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    Top Finance Stock – The Bank of Ireland recovers on IMF/EU Bailout Package for Ireland

    The Governor and Company of The Bank of Ireland (NYSE: IRE) recovered 50% since November 26 low of $1.44, and trades in the range of $2.16 announcement that the IMF and European Union have put in place an €85 billion ($113 billion) bailout package for debt-laden Ireland aimed at stabilizing the Euro and helping Ireland cover heavy bank debts. The IMF and European Union have laid out tough demands for Irish banks, including recapitalizing and cutting them down to size to slash day-to-day funding costs.

    The company lost 76% over the last year due to challenging economic condition in Ireland that caused a default threat to the country’s banking system. The crisis started with the bursting of the country’s property bubble, quickly followed by a crisis for the banking sector, which had funded the boom with construction loans that had modest chance of being repaid.

    IRE is a relationship-driven retail and commercial bank with a conservative business philosophy, which occupies a unique position in Irish banking history. At the core of the modern-day group is the old Bank of Ireland, established by Royal Charter in 1783. The company’s businesses were adversely impacted by the slowdown in the pace of economic activity in Ireland, the downturn in residential and commercial property markets, the poor environment for sale of investment products and higher funding costs.

    The company is in the middle of turn-around program targeting to supplement its capital, improve financing and decrease costs, to strengthen the capital ratios to the required levels. However, the economic conditions remain difficult, slowing down the recovery track. The company’s underlying loss before tax for the six-month period ended June 30, 2010, of €1,246 million compares to an underlying loss before tax of €668 million for the six-month period ended June 30, 2009. This increased loss primarily reflects a reduction in total income (net of insurance claims) and the loss on disposal of assets to Ireland National Asset Management Agencypartly offset by lower impairment charges and operating expenses.

    IRE has recently reported that it has seen an outflow of customer deposits in its capital markets business, while retail deposits have remained stable. The company updated that its loan-to-deposit ratio has increased to 160% in September from 145% at the end of June and that term funding with a remaining maturity of more than one year has fallen to €22 billion ($30 billion) from €24 billion over the same period. Underlying operating profit for 2010 is expected to be 35% to 40% lower than the €1.5 billion reported in 2009.

    Following the bailout announcement, IRE said it will require an additional €2.2 billion in capital ($2.91 billion) by February 28 to reach new capital targets. The Irish government is likely to force IRE to reduce its loan-to-deposit ratios to 110%-120% by 2013 from around 160%; and to have a Tier 1 capital level of 12% from around 8.2% on June 30. Under the terms of the bailout, IRE is given time to raise the additional capital it needs from internal sources. However, if IRE raises the money wholly through the IMF and European Union’s support facility, the Irish government would effectively own the bank. The state’s ownership interest in the bank could rise near 80% from its current 36% position.

    While the bailout plan weathered away the default speculations, the company’s valuation is still dogged by further assets disposal and pending nationalization of IRE which could further dilute the existing shareholders stakes. However, the company’s management reiterated that it intends to generate the cash via “internal capital management initiatives, support from existing shareholders and other capital market sources,” trying to avoid increased state’s ownership.

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