focusIR May 2024 Investor Webinar: Blue Whale, Kavango, Taseko Mines & CQS Natural Resources. Catch up with the webinar here.
Never saw any further info or detail on the UK securitisation deal. Unfortunate as it did seem unusual, from a format point of view. Keep hearing that competition is fierce in the UK market and therefore margins are under pressure. If your funding cost is suspect or too high then you would be wise to lay assets off elsewhere, ie via securitisation. So from a competitive perspective such a deal might be opportune. From a asset growth perspective not good. Time will tell on BIRG.
I think PGee has the main macro points, with the Brexit uncertainty being the main one.
What has not picked up much if any comment is the one resolution passed at the AGM in May, giving the Directors the authority to buy back (and cancel) up to 3% (I think this was the number...need to check my notes) of the share capital. I was speaking to the FD after the meeting and this decision would be triggered on NAV considerations. At 4.60 (the recent low) the NAV was 0.5975. So buying back shares at this level means that you are buying the underlying assets of the bank at a 40% discount. It is impossible to achieve this type of return on money deployed in any other form and therefore from a management perspective this has to be the trade of the year!!! As a sort of comparison, Barclays got down to 0.575 NAV a few years back and that was the trigger point for them. I believe that Lloyds have a regular share buy back scheme going on, same logic. This is one way of combating the value madness that prevails in European banking at present. In pursuing it you maximise a return on assets, improve your return on capital and remove any short manipulation on the share. There is good reason to raise debt to pursue this course as you cannot achieve anything close to such a return in normal lending business. The FD did confirm to me that this policy would not be used as an alternative to increasing dividend to 50% of earnings over time.
This may be seen as a well worn refrain but there is value in this share that cannot be replicated in another 10 years. Keep strong, keep buying!!!
The news release is not very clear. It references a securitisation of GBP2.25b and talks of a release of GBP250-300m in funding. A securitisation normally means a pooling of assets from a balance sheet and the sale of the assets to external buyers. The assets therefore exit the balance sheet and the benefits of the assets disappear. In theory I suppose you could set up the securitisation and then only exit a lesser amount, in this case GBP250-300m. You then keep the rest so continue to retain the asset, which I guess you could sell off further in the future. I cant say I have seen such a play before but who knows. Need more info to understand the whole thing.
Interesting!!!
Given that this is a top quality portfolio of mortgages one has to ask why give them up. The bank is chasing growth so this is the last thing you would want/expect to see. Funding issues in Sterling point more towards the war being fought in the UK mortgage market. The possibility that they cannot compete against the UK majors. The only positive spin as I see it is that it reduces UK exposures against the backdrop of Brexit.
All in all I suspect the market saw this a couple of days ago and the the answers lie in the share price movements we saw yesterday!!! Not great.
Quite a dramatic drop in the SP over the past few days!
As always difficult to judge the real reasons but as always the size of the drop definitely disproportional to the substance of BIRG.
The Deutsche saga is not ideal and is a cancer that needed radical surgery a number of years ago. One can predict a slow but sure death there.
Brexit remains a curse and sadly something that is unlikely to resolve itself during the remainder of 2019. Obviously a drain on BIRG.
Off more interest perhaps is the state of the mortgage market in the UK. In the past few days we have had Tesco capitulate, claiming an inability to compete against the main players, but in particular HSBC who have adopted a particularly aggressive stance in building market share. Since the UK ring fenced funding in mortgages to deposit taking within the UK, HSBC have found themselves with an immense under utilized pool of funds. This they have deployed into mortgage lending, driving margins down to an all time low in that market. The big players have felt the heat, Lloyds a particular casualty, hence their share price drop. BIRG is not immune and may be feeling the heat on their book across in the UK. The nonsense spewed by the odd politician cannot be of much relevance except as a choking up of nationalism!
With European banking up for grabs and consolidation a must would BIRG not be a very juicy target? Consider that HSBC are the big boys on the block, chasing asset growth in this sector in the UK but why not Ireland as well. Consider where the new CEO of BIRG came from!!!! The SP falling to levels that value the group closer to Eur 4b than Eur 5b is like a gift from heaven. Buying ready made assets at 0.7% of NAV rather than create them at 1.0 is like a joke! These are levels of takeover, not doom and gloom. These are levels that you take what is left of your funds and buy more. Your day will come, sooner than you can imagine right now!!!
