Boucher’s strategy vindicated by Bank of Ireland’s back to black performance

Bank of Ireland’s share price has been under pressure this week. By close of business yesterday it had declined by about 16 per cent on its close from last Friday, wiping close to €1.9 billion off its market cap.

This has hit the value of the State's 14 per cent holding by around €265 million, but in the words of the Dad's Army character Corporal Jones: "Don't panic, don't panic."

A combination of market jitters over the situation in Ukraine, combined with the decision by Wilbur Ross and Fairfax Financial Holdings to sell about one- third of the stake they acquired in Bank of Ireland in 2011, saw the shares dip to below 33 cent, having traded at just under 39 cent at the end of last week.

The shares were placed at 32.8 cent each yesterday with a range of institutional investors, thus improving the liquidity of the stock.

Stellar run
Bank of Ireland has had a stellar run over the past 12 months. Bloomberg's trusty vault of data tells me that Bank of Ireland's share price is up about 139 per cent on a year ago. This was fuelled by growing evidence of an Irish economic recovery, chief executive Richie Boucher resolving the CoCos (Contingent Capital Notes) and preference shares held by the State, and the bank's return to the black.

Speaking to me by phone yesterday from his base in New York, Wilbur Ross said he had “no intention” of selling any more shares at this point in time and spoke warmly of Boucher and his management team and the job they have done in turning around the bank’s performance over the past three years. “We are totally supportive of Richie and his team and what he’s doing,” he said.

Ross has a reputation for investing in distressed assets and making healthy returns from them but even he was surprised by the speed at which Boucher turned around the business, given the state of the economy at the time. Let’s not forget this was only months after the previous Fianna Fail-led government had gone cap in hand to the European Union and the International Monetary Fund for a financial bailout.

External confidence
Ross's support for Bank of Ireland in 2011, along with Fairfax, Kennedy Wilson, Capital Group and Fidelity Investments, was trumpeted at the time by the Fine Gael-Labour coalition as an important sign of external confidence in the country at a time when the economy was still on its knees.

Ross is a big fan of Boucher, as is Fairfax chief Prem Watsa. It's no wonder. Both bought their shares at 10 cent apiece in 2011 and have seen them more than treble in the meantime.

By selling one-third of their Bank of Ireland shares yesterday at 32.8 cent each, Ross and Fairfax have covered the carrying cost of the stock. Their remaining shares are effectively pure profit.

Bank of Ireland's results this week surprised analysts on a number of fronts. Its net loss of €490 million beat the €586 million median of 10 analysts surveyed by Bloomberg.

Boucher’s target of getting its net interest income above 2 per cent was beaten in the second half of the year.

It also agreed a deal with staff to deal with its pension deficit, successfully persuaded the European Commission to allow it retain its New Ireland life and pensions business (it made a profit of €107 million last year), and put together a capital package in December to allow it take out the Government’s interest in 1.8 billion preference shares.

It reported defaulted loans were reducing (down by €1.2 billion since the end of June 2013) and that the bank was back in profit, generating capital, and sufficiently capitalised to pass the ECB’s stress tests later this year. Not even a spat with the Central Bank last year over loan provisions could deflect from the positive message.

Critics proved wrong
It is the first of the domestic banks to return to the black since the collapse of the financial sector here in late 2008.

Boucher has repaid Ross and Watsa's confidence in spades and proved quite a few of his critics wrong. In 2009, successful financier Dermot Desmond, who held a 1 per cent stake in the bank at the time, questioned Boucher's appointment as chief executive in a letter addressed to the bank's board.

“The people who got the bank into the mess are not the people to get the bank out of the mess,” Desmond is reported to have said in his letter.

It seems that he was wrong. Boucher must derive great satisfaction from this. Michael Noonan should be pleased, too.