Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 01/04/11

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Today was mainly about the fall-out from the stress tests. The varying share price reactions on the ISEQ today (Bank of Ireland +41.4%, AIB +11.1% and Irish Life & Permanent -58.8%) told its own story about how the market views the prospects for the different quoted banks here.

Despite the huge jump in its price today, Bank of Ireland is still only capitalised at €1.65bn – less than a third of the extra capital it needs to raise. Davy Stockbrokers say it’s the only one of the three that “retains a reasonable prospect of recreating an equity investment case in the near term“, but my view is that it’s going to be a serious challenge to achieve this. I would agree more with Goodbody’s statement that it “would advise investors to await the capital raise details before deciding onwhether or not to get involved“. On Irish Life & Permanent, the spinning-off of its life and investment management division might, depending on valuations, create an interesting new stock for ISEQ investors to play. But the rump banking unit looks very sick.

There were two interesting perspectives offered to me today on the stress tests. The first one is this: In the stress tests it ran, BlackRock assumed that any loan in trouble would default, the bank would seize the property and then sell it at a significant discount. With assumptions like that, does that give banks enough scope to start properly dealing with mortgages that need restructuring?

The second perspective was from a note by Citibank, which speculated that Ireland might receive a 1.00% reduction in the interest rate on the EU-IMF package as a payback for not burning the senior bondholders. Personally, I think we should have shafted the bondholders. I don’t subscribe to the Tesco view that “Every little helps”.

The credit rating agencies were busy today. In relation to Ireland Inc, S&P cut its rating on the country to BBB+, which puts us only 3 grades above junk. The outlook was described as “stable”. S&P has Ireland on the same rating as Thailand and the Bahamas. S&P’s rival Fitch placed Ireland’s ratings on Rating Watch Negative, citing “unexpectedly weak” Q4 GDP numbers. Fitch currently rates Ireland BBB+, which like S&P is 3 grades above junk.

An Irish stock that was in focus today was Providence, which sold its Gulf of Mexico gas assets for $22m, having paid $67.5m in early 2008 for them. The valuation of this operation had been hit by the shale gas revolution, hurricanes and the fall-out from Macondo. Speaking of the shale gas revolution, have a read of this primer on it. Its fellow Irish headquartered energy company, Tullow, saw Citigroup cut its target price on it from 1650p to 1590p due to the lower than expected price it got from its recent Ugandan farm-out. Citi has maintained its “hold/high risk” rating on Tullow. Another stock in the news was C&C, where it was reported that the Financial Regulator is investigating director share deals.

From an Irish macro perspective, Goodbody downgraded its forecasts for Ireland Inc today, its economists Dermot O’Leary and Juliet Tennent now see GDP growth of only 0.4% in 2011 and 1.5% in 2012 (from 1.1% and 2.1%).

The fall-out from Japan’s disaster will last for months, and Europe’s ports are only just starting to get affected by this. I’ve a piece in the new Business & Finance magazine on this – if you’re looking for something to read over the weekend, go out and buy it.

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Written by Philip O'Sullivan

April 1, 2011 at 5:37 pm

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