European bank equity: Still hemmed in
As European banks return to the stock exchange, don’t expect much growth in balance sheet or geography.
The completion of ABN Amro’s IPO in late 2015 is by no means the end of the stream of European bank equity sales. Allied Irish Banks (AIB) will compete for investor interest with a host of other banks across Europe in its effective IPO this year. The UK government is selling more of Lloyds and RBS, while a host of UK challenger banks are looking to bring IPOs. The Dutch government will also seek to sell more of ABN Amro after a six-month lock-up period.
These deals follow years of bank capital raisings, most recently from Credit Suisse and Standard Chartered, and most tiresomely, the Greek banks. Yet bankers are confident of the next wave’s chances of success, despite the difficult backdrop in terms of regulation and global growth. Liquidity is still plentiful. Europe’s recovery is encouraging, especially in markets like the Netherlands and Ireland.
Banks like ABN Amro – which rose after its IPO, and enjoys almost 13% return on equity – demonstrate the way into investors’ good books. AIB may try to sell a similar story of a domestic retail-orientated bank, not too different to Lloyds in the UK. Despite lingering government ownership, these kinds of banks are in fashion, particularly with investors looking for yield, and exposure to the European recovery. In fact, many bailed out banks have achieved better valuations than lenders that remained private after the crisis.
Government ownership of banks has encouraged an orientation towards a local retail business model that appeals to investors today. The problem is that, for the likes of AIB and ABN Amro, their only chances for growth now lie outside their home markets, or in wholesale lending. Those who worry about a new credit binge in Ireland are way off the mark – bank loan books there are still contracting. ABN Amro’s Dutch mortgage business is also unlikely to see much, if any, growth.
Both AIB and ABN Amro have bigger opportunities to grow internationally. AIB is expanding faster in the UK than in Ireland, while ABN Amro’s international growth is targeting revenue streams in private banking, asset-backed finance, and energy, transport and commodities (ECT). Once back in private hands, many within these banks may be itching for a more assertive attitude to these opportunities.
So far, however, the two banks’ international expansion has been tame. Equity investors hoping for dividends and a pure-play domestic story, meanwhile, might be even less likely to look favourably on faster international growth than government owners. The market’s still-cautious attitude to banks, at a time when so many are hoping to sell shares, means such wishes will not be ignored.