Market inefficiency of the day, Irish bank edition

October 26, 2011


You won’t be surprised to hear that shareholders in Allied Irish Banks have not done very well for themselves in the past five years. It did go bust, after all, and had to be nationalized; the share-price chart is above. But recently, as part of the recapitalization of the bank, the number of shares outstanding rose dramatically. Here’s the announcement, which doesn’t quite spell things out:

The Capital Raising will comprise an equity placing (the “Placing”) of ordinary share capital of €5 billion to the NPRFC and an issue of up to €1.6 billion of contingent capital convertible notes (the “Contingent Capital Notes Issue”) to the Minister. The Placing will comprise an issue of new Ordinary Shares for cash at a price of €0.01 per share.

If you do the math, you can see that injecting €5 billion of capital at €0.01 per share means that 500 billion new shares were created. And ever since those shares were created, if you multiply the shares outstanding by the share price, you can see that technically the market capitalization of AIB is somewhere north of €30 billion! Here’s the same stock, only this time charting market cap rather than share price:


Even when a bank has been nationalized, there are good reasons for the shares to continue to be traded. For one thing, it’s helpful when you’re handing out equity to senior management; for another, it’s very useful if and when the time comes to try to privatize the bank and take it off the government’s hands. So at some point there’s going to have to be a reverse stock split, with the shares trading for some sensible amount.

But right now, the shares are genuinely trading at somewhere over €0.06 a piece — and indeed have risen in value quite dramatically over the past three weeks. I have no idea what the mechanism is here, or who’s buying these shares, but if you want proof that markets aren’t always efficient price-discovery mechanisms, this has got to be Exhibit A. It would help of course if these shares could be shorted, but that still doesn’t explain why people are buying at these levels.

(Thanks very much to Patrick Brun for the tip and the data.)


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