ireland, where the great majority of the states’ holding went back to the private sector, was in my view a turning point for the Irish economy. The sale of Bank of Ireland, coming as early as it did when the country was in a financial aid programme, represented an amazing boost for the economy.
“The gradual return of AIB to the private sector was always part of his thinking. He had previously indicated that he favoured selling a 25% share in AIB in the second half of 2016. Recently the Minister for Finance has indicated that late-2017 now represents a target date.
“In coming to a final decision to sell AIB to the private sector I think five tests should be applied.
“Test No 1 should be the question of fair value for government’s shareholding in the bank. Timing will be critical; selling into a rising market is obviously the optimum scenario. During the past year there has been a major fall in the value of bank shares in international markets. The most obvious Irish comparison is the value of Bank of Ireland whose shares which have fallen in value by about 40% from their previous twelve month high. I think Mr. Noonan is correct to postpone a decision to sell AIB shares in a depressed market. The value of Bank of Ireland is one potential benchmark. But the key requirement is to sell as the market rises.
“Test No 2 should be the strength of the competition in the banking market. AIB should not be sold until there is clear evidence that there is strong competition in two critical markets – mortgages and lending to businesses, particularly the SME sector. At present the Irish mortgage market is seriously dysfunctional. There is also evidence that interest rate gouging is a factor in lending to the SME sector with lending rates to this sector running at 80% above the eurozone average. While AIB remains in state ownership the Minister can still exert a significant degree of influence in setting general policy guidelines for the bank. For example AIB has been more responsive to public concerns regarding variable mortgage interest rates. Before he decides to sell AIB the Minister should be satisfied that there is effective competition.
“Test No 3 must be about favourable market conditions. The Irish economy grew by 7.8% in 2015; it is expected to grow by 5% or more in 2016. The Ratings Agencies now give Ireland an A grade investment rating; Moody’s having done so very recently. Two or three years of steady growth at 5% or higher will further reduce Ireland’s debt to GDP ratio and further increase investor confidence in Ireland. 2017 will be a year of political uncertainty in the EU with major elections in German and France. A sustained economic recovery in Ireland and a stable political environment in Europe are all desirable conditions supporting a bank sale. These tests would indicate that an early sale is not advisable.
“Test no 4 must be a rigorous cost/benefit analysis. The test must be the national interest. Take the state’s 14% shareholding in Bank of Ireland, currently valued at around €1.2 billion. BoI has indicated that it will start paying a dividend in 2017. Which is best – sell the shares and reduce the national debt or retain the shares and continue to receive an annual dividend for the state? The same argument applies to the disposal of AIB shares.
“Test No 5 concerns the customers of AIB. There will be a temptation for management to concentrate on the sale process and fatten bank profits in anticipation of a future sale. These profits will only come at the expense of AIB customer base. The test to be applied here should be – how are AIB customers and the Irish economy best served. Is the country’s best interest served by having AIB management focus on its customers, thereby helping domestic recovery to take hold, rather than the future sale of the bank and all the demands a privatisation process will place on the bank’s management team? That is a question that needs to be answered before any sale takes place.
“Minister Noonan has many issues to take into account in coming to a conclusion on the disposal of AIB.The international financial system remains volatile; timing the sale of bank shares will take judgement and a measure of luck. It’s a big call for Michael Noonan and his advisors, but if ever a politician knew the right time, and had the sound judgment and experience to make that call – it most certainly is him.”