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Bank of Ireland

February 24, 2014 | About:

I bought Bank of Ireland (IRE) in early 2012 based on three things: solid business IF the balance sheet could be addressed, Government support (15% owned) and an Irish economy that though overheated has a very solid manufacturing base (ie, pharmaceutical manufacturing) and conservative stewardship. The stock has almost quadrupled in that time. This leads to two questions I have for fellow members:

1) Why is so little written about this fairly reasonably sized bank that is the most stable bank in a major economy? The lack of publicity has obviously not effected the stock going up, but I want to know WHY the run has occurred. Is it Americans buying ADRs versus Irish/European investors? Anybody know how to find this out? I'm an intrinsic value investor so don't really care about what others think, but I am intrigued as to who is moving this stock.

2) I recently went back to pre-crisis numbers to determine how todays valuation would stack up if IRE returned to an average of their earnings (assuming the balance sheet also stabalized at pre-crisis loss levels). I conservatively figured the bank would be at about a p/e of 10 - not making it a screaming buy anymore, but given that they are the main solvent bank in a quickly recovering major economy, not an unattractive holding (I calculated other metrics of value too that showed a solid valuation). Anybody else hold IRE and perform their own valuation analysis and willing to share?


Rating: 2.7/5 (3 votes)

Comments

gurufocus
Gurufocus premium member - 6 months ago
Congratulations on the investment SeaBud! It is a position that Prem Watsa (Trades, Portfolio) held and we wrote about it extensively a few years ago when he bought it. Not much coverage lately as there were no more actions from him.

It will be interesting to look at its current valuation after a terrific run.

SeaBud
SeaBud premium member - 6 months ago

A thank you to Gurufocus because it was Gurufocus article(s) that started my research!

gurufocus
Gurufocus premium member - 6 months ago

You are welcome! That is exactly the purpose of GuruFocus: to see what the Gurus are doing, and start our research from there.

Very glad that you made money.

vgm
Vgm - 6 months ago
Seabud,

I also own Bank of Ireland (as BKIR on the London exchange). It's my largest position. I started looking at European banks in general in 2011 and zeroed in on BKIR after Wilbur Ross (Trades, Portfolio) and Prem Watsa (Trades, Portfolio) showed interest and then took large positions (at 10 euro cents/share). They publicly stressed that they particularly liked the CEO, Richie Boucher, and had great confidence in him. In addition, Wilbur was very vocal as to Ireland's optimistic future. The tangible book was around 26 euro cents at the time. Due to market volatility, I got in at 8.5 in the fall of 2011. I made it my largest position. It's up 4x. I continue to hold it (see links below).

I suspect institutional investors are now getting in, causing the move you mention, since (a) the waters around BKIR look safer; (b) the government will likely dispose of its 15%; and, (c) BKIR will probably start to pay a dividend soon. (again see linked below)

My view is that it got overlooked due to the uber-bearish outlook on so-called peripheral Europe, and banks worldwide in general (BAC was being crucified), at the time. I personally never believed Europe or the Euro would break apart, nor that banks were permanently going out of fashion. It was a case of "Buy when there's blood running in the streets." I also bought Lloyds Bank in the UK and BAC when Mr Market was giving them away.

But, generally, most articles in GF are US-centric, understandably - though there are exceptions and GF has widened its focus of late. In the Q&A with Prem Watsa (Trades, Portfolio), BKIR was discussed.

Here are a couple of articles from the past few days on BKIR which might be of interest if you haven't seen them:

http://www.independent.ie/business/irish/why-i-invested-in-richie-boucher-by-wilbur-ross-30033153.html

http://www.forbes.com/sites/wallaceforbes/2014/02/14/when-the-cloud-disappears-look-out-above/

Good luck!

SeaBud
SeaBud premium member - 6 months ago

VGM - thanks for the links. I too bought BAC when blood was in the streets (AIG is my largest position dating back a couple years from purchase though if IRE keeps screaming it may take over). I also own Banco Santader. It has not appreciated as much but I think the Spanish recovery (and latin american exposure) make it quite intriguing over the next 3-5 years.

