Wilbur Ross’s Irish Bank Winnings Tested by EU Vote, Loan Crisis

Photographer: Scott Eells/Bloomberg

Wilbur Ross, chairman and chief executive officer of WL Ross & Co. LLC in New York, on Sept. 29, 2011. Close

Wilbur Ross, chairman and chief executive officer of WL Ross & Co. LLC in New York, on Sept. 29, 2011.

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Photographer: Scott Eells/Bloomberg

Wilbur Ross, chairman and chief executive officer of WL Ross & Co. LLC in New York, on Sept. 29, 2011.

U.S. billionaire Wilbur Ross reaped a 105 million-euro ($138 million) gain in five months after buying a stake in Bank of Ireland Plc, the nation’s largest lender, amid one of the costliest banking crises in history.

Ross, 74, may struggle to keep that profit as Ireland’s banks confront soaring losses on home loans and four years of government spending cuts sap economic growth.

“2012 will be a challenge,” Ross said in an e-mail interview. “The Irish economy will continue to feel the effects of fiscal austerity.”

Prime Minister Enda Kenny threw a curveball at the banks last month by laying out his plans to hold a referendum on Europe’s fiscal compact. Although opinion polls indicate the agreement will be approved, the campaign may hinder the banks’ efforts to increase deposits and regain access to market funding as Ireland’s future in Europe comes into question.

The vote brings “unwelcome focus on the banks,” said Eamonn Hughes, an analyst with Goodbody Stockbrokers in Dublin. It “adds an element of additional risk for the sovereign and the banks, given recent soundings had indicated there may be no need for a referendum.”

Hughes, who put a sell recommendation on Bank of Ireland before Kenny’s announcement, said investors haven’t done enough number crunching on potential mortgage losses. Shares of the Dublin-based lender, up 35 percent since Ross invested, have “run too far, too quickly,” he said.

Bank of Ireland’s market value, at 4.1 billion euros, is still down 78 percent from its peak of 18.3 billion euros in February 2007, before the country’s real-estate bubble burst.

‘Doesn’t Mean Much’

“It’s nice that the stock is up, but the price doesn’t mean much until we want to sell it,” Ross said. “We are not doing so, and expect to own it for years.”

Bank of Ireland, one of six lenders guaranteed by taxpayers in 2008, is alone in escaping state control after the government sold a 35 percent stake last year to a group of five investors, including Ross, for 1.1 billion euros. The company is the largest consumer lender in the country, and has about 11,000 employees in Ireland, almost a third of all bank employees in the republic, according to the Irish Bank Official Association.

In all, the government has injected about 62 billion euros into the financial system. That amounts to about 40 percent of gross domestic product, making the Irish banking collapse among the most expensive in history, according to Alan Ahearne, former adviser to former Finance Minister Brian Lenihan.

‘Capital Strength’

About 70 billion euros of loans owed to seven lenders in Ireland, including Royal Bank of Scotland Group Plc, are unlikely to be paid back in full, the European Commission said in a report published on March 1. This equates to 21 percent of their combined loan books as of the third quarter, it said.

Since the latest round of stress tests and capital injections in July, the banking system has stabilized. Bank of Ireland’s deposits increased by 6 billion euros, or 9 percent, in 2011. Deposits at Ireland’s four guaranteed banks rose in January for a fifth straight month, the finance ministry said on Feb. 29.

Their reliance on European and national central bank funds fell 22 percent last year to 109.5 billion euros, according to the finance ministry. Ordered by Irish regulators to shrink, banks sold or ran down 32 billion euros of loans last year, reaching almost half of a three-year target.

Bank of Ireland’s underlying loss, which excludes one-time losses from loan sales, narrowed to 1.5 billion euros last year from 3.5 billion euros the previous year. On that basis, the bank won’t return to a profit until 2014, when loan losses decline, according to Karl Goggin, an analyst at Dublin-based NCB Stockbrokers. Bank of Ireland executives haven’t given any earnings guidance themselves.

‘Continued Progress’

“We view positively Bank of Ireland’s continued progress on deleveraging its balance sheet, its much-improved liquidity position and its continued capital strength,” said Jason Long, senior international investment analyst at Chicago-based Harris Associates LP, which has a 5.8 percent stake in Bank of Ireland. Still, “asset quality, margin pressures and the economic environment remain the key challenges,” he said.

