The news out of Ireland has been rather depressing as of late as the country has found itself at the epicenter of the world’s financial crisis. Over the last several months, the Irish state has effectively guaranteed all of the country’s deposits, nationalized one of its more beleaguered banks and bought preferred shares in the remaining publicly traded banks. Such events, while concerning, should not exclude the country and its financial sector from one’s investment universe. Of particular interest is Allied Irish Banks (AIB), the diversified multinational bank holding company that I previously talked about here. Allied Irish Banks is without a doubt the strongest, largest and most diversified of the Irish banks as its relatively strong underwriting policies, aggressive deposit growth strategies, and diversified international investments have allowed the bank to become one of the more up and coming international banks.
With shareholder equity of 10.9 billion euros and a market cap of less then a billion dollars, Allied Irish is cheap and should be viewed as being not only attractive to investors but to its competitors as well. A sum of the parts evaluation reveals that Allied Irish is holding a significant amount of nonessential assets that could either be sold to bolster the company’s balance sheet or acquired by a competitor through an acquisition of Allied Irish. The company is essentially composed of five units scattered throughout the United States, European Union and the United Kingdom. The holding company has full ownership of the domestic operations within Ireland, First Trust Bank of Northern Ireland and Allied Irish Banks (GB) out of the United Kingdom, along with a 24.2% of M&T Bank (MTB) out of New York, 70.5% of Bank Zachodni WBK out of Poland and 49.99% of Bulgarian American Credit Bank out of Bulgaria. In addition to these investments, Allied Irish also has relatively minor investments in the U.S. and in the Baltic states of northern Europe.
These stakes could be unloaded in such a manner as to generate significant amounts of capital for the parent company. The sale of the company’s stake in M&T Bank would likely generate nearly a billion dollars, while the sale of the company’s stake in its Polish subsidiary would bring in well over a billion euros. In addition, a sale of the company’s stake in its Bulgarian and Baltic subsidiaries would generate at least a hundred million dollars while a sale of the First Trust division of Northern Ireland would bring in anywhere from 500 – 800 million pounds. In short, Allied Irish should be able to raise 3 billion euros fairly shortly if it felt compelled to boost its capital position. However, this will likely not be necessary as the banks tier 1 capital is now at 7.5% after receiving a non-dilutive preferred stock investment from the Irish government in late 2008. If the company were to sell the above-mentioned divisions, it could likely boost its capital ratio to at least 9.5%. When the value of these assets are coupled with the company’s ability to sell bonds backed by the Irish government, Allied Irish should be able to hold onto the majority of its subsidiaries until valuations rise in the future.
While loan losses are expected to be significant in Ireland the company should be able to add 1.5 billion euros in loan losses a year going forward, even with housing prices declining 30-40% and an unemployment rate that is significantly above the E.U. average. Allied Irish’s diversified lending portfolio in Ireland and stricter underwriting policies will allow the company to escape the pitfalls that its peers, who were more weighted towards residential lending, are currently experiencing. In addition, the company’s UK division has become a source of tremendous liquidity, as the deposit guarantee offered by the Irish government has proved immensely attractive for UK customers concerned about relatively paltry deposit limits at their country's own institutions. This arrangement will further strengthen the company’s funding options, making it an even more attractive acquisition target.
While Allied Irish Banks is clearly undervalued and represents an attractive opportunity to purchase a diversified international bank it is likely an infinitely more attractive investment for its U.S. subsidiary, M&T Bank out of New York. Allied Irish’s 24.2% stake in M&T Bank is likely concerning for the management team of M&T as it puts the bank’s status as an independent institution in doubt. Given the current environment, an acquisition by M&T Bank of Allied Irish makes perfect sense. In purchasing Allied Irish, M&T Bank would triple its balance sheet, gain international exposure to vibrant markets, retire a quarter of its outstanding shares and dramatically reduce the extremely high portion of its shareholder equity tied up in goodwill on its balance sheet. While M&T Bank’s capital ratios are not exceptionally high, the bank’s recent share issuance through the TARP program should provide the necessary capital to make a joint cash and stock bid for Allied Irish Banks. M&T Bank’s ability to masterfully navigate the credit crisis has left the bank in a position where it can provide long term and above average returns for its shareholders in the years to come, should it act decisively and acquire Allied Irish.
Allied Irish Banks recent decline has presented an opportunity to acquirer shares in a dynamic bank at bargain prices. Once the market recovers the stock will likely trade at significantly higher levels, especially if asset sales follow in the months ahead. If a bid from M&T Bank emerges or from some other aspiring bank it only serves as further upside for Allied Irish’s equity.
Disclosure: Long AIB
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