I will keep IRE as profits emerge this year and we see what the new company looks like from an operating perspective (fcf, margins etc). Several interesting events are on the horizon: govt. sale of its 15%, generating a profit and offering of a dividend. Generally I want to hold a stock forever but if the market gets over excited about IRE, I will sell to those optimistic souls.

Good luck.

joe sod
Joe sod - 6 months ago
I also bought bank of Ireland for 11cent in 2012, however I sold it last august, way to early for 22cent. The big run up in the share price has only happened in the last 6 months. As recently as June it had sunk back down to 13cent. Its been all good news since then but the bank still has major problems. It will be interesting to see how long Wilbur Ross (Trades, Portfolio) et al stay on board, it was the reason I decided to invest in the first place. It took alot of guts by those guys to take that big stake in the bank. However it must not be forgotten that the original investors in bank of ireland were wiped out. If it was me I would be taking my money off the table now

AlbertaSunwapta
AlbertaSunwapta - 6 months ago

Just an observation. I was in Ireland last summer and there seemed to be growing hostility towards the austerity programs, the government and the banks. eg A psychiatrist saying bank heads are directly responsible for suicides, etc.

vgm
Vgm - 6 months ago

"I sold it last august, way too early for 22 cents"

"If it was me I would be taking my money off the table now"

joe sod -- I'm sure your advice is well-intentioned, but I hope you can see the irony in your statements. One of the most difficult things in investing I think is to stay with a big winner. It must come down to valuation and the prospects for the future, not the fact that significant gains have already been made. I see BKIR as modestly valued and the prospects for the banking sector in Ireland as positive. Furthermore, BKIR has an exceptional jockey in Richie Boucher, as Wilbur Ross (Trades, Portfolio) describes in the first link I provided above. It may not be an exaggeration to say that the biggest risk in financials at present may be getting out too early. Let's see how Bank of Ireland, Lloyds Bank and BAC look in 3-5 years' time.

AS -- all around the world, there are (still) those who are unhappy with what happened in the banking sector and who are ready to blame others for their misfortune. Anecdotes of the kind you mention are legion. You don't need to go to Ireland to hear them. The truth is that Ireland took its medicine quick, hard and early. As a result, its recovery has been dramatically ahead of the ClubMed countries in the Eurozone. The realism and resolve of the Irish, which in part stem from the history of the country, as well the solid commercial underpinnings of the Irish economy, were partly what attracted Prem Watsa (Trades, Portfolio) and Wilbur Ross (Trades, Portfolio) in the first place.

SeaBud
SeaBud premium member - 6 months ago

I believe I am largely battling my own psychology of "loss aversion". It is easy to say "book some gains" - but I am a logical creature and that is a conclusion with no analysis. In reality the questions are:

- Do I believe in this stock for the long term? In this case, as the largest bank in a significant country with a stable political system, sound fiscal policy, a good leader and improving operations, I think I do.

- Would I buy it today (ie, how is the valuation assuming I like the business)? This is where I struggle because the margin of safety I saw 2 years ago has eroded with price (put another way, the increase in the price is greater than the decrease in risk so my margin of safety has narrowed). I struggle with this when a solid long term holding gets ahead of itself - for example I sold JNJ when the P/E crossed 19 because I thought the margin of safety gone. In this case, however, I do not think the stock is over valued.

Thanks for the responses as it has helped me clarify my analysis.

vgm
Vgm - 6 months ago

"Finally, jobs news worth shouting from the rooftops"

http://www.independent.ie/business/irish/finally-jobs-news-worth-shouting-from-the-rooftops-30048566.html

More good news out of Ireland.

AlbertaSunwapta
AlbertaSunwapta - 6 months ago

VGM, in several papers there were very negative coments and even editorials on the bank actions and austerity programs. Having come from Alberta where we've seen a dramatic recession and housing collpase, bank failures and austerity programs I've lived through such reporting. While large banks in most locales are pretty much immune to criticsm and even modest consumer biased legislation, Ireland is slightly different due to its small economy, worsening net out migration, the world's highest penetration of credit unions and a number of other factors that can lessen the Bank of Ireland's moat. Just as the earlier reporting that anyone can buy a summer home in Spain or Portugul, such reporting acts as a canary in a coal mine. Most reporting and even opn the street protesting has zero impact on a country's major banks but one would want to at least keep an eye on the horizon.

