Dáil Éireann Debate, Wednesday - 13 May 2020
61. Deputy Michael McGrath asked the Minister for Finance the risks facing the economy as a result of the recent falls in stock prices on the Stock Exchange here and globally; the potential impacts on banks here including the capitalisation of the banks and the value of the shareholding of the State in each; and if he will make a statement on the matter. [4291/20]
Amharc ar fhreagra68. Deputy Michael McGrath asked the Minister for Finance the relationship, direct or otherwise, between the share price of a bank and the capitalisation of that bank; and if he will make a statement on the matter. [4322/20]
Amharc ar fhreagraI propose to take Questions Nos. 61 and 68 together.
As the Deputy will know, we are now in the midst of a severe recession, both globally and domestically. Jobs and our people, have borne the brunt of the unprecedented economic decline. But we can and we will recover. Our economy can grow again next year, employment can grow, unemployment can fall, and our public finances can improve. This is because, as the experience of the last financial crisis and Great Recession shows, our economy and labour market are very resilient and have real underlying strengths that this crisis will not have altered.
In fact, none of the imbalances that characterised our economy before the last recession – unsustainable credit growth, borrowing from abroad through a balance of payments deficit – are evident at present.
Similarly, the three banks in which the state has a shareholding (AIB, Bank of Ireland and PTSB) entered this crisis in a good position with strong capital and liquidity positions – a stark contrast to the previous recession. There are now significant capital and liquidity buffers in place in Irish banks which puts them in a strong position to continue to lend to the economy and to aid the recovery.
Both myself and my officials have engaged and will continue to engage extensively with the Banking and Payments Federation (BPFI) and the banks directly in relation to supports for personal and business customers affected by the COVID-19 crisis. Officials in the department are alert to issues raised directly by the public and these inform the department’s ongoing engagement process and policy formation.
All the banks have continued to evolve and expand the supports they have available and I would expect that this process continues. Consequently given the size of the economic shock and the uncertainty around the short to medium term outlook, management teams across every bank in Europe are withdrawing previously issued guidance on earnings for the year and setting out new plans. Our banks are no different.
In regard to the value of the State's shareholdings, we have obviously seen a large drop as share prices everywhere have fallen. However it should also be noted that Irish bank share prices have been under-performing for at least 18 months i.e. before the onset of the current COVID-19 health and economic crisis.
It is therefore clear that in these challenging times, recovering all of the €29bn that the state invested in the three remaining banks is not realistic in the short term and perhaps not the medium term either.
|
AIB |
AIB |
Bank of Ireland |
Bank of Ireland |
PTSB |
PTSB |
|
|
Date |
Share Price |
Value of Shareholding €M (c. 71% of total shares following IPO) |
Share Price |
Value of Shareholding €M (C. 14% of total shares) |
Share Price |
Value of Shareholding €M (c. 75% of total shares) |
|
08/05/2020 |
1.085 |
2094.52 |
1.644 |
247.28 |
0.48 |
163.52 |
With regard to the factors influencing the shares since the current crisis began, I have been informed that feedback from investors and analysts identifies a few likely contributing factors:
1. The large state shareholding: Feedback from investors and advisory firms indicates market concern that banks across Europe with a large state shareholding could be subject to political pressures. Therefore there is some correlation between share price performance and state shareholdings. In Ireland's case we have legally binding Relationship Frameworks which ensure that commercial decisions are matters for the board and management of the banks in which we have a shareholding.
2. A low level of trading volumes: in the current turbulent environment investors have a preference for highly liquid stocks that they can trade in and out of rapidly.
These factors likely explain why there is such an apparent lack of correlation between the share price of Irish banks and their strong capital positions relative to their peers around Europe.
As regards the fall in the Irish and international stock markets more generally, aside from the knock on wealth and confidence effects, it will likely be more difficult and expensive for some companies to raise equity finance in the months ahead. This is why it is so important that our banking system support its customers appropriately so we can all navigate the current crisis successfully.
