FT LEX on Irish Life & Permanent

Shareholders are right to fight back

against moves by the State
Published: May 26 2011 16:08 |

Irish taxpayers have borne the brunt of the country’s banking collapse – a
€70bn hit. So have shareholders. They have been wiped out at Anglo Irish
Bank, and diluted to the point of emaciation at Allied Irish Banks and Bank of
Ireland. Now the death cart has been summoned for shareholders in Irish Life
& Permanent, which is facing a mandatory €4bn recapitalisation of its banking
division. Some ILP investors have started a fightback. That’s good.

The Irish bank stress tests in March had ultra-pessimistic assumptions about
mortgage defaults and loan losses. The authorities wanted to draw a line
under the banking crisis. The long term outcome, unless Armageddon arrives,
is that the banks will be significantly overcapitalised. ILP’s Permanent TSB
bank reported a robust-looking core tier one capital ratio of 10.6 per cent at
the end of 2010. The group reckons the forced recapitalisation will lift the ratio
to 33 per cent by 2013, leaving PTSB with excess capital of €1.5bn.

The recapitalisation will be funded by selling ILP’s life insurance division –

which could be worth €2bn – and by the state. And there’s the rub: the
government is demanding almost full ownership of the rump of ILP in return.
Angry investors say that is tantamount to expropriation: the life business
belongs to shareholders, and the state’s ILP stake should be no more than 56
per cent, to reflect its maximum contribution to the recapitalisation. One
shareholder, Malta-based Scotchstone Capital, insists PTSB does not need
such a big recapitalisation. The dissidents are pressing for a better solution,
such as giving private investors a call option on the state’s stake.

The investors have a case: the ILP recapitalisation looks arbitrary and should
be re-examined. Ireland’s banking collapse was an exercise in wanton value
destruction. Fixing it must not do likewise.

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