Memories of the bank bailouts remain fixed in the minds of investors. Who could forget the spectacular failure of Wall Street that necessitated bailouts to the tune of billions of dollars?
But while the U.S. mortgage collapse was severe, the popping of the Irish real estate bubble threatened the entire nation's solvency. After a European Union bailout, and with many of Ireland's top financial institutions nationalized or effectively nationalized, investors may wonder why anyone would venture back into this economy.
But through the reorganization of the nation's banking system, one institution looks poised to have a strong recovery when the Irish markets rebound.
Prior to the financial crisis, banking was big in Ireland. The real estate market was hot, and the mortgage market was hotter. As long as home prices continued rising, Ireland's top banks could continue raking in the money.
But we've heard this story before. The collapse of the Irish banking system brought major institutions to their knees. Anglo Irish Bank, once a top financial institution, was nationalized with a plan to wind it down. Meanwhile, the government took stakes in excess of 99% in both Allied Irish Banks and Irish Life and Permanent.
However, Bank of Ireland (OTC:IREBY) survived with only 15% state ownership. Granted, there was still massive share dilution, and billions in new funds were required from both the government and outside private investors. Nonetheless, Bank of Ireland remains a largely privately run enterprise.
Pillar bank strategy
Limited competition tends to be good for business, and Bank of Ireland looks ready to capitalize on this new reality. The Irish government's strategy of reorganizing the banking system centers around maintaining two pillar institutions -- Bank of Ireland and Allied Irish Banks.
At this point, Bank of Ireland is the only privately controlled member of the pillar banks -- a grouping established with the purpose of dominating the Irish banking system. If the strategy succeeds, Bank of Ireland will be in a very advantageous position in the Irish banking market.
While the U.S. government did not have the same level of involvement in the banking system the Irish government has been forced to take, examples of potential future market dominance are already being seen among American banks.
Bank of America (NYSE:BAC) is not known for playing the acquisitions game well during the financial crisis -- its takeover of Countrywide Financial still haunts B of A in the form of billions of dollars in mortgage-related lawsuits. Still, the acquisition of Merrill Lynch allows B of A to further integrate traditional banking with investments.
In contrast to B of A's unwise decision to take over Countrywide, Wells Fargo (NYSE:WFC) appears to have made a smart deal in buying Wachovia near the bottom of the crisis. Wells Fargo was able to gain a far larger branch network with minimal overlap while not taking on the unrelenting onslaught of lawsuits Countrywide has been manufacturing. These branches have given Wells Fargo exposure to more potential customers as it fights for the title of world's largest bank by market capitalization.
While Bank of Ireland shares are still nowhere near their precollapse highs (and may not be in our lifetimes thanks to massive share dilution), its market position in the new pillar bank system appears to be a major advantage in a recovery. Like Bank of America and Wells Fargo, Bank of Ireland now has a greater presence in the market than it did before the crisis. Investors interested in European banking investments should consider the opportunities presented by this new banking system setup.