Allied Irish: Buyer Beware Or Easy Money?

By: Ockham Research Wednesday, January 14, 2009 7:42 AM

Article Author

Follow Me

Bio and Articles
Author's Website

Vote for next session

The next market session will close:

Allied Irish Banks PLC (AIB) is Ireland’s largest bank, and in the last two years the company’s shares have been on a relentless march downwards. AIB, and its two main competitors Anglo Irish Bank (AGIBY.PK) and Bank of Ireland (IRE) were subject of a major bank recapitalization effort from the government in Dublin worth more than $7.7 billion. In the last year, the bank has lost nearly 87% of its market value as the Irish economy has faltered in the global credit crisis. However, as bad as the stock performance has been, AIB still looks fundamentally intact. The bank has been able to hold up its strong tradition of pulling off return on equity (ROE) of over 15% year after year, with its most recent reporting being over 20%. We regard this as a positive reflection on management, which has been touted as the most conservative management of the three major Irish banks.

stock chart of AIB Since the late 1990’s, the Irish economy had boomed and the small island’s real estate was very much in demand. The Irish success story even earned it the title of the Celtic Tiger for its continued and rapid growth. However, as signs of trouble started to brew throughout the world, the Irish property bubble burst along with it. There were similarities between the American downturn and the Irish one, as household debt expanded greatly in the previous two decades. Despite this similarity, as far as banks go, the story diverges between the Irish and American institutions. As everyone is well aware, the U.S.

Bookmark:
Email
Print


2/21/2009 10:33:00 PM Allied Irish Banks by Fliujniligui Buyer beware because there is no easy money... but market doesn't reward comfort. Right now this ADR is priced at 1.60$. buying 16 of these gives the equivalent of a free M&T Bank shares since AIB owns 24% of M&T Bank who is also owned (6%) by Warren Buffett. Along with this, AIB owns 71 % of a profitable conservative bank in Poland, Bank Zachodni. Those 2 businesses owned by AIB represent more than 3 times AIB market cap of about 650 millions $. What is the catch. AIB will receive 3.5 billion euros of core tier 1 equity from government in form of preferred shares and It will bring its Core tier 1 capital ratio at 8.5%. With this, AIB may mathematically sustain about 10 billions euros of asset impairment (loan losses) for 2009-2010-2011. The board and its CEO, Eugene Sheehy seem to be the model of successful auto-regulation of free markets since they attained good performance while managing risk conservatively in the context of the boom in which it would have been easy to go on subprime lending and speculation. They refrained from this, along with avoiding scandals which occur daily to weekly in Irish banking system. What is the catch ? Government insisted they did not target a takeover or nationalization of IRE and AIB. They have a possible 15% to 25% equity stake due to warrants to be exercised in 5 years. The deal is awesome at 1.60 $, but a dreadful risk is lurking. Some are calling for Ireland to be forced to nationalize its whole banking system including AIB and if this happens, your 1.60 is worth near nothing except the fact that the share certificate probably looks beautiful visually and you may keep it for the visuals!!! I do not think there are rational reasons to nationalized AIB since it is well managed, able to absorb its losses while paying back government the dividend on capital injection, it contributes to Irish international prestige with its Bank Zachodni and M&T stakes and it is well regarded in the industry. Nationalization is meant to clean something up but who can be sure that government would do better than the current management if they took it over. The reputational damage for Ireland would be very dramatic if they take over IRE and/or AIB since those are traded on NYSE and other European markets. Example : I am long on AIB, should they nationalize it while there is evidence it could survive by itself with more minor help such as the current recapitalization scheme, I will feel as if I was stolen and will probably NEVER want to buy Irish company again. To fuel growth, you need foreigh capital and local one. Ireland, by nationalizing if not totally necessary, would damage its reputation with foreign investors. So the risk is there, If it go trough the depression, this is the once in a lifetime investment opportunity and I am playing it since next 3 years I will work and make back the cash invested anyways, but in the next 10 years, I may never see such investment opportunity. Reply Rating: (0) (0)

Right now this ADR is priced at 1.60$. buying 16 of these gives the equivalent of a free M&T Bank shares since AIB owns 24% of M&T Bank who is also owned (6%) by Warren Buffett. Along with this, AIB owns 71 % of a profitable conservative bank in Poland, Bank Zachodni. Those 2 businesses owned by AIB represent more than 3 times AIB market cap of about 650 millions $.

What is the catch. AIB will receive 3.5 billion euros of core tier 1 equity from government in form of preferred shares and It will bring its Core tier 1 capital ratio at 8.5%. With this, AIB may mathematically sustain about 10 billions euros of asset impairment (loan losses) for 2009-2010-2011. The board and its CEO, Eugene Sheehy seem to be the model of successful auto-regulation of free markets since they attained good performance while managing risk conservatively in the context of the boom in which it would have been easy to go on subprime lending and speculation. They refrained from this, along with avoiding scandals which occur daily to weekly in Irish banking system.

What is the catch ? Government insisted they did not target a takeover or nationalization of IRE and AIB. They have a possible 15% to 25% equity stake due to warrants to be exercised in 5 years. The deal is awesome at 1.60 $, but a dreadful risk is lurking. Some are calling for Ireland to be forced to nationalize its whole banking system including AIB and if this happens, your 1.60 is worth near nothing except the fact that the share certificate probably looks beautiful visually and you may keep it for the visuals!!! I do not think there are rational reasons to nationalized AIB since it is well managed, able to absorb its losses while paying back government the dividend on capital injection, it contributes to Irish international prestige with its Bank Zachodni and M&T stakes and it is well regarded in the industry. Nationalization is meant to clean something up but who can be sure that government would do better than the current management if they took it over. The reputational damage for Ireland would be very dramatic if they take over IRE and/or AIB since those are traded on NYSE and other European markets. Example : I am long on AIB, should they nationalize it while there is evidence it could survive by itself with more minor help such as the current recapitalization scheme, I will feel as if I was stolen and will probably NEVER want to buy Irish company again. To fuel growth, you need foreigh capital and local one. Ireland, by nationalizing if not totally necessary, would damage its reputation with foreign investors.

So the risk is there, If it go trough the depression, this is the once in a lifetime investment opportunity and I am playing it since next 3 years I will work and make back the cash invested anyways, but in the next 10 years, I may never see such investment opportunity.

Rating: (0) (0)

Post Comment

Name:

Alert for new comments:

Your email:

Your Website:

Title:

Comments:

The above story is the opinion of the author only and it does not reflect iStockAnalyst opinion. Further, the author is not personally advising you regarding the suitability of the story for your investment needs. In no event iStockAnalyst will be liable for any loss or damage including without limitation, indirect or consequential loss or damage, or any loss or damage whatsoever arising from or arising out of, or in connection with the use of this information. Please consult your investment advisor before making any investment decision.

Related Stories