Is Bank of Ireland Returning to its Pre-Crisis Prosperity?


Source: Wikimedia / Miguel Mendez.

I first bought shares of Bank of Ireland (NASDAQOTH: IREBY  ) in March of 2012 at a price of $6.98 with a plan to profit from the eventual recovery of the Irish economy after the financial crisis of 2008. But I recently sold two-thirds of my stake in the stock for a nice gain, even though the share price is still more than 95% lower than it was at the company's peak market cap prior to the collapse. Why don't I see a return to pre-crisis levels for Bank of Ireland stock? Frankly put, comparing a current share of the company's stock to a pre-crisis share is like comparing night to day.

Don't get trapped
When tough times hit the economy, banks' share prices get hammered. Bank of Ireland is not the first bank stock that I have bought after witnessing a collapse in share price. In early 2009, I rode the recovery in Bank of America from around $10 per share to my selling point at around $17.50, a nice 75% gain in a matter of months. These fire sales make for great investing opportunities if you avoid two traps:

1. You must pick a bank that will survive the recession. Banks battered by a downturn in the economy will recover and grow stronger eventually. But the ones that go under tend to stay under, at least when it comes to their shareholders.

2. As a shareholder, when a bank decides that it is willing to do whatever it takes to survive, you might want to avoid some of the options that are brought to the table.

Let's look at a long-term chart of Bank of Ireland:

Yikes. That looks like something out of a horror movie. If I knew nothing about the story behind the Bank of Ireland, and all I had to go by was this chart and the recent statement by Fitch proclaiming their expectation that IRE will return to profitability in 2014, I would think that, at $16.50, Bank of Ireland is a heck of a bargain! 

Buyer beware
So why did I sell two-thirds of my Bank of Ireland shares on February 14 at $18.75? I'll give you a hint: it wasn't because I needed cash for my wife's Valentine's Day gift. According to this chart, B of I was trading at $900 a share seven years ago. The same bank, the same country, the same stock market, right? But is Bank of Ireland the same stock it was back then? The answer to that question is absolutely not. 

The biggest difference between 2007 Bank of Ireland and the 2014 version is share count. Back in 2007, IRE (the ADR for Bank of Ireland that trades on the NYSE) had a share count of less than 250 million. Now it has a share count of 753 million! But the story gets much worse. In October of 2011, Bank of Ireland effected a 10:1 reverse stock split on IRE, meaning that the company's share count was divided by 10. Yet there are now still more than three times the number of shares as there was in 2007!

Even if Bank of Ireland were exactly the same bank as it was in 2007, a single share of IRE now represents about 96.7% less ownership of the company than it did in 2007. And that's if the bank were exactly the same bank as it was. It is not. As of the last annual report, Bank of Ireland generated a yearly revenue of around $8 billion compared to the $21 billion in revenue it brought in in 2008.

Source: Flickr / Kevin Dooley.

What should we realistically expect from the new Bank of Ireland?
So while Bank of Ireland at $16.50 may appear to be the bargain of the century, the numbers tell a different story. If you have dreams of the company reaching $900 per share, sorry, it ain't gonna happen. First of all, IRE never traded near $900 prior to the downturn. The chart above has been adjusted to account for the reverse-split by multiplying all share prices prior to the reverse-split by 10. But if you thought $90 per share was a fair price for Bank of Ireland back in 2007, what would a fair price be now? By dividing by 3 to compensate for the share dilution, we get  $30. Then, by dividing by 2.6 to correct for the drop in revenue, we get $11.54 per share. Hmmm... suddenly B of I isn't looking so cheap anymore.

This math is an oversimplification of an extremely complicated company, but it does paint a rough picture of what has happened to Bank of Ireland's stock in the past seven years. As the Irish economy continues to recover from the recession in the coming years, hopefully shareholders will continue to profit from the company's slow return to prosperity. Just don't expect a return to pre-crisis levels for IRE share price.

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Read/Post Comments (10) | Recommend This Article (9)

Comments from our Foolish Readers

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  • Report this Comment On May 18, 2014, at 12:11 PM, OldE5 wrote:

    I'm a little confused by your calculations. If there was a 10:1 reverse stock split on IRE, wouldn't you divide by 10 only, to compensate for share dilution?

