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cofabmd
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Thanks Cofabmd!  Just a terrific article on Bill and Kennedy Wilson!  Bill has been at our dinner for the last two years.  Mary Ricks also came with him at the first dinner he came to.

 

I know plenty of you have looked at and are invested in Bank of Ireland, so I thought I would expand this thread by starting a bit of a discussion.  I really like Richie Boucher, CEO of Bank of Ireland and who also was at our dinner last year, and I'm keen on investing in Ireland, but I'm struggling with their business...still a ton of risk. 

 

If you look at page 27 of their June 30th financials, they are really, really underfunded on their loan loss portfolio.  I mean there is potential for half of their equity to be wiped out easily:

 

http://www.bankofireland.com/fs/doc/publications/investor-relations/interim-report-20121.pdf 

 

In my opinion, they need to deleverage a hell of alot faster than the timeline they've given themselves.  They probably need to be selling assets left, right and centre like Moynihan was doing at BAC.  Please feel free to give me your opinions, because I think this is an intriguing investment, but it's priced based on the amount of risk around it...I'm still not sure it's cheap enough!  Cheers!

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Thanks Cofabmd!  Just a terrific article on Bill and Kennedy Wilson!  Bill has been at our dinner for the last two years.  Mary Ricks also came with him at the first dinner he came to.

 

I know plenty of you have looked at and are invested in Bank of Ireland, so I thought I would expand this thread by starting a bit of a discussion.  I really like Richie Boucher, CEO of Bank of Ireland and who also was at our dinner last year, and I'm keen on investing in Ireland, but I'm struggling with their business...still a ton of risk. 

 

If you look at page 27 of their June 30th financials, they are really, really underfunded on their loan loss portfolio.  I mean there is potential for half of their equity to be wiped out easily:

 

http://www.bankofireland.com/fs/doc/publications/investor-relations/interim-report-20121.pdf 

 

In my opinion, they need to deleverage a hell of alot faster than the timeline they've given themselves.  They probably need to be selling assets left, right and centre like Moynihan was doing at BAC.  Please feel free to give me your opinions, because I think this is an intriguing investment, but it's priced based on the amount of risk around it...I'm still not sure it's cheap enough!  Cheers!

 

Great question!

 

I wonder what Mr. Ross and Mr. Watsa would give as an answer. :)

 

 

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I agree, Parsad. 

 

If I'm following you, from the Asset Quality chart on pg. 27, BIR has provisioned for 46% of the EU15b in impaired loans with another EU6b "past due but not yet impaired".  Provisioning the 6b at the same 46% rate = ~3b in additional provisions - or another 40%+ hit to book value.

 

This doesn't tie with Prem's comments on how far their book was already marked down and was nearly bullet proof.

 

Here is the other part I don't get.  How can they have EU8b in book value which is only 5% of assets and <10% of net loans, yet Tier 1 capital ratio of 14% (page 23)?  Pardon my ignorance, but I guess I need to be educated on how RWA is calculated.  How can 157b in assets be adjusted down to 61b in the RWA calculation especially when 105b of those assets are in loans?

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The RWA adjustment implies that the average asset is high quality. To most people that means a barbell of sh1te loan book plus a big portfolio of Irish Government debt, financed with bail out funds. The spread on the Irish debt will be used to write off the loan book as they need to, & is being paid by the Irish population as a whole. It does not mean the bank is less risky, it just means the risk is being ring fenced within Ireland - & achieved by granting artificially low risk ratings to Irish government debt held by Irish financial institutions. A German bank holding the same Irish government debt would have to pony up > 50% of additional capital reserve.   

 

A 40% write-off will take their Tier 1 capital to around 8.2%. They need a minimum Basel III 7.5% for Q1 2013, & 8.5% for Q1 2014. Starting 2014 Tier 1 capital will also take a hit of 20% of whatever they have in deferred tax assets, & any IFRS transitioning. Without the favorable capital rating they would have insufficient capital, & would have to either call-in loans or sell the loan book at fire sale prices.

 

They need the Irish Government to either buy a  piece of their loan book, or issue additional Tier 1 capital over the next 12-18 months. If you already own it, there is a very good possibility you will see a warrant issue, but you would prefer the government to do a QE & prevent dilution.

 

 

 

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