Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 16/7/2012

with one comment

Since my last update there have been quite a few developments around the banking sector. The Irish banks’ reliance on monetary authorities for funding rose marginally in June, but it remains 32% below peak (€187bn in February 2011) levels. Elsewhere, UBS put together an interesting table showing credit and deposit trends across Europe – the deleveraging process for households in Ireland is especially acute relative to other EU member states, while the deposit trends are disappointing, especially given the competitive rates the banks are offering to savers. On that note, with deposit rates looking set to continue to fall as the Irish banks work towards rebuilding their net interest margins, I wonder if this might lead to more deposits moving out of the country over time. Time will tell.

 

(Disclaimer: I am a shareholder in Bank of Ireland, AIB and Permanent TSB) Speaking of Irish banks, I had a look at the liquidity of their shares after noticing a few comments about abnormal price moves. Bank of Ireland has a free float of 85%, compared to the circa 0.2% of AIB and PTSB that is outside of State ownership, so it was no surprise to see that the average daily volume of shares traded in Dublin in Bank of Ireland (33m) is 44 times that of AIB (750k) and 98x PTSB (337k). Considering that, based on where PTSB’s share price closed on Friday (2.5c) the average daily volume traded in that stock is worth less than €10,000 you would want to be careful not to read too much into any daily movements in its share price. The same applies for AIB, where on the same criteria less than €50k worth of stock is traded each day in Dublin.

 

(Disclaimer: I am a shareholder in RBS plc) Elsewhere in the financial space RBS’ planned IPO of Direct Line was the subject of significant media coverage in recent days. Press reports over the weekend suggested that leading private equity firms are circling around RBS’s insurance operation, which generated operating profits of £454m on revenues of £4,072m last year. I think a trade or private equity sale of this business, which is valued at £3-4bn, would be in shareholders’ best interest – particularly given that, with 11 investment banks lined up to advise RBS on an IPO, the fees involved would be substantial if it goes down the listing route.

 

(Disclaimer: I am a shareholder in Independent News & Media plc) Switching to media, TCH announced that it is considering restructuring its debt. The group operates national and local newspapers along with several local radio stations and its quoted competitors include Independent News & Media, UTV Media and Johnston Press. Should any restructuring move lead to closures of underperforming assets there will presumably be opportunities for those three, along with TCH’s unquoted peers, to gain market share.

 

(Disclaimer: I am a shareholder in BP plc)  In the energy space, I am concerned by a report that an Argentinian province is threatening to revoke a licence held by BP’s joint venture, Pan American Energy. The asset in question is Argentina’s largest oil field, while the recent nationalisation of Repsol’s business in that country shows that Argentine politicians are not above taking actions that will ultimately prove ruinous to FDI inflows.

 

Investors Chronicle’s John Ficenec wrote a good piece on the recruitment sector. I’ve been tempted by some of the cheap valuations in the sector of late but am torn by the macroeconomic headwinds. Of course, if there’s any hint of these abating the sector should significantly re-rate, but timing that entry point is easier said than done!

 

(Disclaimer: I am a shareholder in Total Produce plc) In the food sector I note a report saying Total Produce has made a bolt-on acquisition in France. There’s no official word from the company, but assuming the report is accurate I’m guessing the business should add 1% to TOT’s topline with a slightly lower effect (due to: (i) finance costs; (ii) France having a 33.3% corporate tax rate, versus TOT’s current 19.3% effective rate; and (iii) synergy benefits will presumably be lower than they would be in areas where TOT has a more substantial presence) on earnings.

 

Finally, with the US Presidential election only a few months away, I was interested by the results I got on this questionnaire that matches your political views to those of the candidates – supposedly I’m 93% in-tune with Gary Johnson and 88% with Ron Paul! Why don’t you take the questionnaire and see where you stand.

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Written by Philip O'Sullivan

July 16, 2012 at 7:50 am

One Response

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  1. Recent ECB pronouncements on Senior Debt make depositor funding ever more valuable…but the notion that deposits in a particular bank should match lending seems rather arbitrary, especially as you point out that even retail money will/should flow across borders more easily. And indeed the quaint notion that deposit funding is more “sustainable” is just a another way of saying deposit cash is sticky / retail punters don’t chase small benefits.

    ECB and other sources obsession with the primacy of the deposit funding model is rather silly, and indeed they should prefer other funding models as they are more amenable to “macro prudential regulation”

    desmondbrennan

    July 16, 2012 at 4:11 pm


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