# Bank of Ireland ADRs Ridiculously Overpriced vs. London Listed Shares

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by: Studioso Research

Bank of Ireland’s NYSE-listed ADRs (NYSE:IRE) have been trading at a significant premium to the bank’s London/Ireland listed shares (symbol BKIR.L) since late 2010. There does not seem to be any legitimate reason why IRE is trading at a much higher price than BKIR.L. This article will show that in order for IRE shares to move to parity with BKIR.L, the stock should fall by about \$0.90 or 58%.

In other words, investors are paying \$0.90 more for IRE than they would pay for the equivalent stock in London.

Share price calculation – background information

• BKIR shares are denominated in Euro and not British Pounds.
• IRE ADRs are denominated in US Dollars.

The ratio of ADRs to London listed shares is 1:4.

Share price calculation as at 11.30am New York time on Thursday 28 July 2011
 BKIR (ask) in EUR 0.11 EUR/USD exchange rate 1.4311 IRE (bid) in USD 1.53

To convert BKIR to a theoretical IRE equivalent:

0.110 EUR * 4 (number of London shares for each ADR) = 0.440 EUR

0.440 EUR * 1.4311 = \$0.6297

Therefore the theoretical IRE share price is about \$0.63

But at that time, the prevailing IRE bid in New York was \$1.53.

Price difference between the two securities:

\$1.53 – \$0.63 = \$0.90

0.90 / 1.53 = 58.84% decline required for IRE to reach parity with London listed shares of BKIR.L.

0.90 / 0.63 = 1.4298
IRE is overvalued by 142.98% when compared to BKIR.L.

How long has this overvaluation been in place, and why?

The BNY Mellon web page for IRE ADRs states “Bank of Ireland Group – Books Closed for Issuance” on 3 December 2010. This means that it was no longer possible to submit BKIR.L shares and request IRE ADRs in exchange.

According to our calculations, the difference between the prices of BKIR.L and IRE was less than 1% on 3 December. Following this, when conversations (from BKIR.L to IRE) were no longer possible, the premium widened quickly, and reached 50% on 20 December 2010.

The following table shows the wild and unexplained fluctuations in the IRE share price when compared to the BKIR.L equivalent:

 Date BKIR (ask) EUR/USD Theoretical price (NYSEARCA:USD) IRE Percentage overvaluation as % of theoretical price Percentage drop from IRE to theoretical price 28 July 2011 (close) 0.110 1.4311 0.6297 1.53 (bid) 142.98% 58.84% 1 July 2011 (close) 0.122 1.4549 0.7100 1.07 (bid) 50.70% 33.64% 31 May 2011 (close) 0.133 1.4378 0.7650 1.58 (bid) 106.60% 51.60% 20 December 2010 0.322 1.3124 1.6903 2.54 (low of day) 50.26% 33.45% 3 December 2010 0.326 1.3366 1.7429 1.75 (low of day) 0.41% 0.40%

Fundamentals of IRE and downside price target – no higher than \$0.78

Bank of Ireland recently underwent a recapitalization by raising billions of EUR of additional capital. It sold additional common stock at 0.10 EUR per share, and completed a debt for equity exchange, with the conversion of debt priced at 0.1156 EUR per share.

In the week ended 1 July 2011, when many global stock markets rallied by over 5%, BKIR.L barely budged, and did not go higher than 0.126 EUR.

It’s unlikely that the BKIR.L price (which should influence the underlying value of IRE) will rise beyond 0.13 EUR, due to the ‘anchoring’ of the share price to the rights issue price and the debt for equity exchange price.

Furthermore, due to the ongoing problems in Greece, Ireland, Portugal, Spain and Italy it’s hard to see the EUR/USD going above 1.50.

Using a maximum price of 0.13 EUR for BKIR.L and maximum price of 1.50 for EUR/USD, the maximum fair value for IRE can be calculated as:

0.13 EUR * 4 * 1.50 = \$0.78.

However it should fall lower than \$0.78 if the EUR/USD stays below 1.50 and/or BKIR stays below 0.13 EUR.

What are buyers of IRE thinking?

It’s fair to assume that if it was possible to convert BKIR.L shares to IRE, then this premium would quickly disappear, as investors wanting to buy IRE cheaply could just buy BKIR.L and then ask BNY Mellon to convert these to IRE ADRs.

In any case, one wonders what the buyers of IRE at \$0.90 and above have been thinking in the last seven months – they could have purchased the shares at a much lower price in London. Using the prices at 11.30am (New York time) on Thursday 28 July, IRE was trading at \$1.53, compared to the London equivalent of 0.110 EUR * 4 * 1.4311 = \$0.6297. This represents a premium of \$0.90 for no apparent reason.

Does the same price discrepancy also apply to AIB?

Until recently, the price of Allied Irish Bank (AIB) shares in New York closely followed the price of AIB.IR shares in Ireland. However today (Thursday 28 July) AIB.IR shares declined by 14%, and the New York listed ADR (AIB) rose by 2%. Thus it appears that AIB is starting to trade at a premium to AIB.IR in a similar manner. In a future article we will analyze the price discrepancy of AIB.IR shares compared to AIB shares.

Disclosure: I am short AIB, IRE.

Additional disclosure: 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 stock you should conduct your own research and analysis, and seek advice from an independent financial adviser. We have a short position in AIB and IRE and will profit if the share price of these companies decline.