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James O’Halloran managing director of Adams Autioneers, Dublin, with some of the works of art from the Bank of Ireland’s collection auctioned in Dublin in late 2010. When three of the world’s savviest investors plunk down serious money on the bank, a former blue chip that has sunk to penny stock status, it may pay to take notice. (Peter Morrison/AP)
James O’Halloran managing director of Adams Autioneers, Dublin, with some of the works of art from the Bank of Ireland’s collection auctioned in Dublin in late 2010. When three of the world’s savviest investors plunk down serious money on the bank, a former blue chip that has sunk to penny stock status, it may pay to take notice. (Peter Morrison/AP)

At the Bell

Out-of-favour Bank of Ireland piques savvy trio’s interests Add to ...

When three of the world’s savviest investors plunk down serious money on a former blue chip that has sunk to penny stock status, it may pay to take notice.

The stock in question is Bank of Ireland, which trades for all of 9.4 euro cents a share, a depressed valuation that is a legacy of Europe’s financial crisis and Ireland’s real estate implosion.

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The investors in question include a pair of well-known Canadian financial heavyweights – Prem Watsa, head honcho at Fairfax Financial Holdings Ltd., and hedge fund manager Albert Friedberg. The trio is rounded out by Wilbur Ross, the U.S. investor famed for spotting troubled, but salvageable companies, buying in big time at distressed prices, and then making a killing when they recover.

Just what do they see in Ireland’s oldest bank, of which they’ve bought hundreds of millions of shares from the 30 billion outstanding?

The Irish bank looks like one of those classic opportunities the stock market regularly offers, allowing investors to scoop up $1 value for only 50 cents or even less. In this case, the bargain is even greater than 50 per cent because the shares have a book value of 22 euro cents each.

One way to get a sense of the value on offer is to compare the Bank of Ireland with Royal Bank of Canada. RBC trades for more than double book, meaning that investors are paying $2 to get $1 worth of bank equity, while Bank of Ireland changes hands for less than half of book.

By this metric, investors are getting control of four times more book value for an equivalently sized investment in Bank of Ireland than in RBC. In a bullish scenario, there is tremendous upside from Bank of Ireland.

RBC does have some obvious advantages, such as a 4.2 per cent dividend yield, while its Irish counterpart is too strapped to pay anything. RBC also isn’t 15 per cent owned by government, as is Bank of Ireland, a legacy of its near-death experience during the crisis. RBC has the not-inconsiderable advantage of actually making money, while Bank of Ireland is mired in losses.

But therein lies the appeal for contrarian value investors. RBC may be overloved by the Street, the Bank of Ireland underloved. Among the 10 analysts who follow the latter, there are no “buy” recommendations, six “holds” and four “sells.” RBC’s analyst following is eight buys, nine holds, and two sells.

For North Americans, Bank of Ireland stock is available through U.S. traded American depositary receipts. Each ADR represents ownership of 40 bank shares and trades for $5.44 (U.S.).

Fairfax didn’t want to comment on the record. Mr. Friedberg couldn’t be reached, although he mentioned the stock favourably earlier this year in a conference call with clients.

Now, if making big money on the market were as easy as buying a depressed stock or two at a huge discount, everyone would be as rich as our savvy trio.

It’s obviously far harder than that. When buying out-of-favour securities, value investors often have to do some serious sweating before they know if their thesis is correct. And that is where Bank of Ireland now stands as an investment.

On the plus side, the shares are a bargain by the book value metric. The bank is also well capitalized, with little danger of insolvency. Ireland is a country is on the mend and its citizens have taken the bitter capitalist medicine of fiscal austerity without the howls of protest common in southern Europe.

At some point, Ireland will be prosperous again, turning the bank from a money loser to a money maker. That’s the bet, and when you’re controlling lots of book value bought at a discount, serious upside will be yours if it all works out.

Why wouldn’t it? The big knocks against the bank are that loan losses are rising again and profit margins on lending are shrinking. First-half results were well below expectations. Among the doubters is Ireland’s Goodbody, a brokerage firm. It expects the bank to endure losses for the next couple of years that will erode its book value down to 15 euro cents a share, hardly bullish for the stock. Goodbody’s share price target: 8 euro cents.

My assessment: the recent deterioration in financial results indicate Mr. Watsa et al. are too early on this one. They’ll make money eventually, but it will be a long, hard slog.

 
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