BoI strengthens hand for acquisitions

THE raising of €507 million by Bank of Ireland is a prelude to an acquisition in Britain or an optimisation of the bank’s capital efficiency, depending on which of the main stockbrokers you listen to.

Bank of Ireland (BoI) subsidiary Davy Stockbrokers should have the inside track but are coy enough on the subject.

“We do not interpret this issue as a precursor to an acquisition, but rather view it as part of an ongoing effort to optimise the bank’s capital efficiency, said Davy analyst Scott Rankin.

Mr Rankin added that Bank of Ireland have so far spent almost 100m as part of a rolling buyback programme.

“Given that it has such a strong balance sheet, Bank of Ireland has the potential to buy back a multiple of this figure over the next year.”

However, Goodbody Stockbrokers, 100%-owned by rival AIB Bank, takes a different tack and believes the surplus capital of close to €1.4bn the company now has could be used to make an acquisition in Britain.

BoI gave guidance that the money raised in sterling would be: “Used for the development and expansion of the business of the Group and to strengthen its capital base.”

Goodbody analyst Len Riddell’s interpretation of this statement is very different to that of his counterpart at Davy.

“Given this guidance and also the currency of the issue it would now appear that the group has either identified or is confident of identifying a British-based bolt-on (acquisition) in the short to medium term,” Mr Riddell said.

Given BoI boss Michael Soden’s ambition to grow the company through acquisition, as evidenced by his failed bid to takeover Abbey National late last year the scenario identified by Mr Riddell appears to be the most likely.

Dolmen Stockbrokers analyst Stuart Draper sides with the Davy view on the guidance.

“This could mean that the new capital will be used to fund further share buybacks, as Bank of Ireland has stated that it would be willing to increase the debt portion of its Tier 1 capital to 25%-30%.

“In its most recent financial statements, this debt portion was 16%,” said Mr Draper.

He also believes BoI is undervalued and rates the shares a buy with a price target of €11.70, an upside of 17%. Bank of Ireland has raised €507m of guaranteed callable perpetual preferred securities with the coupon set at 6.25% and Davy understands it could be tax deductible.