Note in the excerpts below, that while Fairfax (which I own) likes the company, it is "rebalancing". In my view that means that either concentrated investing has its limits in Watsa's mind, or Watsa has found a more attractive use for the funds. Either way, it's taking profits due to price appreciation.

Wilbur Ross (Trades, Portfolio) and Fairfax to sell 6 pct of Bank of Ireland

Mar 4, 2014

excerpt:

"Bank of Ireland has been one of our most successful investments," Watsa told Reuters in an interview.

"Because of the significant appreciation, we are rebalancing our position. The position had become very significant (in terms of our overall portfolio)."

"We remain strong supporters of (chief executive) Richie Boucher and Bank of Ireland... Bank of Ireland will benefit from the ongoing recovery of Ireland and we have no intention to sell any more of our stake. We are long term investors."

http://www.reuters.com/article/2014/03/04/bankofireland-stake-idUSL6N0M128G20140304

vgm
Vgm - 6 months ago

AS -- Hmmm, not sure what, if anything, is new in what you wrote. As I've pointed out before, it's no secret that people and communities got hurt in the recession. And some are recovering faster than others. Sorry to hear that yours in Alberta struggled so badly.

But I think you're confusing Main St with Wall St - and assuming unsubstantiated parallels between Alberta and Ireland. Economies have struggled since 2008/9, but markets and stocks have done brilliantly. And again to repeat, Ireland took its medicine early and is the beneficiary of that. Watsa and Ross have talked repeatedly about this - and Prem mentions the "ongoing recovery of Ireland" in the quotation you gave! They both know Ireland far better than you or me.

My post above mentioned that they both sold a fraction of their BoI shares after huge appreciation. No surprise, in fact I've been expecting at least Wilbur to do it. It's his way. I'm sure they have lots of alternatives for capital allocation. Prem recently started to invest in Greece, and Wilbur in Spain. No shortage of bargains there, assuming you know what you're doing. And I'm sure you'll not fail to realize that both those southern European countries are far from out of recession - yet are investable even for the risk-averse Watsa.

The fact that they are retaining ca 70% of their stake in BoI, coupled with Prem's statement that "Bank of Ireland will benefit from the ongoing recovery of Ireland and we have no intention to sell any more of our stake. We are long term investors." represents a pretty darned positive outlook for the Bank. That coincides with my own view, and substantially boosts it. I was fortunate to get in at an even lower price than those two wonderful investors and have made 4x from a large base. It continues to represent good value to me, despite the appreciation.

vgm
Vgm - 6 months ago

Prem Watsa (Trades, Portfolio)'s commentary on Ireland and Bank of Ireland from the new 2013 Fairfax annual letter (p9/10):

"It is amazing to witness the transformation that has taken place in Ireland. In 2011, when we made our investment in the Bank of Ireland at 10 euro cents per share, 10-year Government of Ireland rates were 12%, housing prices had come down 40% and sentiment was bleak. Since then, 10-year Government of Ireland rates have dropped to 3.1%, house prices have bottomed out and have begun to rise, Ireland has access to the bond markets again and capital is flooding into Ireland! Under Richie Boucher’s strong leadership, the Bank of Ireland continues to do well as it recently refinanced its government-owned A1.8 billion preferred by doing a A580 million equity issue at 26 euro cents per share and selling the rest into the marketplace. Also, it did a A750 million unsecured five-year bond financing at 3.34%! The Irish Government has now had all its loans to the Bank of Ireland paid back and its 13.95% ownership of the common stock is in a sizeable profit position. We thank the Irish Government for its exceptional support of the Bank of Ireland and look forward to the Bank’s continued progress under Richie’s leadership.

As this letter went to print, because of the significant appreciation in our position in the Bank of Ireland, we rebalanced that position by selling a third of it at approximately 33 euro cents per share. The Bank of Ireland has been one of our most successful investments because of the outstanding performance of Richie and his management team. We continue to be strong supporters of Richie and the Bank of Ireland."

http://www.fairfax.ca/files/2013%20Shareholders%20Letter%20(final%20from%20Printers)_v001_m402d2.pdf

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