Bond investors more optimistic about Irish banks than the stock market

The Central Bank highlighted in its biannual Financial Stability Review, released this week, how Irish banks had higher capital levels before the Covid-19 crisis than most European countries – putting them in a better position to absorb shock losses as faults increase.

However, the shares of state lenders have been among the hardest hit in the industry so far this year, as investors reflect on the impact of the pandemic on the economy.

While the Iseq Financial Index is up nearly a third from its March lows, it remains down 55% so far this year, leaving bank stocks trading at around 20% of the level at which their assets are valued, or what is known as book value.

It’s just as good that the banks don’t have an immediate need for new stocks, as they would have a hard time increasing them.

“Low valuations imply that banks may find it difficult to raise capital through issuance in the market in the future, forcing them to deleverage. [reduce assets] instead of maintaining capital ratios, ”the bank said.

However, bond markets have told a different story lately. AIB managed to sell € 625 million of the riskiest form of bank debt on Tuesday, after securing orders from international investors for eight times the amount offered.

These notes, known as Additional Tier 1 (AT1) bonds, are the first line, after equity, to be hit in the event of a bank’s financial hardship.

It follows the Bank of Ireland which raised a similar amount a month ago as it reopened a segment of the market for European banks that had been closed the previous two months.

“Credit markets demand for Irish bank AT1 paper is a strong vote of confidence from the debt market for the resilience of Irish banks’ balance sheets to Covid-19,” Goodbody Stockbrokers analysts said Thursday in a note to customers.

Equity investors, on the other hand, need more conviction.

Carol M. Barragan

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