The name is a bit of a mouth full for those of us who are into the "whole brevity thing," so I'm just going to refer to it as "the bank" from here on out. The bank is an interesting situation right now. Let me give you some background information.
Ways to buy the bank:
The ordinary shares trade under the symbol BKIR.L on the London Stock Exchange (LSE) and under the symbol BIR.IR on the Dublin Stock Exchange. As far as I can tell, prices on these two exchanges are consistent with one another. The bid-offer spread has been around 0.086-0.088 Euros for most of this week. There is also an ADR, symbol IRE, which represents four ordinary shares and currently trades at around $1.24 per ADR. In most cases the ADR is the easiest and cheapest way for a U.S. investor to buy into a foreign stock, but in this case buyers of the ADR are paying a huge premium. With the Euro trading at around 1.43 dollars, an ADR representing four ordinary shares should trade at around 0.088*4*1.43 = $0.5034, or about fifty American cents. I have no idea what the ADR buyers are doing, but for their sake I hope that they know what they are doing.
Before you rush out to try to buy the shares in London, convert them to ADR's, and sell them in the open market, you should know that Bank of NY Mellon has suspended conversion of ordinary shares into ADR's. At some point they are likely to reopen conversion, at which point the ADR is likely to get hammered, unless of course the ordinary shares have shot up dramatically. So the obvious solution then is to buy the ordinary shares in London and then sell the ADR short, right? Right, but unsurprisingly, it seems to be impossible to borrow the ADR for shorting. I tried it at both of my brokerages and was told the same thing - there is not enough IRE available to short. Maybe some smart guys have already snapped up all available shares, I don't know. According to Yahoo Finance, there are about 7 million shares short, out of about 1.32 billion shares outstanding. Anyway, if you are interested in the stock from the long side, then clearly the thing to do is to buy it in London, right? Well, I thought so myself, until I found that I faced a limit of 500 shares per transaction, and that the commission on 500 shares at 0.088 euros would be four euros, or almost 10% of the purchase price. I know that high trading costs are the norm with low-priced stocks, but it turned out that there was another option. The bank also trades on the U.S. pink sheets under the symbol IRLBF.pk. I was able to land 40,000 shares of IRLBF.pk at $0.13 per share for my personal account at Fidelity while paying only the standard online commission. I should also note that I wasn't even able to buy IRLBF.pk through my other brokerage because the shares are not DTC eligible.
Why would you want to buy this bank anyway?:
I believe that the fix is in on the Governor and the Company of the Bank of Ireland. The bank, founded in 1783, is the only bank in Ireland that is still in private hands. In July of this year, a group of American and Canadian investors purchased about 35% of the bank's ordinary shares at just over 0.10 Euros per share. This group included the investment vehicle of noted billionaire vulture investor Wilbur Ross, Prem "the Warren Buffett of Canada" Watson's Fairfax Financial Holdings, Fidelity Investments (yes, the same Fidelity that I was able to purchase the shares through), Capital Research, and Kennedy Wilson. This is not a shabby group. If you can get the ordinary shares for 0.10 Euros or better, this is the team that you are on.
Ireland's economy is in bad shape, but it has some strong points. The central government is fully funded at least through 2012 and probably through most of 2013. They are actually growing, though very slowly, and they run trade surpluses both within the euro zone and with the rest of the world. Crucially, Ireland seems to have won the battle to keep their low corporate tax rate. They have a young, well educated, and also highly mobile population. Ireland is the only PIIG nation to have agreed to a harsh regime of internal devaluation. If there is a way out of this jam, I think that they will find it, and as the only English speaking country in the euro zone and the advantages listed above, I think that within a couple of years Ireland could return to the strong growth of the 1990's and early to mid 2000's, less the froth from the property bubble.
