Merrion still rates Bank of Ireland a buy despite funding requirements

BANK of Ireland is still rated a buying opportunity since its recent loss in share value, according to Merrion Stockbrokers.

The report does not see AIB shares as a buying opportunity because of its need of further substantial capital and is deemed to be too high an investment risk.

The report confirms its an earlier June analysis from the brokers on the two banks that back then also favoured BoI over AIB.

The report’s author Sebastian Orsi said: “The recent pullback in Bank of Ireland’s share price presents a buying opportunity. The risk/reward balance in AIB sees our rating remain at hold.”

Speculation about the level of discounts (haircut) each of the banks faces for the loans transferring to NAMA, the bad bank, continues.

Mr Orsi estimates BoI faces a discount of up to 27% (from 18%), but is reducing its cumulative credit loss forecast to €8.3bn.

Losses forecast for AIB remain unchanged €12bn despite a deeper 35% NAMA discount which Mr Orsi has bumped up from his 25% June forecast.

“While recapitalisation needs are significant, they are well anticipated. We expect shareholders’ pre-emption rights to be preserved,” he said.

On the unresolved issue of how much further funding the banks will need to bump up their capital ratios he has projected BoI will require a further €2.8bn on top of the €3.5bn injected by the state to get it to an acceptable 8% equity tier I ratio.

These amounts exceed the current market capitalisations of the banks and could result in the conversion of the Government’s preferred shares to common equity. This would mean the Government could end up with a majority shareholding in each bank, something which some bank commentators think is inevitable as the rescue deal unfolds further.

While financial forecasts have been changed to accommodate the changing outlook for the bank Mr Orsi saw no reason to revise his basic ratings from June.

The “hold” rating on AIB reflects higher risk, lower reward, he said.

Allied Irish Bank’s recapitalisation needs will be as high as €4.4bn to get it to an 8% equity tier I ratio, now favoured by the more rigorous international banking requirements, post the international credit crunch that left many major banks bankrupt.

Despite having obvious asset disposal options as a source of €2.5bn of this capital, he see less upside for shareholders than in BoI.

The impact of potential disposals at current prices “is neutral” and Merrion says it expects the disposal of the non-core M&T stake to reduce external capital requirements.

It has increased its NAMA discount to reflect concerns on valuations, he said.

Weekend reports from property experts including CB Richard Ellis questioned discounts proposed for the banks as being way too optimistic, particularly in relation re-zoned land.

Aside from that the Merrion report said the outlook for credit losses is stable or improving.


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