Here’s one the FT Alphaville team hasn’t seen before — a bullish analyst recommendation that’s, by self-admission, based on giving the company “the benefit of the doubt.” From Alex Potter at Collins Stewart today:
Why so positive on Anglo Irish? Put simply, we are giving the company the benefit of the doubt. The highest bad debt charge the bank has made in the last decade is 91bp in 1999. We feel recourse back to the last UK commercial property cycle (early-1990s) is useless as the bank was both a far smaller lender and also a far smaller operator in the UK market.
Anglo management makes the case that it underwrites lending in a rather different way to other major lenders, that it understands its customer base rather better and that the benefit of personal guarantees and crosscollateralisation underlie its lending.
He’s forecasting a loan loss rate for Anglo Irish about 40 per cent lower than its Irish competitor, Allied Irish Banks — even though, as he notes, Anglo’s €40.6bn loan book in Ireland is larger than Allied’s Irish construction and property lending of €40bn. And Allied, let’s not forget, dropped something like 17 per cent yesterday after saying bad debts are on the rise in its residential development book.
Might Merrill Lynch have kicked off a trend away from numbers/models-based analytics?
Well, Potter does have some numbers to back up his assertion. Anglo for instance, has better non-performing loan coverage and currently a materially lower incidence of NPLs as well, he says, as shown below.
Despite the positivity on Anglo, Allied Irish comes out of the full 16-page analysis as Potter’s preferred Irish bank.
The analyst says Allied will likely have the least dilution if Irish banks recapitalise. Recall he argued last month that Ireland’s decision to fully guarantee the deposits and debts of six local banks, charging the banks a fee for doing so, is at risk of wiping out the companies’ profits.
As such, we feel that pressure will grow on the Irish government to force equity issuance by the banks, presumably to the government. Allied Irish stated that their cost of guarantee is currently c. 30m per quarter which seems a deal very favourable to shareholders over taxpayers, especially if the blowout in Irish sovereign CDS spreads is taken into account (and the implicit rising cost of public debt in Ireland).
To keep capital ratios similar to their UK competitors, however, the banks would need to raise equity something like this:
At current market prices, this would imply the majority nationalisation of all three main Irish banks.
Will this happen? In short, we cannot read the mind of politicians, so we do not know. The way we address this problem is simply by stating that, if there is a requirement for capital, Allied Irish has least to lose in terms of dilution.
Further, Allied Irish also has options it holds certain stakes that can be sold. In fact, the value of its stakes in MTB US and BZW PW currently represent over 100% of the market cap (c.EUR3.81 per share).
As noted yesterday, the Allied’s CEO would apparently rather “die than raise equity.” Specifically selling the MTB stake could, according to Potter, produce a capital gain iof about €1.2bn and improve Allied’s equity Tier 1 capital ratio by at least 1 full percentage point.
Anyway, Bank of Ireland’s first-half results are out Nov. 13 while Anglo will publish fiscal-year results on Dec. 3.
And despite the “benefit of the doubt” first mentioned, Potter says:
We see Anglo struggling to generate any profit in the coming two years, even assuming it sees materially lower commercial property loan losses than its peers. However, trading at 0.67x recapitalised book value, we believe absolute falls are limited. However, as the most opaque and least profitable of the Irish banks, we would avoid the stock.
Related links
Risky territory – FT Alphaville
The deteriorating picture at AIB – FT Alphaville
Ireland’s gamble – FT Alphaville