Ross cashed in his Bank of Ireland chips for a reason

A couple of years back, billionaire US investor Wilbur Ross brought together a number of top executives from the various companies in which his group, WL Ross & Co, is invested.

They met in New York and it included Bank of Ireland chief executive Richie Boucher, who was feeling a touch nervous about the meeting.

To help break the ice, Boucher presented Ross with a Leinster rugby jersey. With the Bank of Ireland brand emblazoned across the chest (as team sponsor), and Ross's name on the back, the American was charmed by the gesture and proudly modelled the jersey to those assembled.

It was a smart move by Boucher who seemed to enjoy a warm working relationship with Ross throughout his near three-year investment. Ross never tired of praising Boucher publicly at a time when others were looking to stick the knife in and he said on Monday evening that he had “total confidence” that Boucher would “lead the bank to a better performance in the years to come”.

In a sense, Ross and Boucher needed each other. The investment in July 2011 by Ross and a syndicate of other North American investors helped Boucher keep Bank of Ireland out of State control, a fate that befell AIB and Irish Life & Permanent.

It possibly saved Boucher's job at a time when the Minister for Finance Michael Noonan was under pressure to ditch him and almost certainly allowed him to retain his €843,000 annual remuneration, which is above the Government's salary cap.

Ross, meanwhile, needed someone to execute a turnaround strategy at Bank of Ireland and earn him a profit for his own investors. Say what you like about Boucher, but the Zambian-born executive is a grafter with an ability to focus in on goals.

He was part of an executive team that made some poor lending decisions in the boom years but he was also hungry to turn around the bank’s fortunes.

Piece by piece, it has fallen into place to the point where Bank of Ireland is now back in profit and has repaid the €4.7 billion in bailout cash that it received from the State. Meanwhile, AIB is still handcuffed to the State and a question mark continues to hang over the future of Ulster Bank.

Improved

Bank of Ireland’s improved performance over the past three years and the sooner-than-expected upturn in the Irish economy has allowed Ross to cash out with a healthy €477 million gain.

Is this latest share sale a call by Ross on Bank of Ireland, some five months before we get the results of the pan-European bank capital stress tests?

Is it a call by the wise one about the nascent Irish economic recovery?

“The sale had nothing to do with the prospects of Bank of Ireland or of Ireland itself,” Ross told me in an emailed response to some questions on Monday night. “The future is bright for both.”

He cited his company’s portfolio concentration in European banks and a new EU rule that a bank director could only be on three boards, “even including what we would regard as in-house boards”, as the reasons for his exit from the share register and the board of the company.

Then again, in March, when he sold the first tranche of his Bank of Ireland shares, Ross told me that he had “no intention” of selling his remaining stake. We now know that this was not the case.

As soon as the lock-up period on the sale of his remaining shares had expired, Ross had cashed out.

Will it make a difference to Bank of Ireland? Between the capital raising in December and Ross’s staged sell-offs, about 20 per cent of Bank of Ireland’s shares have changed hands over the past seven months without too much collateral damage to the share price.

Diversified

The shareholder base is now more diversified, with less than half now based in North America compared with about 70 per cent at the time of Ross’s investment.

And Fairfax's Prem Watsa, who invested alongside Ross three years ago, says he's staying in for the long haul.

There’s no doubt that having Ross on the board was a good calling card for Bank of Ireland and he must have helped to open a few doors for Boucher at a time when the Irish banks were seen as pariahs among the international investment community.

However, the bank’s future will ultimately be decided by its trading performance, which is heavily dependent on the Irish economic recovery.

Growth

This isn’t guaranteed. Employment growth has stuttered of late, retail sales remain anaemic and the Government is due to impose another €2 billion in austerity measures in this year’s budget.

The hype over resurgent property prices masks underlying problems in the market with supply and finance.

We also shouldn’t forget that about 10 per cent of the bank’s owner-occupied Irish mortgage book is in default. It’s much better than the sector average but high nonetheless. And the bank will only convince about its ability to pass the stress tests when it actually has passed the stress tests. We won’t have that result until November.

In a nutshell, the road to recovery will be long and bumpy. Having almost trebled his money, it might explain why Ross decided to cash in his chips and move on.