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In our last article analyzing Allied Irish Banks (AIB) we reviewed the capital raising initiatives announced by AIB. We concluded that the bank had significant downside potential, due to a capital raising of 500 billion shares at a price of 0.01 EUR per share, a discount of more than 90% from its current price.
Although the AIB share price has declined since the publication of that article,
we maintain that AIB remains incredibly overvalued, and reiterate our price target of 0.033 EUR (Ireland shares). For the New York ADRs, we have a slightly lower price target of 0.033 * 10 * 1.4500 = 0.4785 USD, reflecting the decline in the EUR/USD exchange rate.
In this article we will analyze AIB’s balance sheet, and compare it with that of its closest rival, Bank of Ireland (IRE), (BKIR). Our analysis shows that AIB is trading at a price-to-book valuation of 3.08, compared with a price-to-book valuation of 0.26 for IRE.
1. Analysis of AIB
As announced July 1, AIB has completed its acquisition of EBS. Therefore we will analyze the combined financial position of the two entities as of December 31, 2010, the date of the two companies’ last reports. Although these figures are more than 6 months old, it is likely that AIB’s financial position has deteriorated since that date. This is a reasonable assumption given the company’s 10 billion loss in 2010, and the Central Bank of Ireland’s requirement for the bank to raise 11.9 billion EUR in new capital.
§
AIB1
§
EBS2
§
Combined
Assets
§
145,222.0
§
20,086.9
§
165,308.9
Liabilities
§
140,873.0
§
19,394.6
§
160,267.6
Shareholders’ Equity
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4,349.0
§
692.3
§
5,041.3
Amounts in million EUR
(EBS’ financial data is sourced from its annual report as at 31 December 2010. AIB’s financial data is sourced from its annual report as at 31 December 2010.)
Total book value of the combined entity 692.3 + 4,349.0 = 5,041.3 million EUR
Capital to be raised from share issue 5,000 million EUR
Other capital to be raised 8,200 million EUR
(AIB’s capital raising requirements are described in the Central Bank of Ireland’s March 31 press release. The actions planned by AIB to meet these requirements are described in our previous article.)
Total book value following capital raisings
5,041.3 + 5,000 + 8,200 = 18,241.3 million EUR
Shares outstanding: currently 12,245 million
Shares to be issued to National Pensions Reserve Fund Commission (NPRFC) following 26 July shareholder meeting = 500,000 million
Total shares outstanding following capital raising 512,245 million.
Current share price 0.11 EUR
Pro-forma market cap (including 500 billion shares to be issued)
512,245 million * 0.11 EUR = 56,347.0 million EUR
Price to book value = 56,347.0 / 18,241.3 = 3.08 times book value
2. Analysis of BKIR
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BKIR4
Assets
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167,473.0
Liabilities
§
160,066.0
Shareholders’ Equity
§
7,407.0
Amounts in million EUR
(BKIR’s financial data is sourced from its annual report as at 31 December 2010.)
Total book value 7,407.0 million EUR
Capital to be raised from various methods ( BKIR’s plan to meet the Central Bank of Ireland’s capital requirements are discussed in a PDF file attached to this Bloomberg article dated 8 July 2011.)
(liability management exercise; capital raising and other) 4,350 million EUR
Total book value following capital raisings
7,407 + 4,350 = 11,757.0 million EUR
Shares outstanding currently
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5,299,413,620
To be issued as part of debt for equity offer
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5,741,927,474
To be issued as part of rights issue
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19,077,889,032
Total shares outstanding following capital raising
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30,119,230,126
Current share price 0.101 EUR
Pro-forma market cap (including shares to be issued)
30,119,230,126 * 0.101 = 3,042.0 million EUR
Price to book value = 3,042.0 / 11,757.0 = 0.26 times book value.
3a. Comparison of AIB versus BKIR
We believe that BKIR is a stronger bank than AIB. This is confirmed by 2010 financial performance of the two banks, as well as recent actions by the Irish government.
For the 12 months ending December 31, 2010, BKIR’s loss (pdf) was “only” 609 million EUR, compared with a massive loss of over 10 billion EUR for AIB (pdf).
After completion of 500 billion share issue, the Irish government will hold a 99.8% stake in AIB - effective nationalisation. Even if the Irish government is required to buy all of the shares issued in BKIR’s rights issue, it will only hold a 69.7% stake in that company.
The share price for AIB’s capital raising is 0.01 EUR, whereas BKIR’s rights issue is 0.10 EUR. The higher share price for BKIR’s capital raising, and the resultant lower government stake, suggests that the Irish government is more confident about the future performance of BKIR when compared with AIB.
3b. Irish economy and banking system
In 2010, Ireland received a bailout following a substantial rise in government bond yields. At the time of writing, Ireland’s 2-year note fetches a yield of 23.22%, indicating the market’s concern over the solvency of the country, and potential for a sovereign default.
Furthermore, AIB (and presumably other Irish financial institutions) have faced a gradual decline in customer deposits – a slow-motion bank run. As announced on April 12, 2011, customer deposits declined by 22 billion EUR to 52 billion EUR, which (at best) has the effect of raising net interest margins, and at worst could result in bank insolvency.
In stronger economic times, banks are often valued at a price-to-book valuation greater than 1.0, reflecting economic growth, profitability and low provisions for non-performing loans. Given the headwinds facing the Irish economy and the Irish banking system, a price-to-book multiple at or below 1.0 is more appropriate.
4. Price targets for AIB
AIB and BKIR comparison, following completion of capital raising initiatives:
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BKIR
§
Combined AIB+EBS
Assets
(31 Dec 2010)
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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
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11,757.0
§
18,241.3
Shares outstanding after capital raisings
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30,119.0
§
512,245.0
Recent share price
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0.101
§
0.11
Market capitalisation
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3,042.0
§
56,347.0
Price to book ratio
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0.26
§
3.08
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 raisings.
As calculated above, BKIR will have a price-to-book of about 0.26. This reflects concerns about Irish economic growth, non-performing bank loans and the potential negative effects from a sovereign default.
At a valuation of 3.08 times book value, AIB is incredibly overvalued. When compared with its rival, BKIR, this valuation is even more extreme, the later being valued at a price to book valuation of less than 10% of AIB’s valuation.
At a generous price-to-book multiple of 0.92 (compared with 0.26 for its stronger rival), AIB would fetch a valuation of 16.782 billion EUR, equivalent to a share price of 0.033 EUR, matching the price target mentioned in our previous article. Using a EUR/USD exchange rate of 1.4500, this gives a target of 0.4785 USD per ADR.
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