Bailed-out banks on block as markets surge
By Patrick Jenkins
Today, five years on from the shaming injections of public money they needed to stay alive, there is a very different story to tell
There have been few better investments than European banks over the past year. Consider this clutch: Lloyds Banking Group, whose share price is up 130 per cent compared with July 2012; Bank of Ireland and Belgium’s KBC, both up 75 per cent; even Royal Bank of Scotland, for all its troubles, has seen its stock rise by nearly half.
Those names, all of which have trounced the European bank average gain of 39 per cent, are part of a special club of bailed-out banks. Today, five years on from the shaming injections of public money they needed to stay alive, there is a very different story to tell. For the first time since the financial crisis, it is easy to imagine governments exiting their vast bank investments – in some cases potentially starting the sale within days.
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The UK seems tempted to follow suit very soon, encouraged both by buoyant share prices and a fast-growing appetite among fund managers for the kind of bank stocks they have been underweight on since the crisis.
Officials are even toying with kicking off the process on the back of Lloyds’ second-quarter results on Thursday, potentially placing as much as £5bn of stock with fund managers from the UK and abroad, and a selection of sovereign wealth funds.
Treasury officials have made clear for some time that the sell-off could begin by the end of the year. But there is a mounting feeling that share valuations cannot last. Waiting until a more traditional window in September or October could be risky if markets grow nervous about the solidity of a European economic recovery.
There seems little chance of the stock being sold in the short term for more than the 74p a share price at which the government injected its £21bn of bailout money nearly five years ago. But with the shares trading at just over 68p, getting within 10 per cent of the break-even level looks feasible, even after a placing discount of 4 or 5 per cent.
Lloyds’ underlying recovery looks to be accelerating, too. The bank is still feeling the effects of the crisis, in terms of loan losses from the toxic assets it inherited with its HBOS acquisition. But the deal has left the bank with dominant market shares of 25 to 30 per cent across its high-street banking operations – all the more appealing if the UK economy really is in recovery, as recent economic data suggest.
For the first time since the financial crisis, it is easy to imagine governments exiting their vast bank investments – in some cases potentially starting the sale within days
Could Bank of Ireland be next? Although its bailout by the Irish government was structured in a more complex manner, it, too, has good reason to focus on buoyant capital markets.
By next March, it must repay €1.8bn of government-owned preference shares or face a rise in the coupon payments it must make on the instruments. Some investors are betting that the bank will persuade the government to renegotiate those terms, but if it cannot it could be well advised to raise money while it can.
Bank equity placings and rights issues are becoming quite the fashion these days. Barclays’ plan for a £5bn-plus issue on Tuesday, following Deutsche Bank’s €3bn placing a couple of months ago, are all about complying with regulators’ toughening capital requirements. But bailed-out banks have been at it, too, largely to pay back governments. KBC, for example, raised €1.25bn at the end of last year to fund the repayment of its €3.5bn Belgian government bailout. It will not say whether today’s healthier equity valuations would encourage it to raise more still to pay back the final few billion it owes the Flemish authorities.
There are always exceptions to a trend. Commerzbank tried a similar trick, launching a €2.5bn rights issue in May to help repay state aid. But the German bank is so swamped by legacy losses and government support that investors have no faith in it any more. In contrast to the booming share prices of rivals, Commerzbank’s stock has been falling steadily since the crisis and is close to a record low, making it an obvious target to be taken over or put into run-off. Someone should put it out of its misery.
Patrick Jenkins is the Financial Times’ banking editor
