A Decade After the Crisis, AIB IPO Is a Milestone for Ireland

(Bloomberg Gadfly) -- Euro-zone banks are toxic no more. An economic rebound, the election victory of Emmanuel Macron in France, and long-running efforts to replenish bank capital levels have all helped to boost investor appetite for financials.

Financial share sales in past 12 months

$78 billion

The industry has been the top source of share sales in Europe over the past 12 months. Firms have announced about $78 billion of deals, with Deutsche Bank and Italy's UniCredit among the successful sellers, according to data compiled by Bloomberg.

Now Ireland wants a piece of the action. The country's plan to sell 25 percent of Allied Irish Banks Plc -- the recipient of a 21 billion-euro ($24 billion) bailout after the 2008 financial crisis -- is a symbol of just how much times have changed.

The country's economy has staged a dramatic return to health in the past five years. Growth has outpaced the euro-zone every year since 2013, thanks to a combination of budget cuts, bank restructuring and economic reforms. The stock market has soared.

Investors are likely to warm to AIB as a way to bet on Ireland's continued economic growth and the lender's own work to clean up its balance sheet.

AIB has cut total assets by almost half since 2009, sold off bad loans and shuttered branches. The buoyant housing market has helped the lender to turn a profit, pay out a dividend and repay 6.8 billion euros to the state.

With an estimated valuation of between 10 billion euros and 13 billion euros, AIB should be worth between 0.8 times and 1 times book value -- on a par with the euro zone's largest banks, BNP Paribas and Banco Santander, and not far off Britain's Lloyds.

If that valuation looks a stretch, remember that there aren't that many other stock-market proxies out there for Ireland's strong economy and still-growing mortgage market.

Bank of Ireland, which trades at a 20 percent discount to its book value, is the main alternative -- but it is more exposed to the Britain and Brexit than AIB, and is also grappling with an IT investment program and pension deficit. Unlike AIB, Bank of Ireland held off from paying a dividend last year and isn't expected to resume payments until 2018, according to Bloomberg Intelligence's Jonathan Tyce.

The key question of how Brexit will affect the Irish economy is anyone's guess, but probably won't hurt investor appetite in these euro-enthusiastic times. For now, foreign direct investment is strong and talk of bankers and businesses setting up shop in Dublin is positive in the short term.

But Brexit is likely to have an increasing bearing on sentiment as AIB moves towards full privatization, a process that could take ten years.

Ireland faces long-term questions over its trade ties and border politics with Britain. In March, the IMF warned the "sizeable" presence of multinationals in Ireland, which boasts one of Europe's lowest corporate tax rates, leaves the country exposed to global disputes over tax. These are big risks.

Still, as long as you assume the U.K. election fails to derail market sentiment and investors bet AIB can ride a growing housing market without sacrificing margins, this IPO should be seen as a positive milestone for Ireland's post-crisis rebound. It's only a first step, but it's a positive one.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

To contact the author of this story: Lionel Laurent in London at llaurent2@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net.