Bank of Ireland shares

patsy_mccabe wrote: »

I bought BOI at 1.39. Got them right at the dip.

bankboucy wrote: »

In regard to Irish banks - everyone is fighting the last war.

This crisis is an income statement recession - the GFC was a balance sheet recession and the largest you and I are likely to see in our lifetimes. Household & Bank balance sheets were completely destroyed with negative equity, the negative wealth effects then hit incomes and credit was completely withdrawn from the economy as Irish banks were no longer able to source inter-bank capital meaning they desperately attempted (& failed) to rebuild their capital base by choking off the oxygen source that was fueling a large chunk of Ireland's GDP which was overly dependent on credit fueled construction related activities (the paradox of thrift writ large). Bank balance sheets then had limited shock absorbers and tangible book value was destroyed in the process wiping out existing shareholders. Bank's were on paper better businesses then (higher ROE) but they were inherently more leveraged and by extension more dangerous as any 2008 vintage BOI/AIB diluted shareholder found out. Ireland Inc. had stupidly tied itself to the banks such that every inch of fiscal space that could have been used to support the real economy with stimulus got pored into zombie banks & got locked up as regulatory capital on bank balance sheets - stagnant and un-lent. In short the Irish bank bailout had ‘no velocity’ in the real economy, zero in fact.

Irish/European bank's today are boring, don’t make as good returns but are orders of magnitude less likely to destroy shareholder equity. On the continent the profit pool for banks has shrunk so much that its clear that there is 2-3x the number of banks needed in most large European countries and consolidation is the only pathway to rational returns where banks earn at least their cost of capital over a cycle. In this one instance Ireland is a country from the future - unless people haven’t noticed, we already have a consolidated banking sector - AIB / BOI / Ulster - own about 70% of the mortgage market and near 90%+ of SME lending. Ulster seems ready to exit stage left too for those not following the news.

Today BOI is stuffed to gills with capital and not sh*tty overnight interbank capital, no boring 0% yielding current account customer deposits & negative yielding corporate deposits (+ some CoCo bonds). BOI has dealt with non-performing loans to a greater degree than most European/Irish banks with NPL exposure down to 4%. The loans they've written for the past 11 years I can assure you have been written to a very conservative standard under the watchful eye of the CBI/ECB & SSM. BOI's legacy culture of being Ireland's least likely underwriting bank team to 'reach' for deals persists (BOI ‘only’ joined the Anglo Irish bank / Celtic tiger madness fairly late..c.2006) and if there's one thing bank execs do well its self preservation and post GFC BOI was not going to be writing PoS loans as it, first fought for survival, then raced to get the government out off its shareholder registrar (Wilbur Ross / Prem Watsa say thanks). CET1 capital buffers are very large at BOI and currently a clear 5% over their new revised 9.27% regulatory minimum. ALOT!!! of bad things need to happen to get to breach regulatory levels and wipe out shareholder equity with dilutive capital raise. Look at the ECB/SSM stress tests to see what the banks have been built to ride out. People also don’t default on mortgages with 30-40% positive equity………..just doesn’t happen.

This crisis is terrible but it wont be enough to destroy book value of the Irish banks. In the last crisis billions of euros was pored into the black hole of balance sheets- the sovereign borrowing for this purpose did nothing to stimulate the real economy - it repaired bank balance sheets and never reached Joe Public’s wallet. Instead of Keynesian spending to boost the economy, austerity was imposed as all spare fiscal space was used to plug the holes in the banks we'd stupidly guaranteed. Rates weren't even at zero then (anyone remember the ECB raising rates in 2011?!!!?) The Irish economy is much more balanced this time - the FDI sectors we rely on should remain robust (Tech / Healthcare / Financial Services). AIB/BOI can actually lend through this crisis given the capital buffers they have - all very different than the last time. Ireland 2009 - 2014 was a financial wasteland mired in an internal devaluation & a deflationary bust. The government this time can, should and is borrowing at near zero rates to support damaged household incomes bridging them from the COVID to the post-COVID economy. Vaccines give us a timeline for this - Q3 2021 for mass vaccination and normal-ish economy. The EU via ECB will be accommodative and has done a fluffed Eurobond with federal like stimulus payments. The ECB will hoover up any bonds we print keeping nominal rates on new Irish borrowing at effective negative rates. State aids rules have been thrown out the window - the Irish government can and should support Irish SME’s robustly to bridge them to health (this includes helping them pay their loans!!). The credit guarantee scheme should see a situation arise where banks SME legacy loan book will be bailed out by new credit guarantee loans for businesses with a post-pandemic future (rightly so).

Now whats Bank of Ireland worth then today?????

In a post-Covid stabilized world of 0% interest rates & Eire growing GDP 2-3% a year. Lets call it Ireland 2022 to be safe (so negative earnings for BOI in 2020 & 2021). I’m going to repeat the write downs on H1 2020 c.700m, into H2 2020 & 2021…so a hit to equity of another c.2bn. Share holder equity of BOI in 2022 would likely be reduced to c.7bn then. Bank of Ireland can earn conservatively 8% on equity so about c.500 million a year in 2022. 50% retained/50% distributed to shareholders. Book will then grow c.3.x% a year in that scenario, so 2023 earnings 637m (7% on 9.1bn), 2024 = 659m, 2025 =682m, 2026 = 706m etc. Maths are super rough!. I'll leave terminal growth rate at 2%. DCF the earnings at a 10% risk free rate - banks are cyclical & don’t deserve a market multiple of 15x. Bank of Ireland's intrinsic value IMO is c.6 euro a share.

