|Shares Out. (in M):||0||P/E|
|Market Cap (in $M):||15,000||P/FCF|
|Net Debt (in $M):||0||EBIT||0||0|
|TEV (in $M):||0||TEV/EBIT|
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Bank of Ireland (ADR: IRE) is one of the two dominant full service banks in Ireland and trades at a compelling valuation of only 9.4 times current year EPS (fiscal year ends in March) despite recently reporting 22% annual operating EPS growth (all organic) along with a bullish outlook statement. This valuation makes even less sense when considering that the country of
Why does Bank of Ireland trade at such a discount?
Three words: housing, housing, housing. The focus on mildly softening prices (from €310K in December 2006 to €301K in April 2007) and new completions has become a point of obsession and idiocy to the neglect of many positives. As a result of
#1 Look what some of the U.S. housing/mortgage stocks did after the big sell-off in late February and March. They rebounded with a vengeance: WaMu up from $39 to $44; CFC from $33 to almost $42; MTB from $105 to $113.
#3 Less than 10% of IRE’s earnings come from its Irish mortgage operations. At a recent Merrill Lynch conference IRE presented on its property and construction business. It is worth flipping through: http://www.bankofireland.ie/html/gws/includes/investor/pdfs/lynch.pdf. While there is no denying that the strength of Ireland’s real estate market has probably supported many aspects of IRE’s overall business, IRE is clearly a diversified, full service commercial bank with several earnings drivers beyond Irish housing prices and mortgages. And rather amazingly, because of
#6 The Irish government runs a fiscal surplus and will likely cut taxes (specifically the stamp tax, which is a sales tax on the purchase of housing), further boosting the ability of Irish homeowners to spend and make their mortgage payments. In addition to this, in 2001, the Irish government introduced Special Savings Investments Account (SSIAs), for which every Irish citizen was eligible. Basically, it is a five-year savings/investment plan that the government tops up by 25% through a tax credit. So, if you put €100 in, you will get €125 in 5 years. These plans proved to be extremely popular (particularly in the 2001-2004 era of low interest rates) with a total of 1.1M accounts opened and €16B invested (for an average of almost €15K per account or almost €4K for every person in the country). While much of these savings will likely be re-invested, they provide yet another cushion of support to Irish consumers and homeowners that require it.
#10 At least part of the softness in housing prices this spring was due to the national elections. (Bertie Ahern won his third election on May 24th.) Both candidates and parties were talking of cutting or reducing the stamp tax, which is a sales tax on the purchase of housing that can be as high as 9% of the purchase price. While the effect is difficult to calculate, would you really want to buy a house if the politicians were clamoring about cutting the sales tax? Of course you would defer your purchase. This likely reduced demand temporarily. A preliminary version of the bill was released on June 20 effectively eliminates the stamp tax for all first time buyers and will be retroactively applied to any purchased made since March 31. (The tax is currently 3% of homes prices from €317K -€381K, 6% from €381-€635K, and 9% on anything over €635K.) A key advantage of
#11 On June 17th, the Department of the Environment (government agency that keeps statistics) published its results on housing completions for May and also provided a very interesting adjustment to its 2006 numbers. It turns out that because of the extraordinary amount of building activity that was going on in late 2005, about 5,000 of the completions were more or less booked in the first half of 2006 when they were actually built in 2005. Adjusting for this, housing completions are actually up 2.6% through the first 5 months of 2007. This is remarkable, particularly considering all of the election rhetoric regarding the stamp tax.
#12 On June 21, competitor Irish Life and Permanent (see below) released a business “trading update” and raised 2007 EPS guidance from mid-teens growth to high teens. The strong performance was driven by their life/pension business, but their banking operations did just fine.
Almost all of what I write about IRE, applies to the other market leader, Allied Irish Banks (ADR is AIB) which we also own. AIB is slightly more complicated, however. Through historical circumstance, they have a $3B stake in New-York based M&T Bank (MTB), which at 17 times Q1/07 annualized EPS is a good stand-alone short, but works out as a decent partial hedge to being long AIB. AIB also gets about 10% of its earnings from its majority ownership in a Polish bank, which happens to be publicly traded. AIB (and many others) is very bullish on the potential in Poland, which still has a very low penetration of mortgage and financial products and a population that is about 10 times the size of Ireland’s (39M vs. 4M). It presents a rather ideal scenario as AIB can seamlessly invest the excess capital generated from the Irish operations into its rapidly growing Polish operations. If you deduct AIB’s stakes in MTB and the Polish bank (both are publicly quoted), you get the rest of AIB’s core operations for about 9-10 times 2007 EPS.
