Market Musings 11/11/11
Markets are going better on optimism around regime change in Greece and Italy, but I suspect this positive sentiment is a little premature given how often we’ve been let down by Europe’s political class. We’ve also seen some political pressure applied to the Irish financial sector, which is a case of “Robbing Peter to pay Pól”. Finally, the Irish blogging sector has a great new entrant, more of which anon.
(Disclaimer: I am a shareholder in AIB plc) 99.9% State-owned AIB announced that it has u-turned on its previous decision not to pass on the recent ECB rate cut after being leaned on by the government. The bank’s previous stance had been categorised as Scrooge-like behaviour, but in reality, as economist Ronan Lyons says, it represents “a win for mostly pre-2004 borrowers at the expense of taxpayers“. By holding back AIB’s ability to return to profitability and rebuild its capital, this exposes taxpayers to the risk of having to inject even more money into the bank down the road.
(Disclaimer: I am a shareholder in Bank of Ireland plc) Elsewhere, Bank of Ireland released a solid trading statement earlier today. One broker note I saw states: “it reads like it’s steadying the ship”, which I think is a reasonable summation. I was pleased with the improvement in the LDR (from 164% in June to 153% at end-October) and the stabilising NIM. Of course, the big unknowns are what happens if the eurozone crisis deepens and/or the Irish government gets even more ‘hands on’ with the financial sector, so let’s not count our chickens just yet!
Staying with corporate newsflow, Carr’s Milling released full-year results earlier today that confirmed a buoyant agri-sector in the UK, which has positive read-through for Irish listed Origin Enterprises.
(Disclaimer: I am a shareholder in Total Produce) Finally, I was delighted to learn earlier today that there are now three Irish blogs focused on equities. In addition to mine and John McElligott’s ‘Value Stock Inquisition‘, you can now follow Wexboy’s value investing blog. He has a great post on Total Produce, which I’m a big fan of, that’s really worth a read. Be sure to bookmark his site.
Philip O'Sullivan's Market Musings 
The banking sector is becoming increasingly interesting. On the AIB U-turn I was delighted to see a commentator (Lyons in this case) point out that there are indeed 2 sides to every story. While I have some sympathy for some of the folks having mortgage troubles, it is (as owners of this bank) in all of our interests that (i) it can fund itself and (ii) that it returns to profitability. I used to specialise in banks and what struck me was the secular trend in net interest margain contraction that can be traced back to the early 1990’s for all European banks. While it will be apinful for borrowers, I do think that society need NIM to begin an expansionary cycle. It really is the key to credit provision. On BKIR, I was pleasantly surprised to see the interims this morning. One or two swallows do not make a Spring, but it is moving in the correct direction. I think that EZ collapse excepted there is a very significant amount of long term value. The increased liklihood of EZ implosion means that it is still hugely speculative and could go to the wall any day like nearly every other bank in Europe.
jmcelligott
November 11, 2011 at 10:00 pm
A very succinct analysis of the banking sector John! I agree with what you say, Ireland really needs to have a proper debate around these issues – sadly too much of the narrative in the popular media is limited to caricaturing what’s going on as “greedy bankers preying on vulnerable borrowers”. As one of the many people who made a spectacularly ill-timed (in hindsight!) property purchase here, I don’t expect any special treatment or bail-outs (in the form of tax breaks / uneconomic interest rates) – similarly had my purchase shot up in value I wouldn’t expect a punitive tax on my gains either.
The banks have to return to sustainable profitability for the sake of the proper functioning of the economy (through enhanced capacity to lend) and also to repay the taxpayers who were put “all-in” to the sector by our political ‘leadership’.
Like yourself I have been toying with the idea of increasing my bank exposure (through adding to my legacy holdings in RBS and/or BKIR) but with so many “known unknowns” I’m sitting tight for now.
Philip O'Sullivan
November 12, 2011 at 2:44 pm
[…] AIB referred to a stabilising NIM, stabilising deposits and good progress on deleveraging. Which pretty much mirrors what Bank of Ireland said in its recent update. While the Irish banks are by no means out of the […]
Market Musings 1/12/11 « Philip O'Sullivan's Market Musings
December 1, 2011 at 5:19 pm