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State may take lower price to get top investors to buy into AIB

The Government is considering roping in a handful of blue-chip investors to anchor AIB’s shareholder base when it sells €3bn of shares in the bank this summer.

But any move to restrict smaller hedge funds and opportunist investors from piling into the deal could mean a lower price for the State when it sells the shares.

Selling a bigger slice of the bank to a handful of large investors would help dampen volatility and could boost long-term demand for the shares following the planned initial public offering of the nationalised lender later this year.

While the timing of AIB’s return to the stock exchange has yet to be confirmed, the Irish Independent has established that the nine-strong banking syndicate and Department of Finance is assessing the merits of a so-called anchor investor process.

Allocating shares to marquee investors can reduce share-price fluctuations after a market listing. But bigger investors also wield greater influence on price, potentially leaving the Government open to the politically toxic charge of under-pricing the deal.

One source within the syndicate stressed “no plan” had been set and described the mooted €3bn IPO – representing 25pc of the Government’s stake – as a “fluid process”.

Over the past two months AIB’s management, headed by CEO Bernard Byrne and chief financial officer Mark Bourke, along with its advisers, have met with numerous potential investors.

Sources said the reception from institutional fund managers has been enthusiastic.

It opens the potential for a small group of fund managers to commit to purchasing a large portion of shares ahead of the deal launch.

That would de-risk the sale for the State, and allow the Government to lock in what are regarded as top tier, long-term investors. It would also reduce the risk of shares being flipped in the wake of a deal.

Yet while confidence within the ranks of advisers and officials managing the flotation is riding high, prospective investors remain concerned about a frothy valuation, given the lacklustre performance of Permanent TSB since its partial privatisation.

Those close to the AIB deal are keen to downplay comparisons with its smaller rival, pointing out that the bigger lender, which recently paid a dividend for the first time since its €20bn-plus bailout by the taxpayer, is a diversified bank with a lower volume of non-performing loans.

It is understood the Department of Finance and its advisers are confident of securing a premium to AIB’s book value when they sell shares.

But Noel O’Halloran, chief investment officer at KBI Global Investors said most European banks now trade at a discount.

“There is no shortage of bank paper in Europe,” he said and emphasised that Ireland is not “commanding a premium at the moment”.

He argued investors are likely to compare AIB to its European peers, rather than apply a narrow focus against Bank of Ireland and PTSB.

A key selling point of the recently completed non-deal roadshow, was AIB’s status as a national champion, given its growing dominance in the mortgage market.

AIB’s market share of new mortgage lending is 35pc versus around 25pc for nearest rival Bank of Ireland.

The reinstalment of the dividend, something Bank of Ireland is also behind on, has also been characterised as a major draw for AIB investors.

But Mr O’Hallorhan cautioned the market will focus on the lender’s ability to “grow that dividend”. He also stressed “AIB’s ability to consistently deliver returns higher than the cost of the capital” – meaning its return on equity – “has yet to be proved”.
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