Anglo-Irish Bank is the third large Irish bank and they are probably also a decent buy at current prices, but they are a specialized commercial property lender. They are also something of a cult stock, trading near 13 times earnings, much higher than its Irish peers. They also have fairly extensive operations in the
Irish Life & Permanent is the smallest, with a €5.2B market cap. Half the company is devoted to life insurance, asset management, retirement planning (“asset accumulation”), which is a very good business, comparable to what Principal Financial Group here in the
A basket investment of these four names makes sense. If I had $10 to invest, I would put $3 in IRE, $3 in AIB, $2 in ANGL.L, and $2 in IPM.L.
The following is speculation, but I think it makes sense. While it is currently a mess, eventually ABN Amro will get bought and I think RBS will win. It is almost a $100B deal and over 80% of it is in cash. What will the former ABN Amro investors do with their $80B cash windfall? My suspicion is that much of it will get reinvested back into European banks. The Irish banks because of the low valuations and great long-term growth profiles are a natural investment. They only need a few billion of the $80B total to spark a substantial rally in the shares.
While the CEOs of both IRE and AIB have made it clear they want to stay independent (justifiably given the outstanding results) , I think it makes sense for the Irish banks to eventually be part of a pan-European bank. Perhaps we could see deals in 3-5 years. The CEO of UK-based HBOS has been rumored to be interested in buying IRE—if it were for sale. If ABN Amro, a poorly run franchise in mediocre markets, can go for 15 times earnings, I think the Irish banks could get something near 18 times. Obviously this is fairly far off into the future, but European banking consolidation will continue.
Irish housing market collapses.
Competition is pretty intense (as it is pretty much everywhere in the world), but
Recent Results and Valuation
IRE recently reported operating EPS of €1.45 per share, up 22% YOY, based on robust 13% revenue growth and 6% op/ex growth. The growth was broad-based across their four divisions: their core retail Irish operations (41% of profits) were up 27%; capital markets profits (34% of total) were up 21%;
It should also be noted that reported EPS was actually €1.77, well ahead of operating EPS, primarily because of some property sales. While these sales aren’t core earnings (they had gains the previous year as well), we shouldn’t completely ignore the fact that IRE likely owns a lot of property that is substantially understated. And the gains do add to book value. IRE trades at only 2.4 times stated tangible book value (€6.71 per share) despite earning a 28% ROE on average equity over the past year. IRE’s capital ratios also improved over the year (the Tier 1 ratio improved from 7.3% to 8.2% and the equity/assets ratio improved from 4.8% to 5.2%), leaving room for a potential share buyback. While Europeans don’t approach share buybacks with the same philosophy as Americans, we think a share buyback is one of the smartest things management can do right now—we and others are encouraging them to look at this option given the sharp decline in the stock.
While the past year’s results are particularly impressive, Bank of Ireland has been a solid long-term grower, with operating earnings up nearly 60% from 5 years ago and up over 400% from 10 years ago. The shares are currently only about 20% higher from 5 years ago despite this track record and
The stock is still trading 20% below its recent February peak despite reporting excellent results, a generally bullish stock market, and continued European banking consolidation. My suspicion is that IRE will be well above its previous peak before the year is out.
The stock also carries a healthy 4%+ dividend yield, so you get paid while you wait.
And please forgive me, but I am going to opine a bit on the large valuation gap between fixed income investments and equities. Short term interest rates in
In conclusion, how can Warren Buffett buy/own Wells Fargo (PE of 12.8, 9% EPS growth), US Bancorp (PE of 12.5, 3% EPS growth) and M&T Bancorp (PE of 14.8 and EPS growth of -1%) and not consider the Irish banks, which have both better valuations and growth profiles, solid managements, and are large and liquid? I’m serious-- someone please give him or Charlie a call.
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