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Honohan makes the case for foreign takeover of banks

THE ADVANTAGE of having Bank of Ireland or AIB taken over by a foreign bank was mentioned by the governor of the Central Bank, Patrick Honohan, in his speech to the International Institute of Finance in Washington at the weekend.

Leaving in place the managements that had made such poor decisions at the banks, Prof Honohan said, may have prolonged their natural tendency to remain in denial about the scale of their problems.

Takeover by a large international bank could have been a way of securing well qualified replacement management. A takeover by a foreign bank would also have the advantage of easing the banks’ funding difficulties.

No bidders had come forward as yet but “this may yet prove to be a good way forward”, he commented.

On the absolute bank guarantee, Prof Honohan said that, had the scale of the difficulties at Anglo Irish been known two years ago, other options for it might have, on balance, proved better. He didn’t expand on these alternatives.

He did, however, give the thumbs down to Taoiseach Brian Cowen’s performance when he was minister for finance. The governor gave three reasons for why Ireland’s large deficit developed, including the fact that, towards the latter part of the boom the government, following years of surplus accounts, “relaxed its vigilance and allowed spending to surge ahead”.

He didn’t seek to draw any parallel between replacing bank managements who had busted their banks, and former ministers for finance who had helped to bust their country.

Boost for last man standing

With four of the five banks within the National Asset Management Agency’s oversight now effectively nationalised, a simple process of elimination would point to Bank of Ireland being the best prospect for investors.

That’s certainly the view being put forward by British financial adviser Collins Stewart, which yesterday issued a positive note on the Irish bank.

Running its Quest analytical tool, the UK investment house is understood to be the first to post a buy rating on an Irish bank since the crisis broke with the collapse of Lehman’s back in September 2008.

It is certainly the most upbeat report for an Irish bank since the dreaded final tot on the cost of our banking collapse became public at the end of last month.

“If capital is scarce or an industry is engaged in more disciplined deployment of capital (voluntary or not) then there is potentially a higher returns opportunity for the strongest player,” Collins Stewart states, adding that BoI is “unquestionably” best positioned to win market share as it has successfully completed its rights issue earlier in the year.

The retrenchment being undertaken by foreign banks which flooded into Ireland in search of quick profit during the tiger years and the likely pressure on the Government to reduce supports for deposits at the other “nationalised” banks are cited as just two elements of an improving competitive landscape for Bank of Ireland.

The UK brokerage argues that the last bank standing might have been overly punished for the failings of our reckless credit boom. Even allowing for further pain on the bank’s mortgage book, it says a market value of just over three times likely profits “looks to have captured all that pain and then some”.

While the €50 billion-plus combined valuation of AIB, Anglo and Bank of Ireland at the peak – close to 35 per cent of GDP – was “pure lunacy”, valuing the “last remaining private franchise at less than 10 per cent of that number is equally wrong”, Gary McCarthy of Collins Stewart argues, noting that getting back to the 10 per cent of peak figure would constitute upside of 42 per cent on the current share price.

Not-so-ill wind for Germany

As the global currency war rumbles on, one of the more intriguing ideas floating around is that it may quite suit Germany to have a few basket cases in the euro zone.

Roger Bootle of Capital Economics in London pointed out recently that Germany and the rest of the euro zone will have a real problem if the current round of competitive devaluation becomes a fully fledged war.

The European Central Bank (ECB) – which is primarily a German construct – is not a believer in the two main tools at its disposal to bring down the value of the euro in such a situation; full-on quantitative easing and intervention in the market.

Both of these positions stem from Germany’s historical deep fear of inflation and its attachment to a strong currency, both of which it brought to the ECB table.

The problem – as Bootle points out – is that the euro could end up being the fall guy in the global currency war. Germany, with its huge dependence on exports would be hit as hard, if not harder than most.

In the absence of a change of tack by the ECB, the only break on the rise of the euro is provided by the prospect of a sovereign default by one its members, which in turn could bring the whole thing tumbling down.

It’s stretching things to see all this as some sort of fiendish Germanic plot. More a case of an ill wind being one that blows no good for anyone.

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