Unprofitable Allied Irish Banks At 4.98 Times Book Value - An Absurd Valuation

| About: Allied Irish (AIBYY)

In three articles since mid-2011, we explained the massive overvaluation of Allied Irish Banks (OTCQB:AIBYY). Despite those numerous warnings, AIB shares have recently risen to ridiculous heights.

On Monday 21 October at its intraday peak of 0.16 EUR, AIB was trading at a market capitalisation of 82.9 billion EUR, at a price to book ratio of about 7.8. At the (Irish) close of Thursday 24 October of 0.102 EUR, AIB still has a market capitalisation of 52.8 billion EUR, with a price to book ratio of 4.98.

With most banks trading at price to book ratios of about 1 and nearly all at price to book ratios under 2, AIB's valuation is out of touch with the rest of the sector.

At a more reasonable price to book ratio of 1, AIB shares would need to fall to about 0.0202 EUR. For US investors in the ADRs, this is equivalent to a share price of 0.0202 * 10 * 1.3800 = 0.28 USD per share. At a generous price to book ratio of 1.5, similar to that given to Wells Fargo (NYSE:WFC), AIB would trade at 0.0303 EUR or 0.42 USD for the ADRs.

For what it's worth, when we first wrote about AIB in July 2011, we gave a price target of 0.033 EUR per share, or about 10% higher than the generous valuation applied above. Just in case you're wondering, AIB is still unprofitable, so it's difficult to use an earnings-based metric such as a P/E ratio.

Goodbody Corporate Finance valuation

Earlier this week, the Irish Times reported that

"The State's shareholding in AIB and Bank of Ireland is managed by the National Pensions Reserve Fund (NPRF), under direction from the Government. According to an independent valuation by Goodbody Corporate Finance for the NPRF, AIB shares were worth only €0.0079 at the end of 2012. That would give it a market value of €4.1 billion."

This is more than 60% lower than the 0.0202 EUR valuation we gave above at a price to book ratio of 1.

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.

We update this valuation comparison below. Financial data from companies' June 2013 financial reports.

Unless otherwise indicated, the amounts below are in million EUR.

Bank of Ireland








Shareholders' equity



Book value



Shares outstanding

30,111 million

518,237 million

Recent share price

0.262 EUR

0.102 EUR

Market capitalisation



Price to book ratio

0.99 times book

4.98 time book

Again this demonstrates that the AIB is an anomaly, especially given that Bank of Ireland is generally considered to be a stronger bank.

ADRs at a 26% premium to Ireland listed shares

The Irish listed shares closed on Thursday 24 October at 0.102 EUR. The equivalent price for US listed ADRs is 0.102 * 10 * 1.38 = 1.41 USD per share. However on Thursday, the shares closed at $1.79, and only traded as low as $1.72. Even if AIB shares remain at 0.102 EUR per share, a price of $1.79 in New York is more than 26% the USD equivalent of the price in Ireland.

Why is AIB trading at such lofty levels?

The main reason for AIB's absurd valuation is that about 99.8% of the shares outstanding are held by the Irish government.

Therefore the investing public only holds about 1 billion shares (worth about 102 million EUR at a share price of 0.102 EUR). It seems that AIB investors are largely ignoring the government's ownership of over 518 billion shares, and don't understand that its market capitalisation is over 52 billion EUR.

According to the Irish Times article above, it seems that the government / NPRF does not have any immediate intentions to sell part or all of their 99.8% shareholding at these high levels:

"No comment was available from AIB yesterday on whether any intervention was being considered by the board.

"A spokesman for the Department of Finance said he was "not aware of any change to the current position" relating to the trading of AIB shares. The NPRF declined to comment."

The Irish government / NPRF is not acting in the best interests of its citizens if it continues to hold over 50 billion EUR of stock in a bank that does not deserve such a rich valuation. We concede that it is not realistic to expect the entire 500-plus billion share stake to be sold above 0.10 EUR, but at the very least, the NPRF should be able to sell some of its shares at these high prices.

Catalyst for decline

It doesn't seem that the NPRF is looking to sell their shares in the near future, however if they changed their mind this would provide an obvious catalyst for the shares to decline. The manic rise in AIB shares in recent weeks mirrors the rise seen in January and February 2012. Following that rise, the stock declined to 0.07 EUR in less than 3 months, and to 0.05 EUR in the following 7 months. It's reasonable to expect a similar gradual decline from here as shareholders digest the stock's high valuation, as described both here and also in the previously mentioned Irish Times article.


As we've concluded in our three previous articles about AIB, the company's stock deserves a valuation much closer to 0.03 EUR.

Other authors have concurred with our analysis - including Felix Salmon of Reuters, who stated that AIB's pricing at this level is an example of a market inefficiency. Although that article was published on 26 October 2011, it applies equally to AIB at the time of writing.

At a generous price to book ratio of 1.50, AIB would trade at 0.0303 EUR per share, or $0.42 per ADR. At current levels of 0.102 EUR per share, the stock is extremely overvalued. The ADRs at $1.79 are even more overvalued.

Disclosure: I am short OTCQB:AIBYY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. 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.

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