31 May 2017
SEANAD ÉIREANN - Statements on the proposed sale of AIB shares
Minister for Finance Michael Noonan T.D. - Opening Statement
CHECK AGAINST DELIVERY
Thank you for this opportunity to address the house and to give a brief update on the progress made in returning AIB to private ownership and the continued normalisation of the State’s involvement in the Irish banking system.
Yesterday evening I published an 'Intention to Float' (ITF) announcement, indicating that my department is preparing for the sale of around 25% of the State's shareholding in AIB. This announcement marks the start of an IPO process which is expected to culminate in the disposal of these shares towards the end of June.
I believe that the issuing of an ITF marks a significant milestone in returning our banking sector to a sustainable and normalised environment. Much work has been conducted at European level to break the link between the State and the banking system and ensure that instances of taxpayer funded bail outs do not reoccur into the future. Exiting our equity investments in the banks is a natural part of this process and will reduce contingency liabilities for the State. These disposals will also help reduce our elevated national debt and can foster further competition in the Irish banking market, by removing any perception of State interference that might dissuade new entrants.
I have previously made the case, and it is this Government’s firm view that the State should not own and support banks when the capital markets are willing and capable of providing this function. Equity investments in any sector are risky propositions and the State’s resources are better allocated to more appropriate areas.
Moreover, the issuing of an ITF reaffirms the Government’s commitment to recovering its investment in AIB for the benefit of the Irish people. During the financial crisis the country was forced to make significant investments in AIB to protect the wider economy, reaching a total of €20.8bn. We have already recouped €6.6bn of this, through disposals, interest charges, coupons and fees. The Department of Finance, supported by advice received through 2015 and 2016 from our financial advisors Rothschild and, previously, Goldman Sachs, did considerable work to identify the optimal route to maximise the value of our investment over time. It is clear from our analysis, given the size of the State’s investment – that an Initial Public Offering followed by the gradual sell down of our remaining shareholding over time, represents our best opportunity to achieve this.
The advantage of a sell down through the stock market is that it allows us de-risk our exposure over time as circumstances permit. While we benefit from the proceeds of disposals along the way, at the same time the State can recoup the value of an improvement in the bank’s prospects over the medium term through the remaining investment.
I have given careful consideration to the timing of an ITF announcement, and made my announcement this week based on advice from my officials, our banking syndicate and our independent financial advisor Rothschild. I am confident that the conditions are currently conducive to achieving a successful transaction. As we look at stock markets today, conditions are encouraging with US and UK markets close to all-time highs and bank stocks are trading positively. My officials also inform me that the Irish macro-economic story is resonating well with international investors.
The strong financial performance of AIB in recent reporting periods is also a factor in the timing of this announcement. The bank has now delivered three and a half years of profits, it is well capitalised and – with the full approval of its regulator – was in a position to pay a dividend on the basis of its 2016 Annual Results, the first time it has paid a dividend since 2008. I believe investors will now be able to see the significant progress made by the bank, its achievements so far in reducing its non-performing loans, and will therefore be prepared to put a fair and reasonable value on the bank's equity.
Some opposition politicians have been mistakenly seeking to draw a connection between the implementation of our banking sector policy with the constraints on the State’s ability to increase our national spending imposed by the European Union Stability and Growth Pact. This is a mistake for two simple reasons.
Firstly, it conflates two separate and discrete policy areas unnecessarily. We are in a good position to make significant progress in the normalisation of our banking sector, reducing our contingent liabilities and fostering greater competition as I have described already. This progress is in no way related to, or contingent on, the application of the Fiscal Rules. It would be entirely counterproductive to conflate the two.
Secondly, to identify potential income from an IPO as cash available to the State is to misunderstand the constraints on capital spending. The sales of financial assets such as bank shares are transactions which do not result in a beneficial impact on the general Government balance under EUROSTAT rules. Such disposals are classified as financial transactions that essentially involve the exchange of one form of asset such as shares, for another such as cash. Consequently, the sale of any shareholding in AIB would not count as general Government revenue. Moreover, When it comes to investing in infrastructure, it is a not a shortage of cash that is inhibiting additional investment in infrastructure but the fact that we have reached the ceiling under the fiscal rules. The issue is our capacity legally to spend additional moneys or capital, not its availability. The fact is that the fiscal rules are enshrined in Irish law, in the Fiscal Responsibility Act 2012.
My strong view is that public indebtedness rose partly due to the recapitalisation of the Banks; the appropriate way of treating one-off revenue from divesting the State of its banking assets is to use these proceeds towards debt reduction and to reduce the cost of debt servicing in future years. The strategy of reducing the National debt is consistent with Government policy of repaying the borrowing previously undertaken to finance the bailout of the banking sector during the financial crisis. This policy has been clearly articulated by Government since 2011 and has been consistently endorsed by a number of market analysts and international financial institutions. It has been argued in some quarters that they should not be used to repay debt simply because it would have little or no impact on the overall debt –to-GDP ratio. I would reiterate that it is precisely because the nominal amount of debt is so high that the impact might be considered small; but this makes the need to reduce the debt level all the more pressing.
The decision to proceed with an IPO of AIB is an opportunity to reflect on the progress made in returning the bank, and the banking sector more generally, to more stable, normal business activity, which can provide services to the public in a prudent and competitive manner, facilitating investment and enterprise in our wider economy.
31 May 2017
CHECK AGAINST DELIVERY