Bank bull market bolsters state shareholding plan

After a dismal decade, European banking stocks are finally in tears and the news could not have come at a better time for Finance Minister Paschal Donohoe, who is in the process of selling part of the state’s banking stakes.

The enders are the best performing industry group so far this year in the Stoxx Europe 600 index, which is up 10%, up nine straight days to start the year before falling on Friday. It was the longest winning streak since 2018 and so far the best January start ever.

Irish bank stocks are also significantly outperforming the sector, kicking off 2022 with a bang as the government is in the market to sell its stakes in Bank of Ireland and AIB.

Bank of Ireland shares are up more than 17% year-to-date, while AIB is up more than double the European average with a 20.5% gain in the past two weeks of negotiation.

Rising prices mean two things: that buyers are hungry to invest in banks to play on the economic recovery and that Mr. Donohoe is likely to get a better price for the taxpayer.

The catalyst: Expectations of monetary policy tightening from the Federal Reserve and other central banks have caused bond yields to spike, helping banks lend more profitably. The recovery of the economy from the pandemic will also lead to increased borrowing by businesses and consumers.

“As stock market investors need to know who benefits most from upcoming central bank measures, it seems logical to look at banks,” said Andreas Meyer, CEO of Fountain Square Asset Management. It’s been a long time coming. Bank stocks have underperformed the rest of the market for years due to low to negative bond yields, constant regulatory pressure, money laundering scandals and failed turnarounds. The Stoxx 600 Banks index has fallen 45% in the decade to 2020, while the broader index has risen by the same amount.

This poor performance has slowed government plans to withdraw from the banking sector.

After initial public offerings for Permanent TSB and AIB in 2015 and 2017, respectively, the Irish banking market deteriorated, leaving the Department of Finance with a majority stake in both institutions and a substantial minority stake in Bank of Ireland. But the departures announced last year by Ulster Bank and KBC from the Irish market made this situation increasingly untenable.

Now, with a buoyant investment backdrop, the National Treasury Management Agency is on its way out of Bank of Ireland entirely by mid-2022.

Mr. Donohoe announced in December that the agency would also begin to inject AIB shares into the market to reduce the state’s exposure and recoup more money from crisis bailouts.

The market rally began last year, when European banks set aside less cash for bad debt and buoyant financial markets boosted trading profits. Today, interest rates are finally rising from their lowest levels since the 2008-2009 financial crisis.

Visibility of shareholder returns has also increased since the expiration of a dividend and share buyback ban by the European Central Bank and banks’ asset quality has remained strong despite the pandemic. (additional reports by Bloomberg)

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