A5G.IR - AIB Group PLC

[ValuePadawan]

Hey everyone I'm trying to understand the dynamics for bank profitability specifically in Europe so I can figure out why Allied Irish Banks is valued so cheap.

 

I'm a complete newcomer to looking at bank stocks so if I get something wrong or am missing nuance please let me know.

 

Here's the broad strokes of how I've been thinking about banks.

 

-There are two things that determine profitability: Interest rates and how concentrated the banking sector is.

 

Concentrated markets such as Australia have entrenched oligopolies in growing demographies and therefore are very profitable having revenue/risk-weighted assets of 7-8% on the other side of the spectrum you have German and Japanese regional banks that have extreme competition as well as dying demographics making them structurally unprofitable.

 

Then somewhere in the middle you have U.S and Irish banks. Revenue to RWA is around 4-5% both have much more stringent regulations and CET1 requirements after their respective banking crises, both have growing demographics.

 

The big difference is the Bank of Ireland 10y is about 0% while the US is sitting about 1.8%. So while AIB has the oligopoly it doesn't have rates on its side.

 

Here's the question. Right now all EU banks are being valued extremely cheap because of the low and even negative interest rates. In domiciles with competition and bad demographics I see why this is. But should a company that controls effectively 1/3 of the banking in a country with a growing population be trading at rock bottom valuations? Won't the highly oligopolistic nature make sure they don't suffer the fate of Deutsche? Are they throwing the baby out with the bathwater?

 

As an absolute newbie I appreciate all corrections and criticism let me know what you think.

[ValuePadawan]

https://www.spratings.com/documents/20184/3025551/Irish+Banks+Recovery+Phase+Draws+To+A+Close/01e7ff3e-2cff-ef95-ece6-a906e9495d70

 

For a bit of background.

[no_free_lunch]

I will admit that this is worth investigating.

 

Did this wipe out the shareholders during the GFC?  Is it different now?  Maybe higher tier 1 ratios.

 

On the surface, it is at a low P/B (0.6?), high dividend (>5%), high tier 1 ratio. 

 

I also do like the irish economy.  In the past they have been quite the capitalists.  I remember headlines about google setting up shop there for the low tax rate.  Could be a good place for some money.

 

In its autumn 2019 Economic Forecast, it predicts that Irish gross domestic product (GDP) will grow by 5.6% for 2019.

 

That is up from a predicted rise of 4% in its summer forecast, and the highest in the European Union for 2019.

 

This compares to a predicted EU average growth rate of 1.4% for this year and for 2020 and 2021.

 

It says GDP growth in Ireland is expected to moderate to 3.5% in 2020 and to 3.2% in 2021, on the back of increasing capacity constraints and an expected slowdown in Government expenditure.

 

https://www.newstalk.com/news/irish-economy-see-highest-growth-eu-2019-922452

[BroKon]

ValuePadawn,

 

The problem with the Irish banking market is that its oligopolistic nature is actually due to its unattractiveness, and hence there are no foreign entrants. Three main reasons:

 

- Capital treatment of Irish mortgages is incredibly harsh due to the how badly they performed during the crisis

- NPLs: Irish banks have been unable for political reasons to actively repossess houses if the mortgage went into arrears, which obviously caused more arrears. They have solved this problem by selling their NPLs to US "vulture" funds, but that has been an expensive exit.

- Central bank mortgage rules: the ability for an individual to take out a mortgage has been severely restricted, as the central bank has enforced rules to make the banking system safer.

 

The combination of the above three has meant that other European banks have been generally trying to exit the market rather than enter it.

 

However there has been some better news recently, the banks have done a decent job of cleaning up their NPL problem (as well as the tracker mortgage scandal), and there is an awareness (as well as a new governor) at the central bank that maybe they have been too restrictive with their mortgage rules. Not enough yet for a turnaround in the fortunes of the share prices but at least its a start. On a more macro level the ECB seems to be beginning to realise that there are limits to its negative rates policy.

 

So all that said, while its not going to be any easy investment, there is potential for a re-rating of the banks over the next two years. I personally own BKIR, but I think AIB and BKIR will be pretty interchangeable when it comes to any re-rating of the sector.

 

One final comment, if you are going to look at European banks there are much easier places to start, for example Lloyds in UK, while a lot more expensive on value metrics, is a capital generation machine when you remove the PPI issues - which have finally come to an end.

