Analysis: Bank of Ireland seen set to rule the roost

By Matt Scuffham

DUBLIN (BestGrowthStock) – Bank of Ireland looks set to emerge as the dominant force in Irish banking, with any overseas investment in rivals unlikely to materialize until fears are allayed over the country’s economic recovery.

With Allied Irish Bank, once Ireland’s biggest company, now facing majority state-control and foreign lenders baling out of the Irish market, Bank of Ireland has an unprecedented opportunity to seize control, analysts say.

“It is the natural winner. There’s a fundamental opportunity there,” said Collins Stewart analyst Gary McCarthy. “It has the strongest capital position and can capitalize on the problems that the (domestic) competition have as well as international competition having left their banking franchises behind.”

In a research note last month Goldman Sachs put an implied valuation of 7.4 billion euros ($9.7 billion) on the stock based on forecast 2013 earnings. That is almost three and half times its current market value of 2.2 billion euros.

“On our estimates BOI is well placed to take advantage of eventual macro recovery and its current valuation of 3.6 times recovery earnings (2013) offers meaningful upside,” it said.

Goldman Sachs has a ‘buy’ recommendation on Bank of Ireland but a ‘neutral’ recommendation on Allied Irish Banks where it sees limited upside for the bank’s near-term share price performance given that the state is expected to take a stake of over 90 percent by underwriting a 5.4 billion-euro rights issue.

Goldman Sachs said Allied Irish Banks trades at between six and nine times its forecast recovery earnings for 2013 while European banks on average trade at nine times 2011 earnings and 6.5 times their 2012 earnings.

The problem in the short-term is the Irish economy and future prospects for all Ireland’s banks will depend upon how effective austerity measures prove in shrinking the European Union’s worst budget deficit.

Both Bank of Ireland, in which the government holds a 36 percent shareholding, and Allied Irish Banks are expected to primarily focus on their domestic operations in retail and corporate lending.

But AIB will be hampered in the foreseeable future by its continued reliance on government support.

“You’ve got a duopoly where one (AIB) is pretty badly handicapped because of the position it is in. Bank of Ireland (in contrast) is open for business. They don’t have as much political interference,” said Collins Stewart’s McCarthy.

Bank of Ireland did not require any additional capital from Ireland’s Department of Finance when the latest measures to support the country’s financial sector were announced at the end of September, unlike its rivals.

Ireland has now committed nearly 20 percent of its GDP to propping up the financial sector as it looks to unravel years of reckless lending during the go-go years of the “Celtic Tiger” economy.

The banks themselves have inflicted huge damage on public finances having left the taxpayer with a bill of up to 50 billion euros or over 11,000 euros per head of Ireland’s 4.5 million strong population, to clean up their bad debts.

Shares in Bank of Ireland slumped to their lowest level in over 18 months this week with Ireland’s central bank governor conceding that the sector’s huge recapitalization programme had failed to allay concerns over Ireland’s financial stability.

In a Reuters poll two thirds of economists and bond strategists believe Ireland will seek international rescue funds before the end of next year.

And Davy Stockbrokers analyst Stephen Lyons thinks it unlikely foreign investment will be attracted back into the Irish banking sector while that risk persists.

“The fact of the matter is until a few months after the budget when we see how the economy handles the cuts and comes on from there, I think there would be limited appetite in any form. You need the positive support for the economy. We’re not there yet,” he told Reuters.

Alan Dukes, chairman of Anglo Irish Bank, expects Ireland’s banking sector to be dominated by Bank of Ireland and Allied Irish Bank for the foreseeable future and believes foreign banks, which had controlled around a third of Irish mortgages, are unlikely to return for the immediate future.

“I think it’s going to be quite a long time before the Irish market becomes a place that is attractive for any outside banks to come back into,” he told Reuters last month.

Foreign lenders such as Lloyds and BNP Paribas have already beaten a retreat from Ireland, while Nordic lender Danske Bank has cut almost half of its Irish branch network.

Later this month the government will detail how it intends to squeeze 15 billion euros in fiscal savings between 2011 and 2014 and the response of debt markets as well as the European Commission to the plans will be critical to the investment case for Bank of Ireland.

Faced with the worst budget deficit in the EU and fears it is on the verge of a Greek style debt crisis, the government has no choice but to push through years of fiscal misery that some economists say risks plunging Ireland into a prolonged downturn.

The government and main opposition parties are committed to bringing the level of Ireland’s deficit down to an EU limit of 3 percent of GDP by 2014 from the unprecedented 32 percent it is forecast to hit this year.

Anglo Irish Bank, the EBS building dociety and Irish Nationwide Building Society are all now fully owned by the state.

Irish Life & Permanent is one of the two final bidders for EBS, which has been put up for sale by the government, with a view to merging its loss-making permanent tsb banking arm with EBS.

Irish Life had also looked at Royal Bank of Scotland’s Ulster Bank unit as a potential partner for its banking division but neither combination is expected by analysts to become big enough to create a credible “third force” in Irish banking.

(Editing by Greg Mahlich)

Analysis: Bank of Ireland seen set to rule the roost