Note the lack of no buying by the Directors, a matter condemned at the recent AGM. Maybe they can't buy, maybe they are already in a discussion that precludes them.
Note also the lack of comment at the AGM on the State's stake. Maybe a very nice parcel already under negotiation! Maybe why PGEEs manipulators drive the price down 5% against every 0.55 movement in the market.
Hang in, buy in but do not sell!!!!
Good numbers and ratios in the quarterly update:
Loan growth, 2.7% quarterly or 11% annual. That is strong. Interesting (and to be expected) this growth came from the UK retail book and some better SME lending, undefined as to whether in Ireland or the UK. It is clear that the bank sees the UK retail book as being the point of real and meaningful growth gong forward. The retail growth in Ireland is limited and their market share is such that meaningful growth of this base is not realistic. The split between Irish and UK assets will grow in favor of the UK book. Obviously the whole Brexit issue will continue to weigh in the belief that it is negative, but as debated before is this really realistic given that the asset is mortgages.
Interest margin more or less unchanged fro FY18. ll good provided volumes grow......which they are.
Good moves in acquiring an asset portfolio up for sale and selling a parcel of NPL. With the latter a reduction of 0,4 in NPL levels and 0.30 capital positive in CET1. Good management.
It remains odd that the market does not give greater recognition to this share and what it stands for. It continues to lump it into a general European Bank sector and ignores its retail specific (primarily mortgages) focus. Management answer needs to be continue growing, pushing income and rushing that dividend up to a 50% payout.
European banking came under the cosh today, mixed results from the heavyweights and the imminent breakup of the talks between Deutsche and Commerzbank. Sadly, as debated before the market tosses BIRG into the same sector and knocks it down. Most of us would say by more than the sector but then on the up it accelerates more. The bottom line is that we should not be correlated in the way that we are, but there is nothing we can do. Not ideal as we essentially fall back on an improvement in the recovery of the European banking sector, and that's not going to happen in a hurry.
The actual mechanics of CoCos are fairly simple: They pay a high(er) coupon but have an equity conversion trigger. This is linked to Tier 1 Capital ratio. More recent issues have a conversion trigger of 8% Tier 1 (this coincides with the Basle 1 convention on Capital....obviously no longer as we are on Basle 3 now). So if a Bank's Tier 1 Capital drops to or below 8% then the CoCo Bond is converted to equity (conversion price is normally defined... in BIRG''s first issue it was 5c ...old pricing). You as a holder of CoCo become owners of equity/shares at that price. There is no condition of write off but obviously your share price could go to zero after conversion.
The secret is to understand the bank as a credit. The Cyprian Banks issued CoCos when their NPL were still up at 25-35%, selling the story that they were a good alternative to deposits in the bank. This was untrue as we now see with their imminent collapse and depositors would have retained more value by not holding CoCos. A bank like Deutsche issued CoCo Bonds when they had the biggest derivative exposure in the world, exposure that was not correctly priced to maturity and which utilised far more capital in a final analysis. Their CoCo Bonds were therefore toxic before they even issued. Bad news!!
Where a balance sheet is not totally transparent and future events could cause chaos stay away. BKIR is clean. Its NPL are clearly defined and no longer a threat to the well being of the bank. It operates primarily in mortgages and spreads its risk between two economies. I guess one could have an absolute wipe out in housing as we saw in 2006/07 or a complete collapse in the UK market but these are things that are tangible and forecast(able).
The terms of their issuance will be very interesting. I hope they don't get too cheeky....if they do then blame Draghi and his voodoo economics.
All about tiering and cost!
CoCo issuance will most likely be the most expensive option on the debt spectrum (nominal rate around 6.5% but deduction of interest charge for tax will drop that in the bank's books to about 50% of that). Benefits though are a) Teir 1 capital inflow without equity issuance b) duration will be either 7 years or maybe 10 years. Irish banks have not really accessed past 7 years in terms of standard issuance c) A wide range of debt instruments is a sign of a mature and strong bank balance sheet. Savvy management would use such issuance to market to their depositor base, offering respite from the zero rate environment over the past years. Critical to this is the belief and knowledge of the bank (went horribly wrong with the Cyprian Banks a number of years ago.... resulting in a series of lawsuits going on right now). I view BIRG an an ideal candidate, clean balance sheet, high Tier 1 Capital base, strong income flow and focused on a base activity, mortgage lending in two countries.