 

[BroKon]

I should add that if you want to avoid UK/Brexit issues, then I think ABN AMRO in the Netherlands is worth a look too, and nearly as cheap as the Irish banks (due to a money laundering issue which should resolve itself in 2020 with a fine that is already priced in.

[ValuePadawan]

 

So all that said, while its not going to be any easy investment, there is potential for a re-rating of the banks over the next two years. I personally own BKIR, but I think AIB and BKIR will be pretty interchangeable when it comes to any re-rating of the sector.

 

 

BroKon,

 

Just curious when discussing the differences between AIB and BKIR, obviously BKIR is larger and has more assets (100.5 B in interest earning assets vs AIB at 85.9B in interest earning assets and holds more market share but it has a lower net interest margin such that they both earned about the same amount of operating income in the first half of this year (1.4B).

 

In addition BKIR has markedly more operating expenses at 903M vs AIB at 744M so I guess you've made me wonder why you prefer BKIR?

[ValuePadawan]

In addition frankly speaking I'm glad that the other European banks have decided not to try to enter Ireland whether it be due to regulatory issues or because its a small market to spend a lot of time and money to get into.

 

If you're an Irish citizen with the banking crisis fresh in your mind and some British or European bank starts opening up branches in your county are you going to switch from the bank you and your parents and their parents have always gone to? I don't think so but if I'm missing something do let me know please.

[BroKon]

Fair point.

When I initiated the buy, BKIR seemed cheaper than AIB. Also, as a general rule I try to remain disciplined and not churn the portfolio, so I stayed with BKIR.

That said, AIB has since materially under-performed BKIR so maybe its time to do some further work on AIB to see if its worth switching.

[BroKon]

Ok had a look at both again and I am not sure I changed my mind about preferring BKIR, even though AIB looks cheaper (and potentially has more capital to distribute).

 

AIB's NIM seems to be rapidly approaching BKIR's, and even though as you say BKIR has a higher cost/income ratio, that also gives it more levers to pull when cutting costs (and indeed it is on the better cost trajectory at the moment). BKIR is also further along in terms of NPL reduction.

 

So on the basis that I think the forward probably looks slightly more positive for BKIR I will probably stay with that one, but as I said earlier, I think they either both do well or both struggle.

[ValuePadawan]

Ok had a look at both again and I am not sure I changed my mind about preferring BKIR, even though AIB looks cheaper (and potentially has more capital to distribute).

 

AIB's NIM seems to be rapidly approaching BKIR's, and even though as you say BKIR has a higher cost/income ratio, that also gives it more levers to pull when cutting costs (and indeed it is on the better cost trajectory at the moment). BKIR is also further along in terms of NPL reduction.

 

So on the basis that I think the forward probably looks slightly more positive for BKIR I will probably stay with that one, but as I said earlier, I think they either both do well or both struggle.

 

I really appreciate the second opinion BroKon, you're right if they can cut costs to the level AIB has BKIR will be very valuable in the future. If it does that and it can close the ROE gap it could be an excellent investment for decades as the Aussie and Canadian banks have been.

 

Something else I was reading about but hadn't considered is because the Irish gov't has a 71% stake in AIB the Irish gov't has put a cap on top executive salaries. Due to this other banks such as BKIR that only have a 14% gov't ownership can effectively buy all the top talent that AIB develops.

 

Now I'm not saying it takes a rocket scientist to run a bank with 30% market share in AIB's case or near 40% in BKIR's but it's another advantage BKIR will have until the gov't monetizes their majority stake in AIB. AIB's CEO left last year due to disagreement with the government over reinstating market based pay packages.

 

So far for me this goes in the too hard pile but I'm going to keep diggin to try to better understand the dynamics.

 

Who knows by the time when Brexit goes through the domestic market will panic and maybe AIB's share price will drop back down to the low 2s and I'll  be comfortable enough to dip my toe in.

 

If I figure anything out I'll be sure to post it.

 

Cheers

[BroKon]

All three Irish banks are subject to the salary cap (BKIR got an exemption for their CEO as her salary was structured to match that of her predecessor, but that is it), so they all keep losing their top talent. The politics in Ireland around banks is pretty toxic, and continues to have repercussions on the profitability of the banks, so I don't blame you for wanting to put it in the too hard pile, but for a long term holder, I am not sure there is much downside, so if you can buy them 10-15% lower (they have the advantage of being volatile), it may be worth doing the work. Anyway, thanks for starting this thread, always useful questioning my thesis.

