Great Pick!

Where did you find this?

MAGE

www.aib.ie
Found it in newspaper in summer 2008 while a reader complained that this stocks recommended 1 year earlier at around 50$ was down at 25$ one year later. The reader asked if this was justified for the stock to have lost 50% and the journalist told (erroneously I agree) that the fundamentals made this business a bargain. The future was not known then and Ireland entered a massive housing and economic slump which aggravated in September. Still, this business, I bought first at 20$ and kept buying it all the way down to 1.01 (lacked the guts to place a buy at 0.75$). It has 8.5 billion euros of equity capital, A stake in M&T Bank worth about 1.25 billion$ (24.2%) and a stake in Bank Zachodni WBK (Good quality in Poland, 70,5$) worth about 1 billion euros depending on Mr.Market humour.

Irish Government made a deposit and debt guarantee scheme in September for the Irish Banks, Recapitalized them with 3.5 billions of Preferred Equity and is now going to optimize an already announced bad bank insurance scheme in the Irish emergency budget. The preferred shares are dilutive in 5 years by 15 to 25% and the bad bank may be dilutive if losses are too large. AIB management is top notch clean up to date and the bank was well run apart from errors in lending to property developers in a boom, there is about 16 billion euros in commercial and residential development loans on the book and this is the toxic assets in the bank. AIB avoided almost totally securitized toxic assets and despite the boom, it used conservative underwriting standards.

Management presentation is clear for 2008 results and presents things as they are. Ugly but manageable, with some bright spots. Preprovision profits are 2.7 billion euros for 2008, Cost/income was reduced importantly despite ongoing investment in Poland part of the group, NIM is good at 2.2% and deposit growth, a badly needed thing among funding strains, is great for 2008.

http://www.aib.ie/servlet/ContentServer?pagename=AIB_Investor_Relations/AIB_Download/aib_d_download&c=AIB_Download&cid=1234961081248&channel=IRHP

The stress test says under the harder scenario, 6.6 billion euros of losses are to be taken over 2009-2010 and during this time, about 4 billion euros of preprovision profit are used in the calculation. AIB has a Tangible common equity ratio of 4.2% now and it seems to be able to get out of this storm with better than a non-government assisted Citigroup. For the price it is, value is large, even if the bad bank scheme ends up diluting shareholder anything under 70%.

I am in at an average of 3.13$ and I hold to the position for the moment. I am confident in my analysis and long term potential on this one. But buying at 20 $ after analyzing it correctly taught me something: it is not because something good seems cheap that it should not go down much more from that price at which it seems cheap ;)

With what is going on in Ireland, AIB may return to 1.64 and I would have nothing to say for my defense. I would not be able to say :" cool, a bargain let's buy more of it" because the lower the price goes the higher the dilution will be when it gets recapitalized. Government or shareholders' may need to recapitalize to the extent of 2 times today's market cap. At 1.64 it will be to the extent of 6 times market cap and so on. For sure if AIB goes back to 10$ as it did in September, the recapitalization and dilution will be much milder and in fact at 10$, AIB could re-become a nice investment. Meanwhile, basing an investment policy on the "hope" that "hype" will work again to drive this to 10$ while money has a lot of places to go where immediate profit and bargain prices are granted (DB BCS NBG) is pure speculation. Since I failed to get out at 9-10$ but still have a 250% gain on this stock, I run away and redeploy the money in IRE.