Bank of Ireland: Is Now the Time to Buy?

Photo: AlmazUK

Shares of Bank of Ireland (NYSE: IRE) were pounded during the financial crisis as the Irish mortgage market collapsed revealing just how overexposed the Irish financial giant was. But more recently, Bank of Ireland shares have been rallying on the back of positive news. Is now the time to buy?

Government shares
In addition to its ownership of Bank of Ireland common stock, the Irish government also received 1.8 billion euros in B of I preferred shares as part of the bailout of the Irish lender.

The preferred shares come with two disadvantages for the bank. First, it keeps B of I known as a partially state-owned lender, which hurts its image, and projects an image of greater investment risk. Second, the bank only has another few months before the preferred shares can increase in value by 25% per the terms of the preferred shares.

Bond issue
With Bank of Ireland's financial health on the rebound, repurchasing the government-owned preferred shares is near the top of the agenda. To raise the money, the bank launched a fairly standard refinancing plan to issue bonds to buy back the preferred shares.

Normally, it would be enough positive news just to refinance the preferred shares, but B of I did investors one better. The bond issue turned out to be heavily oversubscribed, signaling the market's appetite for the bank's debt.

Just a couple years ago, B of I relied on the government to plug capital holes. This bond issue marks another step in the bank's turnaround, as it demonstrates the ability to raise capital from the private markets again at reasonable rates.

Best Irish bank
Investors are even more bullish on Irish stocks following the sale of Irish sovereign debt, which received high demand with a yield of only 3.5%. Ireland appears to be on the path to recovery, and I'm bullish on Bank of Ireland; however, I'm bearish on Allied Irish Banks (AIBYY).

Allied Irish has rallied alongside Bank of Ireland following positive developments in the Irish economy. However, the market has not been taking into account the more than half trillion Allied Irish shares currently outstanding. While B of I did experience severe stock dilution, Allied Irish fared far worse, which resulted in this exceptionally high share count. Taking the current Allied Irish share count multiplied by the trading price, the market is valuing Allied Irish at around 76 billion euros.

For comparison purposes, the current market cap of Allied Irish is greater than that of Barclays Plc (BCS 1.11%). And unlike Allied Irish, Barclays pays a reasonable dividend, is solidly profitable, and is not controlled by the government. Not only is the market valuing Allied Irish higher than healthier Barclays, but Allied Irish is also being valued at around eight times Bank of Ireland's market cap. With B of I being more profitable and returning to the private markets, I'm positive on Bank of Ireland's prospects, while strongly negative on those of Allied Irish.

Further upside
Bank of Ireland was a top performer in 2013, and has registered further gains for the beginning of 2014. But I still see long-term upside here. While pre-recession share prices should not be expected for decades, at least, due to recapitalization related dilution, B of I trades at only around half its pre-recession market cap. On this basis, I could see B of I shares doubling from here in the long term as the Irish mortgage market regains strength.