[ValuePadawan]

Something else I worked out is that BKIR has about 380M in interest earning assets per branch. [100.5B interest earning assets / 265 branches (BKIR 2019 interim report pg 50)]

 

Meanwhile AIB has 421M in IEA per branch. [85.9B/204 branches (AIB 2019 interim report pg 105)]

 

Somehow AIB is getting more assets per branch, maybe it's wealthier customers or they have branches in larger population centres with more customers/branch while more of BKIR's are in villages with smaller populations per branch.

 

It's a crude way of measuring the banks performance per branch. It seems like AIB is attracting 11% more assets per branch.

 

BKIR should either close down some of its smaller branches or figure out a way to increase its assets.

 

If I figure it out I'll let you know but that ratio is something else to keep an eye on.

 

Also thanks for the info that all banks are fighting with one fist tied behind their back when it comes to attracting talent, at least they are on an even pitch.

[Spekulatius]

I believe that Ireland will benefit from Brexit, perhaps tremendously. At least some business that were located in the UK may find it easier to business with the EU from within the EU, so Ireland will be a natural spot.

 

Then on the other hand, I like the prospects for the banking business in the UK better. The reason is that the UK keeps their GBP and their own central bank and most likely never will have the negative interest rates that are destroying the banking system in Europe.

[Cigarbutt]

If you know or believe that coming out of the low rate rabbit hole is likely and without consequences, and if you think that rates will rise and reach escape velocity, then the AIB Group, or its oligopolistic peers, is a nice place to be. I think that low rates (for banks, including the Irish ones) are a solution that is (and will be) turning into a problem. AIB's net interest margin is starting to show that IMO.

 

-----)

...

Then on the other hand, I like the prospects for the banking business in the UK better. The reason is that the UK keeps their GBP and their own central bank and most likely never will have the negative interest rates that are destroying the banking system in Europe.

This is nothing short of fascinating. In another period, Great Britain obtained the first-mover advantage (sort of) when it decoupled from the golden standard. This marked the end of an era, triggering a protectionist race to the bottom as others followed suit. There are periods where achieving domestic economic goals supersedes everything else, including your neighbor. And now, the UK has figured out that it may be better off the European Standard and may be, again, playing the first-mover card. I would say that higher rates now in the UK are tied to the transitional uncertainty and the decoupling may allow more flexibility in dealing with internal issues but of one of the outcomes may involve competitive devaluations and, overall, an absolutely deeper hole.

https://www.ft.com/content/718c8a62-e91d-11e9-a240-3b065ef5fc55

(-----

 

Irish banks (including AIB) are still numb from the GFC but have done relatively well compared to European peers. Looking at the net interest margin evolution over the last few years, this appears to be related to the relative lack of competition in the domestic markets and to lower funding costs, both factors somewhat related to the continental "macroprudential" policies.

https://www.centralbank.ie/docs/default-source/publications/financial-stability-notes/no-10-irish-retail-bank-profitability-2003---2018-(nevin).pdf?sfvrsn=4

 

Opinion: Irish banks, like many of its European sisters, have become zombies in an environment that, somehow, needs to deflate.

-Dialogue coming from a classic financial textbook:

Alice        “But I don’t want to go among mad people,”

The Cat    “Oh, you can’t help that, we’re all mad here. I’m mad. You’re mad.”

Alice        “How do you know I’m mad?”

The Cat    “You must be, or you wouldn’t have come here.”

 

 

[ValuePadawan]

Without the 400M in restitution costs in 2019 the bank would be making at least 750M euros in after tax profit so this thing is trading at a Mkt cap of 2.2B or 3x regular earnings or 0.15x BV there must be something I'm missing?

 

They have ample reserves and are 71% owned by the state they are not going to go bankrupt, I don't think. Now I read that all Irish banks are giving 3 month mortgage breaks for customers but in 5 years Ireland will still need banks right?

 

Is this some post Irish financial crisis trauma causing such a selloff or am I missing a big piece of the picture? Have we arrived in crazy town or something?

[BroKon]

Two points to be made:

 

- the sell-off after the recent election was due to Sinn Fein, who have very bank unfriendly policies, having a realistic chance for the first time of forming a coalition government

 

- that sell-off was then quickly overtaken by the Covid-19 sell-off where European banks got pummeled pretty indiscriminately. The index of Eurostoxx 600 banks now trades below 0.5 P/B.

