Third Avenue Value Fund Comments on Bank of Ireland

Bank of Ireland – Bank of Ireland (LSE:BIRG) is one of Ireland’s two largest lenders and, from a banking perspective, is relatively traditional in its scope of activities. The bank primarily collects deposits and extends retail loans, commercial loans and provides treasury functions in Ireland and the U.K. The company also has a small wealth and insurance products sales business. In many regards Bank of Ireland’s fortunes have mirrored that of its home country. The bank was a participant in the heady days of rapid growth during the early 2000s and was not well-prepared for the related events of the Global Financial Crisis followed by the European Sovereign Crisis, similar to Ireland itself. Those statements are largely true for the entire Irish banking sector and many banks in Europe for that matter. What is more specific to the Irish experience and the Irish banking sector was an early acceptance of the dire state of affairs and a willingness to endure the pain required to facilitate a proper healing. Today, a mere seven years later, Ireland is one of the better capitalized European sovereigns and home to one of Europe’s healthiest and most dynamic economies. Meanwhile, Bank of Ireland also underwent a recapitalization following the European Sovereign Crisis followed by a considerable amount of shedding of legacy non-performing asset portfolios. The bank quickly returned to respectable levels of profitability and the combination of the asset quality improvement, recurring profits and a growing domestic loan market have enabled strong and increasing capital base. Today, Bank of Ireland is among Europe’s better capitalized banks. More broadly, the post-crisis cleansing of the Irish banking sector has seen several exits and left the industry substantially more concentrated than it used to be, which typically facilitates better pricing and structurally higher profit levels. Meanwhile, the Irish economy and the Irish lending that supports it have regained their dynamism and the Irish banking sector is once again growing.

However, while Bank of Ireland has rightly been focused on fortifying its balance sheet in the post-crisis years, little has been done by way of investing in operating efficiencies that are likely to improve cost-to-income and profitability ratios even further. Those initiatives are now underway in earnest. Yet, in spite of all of that improvement, like BMW, Bank of Ireland has seen a substantial “de-rating” over the last couple of years. Today, the shares are trading at 60% of tangible book value and approximately 7.5x 2019 earnings with earnings on an upward trajectory. Again, like BMW and other Fund holdings, from an earnings yield perspective, the shares currently offer a substantial premium to long-term equity market returns. With the current valuation of 60% of tangible book value with a balance sheet that is in terrific condition and a growing income statement, the probabilities of a positive outcome for shareholders appear far greater, in our view, than of a negative one. This is precisely the type of asymmetry we are attempting to establish. What it special about this moment in time is that the attractive asymmetry is available in very healthy, well-capitalized companies with enduring business models.


From Third Avenue Value Fund (Trades, Portfolio)'s second-quarter 2019 portfolio manager commentary.