Allied Irish Banks and Bank of Ireland shares soared on Thursday on expectations the government may not have to take equity in the lenders following the creation of a "bad bank" to purge the sector of risky loans.
Investors have been giving Irish banks the cold shoulder over the past year amid fears that their crippling exposure to falling property assets would force Dublin to bail them out with majority shareholdings or nationalisation.
Finance Minister Brian Lenihan told parliament on Wednesday that taxpayers would have to fork out additional capital for some lenders, on top of paying nearly a third of Gross Domestic Product for the sector's riskiest loans, but he also signalled he was giving the banks headroom to recapitalise themselves.
"Investors clearly are buying into the fact that the Irish banks, going forward, are more attractive propositions now that they have been cleaned up," said one Dublin-based trader.
But Lenihan warned that the lenders had not yet lost their international pariah status.
"The value of trading of these shares at this level is highly speculative," he told national radio.
"We are talking about a bookie's office operation here. There has been very little institutional dealing in Irish bank shares."
Ireland will spend 54 billion euros ($79.68 billion) cleansing its financial system of risky property loans with a nominal value of 77 billion euros that have crippled what was once Europe's fastest-growing economy.
Lenihan's plan is meant to restore the flow of credit and pull Ireland out of the industrialised world's worst recession, but it will require Allied Irish Banks and possibly Bank of Ireland to raise more capital because Dublin is taking over their loans at a discount to book value.
Lenihan said the industry-wide discount would be 30 percent but AIB has said it expects its stock of loans will be bought at a lower writedown and analysts have said Bank of Ireland's haircut could be less than 25 percent.
Dealers said investors, both institutional and retail, wanted to buy into the two lenders, currently among the cheapest banks in Europe, to take advantage of future rights issues and a return to profits in the medium-term.
At 0825 GMT, AIB was up 25 percent and Bank of Ireland was trading 12 percent stronger in a general index 3 percent in the black.
ASSET SALES, STRATEGIC STAKES
After Lenihan's speech, AIB said it was confident it could raise funds internally to meet the writedowns from the transfer of 24 billion euros worth of loans to the "bad bank" or National Asset Management Agency (NAMA).
The country's second-largest bank said it could tap equity shareholders, strategic investors and asset sales to raise 2 billion euros over the next year and a half.
Analysts said AIB was highly likely to sell its stake in U.S. bank M&T, which Davy Stockbrokers estimated could raise around 500 million euros, but they said the bank would try to hold onto its Polish business unless it got a very attractive bid.
Bank of Ireland will release a statement to the market at 1100 GMT on the impact from NAMA, as well as a trading update.
Analysts at Davy's do not think Bank of Ireland will need to raise much, if any, additional capital for NAMA but expect it to hold a rights issue in the next few months to meet an end-of-year deadline to reduce the government's 25 percent stake in the bank to 15 percent.
Dublin has a 25 percent stake in both banks via preference shares it received in return for an investment of 3.5 billion euros in each group.
Five institutions will participate in NAMA and analysts estimate that the discount charged on nationalised lender Anglo Irish Bank as well as mutuals EBS and Irish Nationwide could be above 30 percent.
