Why You Should Stay Away From Allied Irish Bank

When the results of the European banks' stress test came out, Allied Irish Bank's (OTC: AIBYY) shares popped 28% in intraday trading on the news of Irish banks passing the test. But the excitement could be short-lived since the Irish bank nightmare is far from over. But a stock's short-term movement looks pretty meaningless when it is on the verge of losing its independence.

Huge capital holes
The results showed that the four Irish banks -- Allied Irish, Bank of Ireland (NYSE: IRE  ) , EBS, and Irish Life & Permanent -- needed to raise around $34 billion to keep their Tier 1 capital ratio above the required 6%. Allied Irish, which is required to raise $18.8 billion, has the highest share. It was also required to slash its loan books by $27.4 billion to reduce its aggregate loan-to-deposit ratio.

The table below should give you an idea of the dismal way in which the market is valuing Allied Irish and its European peers:

Company

P/E
(TTM)

P/B

ROA

Tier 1 Capital Ratio

Allied Irish Bank N/M 0.15 (5.19%) 9.7%
Bank of Ireland N/M 0.16 (0.35%) 9.7%
National Bank of Greece (NYSE: NBG  ) 5.64 0.43 0.49% 12.9%
Lloyds (NYSE: LYG  ) N/M 0.59 (0.55%) 11.4%
Source: Capital IQ, a division of Standard & Poor's.

These European banks are struggling to keep themselves from collapsing. To make matters worse, a return to profitability doesn't seem to be on the horizon.

Allied Irish hasn't reported profits for the last 10 quarters. And it's difficult to see that changing anytime soon. Its price-to-book ratio reflects not just a cheap stock, but a company the market thinks is deeply troubled. The bank's Tier 1 capital ratio recently stood at 4.3%, though the company has managed to upgrade it by raising new capital in recent months.

The Foolish bottom line
Ireland is creating a banking system with two big banks as its core pillars. While Bank of Ireland will be the first pillar bank, Allied Irish will be merged with EBS to form the second. Besides having outright ugly fundamentals, AIB could lose its entity as a private bank. I would like to reiterate my stance that from an investment point of view, the bank looks miserable, if not perilous. Foolish investors should stay away from such stocks.

Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. The Motley Fool owns shares of National Bank of Greece. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 01, 2011, at 1:00 PM, Teacherman1 wrote:

    Zeeshan

    An interesting post, but seems to me it is a "day late and a dollar short", as the old saying goes.

    Since AIB is now a PK, who would even think about buying it, other than to possibly gain points in CAPS, or as a very, very, very, long term, very, highly speculative play.

    I don't agree that IRE, NBG, and certainly not LYG, are in the same category as AIB.

    IRE and NBG are at this time long term plays, but I think it is highly unlikely that they will go "belly up", and at these prices are affordable "risks".

    They are both on my watch list with a start price well below where they are now, but if they get anywhere near those prices, I will most certainly be a "buyer" in real life.

    As for LYG, it will take 2 or three years to get back to where it was before the HBOS fiasco, but they are no where near being in the same category as the others.

    JMO and worth exactly what I am charging for it.

  • Report this Comment On September 06, 2011, at 2:33 PM, oilresearchguru wrote:

    NBG and IRE are "national banks" and will not be allowed to fail. NBG used to issue its own Greek treasury bonds way back in the 1920's.

    The EU will undergo restructuring, both politically and financially. They are a resolutely stubborn lot and don't like a yank like me telling them about their faults, but someone honest has to!

    Yes, I proudly admit, I own IRE and will buy NBG shares as well. They are long term buys for me. If the Canadian Insurance billionaires can trust them, so can I. Maybe another investor will buy NBG.

  • Report this Comment On September 28, 2011, at 3:32 PM, FridayFriday wrote:

    Funny how all the links to the previous stories hyping AIB as a 'great buy' have been omitted from this article.

    Remember the 'Foolish Four'? Neither does Motley Fool. Worthless.

  • Report this Comment On October 14, 2011, at 5:43 PM, Stocks4cocks wrote:

    One day i bought this stock and the next day i was having to eat homeless peoples poop.

  • Report this Comment On October 21, 2011, at 7:53 PM, mountainsl wrote:

    These fools are the reason I ended with this crap. They recommended buying @ $10.00 per share and I was foolish enough to fall for it.

  • Report this Comment On October 22, 2011, at 8:53 PM, lts2lrn wrote:

    I, too, bought AIB in the years of MDP's hype and advice to make it 4% of my portfolio. I happen ended to miss the sell signal because of other personal catastrophes.

    I am very skeptical of other 'really hot stocks'from the Fools.

  • Report this Comment On December 30, 2011, at 12:08 PM, mountainsl wrote:

    These same fools recommended buying this crap at $40 They don't know sh*t about investing.

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