The economy, which has shrunk by 15 percent since 2007, is struggling to grow as the government raises taxes and cuts spending. Gross domestic product will expand about 0.5 percent this year, the International Monetary Fund forecasts.

Unemployment is showing little sign of falling, property- price declines are accelerating and mortgage arrears continue to rise. Almost 14 percent of private residential mortgages were either more than 90 days in arrears or restructured at the end of December, according to the Irish central bank.

Richie Boucher

Bank of Ireland Chief Executive Officer Richie Boucher told reporters on Feb. 20 that bad loans in coming years will be “above our base case, but we don’t see ourselves in a stress scenario” as home loans sour. A company spokesman said Boucher was unavailable for an interview.

The bank last year forecast it would lose 6 billion euros on impaired loans in the three years through 2013, rising to 7.9 billion euros in its stress case. The figures included 3.5 billion euros already set aside to cover bad loans.

The government is considering insolvency laws that may allow some mortgage debt to be written off. While Moody’s Investors Service said last month the proposed laws may leave as much as 25 percent of mortgage debt open to write-off, Justice Minister Alan Shatter dismissed that analysis, saying the ratings company is missing “a whole range of things.”

Analysts say it’s too early to estimate the potential costs of the proposals.

Debt Relief

Under the plans, borrowers may be able to obtain debt relief, including a possible write-off, of as much as 3 million euros should at least 75 percent of creditors agree. The government proposed cutting the term of bankruptcy to three years from 12 years. Boucher said “there are some pluses and minuses” to the proposals.

“We are conscious that the state itself is trying to be careful of unintended consequences,” he said on a conference call with analysts on Feb. 20.

Irish authorities are considering moving some bad mortgage loans and loans that track the European Central Bank’s key rate out of Bank of Ireland competitors Allied Irish Banks Plc (ALBK) and Irish Life & Permanent Plc, which was once the biggest mortgage lender, according to four people with knowledge of the discussions.

The loans may be transferred to a company specifically set up to warehouse the loans, or moved to nationalized lender Irish Bank Resolution Corp., formerly Anglo Irish Bank Corp., which itself is being wound down by the end of the decade.

Allied Irish

Officials at the finance ministry, central bank, Allied Irish and Irish Life all declined to comment on the matter.

Carving out and hiving off parts of Allied Irish’s and Permanent TSB’s loans “would facilitate an immediate acceleration of the banks’ deleveraging plans and help them return to profitability more quickly,” said Stephen Lyons, an analyst with Dublin-based securities firm Davy.

Easing competition for deposits would help interest margins in the industry, benefiting Bank of Ireland, he said. The bank said on Feb. 20 that it’s getting harder to hit its target of widening its net interest margin to more than 200 basis points by the end of 2014. The margin, the difference between its funding costs and lending rate, fell to 1.33 percentage points last year from 1.46 percentage points in 2010.

Deposit Ratios

“The big benefit for the system is that you have a sudden drop in AIB’s and Permanent TSB’s loan-to-deposit ratios, easing competition for deposits, which would help margins in the sector,” Lyons said. “Although Bank of Ireland may not participate in the transfer of loans, it too would also be a big beneficiary through easing of deposit competition.”

Bank of Ireland has a 35 percent share of the country’s checking account market and a 34 percent share of the credit- card market, the bank said in June, citing third-party surveys.

Some analysts, such as Dublin-based Glas Securities, suggest that concessions by European authorities, in particular allowing the government to spread the cost of the bailout of the former Anglo Irish over a longer period of time, will help to win support for the European fiscal compact.

The deal requires nations to virtually eliminate structural deficits, and provides for tighter control of tax and spending by governments. Two polls published on March 4 show the “yes” campaign in the referendum has a 20-percentage-point lead.

“Ireland is the poster boy for adherence to bailout commitments and clearly will be the first of the bailed-out countries to return to normalcy,” said Ross. “Much credit also goes to the Irish people for understanding the need for fiscal reform and accepting the individual sacrifices necessitated by the banking crisis.”

To contact the reporter on this story: Joe Brennan at jbrennan29@bloomberg.net

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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