It seems amazing that today’s gamble of the week is a major Irish bank with a market capitalisation of around €9.5bn. These are indeed extraordinary times, where financial institutions can be brought to their knees in the blink of an eye. Even so, there is a point when, on a fundamental basis, stocks just look too oversold, even if the risks are still high. Take this stock:
Bank of Ireland (BKIR)
It seems amazing that today’s gamble of the week is a major Irish bank with a market capitalisation of around €9.5bn. These are indeed extraordinary times, where financial institutions can be brought to their knees in the blink of an eye. Even so, there is a point when, on a fundamental basis, stocks just look too oversold, even if the risks are still high. Take this stock:
Due to the credit crunch and worries over its exposure to the cooling Irish property market, it has seen its share price fall by more than 40% from a February high of €18.60. So is the City right to assume Bank of Ireland’s profits are about to disintegrate?
Judging by its H1’07 figures and H2’07 guidance, I suspect not. Underlying earnings per share of 80 cents grew 10% year-on-year; the cost/income ratio improved 2% to 51%; and the net interest margin remained flat at 1.77%.
Importantly, asset quality was described as “excellent”, with bad debt provisions still comprising only 0.82% (from 0.74% in 2006) of the loanbook. Additionally, its Total and Tier 1 Capital ratios remained “strong” at 11.1% and 7.6% respectively. As a rule of thumb, anything above 10% and 6% is thought adequate.
Chief executive Brian Goggin said that Bank of Ireland’s exposure to toxic debt, such as US subprime, structured investment vehicles and collateralised debt obligations, was “insignificant” at e145m (or 0.08% of total assets). Earnings growth is predicted to slow in H2’07, with the City expecting underlying earnings per share of €1.59 and €1.68 respectively for this year and next. That puts the shares on a p/e multiple of 5.6, and paying a 5.9% dividend yield.
One concern is that 46% of its balance sheet is funded from the wholesale markets. However, much of this debt has a maturity profile of more than one year, leaving the loanbook only 20% reliant on more volatile short-term Libor rates. Assuming the credit crunch subsides over the next 12 months, then net interest margins should remain healthy.
Finally, as Warren Buffett famously points out, “Be fearful when others are greedy, and greedy only when others are fearful.” Three directors, including the chief executive, seem to agree, recently piling in at prices ranging from €9.7 to €10.0. Clearly, sentiment will remain weak over the coming months, which makes Bank of Ireland one to tuck away for the long term.
Recommendation: LONG-TERM BUY at €10.75
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments