Wilbur Ross bows out of Bank of Ireland

Wed, Jun 11, 2014, 01:00

Three year ago Wilbur Ross, an American billionaire, was a willing buyer of Bank of Ireland shares at a time when few other investors were prepared to buy the bank’s stock. As a purchaser of distressed assets, where risk has to be weighed carefully against potential reward, Mr Ross’s investment has almost tripled in value and delivered a far higher than anticipated return.

He was never regarded as a long-term investor in the bank, and this week his exit as a major shareholder and bank director – while sooner than some had anticipated – did not come as a major surprise to financial markets. Bank of Ireland’s share price yesterday recorded a modest fall in response to the news.

Mr Ross, via his investment company and together with other US investors, had acquired a large minority interest in Bank of Ireland in July 2011, some months after the EU/IMF bailout programme came into operation. At that time the outlook for the Irish economy was far from encouraging. Credit rating agencies had cut Ireland’s sovereign debt rating to junk status The State’s cost of borrowing had reached a record high with the yield, or interest rate, on the 10-year benchmark bond then exceeding 14 per cent.

The large equity investment in Bank of Ireland however, proved timely, and welcome. It not only ensured that one major bank stayed out of State control. It also provided a major vote of confidence in the future of the Irish economy. And it marked a critical turning point in Ireland’s economic recovery. The willingness of others international investors, most notably the US investment firm Franklin Templeton, to become large buyers of Irish Government bonds since 2011, has greatly helped to transform Ireland’s economic prospects, with the State’s borrowing costs falling sharply. The State can now borrow at a lower rate on long term debt than either the US or the UK, with the yield on Ireland’s 10-year bond under 2.5 per cent.

Certainly Bank of Ireland, and the other major banks are in a far stronger financial position than three years ago, when they were both unwilling and unable to lend. And last week’s interest rate cut by the European Central Bank should facilitate increased lending by the domestic banks. A recent survey of credit demand for the Small and Medium Enterprise (SME) sector had, said Finance Minister, Michael Noonan, shown an improvement in trading conditions for companies in that sector.

As the Minister noted: “The belief among respondents that the banks are lending to SMEs continues to grow”. But he also warned that banks need to ensure that this belief is matched by corresponding lending to viable businesses”. For the banks, as indeed for those businesses most reliant on credit, that remains the ultimate test.