Liams Last Post : Ireland injects capital into AIB , draws line under Anglo , Bank rallies whilst Irish Life tries to

Good Afternoon,

 

Today marked another turning point in the adventures of the Irish economy. Minister of Finance Brian Lenihan played a sure footed hand this morning with the carefully orchestrated sequence of statements. Yes the news on AIB is bad news with an extra 3bn of capital required. Better for this to come out today and throw the Anglo story into the background. How on Earth the Minister was ever going to be in a position to convince the market of the ultimate cost of Anglo was always beyond me. Instead by dealing with AIB unexpectedly even though the news is bad turned out to be good news. Bond markets reacted positively with bond spreads vs Germany shrinking to a mere 437bp. The pricing of the underwriting of the Capital injection at approx 1x book value is also probably in order to ensure that some value was left on the table for existing shareholders. I presume there wont be a stock exchange investigation into the rally in the AIB share price from 3.30pm yesterday. The Government were privileged to be in a position to take advantage of the high closing price to announce their underwriting was taking place at a discount.  Colm Doherty becomes the latest CEO to depart. Interesting this a s AIB had resisted efforts by the government to place an outsider into the CEO role in 2008.  AIB traded down sharply in late morning touching a low -27% down on the day before rallying sharply to close -7% down. This is some performance and I suppose reflects the news that a government majority stake was inevitable. A 92% stake though is effectively total control.  I wonder how many institutions or retail investors will be willing to support the capital raising at the underwriting level of 50c per share.  

 

The main beneficiary of the news today was Bank of Ireland which continued to trade in heavy volume (103m shares or just under 2% of the market cap)  The news that the regulator declared that Bank of Ireland continues to have sufficient capital is a positive and the relative valuation gap between Bank of Ireland and AIB just highlights the relative attractiveness of Bank Of Ireland.  

 

What a cost to the state the Budget deficit rises to 32% of GDP…massive…

 

My view  is that the developments today also bring us one step closer to the resolution of the fate of the EBS building society and the Irish Nationwide. Probably the best investment case in the larger Irish Financials is Irish Life,,,,BUT IT IS A QUESTION OF TIMING... Irish Life and Permanent don't have to raise fresh equity unless they splitting out the Bank per the Regulator's recent PCAR assessment two weeks ago.

They DO continue however to have a problem accessing funding at an economic cost so there is a risk that they may be tempted to do a placing to partially build their capital base or to go for a full fledged rights issue without a deal. In my view I think that they are likely to get involved in any transaction involving the EBS and Irish Nationwide and putting these institutions together would help reduce the loan to deposit ratio and so the attractiveness of the company to external investors would rise sharply not to mention the benefits of better funding costs if they are seen to be less stretched.

There are a series of events which may trigger a complete change of perception of Irish Life and Permanent with the removal of the negative valuation attributed to the bank. Once the Bank issue has been resolved , it will allow the market to focus on the EV per share of the Life Assurance business which is nearly eur9.00. At eur1.39 per share the risks now begin to swing in favour of getting involved and it is time to think about building a position albeit slowly.     

 

Aer Lingus gave up a few percent today and Ryanair was 1.5% . Grafton broke up to cross the Eur3.00 level to close at 3.05. This has been range bound for months.

 

Markets were mixed internationally with the Dow jones being down -0.5% at the European close and marginal movements across the European markets.

 

Have a good evening …

 

Liam

 

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Liam Boggan

　

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