Banking Share Prices

The share prices of the two ‘pillar’ banks have been attracting a bit of attention recently as they have moved in tandem upwards for the past few weeks.  The share price of Bank of Ireland has increased from around 8c to 14c over the past month with the share price of Allied Irish Bank going from 6c to 13c over the same period.

This co-movement would make sense if the outlook for both banks was similar and the close share prices would make sense if the number of shares in issue for both banks was similar.  However, neither of these is true.

Bank in 2008 both banks had about 1 billion shares in issue.  After swaps, splits, issues and other events there are now about 30 billion shares in BOI and a massive 513 billion shares in AIB.

The market capitalisation of BOI is now around €4,300 million.  This means the government’s 15% shareholding has a market value of around €650 million.  If the number of shares in BOI had remained constant the 1 billion shares that were in issue in 2008 would now be worth around €4.25 each.  These shares hit a peak of around €18.  Of course, the holding of the original shareholders have been hugely diluted so the comparison is not valid.

The primary reason BOI has a market capitalisation of over €4 billion is because of the net €3.5 billion that has been provided by the State, the €1 billion that the Wilbur Ross group of investors has provided, €4.5 billion of Liability Management Exercises (“haircuts”) with subordinated bondholders and holders of residential backed securities, and €1.5 billion from debt for equity transactions.

All told BOI has taken a company that was worth €18 billion at the peak, consumed over €10 billion of funds from various sources and turned it into a company worth a little over €4 billion.

We could so a similar analysis for AIB but with 513 billion shares trading at around 13.5c, AIB had a market capitalisation of around €70 billion.  With a 99.8% sharesholding this puts the State’s stake at that same number.  Aren’t we supposed to believe that markets are efficient?