Top Finance Stock – The Bank of Ireland recovers on IMF/EU Bailout Package for Ireland
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    Banking Stock – Moment of Truth for the Bank of Ireland: To recapitalize or not?

    Shares  of The Governor and Company of The Bank of Ireland (NYSE: IRE) are suspended from trading today on the Irish stock exchange pending the publication of crunch stress tests and subsequent announcements concerning the potential recapitalization of the bank. The newly established government of Ireland is expected to unveil a plan of dealing with its banking crisis and convince investors that it can avoid a damaging near-term restructuring. The suspension is aiming to avoid speculations on tentative information during the day.

    A bailout from the European Union (EU) and the International Monetary Fund (IMF) late last year failed to resolve the financial crisis in the Irish banking sector. Last November, the IMF and EU have put in place another bailout package worth EUR 85 billion ($120 billion) for debt-laden Ireland aimed at stabilizing the Euro and helping Ireland cover heavy bank debts. The move helped IRE’s shares to more than double last December. However, the bank lost 33% during 2011 amid a sluggish state of economy, ratings downgrade, high costs of funding, intense competition for deposits and increasing loan-to-deposit ratio.

    Moreover, the bank lost 80% over the last year as the anemic economic conditions in Ireland crushed 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 funded the boom with construction loans that currently had modest chances of being repaid. With a 52-week range of $1.38-$10.57, the March 30 trade at $1.75 was in the lower end of that range.

    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 turnaround 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 lost EUR 1.3 billion ($1.84 billion) for the six-month period ended June 30, 2010, compared to EUR 0.7 billion ($.99 billion) in the similar period of 2009. Underlying operating profit for 2010 is expected to be 35% to 40% lower than EUR 1.5 billion ($2.13 billion) reported in 2009.

    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 EUR 22 billion ($30 billion) from EUR 24 billion ($34 billion) over the same period.

    The Irish government would likely 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. IRE would require significant capital to meet the government requirements, which following the recent tests could become stricter. The bank was given time to raise the additional capital it needs from internal sources, however it is unlikely that the bank would make its way out of crisis without governmental support. 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.

    At the bottom-line of the crisis are the huge problems inside the mortgage sector, where the defaulting rate on residential mortgages is believed to be greater than expected. The results of stress test would hopefully clear the bank’s real financial position and suggest a reorganization path. However, market is currently expecting the Irish banking sector to be shrunk dramatically with biggest players being nationalized. Analysts surveyed by Thompson Reuters expect banks to require EUR 23 billion ($32 billion) in additional capital after the tests.

    While the bailout plan weathered away the default speculations, the valuation of IRE is still dogged by an uncertain economy of Ireland and pending nationalization which could further dilute the existing shareholders stakes.

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