A profit from the BOI bailout?

This morning Bank of Ireland have announced that they indeed to redeem the €1.8 billion of preference shares held by the National Pension Reserve Fund in the bank.  Since the onset of the crisis the State has contributed €5.8 billion to Bank of Ireland.  This comprises:

• €3.5 billion of preference shares in February 2009
• €1.3 billion of ordinary shares in July 2011
• €1.0 billion of contingent capital notes in July 2011

That is a total of €5.8 billion.  And what has been returned?

In April 2010 it was announced that €1.7 billion of the preference shares would be cancelled as part of a swap with ordinary shares in the bank.  That left the €1.8 billion of preference shares in today’s announcement.  As part of the swap the State received around €0.5 billion in warrants for the cancellation of the preference shares.

In July 2011 it was announced that around €1 billion of ordinary shares held by the NPRF would be sold to private investors.  In January 2013, the sale was completed of the €1 billion of contingent capital notes held by the Minister for Finance were sold.

When the €1.8 billion from today’s announcement is received that will bring the total received from asset transaction to €4.3 billion.

There have also been substantial income receipts from Bank of Ireland over the past four years.  These include transaction fees (€0.1 billion), preference share dividends in cash (€0.6 billion), contingent capital interest (€0.2 billion) and various guarantee fees (€1.5 billion).  These total €2.4 billion.

Thus total receipts from Bank of Ireland over the past four years are €6.7 billion which is a surplus of almost €1 billion over the €5.8 billion put in.

It can be seen though that the “profit” only arises with the inclusion of the various guarantee fees and not simply from the financial transactions with Bank of Ireland.  These were a ‘fee for service’ and providing the guarantee was not a costless operation for the State.  Only monies paid to Bank of Ireland are included while costs carried by the State (higher interest rates, reduction/elimination of market confidence) are ignored.  It is probably appropriate to omit the guarantee fees when determining the profit/loss from the State’s financial transactions with Bank of Ireland.

That means we are still nursing a €0.6 billion loss.  However the State still holds a 15 percent equity stake in Bank of Ireland (which will be diluted slightly by today’s announcement if the State does not participate in the rights issue).  With a current market capitalisation of around €8 billion this stake is worth around €1.2 billion.  We may yet turn a profit on the bailout of Bank of Ireland.