 

FWIW, I have kept my exposure to BKIR but I am not adding, I think there are better (read safer) opportunities out there.

 

 

 

 

 

 

 

[ValuePadawan]

Two points to be made:

 

- the sell-off after the recent election was due to Sinn Fein, who have very bank unfriendly policies, having a realistic chance for the first time of forming a coalition government

 

- that sell-off was then quickly overtaken by the Covid-19 sell-off where European banks got pummeled pretty indiscriminately. The index of Eurostoxx 600 banks now trades below 0.5 P/B.

 

FWIW, I have kept my exposure to BKIR but I am not adding, I think there are better (read safer) opportunities out there.

 

 

I'm not very knowledgable in Irish politics but my impression is although Sinn Fein won the 2nd most seats none of the major parties want to work with them for historical and political reasons.

 

Do you have a guess as to what the chances of Sinn Fein being part of a coalition government are?

If they do make it into government will they really be able to cap mortgage rates?

Could they get that passed if they were in coalition with Fianna Fail or Fianna Gael?

 

These are all things I need to try to understand better if you have an opinion I'd love to hear it.

[BroKon]

I am not an expert in Irish politics either, but pre-Covid 19, the situation was that most political parties in Europe understood that being perceived as the junior coalition party was electoral suicide (Liberal Democrats in UK, SPD in Germany, 5 Star in Italy etc), so Fine Gael were reluctant to join Fianna Fail, thereby opening the door for a Sinn Fein/Fianna Fail coalition. My guess is in the end Fine Gael would have taken the risk to stay in government, and you would have been right that Sinn Fein policies would not have mattered.

 

The political landscape has obviously changed now, post-Covid-19 and Leo Varadkar (Fine Gael and Irish Prime Minister) has, for want of a better phrasing, had a good crisis (here is an example of what I mean

). So he would be incentivised to go to polls again, when this is over, rather than form a government, and as it stands he would have a decent chance of winning, and even if he can't go to the polls again, his odds of continuing as prime minister have plummeted in the last week.

 

In the meantime though that type of politics, is pretty irrelevant to the thesis, the politics that counts is how much debt forgiveness the government will demand of the banks, and what their NPLs will be like one year from now. The government owning the majority of AIB is not a really a positive in this environment, at least I don't see it as such.

 

[ValuePadawan]

Not sure anyone is still following Irish banks but although 2020 was a dog's breakfast AIB came into the crisis fat with capital and the ECL charge of 1.4B euros just leaned out the capital ratios to a CETi ratio of 15.6% from 17.3%, nothing even nearly worrisome. Also they reaffirmed 8% ROTE target for 2023. Assuming even if their loan book shrinks and their equity decreases from 14B to 13B by then (unlikely with the Ulster acquisition ensuring inorganic growth) an 8% ROE means pre-tax net income of around 1 billion and net income of 900 million or so. The market cap is 5B so 900m in earnings if continued would be an 18% yield on the current price. Am I making mistakes in my analysis more knowledgable forum members can see? Please feel free to tear apart my thesis. Cheers.

[changegonnacome]

Not sure anyone is still following Irish banks but although 2020 was a dog's breakfast AIB came into the crisis fat with capital and the ECL charge of 1.4B euros just leaned out the capital ratios to a CETi ratio of 15.6% from 17.3%, nothing even nearly worrisome. Also they reaffirmed 8% ROTE target for 2023. Assuming even if their loan book shrinks and their equity decreases from 14B to 13B by then (unlikely with the Ulster acquisition ensuring inorganic growth) an 8% ROE means pre-tax net income of around 1 billion and net income of 900 million or so. The market cap is 5B so 900m in earnings if continued would be an 18% yield on the current price. Am I making mistakes in my analysis more knowledgable forum members can see? Please feel free to tear apart my thesis. Cheers.

