Irish government action presents bank LT2 opportunity, says RBC

Royal Bank of Canada has published research say that today’s action by the Irish government may present an opportunity to buy bank’s lower tier two paper. The Irish government is expected to announce plans to effectively nationalise most of the banking system.

RBC says it forecast this outcome some time ago and moved to overweight LT2 securities of Allied Irish Banks and Bank of Ireland. Although the local market may be prepared for this eventuality, RBC expects that international investors may initially take fright at the size and comprehensive nature of the action.

An Irish Time report says the government is likely to take 40% ownership interests in BKIR and 70% in AIB. In addition, EBS and Irish Nationwide building societies would be fully government owned. The report states that the Irish government is expected to inject in excess of €16 billion into AIB, BKIR, EBS, Irish Nationwide and fully-owned Anglo Irish.

After a period of initial uncertainty, RBC expects the market will begin to price the LT2 debt of these institutions more like other government-controlled banks globally. Strategists note that the AIB 12.5s trade at a (bid) yield to maturity of just over 10% in sterling and euros, while similar maturity Royal Bank of Scotland debt trades at a yield to maturity in the range of 7%. The recently issued BKIR 10 trades at just over 9%. While strategists allow that rating agencies still rate the UK as triple-A while Ireland has a composite rating of double-A, RBC believes the 3% differential in yields is overdone. It notes that the differential between UK and Irish five- and 10-year CDS is only 50bp.