Does Bank of Ireland's Narrowed Loss Put It Back on Track?
Desperate measures have helped Bank of Ireland (NYS: IRE) dodge that country's banking fiasco more effectively than its peers. It has been able to taper first-half losses on the back of declining bad loans, but let's take a closer look at its performance to know whether the Irish banking giant is a safe buy yet.
The quarter in detail
The bank reduced its pre-tax loss significantly, to $1.03 billion from $1.88 billion a year ago. This was primarily due to a 22% drop in impairment charges to cover underperforming loans. But an increase in wholesale funding costs weighed on its results. High funding costs resulted in its operating profit before provisions reducing to $232 million, and the bank posted a net loss of $720 million, compared to a net profit of $203 million last year. The rise in funding costs was triggered by debt chaos in the eurozone.
Regulators are pressing Irish banks to cut their loan-to-deposit ratios to 122.5% by the end of 2013. IRE, whose ratio stands at 175%, plans to sell off more than $43 billion of assets to meet that goal. This is why, after selling off Northern Trust (NAS: NTRS) and a few lending business units in the recent past, the bank is now selling its $1.4 billion U.S. commercial real estate loan portfolio to Wells Fargo (NYS: WFC) .
The high cost of customer deposits and the difficult liquidity environment are going to be major bottlenecks to IRE's growth. And the bank still has to raise $7.5 billion to keep itself from being nationalized. All this makes me wary of this bank.
The Foolish bottom line
Ireland is creating a banking system with two big banks as its core pillars. Allied Irish Banks (NYS: AIB) is being merged with EBS to form one pillar, and IRE alone will be the second pillar. The outcome of this strategy remains to be seen; I would definitely not rely on these banks to hold up my portfolio.
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At the time this article was published Fool contributor Zeeshan Siddique does not own any of the stocks mentioned in the article.The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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