What about the fundamentals? There is no doubt that the bank will continue to report losses in the immediate future. The Irish mortgage situation is still a mess. But there are some good signs. The bank has plenty of measured regulatory capital. In addition to its Irish presence, the bank has a relationship with the post office in the UK and owns a bank in Connecticut. The bank is also following the central government in imposing austerity. Debt for equity swaps have been "suggested to" junior bondholders at terms favorable to the bank. The most recent half year report shows "benefit changes" that reduced pension benefit costs by 63 million Euros versus the first half of 2010. The conservative Wilbur Ross estimates that the bank's true book value at about 0.26 Euros per share. The bank's most recent half year operating profits before taxes and impairments was 163 million Euros. Doubling that, subtracting 15% for taxes, and dividing by shares outstanding comes to 0.0523 Euros per share by my calculations. Applying a multiple of 8 would value the shares at 0.4187 Euros per share. To what extent these figures might hold when we are done with the writeoffs is difficult to estimate.
I think that this bank survives even if Ireland leaves or is kicked out of the Eurozone. Of course that event would plunge the stock price to near zero, but I think that the government would recapitalize the bank with the new Irish currency and that it would eventually prosper. In most cases one would expect the common to be wiped out, but I don't think so in this case. I think that the impressive group of investors who came in did so with certain assurances. An Ireland cut loose from Europe would want to jealously guard its reputation with North American investors. In short, I frankly don't think that Wilbur Ross and Prem Watsa came into this situation to be duped. I think that in return for providing funds (which went directly to the Irish government) to help get this bank back in private hands, and understanding that this is a long-term investment that is likely to show poor results for an extended period of time, the Irish government has agreed to do everything possible to protect the group's investment. One thing that they might do be able to do, if I'm not mistaken, to mitigate the risk that the mortgage situation will overwhelm the bank, is to use the Irish "bad bank" NAMA (National Asset Management Agency), to issue government bonds to the bank in exchange for mortgages to the extent necessary to keep the bank solvent.
Disclosures:
I am long the common stock of The Governor and Company of the Bank of Ireland. I purchased the stock through the pink sheets under the symbol IRLBF.pk.
Nothing in this blog post should be construed as investment advice. I am not a registered investment adviser, and I will not accept inquires about investment management services.
Pink sheet stocks and penny stocks are generally riskier and less liquid than listed stocks. Many penny stocks turn out to be frauds. I am just repeating this as public service; as this post is not intended as investment advice, nothing I've said here should lead the reader to investigate the pink sheets or penny stocks.
I do not guarantee the accuracy of any of the information presented in this post. It is quite possible that I have gotten some details wrong. Please email me if you spot any errors of fact.
Ways to buy the bank:
The ordinary shares trade under the symbol BKIR.L on the London Stock Exchange (LSE) and under the symbol BIR.IR on the Dublin Stock Exchange. As far as I can tell, prices on these two exchanges are consistent with one another. The bid-offer spread has been around 0.086-0.088 Euros for most of this week. There is also an ADR, symbol IRE, which represents four ordinary shares and currently trades at around $1.24 per ADR. In most cases the ADR is the easiest and cheapest way for a U.S. investor to buy into a foreign stock, but in this case buyers of the ADR are paying a huge premium. With the Euro trading at around 1.43 dollars, an ADR representing four ordinary shares should trade at around 0.088*4*1.43 = $0.5034, or about fifty American cents. I have no idea what the ADR buyers are doing, but for their sake I hope that they know what they are doing.
Before you rush out to try to buy the shares in London, convert them to ADR's, and sell them in the open market, you should know that Bank of NY Mellon has suspended conversion of ordinary shares into ADR's. At some point they are likely to reopen conversion, at which point the ADR is likely to get hammered, unless of course the ordinary shares have shot up dramatically. So the obvious solution then is to buy the ordinary shares in London and then sell the ADR short, right? Right, but unsurprisingly, it seems to be impossible to borrow the ADR for shorting. I tried it at both of my brokerages and was told the same thing - there is not enough IRE available to short. Maybe some smart guys have already snapped up all available shares, I don't know. According to Yahoo Finance, there are about 7 million shares short, out of about 1.32 billion shares outstanding. Anyway, if you are interested in the stock from the long side, then clearly the thing to do is to buy it in London, right? Well, I thought so myself, until I found that I faced a limit of 500 shares per transaction, and that the commission on 500 shares at 0.088 euros would be four euros, or almost 10% of the purchase price. I know that high trading costs are the norm with low-priced stocks, but it turned out that there was another option. The bank also trades on the U.S. pink sheets under the symbol IRLBF.pk. I was able to land 40,000 shares of IRLBF.pk at $0.13 per share for my personal account at Fidelity while paying only the standard online commission. I should also note that I wasn't even able to buy IRLBF.pk through my other brokerage because the shares are not DTC eligible.
