Bank of Ireland shares closed up evening after the bank announced its plans to raise about €3.4 billion to meet new capital requirements.
Under the plan the State’s ownership of the bank will be effectively doubled to 36.5 per cent and the shareholding of many existing shareholders will be diluted, although they will be offered an opportunity to purchase additional shares at a discount.
The plan includes a rights issue of €1.9 billion and a €500 million placing with institutional investors which closed today.
The €500 million placing was closed as of today, a spokeswoman for the bank said, and was over-subscribed three times.
The State will convert some preference shares to ordinary share capital, and will get €491 million profit for warrants it holds.
After opening lower, Bank of Ireland shares recovered this afternoon to close at €1.91, a gain of 6 per cent.
Minister for Finance Brian Lenihan welcomed the announcement, and said the market terms of the transaction would allow the State to achieve a significant return on its investment.
“This transaction is good news for our economy, good news for the taxpayer and good news for Bank of Ireland’s shareholders and investors,” Mr Lenihan said.
"The level of private sector investment is tangible evidence of the growing international and domestic confidence in both Bank of Ireland and our economy.
“I have stressed on numerous occasions that others have confidence in us and we need to demonstrate that confidence in ourselves. Today’s announcement shows that Ireland can and is addressing the difficulties in our financial sector.”
Mr Lenihan said it was a positive sign for the entire Irish financial system.
“That's an international vote of confidence in Ireland and this bank. Investors in other countries are saying they're prepared to risk their money in this bank,” he said. “This is a clear sign that international confidence in the banking system is returning.”
He said the bank would become less of a burden on the State and pointed out that the guarantee offered to banks had not been called on, which is to be phased out.
“In return for Ireland saying that we'll honour these deposits the banks have to pay for this and have - €900 million is the exact figure we've received for it. Clearly it's undesirable that Ireland should be on the hook for these deposits indefinitely,” he said.
“What we have to do with those banks is also ensure that the taxpayer gets a return on the investment already made in them. That has been done now in the case of Bank of Ireland. That at least can be offset against the costs that have emerged in Anglo and Irish Nationwide.”
When the deal is complete, the State will hold about €1.78 billion of preference shares earning a higher coupon of 10.25 per cent.
"There may be some disappointment at the dilution, but it's well anticipated and overall the transaction terms look attractive," said Sebastian Orsi, an analyst at Merrion Capital. "The money has been effectively raised now. I'd expect a good level of take-up of the rights."
In an interim management statement this morning, the bank said although markets were difficult, there was some evidence that trading was levelling off.
"Trading conditions in our core markets in Ireland and the UK in the first quarter of our 2010 financial year remain challenging though economic conditions have recently shown some signs of stabilisation after the substantial fall in economic output from early in 2008," the bank said in a statement.
"The challenging economic conditions, unemployment and weak consumer sentiment continue to impact the loan impairment charge as expected. We continue to believe that loan losses on our non-Nama-bound loan portfolios have peaked with the impairment charge progressively reducing as previously guided. Loan losses on these portfolios for the three year period to March 31st, 2011 remain within the loan loss guidance of €4.7 billion."
However, it said there would be pressure on net interest margins in 2010 as new business activity levels remained low, the cost of wholesale funding remained high and competition impacted deposit margins.
Mr Lenihan also defended his role in the controversy over the proposed pension top-up for Bank of Ireland chief executive Richie Boucher, which he has since turned down.
“What the department has confirmed is that I sanctioned his reduced salary, which left him at a salary level lower than many of his subordinates,” he said.
“The terms of his retirement were the same as his predecessors', in other words he could have early retirement, as many public servants can have, as many others can have. In that context, an actuarial exercise had to be done to fund his pension; in other words, the bank is obliged under its own accounting rules and under general rules to say how much money has to be paid into a fund to pay such a pension. There’s no question of Mr Boucher getting this money personally. This was the fund to support his pension.”
"We have to respect facts in these matters. If we want to keep misrepresenting facts about the banks, we will continue to have this weird position where the rest of the world thinks we're doing a great job and we keep beating ourselves up here," he told RTÉ's Morning Ireland.
This evening Fine Gael’s finance spokesman Richard Bruton said taxpayers were being overcharged by €156 million for shares in the bank.
He said taxpayers are paying too much for shares because Bank of Ireland is not offering the same discount to the State as it is offering to private investors.
He said: “Brian Lenihan must explain why taxpayers are not being offered the 15 per cent discount on Bank of Ireland shares the bank is offering other private investors - €1.80 per share for taxpayers versus €1.53 for private investors”.
“For some reason Bank of Ireland has decided to inflict a massive €156 million overpayment for its shares on taxpayers. How can this possibly be regarded as a good deal?”