7 Bells is no dream and may be closer than many believe! 7.70 is NAV 1:1 and is the first target in any ability to grow the book. As explained if this can be accelerated via gearing rather than equity capital then watch this space. The market is not stupid....the move from 5Bells to 6 Bells coincided with the triggering two of the three leveraging initiatives. The third one happens post AGM.
As a by comment keep your eye open for the terms of the CoCo issue. In a bank of this nature a CoCo is highly desirable for investors. BIRG had one previously, coming out of the 2008 mess and largely held by government. 10% coupon and a 5% trigger capital ratio. One of the best investments ever held! This time I would call 6.5% coupon and 8% trigger capital ratio. Mark it down as a buy!!!
With respect to interest rates and Draghi, Meyers has a real point. With regard to Europe and to BIRG I would say his extrapolation of opinion is tenuous and ill informed!!
Daghi's imposition of negative rates in Europe is destructive, wrong and largely based on false assumption. His constant cry to use CPI at 2% as the basis of monetary policy is wrong and false. In an economy that has posted sub 1% CPI for the past 10 years, one cannot use 2% as the basis of policy. It is a fabrication of the truth and has been used to destroy savers and award borrowers. This is a destruction of basic economics and will have consequent going forward. In Europe the base CPI should have been set at 1% and action taken around this marker.....we would never have fallen into the trap of lending governments money free and destroying the yield curves of the continent. For this he should have been driven out of offices 5 years ago and refused a pension!! Let us all hope that the German candidate gets the nod and we re enter the real world by the end of 2019.
BIRG is shielded from this madness. It runs a mortgage book in two countries and its only objective is to grow and stay cost effective. It too derives money at zero from the ECB and also from savers for the most part. A rise in rates in Europe will be a small benefit but nothing to shoot the lights out.
This additional capital is a requirement imposed at European level and raising the ratio required is already well underway. This in itself is not a problem/issue and on balance is probably a good thing. The issue is how management handle it and in this regard BIRG is well ahead of the game, indeed should be strongly commended! How so: Those of you punters that follow things closely, as one should, may have seen a number of initiatives already triggered. These are a) subordinated debt offerings ( a substantial amount has already been raised at very competitive rates close to flat euribor) b) independently funded NPLs, taking them off balance sheet reducing that ratio closer to 5% and freeing up capital. Latest one announced about 10 days ago c) announcement of the intention to raise a CoCo issue post AGM. The details are announced in a resolution to obtain shareholders approval at the AGM mid May.
All of these initiatives have the effect of raising accepted Tier One Capital, as per regulations, effectively removing the need to come to the market for any equity capital. It is therefore an effective gearing up of the balance sheet and in the event of the bank being able to accelerate lending/growth then growing return on assets. In turn return on capital accelerates and the propensity to raise dividends accelerates. SP goes up!!!
Hats off to management on this one!!!
Have observed this PGee for an extended period of time .....certainly since the share built up a head of steam on the downside, which must be over a year now. Every day at 16.35 (appears to be the time the closing price is taken) a trade is put through. 98% of the time it is a sale which distorts the price downwards as much as possible....maxing out the bid price on the downside. No question it is protecting a short position for mark to market purposes (would reduce margin payable by the number they can manipulate). No question it is a serious player who is absolutely conscious of what they are doing and implementing it without fail. A sad state of affairs as we are caught in a vice without the ability as individuals to break it.
While European banking remains in a weak place and there are many top line banks still caught up in the NPL disaster from 2008, BIRG is not one of them and yet the share continues to be painted with the same macro brush. Again points to a big fund just imposing its control over a share that is not involved. BIRG is involved in two domestic economies in the business of mortgage lending, with little else impacting its b/s or income statement. Provided management gets its dividend up to 50% of bottom line profits asap it should trade at a price equal to at least 1:1 NAV. There is little reason why management remains coy on this objective as it is the only way forward and the only reason to own this share. There is nothing else out there for the bank.
Some chatter about Draghi's comments re introducing two tier interest rate structure for the European banking sector. Impact on bank earnings is not in dispute (at last) and is disruptive to the entire economy. Negative rates have to be removed from the equation, irrespective of the slower growth being experienced both in Europe and globally at this point. Sovereigns should not borrow at sub euribor level, banks should not borrow at sub euribor level. Neither group have the balance sheets to justify this and therefore it is nothing but a distortion of economics supply and demand, created by Draghi and his cohorts.
Likely reason for the jump in SP.