    But you divide by 3 to compensate for share dilution once more. Can you elaborate on that please? I'm missing something here.

  • Report this Comment On May 18, 2014, at 7:28 PM, charlyryan wrote:

    Hi Wayne, two things I wondered if you could answer. Firstly, any reason why you offloaded 2/3 rather than the whole thing? If you sold at $17.50 and feel the value of the stock is around $11.54 curious as to why you held onto 1/3 of your stock (unless of course you feel there is future upside which goes against your whole article).

    Secondly, you bought in at $6.98 in March 2012. Based on your simplified logic, wouldn't that have been hugely overvalued back then as well? Revenue for IRE was 2bn EUR (Less than 3bn USD) in 2011. if we take the true value of the stock as $11.54 as you hint at based on 8bn USD 2013 revenue, then the sp in March 2012 should have been $11.54 * 3bn/8bn = $4.32.

  • Report this Comment On May 20, 2014, at 8:30 AM, Elbow5 wrote:

    This is Bank of Ireland's stock price before they have turned a profit, after five years of recovery. Templeton said stocks go up with "triggers." I see numerous "triggers" ahead for the Bank of Ireland that should send it's stock price up. Such as a return to dividends at the end of 2015. (Prohibited now.) They had an underlying profit of a billion euros (plus) during the last earnings season. I look for a bounce in stock price when they return to outright, and sustained growth and profit. Look for articles in the Irish Times, the Independent ie, and at Financial Times to get the most up to date news, and also at the Bank of Ireland Investor Relations web pages. For example, on April 30th, they just issued 750 million euros in unsecured senior bonds (oversubscribed) which indicated a huge vote of confidence by savvy bond investors. I look for ever increasing profits, acquisitions and growth in book value with those profits, and the renewal, and then subsequent increase in dividends as stock price increase triggers, for years to come. (and possibly even stock by-backs with the increase in profits) Also, they are now one of two major banks in a market that used to have four, so their market share should be much larger than before the crisis in 2007/2008. And I don't look for them to return to their pre-crisis prise of 18+ euros per ordinary share (roughly $25 US) to make a "killing.) Just a return to their pre-recovery price they shot up to in 2009 (see Google Finance for a chart of stock price) which was roughly 3.4 euros, which is roughly $4.65 dollars US. Even half that at 1.7 euros, would be huge ($2.32 US per ordinary share). Remember each IRE ADR represents 40 ordinary shares. $2.32 times 40 equals $92.8. BOI only needs to return to 1.7 euros for the ADR price to exceed $92 in US markets! And the ADR price tends to run 5% to 10% higher than the price over in London or Europe. ... And at 3.4 euros a share, the pre recovery price in 2009, the US price for IRE ADR's would be double that at $184 ... Anyway, 1.7 euros is less than 10% of their ordinary stock price in 2007. I don't think that is an unreasonable expectation ...

  • Report this Comment On May 20, 2014, at 8:31 AM, Elbow5 wrote:

    Oh yeah, I own 475,000 shares of BKIR (Bank of Ireland) (11,895 IRE ADR's) and plan to hold 'em for the long haul, Lord Willing. :)

  • Report this Comment On May 20, 2014, at 1:04 PM, yurrnutz wrote:

    I think the Duggan needs to revisit grade school and pay attention to his teacher this time around....calculations don't reflect the facts and therefore, the conclusion is not only erroneous but I suspect, intentionally misleading

  • Report this Comment On May 20, 2014, at 8:17 PM, jeepdrew2 wrote:

    Horrible article and very misleading. The Bank of Ireland will rebound strongly due to the low corporate tax rate and all the US companies setting up shop. Companies create good pay jobs and those people will buy houses, cars etc. Out of all the recovering banks, this one has the best upside. Very little competition in Ireland and I'm guessing they will go strongly in other markets soon. The sky is the limit. Its pretty logical.

  • Report this Comment On June 10, 2014, at 5:29 AM, caninvest wrote:

    Mr. Duggan, I think you need you need to base your calculations or presentation partially on market capitalization. Currently, one ADR of the Bank of Ireland does not represent one share, but forty. Meanwhile, if you accept the premise that the Bank of Ireland will survive, it is probably not too hard to conceive how some investors, particularly those interested in special situations and distressed valuations, might think the bank a worthwhile investment for the long term, as you yourself discovered. (Unfortunately, anxiety about corporate survival often creates unusual investment opportunities.)

