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Paper profit of €200m for investors in BoI as shares sustain rally


INVESTORS led by Wilbur Ross who pumped €1.1bn into Bank of Ireland (BoI) over the summer were sitting on paper profits of almost €200m yesterday after the bank's share price touched its highest level since June.

Shares in BoI have enjoyed a sustained rally since the beginning of the year, rising from an 8.2c open on January 2 to a high of 12.6c yesterday afternoon.

The price is now well above the 10c apiece paid by Wilbur Ross, Fairfax Financial, Fidelity, Capital and Kennedy Wilson when they sealed a deal to buy just over a third of the bank last July.

The quintet's investment was up €190m when BoI's share price hit 12.6c, though the terms of their deal mean they can't sell out for at least three years. They have already been paid "tens of millions" in underwriting fees.

The share price recovery also vindicates the Government's decision to hang on to 15.1pc of the bank. That state stake was worth €450m in late July and €573m yesterday afternoon, which gave the taxpayer a €123m paper profit.

Share price

But the share price would have to shoot up to more than 36c for the State to break even on its €4.8bn investment in BoI, since the investment was more than €1bn underwater when the July deal was struck.

BoI's share price slipped back a little later in the day, closing at 11.6c -- a level that left the strategic investors up about €100m by the end of the session. Analysts say BoI's intrinsic value could be more than 20c a share by the end of 2013.

David Grinsztajn, an analyst with European research firm Alphavalue, attributed the bank's share price rise to investors realising that the European Central Bank's ultra long-term liquidity operations are "a non dilutive recapitalisation scheme for the banks of peripheral countries".

The ECB is lending banks money for an unprecedented three years at an interest rate of 1pc.

The banks have been re-investing the money in bonds that typically carry interest rates above 5pc, making the scheme very earnings positive.

Mr Grinsztajn said it was "no surprise" that the best performers in recent days had been the banks in struggling countries where the market had been pricing in additional "dilutive" recapitalisations - ie, forced investment from the Government or ordinary shareholders that would dilute existing investors' ownership.


"This has not benefited the Portuguese, probably reflecting market anticipation of sovereign debt restructuring," he added. "Ireland seems to be considered as being able to meet its objectives."

Mr Grinsztajn stressed, however, that the potential for further "upside" in Bank of Ireland's share price depended on "earnings expectations on which visibility remains very low".

"The LTRO (ECB's long-term operation) does not address the eurozone's structural flaws so market conditions could remain difficult," he added.

In Dublin, Goodbody analyst Eamonn Hughes said banks generally were having a "good run" so far this year, as investors pared back on "defensive" stocks and returned to "cyclical" players.

Mr Hughes stressed that the "macro" scenario for the overall economy had gotten "more adverse" since the start of the year -- this may curtail further rises in Bank of Ireland's share price.

Irish Independent