Liams Last Post : Irish Financials as 'event driven value opportunities'... maybe getting there ...

Good Afternoon ,

 

A Messy miserable day for markets not helped by US economic data , a rather tepid reception to Ben Bernankes pronouncements last night which hardly took the market by surprise and the news of property Losses in Dubai and to crown it all the Downgrade of the credit rating of Greece.

  

Today Merrion have published a note on the Banks, updating our NAMA discount assumptions and the amounts required to bring the banks to an 8% equity Tier 1 ratio.  For AIB we are now forecasting a 35% NAMA discount and 27% for Bank of Ireland. It would appear that as we get closer to the NAMA event taking place that discretion and caution is guiding the behaviour of all the advisors involved and everyone is looking to protect themselves in terms of the valuations they are prepare to sign off on. So the earlier fears of NAMA simply overpaying are dissipating somewhat.  Clearly the Higher the discount , the higher the equity required to recapitalise the banks. The problem for the market has been to look at the scale of the recapitalisation required relative to the current market capitalisation and then shy away from the banks... in some cases the screeching of tyres as the potential investor has roared off into the distance has been obvious...

 

But I personally believe that times are getting very interesting now for anyone who is prepared to look for elusive 'EVENT DRIVE VALUE OPPORTUNITIES' and Bank of Ireland is potentially a very interesting story...

 

If you take the starting point that the support by the government in the form of preference shares is sufficient to meet regulatory capital requirements , then the only reason that the Bank would look to recapitalise with common equity is to free itself from government influence and to make itself more attractive to equity investors. 

 

We are approaching D-Day for NAMA which will provide certainty, the EU re-structuring is hardly likely to be that onerous for the banks especially when the experience of RBS is taken into account. So the obvious solution to the re-capitalisation of Bank of ireland would be for the Government to agree to under write an equity issue which would repay the Preference shares and protect the pre emption rights of existing shareholders. A similar scheme was already done with Lloyds earlier this year. 

 

I believe that investors are clever sophisticated people who like being presented with simple propositions and the Irish banks have had more variables than any sensible person would look at but over time the options are coalescing and there is a rising degree of certainty which can be priced by the market...

 

If the Government , once they get over the budget tomorrow and NAMA after that , see the light and I presume they will , then a mechanism whereby they underwrite the issue that pays them back could be a huge success... there is nothing like an issue which is already underwritten to create investor interest. The key here is the extent of the discount to the price that the issue takes place at.  It is our view that Bank of Ireland can earn 13%  post recapitalisation to 8% equity Tier 1 on a pre provision normalised profit level which is 36% lower than previous peak profits. This is attractive. 

 

AIB needs a massive injection of cash which we think is most probably in two tranches and requires more imagination....than looking at Bank of Ireland. 

 

I commend Sebastians note to you... definitely worth some quiet contemplation, especially if you are charged with looking for value and performance ....

 

The Easier play is of course Irish Life...but I think I have done this one to death recently... And there is FBD...roaringly cheap and not requiring any re-capitalisation... 

 

Plenty of value in the Irish financials.... and the smoke is clearing....Get your boots on... might not be time to wade in yet... but I sense an opportunity coming... 

 

 

Tomorrow we look forward to being fleeced in the budget... Can hardly wait ...

 

Have a good evening ,

 

Liam

 

 

 

 

___________________________________________

Liam Boggan

　

Merrion Stockbrokers

Tel.: 353-1-2404171

Mob:353-87-2313505

www.merrion-capital.com

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