Bank of Ireland

Bank of Ireland (ADR) (NYSE:IRE) (LON:BKIR) has practically become the poster child for how to recover from a recession, and while the banking sector lagged the recovery a bit, Bank of Ireland is currently up 63% over the last 52-weeks, and that’s after falling from a high of €0.38 at the end of February to €0.275 today. With a PE of 33.2 on 2014 forward earnings and a 1.4 price-to-book ratio, the question is whether the price still has room to rise.

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“The recovery in the bank’s net interest margin (NIM) from a trough of 120bps in the first half of 2012 to over 200bps has been key to its welcome return to profitability this year,” write Davy Research analysts Emer Lang and Stephen Lyons in an April 9 report, who rates Bank of Ireland (ADR) (NYSE:IRE) (LON:BKIR) as Outperform. “There is still potential for the bank to this year reduce its blended average cost of funds below H2 2013’s 126bps, new loans at more sustainable margins – typically a spread of at least 300bps over its cost of funds – will be key to NIM expansion thereafter.”

Bank of Ireland net loans fell in 2013

Bank of Ireland (ADR) (NYSE:IRE) (LON:BKIR) has been focused on rebuilding its balance sheet, and in 2013 it looks like the bank actually overshot, with net loans falling across the board. BKIR’s corporate and treasury division saw the biggest decline, -20% over 2012, while UK retail net loans fell 9.4% and Ireland retail net loans fell 5%. The return to profitability and improved credit quality isn’t unwelcome, but the bank can now change course and start looking to drive profits again now that it’s in good shape.

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New loans could come from real estate, car sales

Since the rest of the economy is also growing, there should be plenty of opportunities for Bank of Ireland (ADR) (NYSE:IRE) (LON:BKIR) to issue new loans. The real estate market is pulling out of the trough, with more home sales and increased investment activity; car sales are starting to increase, which means there will be greater demand for personal loans; and international lending becomes more of an option as the rest of Europe continues to recover.

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In the longer term, the recovery of SMEs will be another avenue for Bank of Ireland (ADR) (NYSE:IRE) (LON:BKIR) to extend new loans, but Lang and Lyons don’t expect that to happen soon. There are still too many non-performing loans from SMEs on the books, and small business owners aren’t yet confident that they will have strong enough cash flows to support new financing.