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Teacherman1 (< 20)

The Luck of the Irish



August 23, 2009 – Comments (2)

There are "bad loans" and then there are "bad loans". Having spent 15 years in commercial banking in one of my previous careers, I am well aware that "bad loans" come in different forms.

There are "bad laons" that were "bad loans" the day they were made. There are "bad loans" that became "bad loans" because of something that happened within or to a particular company or sector. There are also "bad loans" that became "bad loans" because the entire economy collapsed.

The latter is the type of "bad loans" that currently beset AIB. 

Over the last few years (prior to the world turning upside down), Ireland was a country experiencing tremendous growth, due to the policies of the Irish Govt. 

AIB currently  has about $23B in bad property development loans, which are crippling them. Luckily for them, the Irish Govt has a program called NAMA (National Asset Management Agency) that appears poised to buy out those loans at a discount (currently talking about 20-25% discount), and hold them until more normal economic times return. Then they would sell them off to recover their investment.

This would free up the Irish banks to get back to the business of lending, and get their economy going again. The banks were doing what was expected of them, which was to make laons to develop properties to accomodate the tremendous growth Ireland was experiencing.

The Irish Times recently reported that the Royal Bank of Canada was interested in taking a position in AIB, but are wating to see what NAMA will do. That investment by RBC is probably a year or so away.

Anything can happen, but I believe that NAMA will follow through with what they are talking about doing, and AIB will come back strong. I am currently long (with real money) in AIB, but I view it as a longer term investment for the more patient investor. It is up in the shorter time, but could go back down some, so anyone who gets upset when their investement doesn't pay off right away, or follows a "Saw tooth" upward trajectory, rather than a straight line should probably stay away.

Just wanted to put this out for anyone who might not be aware of them, and wanted a possible "big gainer" long term, could do their own research and come to their own investment decision.

As always, JMO and worth exactly what I am charging for it. 

I am also long LYG but for different reasons. 

2 Comments – Post Your Own

#1) On August 23, 2009 at 2:56 PM, SockMarket (34.47) wrote:

nice writeup. I have been following them for some time but have yet to research them, you have certainly perked my interest.

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#2) On August 24, 2009 at 12:30 PM, CaptBS (98.33) wrote:

Nice summary. I've been following AIB since March and was pleased to catch some of the run-up from the 3-5 range in my real-life portfolio, but I'd agree that AIB (as well as IRE) are definitely longer-term plays, given their sheer mass of debt and NAMA's sluggish (or deliberate, depending on your POV) response. These banks are not likely to fail, but it's going to be a long, long road to recovery.

After a bit of a speculation-driven run-up earlier this summer, it's nice to see their prices consolidate to better reflect reality. Long-term, these have a huge upside from a price-appreciation standpoint, but as you suggest, their volatility will make for a bumpy ride.

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