FACTS: Bank of Ireland (BKIR) has agreed to sell Burdale to Wells Fargo at a modest discount, bringing its cumulative deleveraging to 8.6bn at a better-than-expected average discount of 7.1% of drawn balances.
ANALYSIS: The discount involved in the Burdale disposal is equivalent to circa 0.8% of its drawn balances of £575m at the end of November, well below our expectations. The bank had previously announced disposals of 5.7bn at an average discount of 9.4%, but the announcement yesterday (December 19th) reveals that during 2011 it has also undertaken a range of other divestment initiatives on individual loans and smaller loan portfolios that were not individually of a sufficient size to merit separate disclosure. All in all, divestments to date come to 8.6bn, including US CRE (0.8bn), UK CRE (1.5bn), UK mortgages (1.4bn), project finance (1.3bn), other international loans (2.9bn) and Burdale (0.7bn).
DAVY VIEW: This is a very positive announcement by the bank from a couple of perspectives. It confirms that BKIR has made substantial progress towards it 10bn divestment target, less than a year into a process that it has until the end of 2013 to complete and in what is becoming an increasingly crowded market for disposals. In addition, the 8.6bn reduction in loans has been achieved at an average discount of 7.1%, within base case PCAR/PLAR assumptions. With just 1.4bn to go, our anticipated discount of 12% (1.2bn) on the overall 10bn looks too high. By how much obviously depends on the level of discount on the residual, but if that can be contained at the average discount to date, it could be as much as 0.5bn (pre-tax) too high, equivalent to circa 1.4c per share in TNAV terms on our end-2013 forecast of 22.6c.
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