June 12, 2014
If you only look at one chart today to understand the story of Bank of Ireland, this is the one here.
It shows the movement in the share price of Bank of Ireland since Wilbur Ross bought his stake and it contrasts this upward movement with the downward trajectory in the amount of money lent into the economy during the same period.
Mr Ross made his tidy profit. That’s what he is paid to do and no one can begrudge this.
The government spin at the time was that his investment was good for Ireland; it wasn’t. It was good for Mr Ross but not for the economy in any material way. It is not Mr Ross’s job to provide financial assistance for the Irish economy. It is his job to make money, which he has done.
But the line spun in 2011 was that Mr Ross’s position would ensure that the biggest and least wrecked bank in the country would be in a position to lend again to the fragile economy. This has not happened. Overall lending to the economy continues to fall rapidly – as you can see from the chart.
Bank of Ireland’s share price has risen, yet lending to the economy has fallen.
And lending by Bank of Ireland has fallen – not by as much as the rest of the banks – but it is not bucking the trend in any significant way. So what is driving Bank of Ireland’s share price upwards?
It has risen because of “hope” value. The hope is that at some stage it will begin to lend rather than hoard money and, therefore, it will become a normal bank again. This will most likely happen at some stage.
Banks want to lend. This is how they make money. However, when a bank’s balance sheet is destroyed by bad debts, the bank has to get more money in than it is lending out, so that its loan to its deposit ratio comes back down to prudent levels. This means taking in more deposits and lending out less money. And this is what has happened here.
Meanwhile, Wilbur Ross – who said only three months ago that he was a “long-term” investor – has bailed out.
He bought his initial 9.1pc stake of BOI in late July 2011, when the share price was 10 cents. Ross was among a group of North American investors who took a 34.9pc stake in BOI following the Government signing up for the EU/IMF bailout. This stake saved the bank from full nationalisation by what was described at the time as a “Houdini-like escape”. The move reduced the State’s equity from 36pc to 15.1pc, with Mr Ross confident at the time that “Ireland will once again become a Celtic Tiger”.
Mr Ross exited Bank of Ireland in two stages. Following a sale of a chunk of shares this March and this move now, Mr Ross is expected to, more or less, treble his profit on his original investment. Now he has off-loaded his remaining 1.8 billion shares and made himself an estimated profit of €560m.
Fellow investor Prem Watsa, who joined Mr Ross in the initial March sale, has stated that he will hold his remaining 5.8pc stake for the long run and that the decision by Wilbur Ross to sell was “unrelated to business”.
Ross announced that one of the other investors who saved the bank in 2011, Fairfax Financial, was “aware of the trade, but did not participate in it”.
Ross, known as “The King of Bankruptcy” in the US, has said that his actions are in no way a reflection on the future prospects of BOI or the Irish recovery, stating both are “right on track”.
Ross has indicated that a desire to diversify his investments prompted the move, saying “with the continued appreciation of our bank holdings, we were getting so concentrated in banking that we had to cut back”.
In fairness, when you look at Mr Ross’ investment portfolio (from gurufocus.com), it shows that as late as March, it had 28pc of the total in banks and, obviously, he doesn’t want to be so exposed to an Irish bank.
He is also selling into a demand for Irish assets, but that demand is materially affected by having such a big beast as Mr Ross having such a big position. Without his presence, will it lead to investors second-guessing the strength or otherwise of Bank of Ireland?
Until the chart shows bank lending rising, not falling, there will be doubt about Bank of Ireland. After all, a bank that doesn’t lend isn’t a bank. Until it does – in a material way – it is little more than a safe deposit box, good for hoarding but not good for lending.
Mr Ross has done well for Mr Ross. Others will now pick up the stock at €0.26 and hope that it goes up from here.
However, the moral of the story is that people the Irish State is trumpeting as our saviours have little interest in staying here.
The “natural owners” of Irish assets are Irish people and if we end up buying at a premium what we sold at a discount, it just reveals how badly we have played our hand.
David McWilliams hosts a debate on the future of Irish property prices in Dalkey on Sunday, June 22. Tickets at www.dalkeybookfestival.org.