AIB shares will be priced in the range of €4.40-€4.90, according to confidential estimates provided for institutional clients by the stockbrokers hired by the government and AIB to advise them on the planned share sale.
The analysts’ estimates, part of a pre-deal pitch to investors, provide the most reliable indicator of how much the shares will cost before a price range is fixed next week when the bank will publish a prospectus.
Stockbrokers Davy and Goodbody estimate the price range will value AIB at 90%-100% of its book value, about average for the European banking sector, according to clients who received the research after the government approved the long-awaited initial public offering (IPO) last Tuesday evening.
Davy is part of a syndicate of banks advising the government on the share sale, along with Bank of America Merrill Lynch and Deutsche Bank. Goodbody has been hired by AIB as its adviser, along with Morgan Stanley.
A price of €4.88 a share would equate to 100% of AIB’s book value of €13bn.
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The eventual price is expected to be pitched slightly below this level, however, to leave more upside for investors at the IPO.
The investment case for AIB is predicated on rapid growth in mortgage lending, where the bank has a 36% market share, according to the stockbrokers’ research.
It identifies those below the age of 35 as a key target market for growth because of their relative lack of indebtedness compared with the older generation who got on property ladder during the credit bubble.
The pitch to investors, which swung into action as soon as the government approved the IPO, also highlights AIB’s digital capabilities as a key attraction. The bank invested €870m in IT over the past three years and expects to spend €175m-€200m a year on technology into the future.
Investors have been surprised by management’s conservatism about AIB’s future prospects.
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Return on equity, a key performance measure for banks, is forecast at just 9% a year into the future. “It’s supported by a decent backdrop for European banks, although it’s a long way off the returns on equity of 18%-20% that banks were reporting in 2007,” said one institutional investor familiar with the stockbrokers’ research.
Investors are looking for clearer guidance on future dividends. AIB became the first Irish bank to resume dividends since the financial crash when it made a €250m payout to shareholders earlier this year.
Investors are being told to expect a payout ratio of 25%-30% at AIB in the coming years; even other domestically-focused retail banks in Europe distribute closer to 50% of profits to their shareholders.
Sentiment towards bank stocks has improved significantly since last summer when European banks traded at an average of just 60% of book value as the margins were squeezed by record low interest rates.
“With the notable exception of Italy, banks throughout Europe have been re-rated to about book value, making this a good time for AIB to return to the market,” said one asset manager.
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“Equity markets are already looking 18 months ahead when it’s likely that the interest rate cycle will have turned.”