Why would you want to buy this bank anyway?:
I believe that the fix is in on the Governor and the Company of the Bank of Ireland. The bank, founded in 1783, is the only bank in Ireland that is still in private hands. In July of this year, a group of American and Canadian investors purchased about 35% of the bank's ordinary shares at just over 0.10 Euros per share. This group included the investment vehicle of noted billionaire vulture investor Wilbur Ross, Prem "the Warren Buffett of Canada" Watson's Fairfax Financial Holdings, Fidelity Investments (yes, the same Fidelity that I was able to purchase the shares through), Capital Research, and Kennedy Wilson. This is not a shabby group. If you can get the ordinary shares for 0.10 Euros or better, this is the team that you are on.
Ireland's economy is in bad shape, but it has some strong points. The central government is fully funded at least through 2012 and probably through most of 2013. They are actually growing, though very slowly, and they run trade surpluses both within the euro zone and with the rest of the world. Crucially, Ireland seems to have won the battle to keep their low corporate tax rate. They have a young, well educated, and also highly mobile population. Ireland is the only PIIG nation to have agreed to a harsh regime of internal devaluation. If there is a way out of this jam, I think that they will find it, and as the only English speaking country in the euro zone and the advantages listed above, I think that within a couple of years Ireland could return to the strong growth of the 1990's and early to mid 2000's, less the froth from the property bubble.
What about the fundamentals? There is no doubt that the bank will continue to report losses in the immediate future. The Irish mortgage situation is still a mess. But there are some good signs. The bank has plenty of measured regulatory capital. In addition to its Irish presence, the bank has a relationship with the post office in the UK and owns a bank in Connecticut. The bank is also following the central government in imposing austerity. Debt for equity swaps have been "suggested to" junior bondholders at terms favorable to the bank. The most recent half year report shows "benefit changes" that reduced pension benefit costs by 63 million Euros versus the first half of 2010. The conservative Wilbur Ross estimates that the bank's true book value at about 0.26 Euros per share. The bank's most recent half year operating profits before taxes and impairments was 163 million Euros. Doubling that, subtracting 15% for taxes, and dividing by shares outstanding comes to 0.0523 Euros per share by my calculations. Applying a multiple of 8 would value the shares at 0.4187 Euros per share. To what extent these figures might hold when we are done with the writeoffs is difficult to estimate.
I think that this bank survives even if Ireland leaves or is kicked out of the Eurozone. Of course that event would plunge the stock price to near zero, but I think that the government would recapitalize the bank with the new Irish currency and that it would eventually prosper. In most cases one would expect the common to be wiped out, but I don't think so in this case. I think that the impressive group of investors who came in did so with certain assurances. An Ireland cut loose from Europe would want to jealously guard its reputation with North American investors. In short, I frankly don't think that Wilbur Ross and Prem Watsa came into this situation to be duped. I think that in return for providing funds (which went directly to the Irish government) to help get this bank back in private hands, and understanding that this is a long-term investment that is likely to show poor results for an extended period of time, the Irish government has agreed to do everything possible to protect the group's investment. One thing that they might do be able to do, if I'm not mistaken, to mitigate the risk that the mortgage situation will overwhelm the bank, is to use the Irish "bad bank" NAMA (National Asset Management Agency), to issue government bonds to the bank in exchange for mortgages to the extent necessary to keep the bank solvent.
Disclosures:
I am long the common stock of The Governor and Company of the Bank of Ireland. I purchased the stock through the pink sheets under the symbol IRLBF.pk.
Nothing in this blog post should be construed as investment advice. I am not a registered investment adviser, and I will not accept inquires about investment management services.
Pink sheet stocks and penny stocks are generally riskier and less liquid than listed stocks. Many penny stocks turn out to be frauds. I am just repeating this as public service; as this post is not intended as investment advice, nothing I've said here should lead the reader to investigate the pink sheets or penny stocks.
I do not guarantee the accuracy of any of the information presented in this post. It is quite possible that I have gotten some details wrong. Please email me if you spot any errors of fact.
