Bank of Ireland’s share price has had a great run in 2013, doubling in value since the beginning of the year to its close yesterday at 23.5 cent.
This is good news for shareholders, particularly the State, which holds a 15 per cent stake in the bank. And it’s one of the reasons why it is considered the best of a bad lot among Irish banks.
But not everyone is impressed. Analysts at the London office of Société Générale issued a note to clients yesterday advising them to "sell" Bank of Ireland, and placed a 12-month price target on the stock of 18 cent.
SocGen’s view is that the Richie Boucher-led bank is expensive at its current level. It cites two main negatives: the bank’s commercial real-estate book is underprovisioned in its view, while equity issuance looks likely to eliminate the Government’s preference shares before March next.
“Bank of Ireland is on the road to recovery but, with the stock at a similar valuation to Lloyds, BBVA and DNB, this is more than priced in,” SocGen said.
Its analysts compared Bank of Ireland’s provisioning on its commercial real- estate lending relative to 20 loan books across nine other banks and found that “adjusting for quality, provisioning appears €600 million short relative to the industry average”. That is likely to make it more difficult to shed troublesome assets and may mean that the group’s impairment charge remains elevated for longer than the market expects, SocGen mused.
It also expects Bank of Ireland to raise €750 million of new equity and cut the pension fund deficit by €500 million to deal with the Government’s preference shares and issues about its capital ratios.
SocGen notes that Lloyds Banking Group and Bank of Ireland are trading at the same valuation. It believes this to be unjustified given that Lloyds is a couple of years further down the track of “returning to full health”.
SocGen’s negativity didn’t weigh on Bank of Ireland’s share price in Dublin yesterday. The stock closed up 1.7 per cent.
Michael Noonan and Wilbur Ross will no doubt be keeping a beady eye on trading over the coming days.
