Anglo Irish Bank Even Worse Off Than its Peers

 |  Includes: AGIBY, AIBYY, IRE
by: Zignals

By Dr. Declan Fallon

While Bank of Ireland (NYSE:IRE) and Allied Irish Bank (AIB) are digging heels at October/November lows, Anglo Irish Bank (OTC:AGIBY) continues to drift.

click to enlarge

John McManus of the Irish Times wrote:

It is clear from the share price of Anglo Irish Bank that no one - apart from its board, presumably - believes management when they say they the bad debts in its €73 billion loan book will amount to a manageable €879 million while the economy shrinks by up to 4 per cent next year.

The problem for Anglo is that, when you do this sort of worst- case exercise on it, there appears to be little chance that it can attract sufficient capital to allow it to absorb its losses. Hence the collapse in its shares relative to the other banks.

The reasons why Anglo is seen to be in deeper trouble than its peers have been well ventilated over the past six months, and boil down to its exposure to property investment and development.

Put simply, the argument is that, if all Anglo's chickens come home to roost in this regard, the amount of capital required to save it is beyond the resources, or the appetite, of any of the current players in the Irish bank recapitalisation game: the Government, the domestic fund managers and the various private equity funds.

Last night's statement from the Government talked of €10 billion in new capital in total for the sector. And Anglo will be standing behind AIB, Bank of Ireland and Irish Life Permanent in the queue.

The snowball factor

The game appears to be up and it would be irresponsible of Anglo's board just to ignore the share price and limp on under the Government guarantee.

To do that would court insolvency as deposits will start to leave the bank - and that could see the Government guarantee called in. Something nobody really wants to see. Anglo's pivotal role in the property market - and the consequences should it collapse in a disorderly fashion - also means that a wider view has to be taken.

The solution?

By this analysis, the least-worst option is for the board to ask the Government to step in. It would put the Minister in a position to stabilise it, minimise systemic problems and still include Anglo - or its assets - in the wider co-ordinated recapitalisation of the banks.

It would, of course, still be a disaster on a colossal scale, firstly for the people who work at the bank and made careers there, as many of them could lose their jobs. And, secondly, it would be a hammer blow to the reputation of the Irish banking industry and, indeed, to business confidence, to see the once-shining star of Irish banking fall so low. It is obviously a disaster for shareholders too and, lastly, for the generation of entrepreneurial bankers who built the bank from almost nothing but their brains and sweat.

But when you put all of that in balance against the consequences of an Anglo Irish zombie running around until it falls over, this option may be the lesser of several evils.

The stock has spent the past few days loitering around €0.28 support; volume has picked up a little to suggest buyers will make a stand - something they were unwilling to do when it dropped to €1.11 and October support in the middle of November. I have made a Zignals YourCall for a push back to the low €1s but if you think differently we would love to hear from you.