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In two articles last year, we reviewed the capital raising initiatives completed by Allied Irish Banks (AIB).

On 27 July 2011, the bank issued 500 billion (yes, billion is not a misprint!) shares at 0.01 EUR each.

In our article we gave a price target of 0.033 EUR per Ireland-listed share, and $0.49 per ADR. The ADRs declined to that level on 9 September 2011.

In line with the strong performance of the stock market since late November, AIB shares have since risen to 0.10 EUR per Ireland-listed share, and $1.40 per ADR on 8 February. The sale of 500 billion shares at 0.01 EUR represents over 97% of the bank's shares outstanding.

At its current share price of 0.10 EUR in Ireland and over $1.30 in New York, the company has a market capitalisation of 513.4 billion * 0.10 EUR = 51.34 billion EUR. This doesn't make much sense given that the company required a 13.2 billion EUR bailout in July 2011.

Comparison with Bank of Ireland (NYSE:IRE)

In our second article regarding AIB, we compared its valuation to its stronger rival Bank of Ireland, and concluded that the latter is a more sensible alternative for those looking to gain exposure to Irish banks.

The valuation table from that article is updated to reflect the share prices of AIB and IRE on 8 February. Note that the balance sheet figures are from 31 December 2010, given the lack of more recent financial reports for AIB.

Bank of Ireland

Combined AIB+EBS

Assets

(31 Dec 2010)

167,473.0

165,308.9

Liabilities

(31 Dec 2010)

160,066.0

160,267.6

Shareholders' equity

(31 Dec 2010)

7,407.0

5,041.3

Book value after capital raisings

11,757.0

18,241.3

Shares outstanding after capital raisings

30,119.0

513,493.1

Recent share price

0.145 EUR

0.10 EUR

Market capitalisation

4,367.2

51,349.3

Price to book ratio

0.37

2.81

The above amounts in million EUR, apart from share prices and price to book ratios. Market capitalization and price-to-book ratios are calculated based on the shares outstanding after capital raising.

AIB shares have declined a little since that second article (from 0.11 EUR to 0.10 EUR), however Bank of Ireland shares have risen from 0.101 EUR to 0.145 EUR. Despite this, Bank of Ireland is still at a more sensible valuation at a price to book value of about 0.37, versus a silly price to book valuation of 2.81 for AIB.

As Felix Salmon stated in this Seeking Alpha article, AIB pricing at current levels is simply a market inefficiency. Although that article was published on 26 October 2011, it applies equally to AIB at the time of writing.

We stand by our target price of 0.033 EUR per share or (0.033 * 10 * 1.325) $0.44 per ADR from our previous articles.

Disclosure: I am short AIB.

Disclaimer: The above commentary is provided for informational purposes only. This article does not take into account your personal circumstances, and as such, you should consider whether its content is relevant to your situation. Before buying or selling any security you should conduct your own research and analysis, and seek advice from an independent financial adviser.

Source: Allied Irish Banks Significantly Overvalued Versus Bank Of Ireland