Does Bank of Ireland's Narrowed Loss Put It Back on Track?

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Desperate measures have helped Bank of Ireland (NYSE: IRE  ) dodge that country's banking fiasco more effectively than its peers. It has been able to taper first-half losses on the back of declining bad loans, but let's take a closer look at its performance to know whether the Irish banking giant is a safe buy yet.

The quarter in detail
The bank reduced its pre-tax loss significantly, to $1.03 billion from $1.88 billion a year ago. This was primarily due to a 22% drop in impairment charges to cover underperforming loans. But an increase in wholesale funding costs weighed on its results. High funding costs resulted in its operating profit before provisions reducing to $232 million, and the bank posted a net loss of $720 million, compared to a net profit of $203 million last year. The rise in funding costs was triggered by debt chaos in the eurozone.

IRE's ordeal
Regulators are pressing Irish banks to cut their loan-to-deposit ratios to 122.5% by the end of 2013. IRE, whose ratio stands at 175%, plans to sell off more than $43 billion of assets to meet that goal. This is why, after selling off Northern Trust (Nasdaq: NTRS  ) and a few lending business units in the recent past, the bank is now selling its $1.4 billion U.S. commercial real estate loan portfolio to Wells Fargo (NYSE: WFC  ) .

The high cost of customer deposits and the difficult liquidity environment are going to be major bottlenecks to IRE's growth. And the bank still has to raise $7.5 billion to keep itself from being nationalized. All this makes me wary of this bank.

The Foolish bottom line
Ireland is creating a banking system with two big banks as its core pillars. Allied Irish Banks (NYSE: AIB  ) is being merged with EBS to form one pillar, and IRE alone will be the second pillar. The outcome of this strategy remains to be seen; I would definitely not rely on these banks to hold up my portfolio.

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Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article.

The Fool owns shares of and has created a ratio put spread position on Wells Fargo. 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 (5) | Recommend This Article (7)

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 August 25, 2011, at 2:31 PM, Mais78 wrote:

    Did you realise IRE trades at 140% premium to the four BKIR underlying shares?

  • Report this Comment On August 25, 2011, at 10:23 PM, aek3rd wrote:

    Please note that IRE did not "sell Northern Trust (NTRS)" It sold a unit to Northern Trust, as part of the effort by IRE to raise capital and stay afloat. NTRS has been independent for 120+ years and was just ranked as the 5th safest bank in the US.

  • Report this Comment On August 28, 2011, at 10:58 AM, 10HighSigns wrote:

    Apparently WL Ross, Fairfax Hldgs, Fidelity Inv, Capitol Grp, and Kennedy Wilson do not agree with your thinking. Together they bought a 35% stake in IRE which reduces gov't ownership drastically. They feel IRE will survive and return to profitability and a good investment. Obviously,

    either you are WRONG or these people with much more experience and money are fools.....

  • Report this Comment On August 30, 2011, at 9:35 PM, IntristicValue wrote:

    yes, the writer of this story is poorly informed... Ross did buy all of the government owned shares and Northern Trust did purchase a Securities division of the company..

    Also, 90% of the Jr bondholders accepted common shares at $0.20 on the dollar for their bonds and the other 10% are in negotiations...

    Last but not least.... If one studies charts, between the 7th year and 2nd year of every decade is a deleveraging period with the 3rd year to 7th year being boom time.... 1977-1982 was recession.... 1987-1992 was recession.... 1997-2002 was recession.... 2007-2012 will be recession...

    IRE had a high of $98 in 2006 with 240 million outstanding shares... Divide that by 8 to account for the 2 billion outstanding shares now and we are talking a share price of $11 per share by 2016 + inflationary prices should top IRE out at $14-$15 a share.... even at $12 a share

    That is a 10 bagger or 1000% gain if you buy shares today....

  • Report this Comment On September 01, 2011, at 6:37 AM, Buffettslave wrote:

    Does anyone know if the author's comment regarding Bank of Ireland's "need to raise $7.5B to avoid being nationalised" is accurate?? I thought that after the recent private investment they had pretty much escaped that risk? Thanks

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