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Dueling Fools, Why the Bank of Ireland is for Speculators only.

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July 17, 2011 – Comments (1) | RELATED TICKERS: AIBYY , IRE

 I find that going against BravoBevo on one of his conviction calls is generally a bad move. 
See comment #10 here:  http://caps.fool.com/Blogs/allstarportfolio-no-im-not/608441

In this case, I have to disagree with Bravo and we'll see if he makes me eat my short.

The Bank of Ireland is indeed Ireland's best positioned bank at this time and it did do well on it's stress tests.  This past Friday, (16 July), Bank of Ireland started the morning at an all time low of 0.86 per share and started climbing.  It seemed to level off at noon at about $0.97 for a nice 12% gain, but then spiked upward suddenly, rocket style to $1.42 before settling around $1.22 for a 42% gain.  While the stress tests for the European banks was in the news much earlier in the day and while Bank of Ireland had already passed it's tests, the sudden spike in both Bank of Ireland and Allied Irish Bank, (AIB, with a 17% jump), seem out of context.  It's possible the market suddenly decided they had fallen too far and those on the sidelines didn't want to miss the ride now that bottom was in, but it's also possible that a little options expiration, daytrading, and computer trading all kicked in.

Was Bank of Ireland suddenly too cheap???  Did the market decide to start loading up now that the secret was out??  I don't think so.  Here are my three reasons that Bank of Ireland is overpriced, even at the $0.86 low it booked:

1.  Bank of Ireland, as part of their own stress tests last year and four months later had to be bailed out. This past March Bank of Ireland was tasked with raising an additional 4.2B Euros to shore up assets as part of an agreement for an EU-IMF bailout.  While they may have passed this most recent round of tests, the last round didn't prove the test was sufficient. They raised 1.96B Euro by squeezing Junior bondholders, triggering a credit event and forcing their insurance to pay out.  They are pushing a second "rights offering" to current stockholders at 0.10 Euro per share that is not going over very well. Most likely because the first "rights offering" at 0.55 Euro was followed by an 80% further decline in the banks stock. If stockholders do not particpate in the rights offering then the state will need to step in and could own as much as 70% of the bank.  (They currently own 36%). If 100% of stockholders participate the states holdings will drop to 29%.  Overall, the state continues to own more and more of the bank and the stockholders less.

2.  The Stress testing itself is not as strenuous as the "market tests" that are and can occur. There is little faith in the banking system and there is concern that bonds issued by various countries (called sovereign debt), will need to be written down if the decay continues.  All of the European banks hold some bonds from other countries, including their own. Interest rates contain to rise on and the banks sources of capital become more expensive causing them to limit their outlay as their costs increase. 

3.  While the "news" of passing this latest round of stress tests hit when the British markets were closed, the news has been pretty much expected and factored in.  The spike in the Bank of Ireland's share price on the US exchanges widens the huge disparity that already existed in the valuation of Bank of Irelands two listings (IRE, BKIR.I).  Holdings of the BKIR.I shares are reluctant to give .10 Euro on a rights offering.  .10 is the current share price of BKIR.I.  US investors are already (prior to Friday's runup), paying a huge premium for IRE.   There are 4 ADR shares for each BKIR.I share.  At $1.22 per share on Friday's close, this was .33 per BKIR.I share.  (1.20/4 = $0.33*exhange rate at 1.46:1.00 = 0.23 per share).  So currently US shares are more than DOUBLE their UK counterpart.
(At the $0.84 open they were misbalanced 0.15 Euro vs 0.10 Euro).
At some point either the BKIR.I shares need to rise substantially or their could be a rebalancing at some point when the rights offering is done.

Daytrading, Trade the News, vs. Investing. IRE
November 26, 2010:  $1.44
Decmeber 9th, 2010: $3.04
A nice double for IRE holders??

March 31st, 2011:  $1.75
April 4th, 2011:  $2.52
A nice 40%  one week gain??

CLOSE on 7/14/2011 $0.87  Where were all those gains???

July 14th, 2011:  $0.87
July 15th, 2011:  $1.22
A nice one day 42% gain??

More to come???  Or will there be another round of decay and the questions on where those gains went???

I would contend that investing in AIB Allied Irish Bank is even a much more "Foolish move".  It spiked 17% Friday and it's disparity is much lower, (about 16% with a 10:1 ADR).  It plans on issuing Billions of new shares at a few penny's each.  But I'll leave that analysis for another day or another Fool.

Typical disparity between a US listed ADR and a European one is usually less than 1%.

TSIF signing off.  (The Sky Isn't Falling today...but it's raining somewhere).

The Sky Isn't Falling today...(perhaps tomorrow).

Disclaimer, if I knew anything, would I be posting here?  ;) 

1 Comments – Post Your Own

#1) On July 18, 2011 at 1:22 PM, Gonzhouse (72.98) wrote:

The problem with the Bank of Ireland, along with all the other Irish banks, is simply there is too much debt for the banks, and by extension their guarantor's (the Irish government), to plausibly pay it back.  Ireland will be the next EU country to effectively default.  While Greece owes their pending default to unsustainable entitlement payments and lack of tax revenue, Ireland will owe theirs to the banks.

Stress tests are just a mechanism for triggering the recognition of a default.  You could set the test to be 1 million % leverage is OK and it does not impact the end result:  there is simply no reasonable scenario under which that level of debt is sustainable, no matter how it is spread out.

So what's the solution for both Ireland and Greece:  creditors have to take a significant haircut on their debt (and de-facto default).

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