When the results of the European banks' stress test came out, Allied Irish Bank's (OTC: AIBYY) shares popped 28% in intraday trading on the news of Irish banks passing the test. But the excitement could be short-lived since the Irish bank nightmare is far from over. But a stock's short-term movement looks pretty meaningless when it is on the verge of losing its independence.
Huge capital holes
The results showed that the four Irish banks -- Allied Irish, Bank of Ireland (NYS: IRE) , EBS, and Irish Life & Permanent -- needed to raise around $34 billion to keep their Tier 1 capital ratio above the required 6%. Allied Irish, which is required to raise $18.8 billion, has the highest share. It was also required to slash its loan books by $27.4 billion to reduce its aggregate loan-to-deposit ratio.
The table below should give you an idea of the dismal way in which the market is valuing Allied Irish and its European peers:
Tier 1 Capital Ratio
Allied Irish Bank
Bank of Ireland
National Bank of Greece (NYS: NBG)
Lloyds (NYS: LYG)
Source: Capital IQ, a division of Standard & Poor's.
These European banks are struggling to keep themselves from collapsing. To make matters worse, a return to profitability doesn't seem to be on the horizon.
Allied Irish hasn't reported profits for the last 10 quarters. And it's difficult to see that changing anytime soon. Its price-to-book ratio reflects not just a cheap stock, but a company the market thinks is deeply troubled. The bank's Tier 1 capital ratio recently stood at 4.3%, though the company has managed to upgrade it by raising new capital in recent months.
The Foolish bottom line
Ireland is creating a banking system with two big banks as its core pillars. While Bank of Ireland will be the first pillar bank, Allied Irish will be merged with EBS to form the second. Besides having outright ugly fundamentals, AIB could lose its entity as a private bank. I would like to reiterate my stance that from an investment point of view, the bank looks miserable, if not perilous. Foolish investors should stay away from such stocks.
At the time thisarticle was published Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article. The Motley Fool owns shares of National Bank of Greece. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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