 

Following Irish banks - have a significant position in BOI which has done very well since the March/April lows.........PT of 6 euro there in base case......picked up share @ 1.50 euro

 

Your correct on your analysis as I've looked at AIB too.......couple of thoughts -

 

- mortgage book of Irish banks have extremely low LTV's....written very prudently over the past 10 years since GFC with loan to income rules from central bank of c.x3.5 times........default risk and COVID uptick in NPL's likely to low........BOI in better shape with historical NPL

- digitization project at BOI is a number of years in progress........with significant costs associated with it fading into rear view mirror........with flow through cost savings beginning to show up.........BOI likely working towards AIB's cost to income ratio soon

- celtic tiger / property crash ECB credit models which require significant equity capital to be held against mortgage loans at AIB/BOI should begin to roll off soon (if no significant NPL from COVID) enhancing profitability / ROE.....and another opportunity to return capital to shareholders

- ulster bank exit from market returns duopoly to AIB/BOI

- Irish government is attempting to significantly increase housing supply in coming years to c34,000 p/a units...introducing lots of help to buy/shared equity schemes..........potential big increase in mortgage market lending available (now minus 20% market share owner Ulster Bank)........pre-COVID construction only managed to deliver c.22,000

- AIB & BOI + smaller players have entered into JV to develop instant payment app.......attempting to cut off FinTech's like venmo, revolut, N26 etc.

- finally if interest rates surprise to upside there's untold optionality here

 

AIB vs. BOI - prefer BOI given lack of government majority ownership........outside possibility of Sinn Fein being in power at some point scares me in 75% AIB ownership scenario......lots of cost optimization already done at AIB........BOI has lots more cost savings to deliver to markets.......BOI has UK market diversification which could surprise to the upside (was a drag during Brexit debacle)........BOI CEO is an ambitious outsider (former HSBC exec & UK born) looking to build a reputation for her next role and therefore likely as a result to make more robust decisions than AIB CEO who is an AIB lifer and a local. Government at some point is going to try and unload shares........that overhang will keep I think AIB depressed vs. BOI.

 

 

 

 

 

[ValuePadawan]

Not sure anyone is still following Irish banks but although 2020 was a dog's breakfast AIB came into the crisis fat with capital and the ECL charge of 1.4B euros just leaned out the capital ratios to a CETi ratio of 15.6% from 17.3%, nothing even nearly worrisome. Also they reaffirmed 8% ROTE target for 2023. Assuming even if their loan book shrinks and their equity decreases from 14B to 13B by then (unlikely with the Ulster acquisition ensuring inorganic growth) an 8% ROE means pre-tax net income of around 1 billion and net income of 900 million or so. The market cap is 5B so 900m in earnings if continued would be an 18% yield on the current price. Am I making mistakes in my analysis more knowledgable forum members can see? Please feel free to tear apart my thesis. Cheers.

 

Following Irish banks - have a significant position in BOI which has done very well since the March/April lows.........PT of 6 euro there in base case......picked up share @ 1.50 euro

 

Your correct on your analysis as I've looked at AIB too.......couple of thoughts -

 

- mortgage book of Irish banks have extremely low LTV's....written very prudently over the past 10 years since GFC with loan to income rules from central bank of c.x3.5 times........default risk and COVID uptick in NPL's likely to low........BOI in better shape with historical NPL

- digitization project at BOI is a number of years in progress........with significant costs associated with it fading into rear view mirror........with flow through cost savings beginning to show up.........BOI likely working towards AIB's cost to income ratio soon

- celtic tiger / property crash ECB credit models which require significant equity capital to be held against mortgage loans at AIB/BOI should begin to roll off soon (if no significant NPL from COVID) enhancing profitability / ROE.....and another opportunity to return capital to shareholders

- ulster bank exit from market returns duopoly to AIB/BOI

- Irish government is attempting to significantly increase housing supply in coming years to c34,000 p/a units...introducing lots of help to buy/shared equity schemes..........potential big increase in mortgage market lending available (now minus 20% market share owner Ulster Bank)........pre-COVID construction only managed to deliver c.22,000

- AIB & BOI + smaller players have entered into JV to develop instant payment app.......attempting to cut off FinTech's like venmo, revolut, N26 etc.

- finally if interest rates surprise to upside there's untold optionality here

 

AIB vs. BOI - prefer BOI given lack of government majority ownership........outside possibility of Sinn Fein being in power at some point scares me in 75% AIB ownership scenario......lots of cost optimization already done at AIB........BOI has lots more cost savings to deliver to markets.......BOI has UK market diversification which could surprise to the upside (was a drag during Brexit debacle)........BOI CEO is an ambitious outsider (former HSBC exec & UK born) looking to build a reputation for her next role and therefore likely as a result to make more robust decisions than AIB CEO who is an AIB lifer and a local. Government at some point is going to try and unload shares........that overhang will keep I think AIB depressed vs. BOI.