  • Report this Comment On June 10, 2014, at 12:20 PM, Elbow5 wrote:

    Michael Noonan, Minister for Finance for the Country of Ireland, characterized the Bank of Ireland as one of the "two Pillars of the new central banking system." I don't think they are going any where. Since the financial crisis, The European Union has set up a new central banking system, and the Bank of Ireland plays a key role in it apparently. The other "Pillar" of the new central banking system in Ireland, is Allied Irish Banks, which is currently traded on the pink sheets, and is 99.9% owned by the Irish Government, as I understand it.

  • Report this Comment On October 28, 2014, at 1:05 AM, ntg187 wrote:

    This entire article is rubbish.

    Let me help the author:

    But if you thought $900 per share was a fair price for Bank of Ireland back in 2007, what would a fair price be now? By dividing by 3 to compensate for the share dilution, we get $300. Then, by dividing by 2.6 to correct for the drop in revenue, we get $115.40 per share. Hmmm... suddenly B of I isn't looking so cheap anymore.

    Actually it does look pretty damn cheap when you learn how to do math. Idiot.

  • Report this Comment On December 24, 2014, at 7:54 AM, Elbow5 wrote:

    My Take on Bank of Ireland:

    Currently, Bank of Ireland has 32.34 billion ordinary shares outstanding. IN the United States one ADR represents 40 ordinary shares. In the first half of 2014, Bank of Ireland posted a profit of 399 million euros. If they duplicate in the second half, that would be 798 million euros profit. This is their first year back to profitability since the crisis. They were profiting by 7 to 8 billion euros per year in 2007/2008.

    If they pay out 80% of their earnings in dividend, which is what good dividend paying companies do (and they are) that would be a dividend of .02467 euros per ordinary share, times 40 per ADR and that is .9868 euros per ADR or $1.23 dividend per ADR U.S. The Irish economy is predicted to grow at an astounding 3.7% in 2015. Currently 30 year U.S. Treasury bonds are yielding about 3.9%.

    A dividend return of about 3.7% would be very good in today's market. $1.23 is 3.7% of what number? $33.24 U.S. dollars. That is my price prediction for Bank of Ireland's ADR come March thru June 2015, in that range. Bank of Ireland is now the biggest non government owned bank in Ireland. Gone is Anglo Irish. They had to sell off some assets to appease ECB requirements, but end up with less competition and a bigger market share. Returning to profits of 8 billion euros per year are not unlikely. If they pay $1.23 dividend per ADR on a profit of 798 million euros, what would they pay on a profit of 8 billion? The multiplier in this case is 10.03. (8 billion divided by 798 million). 10.03 times $1.23 = a dividend of $12.34 per ADR. (Of course they would probably split by then.) Using a dividend to price ratio of 3.7% and you come up with a price of $333.51 per US ADR. How long it takes for Bank of Ireland to return to profit levels like they had in 2007 or 2008? Who knows. But I don't think it is unlikely. Currently they have about 10 billion euros in impairment charges that exceed the normal, non crisis ratio. And as their economy normalizes (and it is rapidly, with housing sales up 16%, and measures being taken to cool it down so another bubble doesn't develop), those impairments will continue to diminish and normalize. (They are/were at 20%, normal would be about 8%.) And impairments have been reported to have already dropped by 1.8 billion euros since their mid year interims.)

    Using an earnings per share analysis (P/E), they are already poised to earn .0301 U.S. cents per ordinary share in 2014 (to be announced in March, 2015) (Assuming a duplication in the second half of 2014 of what they did in the first half, 798 million euros profit for the year.) That is an earnings per U.S. ADR (representing 40 ordinary shares) of $1.204. Times the customary 20 that an ADR runs times its earnings and you get a price of $24.08 per ADR (plus an additional 10% that the US market runs above the price in London = $26.49 per ADR by March to June, 2015. At 8 billion euros profit, using the same multiplier of 10.03 as above, and you get a U.S. price for the BOI ADR of $265.70 per ADR, using a P/E analysis.

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