Shane Ross: Want to invest in 'pillar' banks? Trust me, wait
Published 02/03/2014 | 02:30
SO you missed the property bounce? No bottle. You are beginning to think the unthinkable. You were burnt in the last bank shares bubble back in 2008, but this time is different.
Persuade yourself. Bank shares are a fraction of their former price. AIB at 14c and even Bank of Ireland at 35c look a 'steal' – a one-way bet. The Government cannot afford to let either of its 'pillar' banks sink into oblivion. Nor will the ECB. They are underwritten, heading for profits in a recovering economy. Fill your boots ...
A word of caution. Wait, at least until tomorrow morning when Bank of Ireland releases its 2013 results.
The headline numbers will not be a top priority. Bank of Ireland will register a loss until it returns to modest profit in the first half of 2014. But one item could resolve a bloody battle being fought on the Irish banking landscape: the winner could emerge in the duel between Bank of Ireland and its regulator, the Central Bank, .
Last December, the regulator warned Bank of Ireland (BoI) that it was underprovisioning for bad and doubtful debts. After carrying out its own balance sheet assessment, the Central Bank told the bank that it was not recognising the full amount of losses for mortgage arrears and must provide an extra €1.1bn for bad loans.
Smoke was reported to have poured out of every orifice in BoI boss Richie Boucher's body when he got the message. The bank was forced to release the figure, but is still hotly disputing the regulator's methodology. The two sides have been at loggerheads, behind closed doors, in the intervening months.
Tomorrow morning, when BoI releases its results, we should know who has won the war.
The contrasting styles of the gentle governor Patrick Honohan and the bruiser Boucher locked in mortal combat makes the outcome intriguing.
But we should discover from the announcement whether one of the worst diseases in the banking sector – known as 'regulatory forbearance' – is still the norm or if BoI has bowed the knee to the regulator.
The banks have been cheeking the Central Bank ever since the crisis broke. Their balance sheets have been fantasy figures. The regulator has been happy to postpone the crunch, colluding in the fiction.
That little local scenario is all due to end this year when Europe takes the reins. In the autumn Europe-wide stress tests will take place in all major banks. Ireland's regulator is eyeing the prospect with trepidation. So it has been preparing our banks for the apocalypse with its own kindergarten balance-sheet assessments.
BoI fell at the first hurdle. It is believed that AIB and Permanent TSB suffered a similar fate, but AIB and Permanent TSB were spared the indignity of being publicly exposed. (BoI was unlucky – a fundraising circular it was issuing at the time required the relevant public disclosure.)
All the banks have put a gloss on the unfavourable balance sheet assessments, boasting that the local tests did not require them to recapitalise their balance sheets. Cold comfort. The tests from the European mainland are expected to be far more stringent.
Indeed, they are flagged as destined to be much tougher than their predecessor in 2011 – now generally regarded as so soft that they allowed several banks that later collapsed through the net.
This time the credibility of the entire European banking system is at stake.
It will be a sobering experience for 'pillar' bankers who are accustomed to giving their regulator the run-around and a good lunch.
But where does that leave shareholders in BoI and AIB? Should we buy into the bullish story being peddled by Goodbody and other local stockbrokers? As a holder, I am thinking of selling my shares at 35c tomorrow morning, depending on the figure released for extra provisioning.
Last week, Bloomberg News carried out a survey of six analysts' predictions. The average forecast was that BoI would steer a middle course, providing a token amount, an extra €470m 'to appease the regulator', making a mid-term loan impairment loss of €1.8m. Anything less than this will augur badly for Irish banks, signalling that the Central Bank's writ still runs little further than its Dame Street headquarters.
'Appeasing the regulator' is a progressive disease. It makes a return to health harder in the long run. Tales of overseas bank crises, like in Sweden, show that the best course of action BoI and AIB could take is to recognise the full amount demanded by the Central Bank up-front.
That course may be painful in the short term, but will herald the fastest possible recovery.
The alternative could be the perpetuation of our zombie 'pillar' banks. Today we are cursed with two prime candidates for the zombie tag; neither AIB nor BoI are making the necessary contribution to the economy's recovery.
The Irish economy is growing despite their failure to lend properly to businesses and fuel consumer demand. Europe itself is growing painfully slowly, partly because it is peppered with zombie banks, making the ECB's job of sorting them out this year a steep challenge.
Suddenly, BoI and AIB shares do not look so enticing. Nervous investors were telling me last week that they attributed the spike in BoI shares to waves of foreign buyers, pouring into Irish bank shares as one of the few ways of investing in the Irish comeback story.
There are few 'Irish plays' in the market. The pillar banks provide an obvious vehicle.
Yet they seem to be buying at silly prices. Thirty-five cents sounds low but the various restructurings have left more BoI shares than there are grains of sand in the Sahara. The stock is selling on a huge premium-to-net asset value (NAV), with the NAV at 20c and the share price hovering close to a lofty 35c. Barclays Bank makes an awkward global comparison with them, selling at a discount. Both AIB and BoI stand on a negative price earnings ratio.
Despite the bulls' whispers that the two banks can increase margins because they are now happily an anti-consumer duopoly; despite their unspoken respect for the BoI management team; despite the improving economy, the regulatory dynamics suggest that shares in BoI might stabilise soon.
The problem is that if the Central Bank does not win this battle, the shares might stabilise, zombified, at in or around 25c and remain there for years.
A lot rides on the figures to be released tomorrow.
If BoI displays its characteristic hubris, fails to toe the regulator's line and gives it the two fingers, then we will know that the game is at a very dangerous stage.
Despite Finance Minister Michael Noonan's insistence – a mere two weeks ago – that he still does not envisage recapitalisation, the danger of a search for more capital is a tangible threat. That has fearsome consequences for the banks and for the Irish economy itself.
For those contemplating putting a toe in the water, it could mean a spate of rights issues.
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