 

Thanks for taking the time to give me more detail on BOI I appreciate it. Your concern that the Government might sell their stake and depress prices doesn't worry me as when that happens I expect AIB to be quite profitable and AIB's CFO just the other day stated that "if we get into '22 and let's say, equity valuations are where they are currently, I'd be mad not to look at a buyback as opposed to a cash dividend." So I'd be happy in that eventuality actually.

[changegonnacome]

In regard to Irish banks and share prices - everyone is fighting the last war -  a few of my thoughts when I bought in at 1.50 - 1.70 last year.....& posted to a local market investing board. This note below is from Dec 2020. It still holds up IMO and the rationale still stand with a conservative PT of 6 euro a share on BOI..........my reservation around AIB remains two fold......black swan risk that Sinn Fein becomes majority party while government is still 90% shareholder AND future challenge of selling the holding into the market at some point in the future:

 

This crisis is an income statement recession - the GFC was a balance sheet recession and the largest you and I are likely to see in our lifetimes. Household & Bank balance sheets were completely destroyed with negative equity, the negative wealth effects then hit incomes and credit was completely withdrawn from the economy as Irish banks were no longer able to source inter-bank capital meaning they desperately attempted (& failed) to rebuild their capital base by choking off the oxygen source that was fueling a large chunk of Ireland's GDP which was overly dependent on credit fueled construction related activities (the paradox of thrift writ large). Bank balance sheets then had limited shock absorbers and tangible book value was destroyed in the process wiping out existing shareholders. Bank's were on paper better businesses then (higher ROE) but they were inherently more leveraged and by extension more dangerous as any 2008 vintage BOI/AIB diluted shareholder found out. Ireland Inc. had stupidly tied itself to the banks such that every inch of fiscal space that could have been used to support the real economy with stimulus got pored into zombie banks & got locked up as regulatory capital on bank balance sheets - stagnant and un-lent. In short the Irish bank bailout had ‘no velocity’ in the real economy, zero in fact.

 

Irish/European bank's today are boring, don’t make as good returns but are orders of magnitude less likely to destroy shareholder equity. On the continent the profit pool for banks has shrunk so much that its clear that there is 2-3x the number of banks needed in most large European countries and consolidation is the only pathway to rational returns where banks earn at least their cost of capital over a cycle. In this one instance Ireland is a country from the future - unless people haven’t noticed, we already have a consolidated banking sector - AIB / BOI / Ulster - own about 70% of the mortgage market and near 90%+ of SME lending. Ulster seems ready to exit stage left too for those not following the news.

 

Today BOI is stuffed to gills with capital and not sh*tty overnight interbank capital, no boring 0% yielding current account customer deposits & negative yielding corporate deposits (+ some CoCo bonds). BOI has dealt with non-performing loans to a greater degree than most European/Irish banks with NPL exposure down to 4%. The loans they've written for the past 11 years I can assure you have been written to a very conservative standard under the watchful eye of the CBI/ECB & SSM. BOI's legacy culture of being Ireland's least likely underwriting bank team to 'reach' for deals persists (BOI ‘only’ joined the Anglo Irish bank / Celtic tiger madness fairly late..c.2006) and if there's one thing bank execs do well its self preservation and post GFC BOI was not going to be writing PoS loans as it, first fought for survival, then raced to get the government out off its shareholder registrar (Wilbur Ross / Prem Watsa say thanks). CET1 capital buffers are very large at BOI and currently a clear 5% over their new revised 9.27% regulatory minimum. ALOT!!! of bad things need to happen to get to breach regulatory levels and wipe out shareholder equity with dilutive capital raise. Look at the ECB/SSM stress tests to see what the banks have been built to ride out. People also don’t default on mortgages with 30-40% positive equity………..just doesn’t happen.

 

This crisis is terrible but it wont be enough to destroy book value of the Irish banks. In the last crisis billions of euros was pored into the black hole of balance sheets- the sovereign borrowing for this purpose did nothing to stimulate the real economy - it repaired bank balance sheets and never reached Joe Public’s wallet. Instead of Keynesian spending to boost the economy, austerity was imposed as all spare fiscal space was used to plug the holes in the banks we'd stupidly guaranteed. Rates weren't even at zero then (anyone remember the ECB raising rates in 2011?!!!?) The Irish economy is much more balanced this time - the FDI sectors we rely on should remain robust (Tech / Healthcare / Financial Services). AIB/BOI can actually lend through this crisis given the capital buffers they have - all very different than the last time. Ireland 2009 - 2014 was a financial wasteland mired in an internal devaluation & a deflationary bust. The government this time can, should and is borrowing at near zero rates to support damaged household incomes bridging them from the COVID to the post-COVID economy. Vaccines give us a timeline for this - Q3 2021 for mass vaccination and normal-ish economy. The EU via ECB will be accommodative and has done a fluffed Eurobond with federal like stimulus payments. The ECB will hoover up any bonds we print keeping nominal rates on new Irish borrowing at effective negative rates. State aids rules have been thrown out the window - the Irish government can and should support Irish SME’s robustly to bridge them to health (this includes helping them pay their loans!!). The credit guarantee scheme should see a situation arise where banks SME legacy loan book will be bailed out by new credit guarantee loans for businesses with a post-pandemic future (rightly so).

