Bank of Ireland shareholders have little option but to 'follow the money'
The support of top international investors is just the beginning for Richie Boucher's attempted recovery
Richie Boucher couldn't have gotten his timing worse -- or better. After months of planning for the moment when he could push the button on corporate Ireland's biggest cash call, Iceland's erupting Eyjafjallajokull volcano forced the Bank of Ireland boss into a rethink of how he was going to woo the market.
The decision was taken on Tuesday, April 20, for Boucher and his finance director John O'Donovan to travel on separate ferries to the UK to court international investors. The aim was to have large institutional investors on board for a €500m share placement -- the cornerstone of a €3.56bn equity-raising deal.
Positive feedback from presentations in London was enough to finally convince the Government and a group of investment banks to sign up that Sunday to fully guarantee the remainder of the highly-complex transaction.
Within days, however, bubbling lava was spewing on the other side of Europe -- as the Greek financial crisis went into overdrive, sending stock and debt markets into tailspin.
Boucher would rather not think about his attempt to pull BoI out of the quagmire, had the debt chaos in Athens crescendoed before he had the investment banks on board.
BoI has managed to tick a number of key boxes for investors over the past two months, including:
- The transfer of its first NAMA loans, at a 35pc discount, well below the industry average haircut of 50pc.
- Settling with the Financial Regulator that it needs to raise €2.66bn to reach new regulatory capital targets by the end of the year (BoI will, in fact, net €2.94bn from the deal).
- Receiving clarity from Brussels on what assets it needs to sell under its restructuring plan.
- The completion of a pension-scheme review, aimed at cutting its €1.6bn pension deficit, at a time when the influential Basel Committee on Banking Supervision is calling for pension shortfalls to be deducted from banks' capital reserves.
But it is not out of the woods yet. The €1.1bn-worth of shares offered in the rights issue (outside of €630m earmarked for the Government) is fully underwritten, and, indeed, largely sub-underwritten by up to 50 large investment firms. But the deal would be seen as a dud -- and a setback for Ireland Inc -- if it does not secure a strong take-up from the market.
For most of BoI's almost 100,000 small shareholders, the key question is when will the beleaguered bank be in a position to start paying dividends again.
BoI's last payout to shareholders was for the year to the end of March 2008, when a 63.6c dividend was dished out on each share. (It was the equivalent of more than 40pc of its underlying earnings per share -- a payout ratio we're unlikely to see again, even when dividends are resumed).
The bank has agreed with Brussels, as part of a state-aid restructuring plan, that it will not pay dividends again until September 2012, unless the Government sells in the meantime its remaining €1.9bn of preference shares back to BoI or in the market.
But really, the key to when BoI can start paying dividends again will be down to when it can sure it is on the way back to sustainable profits -- or what analysts like to call "normalised earnings".
O'Donovan has been telling investors it will be 2013 before this is reached. Critical to this is a plan to build the bank's net interest margin -- the difference between the rates at which it funds itself and lends to customers -- back up to 1.75pc, having hit a low of 1.59pc last year.
For customers, that means higher rates on loans and lower offers on deposits.
"Management commentary on normalised earnings by 2013 is consistent with our view," said Sebastian Orsi, an analyst with Merrion Capital. "Assuming net margin recovery, we can envision earnings in the order of €1bn."
However, Goodbody Stockbrokers' Eamonn Hughes believes that it could take up to 2014 before earnings at BoI, which has earned the nickname of 'least worst Irish bank', are back on an even keel.
"The markets believe that Irish bank margins will recover quickly, because they're improving quickly in the UK. But UK margins troughed in the first of 2009 and we're unlikely to see them bottom out here until the second half of this year -- so, we're already 18 months behind," said Mr Hughes.
In addition, banks have to tread a difficult line when expanding margins. Do it too aggressively and they risk pushing borderline borrows over the edge -- further fuelling bad loan losses.
The past two years have seen the 11 banks and building societies operating in Ireland writing down almost €40bn of loans -- mainly relating to property development and investment. (Analysts estimate that banks will end up having to write off 15pc to 20pc of their property and construction portfolios before the downturn is over.)
The Financial Regulator recently stress tested banks in a scenario where they wrote down 5pc of their Irish mortgage books -- double what most analysts and ratings agencies are assuming.
But the biggest fear among senior bankers is that there'll be a step-change in the attitude of Irish mortgage borrowers, more than a fifth of whom are wallowing in negative equity, to paying back loans. This would make even the watchdog's worst-case scenario look optimistic.
NCB Stockbrokers analyst Ciaran Callaghan has pencilled in BoI writing down 2pc of its €28bn Irish mortgage book before the crisis is over. But he cautioned it is very difficult to accurately forecast, as the domestic economy has never been through such a boom-to-bust cycle.
Meanwhile, UBS believes that funding costs -- the other key part of margins -- remain uncertain for all Irish banks for the foreseeable future. While BoI's recapitalisation should help it raise unguaranteed debt again, the Swiss broker said it is unclear what price the bank will be forced to pay for the privilege. Recent volatility in European debt markets hasn't helped. "More challenging will be the cost of raising deposits in Ireland," said UBS.
While the country's lender believe that deposit rates will start coming down again as they receive more government-backed bonds for NAMA loans, competition for deposits will remain fierce.
BoI's stated aim is to lower its loan-to-deposits ratio from 152pc last December -- or having €1.52 out on loan for every €1 on deposit -- to below 125pc by 2013.
Still, the fact that it is winding down €53bn of its €135bn loan book -- between NAMA taking more than €12bn of loans and most of the UK mortgage book being run down -- should help it beat this target.
Investors backing BoI's rights issue will be hoping Boucher'll be able to top expectations on a few more fronts.