10 things you know about should AIB before splashing out on shares
Our advice is to look before you leap (even if you’re a stag!) before parting with your cash
Michael Noonan is bowing out as Finance Minister. And his political swansong will be the sale of AIB shares to the public. The Government is to flog 25% of its 99.99% stake in the bailed-out bank, hoping to raise €3bn in the process.
The money raised is earmarked to pay off the national debt. But sickeningly, the debt is rising all the time as we keep racking up interest and extra borrowing from various bank bailouts. In fact, it has already risen by €3bn. The National Treasury Management Agency estimated our national debt at €185bn at the end of last year but that has gone up to €188bn for the end of April. So the entire €3bn to be raised by the sale of AIB shares has effectively already gone up in a puff of smoke.
The good news is that the sale means we are on course to break even on our initial €21bn bailout of the bank. AIB has already stumped up nearly €7bn to the taxpayer through dividends and other payments. With another €3bn to be raised in the sale; that tots up to almost €10m.
But the Government still holds nearly 75% of shares in the bank.
Those shares are theoretically worth another €9bn. And that brings us to €19bn – only €2bn short. However, shares in such public offerings are usually priced to be snapped up and rise on the day – otherwise the whole exercise could prove a flop.
So the value of the remaining three-quarters of AIB in State ownership could rise past €11bn before long. That’s what Mr Noonan is aiming to achieve before he goes: concrete proof that his management of the AIB bailout was a success.
AIB has certainly done okay. The bank returned to profitability in 2014, and last year made €1.7bn after tax. At its low point, it had €29bn in bad loans – a third of its total. That’s been massively reduced to €9bn. But this is still worryingly high.
The minimum investment in the flotation will be €10,000, pricing many out of the market. But if you have the money to spare, should you invest in AIB?
Here are 10 things you should know before taking the plunge:
1 You will be buying a ‘pig in a poke’
The key measure of the AIB
shares will be the price. But while a range will be published later this month, we won’t know the exact price until people commit to buy at the end of the month. If Mr Noonan sets too high a price, the sale could turn into a damp squib, so he probably won’t. But look at what has happened in the past…
2 Past share sales have been disastrous
Remember Eircom? The State sold its shares to practically everyone. The price went up initially before plunging – and staying down. More recently, the Government sold shares in PTSB to institutional investors. The stock looked like an okay bet initially but lost a third of its value inside a year.
3 But this time could be different
You’ll hear a lot of analysis of AIB and its share price before the launch. But the main reason for being interested has nothing to do with AIB’s business fundamentals and everything to do with politics and common sense.
The Finance Minister sets the price. He’s a wily operator who wants to make as much as he can for the taxpayer.
But he also needs to make a success of the launch with a price low enough to inspire people to buy at the time of the launch. Where it goes after that is anyone’s guess.
4 You’re losing money on deposit
Play-safe savers are being forced to put their money at risk in shares because interest rates are so low.
Recently, interest rates fell below inflation, which makes many savers feel that they have no option but to invest. If they keep their cash in the bank, they know they will definitely lose money; at least there’s a chance of making some by investing in shares. So even a 1% increase in AIB’s share price in a year would be better than the best bank deposit rate.
5 Don’t put all your eggs in one basket
You need to commit to buying at least €10,000 shares. But if you’re a small investor, you would be taking a huge risk by putting all that in one basket. AIB has bounced back but it still has a huge chunk of bad loans. You’d also be putting all your eggs in the basket of the Irish economy. If things go pear-shaped here, you would be in double trouble.
6 Don’t mention the B word
AIB has 14% of its loans in the UK market and has warned that sterling’s weakness after Brexit ‘could have an adverse effect on the group’.
7 Consider running with the stags
You may have heard of the bulls who want to buy shares and the bears who want to sell. Well, there’s another animal in the stock market – stags.
These buy and sell quickly to make a fast buck. Some cute stags even made a profit on the Eircom sale while long-term investors lost out.
Unlike Eircom, the AIB offering has no incentives to hold shares long term.
So the price could be volatile. It may rise at first but could fall sharply soon after as the ‘stags’ sell off to cash in any profits.
8 Now is a dangerous time to invest
Stock markets are trading at all-time highs and some wellrespected commentators are braced for a downturn.
Wily investor Warren Buffet, the fourth richest American, has $90bn in cash awaiting what he sees as an inevitable drop in prices.
Irish financial shares are also seen as particularly overvalued. But watch out for analysts’ reactions when the AIB price range is announced later this month. If it’s seen as too pricey, don’t take the plunge.
9 Be an early bird
If you do decide to invest in AIB, you’ll have to set up an account with one of the approved stockbrokers before the deadline of 5pm on June 18. These are: Davy, Goodbody, Investec, Merrion Private, Campbell O’Connor and Cantor Fitzgerald.
10 Watch out for special deals
Stockbrokers aren’t allowed to charge you to buy shares but they may charge a fee for holding them and for related services. Watch out for pricing deals before you decide which broker to choose as some may be cheaper than others.