 

Now whats Bank of Ireland worth then today?????

 

In a post-Covid stabilized world of 0% interest rates & Eire growing GDP 2-3% a year. Lets call it Ireland 2022 to be safe (so negative earnings for BOI in 2020 & 2021). I’m going to repeat the write downs on H1 2020 c.700m, into H2 2020 & 2021…so a hit to equity of another c.2bn. Share holder equity of BOI in 2022 would likely be reduced to c.7bn then. Bank of Ireland can earn conservatively 8% on equity so about c.500 million a year in 2022. 50% retained/50% distributed to shareholders. Book will then grow c.3.x% a year in that scenario, so 2023 earnings 637m (7% on 9.1bn), 2024 = 659m, 2025 =682m, 2026 = 706m etc. Maths are super rough!. I'll leave terminal growth rate at 2%. DCF the earnings at a 10% risk free rate - banks are cyclical & don’t deserve a market multiple of 15x. Bank of Ireland's intrinsic value IMO is c.6 euro a share.

 

I could add in credit for future headcount/cost cuts once IT transformation is complete - but people are people and sacking colleagues/friends requires stomach European's in relatively small communities/markets like Ireland/Dublin don’t have. If real efficiency, branch closures and slashing and burning was done I'm positive RoTE could get up to 10%. Depends on how ambitious Francesca McDonough is and what her post-BOI ambitions are.

 

The other thing I gave BOI no credit for was the net present value of its carried forward losses from the GFC of c.1bn...have no doubt that is genuine asset sitting inside the bank for the next decade+….…the net present value of that could easily be 500m between friends. If you wanted to be aggressive you could back that out of the price you’re paying today for BOI maybe say its worth 0.59 a share alone.

 

Saw some folks a few threads back talk about challenger banks - for sure AIB/BOI need to wake up and realize the duopoly they’ve been re-handed in the Irish market is permanent only if they work at it…this needs to be done before a 3rd online digital player emerges with real scale I looked at Revolut/N26 and sorry they’re just not at the races in terms of deposits not even close……AIB/BOI are in a very privileged position collecting such low cost deposits from the Irish population and should immediately team up with PTSB/Ulster & create a cross institution instant payment app to kill revolut & stop Venmo or Square in the future. A digital only millennial sub-brand banking app of BOI should be looked at (Santander is doing something similar).

 

Finally think with Sinn Fein off the table for possibly the next 4.5 years. The big risk to the banks - Government meddling (this is why AIB imo is untouchable as an alternative investment given 90%+ ownership by the state and even the hints Sinn Fein might control it one day), is somewhat reduced, lets see how stable this coalition is…….the populist thing to do is to drive the banks into unprofitable lending & double down on repossession barriers/asset recourse…….I think Paschal Donohue + others in FF are pragmatic enough to understand that like it or lump it a functioning profitable market led banking system is key pillar of economic prosperity. Ireland already ran the experiment of what happens to an economy without a functioning prudent underwriting led banking system.

 

Lots of people on here trading BOI - I suggest not doing that - I’ve bought and held since 1.70………when its 20% off my conservative estimation of 6 euro per share intrinsic value (c.4.80) I’ll look again to see if my thesis is still in tact and only then consider my next move. Jumping in and out is a dangerous game - a true trader plugged into the ziegesit is a rare beast (Paul Tudor Jones & Stanley Druckenmiller come to mind)……I’d suggest most here aren’t traders. Big moves in stocks happen on tiny amounts of days......nobody can tell when exactly......but you can tell that over time a business earning 0.60c a share in a quasi-monopoly business with high barriers to entry in a western European democracy with good demographics can easily trade at x10 eps......or 6 euro......dont double guess it.