Irish Banks: Lots of Room to Improve

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 |  Includes: AIBYY, BKZHY, IRE
by: Brian Nichols

Irish Banks have garnered much attention over the past several days. The financial situation of Ireland and its banks are dismal at least. With Irish Banks passing the stress test, many of the institutions have received approval from investors while others have not taken them seriously. I will be looking at Allied Irish Bank (AIB) and Bank of Ireland (NYSE:IRE) in a brief review of their most recent developments. My objective is to discover if these banks are improving, if these banks have reached the bottom or if these banks at their current position are good investments?

Allied Irish Bank has suffered severe business turmoil as a result of its own decisions along with the fractured economy of Ireland. The banks stock has decreased over 99% during the past five years and over 85% during the last 12 months. In 2007 the company's stock began to decline. However, the crash in stock price did not occur until 2008. The company's financial situation has become devastating, compiling significant amounts of total debt along with a decrease in net income year over year. One bright spot is the company has successfully disposed of many toxic assets. While it is yet to be seen if this disposal will result in the company moving forward it, shows promise for their immediate future. Some major disposals include the 70.36% Stake in Bank Zachodni (OTC:BKZHY) and 49.99% sale of interest in Bulgarian-American Credit Bank.

Bank of Ireland has suffered the same fate as Allied Irish Bank. They have witnessed their stock plunge over 70% in one year and over 98% since 2006. Unlike AIB, the company has seen net income increase over 2010 compared to 2009. Yet, the company has still reported negative income for 2009 and 2010. The company appears to be working hard at disposing some of their toxic assets as their total assets, total liabilities and total debt have continued to decrease year over year since 2009.

Both Bank of Ireland and Allied Irish Bank have seen losses greater than 98% over five years. In 2009, the government tried to salvage the companies with a rescue package worth 7 billion euros. Both companies experienced short term success as the result of this package only to fall by the end of the year.

On Friday July 15 both AIB and IRE saw large gains as the result of the findings from the stress test given to the banks. According to the stress test, all Irish Banks passed. Since the announcement of these results there has been an increase in interest regarding these two stocks. Both volume and price action have significantly improved.

I am not sold on the stress tests that the Irish Banks keep passing. Just one year ago, another stress test was passed by these banks. Shortly after, the banks required billions in financial assistance. If the banks needed this kind of money then I cannot understand how they passed a stress test. I do not believe in the reliability of these tests nor do I believe they show financial strength in any way.

Ireland has many economical issues they must overcome. They have high unemployment, decrease in property and increase in currency, etc. The issues that are faced in Ireland all affect the banks and their future. Both banks have a realistic chance of improving their situation but I do not believe it is part of our immediate future.

I would not invest in either one of these companies as this time. When I see signs of economic improvement within Ireland it may become a good investment. While the companies are not attractive at the moment, it is important to watch and realize the steps they are taking towards improvement.

Both companies had negative income after tax: IRE actually lost less year over year while AIB losses increase year over year. AIB saw a large decrease in total assets in comparison to 2009, while IRE's decrease has been at a slower rate. IRE has seen their total debt decrease while AIB has seen their debt increase year over year.

There is much risk in investing in these two companies. Even if the government gives them more money and their stock sees massive gains, there is a legitimate chance it will fall. They may continue to give stress tests for the next five years saying the banks are fine and they may still lose 50% per year. The only hope will be an improved economy for both Ireland and Europe. If I were to choose which bank has made the most progress and has the best chance of success, I would choose Bank of Ireland. While both banks have problems and are far from achieving a level of sufficiency, Bank of Ireland has concentrated on the issues I personally see as more important. Bank of Ireland seems to be making an attempt to control their spending and has seen a reduction in total debt. Bank of Ireland has temporarily avoided state control after a group of investors purchased a 37% stake in the company. Whether or not this action will be effective is yet to be seen, however it will give them time to continue on their own plan of action.

I have outlined only a few of the many issues that are present within the Irish banking system. There are numerous events that have taken place both independently, economically and financially that could take years to recover if it's at all possible. While these two banks are receiving a great deal of attention, investors need to ask themselves, what are the reasons to buy one of these stocks? I would not purchase either of these stocks at this time. Wait it out and see what happens or wait for more signs of improvement. If the economy gets better than this, it's is a great investment but there is no way to tell. Investors who justify their investment with a low price must consider the obvious facts. At this point in the market what price will these banks hit first $10 or $.10? I am not willing to take the risk as both banks have many areas of concern regardless of the amount of attention they attract, the number of stress tests they pass, or the amount of euros they are given. I want to see progress within the banks before making an investment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.