I could add in credit for future headcount/cost cuts once IT transformation is complete - but people are people and sacking colleagues/friends requires stomach European's in relatively small communities/markets like Ireland/Dublin don’t have. If real efficiency, branch closures and slashing and burning was done I'm positive RoTE could get up to 10%. Depends on how ambitious Francesca McDonough is and what her post-BOI ambitions are.

The other thing I gave BOI no credit for was the net present value of its carried forward losses from the GFC of c.1bn...have no doubt that is genuine asset sitting inside the bank for the next decade+….…the net present value of that could easily be 500m between friends. If you wanted to be aggressive you could back that out of the price you’re paying today for BOI maybe say its worth 0.59 a share alone.

Saw some folks a few threads back talk about challenger banks - for sure AIB/BOI need to wake up and realize the duopoly they’ve been re-handed in the Irish market is permanent only if they work at it…this needs to be done before a 3rd online digital player emerges with real scale I looked at Revolut/N26 and sorry they’re just not at the races in terms of deposits not even close……AIB/BOI are in a very privileged position collecting such low cost deposits from the Irish population and should immediately team up with PTSB/Ulster & create a cross institution instant payment app to kill revolut & stop Venmo or Square in the future. A digital only millennial sub-brand banking app of BOI should be looked at (Santander is doing something similar).

Finally think with Sinn Fein off the table for possibly the next 4.5 years. The big risk to the banks - Government meddling (this is why AIB imo is untouchable as an alternative investment given 90%+ ownership by the state and even the hints Sinn Fein might control it one day), is somewhat reduced, lets see how stable this coalition is…….the populist thing to do is to drive the banks into unprofitable lending & double down on repossession barriers/asset recourse…….I think Paschal Donohue + others in FF are pragmatic enough to understand that like it or lump it a functioning profitable market led banking system is key pillar of economic prosperity. Ireland already ran the experiment of what happens to an economy without a functioning prudent underwriting led banking system.

Lots of people on here trading BOI - I suggest not doing that - I’ve bought and held since 1.70………when its 20% off my conservative estimation of 6 euro per share intrinsic value (c.4.80) I’ll look again to see if my thesis is still in tact and only then consider my next move. Jumping in and out is a dangerous game - a true trader plugged into the ziegesit is a rare beast (Paul Tudor Jones & Stanley Druckenmiller come to mind)……I’d suggest most here aren’t traders. Big moves in stocks happen on tiny amounts of days......nobody can tell when exactly......but you can tell that over time a business earning 0.60c a share in a quasi-monopoly business with high barriers to entry in a western European democracy with good demographics can easily trade at x10 eps......or 6 euro......dont double guess it.

bankboucy wrote: »

Thanks for your thoughts

Yes the interest rate environment isn't favorable for banks - but it isn't like European/irish banks haven't been operating in that environment for years & ECB seems to realize that going deeper into negative rate territory has exhausted its positive effect...IMO rates aren't going any lower from here....

bankboucy wrote: »

The interesting thing is that Irish banks NIM's are the envy of European banks (as low as they are), most continental European banks would kill for 2% - which again speaks to the consolidated nature of the Irish banking sector.

Timing belt wrote: »

I agree that logically we should see inflation but think that we won't see it materialise as the fiscal spending is not creating any shortage of any commodity or service with the exception of China who is building up it's infrastructure and driving up the price of steel, shipping etc.

If you take Ireland as an example the government's fiscal spending is mainly on filling the void created by Covid via social protection in the form of pup, a bit of spending in health care and construction which will lead to small element of inflation in these sectors.

The notion that people have been forced to save because they can't spend due to lockdown's and once Covid is gone all this cash will be unleashed and will generate inflation is not something that I am buying into as people have been saving since 2015 long before Covid was around and I can't see people just going mad and spending it for the sake of it. They are more likely to use this for an asset purchase such as a property than blow it on a party. Don't get me wrong I do expect there will be an uptick in spending and Inflation as the world gets back to normal but think that this will be short lived and not sustained for a long enough period to create enough inflation for bond yields to rise significantly.

The only way I see real inflation is if the banks who are struggling to make a profit in the current environment start passing the cost onto retail customers via negative interest rates which would really get people spending. This accompanied by a sharp rise in Oil would generate the inflation.

If Bond yields go up off the back of inflation you would expect investors to switch asset class and buy stocks/shares as they pull their money out of the Bond market. Banks would be a big winner in such a scenario as they would start generating healthy profits from the yield curve and are somewhat undervalued at the moment in relation to other sections of the stock market that are overvalued and have already priced in a full recovery with the expectation of future bumper profits from pent up demand that may not materialise or will be short lived. .

My prediction is:
- that we won't see the inflation and that banks will hamstrung by the lack of a yield curve and the low interest rate environment persisting which will make it difficult for them to rebuild any capital used for impairments.

- That QE will be around for a while as the first sign of this tapering off will crash the stock market unless the future bumper profits materialise.

- That we will see a demand increase in the housing market which will push up prices as institutional investors chase yield and homeowners spend their savings accompanied by an increase in lending for house purchases.

Bass Reeves wrote: »

Lot of fund managers are on holidays until next week. I expect action next week maybe 4 euro by end of January.